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, 1999 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 48124
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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
- ------------------- ------------------------
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 1, 2000: Common Stock, $14,183,832.
Indicate the number of shares outstanding of each of the registrant's classes
of common stock as of March 1, 2000: Common Stock, 2,417,829 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the 1999 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 14, 2000, to be filed pursuant
to Regulation 14A, are incorporated by reference in Part III of this report.
DEARBORN BANCORP, INC.
FORM 10-K
PART I
Forward Looking Statements
The following discussion contains forward-looking statements that are based
on management's beliefs, assumptions, current expectations, estimates and
projections about the financial services industry, the economy, and about the
Corporation and Bank. Words such as "anticipates", "believes", "estimates",
"expects", "forecasts", "intends", "is likely", "plans", "projects",
variations of such words and similar expressions are intended to identify
such forward- looking statements. These statements are not guarantees of
future performance and involve certain risks, uncertainties and assumptions
("Future Factors") that are difficult to predict with regard to timing,
extent, likelihood and degree of occurrence. Therefore, actual results and
outcomes may materially differ from what may be expressed or forecasted in
such forward-looking statements. The Corporation undertakes no obligation to
update, amend or clarify forward-looking statements, whether as a result of
new information, future events (whether anticipated or unanticipated), or
otherwise.
Future Factors include changes in interest rates and interest rate
relationships; demand for products and services; the degree of competition by
traditional and non-traditional competitors; changes in banking regulation;
changes in tax laws; changes in prices, levies and assessments; the impact of
technological advances; governmental and regulatory policy changes; the
outcomes of contingencies; trends in customer behavior as well as their
ability to repay loans; and changes in the national and local economy. These
are representative of the Future Factors that could cause a difference
between an ultimate actual outcome and a preceding forward-looking statement.
Item 1. Business
Dearborn Bancorp, Inc. (the "Corporation"), a Michigan corporation, is a bank
holding corporation owning all the common stock of the Community Bank of
Dearborn (the "Bank"), a Michigan banking corporation which commenced
business on February 28, 1994. The Bank is the only commercial bank
headquartered in Dearborn, Michigan and conducts business primarily in
western Wayne County, Michigan.
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 Corporation's management, this situation has
created a favorable opportunity for a local commercial bank with local
management and directors. Management of the Corporation 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 Corporation 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 Corporation was incorporated as a Michigan business
corporation on September 30, 1992. The Corporation was formed to acquire all
of the Bank's issued and outstanding stock and to engage in the business of a
bank holding corporation under the Bank Holding Company Act of 1956, as
amended (the "Act").
The executive offices of the Corporation and the Bank are located
at 22290 Michigan Avenue, Dearborn, Michigan 48124, telephone number (313)
274-1000.
2
Business of the Corporation
The primary purpose of the Corporation is the ownership of the
Bank. In the future, the Corporation 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 Corporation.
Business of the Bank
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 Corporation 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.
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
Growth 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,
1999 had $22.2 million in total deposits, while the Plymouth Township office
opened on August 11, 1997 and as of December 31, 1999 had $16.1 million in
total deposits. In 2000, the Bank intends to open an office in Canton
Township.
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 Corporation's Primary Market. The Corporation's initial
lending philosophy concentrated on single family residential lending but has
grown to include a more diverse group of loan products. The Corporation'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 Corporation 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 Corporation's markets. As part of its normal business
operations, management maintains contact with financial institutions to
discuss various acquisition possibilities. However, the Corporation 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 Corporation will be successful
in its acquisition strategy.
3
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, 1999, the Community Club had over 1,800 members who
accounted for total deposits of $52.8 million, or 44% of the Bank's total
deposits.
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, Musson,
Rautio 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 database
composed of those referral sources. The Bank also maintains an active role in
several local real estate boards offering product training to members.
4
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 of 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.
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, Loan Administration Officer and Senior Lender
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 $1,000,000 requiring approval by a loan
committee. Larger loans up to the legal maximum authorized by law require 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 - 80% 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 Messrs. Ross, Cuttle and Musson, who have over 79 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.
5
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.
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 adjusts
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.
6
Employees
As of March 1, 2000, the Bank had 42 employees, including 15
officers and 27 customer service, operations and other support persons.
Management believes that the Bank's relations with its employees are
excellent.
Competition
The Bank faces 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 Corporation is a registered bank holding company and subject
to the supervision of the Federal Reserve System ("Federal Reserve"). The
Corporation 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 Corporation 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 Corporation of
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 Corporation 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.
7
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
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 1999 Annual Report to Stockholders and is incorporated herein by
reference.
Item 2. Properties
The main office of the Corporation 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 Corporation and leased to the Bank.
The Bank's Dearborn Heights, Michigan branch office is located in
a single story commercial/retail office building at 24935 W. Warren Avenue,
which is also owned by the Corporation. 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.
The Bank's branch office located at 44623 Five Mile, Plymouth
Township, Michigan, contains 1,595 square feet in leased space in a retail
shopping center anchored by a regional grocery store.
The Bank has a commitment to purchase property at 1325 N. Canton
Center, Canton Township, Michigan and will be constructing a 6,000 square
foot branch office. Approximately 50% of the 6,000 square feet will be leased
to a non-affiliated tenant.
Item 3. Legal Proceedings
From time to time, the Corporation and its subsidiary are parties
to various legal proceedings incidental to their business. At December 31,
1999, there were no legal proceedings which management anticipates would have
a material adverse effect on the Corporation.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the
fourth quarter of 1999.
Executive Officers of the Corporation and Bank
Set forth below are the names and ages of the executive officers
of the Corporation and the Bank, positions held and the years from
which held. There are no family relationships among such persons.
John E. Demmer, 76
Chairman of the Board, Dearborn Bancorp, Inc. and Community Bank
of Dearborn
Chairman of the Board and Director of the Corporation 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.
8
Richard Nordstrom, 72
Vice Chairman, Dearborn Bancorp, Inc.
Vice Chairman and Director of the Corporation since 1998.
President and Director of the Corporation 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, 49
President, Dearborn Bancorp, Inc.
President and Chief Executive Officer, Community Bank of Dearborn
President and Director of the Corporation since 1998. Vice
President and Director of the Corporation from 1993 to 1997.
President, Chief Executive Officer, and Director of the Bank since
1993.
Jeffrey L. Karafa, 35
Vice President, Treasurer and Secretary, Dearborn Bancorp, Inc.
Vice President, CFO, Cashier and Secretary, Community Bank of
Dearborn
Vice President and Treasurer of the Corporation since 1998.
Secretary of the Corporation since 1999. Vice President, CFO and
Cashier of the Bank since 1996. Secretary of the Bank since 1999.
Assistant Vice President of the Bank from 1994 to 1996.
Donald G. Karcher, 70
Vice President, Dearborn Bancorp, Inc.
Vice President and Director of the Corporation since 1992.
Director of the Bank since 1993. Chairman of the Board of Karcher
Agency, Inc. since 1994.
Timothy J. Cuttle, 53
Executive Vice President, Loan Administration, Community Bank of
Dearborn
Executive Vice President of the Bank since 1996. Senior Vice
President of Huntington Banks of Michigan from 1990 to 1995.
Brian A. Mamo, 32
Vice President, Commercial Loan Officer, Community Bank of
Dearborn
Vice President of the Bank since 1998. Commercial Relationship
Officer of Citizens Bank from 1997 to 1998. Director of
Administration and Controller of TGI-VMS from 1995 to 1997.
Commercial Loan Officer of the former NBD Bank from 1989 to 1995.
Warren R. Musson, 43
Vice President, Senior Lender, Community Bank of Dearborn
Vice President of the Bank since 1999. Senior Vice President and
Senior Loan Officer of Peoples State Bank from 1993 to 1999.
H. Kristene Rautio, 52
Vice President, Branch Administration, Community Bank of Dearborn
Vice President of the Bank since 1999. Relationship Manager,
Private Client Services of the former First of America Bank from
1997 to 1999. Branch Sales Manager of the former First of America
Bank from 1996 to 1997. Retail Sales Manager of the former First
of America Bank from 1994 to 1996.
Jeffrey J. Wolber, 44
Vice President, Sales and Product Manager, Community Bank of
Dearborn
Vice President of the Bank since 1994.
9
PART II
Item 5. Market for Registrant's Common Equity, and Related Stockholder
Matters
The information required by this item appears in the Corporation's
1999 Annual Report to Stockholders under the caption "Dearborn Bancorp, Inc.,
Common Stock" and is incorporated by reference herein.
Item 6. Selected Financial Data
The information required by this item appears in the Corporation's
1999 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
Results of Operations
The information required by this item appears in the Corporation's
1999 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 7A. Quantitative and Qualitative Disclosure About Market Risk
The Registrant is not required to provide this information as the
Registrant meets the definition of a small business issuer.
Item 8. Financial Statements and Supplementary Data
The financial statements included in the Corporation's 1999 Annual
Report to Stockholders are incorporated by reference herein.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
The Corporation has dismissed its former principal accountants,
Grant Thornton LLP of Southfield, Michigan, and engaged Crowe Chizek and
Company, LLP of Grand Rapids, Michigan as its principal accountants. The
change was made effective October 29, 1999.
During the two most recent fiscal years of the Corporation and
each subsequent interim period preceding December 31, 1999, there were no
disagreements with the former accountants on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure, which disagreements, if not resolved to the satisfaction of the
former accountants would have caused them to make reference in connection
with their report to the subject matter of the disagreements.
The reports of the former principal accountants on the financial
statements of the Corporation for either of the past two years contained no
adverse opinion or disclosure of opinion, nor was either qualified or
modified as to uncertainty, audit scope, or accounting principles.
The decision to change accountants was approved by the Board of
Directors of the Corporation.
10
PART III
Item 10. Directors and Executive Officers of the Registrant
The information set forth under the caption "Information about
Directors and Nominees for Directors" in the definitive Proxy Statement of
the Corporation dated April 14, 2000 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
The information set forth under the caption "Executive
Compensation" in the definitive Proxy Statement of the Corporation dated
April 14, 2000 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 14, 2000 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 14, 2000 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
in the Corporation's 1999 Annual Report to Stockholders and
are incorporated by reference in item 8.
Report of Independent Auditors
Consolidated Balance Sheets as of December 21, 1999 and 1998
Consolidated Statements of Income for the years ended
December 31, 1999, 1998 and 1997
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules
No schedules are required under this item.
11
(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. The Exhibit marked with two asterisks
below was filed as an Exhibit to the Form 10-K Report of the
Registrant for the fiscal year ended December 31, 1993 is
incorporated herein by reference. The Exhibit marked with
three asterisks below was filed as an Exhibit to the Form
10-K Report of the Registrant for the fiscal year ended
December 31, 1995 is incorporated herein by reference. The
Exhibit marked with four asterisks below was filed as an
Exhibit to the Form 10-Q Report of the Registrant for the
quarter ended June 30, 1997 is incorporated herein by
reference. The Exhibit numbers in brackets being those in
such Registration Statements, Form 10-K or Form 10-Q
Reports.
(3)(a)**** Articles of Incorporation of Registrant, As
Amended. [3(a)]
(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, As Amended. [10(b)]
(13) 1999 Annual Report to Stockholders. [13]
(21)** Subsidiaries of the Registrant. [21]
(23) Opinion of Grant Thornton LLP. [23]
(27) Financial Data Schedule. [27]
(b) Reports on Form 8-K
The Corporation filed a Form 8-K on October 29, 1999
regarding Changes in Registrant's Certifying Accountant.
12
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 1,
2000.
Dearborn Bancorp, Inc.
By /s/ John E. Demmer
--------------------------------------
(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 1, 2000.
/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, Treasurer and Secretary
(Jeffrey L. Karafa) (Principal Financial and Accounting Officer)
/s/ Wilber M. Brucker, Jr.
- -------------------------- Director
(Wilber M. Brucker, Jr.)
/s/ Margaret I. Campbell
- -------------------------- Director
(Margaret I. Campbell)
/s/ Michael V. Dorian, Jr.
- -------------------------- Director
(Michael V. Dorian, Jr.)
/s/ David Himick
- -------------------------- Director
(David Himick)
/s/ Bradley F. Keller
- -------------------------- Director
(Bradley F. Keller)
/s/ Donald G. Karcher
- -------------------------- Director
(Donald G. Karcher)
/s/ Jeffrey G. Longstreth
- -------------------------- Director
(Jeffrey G. Longstreth)
/s/ Richard Nordstrom
- -------------------------- Vice Chairman and Director
(Richard Nordstrom)
/s/ Michael J. Ross
- -------------------------- President and Director
(Michael J. Ross)
/s/ Robert C. Schwyn
- -------------------------- Director
(Dr. Robert C. Schwyn)
/s/ Ronnie J. Story
- -------------------------- Director
(Ronnie J. Story)
23
Dearborn Bancorp, Inc.
Exhibit Index
1999 Annual Report to Stockholders. [13]
Opinion of Grant Thornton LLP. [23]
Financial Data Schedule. [27]
Dearborn Bancorp, Inc.
and its subsidiary
Community Bank of Dearborn
1999
ANNUAL REPORT
Dearborn Bancorp, Inc.
and its subsidiary
Community Bank of Dearborn
CONTENTS
Corporate Information ......................................... 3
Stock Information ............................................. 4
Summary of Selected Financial Data ............................ 5
Chairman's and President's Letter to Stockholders ............. 6
Consolidated Balance Sheets ................................... 8
Consolidated Statements of Income ............................. 9
Consolidated Statements of Changes in Stockholders' Equity .... 10
Consolidated Statements of Cash Flows ......................... 12
Notes to Consolidated Financial Statements .................... 13
Report of Independent Auditors ................................ 33
Management's Discussion and Analysis .......................... 34
Dearborn Bancorp, Inc. Directors and Officers ................. 49
Community Bank of Dearborn Officers ........................... 50
2
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, safe deposit 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., 22290 Michigan Avenue, Dearborn, Michigan 48124
ANNUAL MEETING
The Annual Meeting of Stockholders will be held on May 16, 2000, at Park
Place, 23400 Park Avenue, Dearborn, Michigan, at 4:00 p.m.
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Crowe Chizek & Company LLP
300 Riverfront Plaza Building
55 Campau Avenue, N.W.
Grand Rapids, Michigan 49503
3
DEARBORN BANCORP, INC. COMMON STOCK
Dearborn Bancorp, Inc. common stock is listed on the Nasdaq Stock Market and
is traded under the symbol "DEAR".
STOCK TRANSFER AGENT AND REGISTRAR
Shareholders requiring a change of name, address or ownership of stock, as
well as information about shareholder records or lost or stolen certificates
should contact:
Fifth Third Bank
Corporate Trust Division
38 Fountain Square Plaza
Cincinnati, Ohio 45263
Toll Free 1-800-837-2755
PRINCIPAL MARKET MAKERS
First of Michigan Corporation
300 River Place
Detroit, MI 48207
(313) 259-2600
Herzog, Heine, Geduld, Inc.
525 Washington Boulevard
Jersey City, NJ 07310
(800) 221-3600
Raymond James & Associates, Inc.
880 Carillon Parkway
St. Petersburg, FL 33716
(727) 573-3800
INVESTOR RELATIONS
Additional information about the corporation may be obtained by writing or
calling: Jeffrey L. Karafa, Vice President, 22290 Michigan Avenue, Dearborn,
Michigan 48124; (313) 274-1000 ext. 312
[GRAPHIC OMITTED]
QUARTERLY COMMON STOCK PRICE INFORMATION
COMMON STOCK PRICE INFORMATION
High Low Close
-----------------------------
1999
- ----
First quarter $ 12.25 $ 8.88 $ 9.00
Second quarter 10.13 8.38 9.25
Third quarter 9.88 7.00 8.25
Fourth quarter 8.25 4.25 6.00
1998
- ----
Initial public offering (1) $ 14.00 $ -- $ --
Second quarter 18.14 14.00 14.46
Third quarter 14.71 10.54 11.77
Fourth quarter 13.73 9.80 10.50
(1) Dearborn Bancorp, Inc. began trading on the Nasdaq Stock Market on
April 8, 1998.
4
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, 1999 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 Balance Sheets as of December 31,
1999 and 1998, and the Consolidated Statements of Income for the years ended
December 31, 1999, 1998 and 1997 are included elsewhere in this Annual
Report.
<TABLE>
<CAPTION>
(In thousands, except share and
per share data) 1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
OPERATIONS
Interest income $ 9,677 $ 8,290 $ 5,404 $ 3,314 $ 2,023
Interest expense 4,735 4,466 2,998 1,706 1,004
----------- ----------- ----------- ----------- -----------
Net interest income 4,942 3,824 2,406 1,608 1,019
Provision for possible credit losses 772 120 164 164 114
----------- ----------- ----------- ----------- -----------
Net interest income after provision for
possible credit losses 4,170 3,704 2,242 1,444 905
Total non-interest income 558 533 312 284 210
Total non-interest expense 3,804 2,941 2,089 1,701 1,403
----------- ----------- ----------- ----------- -----------
Income (loss) before federal income tax
expense (benefit) 924 1,296 465 27 (288)
Income tax expense (benefit) 394 346 (145) -- --
----------- ----------- ----------- ----------- -----------
Net income (loss) $ 530 $ 950 $ 610 $ 27 $ (288)
=========== =========== =========== =========== ===========
FINANCIAL CONDITION
Total assets $ 152,698 $ 126,755 $ 86,653 $ 56,599 $ 35,130
Investment securities, available for sale 55,022 50,211 29,780 10,493 10,035
Federal Home Loan Bank stock 381 -- -- -- --
Loans 85,390 66,023 52,139 36,263 19,945
Deposits 118,875 97,610 75,397 47,463 28,922
Other borrowings 5,493 517 2,037 554 569
Stockholders' equity 27,260 27,731 8,752 8,190 5,458
PER SHARE INFORMATION (1)
Net income per common share - basic and diluted $ 0.21 $ 0.45 $ 0.57 $ 0.04 $ (0.38)
Book value per common share $ 11.16 $ 11.21 $ 8.21 $ 7.68 $ 7.22
Average shares outstanding - basic 2,472,352 2,099,239 1,065,767 756,982 756,134
Average shares outstanding - diluted 2,472,352 2,112,866 1,076,922 756,982 756,134
Shares outstanding at end of period 2,442,740 2,473,295 1,065,767 1,065,767 756,134
OTHER DATA
Return on average assets 0.38% 0.75% 0.86% 0.06% (1.01)%
Return on average equity 1.92% 2.99% 7.23% 0.50% (5.20)%
Net interest margin 3.69% 3.16% 3.60% 3.98% 3.92%
Net interest spread 2.44% 1.78% 2.54% 2.92% 2.65%
Allowance for possible credit losses to total loans 0.91% 0.95% 1.01% 1.01% 1.02%
Nonperforming assets to total assets 0.19% 0.32% 0.02% 0.02% 0.21%
Stockholders' equity to total assets 17.85% 21.88% 10.10% 14.47% 15.54%
Total interest expense to gross interest income 48.93% 53.87% 55.48% 51.48% 49.63%
Number of offices 3 3 3 2 2
<FN>
(1) All per share amounts presented have been adjusted to reflect the
issuance of stock dividends.
</TABLE>
5
To Our Shareholders:
During 1999, Community Bank of Dearborn observed the fifth
anniversary of its opening and the robust growth that has characterized every
year we have been in business continued. Over the course of the year, total
assets increase 20.47 percent to $152,698,000, total deposits went to 21.79
percent to $118,875,000 and total loans grew 29.33 percent to stand at
$85,390,000 at year-end.
Net income for the year was $530,000 or $0.21 per common share.
For 1998, we reported earnings of $950,000 or $0.45 per share. Had it not
been for the charge-off of a large loan to a commercial customer that
suddenly and unexpectedly declared bankruptcy, we would have recorded another
increase in earnings in 1999.
To ensure that we maintain a high level of customer service, we
continued to add to our staff, including the employment of two senior
officers who brought extensive banking experience to our management group.
Warren R. Musson was named Vice President and Senior Lender while H. Kristene
Rautio became Vice President and Branch Administrator. Mr. Musson completed
the highly regarded credit training program at the former NBD Bank and then
earned ten promotions in twelve years as a commercial lending officer. For
the past eight years, he has been a senior credit officer at two other banks
in southeastern Michigan. Ms. Rautio spent 21 years in increasingly
responsible positions at the former First of America organization. During the
past 12 years, her primary duties have involved branch administration,
business development and retail sales management.
Both of our branch offices on Warren Avenue in Dearborn Heights
and on Five Mile Road in Plymouth Township are doing well and making a solid
contribution to our "bottom line." Consequently, we are now making plans to
open a fourth banking office in Canton Township on Canton Center Road between
Ford and Saltz Roads. We have applied for permits to build a 6,000 square
foot building on the site. Initially, we will use half of the space to house
the new branch and lease the other half to an unaffiliated tenant. This will
be a full-service branch with drive-in facilities, safe deposit boxes and an
automatic teller machine. If there are no unanticipated delays in the
permitting process or construction, we expect that the new office will open
for business during the fourth quarter of 2000.
Traditional "brick and mortar" branch networks will never be quite
as important in building a bank's business as they once were. Still, a few
strategically located banking offices will always play a major role in our
marketing strategy in western Wayne and southwestern Oakland Counties.
Electronic and internet services and automated teller machines will
increasingly satisfy many of our customers' day-to-day financial needs but
person-to-person contact in a banking office is likely to remain the most
widely used means of opening new accounts, originating loans and the like as
far as we can foresee into the future.
Moreover, older, more affluent consumers often prefer doing
business in a banking office. In our case, the mature market is a very
important part of our customer base. We now have more than 1,800 members of
our Community Club for those ages 50 and older. In fact, Community Club
members provide almost 45 percent of our total deposits. We cultivate our
relationships with these customers very carefully with popular events such as
the "Oktoberfest" Seniors Fair that attracted over 400 people last fall.
In the words of Crain's Detroit Business, bank stock prices were
"clobbered" during 1999. Some of the nation's best banking companies saw
their price-earnings ratios fall below 10 and their premiums over book value
drop to the lowest levels in many years. Community banking organizations such
as ours were similarly affected by this trend. During much of the year, the
entire market seemed to be driven more by speculation and enthusiasm for
unproven technologies than by traditional economic fundamentals. Given this
environment, over which we had absolutely no control, we took two actions
which should have a positive impact on our stock price in the long-term.
First, we moved our stock listing from the Nasdaq SmallCap Market
to the Nasdaq National Stock Market. In time, this should allow us to attract
more market makers and expand investor interest in our stock. Then, in
November, our board of directors authorized a modest stock repurchase
program. Management was authorized to repurchase up to 125,000 shares on the
open market. Through the end of the year, approximately 30,000 shares had
actually been acquired. The repurchased shares will be held for future
corporate uses.
6
Late in the year, Congress passed the Gramm-Leach-Billey Act. This
legislation was the most dramatic restructuring of the financial services
industry since the Great Depression. One important provision of the Act will
significantly expand the authority of the Federal Home Loan Banks to provide
advances to community banks. Through the Federal Home Loan Banks,
organizations like ours will now have access to the national and
international money markets to fund some of their lending. During 1999, we
joined the Federal Home Loan Bank of Indianapolis and look forward to a long
and mutually beneficial relationship with this institution.
The directors and senior officers join us in encouraging you to
attend the Annual Meeting, which will be held at Park Place in Dearborn on
May 16, 2000 at 4:00 pm. We look forward to your comments, questions and
suggestions and an opportunity to discuss our plans to keep Dearborn Bancorp,
Inc. on the path to further progress and ever-greater success.
Sincerely,
John E. Demmer Michael J. Ross
Chairman of the Board and CEO President and CEO
Dearborn Bancorp, Inc. Community Bank of Dearborn
7
DEARBORN BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Dollars, in thousands) December 31,
---------------------
1999 1998
---- ----
ASSETS
Cash and cash equivalents
Cash and due from banks $ 2,446 $ 2,259
Federal funds sold 4,963 3,995
--------- ---------
Total cash and cash equivalents 7,409 6,254
Mortgage loans held for sale 783 1,211
Investment securities, available for sale 55,022 50,211
Federal Home Loan Bank stock 381 --
Loans
Loans 85,390 66,023
Allowance for possible credit losses (781) (627)
--------- ---------
Net loans 84,609 65,396
Premises and equipment, net 2,388 2,378
Accrued interest receivable 1,370 933
Other assets 736 372
--------- ---------
Total assets $ 152,698 $ 126,755
========= =========
LIABILITIES
Deposits
Non-interest bearing deposits $ 14,859 $ 11,142
Interest bearing deposits 104,016 86,468
--------- ---------
Total deposits 118,875 97,610
Other liabilities
Federal funds purchased 3,000 --
Federal Home Loan Bank advances 2,000 --
Mortgage payable 493 517
Accrued interest payable 469 338
Other liabilities 601 559
--------- ---------
Total liabilities 125,438 99,024
--------- ---------
CONTINGENCIES -- --
STOCKHOLDERS' EQUITY
Common stock - 5,000,000 shares
authorized, 2,442,740 and 2,473,295
shares outstanding at December 31,
1999 and 1998, respectively 28,822 29,015
Accumulated deficit (740) (1,270)
Accumulated other comprehensive loss (822) (14)
--------- ---------
Total stockholders' equity 27,260 27,731
--------- ---------
Total liabilities and stockholders'
equity $ 152,698 $ 126,755
========= =========
The accompanying notes are an integral part of these consolidated
financial statements.
8
DEARBORN BANCORP, INC. AND SUBSIDIARY
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share
and per share data) Years Ended December 31,
----------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Interest income
Interest on loans $ 6,302 $ 5,259 $ 3,981
Interest on investment securities,
available for sale 3,162 2,504 1,235
Interest on federal funds and
deposits with banks 213 527 188
----------- ----------- -----------
Total interest income 9,677 8,290 5,404
Interest expense
Interest on deposits 4,687 4,425 2,955
Interest on other borrowings 48 41 43
----------- ----------- -----------
Total interest expense 4,735 4,466 2,998
Net interest income 4,942 3,824 2,406
Provision for possible credit losses 772 120 164
----------- ----------- -----------
Net interest income after provision for
possible credit losses 4,170 3,704 2,242
----------- ----------- -----------
Non-interest income
Service charges on deposit accounts 197 141 124
Fees for other services to customers 26 23 26
Gain on the sale of loans 340 286 144
Gain (loss) on the sale of
investment securities (12) 71 13
Other income 7 12 5
----------- ----------- -----------
Total non-interest income 558 533 312
Non-interest expenses
Salaries and employee benefits 2,226 1,700 1,218
Occupancy and equipment expense 446 411 267
Advertising and marketing 101 85 105
Stationery and supplies 164 113 80
Professional services 333 166 99
Data processing 158 123 90
FDIC insurance premiums 12 10 7
Other operating expenses 364 333 223
----------- ----------- -----------
Total non-interest expenses 3,804 2,941 2,089
----------- ----------- -----------
Income before federal income tax
provision (benefit) 924 1,296 465
Income tax provision (benefit) 394 346 (145)
----------- ----------- -----------
Net income $ 530 $ 950 $ 610
=========== =========== ===========
Per share data:
Net income - basic and diluted $ 0.21 $ 0.45 $ 0.57
Weighted average number of shares
outstanding - basic 2,472,352 2,099,239 1,065,767
Weighted average number of shares
outstanding - diluted 2,472,352 2,112,866 1,076,922
<FN>
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
9
DEARBORN BANCORP, INC. AND SUBSIDIARY
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 1999, 1998 and 1997
Common
Stock Accumulated
Subscribed Other Total
Common but Accumulated Comprehensive Stockholder's
Stock Unissued Deficit Income (Loss) Equity
(In thousands, except shares) -------- ---------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1997 $ 6,521 $ 2,752 $ (1,065) $ (18) $ 8,190
309,634 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
Other comprehensive income:
Changes in net unrealized loss on
securities available for sale -- -- -- (58) (58)
Reclassification adjustment for (gains)
losses included in net income -- -- -- (13) (13)
------ --------
Net change in net unrealized loss on
securities available for sale -- -- -- (71) (71)
Tax effects -- -- -- 24 24
------ --------
Other comprehensive loss -- -- -- (47) (47)
--------
Comprehensive income -- -- -- -- 563
-------- -------- -------- ------ --------
Balance, December 31, 1997 10,506 -- (1,689) (65) 8,752
Initial public offering of 1,407,527
shares of common stock (net of
offering costs of $1,342) 17,978 -- -- -- 17,978
2% stock dividend declared December 15,
payable January 15, 1999 531 -- (531) -- --
Net income -- -- 950 -- 950
Other comprehensive income
Changes in net unrealized loss on
securities available for sale -- -- -- 148 148
Reclassification adjustment for (gains)
losses included in net income -- -- -- (71) (71)
------ --------
Net change in net unrealized loss on
securities available for sale -- -- -- 77 77
Tax effects -- -- -- (26) (26)
------ --------
Other comprehensive income -- -- -- 51 51
--------
Comprehensive income -- -- -- -- 1,001
-------- -------- -------- ------ --------
Balance, December 31, 1998 $ 29,015 $ -- $ (1,270) $ (14) $ 27,731
======== ======== ======== ====== ========
</TABLE>
10
DEARBORN BANCORP, INC. AND SUBSIDIARY
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (con't)
Years Ended December 31, 1999, 1998 and 1997
Common
Stock Accumulated
Subscribed Other Total
Common but Accumulated Comprehensive Stockholder's
Stock Unissued Deficit Income (Loss) Equity
(In thousands, except shares) -------- ---------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1999 $ 29,015 $ -- $ (1,270) $ (14) $ 27,731
Repurchase of 30,555 shares of common stock (193) -- -- -- (193)
Net income -- -- 530 -- 530
Other comprehensive income:
Changes in net unrealized loss on
securities available for sale -- -- -- (1,236) (1,236)
Reclassification adjustment for (gains)
losses included in net income -- -- -- 12 12
-------- --------
Net change in net unrealized loss on
securities available for sale -- -- -- (1,224) (1,224)
Tax effects -- -- -- 416 416
-------- --------
Other comprehensive loss -- -- -- (808) (808)
--------
Comprehensive loss -- -- -- -- (278)
-------- -------- -------- -------- --------
Balance, December 31, 1999 $ 28,822 $ -- $ (740) $ (822) $ 27,260
======== ======== ======== ======== ========
<FN>
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
11
DEARBORN BANCORP, INC. AND SUBSIDIARY
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) Years Ended December 31,
---------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities
Interest and fees received $ 9,240 $ 8,256 $ 5,142
Interest paid (4,604) (4,438) (2,815)
Proceeds from sale of mortgages held for sale 21,707 21,279 11,209
Taxes paid (435) -- --
Origination of mortgages held for sale (20,939) (21,857) (11,109)
Cash paid to suppliers and employees (3,050) (2,782) (2,032)
--------- --------- ---------
Net cash provided by operating activities 1,919 458 395
Cash flows from investing activities
Proceeds from the sale of securities
available for sale 3,670 36,572 2,613
Proceeds from maturities of securities
available for sale 33,828 52,808 19,500
Purchases of securities available for sale (43,669) (109,690) (41,438)
Purchase of Federal Home Loan Bank stock (381) -- --
Increase in loans, net of payments received (19,985) (13,899) (15,884)
Purchases of property and equipment (275) (326) (369)
--------- --------- ---------
Net cash used in investing activities (26,812) (34,535) (35,578)
Cash flows from financing activities
Net increase in non-interest bearing deposits 3,717 2,555 1,004
Net increase in interest bearing deposits 17,548 19,658 26,930
Increase (decrease) in federal funds purchased 3,000 (1,500) 1,500
Proceeds from Federal Home Loan Bank advances 2,000 -- --
Principal payments on mortgage payable (24) (20) (17)
Initial public offering of common stock -- 17,978 --
Purchase of treasury stock (193) -- --
--------- --------- ---------
Net cash provided by financing activities 26,048 38,671 29,417
Increase (decrease) in cash and cash equivalents 1,155 4,594 (5,766)
Cash and cash equivalents at the beginning of the period 6,254 1,660 7,426
--------- --------- ---------
Cash and cash equivalents at the end of the period $ 7,409 $ 6,254 $ 1,660
========= ========= =========
Reconciliation of net income to net cash provided by
operating activities
Net income $ 530 $ 950 $ 610
Adjustments to reconcile net income to net cash
provided by operating activities
Provision for possible credit losses 772 120 164
Depreciation and amortization expense 265 244 158
Accretion of discount on investment securities (5) (22) (6)
Amortization of premium on investment securities 130 23 10
(Gain) loss on the sale of investment securities 12 (71) (13)
(Increase) decrease in mortgages held for sale 428 (864) (44)
(Increase) in interest receivable (437) (210) (417)
Increase in interest payable 131 28 183
(Increase) decrease in other assets 51 (142) (142)
Increase (decrease) in other liabilities 42 402 (108)
--------- --------- ---------
Net cash provided by operating activities $ 1,919 $ 458 $ 395
========= ========= =========
<FN>
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
12
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
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 Township,
Michigan, offering a full range of banking services to individuals
and businesses.
Its primary deposit products are checking, savings, and term
certificate accounts, and its primary lending products are
commercial, residential mortgage, and installment loans.
Substantially all loans are secured by specific items of
collateral including business assets, consumer assets and real
estate. Commercial loans are expected to be repaid from cash flow
from operations of businesses. Real estate loans are secured by
both residential and commercial real estate. Other financial
instruments which potentially represent concentrations of credit
risk include deposit accounts in other financial institutions.
While the Corporation's chief decision makers monitor the revenue
streams of the various products and services, operations are
managed and financial performance is evaluated on a
Corporation-wide basis. Accordingly, all of the Corporation's
banking operations are considered by management to be aggregated
in one reportable operating segment.
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.
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.
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. Net cash flows are
reported for loan and deposit transactions.
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.
13
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999, 1998 and 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 other comprehensive income
and as a separate component of stockholders' equity until
realized. All of the Corporation's securities are classified as
available for sale. Gains and losses on sales are based on the
amortized cost of the security and securities are written down to
fair market value when a decline in fair value in not temporary.
Loans
Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff are reported at the
principal balance outstanding, net of unearned interest, deferred
loan fees and costs, and an allowance for loan losses.
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. Payments received on such loans are reported
as principal reductions. 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.
Allowance for Possible Credit Losses
The allowance for possible credit losses is a valuation allowance
for probable incurred credit losses, increased by the provision
for loan losses and decreased by charge-offs less recoveries.
Management estimates the allowance balance required using past
loan loss experience, the nature and volume of the portfolio,
information about specific borrower situations and estimated
collateral values, economic conditions, and other factors.
Allocations of the allowance may be made for specific loans, but
the entire allowance is available for any loan that, in
management's judgment, should be charged-off.
Loan Impairment
A loan is impaired when full payment under the loan terms is not
expected. Impairment is evaluated in total for smaller-balance
loans of similar nature such as residential mortgage, consumer,
and credit card loans, and on an individual loan basis for other
loans. If a loan is impaired, a portion of the allowance is
allocated so that the loan is reported, net, at the present value
of estimated future cash flows using the loan's existing rate or
at the fair value of collateral if repayment is expected solely
from the collateral.
14
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999, 1998 and 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Foreclosed Assets
Assets acquired through or instead of loan foreclosure are
initially recorded at fair value when acquired, establishing a new
cost basis. If fair value declines, a valuation allowance is
recorded through expense. Costs after acquisition are expensed.
Premises and Equipment
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
Long-term Assets
Premises and equipment and other long-term assets are reviewed for
impairment when events indicate their carrying amount may not be
recoverable from future undiscounted cash flows. If impaired, the
assets are recorded at discounted amounts.
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 Compensation
Employee compensation expense under stock option plans is reported
if options are granted below market price at grant date. Pro forma
disclosures of net income and earnings per share are shown using
the fair value method to measure expense for options granted,
using an option pricing model to estimate fair value.
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.
15
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999, 1998 and 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Per Share
Basic income per share is net income divided by the weighted
average number of common shares outstanding during the period.
Diluted income per share includes the dilutive effect of
additional potential common shares issuable under stock options.
Income per share is restated for all stock splits and dividends
through the date of issue of the financial statements.
Restrictions on Cash
The Corporation was required to have $513,000 and $277,000 of cash
on hand or on deposit with the Federal Reserve Bank to meet
regulatory reserve and clearing requirements at year end 1999 and
1998. These balances do not earn interest.
Dividend Restriction
Banking regulations require maintaining certain capital levels and
may limit the dividends paid by the Bank to the Corporation or by
the Corporation to shareholders.
Fair Value of Financial Instruments
Fair values of financial instruments are estimated using relevant
market information and other assumptions, as more fully disclosed
in a separate note. Fair value estimates involve uncertainties and
matters of significant judgment regarding interest rates, credit
risk, prepayments, and other factors, especially in the absence of
broad markets for particular items. Changes in assumptions or in
market conditions could significantly affect the estimates.
Reclassifications
Some items in the prior year financial statements were
reclassified to conform to the current presentation.
16
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999, 1998 and 1997
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):
December 31, 1999
---------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ---------
US Treasury securities $ 2,320 $ -- $ (76) $ 2,244
US Government agency securities 53,822 -- (1,167) 52,655
Municipal Securities 125 -- (2) 123
-------- ------- -------- --------
Totals $ 56,267 $ -- $ (1,245) $ 55,022
======== ======= ======== ========
December 31, 1998
---------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ---------
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
======== ======= ======== ========
The amortized cost and estimated market value of investment
securities - available for sale at December 31, 1999 by
contractual maturity are shown below (in thousands):
Estimated
Amortized Market
Cost Value
--------- ---------
Due in three months or less $ -- $ --
Due in three months through one year -- --
Due in one year through five years 56,267 55,022
------- -------
Totals $56,267 $55,022
======= =======
17
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999, 1998 and 1997
NOTE B - INVESTMENT SECURITIES - AVAILABLE FOR SALE (Continued)
The Bank's securities at December 31, 1999 have an unrealized loss
of $1,245,000 compared to an unrealized loss of $21,000 at
December 31, 1998. The decrease in the market value of the
investment portfolio was primarily due to an increasing interest
rate environment. The market position of the Bank's investment
portfolio is reviewed and discussed regularly by management.
Securities having a market value of $2,243,750 and $2,011,875 at
December 31, 1999 and 1998, respectively, were pledged to secure
public deposits. Securities having a market value of $1,976,875
and $2,000,625 at December 31, 1999 and 1998, respectively, were
pledged to secure treasury, tax and loan payments with the Federal
Reserve Bank of Chicago. Securities having a market value of
$7,801,875 at December 31, 1999 were pledged to the Federal Home
Loan Bank of Indianapolis to secure advances.
NOTE C - FEDERAL HOME LOAN BANK STOCK
The Bank became a member of the Federal Home Loan Bank of
Indianapolis during 1999. During this process, the Bank purchased
Federal Home Loan Bank stock in the amount of $381,300 during
1999.
NOTE D - LOANS
Major categories of loans included in the portfolio at December 31
are as follows (in thousands):
Percent
1999 1998 Incr(decr)
---- ---- ----------
Consumer loans $ 10,967 $ 12,434 (11.80)%
Commercial, financial, & other 20,563 14,843 38.54%
Commercial real estate construction 3,656 2,619 39.60%
Commercial real estate mortgages 23,103 12,478 85.15%
Residential real estate mortgages 27,101 23,649 14.60%
-------- ------- -------
85,390 66,023 29.33%
Allowance for possible credit losses (781) (627)
-------- --------
$ 84,609 $ 65,396
======== ========
18
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999, 1998 and 1997
NOTE D - LOANS (Continued)
Certain directors of the Corporation, including their related
interests, were loan customers of the Bank during 1999. Total
loans to these persons at December 31, 1999 amounted to
$2,247,000. During 1999, $3,026,000 of new loans were made and
repayments totaled $3,495,000. These loans aggregated to 8.2% of
consolidated stockholders' equity as of December 31, 1999.
Transactions in the allowance for possible credit losses for the
years ended December 31 are as follows (in thousands):
1999 1998 1997
---- ---- ----
Balance, beginning of year $ 627 $ 522 $ 366
Charge-offs:
Consumer loans (55) (15) (8)
Commercial Loans (584) -- --
Recoveries:
Consumer loans 21 -- --
----- ----- -----
Net charge-offs (618) (15) (8)
Additions charged to operations 772 120 164
----- ----- -----
Balance at end of period $ 781 $ 627 $ 522
===== ===== =====
Net charge-offs for 1999 were $618,000 in 1999 compared to $15,000
in 1998. The increase in charge-offs was primarily due to the
charge-off of a commercial loan relationship in the amount of
$584,000. Since the Bank's inception in 1994 through December 31,
1998, net charge-offs were $35,000.
The aggregate balances in impaired loans at December 31, are as
follows (in thousands):
1999 1998
---- ----
Impaired loans with no allocated
allowance for loan losses $-- $--
Impaired loans with allocated
allowance for loan losses 618 34
---- ---
Total $618 $34
==== ===
Amount of the allowance for loan losses allocated $171 $ 5
Average of impaired loans during the year $436 $26
Interest income recognized during impairment $-- $ 5
Cash-basis interest income recognized $ 1 $--
19
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999, 1998 and 1997
NOTE E - BANK PREMISES AND EQUIPMENT
Bank premises and equipment are comprised of the following at
December 31 (in thousands):
1999 1998
---- ----
Land and improvements $ 394 $ 394
Building and improvements 1,706 1,595
Furniture and equipment 1,212 1,052
------ ------
3,312 3,041
Less accumulated depreciation 924 663
------ ------
$2,388 $2,378
====== ======
Depreciation expense for 1999, 1998 and 1997 amounted to $265,000,
$247,000 and $152,000, respectively. The Corporation anticipates
additional capital expenditures of approximately $1.7 million to
be incurred in 2000 for the construction of its new branch in
Canton Township, Michigan.
NOTE F - DEPOSITS
Time deposits of $100,000 or more were $41,519,000 and $26,754,000
at December 31, 1999 and 1998, respectively.
Scheduled maturities of time deposits at December 31, 1999 were as
follows (in thousands).
$100,000 and over Less than $100,000 Total
----------------- ------------------ -----
2000 $39,418 $33,237 $72,655
2001 1,464 5,049 6,513
2002 534 1,387 1,921
2003 103 1,230 1,333
2004 -- 81 81
------- ------- -------
$41,519 $40,984 $82,503
======= ======= =======
Related party deposits were approximately $3,346,000 at
December 31, 1999.
20
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999, 1998 and 1997
NOTE G - MORTGAGE PAYABLE
The mortgage payable to a bank matures September 1, 2012 and
requires monthly installments of $4,925 including interest at
6.82% per annum. Effective September, 2003 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 principal payments for the five years following
December 31, 1999 and thereafter are as follows (in thousands):
2000 $26
2001 28
2002 30
2003 31
2004 32
Thereafter 346
-----
$493
=====
NOTE H - FEDERAL FUNDS PURCHASED
The Bank has entered into federal funds credit lines with other
banks in the amount of $4,500,000 to provide additional
flexibility in the daily management of liquidity. The outstanding
balance of the federal funds credit line at December 31, 1999 was
$3,000,000 and was repaid on January 3, 2000.
NOTE I - FEDERAL HOME LOAN BANK ADVANCES
The Bank joined the Federal Home Loan Bank of Indianapolis with
the intention of utilizing the facility as an additional source of
funds and entered into an Advances, Pledge and Security Agreement
with the Federal Home Loan Bank of Indianapolis. At December 31,
1999, the Bank held a $2,000,000 variable rate advance with a rate
of 5.97% at December 31, 1999, maturing on May 22, 2000. The
advance is subject to a prepayment penalty based on the conditions
of the credit policy of the Federal Home Loan Bank.
21
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999, 1998 and 1997
NOTE J - INCOME TAXES
The federal tax provision consists of the following (in
thousands):
1999 1998 1997
---- ---- ----
Current $383 119 $ --
Deferred 11 227 (145)
----- ---- -----
$394 $346 $(145)
===== ==== =====
The reconciliation of the effective income tax rate to the federal
statutory tax rate is as follows:
1999 1998 1997
---- ---- ----
Federal income tax rate 34% 34% 34%
Effect of net operating loss
carryforward and valuation
allowance -- (5) (63)
Other 9 (2) (2)
=== === ===
Effective tax rate 43% 27% (31)%
=== === ===
22
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999, 1998 and 1997
NOTE J - INCOME TAXES (Continued)
The details of the net deferred tax asset (liability) are as
follows at December 31, (in thousands):
1999 1998
---- ----
Deferred tax assets
Provision for possible credit losses $ 196 $ 200
Net unrealized losses on securities
available for sale 423 6
Other 3 --
----- -----
Total deferred tax assets 622 206
Deferred tax liabilities
Accretion of discounts on
securities available for sale (2) --
Deferred loan fees (102) (91)
Premises and equipment (66) (57)
Mark to market on loans held for sale (4) --
Accrual to cash conversion (124) (140)
----- -----
Total deferred tax liabilities (298) (288)
----- -----
Net deferred tax asset (liability) before
valuation allowance 324 (82)
Valuation allowance -- --
----- -----
Net deferred tax asset (liability) $ 324 $ (82)
===== =====
The tax benefit of the net unrealized losses on securities
available for sale, was charged directly to its related component
of stockholders' equity.
At December 31, 1998, the Corporation had exhausted all net
operating loss carryforwards.
23
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999, 1998 and 1997
NOTE K - FINANCIAL INSTRUMENTS AND OFF-BALANCE SHEET RISK
Fair Value of Financial Instruments
The estimated fair value of the Corporation's financial
instruments at December 31, are as follows (in thousands):
1999 1998
-------------------- -------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ---------- -------- --------
Assets:
Cash and cash equivalents $ 7,409 $ 7,409 $ 6,254 $ 6,254
Loans held for sale 783 796 1,211 1,229
Securities 55,022 55,022 50,211 50,211
Federal Home Loan Bank stock 381 381 -- --
Loans, net 84,609 84,058 65,396 65,221
Accrued interest receivable 1,370 1,370 933 933
Liabilities:
Deposits 118,875 119,087 97,610 97,424
Federal funds purchased 3,000 3,000 -- --
Federal Home Loan Bank advances 2,000 2,000 -- --
Mortgage payable 493 493 517 517
Accrued interest payable 469 469 338 338
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.
24
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999, 1998 and 1997
NOTE K - FINANCIAL INSTRUMENTS AND OFF-BALANCE SHEET RISK (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.
Federal funds purchased: The carrying amounts reported in the
balance sheet for federal funds purchased approximate those
liabilities' fair values.
Federal Home loan Bank advances: The carrying amounts reported in
the balance sheet for Federal Home Loan Bank advances approximate
those liabilities' fair values.
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.
25
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999, 1998 and 1997
NOTE K - FINANCIAL INSTRUMENTS AND OFF-BALANCE SHEET RISK (Continued)
Off-Balance-Sheet Risk (Continued)
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 notional amount of those items. The Corporation
generally requires collateral to support such financial
instruments in excess of the contractual notional amount of those
instruments and, therefore, is in a fully collateralized position.
The Corporation had outstanding loan commitments aggregating
$16,122,000 and $9,367,000 and outstanding financial standby
letters of credit aggregating $641,000 and $498,000 at
December 31, 1999 and 1998, respectively.
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.
NOTE L - 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
October 1, 1998, the Corporation began matching 50% of the first
6% of employee contributions to the plan. Employer contributions
vest 20% per year for five years. During 1999 and 1998, employer
contributions were $31,000 and $8,000, respectively.
NOTE M - REGULATORY MATTERS
The Corporation and Bank are 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 financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective
action, the Corporation and Bank must meet specific capital
guidelines that involve quantitative measures of assets,
liabilities, and certain off-balance-sheet items as calculated
under regulatory accounting practices. The 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 Corporation and 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).
26
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999, 1998 and 1997
NOTE M - REGULATORY MATTERS (Continued)
The following is a presentation of the Corporation's and Bank's
regulatory capital ratios (in thousands):
<TABLE>
<CAPTION>
Minimum
To Be Well Capitalized
Minimum For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Regulations
--------------- ------------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1999
Total capital
(to risk weighted assets)
Consolidated $28,864 32.1% $7,193 8.0% $8,992 10.0%
Bank 12,878 15.1% 6,824 8.0% 8,531 10.0%
Tier I capital
(to risk weighted assets)
Consolidated 28,083 31.2% 3,597 4.0% 5,395 6.0%
Bank 12,097 14.2% 3,412 4.0% 5,118 6.0%
Tier I capital
(to average assets)
Consolidated 28,083 19.2% 5,860 4.0% 7,325 5.0%
Bank 12,097 9.2% 5,255 4.0% 6,568 5.0%
As of December 31, 1998
Total capital
(to risk weighted assets)
Consolidated 29,642 38.1% 6,223 8.0% 7,779 10.0%
Bank 10,622 16.2% 5,245 8.0% 6,557 10.0%
Tier I capital
(to risk weighted assets)
Consolidated 29,015 37.3% 3,112 4.0% 4,668 6.0%
Bank 9,995 15.2% 2,623 4.0% 3,934 6.0%
Tier I capital
(to average assets)
Consolidated 29,015 22.4% 5,170 4.0% 6,463 5.0%
Bank 9,995 9.0% 4,438 4.0% 5,547 5.0%
</TABLE>
Based on the respective regulatory capital ratios at December 31,
1999 and 1998, the Corporation and Bank are considered to be well
capitalized.
NOTE N - COMMON STOCK OFFERING
On April 8, 1998, the Corporation completed its initial public
offering of 1,407,527 shares of common stock at a price of $13.73
per share and began trading on the Nasdaq SmallCap Market. During
1999, the Corporation began trading on the Nasdaq National Market.
27
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999, 1998 and 1997
NOTE O - STOCK REPURCHASE PLAN
The Corporation approved a Stock Repurchase Plan, by which the
Corporation may repurchase up to 125,000 outstanding common shares
of the Corporation on the open market at a price ranging from
$5.00 to $13.00. As of December 31, 1999, the Corporation had
repurchased 30,555 shares of the Corporation at an average price
per share of $6.29. The shares that were repurchased are being
reserved for future corporate uses.
NOTE P - STOCK OPTION PLAN
Options to buy common stock are granted to officers and employees
under a Stock Option Plan which provides for issue of up to
255,000 shares. Exercise price is the market price at date of
grant. The maximum option term is ten years, and options vest
fully after six months from the date of grant. If an option
expires or terminates without having been exercised, such option
becomes available for future grant under the Plan.
A summary of the option activity is as follows:
Weighted
Weighted Average Fair
Available Average Value of
for Options Exercise Options
Grant Outstanding Price Granted
--------- ----------- -------- ------------
Outstanding at January 1, 1997 255,000 -- --
Granted (46,002) 46,002 $ 8.91 $ 6.29
------- ------ --------
Outstanding at December 31, 1997 208,998 46,002 8.91
Granted (33,150) 33,150 12.75 6.28
------- ------- --------
Outstanding at January 1, 1998 175,848 79,152 10.52
Granted (71,000) 71,000 11.23 4.01
------- ------- --------
Outstanding at January 1, 1999 104,848 150,152 $ 10.85
======= ======= ========
For the options outstanding at December 31, 1999, the range of
exercise prices was $8.91 to $12.75 per share with a
weighted-average remaining contractual term of 8.4 years. At
December 31, 1999, 1998 and 1997, 150,152, 79,152, and 46,002
options were exercisable at weighted average exercise prices of
$10.85, $10.52, and $8.91 per share, respectively.
Had compensation cost for stock options been measured using the
fair value method of FASB Statement No. 123, net income and
earnings per share would have been the pro forma amounts indicated
below (in thousands, except per share data). The pro forma effects
may increase in the future if more options are granted.
1999 1998 1997
---- ---- ----
Net income
As reported $ 530 $ 950 $ 610
Pro forma 245 813 419
Basic and diluted income per share
As reported $0.21 $0.45 $0.57
Pro forma 0.10 0.38 0.39
28
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999, 1998 and 1997
NOTE P - STOCK OPTION PLAN (continued)
The pro forma effects are computed with option pricing models,
using the following weighted average assumptions as of grant date.
1999 1998 1997
---- ---- ----
Risk-free interest rate 4.94% 5.79% 6.67%
Expected option life 9 years 10 years 10 years
Dividend yield 0.00% 0.00% 0.00%
Expected volatility of stock price 33.45% 22.38% 51.23%
All share and per share amounts have been adjusted for stock
dividends.
NOTE Q - INCOME PER SHARE
The following is a reconciliation of the numerator and denominator
of the basic and diluted income per share calculation for the
years ended December 31, 1999, 1998 and 1997 (in thousands, except
share and per share data):
1999 1998 1997
---- ---- ----
Basic
Net income $ 530 $ 950 $ 610
Weighted average common shares 2,472,352 2,099,239 1,065,767
Basic earnings per common share $ 0.21 $ 0.45 $ 0.57
Diluted
Net income $ 530 $ 950 $ 610
Weighted average common shares
outstanding for basic earnings
per ommon share 2,472,352 2,099,239 1,065,767
Add: Dilutive effects of assumed
exercises of stock options -- 13,627 11,155
Average shares and dilutive
potential common shares 2,472,352 2,112,866 1,076,922
Diluted earnings per common share $ 0.21 $ 0.45 $ 0.57
Stock options for 150,152 shares of common stock were not
considered in computing diluted earnings per common share for 1999
because they were antidilutive. All share and per share amounts
have been adjusted for stock dividends. Stock options for 60,500
shares were granted on January 18, 2000.
29
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999, 1998 and 1997
NOTE R - ISSUED BUT NOT YET ADOPTED ACCOUNTING STANDARDS
Beginning January 1, 2001, a new accounting standard will require all
derivatives to be recorded at fair value. Unless designated as hedges,
changes in these fair values will be recorded in the income statement. Fair
value changes involving hedges will generally be recorded by offsetting gains
and losses on the hedge and on the hedged item, even if the fair value of the
hedged item is not otherwise recorded. This is not expected to have a
material effect, but the effect will depend on derivative holdings when this
Standard applies.
30
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999, 1998 and 1997
NOTE S - 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.
CONDENSED BALANCE SHEETS
(In thousands) December 31,
------------------
1999 1998
------- -------
ASSETS
Cash and cash equivalents $ 1,428 $ 2,185
Investment securities 11,176 14,460
Investment in subsidiary 11,448 9,985
Advances to subsidiary 2,000 --
Other assets 1,881 1,803
------- -------
Total assets $27,933 $28,433
======= =======
LIABILITIES AND
STOCKHOLDERS' EQUITY
Mortgage payable $ 493 $ 517
Other liabilities 180 185
Stockholders' equity 27,260 27,731
------- -------
Total liabilities and stockholders' equity $27,933 $28,433
======= =======
CONDENSED STATEMENTS OF INCOME
(In thousands) Years Ended December 31,
------------------------
1999 1998 1997
---- ---- ----
Interest income $ 852 $ 655 $ 58
Operating expenses (424) (259) (68)
----- ----- -----
Income (loss) before equity in undistributed
income (loss) of subsidiary
428 396 (10)
Equity in undistributed income
of subsidiary 102 554 620
----- ----- -----
Net income $ 530 $ 950 $ 610
===== ===== =====
31
DEARBORN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999, 1998 and 1997
NOTE S - PARENT ONLY CONDENSED FINANCIAL INFORMATION (Continued)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(In thousands) Years Ended December 31,
-----------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 530 $ 950 $ 610
Adjustments to reconcile net income
to net cash provided by
operating activities
Equity in undistributed income
of subsidiary (102) (554) (620)
Other 5 114 66
------- -------- -------
Net cash flows provided by
operating activities 433 510 56
Cash flows from investing activities
Investment in subsidiary (2,000) (2,004) (2,600)
Advances to subsidiary (2,000) -- --
Purchases of securities - available for sale (7,748) (20,608) (1,000)
Maturity of securities - available for sale 8,375 4,150 1,000
Sale of securities - available for sale 2,400 1,998 --
Property and equipment acquired -- -- (14)
------- -------- -------
Net cash flows (used in)
investing activities (973) (16,464) (2,614)
Cash flows from financing activities
Proceeds from sale of common stock -- 17,978 --
Proceeds due stockholders on
Oversubscription of stock -- -- (145)
Purchase of treasury stock (193) -- --
Reduction of mortgage payable (24) (20) (17)
------- -------- -------
Net cash flows provided by (used in)
financing activities (217) 17,958 (162)
Increase (decrease) in cash and
cash equivalents (757) 2,004 (2,720)
Cash and cash equivalents at
beginning of year 2,185 181 2,901
------- -------- -------
Cash and cash equivalents at end of year $ 1,428 $ 2,185 $ 181
======= ======== =======
32
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Dearborn Bancorp, Inc. and Subsidiary
Dearborn, Michigan
We have audited the accompanying consolidated balance sheet of Dearborn
Bancorp, Inc. and subsidiary as of December 31, 1999 and the related
consolidated statement of income, changes in stockholders' equity, and cash
flows for the year then ended. 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 audit. The
consolidated financial statements of Dearborn Bancorp, Inc. and subsidiary as
of December 31, 1998 and for the years ended December 31, 1998 and 1997, were
audited by other auditors whose report dated February 17, 1999, expressed an
unqualified opinion on those statements.
We conducted our audit 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 audit provides 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, 1999, and the
results of its operations and its cash flows for the year then ended, in
conformity with generally accepted accounting principles.
Crowe, Chizek and Company LLP
Grand Rapids, Michigan
March 3, 2000
33
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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.
Forward Looking Statements
The following discussion contains forward-looking statements that are based
on management's beliefs, assumptions, current expectations, estimates and
projections about the financial services industry, the economy, and about the
Corporation and Bank. Words such as "anticipates", "believes", "estimates",
"expects", "forecasts", "intends", "is likely", "plans", "projects",
variations of such words and similar expressions are intended to identify
such forward- looking statements. These statements are not guarantees of
future performance and involve certain risks, uncertainties and assumptions
("Future Factors") that are difficult to predict with regard to timing,
extent, likelihood and degree of occurrence. Therefore, actual results and
outcomes may materially differ from what may be expressed or forecasted in
such forward-looking statements. The Corporation undertakes no obligation to
update, amend or clarify forward-looking statements, whether as a result of
new information, future events (whether anticipated or unanticipated), or
otherwise.
Future Factors include changes in interest rates and interest rate
relationships; demand for products and services; the degree of competition by
traditional and non-traditional competitors; changes in banking regulation;
changes in tax laws; changes in prices, levies and assessments; the impact of
technological advances; governmental and regulatory policy changes; the
outcomes of contingencies; trends in customer behavior as well as their
ability to repay loans; and changes in the national and local economy. These
are representative of the Future Factors that could cause a difference
between an ultimate actual outcome and a preceding forward-looking statement.
Results of Operations
1999 Compared to 1998. The Corporation reported net income of $530,000 in
1999 compared to $950,000 in 1998. The Corporation's decrease in net income
was primarily due to an increase in the provision for possible credit losses
and an increase in non-interest expense , which was partially offset by the
continued increase in net interest income.
1998 Compared to 1997. The Corporation reported net income of $950,000 in
1998 compared to $610,000 in 1997. The improvement from 1997 to 1998 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.
34
Net Interest Income
1999 Compared to 1998. Net interest income for the period ended December 31,
1999 was $4.9 million compared to $3.8 million for the period ended December
31, 1998, an increase of $1.1 million or 29%. This increase was caused
primarily by an increase in average earning assets of $21.8 million between
the periods while interest bearing liabilities grew by $15.7 million.
Management believes that average net earning assets will continue to grow in
volume consistent with 1999 growth.
The Corporation's interest rate spread increased to 2.44% in 1999 from 2.03%
in 1998. The Corporation's net interest margin also increased in 1999 to
3.69% from 3.41% in 1998. The increases in net interest spread and net
interest margin were primarily the result of increases in the volume of net
earning assets and decreases in the cost of deposits. While management is
continually reviewing spreads and margins, future increases in the net
interest margin are primarily expected from volume growth.
1998 Compared to 1997. Net interest income for the period ended December 31,
1998 was $3.8 million compared to $2.4 million for the period ended
December 31, 1997, an increase of $1.4 million or 58%. This increase was
caused primarily by an increase in average earning assets of $45.1 million
between the periods while interest bearing liabilities grew by $29.1 million.
The Corporation's interest rate spread decreased to 2.03% in 1998 from 2.54%
in 1997. The Corporation's net interest margin also decreased in 1998 to
3.41% from 3.60% in 1997. However, the decreases in net interest spread and
net interest margin were offset by increases in the volume of net earning
assets. The Corporation's decrease in interest rate spread and net interest
margin was a direct result of the repositioning of investment funds and
decreases in loan yields due to declining interest rates.
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.
35
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>
<TABLE>
<CAPTION>
Year Ended December 31, 1999 Year Ended December 31, 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 $ 3,973 $ 213 5.36% $ 9,827 $ 527 5.36%
Investment securities, available for sale 56,573 3,162 5.59% 42,853 2,504 5.84%
Loans 73,327 6,302 8.59% 59,355 5,259 8.86%
-------- ------ ----- ------- ------ -----
Sub-total earning assets 133,873 9,677 7.23% 112,035 8,290 7.40%
Other assets 6,525 5,273
-------- --------
Total assets $140,398 $117,308
======== ========
Liabilities and stockholders' equity
Interest bearing deposits $98,185 $4,687 4.77% $ 82,702 $4,425 5.35%
Other interest bearing liabilities 753 48 6.37% 505 41 8.12%
-------- ------ ---- -------- ------ ----
Sub-total interest bearing
liabilities 98,938 4,735 4.79% 83,207 4,466 5.37%
Non-interest bearing deposits 13,159 10,706
Other liabilities 727 509
Stockholders' equity 27,574 22,886
-------- --------
Total liabilities and
stockholders' equity $140,398 $117,308
======== ========
Net interest income $4,942 $3,824
====== ======
Net interest rate spread 2.44% 2.03%
==== ====
Net interest margin on
earning assets 3.69% 3.41%
==== ====
</TABLE>
36
<TABLE>
<CAPTION>
Year Ended December 31, 1997
-------------------------------
Average Average
(In thousands) Balance Interest Rate
------- -------- -------
<S> <C> <C> <C>
Assets
Federal funds sold and interest
bearing deposits with banks $ 3,351 $ 188 5.61%
Investment securities, available for sale 20,031 1,235 6.17%
Loans 43,533 3,981 9.14%
------- ------ ----
Sub-total earning assets 66,915 5,404 8.08%
Other assets 4,361
-------
Total assets $71,276
=======
Liabilities and stockholders' equity
Interest bearing deposits $53,559 $2,955 5.52%
Other interest bearing liabilities 582 43 7.39%
------- ------ ----
Sub-total interest bearing
liabilities 54,141 2,998 5.54%
Non-interest bearing deposits 8,374
Other liabilities 322
Stockholders' equity 8,439
-------
Total liabilities and
stockholders' equity $71,276
=======
Net interest income $2,406
======
Net interest rate spread 2.54%
====
Net interest margin on
earning assets 3.60%
====
</TABLE>
37
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>
1999/1998 1998/1997
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 $ (314) $ -- $ (314) $ 347 $ (8) $ 339
Investment securities, available
for sale 767 (109) 658 1,334 (65) 1,269
Loans 1,201 (158) 1,043 1,402 (124) 1,278
------- ------- ------- ------- ----- -------
Total earning assets $ 1,654 $ (267) $ 1,387 $ 3,083 $(197) $ 2,886
======= ======= ======= ======= ===== =======
Liabilities
Interest bearing deposits $ 739 $ (477) $ 262 1,559 $ (89) $ 1,470
Other borrowings 16 (9) 7 (6) 4 (2)
------- ------- ------- ------- ----- -------
Total interest bearing liabilities $ 755 $ (486) $ 269 $ 1,553 $ (85) $ 1,468
======= ======= ======= ======= ===== =======
Net interest income $ 1,118 $ 1,418
======= =======
Net interest rate spread 0.41% (0.51%)
======= =======
Net interest margin on earning
assets 0.28% (0.19%)
======= =======
</TABLE>
Provision for Possible Credit Losses
1999 Compared to 1998. The provision for possible credit losses was $772,000
in 1999, compared to $120,000 in 1998. The increase in the provision for
possible credit losses was primarily a result of replenishing the provision
for possible credit losses for a commercial loan charge-off in the amount of
$584,000 and secondarily to provide for loan growth. Management expects that
during the year 2000, the provision for possible credit losses will
approximate one percent of loan growth. 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. Management currently has no knowledge of any performing loan,
non-performing loan or impaired loan that may result in a significant
charge-off during 2000.
1998 Compared to 1997. The provision for possible credit losses was $120,000
in 1998, compared to $164,000 in 1997. The increase in the provision for
possible credit losses was primarily a result of loan growth during 1998. 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 D of the Notes to
Consolidated Financial Statements for additional information.
38
Non-interest Income
1999 Compared to 1998. Non-interest income was $558,000 in 1999 compared to
$533,000 in 1998, an increase of $25,000 or 5%. The increase in non-interest
income was primarily due to gain on sale of mortgage loans. Increases in the
gain on sale of mortgage loans were a result of a refinancing boom and the
addition of a mortgage loan originator in April of 1999 bringing the total
number of mortgage loan originators to three. As the refinancing boom ended
in mid 1999 due to an increasing interest rate environment, the mortgage
origination staff was able to maintain origination volume by moving from
mortgage loan refinancing to new purchase mortgage loans. Management expects
in 2000 that mortgage origination will be dominated by new purchase mortgages
and that volumes of mortgages originated will continue to grow with an
addition of one or more qualified mortgage originators to the staff of the
Bank.
Service charges increased from 1998 to 1999 due to an increase in the number
of deposit accounts and an increase in non-sufficient funds fees. During
2000, management anticipates an increase in service charges on deposit
accounts primarily as a result of opening new accounts.
1998 Compared to 1997. Non-interest income was $533,000 in 1998 compared to
$312,000 in 1997, an increase of $221,000 or 71%. The increase in
non-interest income was primarily due to the gain on sale of mortgage loans
due to a decreasing interest rate environment that led to a mortgage
refinancing boom.
Non-interest Expense
1999 Compared to 1998. Non-interest expense was $3.8 million in 1999 compared
to $2.9 million in 1998, an increase of $0.9 million or 31%. The largest
components of the change in non-interest expense were salaries and employee
benefits which amounted to $2.2 million and professional services which
amounted to $333,000 in 1999. In 1998, salaries and employee benefits and
professional services were $1.7 million and $166,000, respectively. The
primary factor for the increase in salaries and employee benefits expense was
the expansion of the retail banking and lending departments during 1999 in
anticipation of future growth. As of December 31, 1999, the number of full
time equivalent employees was 40 as compared to 36 as of December 31, 1998.
Management anticipates that salaries and employee benefits will continue to
grow as the Corporation increases in asset size. In addition, approximately
five full time equivalent employees will be added to the staff during the
third quarter of 2000 in anticipation of the opening of a branch office in
Canton Township, Michigan during the fourth quarter of 2000.
The increase in professional services was primarily due to three one-time
charges. First, the Corporation was accepted for listing on the Nasdaq
National Market and incurred a one-time application and entry fee of $49,000.
Second, the Bank successfully defended itself against a lawsuit without merit
and incurred $50,000 in legal expense. And third, the Corporation spent
$30,000 on outside technical support related to Year 2000 issues.
1998 Compared to 1997. Non-interest expense was $2.9 million in 1998 compared
to $2.1 million in 1997, an increase of $0.8 million or 38%. The largest
components of non-interest expense were salaries and employee benefits which
amounted to $1.7 million and occupancy and equipment expense which amounted
to $411,000 in 1998. In 1997, salaries and employee benefits and occupancy
and equipment expense were $1.2 million and $267,000, respectively. The
primary factor for these increases was the opening of the Bank's office in
Plymouth Township in August 1997 and the expansion of the operations and
lending departments on 1998. As of December 31, 1998, the number of full time
equivalent employees was 36 as compared to 26 as of December 31, 1997.
Income Tax Provision
1999 Compared to 1998. The income tax expense was $394,000 in 1999 compared
to $346,000 in 1998, an increase of $48,000 or 14%. Although pretax income
decreased from 1998 to 1999, the provision for income taxes increased as a
result of changes in deferred tax assets and liabilities. Refer to Note J of
the Notes to Consolidated Financial Statements for additional information.
1998 Compared to 1997. The income tax expense was $346,000, compared to an
income tax benefit was $145,000 in 1997, an increase of $491,000. The
increase was primarily due to the exhaustion of net operating loss
carry-forwards from inception in 1992 through 1997. Refer to Note J of the
Notes to Consolidated Financial Statements for additional information.
39
Comparison of Financial Condition at December 31, 1999 and December 31, 1998
Assets. Total assets at December 31, 1999 were $152.7 million compared to
$126.8 million at December 31, 1998, an increase of $25.9 million or 20%. The
increase was primarily due to increases in loans and investment securities
available for sale funded by increases in deposits and Federal Home Loan Bank
advances.
Investment Securities - Available for Sale. Total investment securities
available for sale, at December 31, 1999 were $55.0 million compared to $50.2
million at December 31, 1998, an increase of $4.8 million or 10%. During
1999, the Corporation purchased $43.7 million in securities and $33.8 million
of securities were called or matured during the year. In addition, the
Corporation sold securities of $3.7 million and recognized losses on such
sales in the amount of $12,000. The Bank's portfolio of investment securities
- - available for sale have an amortized cost and estimated market value of
$56.3 million and $55.0 million, respectively. The securities and their
weighted average yield are as follows (in thousands):
Estimated Weighted
Amortized Market Average
Par Value Cost Value Yield
--------- --------- -------- --------
US treasury securities $ 2,000 $ 2,320 $ 2,244 5.12%
US government agency securities 53,815 53,822 52,655 5.64%
Municipal securities (tax
equivalent adjusted) 125 125 123 5.30%
------- ------- ------- ----
Totals $55,940 $56,267 $55,022 5.62%
======= ======= ======= ====
The entire portfolio matures in one to five years and has an unrealized loss
of $1.2 million. The unrealized loss is reflected by an adjustment to
stockholders' equity and the recognition of a deferred tax asset and is not
expected to impact net interest income as the Corporation intends to hold the
majority of these securities until maturity. All securities within the
Corporation's U.S. treasury or U.S. government sponsored agency portfolios
carry AAA ratings. The Corporation does not hold any securities in the "Held
to Maturity" category nor does the Corporation hold or utilize derivatives.
Refer to Note B of the Notes to Consolidated Financial Statements for
additional information.
Loans. Total loans at December 31, 1999 were $85.4 million compared to $66.0
million at December 31, 1998, an increase of $19.4 million or 29%. The
components of the outstanding balances and percentage increase in loans from
1998 to 1999 are as follows (in thousands):
1999 1998
---------------- --------------- Increase
Balance Percent Balance Percent (Decrease)
------- -------- ------- ------- ----------
Consumer loans $10,967 12.84% $12,434 18.83% (11.80%)
Commercial, financial, & other 20,563 24.08% 14,843 22.48% 38.54%
Commercial real estate
construction 3,656 4.28% 2,619 3.97% 39.60%
Commercial real estate mortgages 23,103 27.06% 12,478 18.90% 85.15%
Residential real estate
mortgages 27,101 31.74% 23,649 35.82% 14.60%
------- ------ ------- ------ ------
$85,390 100.00% $66,023 100.00% 29.33%
======= ====== ======= ====== ======
40
During 1999, the Bank purchased $948,000 in indirect automobile loans from
local dealers compared to $3.8 million in 1998. The decrease was a result of
substantially lower rates offered by the major captive finance companies as
well as a flow of consumers moving toward lease financing. The decrease in
new indirect auto leasing coupled with runoff resulted in the decrease in the
total consumer loan portfolio. Management expects that the consumer loan
portfolio will nominally increase during 2000.
During 1999, all types of commercial loans increased as a result of an
addition of a Senior Lender and a solid business development program.
Management expects the commercial lending segments to increase as a
percentage of the loan portfolio during 2000 via business development
programs and the addition of one or two commercial lenders. These types of
loans carry a relatively large average balance and produce more cross-selling
opportunities and are typically well secured by equipment, receivables or
real estate.
Residential real estate mortgages also increased in 1999. This increase was
primarily due to the addition of a Mortgage Loan Originator in 1999. In 2000,
management anticipates that residential mortgage loans will increase with the
addition of one or more mortgage loan originators.
A maturity and repricing schedule of the loan portfolio is listed below (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 $ 3,987 $ 394 $ 6,455 131 $10,967
Commercial, financial & other 10,774 1,077 8,112 495 20,458
Commercial real estate construction 3,656 -- -- -- 3,656
Commercial real estate mortgages 980 748 15,115 6,260 23,103
Residential real estate mortgages 600 4,430 15,536 6,535 27,101
------- ------- ------- ------- -------
$19,997 $ 6,649 $45,218 $13,421 85,285
======= ======= ======= =======
Non-accrual loans 105
-------
Total loans $85,390
=======
Loans at fixed interest rates $ 1,023 $ 1,655 $30,254 $12,992 $45,924
Loans at variable interest rates 18,974 4,994 14,964 429 39,361
------- ------- ------- ------- -------
$19,997 $ 6,649 $45,218 $13,421 85,285
======= ======= ======= =======
Non-accrual loans 105
-------
Total loans $85,390
=======
</TABLE>
Variable rate loans comprise 46% of the loan portfolio. The interest rate of
these loans change or reprice at specific intervals according to certain
market indices. The remainder of the loan portfolio has a fixed interest rate
until maturity.
41
The aggregate balances on non-performing loans and the reduction in interest
income associated with these loans at December 31, are as follows (in
thousands):
1999 1998 1997
---- ---- ----
Troubled debt restructuring $ -- $ -- $ --
Over 90 days past due 190 2 25
Non-accrual loans 105 410 11
----- ----- --------
Total non-performing assets $ 295 $ 412 $ 36
===== ===== ========
As a percentage of total loans 0.35% 0.62% 0.02%
===== ===== ========
Income in accordance with original loan terms $ 22 $ 20 $ 2
Income recognized (13) -- --
The Bank automatically places any loan that has been partially charged-off or
any loan to borrowers in bankruptcy proceedings on non-accrual. The Bank on a
discretionary basis places loans on non-accrual when a borrower is in
bankruptcy where adequate security cannot be demonstrated and the borrower
ceases paying interest. All other loans are typically placed on non-accrual
after the borrower is ninety days or more past due unless collection is
expected within 60 days.
Allowance for Possible Credit Losses. The allowance for possible credit
losses at December 31, 1999 was $781,000 compared to $627,000 at December 31,
1998, an increase of $154,000 or 25%. Transactions in the allowance for
possible credit losses for the years ended December 31, are as follows (in
thousands):
1999 1998 1997
---- ---- ----
Balance, beginning of year $ 627 $ 522 $ 366
Charge-offs:
Consumer loans (55) (15) (8)
Commercial loans (584) -- --
Recoveries:
Consumer loans 21 -- --
------ ------ --------
Net charge-offs (618) (15) (8)
Additions charged to operations 772 120 164
------ ------ --------
Balance at end of period $ 781 $ 627 $ 522
====== ====== ========
Allowance to total loans 0.91% 0.95% 1.01%
====== ====== ========
Allowance to non-performing assets 264.75% 152.18% 1,450.00%
====== ====== ========
Net charge-offs to average loans 0.84% 0.03% 0.02%
====== ====== ========
Charge-offs increase from 1998 to 1999 primarily due to a $584,000 charge-off
of one commercial loan relationship which unexpectedly declared bankruptcy
and closed its doors for business.
42
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. Management
expects that the allowance for possible credit losses to total loan ratio
will approximate one percent during 2000.
The allocation of the allowance for possible credit losses as of December 31,
are as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
--------------------- --------------------- ----------------------
Percent of Percent of Percent of
loans in each loans in each loans in each
category to category to category to
Amount total loans Amount total loans Amount total loans
------ ------------- ------ ------------- ------ -------------
<S> <C> <C> <C> <C> <C> <C>
Consumer loans $16 12.73% $20 18.83% $15 24.37%
Commercial, financial & other 239 23.86% 266 22.48% 7 20.46%
Commercial real estate construction 3 4.24% 2 3.39% 1 3.35%
Commercial real estate mortgages 16 26.81% 9 18.90% 7 18.79%
Residential real estate mortgages 45 32.36% 101 36.40% 12 33.03%
Unallocated 462 N/A 229 N/A 480 N/A
---- ------ ---- ------ ---- ------
$781 100.00% $627 100.00% $522 100.00%
==== ====== ==== ====== ===== ======
</TABLE>
Premises and Equipment. Bank premises and equipment were $2.4 million at
December 31, 1999 and December 31, 1998. The Corporation intends to open a
new branch office in Canton Township, Michigan in the fourth quarter of 2000.
Expenditures for the project in 1999 were $126,000. The estimated total
expenditures for the project are $1.7 million, including land, building
construction, furniture and equipment.
Accrued Interest Receivable. Accrued interest receivable at December 31, 1999
was $1.4 million compared to $0.9 million at December 31, 1998, an increase
of $0.5 million or 56%. The increase was due to increased loan volume and the
increased volume of investment securities, available for sale, for which
interest is receivable semi-annually.
Other Assets. Other assets at December 31, 1999 were $736,000 compared to
$372,000 at December 31, 1998, an increase of $364,000 or 98%. The increase
was due to an increase in the Bank's recognition of a deferred tax asset
related to the unrealized loss on the investment securities, available for
sale portfolio.
43
Deposits. Total deposits at December 31, 1999 were $118.9 million compared to
$97.6 million at December 31, 1998, an increase of $21.3 million or 22%. The
components of the outstanding balances and percentage increase in deposits
from 1998 to 1999 are as follows (in thousands):
1999 1998
----------------- ----------------- Increase/
Balance Percent Balance Percent Decrease)
------- ------- ------- ------- --------
Non-interest bearing:
Demand $ 14,859 12.50% $11,142 11.41% 33.36%
-------- ------ ------- ------ -----
Interest bearing:
Checking $ 5,391 4.53% $ 3,630 3.72% 48.51%
Money market 13,013 10.95% 11,215 11.49% 16.03%
Savings 3,109 2.62% 2,079 2.13% 49.54%
Time, under $100,000 40,984 34.48% 42,790 43.84% (4.22)%
Time, $100,000 and over 41,519 34.93% 26,754 27.41% 55.19%
-------- ------ ------- ------ -----
$104,016 100.00% $86,468 100.00% 20.29%
======== ====== ======= ====== =====
The increase in deposits was primarily due to growth in time deposits. During
1999, the Bank completed one major marketing campaign, an annual birthday
celebration in March, offering a premium rate of interest on time deposits.
This campaign raised in excess of $7.3 million in new deposits in a period of
approximately one week. In addition to the birthday campaign, the Bank
aggressively sought out public funds, in the form of time deposits, $100,000
and over, in the local communities that the Bank serves. Public funds at
December 31, 1999 were $8.2 million compared to $2.7 million at December 31,
1998. Additional growth in all types of deposits was achieved via a strong
business development program which includes normal marketing, telemarketing,
referral and visitation programs. At December 31, 1999, within the large
concentration of time deposits, $100,000 or more, the Bank considers 97% of
these deposits to be core deposits, based upon the length of the relationship
with customers and other deposit or lending relationships maintained at the
Bank.
The Corporation has historically relied heavily on time deposits as a
percentage of total deposits to fund the growth of the Corporation. These
deposits are sensitive to changes in the interest rate environment. During
2000, transaction based deposit products are expected to increase and time
deposits are expected to decrease as a percentage of total deposits.
Final maturities of total time deposits are as follows (in thousands):
$100,000 Less than
And over $100,000 Total
-------- --------- -----
Due in three months or less $10,191 $ 7,259 $17,450
Due in over three months through six months 12,047 14,198 26,245
Due in over six months through one year 17,180 11,780 28,960
Due in one year through five years 2,101 7,747 9,848
------- ------- -------
Totals $41,519 $40,984 $82,503
======= ======= =======
44
The following is a summary of the distribution and weighted average interest
rate of deposits at December 31 (in thousands):
1999 1998
------------------ -------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
------ -------- ------- ---------
Non-interest bearing:
Demand $ 14,859 -- $11,142 --
======== =======
Interest bearing:
Checking $ 5,391 2.96% $ 3,630 2.96%
Money market 13,013 3.39% 11,215 3.39%
Savings 3,109 2.50% 2,079 2.50%
Time, under $100,000 40,984 5.16% 42,790 5.51%
Time, $100,000 and over 41,519 5.44% 26,754 5.45%
-------- -------
$104,016 $86,468
======== =======
During the first half of 1999, the Corporation was able to reprice the
majority of its time deposits at lower rates than 1998 due to a decreasing
rate environment that started late in 1998 and ended in the middle of 1999.
During 2000, management believes that time deposits will become more costly
as the interest rate environment increases.
Federal Home Loan Bank Advances. Federal Home Loan Bank advances at December
31, 1999 amounted to $2.0 million as compared to $0.0 at December 31, 1998.
These funds were utilized to fund commercial lending activity and provide
additional liquidity. Management expects to secure additional advances in
2000. In 1999, the Bank joined the Federal Home Loan Bank of Indianapolis.
Membership in the Federal Home Loan Bank provides the Bank with a stable
source of additional funding at a reasonable cost. Federal Home Loan Bank
advances are collateralized with investment securities - available for sale.
The Bank can secure additional advances in the amount of $5.3 million with
the securities that are currently pledged to the Federal Home Loan Bank.
Accrued Interest Payable. Accrued interest payable at December 31, 1999 was
$469,000 compared to $338,000 at December 31, 1998. The increase was due to
the increase in the volume of time deposits during 1999.
45
Capital
Stockholders' equity at December 31, 1999 was $27.3 million compared to $27.7
million as of December 31, 1998, a decrease of $0.4 million or 1%. Capital
decreased during 1999 primarily due to the after-tax effects of unrealized
losses on available for sale investment securities in an increasing interest
rate environment. Management anticipates that interest rates will continue to
modestly increase during 2000 and plans to hold the majority of the available
for sale investment securities until maturity at which time no loss will be
recognized.
At December 31, 1999 the Bank and Corporation exceeded all applicable
regulatory capital requirements as described in Note M - Regulatory Matters.
Based on the Corporation's December 31, 1999 capital to asset ratio of 17.85
percent, management has the capacity to grow the assets of the Corporation to
approximately $340,000,000 before the necessity to raise additional capital,
while maintaining a minimum 8.00% capital to assets ratio.
In November of 1999, the Corporation announced that it would repurchase up to
125,000 shares of its outstanding common stock at a price range of $5.00 to
$13.00 per share, which represents approximately five percent of the
outstanding common stock. Through December 31, 1999, the Corporation was able
to repurchase 30,555 shares within Securities and Exchange Commission
compliance guidelines. Considering that the Corporation's stock closed at
$6.00 per share on December 31, 1999, representing a 54 percent market to
book ratio, management believes that its stock is highly undervalued. Given
such bargain market prices, the Corporation will continue to repurchase
shares during 2000.
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 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 assets 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.
In 1999, the Bank sold investment securities - available for sale and secured
a Federal Home Loan Bank advance to fund increases in the level of loan
activity. Management expects loan volume to continue to increase in 2000 and
expects to fund that growth with deposit growth and additional Federal Home
Loan Bank advances.
46
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.
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 falling 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 sets forth the amounts of interest earning assets and
interest bearing liabilities outstanding at December 31, 1999 which are
expected to mature or reprice in each of the time periods shown below. For
the purposes of this table, the maturity or repricing periods of other
interest bearing deposits are based upon industry experience in decay rates
as determined by the Company's regulators. These rates are not the
contractual repricing periods, which are shorter than what is shown, as
management has broad discretion in repricing these deposits.
<TABLE>
<CAPTION>
RATE SENSITIVITY ANALYSIS / GAP ANALYSIS
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 $ 4,963 $ -- $ -- $ -- $ 4,963
Mortgage loans held for sale 783 -- -- -- 783
Securities available for sale -- -- 55,022 -- 55,022
Federal Home Loan Bank stock 381 -- -- -- 381
Total loans 20,102 6,649 45,218 13,421 85,390
-------- -------- -------- -------- --------
Total earning assets 26,229 6,649 100,240 13,421 146,539
Interest bearing liabilities
Time deposits 17,450 55,204 9,849 -- 82,503
Other interest bearing deposits 2,376 7,131 12,006 -- 21,513
Federal funds purchased 3,000 -- -- -- 3,000
Federal Home Loan Bank advances 2,000 -- -- -- 2,000
Mortgage payable 6 20 154 313 493
-------- -------- -------- -------- --------
Total interest bearing liabilities 24,832 62,355 22,009 313 109,509
Net asset (liability) funding gap 1,397 (55,706) 78,231 13,108 37,030
-------- -------- -------- -------- ========
Cumulative net asset (liability) funding gap $ 1,397 $(54,309) $ 23,922 $ 37,030
======== ======== ======== ========
</TABLE>
47
Impact of Inflation and Changing Prices
The Consolidated Financial Statements 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 change in the relative purchasing
power of money over time due to inflation. The primary impact of inflation is
reflected in the increased cost of the Corporation's operations. Unlike most
industrial companies, virtually all the assets and liabilities of the
Corporation are monetary in nature. As a result, interest rates have a more
significant impact on a financial institution'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 Issue
During 1999, the Corporation completed its comprehensive Year 2000 (Y2K) plan
in preparing for the Year 2000 date change. The plan involved identifying and
providing a remedy for date recognition problems that might pertain to any
facets of the Corporation's business. These included problems in computer
hardware and software, physical plant and other equipment, working with third
parties to address their Year 2000 issues, assessing major loan and deposit
customers for potential risk and developing contingency plans to address
potential risks in the event of Year 2000 failures. To date, the Corporation
has experienced no disruption in service of any type in the transition to
2000.
During 1999 and 1998, $110,000 and $65,000, respectively, were charged to
expense for depreciation, employee wages and professional services to test,
remediate and upgrade computer workstations, software and networks.
Although considered unlikely, unanticipated problems in the Corporation's
core business process, including problems associated with non-compliant third
parties and disruptions to the economy in general, could still occur despite
efforts to date to remedy affected systems and develop contingency plans. All
business processes will continue to be monitored, including interaction with
the Corporation's customers, vendors and other third parties, throughout 2000
to address any issues and ensure all processes continue to function properly.
48
DEARBORN BANCORP, INC.
DIRECTORS AND OFFICERS
DIRECTORS
WILBER M. BRUCKER, JR. MICHAEL J. ROSS
Retired, Attorney President and Chief Executive Officer
Community Bank of Dearborn
MARGARET I. CAMPBELL
Retired, Consultant DR. ROBERT C. SCHWYN
Physician
JOHN E. DEMMER
Chairman of the Board and RONNIE J. STORY
Chief Executive Officer President and Chief
Jack Demmer Ford, Inc. and Executive Officer
Jack Demmer Leasing Story Development Corp. and
Story Brothers Grading & Excavating
MICHAEL V. DORIAN, JR.
Vice President OFFICERS
Mike Dorian Ford
JOHN E. DEMMER
DAVID HIMICK Chairman of the Board and
Financial Consultant Chief Executive Officer
DONALD G. KARCHER RICHARD NORDSTROM
Chairman of the Board Vice Chairman
Karcher Agency, Inc.
MICHAEL J. ROSS
BRADLEY F. KELLER President
President
Braden Associates, Inc. and JEFFREY L. KARAFA
MultiGard Properties, Ltd. Vice President, Treasurer
and Secretary
JEFFREY G. LONGSTRETH
President DONALD G. KARCHER
Prudential Christie Real Estate Vice President
RICHARD NORDSTROM
Retired, Architect
49
COMMUNITY BANK OF DEARBORN
OFFICERS
JOHN E. DEMMER GARY AMES JR.
Chairman of the Board Controller
MICHAEL J. ROSS DANIEL A. BZURA
President Branch Officer, Dearborn Heights
Chief Executive Officer
CYNTHIA M. IMMONEN
TIMOTHY J. CUTTLE Loan Operations Officer
Executive Vice President
Loan Administration DENIS T. NISSLE
Private Banking Officer, Plymouth
WARREN R. MUSSON
Vice President CYNTHIA A. PIZZO
Senior Loan Officer Branch Officer, Dearborn
BRIAN A. MAMO STEVEN P. SLADE
Vice President Consumer Banking Officer
Commercial Loan Officer
DENISE STAFFELD
JEFFREY L. KARAFA Senior Mortgage Loan Officer
Vice President
CFO, Cashier & Secretary SUSAN M. VETTRAINO
Retail Operations Officer
H. KRISTENE RAUTIO
Vice President CHARLES P. WASCZENSKI
Branch Administration Branch Officer, Plymouth
JEFFREY J. WOLBER PAMELA G. WILKS
Vice President Data Operations Officer
Sales & Product Manager
50
<TABLE>
<CAPTION>
BRANCH LOCATIONS
<S> <C> <C>
Main Office Hours: 9:30 AM - 4:30 PM Monday through Thursday
22290 Michigan Avenue 9:30 AM - 6:00 PM Friday
PO Box 2247 9:30 AM - 1:00 PM Saturday, Drive-In Only
Dearborn, Michigan 48123-2247
Phone: (313) 274-1000
Fax: (313) 274-5050
Cynthia A. Pizzo, Branch Officer
Warren Avenue and Silvery Lane Hours: 9:00 AM - 4:30 PM Monday through Thursday
24935 West Warren Avenue 9:00 AM - 6:00 PM Friday
Dearborn Heights, Michigan 48127
Phone: (313) 724-0100
Fax: (313) 724-1010
Daniel A. Bzura, Branch Officer
Five Mile and Sheldon Road Hours: 9:00 AM - 4:30 PM Monday through Thursday
44623 Five Mile 9:00 AM - 6:00 PM Friday
Plymouth, Michigan 48170 9:30 AM - 1:00 PM Saturday, Walk-Up Window
Phone: (734) 454-1000
Fax: (734) 454-0123
Charles P. Wasczenski, Branch Officer
</TABLE>
51
DEARBORN BANCORP, INC.
22290 Michigan Avenue
PO Box 2247
Dearborn, Michigan 48123-2247
Phone: (313) 274-1000
Report of Independent Certified Public Accountants
Board of Directors
Dearborn Bancorp, Inc.
We have audited the consolidated balance sheet of Dearborn Bancorp, Inc. and
subsidiary as of December 31, 1998, and the related consolidated statements
of income, stockholders' equity, and cash flows for each of the two years in
the period ended December 31, 1998. These financial statements are the
responsibility of the Corporation's management. Our responsibility to express
an opinion on these financial statements based on our audits.
We conducted our audit 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 audit provides 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, 1998, and the
consolidated results of their operations and their cash flows for each of the
two years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles.
/s/GRANT THORNTON LLP
Detroit, Michigan
February 17, 1999
<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, 1999 AND THE
CONSOLIDATED STATEMENTS OF INCOME FOR THE YEAR ENDED
DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<MULTIPLIER> 1,000
<PERIOD-TYPE> 12-MOS
<PERIOD-START> JAN-01-1999
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> $ 2,446
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 4,963
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 55,022
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 85,390
<ALLOWANCE> 781
<TOTAL-ASSETS> 152,698
<DEPOSITS> 118,875
<SHORT-TERM> 5,000
<LIABILITIES-OTHER> 1,070
<LONG-TERM> 493
0
0
<COMMON> 28,822
<OTHER-SE> (1,562)
<TOTAL-LIABILITIES-AND-EQUITY> 152,698
<INTEREST-LOAN> 6,302
<INTEREST-INVEST> 3,162
<INTEREST-OTHER> 213
<INTEREST-TOTAL> 9,677
<INTEREST-DEPOSIT> 4,687
<INTEREST-EXPENSE> 4,735
<INTEREST-INCOME-NET> 4,942
<LOAN-LOSSES> 772
<SECURITIES-GAINS> (12)
<EXPENSE-OTHER> 3,804
<INCOME-PRETAX> 924
<INCOME-PRE-EXTRAORDINARY> 924
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 530
<EPS-BASIC> 0.21
<EPS-DILUTED> 0.21
<YIELD-ACTUAL> 3.69
<LOANS-NON> 105
<LOANS-PAST> 190
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 627
<CHARGE-OFFS> 639
<RECOVERIES> 21
<ALLOWANCE-CLOSE> 781
<ALLOWANCE-DOMESTIC> 781
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
