SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Quarterly period ended September 30, 2004.

Commission file number 000-24478.

DEARBORN BANCORP, INC.

(313) 565-5700
(Registrant’s telephone number, including area code)

N/A
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

     Yes      X           No           

Indicate the number of shares outstanding for each of the issuer’s classes of common stock, as of October 31, 2004.

Indicate by check mark whether the registrant is an accelerated filer (as defined in rule 12b-2 of the 1934 Securities and Exchange Act).

     Yes                 No      X     

DEARBORN BANCORP, INC.
INDEX

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REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Shareholders
Dearborn Bancorp, Inc.
Dearborn, Michigan

We have reviewed the consolidated balance sheets of Dearborn Bancorp, Inc. as of September 30, 2004 and 2003, the related consolidated statements of income and comprehensive income for the three and nine month periods then ended, and the related consolidated statements of cash flows for the nine month periods then ended. These financial statements are the responsibility of the Corporation’s management.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States of America.

	/s/ Crowe Chizek and Company LLC

Grand Rapids, Michigan
October 25, 2004

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DEARBORN BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS (unaudited)

                  The accompanying notes are an integral part of these consolidated statements.

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DEARBORN BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME (unaudited)

           The accompanying notes are an integral part of these consolidated statements.

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DEARBORN BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)

       The accompanying notes are an integral part of these consolidated statements.

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DEARBORN BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

A.

Accounting and Reporting Policies

The consolidated financial statements of Dearborn Bancorp, Inc. (the “Corporation”) include the consolidation of its only subsidiary, Community Bank of Dearborn (the “Bank”). The accounting and reporting policies of the Corporation are in accordance with generally accepted accounting principles and conform to practice within the banking industry.

The consolidated financial statements of the Corporation as of September 30, 2004 and 2003, and December 31, 2003 and for the three and nine month periods ended September 30, 2004 and 2003 reflect all adjustments, consisting of normal recurring items which are in the opinion of management, necessary for a fair presentation of the results for the interim period. The operating results for the quarter are not necessarily indicative of results of operations for the entire year.

The consolidated financial statements as of September 30, 2004 and 2003, and for the three and nine month periods ended September 30, 2004 and 2003 included herein have been prepared by the Corporation, without an audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in interim financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. These financial statements should be read in conjunction with the financial statements and notes thereon included in the Corporation’s 2003 Annual Report to Stockholders on Form 10-K.

Certain of the Corporation’s accounting policies are important to the portrayal of the Corporation’s financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Estimates associated with these policies are susceptible to material changes as a result of changes in facts and circumstances. Facts and circumstances which could affect these material judgments include, but without limitation, changes in interest rates, in the performance of the economy or in the financial condition of borrowers. Management believes that its critical accounting policies include determining the allowance for loan losses and determining the fair value of securities and other financial instruments.

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A.

Accounting and Reporting Policies (continued)

Employee compensation expense under stock option plans is reported using the intrinsic value method. No stock-based compensation cost is reflected in net income, as all options granted had an exercise price equal to or greater than the market price of the underlying common stock at date of grant. The following table illustrates the effect on net income and earnings per share if expense was measured using the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-based Compensation (in thousands, except share and per share data).

Stock options vest after a six month period from date of grant. No options were granted in 2004. The pro forma effects are computed using option pricing models and the assumptions for the 2003 grants were a risk-free interest rate of 3.55%, expected life of seven years, and expected volatility of 25.55%.

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B.

Securities Available For Sale

The amortized cost and estimated market value of securities available for sale are as follows (in thousands):

The amortized cost and estimated market value of securities available for sale at September 30, 2004 by contractual maturity are shown below (in thousands):

The entire portfolio has a net unrealized loss of $853,000 at September 30, 2004. The Bank holds a floating rate issue of preferred stock of the Federal Home Loan Mortgage Corporation that has an unrealized loss of $880,000. This unrealized loss is primarily caused by the floating rate characteristic of this security and its market value is expected to improve as interest rates rise. The Corporation does not expect to realize a loss as a result of holding this security. The Corporation does not hold any securities in the “Held to Maturity” category nor does the Corporation hold or utilize derivatives.

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C.

Stock Option Plan

Options to buy common stock are granted to officers and employees under a Stock Option Plan which provides for issue of up to 747,790 shares. Exercise price is the market price at date of grant. The maximum option term is ten years, and options vest fully after six months from the date of grant. If an option expires or terminates without having been exercised, such option becomes available for future grant under the Plan.

A summary of the option activity for the nine months ended September 30, 2004 is as follows:

For the options outstanding at September 30, 2004, the range of exercise prices was $4.84 to $18.69 per share with a weighted-average remaining contractual term of 6.3 years. At September 30, 2004, 542,432 options were exercisable at weighted average exercise price of $9.63 per share. Stock options for 4,631 shares of common stock were not considered in computing diluted earnings per share for the nine months ended September 30, 2003 because they were antidilutive. There were no antidilutive shares for the nine months ended September 30, 2004.

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PART I — FINANCIAL INFORMATION

ITEM 2. — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
                    CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis are intended to address significant factors affecting the financial condition and results of operations of the Corporation. The discussion provides a more comprehensive review of the financial position and operating results than can be obtained from a reading of the financial statements and footnotes presented elsewhere in this report.

Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that are based on management’s beliefs, assumptions, current expectations, estimates and projections about the financial services industry, the economy, and about the Corporation and Bank. Words such as “anticipates”, “believes”, “estimates”, “expects”, “forecasts”, “intends”, “is likely”, “plans”, “projects”, variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions (“Future Factors”) that are difficult to predict with regard to timing, extent, likelihood and degree of occurrence. Therefore, actual results and outcomes may materially differ from what may be expressed or forecasted in such forward-looking statements. The Corporation undertakes no obligation to update, amend or clarify forward-looking statements, whether as a result of new information, future events (whether anticipated or unanticipated), or otherwise.

Future Factors include changes in interest rates and interest rate relationships; demand for products and services; the degree of competition by traditional and non-traditional competitors; changes in banking regulation; changes in tax laws; changes in prices, levies and assessments; the impact of technological advances; governmental and regulatory policy changes; the outcomes of contingencies; trends in customer behavior as well as their ability to repay loans; and changes in the national and local economy. These are representative of the Future Factors that could cause a difference between an ultimate actual outcome and a preceding forward-looking statement.

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General

The Corporation was formed in 1992 and the Bank was formed in 1993. Subsequently, the Bank has opened offices in several communities in Southeastern Michigan. The date opened, branch location and branch type of each branch is listed below:

The Bank has also formed three subsidiaries that offer additional or specialized services to the Bank’s customers. The Bank’s subsidiaries, their formation date and the type of services offered are listed below:

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Recent Developments

Acquisition of Bank of Washtenaw. On October 29, 2004, the Corporation acquired the Bank of Washtenaw (“Washtenaw”), a wholly owned subsidiary of Pavillion Bancorp, Inc. for $15,100,000 in cash. Washtenaw, which was founded in January 2001, has its main office in Saline, Michigan with a branch office and a regional lending center in Ann Arbor, Michigan. As of September 30, 2004, Washtenaw had total assets of $72,147,000, gross loans of $68,406,000 and total deposits of $64,828,000. Management has not completed the determination of the fair values of the assets acquired and liabilities assumed or the identification of amortizable intangibles and goodwill.

The following table presents pro forma information for the Corporation including the acquisition of Bank of Washtenaw for the nine months ended September 30, 2004 and 2003, as if the acquisition had occurred at the beginning of 2004 and 2003. The pro forma financial information does not include adjustments for the amortization of intangibles arising from the transaction as this analysis has not yet been completed. The pro forma is not necessarily indicative of the results of operations as they would have been had the transaction been effected on the assumed dates.

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Results of Operations

The Corporation reported net income of $1,402,000 and $3,966,000 for the three and nine month periods ended September 30, 2004, compared to net income of $1,010,000 and $2,349,000 for the three month and nine month periods ended September 30, 2003. The increase in net income was primarily due to the improvement in net interest income. The increase in net interest income was partially offset by the decrease in non-interest income. The improvement in net interest income was primarily due to the increase in the commercial real estate loan and other commercial loan portfolios and the decreasing cost of deposits during the period. The increase in loans was partially funded with short term investments such as interest bearing deposits with banks, federal funds sold and floating rate securities, which carry a lower yield than loans.

Net Interest Income

2004 Compared to 2003. As noted on the two charts on the following pages, net interest income for the three and nine month periods ended September 30, 2004 was $5,003,000 and $14,302,000, compared to $4,145,000 and $10,646,000 for the same periods ended September 30, 2003, an increase of $858,000 or 21% and $3,656,000 or 34%, respectively. This increase was caused primarily by the increasing volume of interest earning assets and interest bearing liabilities and the net interest rate spread between these assets and liabilities. The Corporation’s interest rate spread was 3.43% and 3.73% for the three and nine month periods ended September 30, 2004, compared to 4.17% and 3.61% for the same periods in 2003. The Corporation’s interest rate margin was 3.82% and 4.05% for the three and nine month periods ended September 30, 2004, compared to 4.47% and 3.96% for the same periods in 2003. The net interest rate spread and net interest margin declined for the three months ended September 30, 2004 due to elevated levels of interest bearing deposits with bank, federal funds sold and investment securities, available for sale during the period. Management expects the net interest rate spread and net interest margin will improve as the funds currently invested in these short term assets are deployed into loans. The increase in the net interest rate spread and the net interest margin for the nine months ended September 30, 2004 was primarily due to the increase in loans and the decreasing cost of interest bearing liabilities.

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Average Balances, Interest Rates and Yields. Net interest income is affected by the difference (“interest rate spread”) between rates of interest earned on interest-earning assets and rates of interest paid on interest-bearing liabilities and the relative amounts of interest-bearing liabilities and interest-earning assets. When the total of interest-earning assets approximates or exceeds the total of interest-bearing liabilities, any positive interest rate spread will generate net interest income. Financial institutions have traditionally used interest rate spreads as a measure of net interest income. Another indication of an institution’s net interest income is its “net yield on interest-earning assets” or “net interest margin,” which is net interest income divided by average interest-earning assets.

The following tables set forth certain information relating to the Corporation’s consolidated average interest-earning assets and interest-bearing liabilities and reflect the average yield on assets and average cost of liabilities for the periods indicated. Such yields and costs are derived by dividing income or expense by the average daily balance of assets or liabilities, respectively, for the periods presented. During the periods indicated, non-accruing loans, if any, are included in the loan category.

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Rate/Volume Analysis. The following table analyzes net interest income in terms of changes in the volume of interest-earning assets and interest-bearing liabilities and changes in yields and rates. The table reflects the extent to which changes in the interest income and interest expense are attributable to changes in volume (changes in volume multiplied by prior year rate) and changes in rate (changes in rate multiplied by prior year volume). Changes attributable to the combined impact of volume and rate have been allocated proportionately to changes due to volume and changes due to rate.

Provision for Loan Losses

2004 Compared to 2003. The provision for loan losses was $369,000 and $874,000 for the three and nine month periods ended September 30, 2004, compared to $671,000 and $1,410,000 for the same periods in 2003, a decrease of $302,000 or 45% for the three month period and $536,000 or 38% for the nine month period. The decrease is primarily due to the decrease in net charge-offs during the nine months ended September 30, 2004 compared to the nine month period ended September 30, 2003. The provision for loan losses for the three and nine month periods ended September 30, 2004 is based on the internal analysis of the adequacy of the allowance for loan losses. The provision for loan losses was based upon management’s assessment of relevant factors, including types and amounts of non-performing loans, historical and anticipated loss experience on such types of loans, and current economic conditions.

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Non-interest Income

2004 Compared to 2003. Non-interest income was $246,000 and $971,000 for the three and nine month periods ended September 30, 2004, compared to $772,000 and $2,429,000 for the same periods in 2003, a decrease of $526,000 or 68% for the three month period and $1,458,000 or 60% for the nine month period. The decrease was primarily due to the decrease in the gain on the sale of loans during the period. The volume of mortgage loans sold decreased during the period as a result of increased interest rates and a decrease in the size of the mortgage origination staff. Management expects the gain on sale of loans to continue at current levels during 2004.

Non-interest Expense

2004 Compared to 2003. Non-interest expense was $2,755,000 and $8,394,000 for the three and nine month periods ended September 30, 2004, compared to $2,721,000 and $8,113,000 for the same periods in 2003, an increase of $34,000 or 1% for the three month period and $281,000 or 3% for the nine month period. The largest component of non-interest expense was salaries and employee benefits which amounted to $1,868,000 and $5,537,000 for the three and nine month periods ended September 30, 2004, compared to $1,534,000 and $4,579,000 for the same periods in 2003, an increase of $334,000 or 22% for the three month period and $958,000 or 21% for the six month period. The primary factors for the increase in salaries and benefits expense was the expansion of the commercial lending, retail administration and operations departments. As of September 30, 2004, the number of full time equivalent employees was 119 compared to 112 as of September 30, 2003. Salaries and employee benefits will continue to increase due to the acquisition of the Bank of Washtenaw and general staff increases.

Commissions on the origination of loans amounted to $52,000 and $202,000 for the three and nine month periods ended September 30, 2004, compared to $253,000 and $814,000 for the same periods in 2003, a decrease of $201,000 or 79% for the three month period and $612,000 or 75% for the nine month period. The primary reason for the decrease in the commissions on the origination of loans was the decrease in the volume of loans originated during the period. Management expects the commissions paid on the origination of loans to continue at current levels during 2004.

The second largest component of non-interest expense was occupancy and equipment expense. Occupancy and equipment expense amounted to $322,000 for the three month period ended September 30, 2004, compared to $369,000 for the same period in 2003, a decrease of $47,000 or 13% for the three month period. Occupancy and equipment expense amounted to $1,046,000 for the nine month period ended September 30, 2004, compared to $1,040,000 for the same period in 2003, an increase of $6,000 or 1% for the three month period.

Income Tax Provision

2004 Compared to 2003. The income tax expense was $723,000 and $2,039,000 for the three and nine month periods ended September 30, 2004, compared to $515,000 and $1,203,000 for the same periods in 2003, an increase of $208,000 or 40% for the three month period and $836,000 or 69% for the nine month period. The increase was primarily a result of increased pre-tax income.

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Comparison of Financial Condition at September 30, 2004 and December 31, 2003

Assets. Total assets at September 30, 2004 were $574,093,000 compared to $446,075,000 at December 31, 2003, an increase of $128,018,000 or 29%. The increase was primarily due to the increase in loans, securities, available for sale, federal funds sold and interest bearing deposits with banks during the period.

Federal Funds Sold. Total federal funds sold at September 30, 2004 were $11,636,000 compared to $7,651,000 at December 31, 2003, an increase of $3,985,000 or 52%. The increase was primarily due to the short term deployment of funds that were received as a result of an increase in deposits. Available funds are deployed into federal funds sold until they can be utilized to fund loan volume.

Interest bearing deposits with banks. Total interest bearing deposits with banks at September 30, 2004 were $29,600,000 compared to $8,325,000 at December 31, 2003, an increase of $21,275,000 or 256%. This investment was established to provide the Corporation with an alternate short term investment option. This short term investment is a variable-rate certificate of deposit with the Federal Home Loan Bank of Indianapolis that carries a similar rate of return to federal funds sold. Available funds are deployed into interest bearing deposits with banks until they can be utilized to fund loan volume.

Mortgage Loans Held for Sale. Total mortgage loans held for sale at September 30, 2004 were $1,533,000 compared to $1,505,000 at December 31, 2003, an increase of $28,000 or 2%. This increase was a result of the increase in the level of residential real estate mortgage loans waiting to be purchased by mortgage correspondents.

Securities — Available for Sale. Total securities, available for sale, at September 30, 2004 were $39,516,000 compared to $16,948,000 at December 31, 2003, an increase of $22,568,000 or 133%. The increase was due to investment of funds received from the sale of common stock on July 23, 2004. These funds will be invested in securities, available for sale until they need to be deployed to the Bank in anticipation for future growth or utilized for other general corporate purposes.

Please refer to Note B of the Notes to Consolidated Financial Statements for the amortized cost and estimated market value of securities, available for sale.

Federal Home Loan Bank Stock. Federal Home Loan Bank stock was valued at $1,111,000 at September 30, 2004, compared to $1,073,000 at December 31, 2003, an increase of $38,000 or 4%.

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Loans. Total loans at September 30, 2004 were $474,111,000 compared to $400,958,000 at December 31, 2003, an increase of $73,153,000 or 18%. The increase was primarily due to the continued expansion of the commercial lending department during the past twelve months. This expansion included the addition of two experienced loan officers during the last twelve months. Major categories of loans included in the loan portfolio are as follows (in thousands):

The following is a summary of non-performing assets and problems loans (in thousands):

Non-accrual loans at September 30, 2004 were $1,542,000, of which, $791,000 was related to one commercial loan relationship that is well secured. The remaining non-accrual loans consisted of one slow-paying home equity loan with a balance of $28,000, one slow-paying construction loan with a balance of $525,000 and two well-secured residential mortgage loans with balances of $82,000 and $116,000.

Allowance for Loan Losses. The allowance for loan losses was $5,188,000 at September 30, 2004 compared to $4,314,000 at December 31, 2003, an increase of $874,000 or 20%. The increase resulted from provisions for loan losses recorded during the nine months ended September 30, 2004 and a net recovery of $1,000 during the nine months ended September 30, 2004 and responds to the growth of the loan portfolio as well as the mix of loans and levels of nonperforming loans. The allowance for loan losses was based upon management’s assessment of relevant factors, including loan growth, types and amounts of non-performing loans, historical and anticipated loss experience on such types of loans, and current economic conditions.

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The following is an analysis of the allowance for loan losses (in thousands):