SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
__X__ Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended December 31, 1997 or
____ Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from __________ to
__________
Commission file number 000-24478.
DEARBORN BANCORP, INC.
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(Exact name of registrant as specified in its charter)
Michigan 38-3073622
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(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
22290 Michigan Avenue, Dearborn, MI 48123-2247
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(Address of principal executive office) (Zip code)
(313) 274-1000
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(Registrant's telephone number, including area code)
Securities registered pursuant to section 12(d) of the Act:
Name of each exchange on
Title of each class which registered
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None None
Securities registered pursuant to section 12(g) of the Act:
Common Stock
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to the Form 10-K. [X]
State the aggregate market value of the voting stock held by non-affiliates
of the registrant as of March 2, 1998: Common Stock, $11,865,815.
Indicate the number of shares outstanding of each of the registrant's classes
of common stock as of March 2, 1998: Common Stock, 1,044,924 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the 1997 Annual Report to Stockholders of Registrant are
incorporated in Parts I, II and IV of this report. Portions of the definitive
Proxy Statement of the Registrant dated April 17, 1998, to be filed pursuant
to Regulation 14A, are incorporated by reference in Part III of this report.
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DEARBORN BANCORP, INC.
FORM 10-K
PART I
Item 1. Business
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Background
The liberalization of Michigan's branch banking laws, together with
the expansion of interstate banking, has led to substantial consolidation of
the banking industry in Michigan, including within the county in which the
Bank is located. In the past, several of the financial institutions within
the primary market area of the Bank have either been acquired by or merged
with larger financial institutions or out-of-state financial institutions. In
some cases, when these consolidations occurred, local boards of directors
were dissolved and local management relocated or in some cases terminated and
has, in some cases, resulted in policy and credit decisions being centralized
away from local management.
In the opinion of the Company's management, this situation has
created a favorable opportunity for a local commercial bank with local
management and directors. Management of the Company believes that such a bank
attracts those customers who wish to conduct business with a locally managed
institution that demonstrates an active interest in their business and
personal financial affairs. The Company believes that a locally managed
institution, in many cases, will be able to deliver more timely responses to
customer requests, provide customized financial products and services and
offer customers the personal attention of the Bank's senior banking officers.
The Bank seeks to take advantage of this opportunity by emphasizing in its
marketing plan the Bank's local management and the Bank's ties and commitment
to its market area.
The Company was incorporated as a Michigan business corporation on
September 30, 1992. The Company was formed to acquire all of the Bank's
issued and outstanding stock and to engage in the business of a bank holding
company under the Bank Holding Company Act of 1956, as amended (the "Act").
In connection with the formation of the Company, during 1993 the Company sold
741,346 shares of its Common Stock at a price of $9.09 per share. As of
December 31, 1996, the Company sold an additional 303,578 shares of its
Common Stock at a price of $9.09 per share to its shareholders pursuant to a
rights offering.
The executive offices of the Company and the Bank are located at
22290 Michigan Avenue, Dearborn, Michigan 48123-2247, telephone number (313)
274-1000.
Business of the Company
The primary purpose of the Company is the ownership of the Bank. In
the future, the Company may form or acquire other subsidiaries as permitted
under the Act and the regulations of the Federal Reserve. There are no plans,
agreements, understandings or negotiations, either written or oral, at the
present time for any acquisitions by the Company.
Business of the Bank
The Bank is a commercial bank organized under Michigan law which
commenced business on February 28, 1994. The Bank, through its main office
and two branch offices, emphasizes and offers highly personalized service to
its customers.
The customer service officers are well-trained, experienced bank
officers who fill the needs of the customers and handle the requests of their
customers in a professional manner. The management of the Company and the
Bank believe that it is important to the success of the Bank's strategy to
create long-term relationships between customers and Bank employees. The
Bank's senior management holds regular staff information meetings so that all
employees are given information regarding the Bank's plans and objectives,
and employees are offered the opportunity to make suggestions to improve the
Bank's performance. The management of the Bank believes that this approach
creates a commitment by all employees to the Bank's success.
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The Bank offers a wide range of financial products and services.
These include checking accounts, savings accounts, money market accounts,
certificates of deposit, business checking, direct deposit, loan services
(commercial, consumer, real estate mortgages), travelers' checks, cashiers'
checks, wire transfers, safety deposit boxes, collection services and night
depository services. The Bank does not have a trust department.
Business Strategy
Grow Through Branch Expansion. Since commencing operations, the Bank's growth
has been accomplished through internal growth. The internal growth of the
Bank has been aided by the opening of two additional offices. The Dearborn
Heights office opened on December 20, 1995 and as of December 31, 1997 had
$15.7 million in total deposits, while the Plymouth Township office opened on
August 11, 1997 and as of December 31, 1997 had $5.4 million in total
deposits. In 1998, the Bank intends to open an additional office in western
Wayne County.
Emphasize Community Banking. The Bank strives to maintain a strong commitment
to community banking. The Bank's goal is to attract small to medium-sized
businesses and individuals as customers who wish to conduct business with a
local commercial bank that demonstrates an active interest in their business
and personal affairs. Management believes that the Bank is better able than
its larger competitors to deliver more timely responses to customer requests,
provide customized financial products and services and offer customers the
personal attention of senior banking officers.
Expand Lending in the Company's Primary Market. The Company's initial lending
philosophy concentrated on single family residential lending but has grown to
include a more diverse group of loan products. The Company's loan portfolio
currently consists of residential loans, indirect consumer loans with a
select list of local automobile dealers, commercial real estate loans, small
business commercial loans and other consumer loans. Management intends to
maintain its emphasis on these loan products.
Grow Through Selected Acquisitions. Although the Company will continue to
pursue internal growth at the Bank, management believes that greater growth
opportunities may be found in acquisitions of community banks or branches in
Michigan to enhance the Company's markets. As part of its normal business
operations management maintains contact with financial institutions to
discuss various acquisition possibilities. However, the Company has made no
bank or branch acquisitions to date, and it presently has no agreements,
commitments, understandings or arrangements to acquire any other banks or
branches, and there is no assurance that the Company will be successful in
its acquisition strategy.
Marketing Plan
The Bank's marketing plan focuses on the concepts of corporate
citizenship and personal interaction within the communities the Bank serves
through promotion of, and active participation in, a number of civic
organizations and ongoing community activities. Management believes that
these efforts establish the identity and philosophy of the Bank within the
communities it serves and allow Bank officers and employees to personally
interact with local business leaders and members of the public. The marketing
plan also emphasizes direct sales calls by Bank officers and specific
telemarketing programs involving the Bank's branch managers and customer
service representatives.
The Bank has two primary target markets: consumer financial services,
with an emphasis on individual deposit accounts, single family residential
lending and indirect automobile lending; and business financial services,
with an emphasis on small- to medium-sized businesses.
Community Club. At inception, the Bank established a "Community Club"
which has become an important marketing tool to increase the Bank's total
deposits. The Community Club is targeted at individuals over the age of 50.
As of December 31, 1996, the Community Club had over 400 members who
accounted for total deposits of $17.0 million, or 36% of the Bank's total
deposits, while as of December 31, 1997, the Community Club had over 1,000
members who accounted for total deposits of $36.4 million, or 48% of the
Bank's total deposits.
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Among other things, membership in the Community Club entitles the
customer to increased personal attention and service by Bank staff and a 1/4%
premium on new certificate of deposit accounts with a minimum $1,000 balance
and one year maturity. The Bank also hosts local community events,
educational seminars and travel programs which have been well received by the
Community Club members. Management believes that the success of the Community
Club and the Bank's continued efforts to expand the benefits of the program
will foster an increase in the number of Community Club members and deposit
accounts.
Business Financial Services The Bank's business marketing efforts are
directed by senior management, including Messrs. Ross, Cuttle and Wolber with
Mr. Wolber assigned as sales manager, whose duties include administering and
coordinating the business development efforts of the Bank.
Each Bank officer, in addition to each branch manager, is responsible
for creating new business opportunities for the Bank. The targeted list of
new business customers represents a mix of industrial, manufacturing,
professional and retail clients with an emphasis on businesses with annual
sales of $10 million or less.
The Bank has developed an aggressive telemarketing program for new
business. Businesses are identified through listings provided by the various
Chambers of Commerce, local phone directories and other sources targeted to
the communities the Bank serves. Initial sales calls are introductory in
nature with follow-up calls made to determine whether a meeting can be
arranged with the targeted company to discuss the Bank's products and
services. The Bank believes this strategy has been and will continue to be
successful in generating new business for the Bank.
In addition to its telemarketing program, the Bank's officers
maintain contact with local attorneys, accountants and other representatives
in the local community that may be in a position to refer business to the
Bank. The Bank also encourages and supports its officers and employees to
join and participate in various community organizations and events.
Consumer Financial Services. The Bank originates residential real
estate loans primarily through its retail branch facilities. Branch managers
and mortgage loan originators develop new residential mortgage applications
from several sources including real estate brokers, insurance agents,
accountants, attorneys, existing residential mortgage customers and other
customers of the Bank. An extensive telemarketing effort generates potential
customers as a result of these contacts. Additionally, the Bank has developed
targeted real estate newsletters that are mailed to an existing data base
composed of those referral sources. The Bank also maintains an active role in
several local real estate boards offering product training to members.
The Bank, as a result of its secondary market operations, is able to
offer a variety of loan products that serve the needs of first time home
buyers by providing five percent down payment loans and loans with no points.
Customers desiring to construct new homes are able to obtain financing as a
result of the Bank's construction loan program that is offered in addition to
the permanent loan. Non-conforming loans, which are larger residential loans,
are also provided through the Bank's secondary marketing efforts. The Bank
also provides loans that it holds in its own portfolio on those transactions
that evidence excellent credit quality and income but are unable to be sold
in the secondary market for other reasons.
The Bank originates indirect consumer loans primarily from its main
office in Dearborn, Michigan. A consumer loan officer purchases loans from a
select list automobile dealers located in the Metropolitan Detroit Area
through an extensive direct calling program. The Bank intends to target
additional automobile dealers in its market area in an effort to broaden and
diversify its indirect consumer loan portfolio.
Management believes that cross-selling of the Bank's products and
services to its existing customers is vital to expanding account
relationships, generating additional sales opportunities and increasing fee
income.
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Loan Policy
As a routine part of the Bank's business, the Bank makes loans to
individuals and businesses located within the Bank's market area. The loan
policy of the Bank states that the function of the lending operation is
twofold: to provide a means for the investment of funds at a profitable rate
of return with an acceptable degree of risk, and to meet the credit needs of
the responsible businesses and individuals who are customers of the Bank.
However, the Board of Directors of the Bank recognizes that in the normal
business of lending, some losses on loans will be inevitable and should be
considered a part of the normal cost of doing business. Under the loan
policy, only the President, Executive Vice President and Chief Lending
Officer currently have lending authority.
The Bank's loan policy anticipates that priorities in extending loans
will change from time to time as interest rates, market conditions and
competitive factors change. The policy sets forth guidelines on a
nondiscriminatory basis for lending in accordance with applicable laws and
regulations. The policy describes various criteria in granting loans,
including the ability to pay; the character of the customer; evidence of
financial responsibility; purpose of the loan; knowledge of collateral and
its value; terms of repayment; source of repayment; payment history; and
economic conditions.
The loan policy specifies lending limits for certain officers up to a
maximum of $50,000 for unsecured loans and $100,000 for secured loans, with
loans from $100,000 to $250,000 requiring approval by a loan committee.
Larger loans up to the legal maximum authorized by law requires the approval
of the Board of Directors of the Bank.
The loan policy also limits the amount of funds that may be loaned
against specified types of collateral including: listed securities - 70% loan
to value; U.S. Government securities - 90% loan to value; and insured bank
deposits - 100% loan to value. As to loans secured principally by real
estate, the policy requires appraisal of the property offered as collateral
by licensed independent appraisers. The loan policy also provides general
guidelines as to collateral, provides for environmental reviews, contains
specific limitations with respect to loans to employees, executive officers
and directors, provides for problem loan identification, establishes a policy
for the maintenance of a loan loss reserve, provides for loan reviews and
sets forth policies for mortgage lending and other matters relating to the
Bank's lending business.
Lending Practices
Commercial loans. The Bank's commercial lending group originates
commercial loans primarily in the western Wayne County area of southeastern
Michigan. Commercial loans are originated by the officer group with the
assistance of the President and the Executive Vice President, who have over
55 years of combined commercial lending experience. Loans are originated for
general business purposes, including working capital, accounts receivable
financing, machinery and equipment acquisition, and commercial real estate
financing including new construction and land development.
Working capital loans are often structured as a line of credit and
are reviewed periodically in connection with the borrower's year end
financial reporting. These loans generally are secured by all of the assets
of the borrower, a personal guaranty of the owners and have an interest rate
plus a margin tied to the national prime rate. Loans for machinery and
equipment purposes typically have a maturity of five to seven years and are
fully amortizing. Commercial real estate loans are usually written with a
five year maturity and are amortized over a fifteen year period. Commercial
real estate loans may have an interest rate that is fixed to maturity or
float with a margin over the prime rate or a U.S. Treasury index.
The Bank evaluates all aspects of a commercial loan transaction in
order to minimize credit and interest rate risk. Underwriting includes an
assessment of management, products, markets, cash flow, capital, income and
collateral. The analysis includes a review of historical and projected
financial results. Appraisals are obtained by licensed independent appraisers
who are well known to the Bank on transactions involving real estate and, in
some cases, equipment.
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Commercial real estate lending involves more risk than residential
lending, because loan balances are greater and repayment is dependent upon
the borrower's operation. The Bank attempts to minimize risk associated with
these transactions by limiting its exposure to existing well-known customers
and new customers with an established profitable history. Risk is further
reduced by limiting the concentration of credit to any one borrower as well
as the type of commercial real estate financed.
Single-Family Residential Real Estate Loans. The Bank originates
residential real estate loans in its market area according to secondary
market underwriting standards. These loans provide borrowers with a fixed
interest rate with terms up to thirty years. Loans are sold on a servicing
released basis in the secondary market with all interest rate risk and credit
risk passed to the purchaser. The Bank from time to time may elect to
underwrite certain residential real estate loans to be held in it's own loan
portfolio. These loans are generally underwritten with the same standards
that apply to the secondary market. The majority of the portfolio loans have
an interest rate that is indexed to the one-year treasury rate and adjust
annually.
Consumer Loans. The Bank originates consumer loans for a wide variety
of personal financial requirements. Consumer loans include home equity lines
of credit, new and used automobiles, boat loans and overdraft protection for
checking account customers. The Bank also purchases retail installment loans
from a select list of automobile dealerships located in the Bank's primary
market.
Consumer loans generally have shorter terms and higher interest rates
than residential mortgage loans and, except for home equity lines of credit,
usually involve more credit risk than mortgage loans because of the type and
nature of the collateral. While the Bank does not utilize a formal credit
scoring system, the Bank believes its loans are underwritten carefully, with
a strong emphasis on the amount of the down payment, credit quality,
employment stability, and monthly income. These loans are generally repaid on
a monthly repayment schedule with the source of repayment tied to the
borrower's periodic income. In addition, consumer lending collections are
dependent on the borrower's continuing financial stability, and are thus
likely to be adversely affected by job loss, illness and personal bankruptcy.
In many cases, repossessed collateral for a defaulted consumer loan will not
provide an adequate source of repayment of the outstanding loan balance
because of depreciation of the underlying collateral. The Bank believes that
the generally higher yields earned on consumer loans compensate for the
increased credit risk associated with such loans and that consumer loans are
important to its efforts to serve the credit needs of the communities and
customers that it serves.
Allowance for Loan Losses. An allowance for loan losses is maintained
at a level that management of the Bank considers adequate to provide for
potential losses in the loan portfolio. Allowances for loan losses are based
upon the Bank's experience and estimates of the net realizable value of
collateral in each loan portfolio. The Board of Directors and senior
management review the allowance quarterly. The Bank's evaluation takes into
consideration experience, the level of classified assets, non-performing
loans, the current level of the allowance as it relates to the total loan
portfolio, projected charge-offs, current economic conditions, recent
regulatory examinations and other factors.
Employees
As of March 2, 1998, the Bank had 31 employees, including 8 officers
and 23 customer service, operations and other support persons. Management
believes that the Bank's relations with its employees are excellent.
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Competition
The Company and the Bank face strong competition for deposits, loans
and other financial services from numerous banks, savings banks, thrifts,
credit unions and other financial institutions as well as other entities
which provide financial services, including consumer finance companies,
securities brokerage firms, mortgage brokers, insurance companies, mutual
funds, and other lending sources and investment alternatives. Some of the
financial institutions and financial services organizations with which the
Bank competes are not subject to the same degree of regulation as the Bank.
Many of the financial institutions and financial services organizations
aggressively compete for business in the Bank's market area. Most of these
competitors have been in business for many years, have established customer
bases, are larger, have substantially higher lending limits than the Bank,
and are able to offer certain services that the Bank does not currently
provide, including more extensive branch networks, trust services, and
international banking services. In addition, most of these entities have
greater capital resources than the Bank, which, among other things, may allow
them to price their services at levels more favorable to the customer and to
provide larger credit facilities than could the Bank. Additionally, recent
effective legislation regarding interstate branching and banking may increase
competition in the future from out-of-state banks.
Supervision and Regulation
The Company is a registered bank holding company and subject to the
supervision of the Federal Reserve System ("Federal Reserve"). The Company is
required to file with the Federal Reserve annual reports and such other
information as the Federal Reserve may require under the Bank Holding Company
Act of 1956, as amended (the "Act"). The Company and the Bank are each
subject to examination by the Federal Reserve.
The Act requires every bank holding company to obtain prior approval
of the Federal Reserve before it may merge with or consolidate into another
bank holding company, acquire substantially all assets of any bank, or
acquire ownership or control of any voting shares of any bank, if after such
acquisition, it would own or control, directly or indirectly, more that 5% of
the voting shares of such bank holding company or bank. The Federal Reserve
may in its discretion approve the acquisition by the Company the voting
shares or substantially all assets of a bank located in Michigan and, subject
to certain restrictions, located in any other state.
The Act also prohibits a bank holding company, with certain
exceptions, from acquiring direct or indirect ownership or control of more
than 5% of the voting shares of any company that is not a bank, and from
engaging in any business other than that of banking, managing and controlling
banks and their subsidiaries. Holding companies may engage in, and may own
shares of companies engaged in, certain businesses found by the Federal
Reserve to be closely related to banking or the management or control of
banks. Under current regulations of the Federal Reserve, a holding company
and its non-bank subsidiaries are permitted to engage in investment
management, sales and consumer finance, equipment leasing, data processing,
discount securities brokerage, mortgage banking and brokerage, and other
activities. These activities are subject to certain limitation imposed by the
regulations.
Transactions between the Company and the Bank are subject to various
restrictions imposed by state and federal law. Such transactions include
loans and other extensions of credit, purchases of securities, any payments
of fees and other distributions. Federal law places restrictions on the
amount and nature of loans to executive officers, directors and controlling
persons of banks insured by the Federal Deposit Insurance Corporation and
holding companies controlling such banks.
The Bank is a state chartered bank and subject to regulation and
examination by the Michigan Financial Institutions Bureau. The Bank also is
subject to certain provisions of the Federal Deposit Insurance Act and
regulations issued under that act. The regulations affect many activities of
the Bank, including the permissible types and amounts of loans, investments,
capital adequacy, branching, interest rates payable on deposits, required
reserves, and the safety and soundness of the Bank's practices. The Bank is a
not a member bank of the Federal Reserve System and is regulated and examined
by the Federal Deposit Insurance Corporation.
A summary of consolidated net interest income, consolidated net
interest income volume / rate analysis, rate sensitivity analysis / gap
analysis and capital ratios is set forth under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
the 1997 Annual Report to Stockholders and is incorporated herein by
reference.
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Item 2. Properties
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The main office of the Company and the Bank is located in a single
story building containing 8,400 square feet at 22290 Michigan Avenue,
Dearborn, Michigan which is owned by the Company and leased to the Bank.
On December 20, 1995, the Bank opened a branch office located in a
single story commercial/retail office building at 24935 W. Warren Avenue,
Dearborn Heights, Michigan which is also owned by the Company. Approximately
79% of the 3,240 square foot building is leased to the Bank and the remaining
space is leased to a non-affiliated tenant.
On August 11, 1997, the Bank opened a branch office located at 44623
Five Mile, Plymouth Township, Michigan in a leased 1,595 square foot building
in a retail shopping center anchored by a regional grocery store.
Item 3. Legal Proceedings
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There are no legal proceedings pending against the Company or the
Bank.
Item 4. Submission of Matters to a Vote of Security Holders
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No matters were submitted to a vote of security holders during the
fourth quarter of 1997.
Executive Officers of the Company and Bank
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Set forth below are the names and ages of the executive officers of
the Company and the Bank, positions held and the years from which
held. There are no family relationships among such persons.
John E. Demmer, 74
Chairman of the Board, Dearborn Bancorp, Inc. and Community Bank of
Dearborn Chairman of the Board and Director of the Company since
1992. Chairman of the Board and Director of the Bank since 1993.
Chairman of the Board and Chief Executive Officer of Jack Demmer
Ford, Inc. since 1994. President and Chief Executive Officer of Jack
Demmer Ford, Inc. from 1957 to 1994.
Richard Nordstrom, 71
Vice Chairman, Dearborn Bancorp, Inc.
Vice Chairman and Director of the Company since 1998. President and
Director of the Company from 1992 to 1997. Director of the Bank since
1993. Chairman of the Board of Nordstrom Samson Associates from 1960
to 1996.
Michael J. Ross, 47
President, Dearborn Bancorp, Inc.
President and Chief Executive Officer, Community Bank of Dearborn
President and Director of the Company since 1998. Vice President and
Director of the Company from 1993 to 1997. President, Chief Executive
Officer, and Director of the Bank since 1993. President of Mike Ross
and Associates, Inc. from 1992 to 1993.
Jeffrey L. Karafa, 33
Vice President and Treasurer, Dearborn Bancorp, Inc.
Vice President and Cashier, Community Bank of Dearborn
Vice President and Treasurer of the Company since 1998. Vice
President and Cashier of the Bank since 1996. Assistant Vice
President of the Bank from 1994 to 1996. Second Vice President of
Michigan National Bank from 1992 to 1994.
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Donald G. Karcher, 68
Vice President, Dearborn Bancorp, Inc.
Vice President and Director of the Company since 1992. Director of
the Bank since 1993. Chairman of the Board of Karcher Agency, Inc.
since 1994. President of Karcher Agency, Inc. from 1965 to 1994.
Wilber M. Brucker, Jr., 72
Secretary, Dearborn Bancorp, Inc. and Community Bank of Dearborn
Secretary and Director of the Company since 1992. Secretary and
Director of the Bank since 1993. Of Counsel, Law Firm of Riley and
Roumell from 1989 to 1995.
Timothy J. Cuttle, 52
Executive Vice President, Community Bank of Dearborn
Executive Vice President and Chief Lending Officer of the Bank since
1996. Senior Vice President of Huntington Banks of Michigan from 1990
to 1995.
Jeffrey J. Wolber, 42
Vice President, Community Bank of Dearborn
Vice President of the Bank since 1994. Banking Officer and Branch
Manager of NBD Bank. from 1990 to 1993.
PART II
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Item 5. Market for Registrant's Common Equity, and Related Stockholder
- ------- --------------------------------------------------------------
Matters
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The information required by this item appears in the Corporation's
1997 Annual Report to Stockholders under the caption "Dearborn Bancorp, Inc.,
Common Stock" and is incorporated by reference herein.
Item 6. Selected Financial Data
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The information required by this item appears in the Corporation's
1997 Annual Report to Stockholders under the caption "Summary of Selected
Financial Data" and is incorporated by reference herein.
Item 7. Management's Discussion and Analysis of Financial Condition and
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Results of Operations
---------------------
The information required by this item appears in the Corporation's
1997 Annual Report to Stockholders under the caption "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and is
incorporated by reference herein.
Item 8. Financial Statements and Supplementary Data
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The financial statements included in the Corporation's 1997 Annual
Report to Stockholders are incorporated by reference herein.
Item 9. Changes in and Disagreements with Accountants on Accounting and
- ------- ---------------------------------------------------------------
Financial Disclosure
--------------------
There are no changes in or disagreements with accountants on
accounting and financial disclosure.
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PART III
Item 10. Directors and Executive Officers of the Registrant
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The information set forth under the caption "Information about
Directors and Nominees for Directors" in the definitive Proxy Statement of
the Corporation dated April 17, 1998 is incorporated by reference herein.
Reference is made to Part I of this report for information as to
executive officers of the Corporation and Bank.
Item 11. Executive Compensation
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The information set forth under the caption "Executive Compensation"
in the definitive Proxy Statement of the Corporation dated April 17, 1998 is
incorporated by reference herein.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- -------- --------------------------------------------------------------
The information set forth under the caption "Security Ownership" in
the definitive Proxy Statement of the Corporation dated April 17, 1998 is
incorporated by reference herein.
Item 13. Certain Relationships and Related Transactions
- -------- ----------------------------------------------
The information set forth under the caption "Related Transactions" in
the definitive Proxy Statement of the Corporation dated April 17, 1998 is
incorporated by reference herein.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
- -------- ---------------------------------------------------------------
(a)(1) Financial Statements
The following financial statements of the Corporation appear
on the indicated pages of the Corporation's 1997 Annual Report
to Stockholders and are incorporated by reference in item 8.
Report of Independent Certified Public Accountants
on 1997 and 1996 consolidated financial statements
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules
No schedules are required under this item.
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(3) Exhibits
The Exhibits marked with one asterisk below were filed as
Exhibits to the Registration Statement of the Registrant on
Form S-18 (Registration Number 33-55808) are incorporated
herein by reference. Exhibits marked with two asterisks below
were filed as Exhibits to the Form 10-K Report of the
Registrant for the fiscal year ended December 31, 1993 are
incorporated herein by reference. Exhibits marked with three
asterisks below were filed as Exhibits to the Form 10-K Report
of the Registrant for the fiscal year ended December 31, 1994
are incorporated herein by reference. Exhibits marked with
four asterisks below were filed as Exhibits to the Form 10-K
Report of the Registrant for the fiscal year ended December
31, 1995 are incorporated herein by reference. Exhibits marked
with five asterisks below were filed as Exhibits to the Form
10-Q Report of the Registrant for the quarter ended June 30,
1997 and are incorporated herein by reference, the Exhibit
numbers in brackets being those in such Registration
Statements.
(3)(a)* Articles of Incorporation of Registrant. [3(a)]
(3)(a)***** Articles of Incorporation of Registrant,
As Amended. [3(a)]
(3)(b)* By-Laws of the Registrant. [3(b)]
(3)(b)**** By-Laws of the Registrant, As Amended. [3(b)]
(10)(a)* Letter re employment of Michael J. Ross by
Registrant. [10(a)]
(10)(b)*** 1994 Stock Option Plan. [10(b)]
(10)(b)***** 1994 Stock Option Plan, As Amended. [10(b)]
(13) 1997 Annual Report to Stockholders.
(21)** Subsidiaries of the Registrant. [21]
(23)** Consent of McEndarffer, Hoke & Bernhard, P.C.[23]
(b) Reports on Form 8-K
The Corporation filed no reports on Form 8-K during the
quarter ended December 31, 1997.
11
<PAGE>
Form 10-K Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, on March 2,
1998.
Dearborn Bancorp, Inc.
/s/ John E. Demmer
By ___________________________________________
(John E. Demmer, Chairman of the Board)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf
of the registrant and in the capacities indicated on March 2, 1998.
/s/ John E. Demmer
- ------------------------ Chairman of the Board, Chief Executive Officer
(John E. Demmer) and Director
(Principal Executive Officer)
/s/ Jeffrey L. Karafa
- ------------------------ Vice President and Treasurer
(Jeffrey L. Karafa) (Principal Financial and Accounting Officer)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
/s/ Wilber M. Brucker, Jr. /s/ William E. Kreger
- -------------------------- Secretary --------------------- Director
(Wilber M. Brucker, Jr.) and Directors (William E. Kreger)
/s/ Margaret I. Campbell /s/ Jeffrey G. Longstreth
- ------------------------ Director ------------------------- Director
(Margaret I. Campbell) (Jeffrey G. Longstreth)
/s/ Michael V. Dorian /s/ Richard Nordstrom
- --------------------- Director --------------------- Vice Chairman
(Michael V. Dorian) (Richard Nordstrom) and Director
/s/ David Himick /s/ Michael J. Ross
- --------------------- Director --------------------- President
(David Himick) (Michael J. Ross) and Director
/s/ Bradley F. Keller /s/ Robert C. Schwyn
- --------------------- Director --------------------- Director
(Bradley F. Keller) (Dr. Robert C. Schwyn)
/s/ Steven M. Kirkpatrick /s/ Ronnie J. Story
- -------------------------- Director ---------------------- Director
(Steven M. Kirkpatrick) (Ronnie J. Story)
</TABLE>
Exhibit 13
Dearborn Bancorp, Inc.
and its subsidiary
Community Bank of Dearborn
1997
ANNUAL REPORT
<PAGE>
[Inside Front Cover ]
[This Page Intentionally Left Blank]
2
<PAGE>
<TABLE>
<CAPTION>
Dearborn Bancorp, Inc.
and its subsidiary
Community Bank of Dearborn
CONTENTS
<S> <C>
Description of Business............................................4
Summary of Selected Financial Data.................................5
Chairman's and President's Letter to Stockholders..................6
Report of Independent Certified Public Accountants.................8
Consolidated Balance Sheets........................................9
Consolidated Statements of Operations..............................10
Consolidated Statements of Stockholders' Equity....................11
Consolidated Statements of Cash Flows..............................12
Notes to Consolidated Financial Statements.........................13
Management's Discussion and Analysis...............................33
Dearborn Bancorp, Inc. Directors and Officers......................43
Community Bank of Dearborn Directors and Officers..................44
</TABLE>
3
<PAGE>
DESCRIPTION OF BUSINESS
Dearborn Bancorp, Inc.
Dearborn Bancorp, Inc. (the "Parent Company" and, together with its
subsidiary, the "Corporation") is a registered bank holding company which was
incorporated on September 30, 1992. The primary purpose of the holding
company is to own and operate the subsidiary bank, Community Bank of Dearborn
(the "Bank").
Community Bank of Dearborn
The Bank was incorporated on June 28, 1993 and began operations as a state
chartered commercial bank on February 28, 1994 from its main office located
on Michigan Avenue in Dearborn. On December 20, 1995, a second office located
on West Warren Avenue in Dearborn Heights was opened. On August 11, 1997, a
third office located on Five Mile Road at Sheldon Road in Plymouth Township
was opened. The Bank offers a wide range of financial products and services.
These include checking accounts, savings accounts, money market accounts,
certificates of deposit, business checking, direct deposit, loan services
(commercial, consumer, real estate mortgages), travelers' checks, cashiers'
checks, wire transfers, safety deposits boxes, collection services, and night
depository service. The Bank does not have a trust department.
FORM 10-K AVAILABLE
For a free copy of the Corporation's Form 10-K filed with the U.S. Securities
and Exchange Commission, please direct your request to Mr. Jeffrey Karafa,
Dearborn Bancorp, Inc., PO Box 2247, Dearborn, Michigan 48123-2247.
ANNUAL MEETING
The Annual Meeting of Stockholders will be held on May 19, 1998, at Park
Place, 23400 Park Avenue, Dearborn, Michigan, at 4:00 p.m.
DEARBORN BANCORP, INC., COMMON STOCK
To the Parent Company's knowledge, there has been no significant trading in
the Parent Company's common stock since it was issued in 1993, and there is
no organized market in the Parent Company's stock. Shares are traded on an
individual basis. The last known trade in 1997 was on September 16, 1997 at
$13.00 per share. The Parent Company declared a 10% stock dividend payable
January 30, 1998, to shareholders of record as of December 16, 1997 and has
no current plans to pay additional dividends in the future.
4
<PAGE>
SUMMARY OF SELECTED FINANCIAL DATA
The following selected consolidated financial and other data as of and for
each of the five years in the period ended December 31, 1997 are derived from
the Corporation's audited consolidated financial statements. The information
set forth below should be read in conjunction with the Consolidated Financial
Statements and the Notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations." The Consolidated Statements
of Financial Condition as of December 31, 1997 and 1996, and the Consolidated
Statements of Operations for the years ended December 31, 1997, 1996 and 1995
are included elsewhere in this Annual Report.
<TABLE>
<CAPTION>
At or for the years ended December 31,
-----------------------------------------------------------------
(In thousands, except share data) 1997 1996 1995 1994 (1) 1993 (1)
---- ---- ---- -------- --------
<S> <C> <C> <C> <C> <C>
OPERATIONS
Interest income $ 5,404 $ 3,314 $ 2,023 $ 674 $ 65
Interest expense 2,998 1,706 1,004 266 --
---------- ---------- ---------- ---------- ----------
Net interest income 2,406 1,608 1,019 408 65
Provision for possible credit losses 164 164 114 100 --
---------- ---------- ---------- ---------- ----------
Net interest income after provision for
possible credit losses 2,242 1,444 905 308 65
Total non-interest income 312 284 210 93 --
Total non-interest expense 2,089 1,701 1,403 1,065 205
---------- ---------- ---------- ---------- ----------
Net income (loss) before federal income
tax benefit 465 27 (288) (664) (140)
Income tax benefit 145 -- -- -- --
---------- ---------- ---------- ---------- ----------
Net income (loss) $ 610 $ 27 ($ 288) ($ 664) ($ 140)
========== ========== ========== ========== ==========
FINANCIAL CONDITION
Total assets $ 86,653 $ 56,599 $ 35,130 $ 20,879 $ 7,041
Investment securities - available for sale 29,780 10,493 10,035 7,088 --
Loans 52,139 36,263 19,945 9,907 --
Deposits 75,397 47,463 28,922 14,389 --
Other borrowings 2,037 554 569 584 597
Stockholders' equity 8,752 8,190 5,458 5,626 6,381
SHARE INFORMATION
Net income (loss) per common share -
basic and diluted $0.58 $0.04 ($0.39) ($0.90) ($1.68)
Book value per common share $8.38 $7.84 $7.36 $7.59 $8.61
Average shares outstanding - basic 1,044,924 742,178 741,346 741,346 83,202
Average shares outstanding - diluted 1,055,861 742,178 741,346 741,346 83,202
Shares outstanding at end of period 1,044,924 1,044,924 741,346 741,346 741,346
OTHER DATA
Return on average assets 0.86% 0.06% (1.01%) (5.12%) (1.99%)
Return on average equity 7.23% 0.50% (5.20%) (11.62%) (2.19%)
Average equity to average assets 11.84% 12.19% 19.46% 44.06% 90.63%
Net interest margin 3.60% 3.98% 3.92% 3.55% ---%
Net interest spread 2.54% 2.92% 2.65% 1.46% ---%
Allowance for possible credit losses to
total loans 1.01% 1.01% 1.02% 1.00% ---%
Non-performing assets to total loans 0.02% 0.02% 0.21% ---% ---%
Stockholders' equity to total assets 10.10% 14.47% 15.54% 26.95% 90.63%
Total interest expense to interest income 55.48% 51.48% 49.63% 39.47% ---%
Number of Offices 3 2 2 1 1
<FN>
(1) Bank operations began on February 28, 1994.
</TABLE>
5
<PAGE>
CHAIRMAN'S AND PRESIDENT'S LETTER
To Our Shareholders:
Our Corporation continued to make extraordinary progress throughout
1997. In less than four years, we have become a profitable institution. While
our market share is still small compared to the giants with which we compete,
it has become clear that our opportunities and potential are almost
unlimited.
Net income in 1997 was $610,000 or $0.58 per common share. In 1996,
we earned just $27,000 or $0.04 per share. In areas that lend themselves to
meaningful comparison, total assets increased 53% to $86.7 million; total
deposits went up 59% to $75.4 million; and total loans grew by 44% to $52.1
million.
In addition, we originated $21 million in residential mortgages and
sold $11 million of these loans in the secondary market. In 1996, by
comparison, we originated $14.5 million in mortgages and sold more than $7
million of them in the secondary market. The annual increases in mortgage
originations and secondary market sales were 45% and 55%, respectively.
The strides we have taken since Community Bank of Dearborn opened for
business in February 1994, are apparent when our results are compared to the
projections our organizers made when we applied for a bank charter. According
to those admittedly conservative projections, we were to have ended 1997 with
$35 million in total assets and annual income of $195,000. Our actual asset
total is approximately two and one half times what we projected and our
earnings exceeded the forecast by a factor of more than three.
We are also exceeding our own internal budgets. The 1997 budget that
the Board approved at the beginning of the year called for us to reach $70.5
million in total assets and earn about $450,000.
We want to emphasize that we have not "forced" growth by compromising
our credit standards. At year-end, the Allowance for Possible Credit Losses
stood at 1.01% of total loans. Yet only 0.47% of all loans were delinquent,
no commercial loans or commercial real estate mortgages were delinquent and
total charge-offs of loans during 1997 were just $7,895.
There are a number of reasons why our organization has done so well.
Most important, we have developed an effective marketing program built around
three principal components: an aggressive and effective officer calling
program, sophisticated telemarketing and productive direct mail advertising.
We have complemented these activities with two other activities intended to
make them even more effective. The first activity is our Community Club
program for people over age 50. At least once a month, we sponsor educational
programs for club members. The club's travel program has allowed hundreds of
members to go on everything from one day trips to nearby attractions to
around-the-world tours. And more than 250 members attended our Customer
Appreciation Luncheon in September 1997. The other activity is the
involvement of our officers and directors in a wide range of local civic and
service activities. The personal relationships they develop become, in many
cases, good sources of new business and referrals.
Moreover, the expansion of our branch network continued with the
opening of our newest office at Five Mile and Sheldon Roads in Plymouth
Township in August. In just four and a half months, this new branch attracted
more than $5.4 million in deposits. It is now close to the break-even point
and we expect it to become profitable during 1998.
6
<PAGE>
To provide our shareholders with tangible benefits from our success,
the Board declared a 10 percent stock dividend at its December meeting.
Certificates representing their additional shares were distributed to
shareholders on January 30, 1998.
At this December meeting, the Board also took the first step to bring
additional capital into the Corporation. We expect that our total assets will
surpass $100 million during the second quarter of 1998. In spite of our
successful rights offering at the end of 1996, our present capital base will
not allow us to grow much beyond that point and we will be forced to turn
away new business if we have to rely solely on retained earnings to build our
capital accounts.
Consequently, the Board authorized negotiations with underwriters
leading to the sale of an additional one million shares of common stock in a
public offering. Those negotiations have been successful and the offering is
expected to be consummated during April, 1998. The proceeds of this sale will
more than double our capital and allow us to continue our rapid growth well
into the foreseeable future.
All the other directors and our senior officers join us in thanking
you for the support and cooperation that you have given us. This has been a
key factor in the progress we have made. Thanks in no small measure to your
personal business and your referrals, Community Bank of Dearborn grew from
2,918 accounts with $47.5 million on deposit at the end of 1996 to 4,204
accounts with $75.4 million on deposit at the end of 1997. We are counting on
your continued help in recording comparable growth in the coming year.
Sincerely,
/s/ John E. Demmer /s/ Michael J. Ross
- ------------------------------ --------------------------
John E. Demmer Michael J. Ross
Chairman of the Board and CEO President and CEO
Dearborn Bancorp, Inc. Community Bank of Dearborn
7
<PAGE>
Report of Independent Certified Public Accountants
Board of Directors
Dearborn Bancorp, Inc.
We have audited the accompanying consolidated balance sheets of Dearborn
Bancorp, Inc. and subsidiary as of December 31, 1997 and 1996, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1997.
These financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Dearborn Bancorp, Inc. and subsidiary as of December 31, 1997 and 1996,
and the results of their operations and their consolidated cash flows for
each of the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles.
/s/ Grant Thornton LLP
Detroit, Michigan
January 28, 1998
8
<PAGE>
<TABLE>
<CAPTION>
DEARBORN BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data) December 31,
-----------------
1997 1996
---- ----
<S> <C> <C>
ASSETS
Cash and cash equivalents
Cash and due from banks $ 1,406 $ 2,126
Federal funds sold 254 5,300
-------- --------
Total cash and cash equivalents 1,660 7,426
Mortgage loans held for sale 347 303
Investment securities - available for sale 29,780 10,493
Loans
Loans 52,139 36,263
Allowance for possible credit losses (522) (366)
-------- --------
Net loans 51,617 35,897
Bank premises and equipment, net 2,296 2,080
Accrued interest receivable 723 306
Other assets 230 94
-------- --------
Total assets $ 86,653 $ 56,599
======== ========
LIABILITIES
Deposits
Non-interest bearing deposits $ 8,587 $ 7,583
Interest bearing deposits 66,810 39,880
-------- --------
Total deposits 75,397 47,463
Other liabilities
Federal funds purchased 1,500 --
Mortgage payable 537 554
Accrued interest payable 310 127
Other liabilities 157 265
-------- --------
Total liabilities 77,901 48,409
STOCKHOLDERS' EQUITY
Common stock - 3,000,000 shares authorized,
1,044,924 and 742,178 shares
outstanding in 1997 and 1996,
respectively 10,506 6,521
Common stock subscribed but unissued,
303,578 shares in 1996 -- 2,752
Accumulated deficit (1,689) (1,065)
Net unrealized gain (loss) on securities
available for sale (65) (18)
-------- --------
Total stockholders' equity 8,752 8,190
-------- --------
Total liabilities and
stockholders' equity $ 86,653 $ 56,599
======== ========
<FN>
The accompanying notes are an integral part of these consolidated statements.
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
DEARBORN BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share data) Years Ended December 31,
------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Interest income
Interest on loans $ 3,981 $ 2,466 $ 1,369
Interest on investment securities
- available for sale 1,235 733 466
Interest on federal funds and
deposits with banks 188 115 188
----------- ----------- -----------
Total interest income 5,404 3,314 2,023
Interest expense
Interest on deposits 2,955 1,662 959
Interest on other liabilities 43 44 45
----------- ----------- -----------
Total interest expense 2,998 1,706 1,004
Net interest income 2,406 1,608 1,019
Provision for possible credit losses 164 164 114
----------- ----------- -----------
Net interest income after provision for
possible credit losses 2,242 1,444 905
----------- ----------- -----------
Non-interest income
Service charges on deposit
accounts 124 92 38
Fees for other services to
customers 26 19 16
Gain on the sale of loans 144 130 126
Gain on the sale of investment
securities 13 37 19
Other income 5 6 11
----------- ----------- -----------
Total non-interest income 312 284 210
Non-interest expense
Salaries and employee benefits 1,218 1,060 877
Occupancy and equipment expense 267 198 147
Advertising and marketing 105 93 63
Stationery and supplies 80 56 62
Professional services 99 63 79
Data processing 90 71 47
FDIC insurance premiums 7 2 16
Other operating expenses 223 158 112
----------- ----------- -----------
Total non-interest expense 2,089 1,701 1,403
----------- ----------- -----------
Income (loss) before federal income tax
benefit 465 27 (288)
Income tax benefit (145) -- --
----------- ----------- -----------
Net income (loss) $ 610 $ 27 $ (288)
=========== =========== ===========
Per share data:
Net income (loss) - basic and diluted $ 0.58 $ 0.04 $ (0.39)
Weighted average number of shares
outstanding - basic 1,044,924 742,178 741,346
Weighted average number of shares
outstanding - diluted 1,055,861 742,178 741,346
<FN>
The accompanying notes are an integral part of these consolidated statements.
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
DEARBORN BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1997, 1996 and 1995
Net
Unrealized
Common Gain (Loss)
Stock on
Subscribed Securities Total
Common but Accumulated Available Stockholders'
(In thousands, except share data) Stock Unissued Deficit For Sale Equity
--------- ----------- ---------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1995 $ 6,521 $ -- $ (804) $ (91) $ 5,626
Net loss -- -- (288) -- (288)
Net change in
unrealized gain (loss)
on securities -- -- -- 120 120
------- ------- ------- ------- -------
Balance, December 31, 1995 6,521 -- (1,092) 29 5,458
303,578 shares of
common stock
subscribed
(net of offering
costs of $8),
but unissued -- 2,752 -- -- 2,752
Net income -- -- 27 -- 27
Net change in
unrealized gain (loss)
on securities -- -- -- (47) (47)
------- ------- ------- ------- -------
Balance, December 31, 1996 6,521 2,752 (1,065) (18) 8,190
303,578 shares of
subscribed common
stock issued
(net of additional
offering costs
of $1) 2,751 (2,752) -- -- (1)
10% stock dividend
declared
December 16,
payable
January 30, 1998 1,234 -- (1,234) -- --
Net income -- -- 610 -- 610
Net change in
unrealized gain (loss)
on securities -- -- -- (47) (47)
------- ------- ------- ------- -------
Balance, December 31, 1997 $10,506 $ -- $(1,689) $ (65) $ 8,752
======= ======= ======= ======= =======
<FN>
The accompanying notes are an integral part of these consolidated statements.
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
DEARBORN BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) Years Ended December 31,
------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities
Interest and fees received $ 5,142 $ 3,415 $ 1,959
Interest paid (2,815) (1,671) (1,040)
Proceeds from sale of mortgages held
for sale 11,209 7,648 8,251
Origination of mortgages held for sale (11,109) (7,413) (8,493)
Cash paid to suppliers and employees (2,032) (1,330) (1,435)
-------- -------- --------
Net cash provided by (used in)
operating activities 395 649 (758)
Cash flows from investing activities
Proceeds from the sale of securities
available for sale 2,613 8,735 3,249
Proceeds from maturities of
securities available for sale 19,500 9,250 4,050
Purchases of securities available for
sale (41,438) (18,514) (10,091)
Increase in loans, net of payments
received (15,884) (16,320) (10,048)
Purchases of property and equipment (369) (194) (483)
-------- -------- --------
Net cash used in investing activities (35,578) (17,043) (13,323)
Cash flows from financing activities
Net increase in non-interest bearing
deposits 1,004 3,510 1,706
Net increase in interest bearing
deposits 26,930 15,031 12,827
Increase in federal funds purchased 1,500 -- --
Principal payments on mortgage payable (17) (15) (15)
Common stock subscriptions received -- 2,752 --
-------- -------- --------
Net cash provided by financing
activities 29,417 21,278 14,518
Increase (decrease) in cash and cash equivalents (5,766) 4,884 437
Cash and cash equivalents at the beginning of
the period 7,426 2,542 2,105
-------- -------- --------
Cash and cash equivalents at the end of the
period $ 1,660 $ 7,426 $ 2,542
======== ======== ========
Reconciliation of net income (loss) to net cash
provided by (used in) operating activities $ 610 $ 27 $ (288)
Net income (loss)
Adjustments to reconcile net income
(loss) to net cash
provided by (used in)
operating activities
Provision for possible credit losses 164 164 114
Depreciation and amortization expense 158 133 104
Accretion of discount on investment securities (6) (11) (54)
Amortization of premium on investment
securities 10 72 38
(Gain) on the sale of investment securities (13) (37) (19)
(Increase) decrease in mortgages held for sale (44) 105 (368)
(Increase) in interest receivable (417) (16) (129)
Increase in interest payable 183 35 36
(Increase) decrease in other assets (142) 1 (57)
Increase (decrease) in other liabilities (108) 176 (135)
-------- -------- --------
Net cash provided by (used in) operating
activities $ 395 $ 649 $ (758)
======== ======== ========
<FN>
The accompanying notes are an integral part of these consolidated statements.
</TABLE>
12
<PAGE>
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied
in the preparation of the accompanying consolidated financial
statements follows.
Basis of Presentation and Operations
------------------------------------
Dearborn Bancorp, Inc. (the Corporation) was incorporated in Michigan
on September 30, 1992. The Corporation's subsidiary, Community Bank
of Dearborn (the Bank), began operations on February 28, 1994. The
Bank operates three community banking offices in Dearborn, Dearborn
Heights and Plymouth, Michigan, offering a full range of banking
services to individuals and businesses.
Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of
Dearborn Bancorp, Inc. and its wholly-owned subsidiary, Community
Bank of Dearborn. All significant intercompany transactions are
eliminated in consolidation.
Cash Equivalents
----------------
For purposes of the consolidated statements of cash flows, the
Corporation considers cash on hand, cash due from banks, and federal
funds sold to be cash equivalents.
Mortgages Held for Sale
-----------------------
Mortgages held for sale are carried at the lower of cost or market.
Market value is determined on the basis of existing forward delivery
contracts.
Investment Securities
---------------------
When securities are purchased and the Corporation intends to hold the
securities for an indefinite period of time but not necessarily to
maturity, they are classified as available for sale and carried at
market value. Any decision to sell a security available for sale
would be based on various factors, including significant movements in
interest rates, changes in the maturity mix of the Corporation's
assets and liabilities, liquidity demands, regulatory capital
considerations, and other similar factors. Cost is adjusted for
amortization of premiums and accretion of discounts to maturity.
Unrealized gains and losses for available for sale securities are
excluded from income and recorded as an amount, net of tax, in a
separate component of stockholders' equity until realized. All of the
Corporation's securities are classified as available for sale.
Interest Income on Loans
------------------------
Interest on loans is accrued and credited to income based upon the
principal amount outstanding. The accrual of interest on loans is
discontinued when, in the opinion of management, there is an
indication that the borrower may be unable to meet payments as they
become due. Upon such discontinuance, all unpaid interest accrued is
reversed. Interest accruals are generally resumed when all delinquent
principal and interest has been brought current or the loan becomes
both well secured and in the process of collection.
13
<PAGE>
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1997, 1996 and 1995
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Allowance for Possible Credit Losses
------------------------------------
The allowance is maintained at a level considered by management to be
adequate to provide for reasonably foreseeable loan losses based on
an evaluation of the loan portfolio, loan loss experience and the
economic environment.
Loan Impairment
---------------
A loan is identified as impaired when it is probable in the opinion
of management that interest and principal may not be collected
according to the contractual terms of the loan agreement.
Bank Premises and Equipment
---------------------------
Bank premises and equipment are stated at cost less accumulated
depreciation. Depreciation is computed using the straight-line method
over the estimated useful lives of the assets as follows:
Building and improvements - 5 to 30 years
Furniture and equipment - 5 to 10 years
Income Taxes
------------
The Corporation files a consolidated federal income tax return. The
Corporation uses the asset and liability method of accounting for
income taxes. Deferred tax assets and liabilities are recorded based
on the difference between the tax bases of assets and liabilities and
their carrying amounts for financial reporting purposes. Tax planning
strategies are utilized in the computation of deferred federal income
taxes. In addition, the current or deferred tax consequences of a
transaction is measured by applying the provisions of enacted tax
laws to determine the amount of taxes receivable or payable,
currently or in future years.
Stock Options
-------------
The Financial Accounting Standards Board (the "FASB") issued
Statement No. 123, "Accounting for Stock Based Compensation" ("SFAS
No. 123") effective for transactions entered into during 1996 and
thereafter. The statement establishes a fair market value method of
accounting for employee stock options and similar equity instruments
such as warrants, and encourages all companies to adopt that method
of accounting for all their employee stock option plans. However, the
statement allows companies to continue measuring compensation cost
for such plans using accounting guidance in place prior to SFAS No.
123. Companies that elect to remain with the former method of
accounting must make pro forma disclosures of net income and income
per share as if the fair value method provided for in SFAS No. 123
had been adopted. The Corporation has not adopted the fair value
provisions of SFAS No. 123 but has disclosed the pro forma effects in
accordance with the pronouncement.
14
<PAGE>
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1997, 1996 and 1995
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Stock Dividends
---------------
The Corporation accounts for stock dividends by capitalizing retained
earnings in an amount equal to the fair value of the additional
shares issued. All share and per share amounts are retroactively
adjusted for stock dividends.
The Corporation declared a 10% stock dividend payable January 30,
1998, to shareholders of record as of December 16, 1997. Accordingly,
per share amounts for 1997, 1996 and 1995 have been adjusted to
reflect the dividend.
Income Per Share
----------------
The FASB has issued Statement No. 128, "Earnings Per Share" ("SFAS
No. 128") which is effective for financial statements issued after
December 15, 1997. The new standard eliminates primary and fully
diluted income per share and requires presentation of basic and
diluted income per share together with disclosure of how the per
share amounts were computed. Basic income per share excludes dilution
and is computed by dividing income available to common shareholders
by the weighted average common shares outstanding for the period.
Diluted income per share reflects the potential dilution that could
occur if securities or other contracts to issue common stock were
exercised and converted into common stock or resulted in the issuance
of common stock that then shared in the income of the entity. The
Corporation adopted SFAS No. 128 at December 31, 1997. All per share
data has been restated to reflect application of this new
pronouncement.
Use of Estimates
----------------
In the preparation of financial statements, management is required to
make estimates and assumptions that affect reported amounts of assets
and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements and revenues and
expenses during the reporting period. Actual results could differ
from those estimates. Estimates that are more susceptible to change
in the near term include the allowance for possible credit losses and
fair value of certain financial instruments.
15
<PAGE>
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1997, 1996 and 1995
NOTE B - INVESTMENT SECURITIES - AVAILABLE FOR SALE
The amortized cost and estimated market value of investment
securities - available for sale are as follows (in thousands):
<TABLE>
<CAPTION>
December 31, 1997
------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
US Treasury securities $ 2,001 $2 $-- $ 2,003
US Government agency
securities 27,844 -- (67) 27,777
------- -- ---- -------
Totals $29,845 $2 $(67) $29,780
======= == ==== =======
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996
---------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
US Treasury securities $ 2,009 $-- $(10) $ 1,999
US Government agency
securities 8,502 4 (12) 8,494
------- -- ---- -------
Totals $10,511 $ 4 $(22) $10,493
======= === ==== =======
<FN>
The amortized cost and estimated market value of investment
securities - available for sale at December 31, 1997 by contractual
maturity, are shown below (in thousands):
</TABLE>
<TABLE>
<CAPTION>
Estimated
Amortized Market
Cost Value
---------- ---------
<S> <C> <C>
Due in three months or less $ 1,000 $ 999
Due in three months through one year 999 1,000
Due in one year through five years 27,846 27,781
------- ---------
Totals $29,845 $ 29,780
======= =========
</TABLE>
16
<PAGE>
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1997, 1996 and 1995
NOTE B - INVESTMENT SECURITIES - AVAILABLE FOR SALE (Continued)
Securities having a carrying value of $2,001,000 and a market value
of $2,003,000 were pledged to secure public deposits. Securities
having a carrying value of $1,000,000 and a market value of $999,000
were pledged to secure treasury, tax and loan payments with the
Federal Reserve Bank of Chicago.
NOTE C - LOANS
Major categories of loans included in the portfolio at December 31
are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
------- --------
<S> <C> <C>
Consumer loans $ 12,705 $ 8,877
Commercial, financial, & other 10,668 7,199
Commercial real estate construction 1,746 1,971
Commercial real estate mortgages 9,796 6,384
Residential real estate mortgages 17,224 11,832
-------- --------
52,139 36,263
Allowance for possible credit losses (522) (366)
-------- --------
$ 51,617 $ 35,897
======== ========
</TABLE>
17
<PAGE>
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1997, 1996 and 1995
NOTE C - LOANS (Continued)
Final loan maturities and rate sensitivity of the loan portfolio at
December 31, 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
Within Three to One to After
Three Twelve Five Five
Months Months Years Years Total
--------- ------- ------ ------ ----------
<S> <C> <C> <C> <C> <C>
Consumer loans $ 1,779 $ 605 $10,166 $144 $12,694
Commercial, financial &
other 6,006 678 3,984 -- 10,668
Commercial real estate
construction 1,486 53 207 -- 1,746
Commercial real estate
mortgages 486 693 8,337 280 9,796
Residential real estate
mortgages 1,843 5,934 9,378 69 17,224
------- ------ ------- ---- -------
$11,600 $7,963 $32,072 $493 52,128
======= ====== ======= ====
Non-accrual loans 11
-------
Total loans $52,139
=======
Loans at fixed interest
rates $ 778 $1,446 $23,000 $493 $25,717
Loans at variable
interest rates 10,822 6,517 9,072 -- 26,411
------- ------ ------- ---- -------
$11,600 $7,963 $32,072 $493 52,128
======= ====== ======= ====
Non-accrual loans 11
-------
Total loans $52,139
=======
</TABLE>
Certain directors of the Corporation, including their related
interests, were loan customers of the Bank during 1997. Such loans
were made in the ordinary course of business at the Bank's normal
credit terms and interest rates, and do not represent more than a
normal risk of collection. Total loans to these persons at December
31, 1997 amounted to $1,989,000. During 1997, $1,664,000 of new loans
were made and repayments totaled $1,525,000. These loans aggregated
to 23% of consolidated stockholders' equity as of December 31, 1997.
18
<PAGE>
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1997, 1996 and 1995
NOTE C - LOANS (Continued)
Transactions in the allowance for possible credit losses for the
years ended December 31 are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Balance, beginning of year $ 366 $ 204 $ 100
Charge-offs:
Consumer loans (8) (4) (10)
Recoveries:
Consumer loans -- 2 --
----- ----- -----
Net charge-offs (8) (2) (10)
Additions charged to operations 164 164 114
----- ----- -----
Balance at end of period $ 522 $ 366 $ 204
===== ===== =====
Allowance to total loans 1.01% 1.01% 1.02%
===== ===== =====
Net charge-offs to average loans 0.02% 0.01% 0.07%
===== ===== =====
</TABLE>
19
<PAGE>
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1997, 1996 and 1995
NOTE C - LOANS (Continued)
The allocation of the allowance for possible credit losses as of
December 31, are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
---------------------- ---------------------- ----------------------
Percent of Percent of Percent of
loans in loans in loans in
each category each category each category
Amount to total loans Amount to total loans Amount to total loans
------ -------------- ------ -------------- ------ --------------
<S> <C> <C> <C> <C> <C> <C>
Consumer loans $ 15 24.37% $ 8 24.48% $ 10 23.16%
Commercial, financial &
other 7 20.46% 5 19.85% 4 26.95%
Commercial real estate
construction 1 3.35% 1 5.44% 1 4.82%
Commercial real estate
mortgages 7 18.79% 4 17.60% 2 13.42%
Residential real estate
mortgages 12 33.03% 8 32.63% 4 31.65%
Unallocated 480 N/A 340 N/A 183 N/A
---- ------ ---- ------ ---- ------
$522 100.00% $366 100.00% $204 100.00%
==== ====== ==== ====== ==== ======
</TABLE>
The aggregate balances on non-accrual loans and the reduction of
interest income associated with these loans at December 31, are as
follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Non-accrual loans $11 $ 8 $43
=== === ===
As a percentage of total loans 0.02% 0.02% 0.21%
=== === ===
Income in accordance with original
loan terms $ 2 $ 1 $ 2
Income recognized -- -- --
--- --- ---
Reduction in interest income $ 2 $ 1 $ 2
=== === ===
</TABLE>
20
<PAGE>
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1997, 1996 and 1995
NOTE D - BANK PREMISES AND EQUIPMENT
Bank premises and equipment are comprised of the following at
December 31 (in thousands):
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Land and improvements $ 394 $ 394
Building and improvements 1,579 1,469
Furniture and equipment 742 484
------ ------
2,715 2,347
Less accumulated depreciation 419 267
------ ------
$2,296 $2,080
====== ======
</TABLE>
Depreciation expense for 1997, 1996 and 1995 amounted to $152,000,
$127,000, and $98,000, respectively.
NOTE E - DEPOSITS
The following is a summary of the distribution and weighted average
interest rate of deposits at December 31 (in thousands):
<TABLE>
<CAPTION>
1997 1996
----------------------- ---------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
------ -------- ------ --------
<S> <C> <C> <C> <C>
Non-interest bearing:
Demand $8,587 --- $7,583 ---
====== ======
Interest bearing:
Checking $1,274 2.92% $977 2.02%
Money market 6,787 3.98% 5,977 4.22%
Savings 1,529 2.50% 1,240 2.50%
Time, under $100,000 36,114 6.01% 19,048 5.83%
Time, $100,000 and over
Non-volatile priced 12,055 6.00% 5,265 5.74%
Volatile priced 9,051 5.84% 7,373 5.69%
------- -------
$66,810 $39,880
======= =======
</TABLE>
21
<PAGE>
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1997, 1996 and 1995
NOTE E - DEPOSITS (Continued)
Final maturities of time deposits of $100,000 and greater at December
31, 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
Non-volatile Volatile
priced priced Total
------------ -------- -----
<S> <C> <C> <C>
Due in three months or less $ 1,545 $ 4,115 $ 5,660
Due in three months through one year 7,739 4,818 12,557
Due in one year through five years 2,771 118 2,889
------- ------- -------
Totals $12,055 $ 9,051 $21,106
======= ======= =======
</TABLE>
Time deposits of $100,000 and greater that are non-volatile priced
are time deposits that are priced using retail rates and would be
considered by the Bank as core deposits except for the fact that they
are issued in denominations of $100,000 or more. Volatile priced time
deposits of $100,000 and greater are time deposits that are priced
using wholesale rates and are typically referred to as jumbo time
deposits.
NOTE F - MORTGAGE PAYABLE
The mortgage payable with a bank matures September 1, 2013 and
requires monthly installments of $4,925 including interest at 7.75%
per annum. Effective September, 1998 the interest rate will be
computed annually at 2.5% plus the five year treasury rate. The note
is collateralized by a first real estate mortgage on a building and
land.
Aggregate maturities for the five years following December 31, 1997
and thereafter are as follows (in thousands):
<TABLE>
<S> <C>
1998 $18
1999 20
2000 21
2001 23
2002 25
Thereafter 430
----
$537
====
</TABLE>
22
<PAGE>
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1997, 1996 and 1995
NOTE G - FEDERAL FUNDS PURCHASED
The Bank has entered into a federal funds credit line with another
bank in the amount of $1,500,000 to provide additional flexibility in
the daily management of liquidity. The outstanding balance of the
federal funds credit line at December 31, 1997 was $1,500,000 and was
repaid on January 5, 1998.
NOTE H - INCOME TAXES
The federal tax provision consists of the following (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Current $ -- $ -- $ --
Deferred (145) -- --
----- ----- ----
($145) -- --
===== ===== ====
</TABLE>
The deferred tax benefit in 1997 consisted of a reduction of the
beginning of the year valuation allowance of $293,000 offset by a
deferred tax expense of $148,000. Deferred tax benefits for 1996 and
1995 were eliminated by increases in the valuation allowance of
$7,000 and $48,000, respectively.
The reconciliation of the effective income tax rate to the federal
statutory tax rate is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Federal income tax rate 34% 34% (34%)
Effect of net operating loss
carryforward and valuation
allowance (63) (26) 31
Effect of graduated tax rates -- (18) 1
Other (2) 10 2
--- --- ---
Effective tax rate (31%) --% --%
=== === ===
</TABLE>
23
<PAGE>
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1997, 1996 and 1995
NOTE H - INCOME TAXES (Continued)
The details of the net deferred tax asset are as follows at December
31, (in thousands):
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Deferred tax assets
Provision for possible
credit losses $ 163 $ 110
Unrealized losses on
securities available for sale 23 8
Net operating loss carryforwards 282 400
Other 4 1
----- -----
Total deferred tax assets 472 519
Deferred tax liabilities
Accretion of discounts on
securities available for sale (4) (1)
Deferred loan fees (72) (59)
Premises and equipment (72) (56)
Accrual to cash conversion (115) (46)
Unrealized gain on
securities available for sale (1) (1)
----- -----
Total deferred tax liabilities (264) (163)
----- -----
Net deferred tax asset before
valuation allowance 208 356
Valuation allowance (63) (356)
----- -----
Net deferred tax asset $ 145 $ --
===== =====
</TABLE>
The tax benefit of the unrealized losses on securities available for
sale, net of the valuation allowance, was charged directly to its
related component of stockholders' equity.
At December 31, 1997 the Corporation had net operating loss
carryforwards of approximately $829,000 expiring in 2009 through
2011. These losses are available to reduce otherwise taxable income
in future periods.
24
<PAGE>
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1997, 1996 and 1995
NOTE I - FINANCIAL INSTRUMENTS
Fair Value of Financial Instruments
The estimated fair value of the Corporation's financial instruments
at December 31, are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
--------------------------- -----------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
------- -------- -------- ---------
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $ 1,660 $ 1,660 $ 7,426 $ 7,426
Loans held for sale 347 349 303 307
Securities 29,780 29,780 10,493 10,493
Loans 51,617 51,020 35,897 35,332
Liabilities:
Deposits 75,397 75,507 47,463 47,444
Federal funds 1,500 1,500 -- --
purchased
Mortgage Payable 537 537 554 554
</TABLE>
The following methods and assumptions were used by the Corporation in
estimating its fair value disclosure for financial instruments:
Cash and cash equivalents: The carrying amounts reported in the
balance sheet for cash and short-term instruments approximate those
assets' fair values.
Loans held for sale: The market value of these loans represents
estimated fair value. The market value is determined in the aggregate
on the basis of existing forward delivery commitments.
25
<PAGE>
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1997, 1996 and 1995
NOTE I - FINANCIAL INSTRUMENTS (Continued)
Fair Value of Financial Instruments (Continued)
------------------------------------------------
Investment securities: Fair values for investment securities are
based on quoted market prices, where available. If quoted market
prices are not available, fair values are based on quoted market
prices of comparable instruments.
Loans: For variable rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on carrying
values. The fair values for other loans are estimated using
discounted cash flow analysis, using interest rates currently being
offered for loans with similar terms to borrowers of similar credit
quality. The carrying amount of accrued interest receivable
approximates its fair value.
Off-balance-sheet instruments: The Corporation's off-balance-sheet
instruments approximate their fair values.
Deposit liabilities: The fair values disclosed for demand deposits
are, by definition, equal to the amount payable on demand at the
reporting date. Fair values for fixed rate certificates of deposit
are estimated using a discounted cash flow calculation that applies
interest rates currently being offered on similar certificates. The
carrying amount of accrued interest payable approximates its fair
value.
Mortgage payable: The fair value of the Corporation's mortgage
payable is estimated using discounted cash flow analysis, based on
the Corporation's current incremental borrowing rate for similar
types of borrowing arrangements.
Limitations: Fair value estimates are made at a specific point in
time, based on relevant market information and information about the
financial instrument. These estimates do not reflect any premium or
discount that could result from offering for sale, at one time, the
Corporation's entire holdings of a particular financial instrument.
Because no market exists for a significant portion of the
Corporation's financial instruments, fair value estimates are based
on management's judgments regarding future expected loss experience,
current economic conditions, risk characteristics and other factors.
These estimates are subjective in nature and involve uncertainties
and matters of significant judgment and therefore cannot be
determined with precision. Changes in assumptions could significantly
affect the estimates.
Off-Balance-Sheet Risk
----------------------
The Corporation is party to financial instruments with
off-balance-sheet risk in the normal course of business to meet the
financing needs of its customers and to reduce its own exposure to
fluctuations in interest rates. These financial instruments include
commitments to extend credit and financial guarantees. These
instruments involve, to varying degrees, elements of credit and
interest rate risk that are not recognized in the consolidated
statements of operations.
Exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit
and financial guarantees written is represented by the contractual
notational amount of those items. The Corporation generally requires
collateral to support such financial instruments in excess of the
contractual notational amount of those instruments and, therefore, is
in a fully collateralized position.
26
<PAGE>
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1997, 1996 and 1995
NOTE I - FINANCIAL INSTRUMENTS (Continued)
Off-Balance-Sheet Risk (Continued)
-----------------------------------
The Corporation has outstanding loan commitments aggregating
$5,150,000 and outstanding financial standby letters of credit
aggregating $147,000 at December 31, 1997.
Commitments to extend credit are agreements to lend to a customer as
long as there are no violations of any condition established in the
contract. Commitments generally have fixed expiration dates or other
termination clauses and may require a payment of a fee. Since
portions of the commitments are expected to expire without being
drawn upon, the total commitments do not necessarily represent future
cash requirements. The Corporation evaluates each customer's
creditworthiness on a case by case basis. The amount of collateral
obtained upon extension of credit is based on management's credit
evaluation of the customer.
The Corporation originates primarily residential and commercial real
estate loans, commercial loans, and installment loans. The
Corporation estimates that 67% of the loan portfolio is based in
Wayne County, 18% in Oakland County, and the remainder distributed
throughout Michigan.
At December 31, 1997, the Corporation has consumer loans secured by
real estate aggregating approximately $2,790,000 and construction
loans relating to commercial, residential, and land development
properties of $1,746,000.
NOTE J - EMPLOYEE BENEFIT PLANS
On January 1, 1996, the Bank established a 401(k) plan for its
employees. All employees are eligible to participate in the 401(k)
after completion of age and service requirements. An employee can be
enrolled as a participant on the first "Enrollment Date" after
reaching age 18 and completing six months of service. Contributions
to the plan by the Bank are discretionary. As of December 31, 1997
the Corporation has elected not to match any portion of employee
contributions to the plan.
NOTE K - REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory - and possibly
additional discretionary - actions by regulators that, if undertaken,
could have a direct material effect on the Bank's financial
statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's
assets, liabilities, and certain off-balance-sheet items as
calculated under regulatory accounting practices. The Bank's capital
amounts and classifications are also subject to qualitative judgments
by the regulators about components, risk weightings, and other
factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier 1 capital (as defined in
the regulations) to risk-weighted assets (as defined), and of Tier 1
capital (as defined) to average assets (as defined).
27
<PAGE>
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1997, 1996 and 1995
NOTE K - REGULATORY MATTERS (Continued)
The following is a presentation of the Bank's regulatory capital
ratios (in thousands):
<TABLE>
<CAPTION>
Minimum For Capital Minimum
Actual Adequacy Purposes: To Be Well Capitalized:
--------------- ------------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997
Total capital
(to risk weighted assets) $7,963 16.1% $3,964 8.0% $ 4,955 10.0%
Tier I capital
(to risk weighted assets) 7,441 15.0% 1,982 4.0% 2,972 6.0%
Tier I capital
(to average assets) 7,441 9.1% 3,282 4.0% 4,102 5.0%
As of December 31, 1996
Total capital
(to risk weighted assets) 4,586 14.4% 2,548 8.0% 3,185 10.0%
Tier I capital
(to risk weighted assets) 4,220 13.2% 1,279 4.0% 1,918 6.0%
Tier I capital
(to average assets) 4,220 8.5% 1,986 4.0% 2,482 5.0%
</TABLE>
Based on the respective regulatory capital ratios at December 31,
1997 and 1996, the Bank is well capitalized.
NOTE L - COMMON STOCK SUBSCRIBED
On November 15, 1996, the Corporation issued an offering memorandum,
which included an over-subscription privilege, to those stockholders
who were residents of the State of Michigan. The offering memorandum
gave those stockholders the right to subscribe to 303,578 shares of
common stock at a price of $9.09 per share. All rights expired on
December 31, 1996.
At the close of business on December 31, 1996, the Corporation had
received requests to purchase approximately 319,600 shares of common
stock. In accordance with the Corporation's offering memorandum
$2,760,000 was recorded as common stock subscribed, representing
303,578 shares of common stock and $145,490 was recorded as an
oversubscription rights payable in other liabilities. On January 21,
1997, the common stock subscribed was formally issued.
28
<PAGE>
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1997, 1996 and 1995
NOTE M - STOCK OPTION PLAN
On June 21, 1994, the Corporation adopted a stock option plan to
enable key employees of the Corporation and its subsidiaries to
participate in the Corporation's future growth and profitability by
the granting of long-term performance-based incentive compensation.
As of December 31, 1996, 55,000 shares of common stock were
authorized with no options granted.
During 1997, the stock option plan was amended to allow up to 165,000
shares to be granted. Also in 1997, the Corporation issued 45,100
options at an exercise price of $9.09. No options were exercised,
expired or terminated during 1997.
Granted options expire no later than ten years after the date of
grant, may not be exercised for six months after the date of grant
and are granted at a price of not less than the fair market value of
the Corporation's share price on the date of grant. If an option
expires or terminates without having been exercised, such option will
be available for future grant under the plan.
The Corporation accounts for the stock option plan under Accounting
Principles Board Option No. 25, "Accounting for Stock Issued to
Employees." No compensation costs have been recognized for the plan.
Had compensation costs for the plan been determined based on the fair
value of the options at the grant date consistent with the method of
SFAS No. 123, the Corporation's net income per share for the year
ended December 31, 1997 would have been as follows (in thousands,
except per share data):
<TABLE>
<CAPTION>
<S> <C>
Net income
As reported $610
Pro forma 419
Basic and diluted income per
share
As reported 0.58
Pro forma 0.40
</TABLE>
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes options-pricing model with the following
weighted-average assumptions used for grants in 1997: dividend yield
of 0.00%; expected volatility of 51.23%; risk-free interest rate of
6.67%; and expected lives of ten years. All information presented
with respect to stock options has been adjusted for the effects of
the stock dividend.
29
<PAGE>
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1997, 1996 and 1995
NOTE N - INCOME PER SHARE
The following is a reconciliation of the numerator and denominator of
the basic and diluted income per share calculation for the year ended
December 31, 1997 (in thousands, except share data);
<TABLE>
<CAPTION>
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
<S> <C> <C> <C>
Basic income per share
Net income available $ 610 1,044,924 $ 0.58
Effect of dilutive options
Options -- 10,937 --
--------- --------- --------
Diluted income per share
Net income to stockholders
plus assumed conversions $ 610 1,055,861 $ 0.58
========= ========= ========
</TABLE>
NOTE O - ISSUED BUT NOT YET ADOPTED ACCOUNTING STANDARDS
In June 1997, the FASB issued SFAS No. 130, "Reporting of
Comprehensive Income" ("SFAS 130"), which establishes standards for
reporting and display of comprehensive income and its components
(revenues, expense, gains, and losses) in a full set of financial
statements. This statement also requires that all items that are
required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements.
This statement is effective for fiscal years beginning after December
15, 1997. Earlier application is permitted. Reclassification of
financial statements for earlier periods provided for comparative
purposes is required. The Corporation does not anticipate that the
adoption of SFAS 130 will have a material effect on its financial
statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS 131"),
which establishes standards for the manner in which public business
enterprises report information about operating segments in annual
financial statements and requires that those enterprises report
selected information about operating segments in interim financial
reports issued to stockholders. This statement also establishes
standards for related disclosures about products and services,
geographic areas, and major customers. This statement requires the
reporting of financial and descriptive information about an
enterprise's reportable operating segments. This statement is
effective for financial statements for periods beginning after
December 15, 1997. In the initial year of adoption, comparative
information for earlier years is to be restated. The Corporation does
not anticipate that the adoption of SFAS 131 will have a material
effect on its financial statements.
30
<PAGE>
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1997, 1996 and 1995
NOTE P - PARENT ONLY CONDENSED FINANCIAL INFORMATION
The condensed financial information that follows presents the
financial condition of the parent company, Dearborn Bancorp, Inc.,
along with the results of its operations and its cash flows.
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEETS
(In thousands) December 31,
-------------- ------------
1997 1996
---- ----
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 181 $2,901
Investment in subsidiary 7,376 4,203
Other assets 1,741 1,792
------ ------
$9,298 $8,896
====== ======
LIABILITIES AND
STOCKHOLDERS' EQUITY
Mortgage payable $ 537 $ 554
Other liabilities 9 152
Stockholders' equity 8,752 8,190
------ ------
$9,298 $8,896
====== ======
</TABLE>
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF OPERATIONS
(In thousands) Years Ended December 31,
------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Dividends from subsidiary bank $ -- $ -- $ --
Operating income 58 35 87
Operating expenses (68) (60) (77)
----- ----- -----
Net income (loss) before equity in
undistributed income (10) (25) 10
(loss) of subsidiary
Equity in undistributed income
(loss) of subsidiary 620 52 (298)
----- ----- -----
Net income (loss) $ 610 $ 27 $(288)
===== ===== =====
</TABLE>
31
<PAGE>
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1997, 1996 and 1995
NOTE P - PARENT ONLY CONDENSED FINANCIAL INFORMATION (Continued)
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF CASH FLOWS
(In thousands) Years Ended December 31,
------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating
activities
Net income (loss) $ 610 $ 27 ($ 288)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities
Equity in undistributed (income)
loss of subsidiary (620) (52) 298
Other 66 61 37
------- ------- -------
Net cash flows provided by
operating activities 56 36 47
Cash flows from investing
activities
Investment in subsidiary (2,600) (850) (500)
Investment in securities (1,000) -- (698)
Maturity of securities 1,000 -- 1,600
Sale of securities -- 703 --
Property and equipment acquired (14) (101) (361)
------- ------- -------
Net cash flows provided by (used
in) investing activities (2,614) (248) 41
Cash flows from financing
activities
Proceeds from sale of common stock -- 2,752 --
Proceeds due stockholders on
oversubscription of stock (145) 145 --
Reduction of mortgage payable (17) (15) (15)
Dividends paid -- -- --
------- ------- -------
Net cash flows provided by (used
in) financing activities (162) 2,882 (15)
Increase (decrease) in cash and
cash equivalents (2,720) 2,670 73
Cash and cash equivalents at
beginning of year 2,901 231 158
------- ------- -------
Cash and cash equivalents at end
of year $ 181 $ 2,901 $ 231
======= ======= =======
</TABLE>
32
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
The Company was formed in 1992 and the Bank was formed in 1993. Principal
operations of the Bank commenced on February 28, 1994 when the Bank opened
for business at its main office, located at 22290 Michigan Avenue, Dearborn,
Michigan. On December 20, 1995, the Bank opened its second office, located at
24935 West Warren Avenue, Dearborn Heights, Michigan. On August 11, 1997, the
Bank opened its third office, located at 44623 Five Mile Road, Plymouth
Township, Michigan.
Results of Operations
The Company reported net income of $610,000 in 1997 compared to net income of
$27,000 in 1996 and a net loss of $288,000 in 1995. The improvement each year
was primarily a factor of growth in the volume of investments, loans and
deposits and the corresponding net interest income associated with the
increased volumes.
Net Interest Income
1997 Compared to 1996. Net interest income for the period ended December 31,
1997 was $2.4 million compared to $1.6 million for the period ended December
31, 1996, an increase of $0.8 million or 50%. This increase was caused
primarily by an increase in average earning assets of $26.5 million between
the periods while interest-bearing liabilities grew by $21.9 million. At the
same time the Company's interest rate spread decreased to 2.54% in 1997 from
2.92% in 1996. The Company's net interest margin also decreased in 1997 to
3.60% from 3.98% in 1996. However, the decreases in net interest spread and
net interest margin were offset by increases in the volume of net earning
assets. The Company's decrease in interest rate spread and net interest
margin was a direct result of aggressive time deposit gathering at premium
rates and the direct reinvestment of those funds into investment securities
with similar interest rates until the funds could be redeployed into quality
loans with higher yields.
1996 Compared to 1995. Net interest income for the period ended December 31,
1996 was $1.6 million compared to $1.0 million for the period ended December
31, 1995, an increase of $0.6 million or 60%. This increase was caused
primarily by an increase in average earning assets of $14.6 million between
the periods while interest-bearing liabilities grew by $13.0 million. At the
same time the Company's interest rate spread increased to 2.92% in 1996 from
2.65% in 1995. The Company's net interest margin also increased in 1996 to
3.98% from 3.95% in 1995.
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.
33
<PAGE>
The following table sets forth certain information relating to the Company's
consolidated average interest-earning assets and interest-bearing liabilities
and reflects 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 net loan category.
<TABLE>
<CAPTION>
Year Ended December 31, 1997 Year Ended December 31, 1996
--------------------------- -----------------------------
Average Average Average Average
(In thousands) Balance Interest Rate Balance Interest Rate
-------- --------- -------- --------- ------- --------
Assets
<S> <C> <C> <C> <C> <C> <C>
Federal funds sold and interest
bearing deposits with banks $ 3,351 $ 188 5.61% $ 2,137 $ 115 5.38%
Investment securities - available for sale 20,031 1,235 6.17% 12,400 733 5.91%
Loans 43,533 3,981 9.14% 25,835 2,466 9.55%
------- ------ ---- -------- ------ ----
Sub-total earning assets 66,915 5,404 8.08% 40,372 3,314 8.21%
Other assets 4,361 3,618
------- --------
Total assets $71,276 $ 43,990
======= ========
Liabilities and stockholders' equity
Interest bearing deposits $53,559 $2,955 5.52% $ 31,713 $1,662 5.24%
Other borrowings 582 43 7.39% 564 44 7.80%
------- ------ ---- -------- ------ ----
Sub-total interest bearing liabilities 54,141 2,998 5.54% 32,277 1,706 5.29%
Non-interest bearing deposits 8,374 6,142
Other liabilities 322 210
Stockholders' equity 8,439 5,361
------- --------
Total liabilities and
stockholders' equity $71,276 $ 43,990
======= ========
Net interest income $2,406 $1,608
====== ======
Net interest rate spread 2.54% 2.92%
==== ====
Net interest margin on earning assets 3.60% 3.98%
==== ====
34
<PAGE>
<CAPTION>
(Continued) Year Ended December 31, 1995
---------------------------
Average Average
(In thousands) Balance Interest Rate
------- -------- ----
<S> <C> <C> <C>
Assets
Federal funds sold and interest
bearing deposits with banks $ 3,184 $ 188 5.90%
Investment securities -
available for sale 8,240 466 5.66%
Loans 14,345 1,369 9.54%
------- ------- -----
Sub-total earning assets 25,769 2,023 7.85%
Other assets 2,711
-------
Total assets $28,480
=======
Liabilities and stockholders' equity
Interest bearing deposits $18,748 $ 959 5.12%
Other borrowings 576 45 7.75%
Sub-total interest
bearing liabilities 19,324 1,004 5.20%
------- ------- -----
Non-interest bearing deposits 3,359
Other liabilities 256
Stockholders' equity 5,541
-------
Total liabilities
and stockholders' equity $28,480
=======
Net interest income $ 1,019
=======
Net interest rate spread 2.65%
=====
Net interest margin on earning assets 3.95%
=====
</TABLE>
35
<PAGE>
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.
<TABLE>
<CAPTION>
1997/1996 1996/1995
Change in Interest Due to: Change in Interest Due to:
-------------------------- --------------------------
Average Average Net Average Average Net
(In thousands) Balance Rate Change Balance Rate Change
------- ---- ------ ------- ---- ------
<S> <C> <C> <C> <C> <C> <C>
Assets
Federal funds sold and
interest bearing
deposits with banks $ 68 $ 5 $ 73 $ (56) $ (17) $ (73)
Investment securities -
available for sale 470 32 502 246 21 267
Loans 1,619 (104) 1,515 1,097 -- 1,097
------- ------- ------- ------- ------- -------
Total earning assets $ 2,157 $ (67) $ 2,090 $ 1,287 $ 4 $ 1,291
======= ======= ======= ======= ======= =======
Liabilities
Interest bearing deposits $ 1,206 $ 87 $ 1,293 $ 679 $ 24 $ 703
Other borrowings 1 (2) (1) (1) -- (1)
------- ------- ------- ------- ------- -------
Total interest bearing liabilities $ 1,207 $ 85 $ 1,292 $ 678 $ 24 $ 702
======= ======= ======= ======= ======= =======
Net interest income $ 798 $ 589
======= =======
Net interest rate spread (0.38%) 0.27%
===== ====
Net interest margin on earning assets (0.39%) 0.03%
===== ====
</TABLE>
Provision for Possible Credit Losses
1997 Compared to 1996. The provision for possible credit losses was $164,000
in both 1997 and 1996. The provision for possible credit 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 and projected economic conditions. Refer to Note
C of the Notes to Consolidated Financial Statements for additional
information.
1996 Compared to 1995. The provision for possible credit losses was $164,000
in 1996 compared to $114,000 in 1995, an increase of $50,000 or 44%. The
increase in the provision for possible credit 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 and projected economic conditions. Refer to Note
C of the Notes to Consolidated Financial Statements for additional
information.
36
<PAGE>
Non-interest Income
1997 Compared to 1996. Non-interest income was $312,000 in 1997 compared to
$284,000 in 1996, an increase of $28,000 or 10%. This increase was primarily
due to service charges on deposit accounts as a result of an increase in the
volume of these accounts.
1996 Compared to 1995. Non-interest income was $284,000 in 1996 compared to
$210,000 in 1995, an increase of $74,000 or 35%. This increase was primarily
due to service charges on deposit accounts as a result of an increase in the
volume of these accounts.
Non-interest Expense
1997 Compared to 1996. Non-interest expense was $2.1 million in 1997 compared
to $1.7 million in 1996, an increase of $0.4 million or 24%. The largest
components of non-interest expense were salaries and employee benefits which
amounted to $1.2 million and occupancy and equipment expense which amounted
to $267,000 in 1997. In 1996, salaries and employee benefits and occupancy
and equipment expense were $1.1 million and $198,000, respectively. The
primary factor for these increases was the opening of the Bank's office in
Plymouth Township in August 1997. As of December 31, 1997, the number of full
time equivalent employees was 26 as compared to 23 as of December 31, 1996.
1996 Compared to 1995. Non-interest expense was $1.7 million in 1996 compared
to $1.4 million in 1995, an increase of $0.3 million or 21%. The largest
components of non-interest expense were salaries and employee benefits which
amounted to $1.1 million and occupancy and equipment expense which amounted
to $198,000 in 1996. In 1995, salaries and employee benefits and occupancy
and equipment expense were $0.9 million and $147,000, respectively. The
primary factor for these increases was the opening of the Bank's office in
Dearborn Heights in late December 1995. As of December 31, 1996, the number
of full time equivalent employees was 23 as compared to 24 as of December 31,
1995.
Income Tax Benefit
1997 Compared to 1996. The income tax benefit was $145,000 in 1997 compared
to $0 in 1996, an increase of $145,000. During 1997, the Bank recognized a
$145,000 tax benefit from the change in the valuation allowance against a
deferred tax asset related to net operating loss carryforwards. Refer to Note
H of the Notes to Consolidated Financial Statements for additional
information.
Comparison of Financial Condition at December 31, 1997 and December 31, 1996
Assets. Total assets at December 31, 1997 were $86.7 million compared to
$56.6 million at December 31, 1996, an increase of $30.1 million or 53%. The
increase was primarily due to increases in investment securities - available
for sale and loans.
Investment Securities - Available for Sale. Total investment securities -
available for sale, at December 31, 1997 were $29.8 million compared to $10.5
million at December 31, 1996, an increase of $19.3 million or 184%. During
1997 the Company purchased $41.4 million in securities and $19.5 million of
securities were called or matured during the year. In addition, the Company
sold securities of $2.6 million and recognized gain on such sales in the
amount of $13,000. The increase in deposits has enabled the Company to invest
in investment securities - available for sale until such time as quality loan
opportunities become available. All securities within the Company's portfolio
are U.S. treasury issues or U.S. government sponsored agency issues carrying
AAA ratings. The Company does not hold any securities in the "Held to
Maturity" category nor does the Company hold or utilize derivatives. Refer to
Note B of the Notes to Consolidated Financial Statements for additional
information.
37
<PAGE>
Loans. Total loans at December 31, 1997 were $52.1 million compared to $36.3
million at December 31, 1996, an increase of $15.8 million or 44%. The
components of the outstanding balances and percentage increase in loans from
1996 to 1997 are as follows:
<TABLE>
<CAPTION>
(In thousands) December 31, 1997 December 31, 1996
---------------------- --------------------- Percent
Balance Percent Balance Percent Increase/(Decrease)
------- ------- ------- ------- -------------------
<S> <C> <C> <C> <C> <C>
Consumer loans $12,705 25% $ 8,877 24% 43%
Commercial, financial, & other 10,668 20 7,199 20 48
Commercial real estate
construction 1,746 3 1,971 5 (11)
Commercial real estate
mortgages 9,796 19 6,384 18 53
Residential real estate
mortgages 17,224 33 11,832 33 46
------- --- ------- --- --
$52,139 100% $36,263 100% 44%
======= === ======= === ==
</TABLE>
Refer to Note C of the Notes to Consolidated Financial Statements for
additional information.
Allowance for Possible Credit Losses. The allowance for possible credit
losses at December 31, 1997 was $522,000 compared to $366,000 at December 31,
1996, an increase of $156,000 or 43%. The increase in the allowance for
possible credit 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 and projected
economic conditions. Refer to Note C of the Notes to Consolidated Financial
Statements for additional information.
Bank Premises and Equipment. Bank premises and equipment at December 31, 1997
was $2.3 million compared to $2.1 million at December 31, 1996, an increase
of $0.2 million or 10%. This increase reflects the Bank's investment in
technology as well as capital expenditures necessary to open the Bank's
Plymouth Township Office.
Accrued Interest Receivable. Accrued interest receivable at December 31, 1997
was $723,000 compared to $306,000 at December 31, 1996, an increase of
$417,000 or 136%. The increase was due to the increased volume of investments
securities - available for sale, for which interest is receivable
semi-annually.
Other Assets. Other assets at December 31, 1997 were $230,000 compared to
$94,000 at December 31, 1996, an increase of $136,000 or 145%. The increase
was due to the Bank's recognition of an income tax asset of $145,000 in 1997.
Refer to Note H of the Notes to Consolidated Financial Statements for
additional information.
38
<PAGE>
Deposits. Total deposits at December 31, 1997 were $75.4 million compared to
$47.5 million at December 31, 1996, an increase of $27.9 million or 59%. The
components of the outstanding balances and percentage increase in deposits
from 1996 to 1997 are as follows:
<TABLE>
<CAPTION>
(In thousands) December 31, 1997 December 31, 1996
---------------------- --------------------- Percent
Balance Percent Balance Percent Increase
---------------------- --------------------- -------------------
<S> <C> <C> <C> <C> <C>
Non-interest bearing:
Demand $8,587 11% $ 7,583 15% 13%
Interest bearing:
Checking 1,274 2 977 2 30
Money market 6,787 9 5,977 13 14
Savings 1,529 2 1,240 3 23
Time, under $100,000 36,114 48 19,048 40 90
Time, $100,000 and
over
Non-volatile priced 12,055 16 5,265 11 129
Volatile priced 9,051 12 7,373 16 23
------- --- ------- --- ---
$75,397 100% $47,463 100% 59%
======= === ======= === ===
</TABLE>
The increase in deposits was primarily due to growth in time deposits. During
1997, the Bank completed two major marketing campaigns, an annual birthday
celebration in March and a grand opening celebration in August, offering a
premium rate of interest on time deposits. These campaigns raised in excess
of $7 million in new deposits per campaign in a period of approximately two
weeks each. Additional growth in all types of deposits was achieved via
normal marketing, telemarketing, referral and visitation programs. The
increase in deposits enabled the Company to invest the funds in loans and
investment securities - available for sale.
Federal Funds Purchased. Federal funds purchased at December 31, 1997 were
$1.5 million compared to $0 at December 31, 1996. The increase in federal
funds purchased was a result of the Bank's need for liquidity to fund an
unanticipated $1.5 million outgoing wire transfer for a large customer late
in the day on December 31, 1997.
Accrued Interest Payable. Accrued interest payable at December 31, 1997 was
$310,000 compared to $127,000 at December 31, 1996. The increase was due to
the increase in the volume of time deposits during 1997.
39
<PAGE>
Capital
Stockholders' equity at December 31, 1997 was $8.8 million compared to $8.2
million as of December 31, 1996, an increase of $0.6 million or 7%. In
addition, at December 31, 1997, the Bank exceeded all applicable regulatory
capital requirements. Refer to Note K of the Notes to Consolidated Financial
Statements for further information.
Liquidity and Asset and Liability Management
Liquidity refers to readily available funds to meet the needs of borrowers
and depositors. Levels of liquidity are closely monitored in conjunction with
loan funding requirements and deposit outflows. Adequate liquidity protects
institutions from raising funds under duress at excessive expense and
provides a necessary cushion for occasional unpredictable aberrations in
demand. While adequate liquidity is imperative, excessive liquidity in lower
yielding cash investments or other easily marketable assets reduces potential
interest income. Thus, an appropriate balance must be maintained to protect
the institution and at the same time, prudently maximize income
opportunities. Sources of liquidity from both assets and liabilities includes
federal funds sold, securities available for sale, loan repayments, core
deposits and a federal funds purchase credit facility.
The Company has sought to manage its exposure to changes in interest rates by
matching more closely the effective maturities or repricing characteristics
of the Company's interest-earning assets and interest-bearing liabilities.
The matching of the asset and liabilities may be analyzed by examining the
extent to which the assets and liabilities are interest rate sensitive and by
monitoring the expected effects of interest rate changes on net interest
income.
An asset or liability is interest rate sensitive within a specific time
period if it will mature or reprice within that time period. If the Company's
assets mature or reprice more quickly or to a greater extent that its
liabilities, the Company's net portfolio value and net interest income would
tend to increase during periods of rising interest rates but decrease during
periods of falling interest rates. If the Company's assets mature or reprice
more slowly or to a lesser extent than its liabilities, its net portfolio
value and net interest income would tend to decrease during periods of rising
interest rates but increase during periods of falling interest rates.
Interest Rate Sensitivity Analysis. The matching of assets and liabilities
may be analyzed by examining the extent to which such assets and liabilities
are "interest rate sensitive" and by monitoring an institution's interest
rate sensitivity "gap." An asset or liability is said to be interest rate
sensitive within a specific period if it will mature or reprice within that
period. The interest rate sensitivity "gap" is the difference between the
amount of interest-earning assets maturing or repricing within a specific
time period and the amount of interest-bearing liabilities maturing or
repricing within that time period. A gap is considered positive when the
amount of interest rate sensitive assets exceeds the amount of interest rate
sensitive liabilities, and is considered negative when the amount of interest
rate sensitive liabilities exceed the amount of interest rate sensitive
assets. During a period of rising interest rates, a negative gap would be
expected to adversely affect net interest income while a positive gap would
be expected to result in an increase in net interest income, while conversely
during a period of declining interest rates, a negative gap would be expected
to result in an increase in net interest income and a positive gap would be
expected to adversely affect net interest income.
40
<PAGE>
Different types of assets and liabilities with the same or similar maturities
may react differently to changes in overall market rates or conditions, and
thus changes in interest rates may affect net interest income positively or
negatively even if an institution were perfectly matched in each maturity
category. Additionally, the gap analysis does not consider the many factors
as banking interest rates move. While the interest rate sensitivity gap is a
useful measurement and contributes toward effective asset and liability
management, it is difficult to predict the effect of changing interest rates
solely on that measure, without accounting for alterations in the maturity or
repricing characteristics of the balance sheet that occur during changes in
market interest rates. During periods of rising interest rates, the Company's
assets tend to have prepayments that are slower than those in an interest
rate sensitivity gap and would increase the negative gap position.
Conversely, during a period of falling interest rates, the Company's assets
would tend to prepay faster than originally expected thus decreasing the
negative gap position. In addition, some of the Company's assets, such as
adjustable rate mortgages, have caps on the amount by which their interest
rates can change in any single period, and therefore may not reprice as
quickly as liabilities in the same maturity category.
The following table set forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at December 31, 1997 which are
expected to mature or reprice in each of the time periods shown.
<TABLE>
<CAPTION>
Interest Rate Sensitivity Period
------------------------------------------------------------
(In thousands) 1-90 91-365 1-5 Over
Days Days Years 5 Years Total
---- ---- ----- ------- -----
<S> <C> <C> <C> <C> <C>
Earning assets
Federal funds sold $ 254 $ -- $ -- $ -- $ 254
Mortgage loans held
for sale 347 -- -- -- 347
Securities available
for sale 999 1,000 27,781 -- 29,780
Total loans, net of
non-accrual 11,600 7,963 32,072 493 52,128
-------- -------- -------- -------- --------
Total earning assets 13,200 8,963 59,853 493 82,509
Interest bearing liabilities
Total interest bearing
deposits 11,060 33,303 22,447 -- 66,810
Federal funds purchased 1,500 -- -- -- 1,500
Mortgage payable -- -- -- 537 537
-------- -------- -------- -------- --------
Total interest bearing
liabilities 12,560 33,303 22,447 537 68,847
Net asset (liability) funding gap 640 (24,340) 37,406 (44) $ 13,662
-------- -------- -------- -------- ========
Cumulative net asset (liability)
funding gap $ 640 $(23,700) $ 13,706 $ 13,662
======== ======== ======== ========
</TABLE>
41
<PAGE>
Effects of New Accounting Standards
In June 1997, the Financial Accounting Standards Board (the "FASB") issued
Statement No. 130, "Reporting of Comprehensive Income" ("SFAS 130"), which
establishes standards for reporting and display of comprehensive income and
its components (revenues, expense, gains, and losses) in a full set of
financial statements. This statement also requires that all items that are
required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed
with the same prominence as other financial statements. This statement is
effective for fiscal years beginning after December 15, 1997. Earlier
application is permitted. Reclassification of financial statements for
earlier periods provided for comparative purposes is required. The Company
does not anticipate that the adoption of SFAS 130 will have a material effect
on its financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"), which establishes standards
for the manner in which public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports issued to stockholders. This statement also establishes
standards for related disclosures about products and services, geographic
areas, and major customers. This statement requires the reporting of
financial and descriptive information about an enterprise's reportable
operating segments. This statement is effective for financial statements for
periods beginning after December 15, 1997. In the initial year of adoption,
comparative information for earlier years is to be restated. The Company does
not anticipate that the adoption of SFAS 131 will have a material effect on
its financial statements.
Impact of Inflation and Changing Prices
The Consolidated Financial Statements and Notes thereto presented herein have
been prepared in accordance with generally accepted accounting principles,
which require the measurement of financial position and operating results in
terms of historical dollars without considering the changes in the relative
purchasing power of money over time due to inflation. The impact of inflation
is reflected in the increased cost of the Company's operations. Unlike most
industrial companies, nearly all the assets and liabilities of the Company
are monetary in nature. As a result, interest rates have a greater impact on
the Company's performance than do the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or to the same
extent as the prices of goods and services.
Year 2000 Problem
The Company is aware of the current concerns throughout the business
community of reliance upon computer software programs that do not properly
recognize the year 2000 in date formats, often referred to as the "Year 2000
Problem." The Year 2000 Problem is the result of software being written using
two digits rather than four digits to define the application year (i.e., "98"
rather than "1998"). A failure by a business to properly identify and correct
a Year 2000 Problem in its operations could result in system failures or
miscalculations. In turn, this could result in disruptions of operations,
including among other things a temporary inability to process transactions,
send invoices or otherwise engage in routine business transactions on a
day-to-day basis.
Operations of the Company depend upon the successful operation on a daily
basis of its computer software programs. The Company relies upon software
purchased from third-party vendors rather than internally generated software,
and based upon its ongoing discussions with these vendors, the Company
believes that most of its software already reflects changes necessary to
avoid the Year 2000 Problem. The Company expects to update during 1998 any
remaining software that could be affected by the Year 2000 Problem to
eliminate remaining concerns. This update is not expected to have a material
adverse effect on the Company.
42
<PAGE>
DEARBORN BANCORP, INC.
DIRECTORS AND OFFICERS
DIRECTORS
WILBER M. BRUCKER, JR.
Retired, Attorney
MARGARET I. CAMPBELL
President
Kean Manufacturing Corporation
JOHN E. DEMMER
Chairman of the Board and
Chief Executive Officer
Jack Demmer Ford, Inc. and
Jack Demmer Leasing
MICHAEL V. DORIAN, JR.
Vice President
Mike Dorian Ford
DAVID HIMICK
Financial Consultant
DONALD G. KARCHER
Chairman of the Board
Karcher Agency, Inc.
BRADLEY F. KELLER
President
Braden Associates, Inc.
STEVEN M. KIRKPATRICK
President and Chief Executive Officer
The Bancorp Group, Inc. and
Capital Mortgage Funding, L.L.C.
WILLIAM E. KREGER
Retired, Real Estate Investor
JEFFREY G. LONGSTRETH
President
Prudential Christie Real Estate
RICHARD NORDSTROM
Retired, Architect
MICHAEL J. ROSS
President and Chief Executive Officer
Community Bank of Dearborn
DR. ROBERT C. SCHWYN
Physician
RONNIE J. STORY
President and Chief Executive Officer
Story Development Corp.
OFFICERS
JOHN E. DEMMER
Chairman of the Board and
Chief Executive Officer
RICHARD NORDSTROM
Vice Chairman
MICHAEL J. ROSS
President
JEFFREY L. KARAFA
Vice President and Treasurer
DONALD G. KARCHER
Vice President
WILBER M. BRUCKER, JR.
Secretary
43
<PAGE>
COMMUNITY BANK OF DEARBORN
DIRECTORS AND OFFICERS
DIRECTORS
WILBER M. BRUCKER, JR.
Retired, Attorney
MARGARET I. CAMPBELL
President
Kean Manufacturing Corporation
JOHN E. DEMMER
Chairman of the Board and
Chief Executive Officer
Jack Demmer Ford, Inc. and
Jack Demmer Leasing
MICHAEL V. DORIAN, JR.
Vice President
Mike Dorian Ford
DAVID HIMICK
Financial Consultant
DONALD G. KARCHER
Chairman of the Board
Karcher Agency, Inc.
BRADLEY F. KELLER
President
Braden Associates, Inc.
STEVEN M. KIRKPATRICK
President and Chief Executive Officer
The Bancorp Group, Inc. and
Capital Mortgage Funding, L.L.C.
WILLIAM E. KREGER
Retired, Real Estate Investor
JEFFREY G. LONGSTRETH
President
Prudential Christie Real Estate
RICHARD NORDSTROM
Retired, Architect
MICHAEL J. ROSS
President and Chief Executive Officer
Community Bank of Dearborn
DR. ROBERT C. SCHWYN
Physician
RONNIE J. STORY
President and Chief Executive Officer
Story Development Corp.
OFFICERS
JOHN E. DEMMER
Chairman of the Board
MICHAEL J. ROSS
President
Chief Executive Officer
TIMOTHY J. CUTTLE
Executive Vice President
Chief Lending Officer
JEFFREY L. KARAFA
Vice President
Cashier
JEFFREY J. WOLBER
Vice President
Retail Administration
DANIEL A. BZURA
Branch Officer
SAMANTHA J. MAZIASZ
Bank Administration Officer
DENIS T. NISSLE
Private Banking Officer
STEVEN P. SLADE
Consumer Banking Officer
NANCY M. BARON
Compliance Officer
WILBER M. BRUCKER, JR.
Secretary
44
<PAGE>
COMMUNITY BANK OF DEARBORN
BRANCH LOCATIONS
Main Office
22290 Michigan Avenue
PO Box 2247
Dearborn, Michigan 48123-2247
Phone: (313) 274-1000
Fax: (313) 274-5050
Cynthia A. Pizzo, Branch Manager
Hours: 9:30 AM - 4:30 PM Monday through Friday
9:30 AM - 6:00 PM Friday
9:30 AM - 1:00 PM Saturday, Drive-In Only
Warren Avenue and Silvery Lane
24935 West Warren Avenue
Dearborn Heights, Michigan 48127
Phone: (313) 724-0100
Fax: (313) 724-1010
Daniel A. Bzura, Branch Manager
Hours: 9:00 AM - 4:30 PM Monday through Thursday
9:00 AM - 6:00 PM Friday
Five Mile and Sheldon Road
44623 Five Mile
Plymouth, Michigan 48170
Phone: (734) 454-1000
Fax: (734) 454-0123
Denis T. Nissle, Branch Manager
Hours: 9:30 AM - 4:30 PM Monday through Thursday
9:30 AM - 6:00 PM Friday
9:30 AM - 1:00 PM Saturday, Walk-Up Window
45
<PAGE>
[This Page Intentionally Left Blank]
46
<PAGE>
Inside Back Cover
[This Page Intentionally Left Blank]
47
<PAGE>
DEARBORN BANCORP, INC.
22290 Michigan Avenue
PO Box 2247
Dearborn, Michigan 48123-2247
Phone: (313) 274-1000
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM DEARBORN BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS AT DECEMBER 31, 1997 AND THE
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEAR ENDED
DECEMBER 31, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
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<FISCAL-YEAR-END> DEC-31-1997
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<CASH> $ 1,406
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<TRADING-ASSETS> 0
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<COMMON> 10,506
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