SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the Quarterly period ended June 30, 1999.
--------------
Commission file number 000-24478.
DEARBORN BANCORP, INC.
----------------------
(Exact name of registrant as specified in its charter)
Michigan 38-3073622
-------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
22290 Michigan Avenue, Dearborn, MI 48123-2247
----------------------------------------------
(Address of principal executive office) (Zip Code)
(313) 274-1000
--------------
(Registrant's telephone number, including area code)
N/A
---
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes ____ X ____ No _________
Indicate the number of shares outstanding for each of the issuer's classes of
common stock, as of July 31, 1999.
Class Shares Outstanding
----- ------------------
Common Stock 2,473,295
<TABLE>
<CAPTION>
DEARBORN BANCORP, INC.
INDEX
Part I. Financial Information:
Item 1. Financial Statements
The following consolidated financial statements of Dearborn
Bancorp, Inc. and its subsidiary included in this report are: Page
----
<S> <C>
Consolidated Balance Sheets - June 30, 1999,
December 31, 1998 and June 30, 1998 3
Consolidated Statements of Income (Loss) - For the Three
and Six Months Ended June 30, 1999 and 1998 4
Consolidated Statements of Comprehensive Income (Loss) - For the
Three and Six Months Ended June 30, 1999 and 1998 5
Consolidated Statements of Cash Flows - For Six Months
Ended June 30, 1999 and 1998 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion of Results of Operations and Analysis
of Financial Condition, Liquidity and Capital 7-20
Part II. Other Information:
Pursuant to SEC rules and regulations, the following item(s) are
included with the Form 10-Q Report:
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K 21
Pursuant to SEC rules and regulations, the following items are
omitted from this Form 10-Q as inapplicable or to which the answer
is negative:
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults upon Senior Securities
Item 5. Other Information
SIGNATURES 22
</TABLE>
2
<TABLE>
<CAPTION>
DEARBORN BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In thousands) 06/30/99 12/31/98 06/30/98
(unaudited) (audited) (unaudited)
----------- --------- -----------
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents
Cash and due from banks $ 2,281 $ 2,259 $ 2,707
Federal funds sold 3,009 3,995 6,143
--------- --------- ---------
Total cash and cash equivalents 5,290 6,254 8,850
Mortgage loans held for sale 647 1,211 5,214
Investment securities, available for sale 60,814 50,211 51,500
Loans
Loans 73,850 66,023 56,223
Allowance for possible credit losses (707) (627) (557)
--------- --------- ---------
Net loans 73,143 65,396 55,666
Bank premises and equipment, net 2,375 2,378 2,297
Accrued interest receivable 1,408 933 981
Other assets 824 372 281
--------- --------- ---------
Total assets $ 144,501 $ 126,755 $ 124,789
========= ========= =========
LIABILITIES
Deposits
Non-interest bearing deposits $ 14,798 $ 11,142 $ 13,114
Interest bearing deposits 101,053 86,468 83,381
--------- --------- ---------
Total deposits 115,851 97,610 96,495
Other liabilities
Mortgage payable 505 517 528
Accrued interest payable 391 338 304
Other liabilities 387 559 231
--------- --------- ---------
Total liabilities 117,134 99,024 97,558
STOCKHOLDERS' EQUITY
Common stock - 5,000,000 shares authorized,
2,473,295 shares outstanding in
1999 and 1998 29,015 29,015 28,483
Accumulated deficit (1,234) (1,270) (1,258)
Accumulated comprehensive income (loss) (414) (14) 6
--------- --------- ---------
Total stockholders' equity 27,367 27,731 27,231
Total liabilities and stockholders'
equity $ 144,501 $ 126,755 $ 124,789
========= ========= =========
<FN>
The accompanying notes are an integral part of these consolidated statements.
</TABLE>
3
<TABLE>
<CAPTION>
DEARBORN BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (LOSS) (unaudited)
(In thousands, except share data) Three Months Ended Six Months Ended
06/30/99 06/30/98 06/30/99 06/30/98
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Interest income
Interest on loans $ 1,504 $ 1,249 $ 2,913 $ 2,454
Interest on investment securities, available
for sale 867 713 1,518 1,088
Interest on federal funds and deposits with
banks 63 152 139 267
----------- ----------- ----------- -----------
Total interest income 2,434 2,114 4,570 3,809
Interest expense
Interest on deposits 1,189 1,133 2,241 2,109
Interest on other liabilities 8 10 17 22
----------- ----------- ----------- -----------
Total interest expense 1,197 1,143 2,258 2,131
Net interest income 1,237 971 2,312 1,678
Provision for possible credit losses 585 20 667 42
----------- ----------- ----------- -----------
Net interest income after provision for possible credit
losses 652 951 1,645 1,636
----------- ----------- ----------- -----------
Non-interest income
Service charges on deposit accounts 48 32 89 63
Fees for other services to customers 7 5 14 12
Gain on the sale of loans 79 66 179 93
Gain on the sale investment securities -- 3 -- 16
Other income 1 1 1 4
----------- ----------- ----------- -----------
Total non-interest income 135 107 283 188
Non-interest expenses
Salaries and employee benefits 547 399 1,073 761
Occupancy and equipment expense 107 95 214 191
Advertising and marketing 38 22 56 45
Stationery and supplies 62 43 105 68
Professional services 76 25 118 62
Data processing 47 25 83 53
FDIC insurance premiums 3 2 6 4
Other operating expenses 100 59 197 127
----------- ----------- ----------- -----------
Total non-interest expenses 980 670 1,852 1,311
Income before income tax provision(benefit) (193) 388 76 513
Income tax provision(benefit) (53) 132 40 82
----------- ----------- ----------- -----------
Net income (loss) ($ 140) $ 256 $ 36 $ 431
=========== =========== =========== ===========
Per share data:
Net income (loss) - basic and diluted ($ 0.06) $ 0.11 $ 0.01 $ 0.25
Weighted average number of shares outstanding - basic 2,473,295 2,364,119 2,473,295 1,718,327
Weighted average number of shares outstanding - diluted 2,473,295 2,384,189 2,477,588 1,734,179
<FN>
The accompanying notes are an integral part of these consolidated statements.
</TABLE>
4
<TABLE>
<CAPTION>
DEARBORN BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (unaudited)
(In thousands) Three Months Ended Six Months Ended
06/30/99 06/30/98 06/30/99 06/30/98
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income (loss) ($140) $ 256 $ 36 $ 431
Other comprehensive income (loss) , net of tax
Unrealized gains (losses) on securities
Unrealized holding gains (losses) arising
during period (351) 75 (400) 89
Less: reclassification adjustment for gains
included in net income -- (3) -- (16)
----- ----- ----- -----
Other comprehensive income (loss) (351) 72 (400) 73
----- ----- ----- -----
Comprehensive income (loss) ($491) $ 328 ($364) $ 504
===== ===== ===== =====
<FN>
The accompanying notes are an integral part of these accompanying statements.
</TABLE>
5
<TABLE>
<CAPTION>
DEARBORN BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(In thousands) Six Months Ended
6/30/99 06/30/98
------- --------
<S> <C> <C>
Cash flows from operating activities
Interest and fees received $ 4,198 $ 3,630
Interest paid (2,205) (2,137)
Proceeds from sale of mortgages held for sale 11,626 8,205
Origination of mortgages held for sale (10,873) (7,925)
Participations purchased in mortgages held for sale -- (5,054)
Cash paid to suppliers and employees (2,248) (1,266)
-------- --------
Net cash provided by (used in) operating activities 498 (4,547)
Cash flows from investing activities
Proceeds from maturities of securities available for
sale 29,952 17,350
Proceeds from sales of securities available for sale 2,400 19,908
Purchases of securities available for sale (43,497) (58,883)
Increase in loans, net of payments received (8,425) (4,091)
Purchases of property and equipment (121) (113)
-------- --------
Net cash (used in) investing activities (19,691) (25,829)
Cash flows from financing activities
Net increase in non-interest bearing deposits 3,656 4,527
Net increase in interest bearing deposits 14,585 16,571
Decrease in federal funds purchased -- (1,500)
Principal payments on mortgage payable (12) (9)
Sale of common stock, net of offerings costs -- 17,977
-------- --------
Net cash provided by financing activities 18,229 37,566
Increase (decrease) in cash and cash equivalents (964) 7,190
Cash and cash equivalents at the beginning of the period 6,254 1,660
-------- --------
Cash and cash equivalents at the end of the period $ 5,290 $ 8,850
======== ========
Reconciliation of net income to net cash provided by
(used in) operating activities
Net income $ 36 $ 431
Adjustments to reconcile net income to net cash
provided by (used in) operating activities
Provision for possible credit losses 667 42
Depreciation and amortization expense 213 115
Accretion of discount on investment
securities (2) (9)
Amortization of premium on investment 66 1
securities
Gain on sale of investment securities -- (16)
(Increase) decrease in mortgages held for
sale 564 (4,867)
(Increase) in interest receivable (475) (258)
Increase (decrease) in interest payable 53 (6)
(Increase) in other assets (452) (54)
Increase (decrease) in other liabilities (172) 74
-------- --------
Net cash provided by (used in) operating activities $ 498 ($ 4,547)
======== ========
<FN>
The accompanying notes are an integral part of these consolidated statements.
</TABLE>
6
DEARBORN BANCORP, INC.
FORM 10-Q (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. Accounting and Reporting Policies
The financial statements of Dearborn Bancorp, Inc. (the
"Corporation") include the consolidation of its only subsidiary,
Community Bank of Dearborn (the "Bank"). The accounting and
reporting policies of the Corporation are in accordance with
generally accepted accounting principles and conform to practice
within the banking industry.
The unaudited financial statements of the Corporation for the three
and six month periods ended June 30, 1999 and 1998 reflect all
adjustments, consisting of normal recurring items which are in the
opinion of management, necessary to present a fair statement of the
results for the interim period. The operating results for the
quarter are not necessarily indicative of results of operations for
the entire year.
The consolidated financial statements included herein have been
prepared by the Corporation, without an audit, pursuant to the rules
and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. These financial statements should be read in
conjunction with the financial statements and notes thereon included
in the Corporation's 1998 Annual Report to Stockholders.
PART 1 - FINANCIAL INFORMATION
ITEM 2. - MANAGEMENT'S DISCUSSION, ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis are intended to address significant
factors affecting the financial condition and results of operations of the
Corporation. The discussion provides a more comprehensive review of the
financial position and operating results than can be obtained from a reading
of the financial statements and footnotes presented elsewhere in this report.
Certain information contained in Management's Discussion and Analysis of
Financial Condition and Results of Operations may be deemed to be
forward-looking statements within the meaning of The Private Securities
Litigation Reform Act of 1995 and are subject to the Act's safe harbor
provisions. These statements are based on current expectations and involve a
number of risks and uncertainties. Actual results could differ materially and
adversely from those described in the forward-looking statements as a result
of various factors outside the control of the Corporation, including but not
limited to the following: the risk of non-payment of loans, changes in
prevailing economic conditions causing declines in real estate market values,
rapid changes in interest rates and the monetary and fiscal policies of the
federal government, and strong competition for deposits, loans and other
financial services from competitors.
7
General
The Corporation 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 Corporation reported a net loss of $140,000 for the three month period
and net income of $36,000 for the six month period ended June 30, 1999,
compared to net income of $256,000 and $431,000 for the three and six month
periods ended June 30, 1998. The Corporation's net income was negatively
impacted by a charge-off of $543,000 due to the bankruptcy of a commercial
borrower. The Corporation has fully reserved for the entire debt during the
second quarter of 1999.
Net Interest Income
1999 Compared to 1998. Net interest income for the three month period ended
June 30, 1999 was $1,237,000 compared to $971,000 for the same period ended
June 30, 1998, an increase of $266,000 or 27%. The increase was caused
primarily by an increase in the Corporation's interest rate spread to 2.17%
in 1999 from 1.82% in 1998. At the same time, the Corporation's average
earning assets increased by $19.3 million between the periods while
interest-bearing liabilities grew by $16.2 million. The Corporation's net
interest margin also increased in 1999 to 3.40% from 3.32% in 1998. The
Corporation's increase in interest rate spread was a result of lowering the
cost of deposits, while increasing loan volume.
Net interest income for the six month period ended June 30, 1999 was
$2,312,000 compared to $1,678,000 for the same period ended June 30, 1998, an
increase of $634,000 or 38%. This increase was caused primarily by an
increase in average earning assets of $28.3 million between the periods while
interest-bearing liabilities grew by $16.5 million. At the same time the
Corporation's interest rate spread increased to 2.11% in 1999 from 2.06% in
1998. The Corporation's net interest margin also increased in 1999 to 3.40%
from 3.32% in 1998. The Corporation's increase in interest rate spread was a
result of lowering the cost of deposits, while increasing loan volume.
8
Average Balances, Interest Rates and Yields. Net interest income is affected
by the difference ("interest rate spread") between rates of interest earned
on interest-earning assets and rates of interest paid on interest-bearing
liabilities and the relative amounts of interest-bearing liabilities and
interest-earning assets. When the total of interest-earning assets
approximates or exceeds the total of interest-bearing liabilities, any
positive interest rate spread will generate net interest income. Financial
institutions have traditionally used interest rate spreads as a measure of
net interest income. Another indication of an institution's net interest
income is its "net yield on interest-earning assets" or "net interest
margin," which is net interest income divided by average interest-earning
assets.
The following table sets forth certain information relating to the
Corporation'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>
Three months ended June 30, Three months ended June 30,
1999 1998
------------------------------ ------------------------------------
Average Average Average Average
(In thousands) Balance Interest Rate Balance Interest Rate
---------- -------- ------- -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
Assets
Federal funds sold and interest
bearing deposits with banks $ 4,613 $ 63 5.40% $ 11,597 $ 152 5.24%
Investment securities, available for
sale 60,180 866 5.69% 50,266 713 5.67%
Loans 71,539 1,440 7.96% 55,123 1,249 9.06%
-------- -------- ---- -------- -------- -----------
Sub-total earning assets 136,332 2,369 6.87% 116,986 2,114 7.23%
Other assets 5,588 5,868
-------- --------
Total assets $141,920 $122,854
======== ========
Liabilities and stockholders' equity
Interest bearing deposits $100,243 $ 1,189 4.69% $ 83,989 $ 1,133 5.40%
Other borrowings 507 9 7.02% 530 10 7.55%
-------- -------- ---- -------- -------- -----------
Sub-total interest bearing
liabilities 100,750 1,198 4.70% 84,519 1,143 5.41%
Non-interest bearing deposits 12,763 11,050
Other liabilities 867 390
Stockholders' equity 27,540 26,895
-------- --------
Total liabilities and
stockholders' equity $141,920 $122,854
======== ========
Net interest income $ 1,171 $ 971
======== =======
Net interest rate spread 2.17% 1.82%
==== ===========
Net interest margin on
earning assets 3.40% 3.32%
==== ===========
9
<CAPTION>
Six months ended June 30, Six months ended June 30,
1999 1998
-------------------------------- --------------------------------
Average Average Average Average
(In thousands) Balance Interest Rate Balance Interest Rate
---------- --------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Assets
Federal funds sold and interest
bearing deposits with banks $ 5,094 $ 139 5.43% $ 9,941 $ 267 5.37%
Investment securities, available for
sale 54,469 1,518 5.54% 37,139 1,088 5.86%
Loans 69,820 2,810 8.00% 53,992 2,454 9.09%
-------- -------- ---- -------- -------- -----
Sub-total earning assets 129,383 4,467 6.87% 101,072 3,809 7.54%
Other assets 5,477 5,333
-------- --------
Total assets $134,860 $106,405
======== ========
Liabilities and stockholders' equity
Interest bearing deposits $ 93,884 $ 2,241 4.75% $ 77,339 $ 2,109 5.45%
Other borrowings 511 17 6.62% 540 22 8.15%
-------- -------- ---- -------- -------- -----
Sub-total interest bearing
liabilities 94,395 2,258 4.76% 77,879 2,131 5.47%
Non-interest bearing deposits 11,967 10,713
Other liabilities 840 405
Stockholders' equity 27,658 17,408
-------- --------
Total liabilities and
stockholders' equity $134,860 $106,405
======== ========
Net interest income $ 2,209 $1,678
======== =======
Net interest rate spread 2.11% 2.06%
==== =====
Net interest margin on
earning assets 3.40% 3.32%
==== =====
</TABLE>
10
Rate/Volume Analysis. The following table analyzes net interest income in
terms of changes in the volume of interest-earning assets and
interest-bearing liabilities and changes in yields and rates. The table
reflects the extent to which changes in the interest income and interest
expense are attributable to changes in volume (changes in volume multiplied
by prior year rate) and changes in rate (changes in rate multiplied by prior
year volume). Changes attributable to the combined impact of volume and rate
have been allocated proportionately to changes due to volume and changes due
to rate.
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, 1999/1998 June 30, 1999/1998
Change in interest due to Change in interest due to
---------------------------- --------------------------
Average Average Net Average Average Net
(In thousands) Balance Rate Change Balance Rate Change
-------- -------- ------ ------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Assets
Federal funds sold and interest
bearing deposits with
banks ($ 94) $ 6 ($ 89) ($132) $ 4 ($128)
Investment securities, available
for sale 141 10 153 480 (50) 430
Loans 327 (138) 191 633 (278) 356
----- ----- ----- ----- ----- -----
Total earning assets $ 374 ($121) $ 255 $ 982 ($324) $ 658
===== ===== ===== ===== ===== =====
Liabilities
Interest bearing deposits $ 191 ($135) $ 56 $ 393 ($261) $ 132
Other borrowings (0) (1) (1) (1) (4) (5)
----- ----- ----- ----- ----- -----
Total interest bearing liabilities $ 191 ($136) $ 55 $ 392 ($265) $ 127
===== ===== ===== ===== ===== =====
Net interest income $ 200 $ 531
===== =====
Net interest rate spread 0.37% 0.06%
===== =====
Net interest margin on
earning assets 0.11% 0.09%
===== =====
</TABLE>
Provision for Possible Credit Losses
1999 Compared to 1998. The provision for possible credit losses was $585,000
and $667,000 for the three and six month periods ended June 30, 1999,
respectively, compared to $20,000 and $42,000 for the same periods in 1998,
an increase of $565,000 for the three month period and $625,000 for the six
month period. This significant increase was necessary, due primarily to the
bankruptcy of a borrower, with whom the Corporation participated in a lending
relationship along with a number of other Michigan banks. With this addition
to the provision for possible credit losses, the Corporation has reserved for
the entire debt. 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.
11
Non-interest Income
1999 Compared to 1998. Non-interest income was $135,000 and $283,000 for the
three and six month periods ended June 30, 1999, respectively, compared to
$107,000 and $188,000 for the same periods in 1998, an increase of $28,000 or
26% for the three month period and $95,000 or 51% for the six month period.
This increase was primarily due to gains on loans held for sale and increases
in service charges on deposit accounts.
Non-interest Expense
1999 Compared to 1998. Non-interest expense was $980,000 and $1,852,000 for
the three and six month periods ended June 30, 1999, respectively, compared
to $670,000 and $1,311,000 for the same periods in 1998, an increase of
$310,000 or 46% for the three month period and $541,000 or 41 % for the six
month period. The largest components of non-interest expense were salaries
and employee benefits which amounted to $547,000 and $1,073,000 and occupancy
and equipment expense which amounted to $107,000 and $214,000 for the three
and six month periods ended June 30, 1999, respectively. For the same periods
in 1998, salaries and employee benefits were $399,000 and $761,000 and
occupancy and equipment expense were $95,000 and $191,000, respectively. The
primary factor for these increases was the expansion of the operations and
lending departments of the Bank in 1998 and 1999. As of June 30, 1999, the
number of full time equivalent employees was 44 as compared to 35 as of June
30, 1998.
Income Taxes
1999 Compared to 1998. The income tax benefit was $53,000 for the three month
period ended June 30, 1999, compared to an income tax expense of $132,000 for
the same period in 1998. The income tax expense was $40,000 for the six month
period ended June 30, 1999, compared to $82,000 for the same period in 1998.
The decrease was primarily due to the decrease in net income and changes in
net deferred tax liabilities.
Comparison of Financial Condition at June 30, 1999 and December 31, 1998
Assets. Total assets at June 30, 1999 were $144.5 million compared to $126.8
million at December 31, 1998, an increase of $17.7 million or 14%. The
increase was primarily due to increases in deposits, which were then deployed
into loans and investment securities - available for sale.
Federal Funds Sold. Total federal funds sold at June 30, 1999 were $3.0
million compared to $4.0 million at December 31, 1998, a decrease of $1.0
million or 25%. The decrease was due to the deployment of funds into loans
and investment securities - available for sale.
Mortgage Loans Held for Sale. Total mortgage loans held for sale at June 30,
1999 were $647,000 compared to $1,211,000 at December 31, 1998, a decrease of
$564,000 or 47%. This decrease was primarily due to the volume of
originations of mortgage loans, available for sale.
12
Investment Securities - Available for Sale. Total investment securities -
available for sale, at June 30, 1999 were $60.8 million compared to $50.2
million at December 31, 1998, an increase of $10.6 million or 21%. An
increase in deposits has enabled the Corporation to invest in investment
securities - available for sale until such time as quality loan opportunities
or other higher yielding investments become available. All securities within
the Corporation's portfolio are U.S. Treasury issues, U.S. Government
sponsored agency issues, corporate debt securities carrying ratings of Aa2 or
better or munipal obligations carrying ratings of Aaa or better. The
Corporation does not hold any securities in the "Held to Maturity" category
nor does the Corporation hold or utilize derivatives.
The amortized cost and estimated market value of investments in debt
securities available for sale are as follows (in thousands):
<TABLE>
<CAPTION>
June 30, 1999
----------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
US Treasury securities $ 2,368 $ -- ($ 46) $ 2,322
US Government agency securities 56,865 -- (582) 56,283
Municipal Bonds 126 -- (2) 124
Corporate debt securities 2,085 -- -- 2,085
------- ---- ------- -------
Totals $61,444 $ -- ($ 630) $60,814
======= ==== ======= =======
<CAPTION>
December 31, 1998
----------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
US Treasury securities $ 2,013 $ -- ($ 1) $ 2,012
US Government agency securities 31,682 -- (20) 31,662
Corporate debt securities 16,537 -- -- 16,537
------- ---- ------- -------
Totals $50,232 $ -- ($ 21) $50,211
======= ==== ======= =======
</TABLE>
13
Loans. Total loans at June 30, 1999 were $73.9 million compared to $66.0
million at December 31, 1998, an increase of $7.9 million or 12%. Major
categories of loans included in the loan portfolio are as follows (in
thousands):
06/30/99 12/31/98 06/30/98
-------- -------- --------
Consumer loans $ 11,154 $ 12,434 $ 12,846
Commercial, financial, & other 20,607 14,843 11,015
Commercial real estate construction 3,272 2,619 1,623
Commercial real estate mortgages 14,092 12,478 12,425
Residential real estate mortgages 24,725 23,649 18,314
-------- -------- --------
73,850 66,023 56,223
Allowance for possible credit losses (707) (627) (557)
-------- -------- --------
$ 73,143 $ 65,396 $ 55,666
======== ======== ========
The following is a summary of non-performing assets and problems loans (in
thousands):
06/30/99 12/31/98 06/30/98
-------- -------- --------
Over 90 days past due and still accruing $ -- $ 2 $ --
Non-accrual loans 287 410 44
Renegotiated loans -- -- --
Other real estate owned -- -- --
---- ---- ----
$287 $412 $ 44
==== ==== ====
14
Allowance for Possible Credit Losses. The allowance for possible credit
losses at June 30, 1999 was $707,000 compared to $627,000 at December 31,
1998, an increase of $80,000 or 13%. 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.
The following is an analysis of the allowance for possible credit losses (in
thousands):
<TABLE>
<CAPTION>
06/30/99 12/31/98 06/30/98
-------- -------- --------
<S> <C> <C> <C>
Balance, beginning of year $ 627 $ 522 $ 522
Charge-offs:
Consumer Loans (55) (15) (7)
Commercial Loans (543) -- --
Recoveries:
Consumer Loans 11 -- --
-------- -------- --------
Net charge-offs (587) (15) (7)
Additions charged to operations 667 120 42
-------- -------- --------
Balance, June 30 $ 707 $ 627 $ 557
======== ======== ========
Allowance to total loans 0.96% 0.95% 0.99%
======== ======== ========
Net charge-offs to average loans 0.84% 0.03% 0.01%
======== ======== ========
Average allowance for possible loan losses 624 564 539
Average total loans, gross 69,820 59,355 53,992
Average allowance to average total loans 0.89% 0.95% 1.00%
</TABLE>
Net charge-offs for the three and six month periods ended June 30, 1999 were
$584,000 and $587,000, respectively, compared to $3,000 and $7,000 for the
same periods in 1998. A charge-off of a commercial loan relationship in the
amount of $543,000 during the three month period ended June 30, 1999 was the
largest single charge-off in the Bank's history. Since the Bank's inception
in 1994 through December 31, 1998, net charge-offs were $35,000.
Bank Premises and Equipment. Bank premises and equipment at June 30, 1999 was
$2.4 million compared to $2.4 million at December 31, 1998.
15
Accrued Interest Receivable. Accrued interest receivable at June 30, 1999 was
$1,408,000 compared to $933,000 at December 31, 1998, an increase of $475,000
or 51%. The increase was primarily due to increase in loans and investments
securities - available for sale.
Other Assets. Other assets at June 30, 1999 were $824,000 compared to
$372,000 at December 31, 1998, an increase of $452,000 or 122%. The increase
was primarily due to increases in prepaid expenses.
Deposits. Total deposits at June 30, 1999 were $115.9 million compared to
$97.6 million at December 31, 1998, an increase of $18.3 million or 19%. The
following is a summary of the distribution of deposits (in thousands):
06/30/99 12/31/98 06/30/98
-------- -------- --------
Non-interest bearing:
Demand $ 14,798 $ 11,142 $ 13,114
======== ======== ========
Interest bearing:
Checking $ 4,308 $ 3,630 $ 2,120
Money market 13,439 11,215 10,656
Savings 2,998 2,079 1,859
Time, under $100,000 45,426 42,790 42,661
Time, $100,000 and over
Non-volatile priced 13,509 13,493 15,265
Volatile priced 21,374 13,261 10,820
-------- -------- --------
$101,054 $ 86,468 $ 83,381
======== ======== ========
The increase in deposits was primarily due to normal business development,
marketing, telemarketing, referral programs and growth strategies which
included, an annual birthday celebration and major marketing campaign in
March. The increase in deposits enabled the Corporation to invest the funds
in loans and investment securities available for sale.
Accrued Interest Payable. Accrued interest payable at June 30, 1999 was
$391,000 compared to $338,000 at December 31, 1998, an increase of $53,000 or
16%. The increase was due to the increase in the volume of time deposits.
Other Liabilities. Other liabilities at June 30, 1999 were $387,000 compared
to $559,000 at December 31, 1998, an decrease of $172,000 or 31%. The
decrease was primarily due to the decrease in deferred taxes.
16
Capital
Stockholders' equity at June 30, 1999 was $27.4 million compared to $27.7
million at December 31, 1998, a decrease of $0.3 million or 1%. 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 June 30, 1999
Total capital
(to risk weighted
assets) 11,507 14.93% 6,167 8.00% 7,709 10.00%
Tier 1 capital
(to risk weighted
assets) 10,800 14.01% 3,083 4.00% 4,625 6.00%
Tier 1 capital
(to average assets) 10,800 8.70% 4,967 4.00% 6,209 5.00%
As of December 31, 1998
Total capital
(to risk weighted
assets) 10,622 16.20% 5,245 8.00% 6,557 10.00%
Tier 1 capital
(to risk weighted
assets) 9,995 15.20% 2,623 4.00% 3,934 6.00%
Tier 1 capital
(to average assets) 9,995 9.00% 4,438 4.00% 5,547 5.00%
</TABLE>
Based on the respective regulatory capital ratios at June 30, 1999 and
December 31, 1998, the Bank is considered well capitalized.
On April 8, 1998, the Corporation completed an initial public offering of
common stock underwritten by Roney and Co. As a result of the offering, the
Corporation sold 1,407,600 shares of stock, adjusted for a two percent stock
dividend issued in January 1999 at a price of $13.73 per share and received
$18.0 million in new capital, net of offering costs. On June 18, 1999, the
Corporation moved to the NASDAQ National Market and continues to trade under
the symbol "DEAR".
17
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 include
federal funds sold, securities available for sale, loan repayments, core
deposits and a federal funds purchase credit facility.
The Corporation has sought to manage its exposure to changes in interest
rates by matching more closely the effective maturities or repricing
characteristics of the Corporation'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
Corporation's assets mature or reprice more quickly or to a greater extent
that its liabilities, the Corporation'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 Corporation'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.
18
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
Corporation'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 declining interest rates, the
Corporation's assets would tend to prepay faster than originally expected
thus decreasing the negative gap position. In addition, some of the
Corporation'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 June 30, 1999 which are expected
to mature or reprice in each of the time periods shown (in thousands):
<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 $ 3,009 $--- $--- $--- $ 3,009
Mortgage loans held for sale 647 -- -- -- 647
Securities available for sale 2,085 -- 58,729 -- 60,814
Total loans, net of non-accrual 19,710 5,822 42,403 5,628 73,563
-------- -------- -------- -------- --------
Total earning assets 25,451 5,822 101,132 5,628 138,033
Interest bearing liabilities
Total interest bearing deposits 28,770 45,453 26,830 -- 101,053
Mortgage payable -- -- -- 505 505
-------- -------- -------- -------- --------
Total interest bearing liabilities 28,770 45,453 26,830 505 101,558
Net asset (liability) funding gap (3,319) (39,631) 74,302 5,123 $ 36,475
-------- -------- -------- -------- ========
Cumulative net asset (liability) funding gap ($ 3,319) ($42,950) $ 31,352 $ 36,475
======== ======== ======== ========
</TABLE>
19
Year 2000 Problem
The Corporation 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., "99"
rather than "1999"). 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.
The Corporation began to prepare for the Year 2000 project in 1997. The plan
began with an internal evaluation of equipment, software applications and
vendor supplied products. The Corporation's main data processing vendor has
represented that it is compliant at December 31, 1998, and regularly provides
updates on its progress to the Corporation. The Corporation has a written
plan, which is regularly updated and reported to the Board of Directors. The
testing phase was essentially complete on December 31, 1998. The current
phase of the plan is contingency planning and validation. The Corporation has
also been gathering information from significant borrowers and depositors, to
help mitigate any risk posed to the Bank by their non-compliance.
During 1998, the Corporation made expenditures of $313,000, of which $65,000
was charged to expense for depreciation, testing and employee wages to
upgrade non-compliant personal computer workstations, software and local area
networks. In 1999, the Corporation expects to incur $99,000 in expenses
related to depreciation, testing and employee wages. In August 1998, the
Corporation made a capital expenditure of $151,000 to purchase a new
mainframe computer to accommodate the growth of the Corporation. The
mainframe was certified Year 2000 Compliant at the time of delivery.
Additionally, if the Corporation (or its customers or vendors) are unable to
remedy any potential Year 2000 problems in a timely manner, there could be a
material adverse effect on the Corporation's business. The Corporation has a
written contingency plan in place should testing fail on any given computer
application. Based on information that is currently available, the
Corporation does not anticipate that the cost of achieving Year 2000
compliance will have a material effect on its capital resources, results of
operations, or liquidity as presented herein.
20
DEARBORN BANCORP, INC.
FORM 10-Q (continued)
PART 2 - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Corporation held its regular annual meeting of stockholders on
May 18, 1999. At this meeting, an election was held for four
directors, for three year terms expiring in 2002. The voting results
for each nominee were as follows:
Nominee Total For Total Withheld
------- --------- --------------
William M. Brucker, Jr. 2,108,036 10,839
Bradley F. Keller 2,108,814 10,061
Richard Norstrom 2,107.630 11,245
Ronnie J. Story 2,108,814 10,061
ITEM 6. EXHIBITS AND REPORTS IN FORM 8-K.
(a) Financial Statements:
The following consolidated financial statements of Dearborn Bancorp,
Inc. and its subsidiary included in this report are:
Consolidated Balance Sheets - June 30, 1999, December 31, 1998 and
June 30, 1998
Consolidated Statements of Income (Loss) - For the Three and Six
Months Ended June 30, 1999 and 1998
Consolidated Statements of Comprehensive Income (Loss) - For the
Three and Six Months Ended June 30, 1999 and 1998.
Consolidated Statements of Cash Flows - For the Six Months Ended
June 30, 1999 and 1998
Notes to Consolidated Financial Statements
(b) There were no Form 8-K Reports filed during the three months ended June
30, 1999.
21
DEARBORN BANCORP, INC.
FORM 10-Q (continued)
SIGNATURES
Pursuant to the requirements 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.
Dearborn Bancorp, Inc.
(Registrant)
/s/ John E. Demmer
-------------------------------
John E. Demmer
Chairman and Chief Executive Officer
/s/ Michael J. Ross
-------------------------------
Michael J. Ross
President
/s/ Jeffrey L. Karafa
-------------------------------
Jeffrey L. Karafa
Treasurer and Chief Financial Officer
Date: August 6, 1999
22
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM DEARBORN BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS AT JUNE 30, 1999 AND THE
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE SIX MONTHS
ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<MULTIPLIER> 1,000
<PERIOD-TYPE> 6-MOS
<PERIOD-START> JAN-01-1999
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> $ 2,281
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 3,009
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 60,814
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 73,850
<ALLOWANCE> 707
<TOTAL-ASSETS> 144,501
<DEPOSITS> 115,851
<SHORT-TERM> 0
<LIABILITIES-OTHER> 387
<LONG-TERM> 505
0
0
<COMMON> 29,015
<OTHER-SE> (1,648)
<TOTAL-LIABILITIES-AND-EQUITY> 144,501
<INTEREST-LOAN> 2,913
<INTEREST-INVEST> 1,518
<INTEREST-OTHER> 139
<INTEREST-TOTAL> 4,570
<INTEREST-DEPOSIT> 2,241
<INTEREST-EXPENSE> 2,258
<INTEREST-INCOME-NET> 2,312
<LOAN-LOSSES> 667
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,852
<INCOME-PRETAX> 76
<INCOME-PRE-EXTRAORDINARY> 76
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 36
<EPS-BASIC> 0.01
<EPS-DILUTED> 0.01
<YIELD-ACTUAL> 3.40
<LOANS-NON> 287
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 627
<CHARGE-OFFS> 598
<RECOVERIES> 11
<ALLOWANCE-CLOSE> 707
<ALLOWANCE-DOMESTIC> 707
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
