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| DEAR > SEC Filings for DEAR > Form 10-Q on 14-Aug-2009 | All Recent SEC Filings |
14-Aug-2009
Quarterly Report
Company Overview
Dearborn Bancorp, Inc. 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").
Community Bank of Dearborn (the "Bank"), a Michigan banking corporation,
commenced business on February 28, 1994 in Dearborn, Michigan. On April 30,
2007, Community Bank of Dearborn was renamed Fidelity Bank. Management believes
that its new name, Fidelity Bank represents a more accurate portrayal to our
customers and prospects of the financial products and services offered by the
Bank and the Bank's market area.
The Bank is the only commercial bank headquartered in Dearborn, Michigan and
offers a full line of loan and deposit products and services. The Bank offers
excellent customer service to its loan and deposit customers and maintains
strong relationships with the communities served by the Bank. The Bank
emphasizes strong loan quality, excellent customer service and efficient
operations in order to maximize profitability and shareholder value.
Subsequent to the commencement of business in Dearborn, Michigan in 1994, the
Bank opened five additional offices in Wayne County, Michigan. Since 2001, the
Bank opened two offices in Macomb County, Michigan and in 2003, the Bank opened
an office in Oakland County, Michigan.
In 2004, the Corporation acquired the Bank of Washtenaw from Pavillion Bancorp.
The Bank of Washtenaw's three banking offices, all of which are located in
Washtenaw County, Michigan were successfully consolidated into the Bank.
In 2007, the Corporation acquired Fidelity Financial Corporation of Michigan
(Fidelity), a commercial bank with seven offices in Oakland County, Michigan.
The acquisition has significantly expanded the Bank's presence in Oakland
County, Michigan. Management believes that the acquisition will be beneficial to
the Bank's customers and the Corporation's shareholders. Additionally, the Bank
opened a full service banking office in Shelby Township, Michigan on April 30,
2007. The Bank currently operates seventeen banking offices in Wayne, Macomb,
Oakland and Washtenaw Counties, Michigan.
The Bank has also formed two subsidiaries that offer additional or specialized
services to the Bank's customers. The Bank's subsidiaries, their formation date
and the type of services offered are listed below:
Date Formed Name Services Offered
August 1997 Community Bank Insurance Agency, Inc. Limited insurance related
activities
March 2002 Community Bank Audit Services, Inc. Internal auditing and compliance
services for financial
institutions
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The date opened, branch location and branch type of each branch is listed on the following page:
Date Opened Location Type of office
February 1994 22290 Michigan Avenue Full service retail branch
with ATM
Dearborn, Michigan 48123 Regional lending center
December 1995 24935 West Warren Avenue Full service retail branch
Dearborn Heights, Michigan 48127
August 1997 44623 Five Mile Road Full service retail branch
with ATM
Plymouth, Michigan 48170
May 2001 1325 North Canton Center Road Full service retail branch
with ATM
Canton, Michigan 48187
December 2001 45000 River Ridge Drive Regional lending center
Clinton Township, Michigan 48038
November 2002 19100 Hall Road Full service retail branch
with ATM
Clinton Township, Michigan 48038
February 2003 12820 Fort Street Full service retail branch
with ATM
Southgate, Michigan 48195
May 2003 3201 University Drive, Suite 180 Full service retail branch
Auburn Hills, Michigan 48326
October 2004 450 East Michigan Avenue Full service retail branch
with ATM
Saline, MI 48176
October 2004 250 West Eisenhower Parkway Full service retail branch
with ATM
Ann Arbor, MI 48103 Regional lending certer
October 2004 2180 West Stadium Blvd. Full service retail branch
with ATM
Ann Arbor, MI 48103
December 2004 1360 Porter Street Loan production office
Dearborn, MI 48123 Regional lending center
January 2007 1040 E. Maple Full service retail branch
with ATM
Birmingham, MI 48009 Regional lending certer
January 2007 3681 W. Maple Full service retail branch
with ATM
Birmingham, MI 48301
January 2007 30700 Telegraph Full service retail branch
with ATM
Bingham Farms, MI 48025
January 2007 20000 Twelve Mile Road Full service retail branch
with ATM
Southfield, MI 48076
April 2007 7755 23 Mile Road Full service retail branch
with ATM
Shelby Township, MI 48075
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The Corporation has realized substantial asset growth from the formation of the Corporation through December 31, 2008, depending on the economic and competitive environment.
Historically, the Bank's growth has been realized through the growth of the loan
portfolio. More specifically, the expansion of our commercial banking department
has been a primary element in the Bank's asset growth through December 31, 2007.
The Corporation's growth since its inception has been funded primarily by
deposits. During 2009, the Corporation, total assets have declined due to
management of the Bank's non-performing assets and the liquidation of the Bank's
participation in a wholesale money market deposit program.
Due to losses experienced during 2008 and the first half of 2009, the Bank's
capital position has declined to "adequately capitalized", as defined by the
FDIC Regulation Part 325.103 at June 30, 2009 from "well-capitalized" at
December 31, 2008. Management intends to raise sufficient capital during 2009 to
return the Bank to well-capitalized status and provide sufficient capital for
the Corporation. Management will consider various sources of capital and
estimates that it needs to raise between $20 million and $50 million in capital
during 2009.
The Corporation's earnings depend primarily on net interest income. Management
strives to maximize net interest income through monitoring the economic and
competitive environment and making appropriate adjustments in the
characteristics and pricing of our products and services.
Other factors that contribute significantly to our earnings are the maintenance
of asset quality and efficient operations. Management continually monitors the
quality of the loan portfolio and the impact of the economic and competitive
environment and works to maintain asset quality.
The Bank's market area consists primarily of the Metropolitan Detroit area. This
is a large real estate market and the Bank's loan portfolio accounts for less
than one percent of this market. The Detroit real estate market has been
negatively impacted by the unfavorable economic conditions in the State of
Michigan. The Bank has maintained strong underwriting guidelines and utilizes a
diligent loan review process.
The Corporation recorded a net loss of $9,075,000 and $15,324,000 for the three
and six month periods ended June 30, 2009, respectively. The primary factor
affecting net income was the recording of $13,610,000 and $24,337,000 to the
provision for loan loss for the three and six month periods ended June 30, 2009.
The provision for loan loss was due to net charge-offs of $9,820,000 and
$16,367,000 for the three and six month periods ended June 30, 2009,
respectively and the continued deterioration in the underlying collateral of the
Bank's non-performing assets. Another significant factor was the cost related to
real estate owned, which included defaulted loan expense of $926,000 and
$1,687,000 and write-downs to real estate owned of $1,506,000 and $$1,860,000
during the three month and six months ended June 30, 2009, respectively.
Results of Operations
The Corporation reported net losses of ($9,075,000) and ($15,324,000) for the
three and six month periods ended June 30, 2009, compared to net losses of
($4,614,000) and ($3,938,000) for the same periods in 2008, a decrease of
$4,461,000 for the three month period and $11,386,000 for the six month period.
The decrease in net income was primarily due to the increase in the provision
for loan loss, the decline in net interest income due to the elevated levels of
non-performing loans and the increased costs related to real estate owned.
Net Interest Income
2009 Compared to 2008. As noted on the two charts on the following pages, net
interest income for the three and six month periods ended June 30, 2009 was
$7,537,000 and $15,054,000, compared to $8,284,000 and $16,337,000 for the same
periods ended June 30, 2008, a decrease of $747,000 or 9% for the three month
period and $1,283,000 or 8% for the six month period. This decrease was caused
primarily by the decreasing spread between interest earning assets and interest
bearing liabilities. The Corporation's interest rate spread was 2.48% and 2.63%
for the three and six months periods ended June 30, 2009 compared to 2.95% and
2.86% for the same periods in 2008. The Corporation's interest rate margin was
3.01% and 2.97% for the three and six months periods ended June 30, 2009
compared to 3.45% and 3.40% for the same periods in 2008. The decline in the
Corporation net interest spread and net interest margin was primarily due to the
decline in the Bank's yield on earning assets, which was primarily due to the
impact of the increasing amount of non-performing loans.
Average Balances, Interest Rates and Yields. Net interest income is affected by
the difference ("interest rate spread") between rates of interest earned on
interest-earning assets and rates of interest paid on interest-bearing
liabilities and the relative amounts of interest-bearing liabilities and
interest-earning assets. When the total of interest-earning assets approximates
or exceeds the total of interest-bearing liabilities, any positive interest rate
spread will generate net interest income. Financial institutions have
traditionally used interest rate spreads as a measure of net interest income.
Another indication of an institution's net interest income is its "net yield on
interest-earning assets" or "net interest margin," which is net interest income
divided by average interest-earning assets.
The following table sets forth certain information relating to the Corporation's consolidated average interest-earning assets and interest-bearing liabilities and reflects the average yield on assets and average cost of liabilities for the periods indicated. Such yields and costs are derived by dividing income or expense by the average daily balance of assets or liabilities, respectively, for the periods presented. During the periods indicated, non-accruing loans, if any, are included in the loan category.
Three months ended June 30, 2009 Three months ended June 30, 2008
Average Average Average Average
(In thousands) Balance Interest Rate Balance Interest Rate
Assets
Interest-bearing deposits with banks $ 51,839 $ 103 0.80 % $ 206 $ 1 1.95 %
Federal funds sold 8,026 6 0.30 % 4,802 21 2.75 %
Investment securities, available for sale 46,310 178 1.54 % 12,838 109 3.41 %
Loans 898,739 13,286 5.93 % 948,591 14,994 6.36 %
Sub-total earning assets 1,004,914 13,573 5.42 % 966,437 15,125 6.29 %
Other assets 62,037 81,986
Total assets $ 1,066,951 $ 1,048,423
Liabilities and stockholders' equity
Interest bearing deposits $ 816,083 $ 5,458 2.68 % $ 723,733 $ 5,874 3.26 %
Other borrowings 68,951 578 3.36 % 99,957 967 3.89 %
Sub-total interest bearing liabilities 885,034 6,036 2.74 % 823,690 6,841 3.34 %
Non-interest bearing deposits 82,304 83,614
Other liabilities 2,159 3,117
Stockholders' equity 97,454 138,002
Total liabilities and stockholders' equity $ 1,066,951 $ 1,048,423
Net interest income $ 7,537 $ 8,284
Net interest rate spread 2.68 % 2.95 %
Net interest margin on earning assets 3.01 % 3.45 %
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Six months ended June 30, 2009 Six months ended June 30, 2008
Average Average Average Average
(In thousands) Balance Interest Rate Balance Interest Rate
Assets
Interest-bearing deposits with banks $ 48,562 $ 197 0.82 % $ 193 $ 2 2.08 %
Federal funds sold 7,616 12 0.32 % 3,427 36 2.11 %
Investment securities, available for sale 56,874 434 1.54 % 12,393 218 3.53 %
Loans 909,413 27,096 6.01 % 948,000 31,168 6.59 %
Sub-total earning assets 1,022,465 27,739 5.47 % 964,013 31,424 6.54 %
Other assets 60,961 82,192
Total assets $ 1,083,426 $ 1,046,205
Liabilities and stockholders' equity
Interest bearing deposits $ 828,981 $ 11,456 2.79 % $ 714,982 $ 12,902 3.62 %
Other borrowings 71,127 1,229 3.48 % 106,275 2,185 4.12 %
Sub-total interest bearing liabilities 900,108 12,685 2.84 % 821,257 15,087 3.68 %
Non-interest bearing deposits 80,009 83,233
Other liabilities 2,072 3,674
Stockholders' equity 101,237 138,041
Total liabilities and stockholders' equity $ 1,083,426 $ 1,046,205
Net interest income $ 15,054 $ 16,337
Net interest rate spread 2.63 % 2.86 %
Net interest margin on earning assets 2.97 % 3.40 %
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Rate/Volume Analysis. The following table analyzes net interest income in terms of changes in the volume of interest-earning assets and interest-bearing liabilities and changes in yields and rates. The table reflects the extent to which changes in the interest income and interest expense are attributable to changes in volume (changes in volume multiplied by prior year rate) and changes in rate (changes in rate multiplied by prior year volume). Changes attributable to the combined impact of volume and rate have been allocated proportionately to changes due to volume and changes due to rate.
Three and Six Months Ended June 30, 2009/2008
Change in Interest Due to: Change in Interest Due to:
Average Average Net Average Average Net
(In thousands) Balance Rate Change Balance Rate Change
Assets
Interest bearing deposits with banks $ 103 $ (1 ) $ 102 $ 196 $ (1 ) $ 195
Federal funds sold 14 (29 ) (15 ) 7 (31 ) (24 )
Investment securities, available for sale 129 (60 ) 69 336 (120 ) 216
Loans (687 ) (1,021 ) (1,708 ) (1,316 ) (2,756 ) (4,072 )
Total earning assets $ (441 ) $ (1,111 ) $ (1,552 ) $ (777 ) $ (2,908 ) $ (3,685 )
Liabilities
Interest bearing deposits $ 620 (1,036 ) $ (416 ) $ 1,529 $ (2,975 ) $ (1,446 )
Other borrowings (257 ) (132 ) (389 ) (620 ) (336 ) (956 )
Total interest bearing liabilities $ 363 $ (1,168 ) $ (805 ) $ 909 $ (3,311 ) $ (2,402 )
Net interest income $ (747 ) $ (1,283 )
Net interest rate spread (0.26 %) (0.23 %)
Net interest margin on earning assets (0.44 %) (0.43 %)
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Provision for Loan Losses
2009 Compared to 2008. The provision for loan losses was $13,610,000 and
$24,337,000 for the three and six month periods ended June 30, 2009, compared to
$8,746,000 and $9,632,000 for the same period in 2008, an increase of $4,864,000
or 56% for the three month period and $14,705,000 or 152% for the six month
period. The increase is primarily due to net charge-offs of $16,367,000 during
the period and the continued deterioration of the underlying collateral for the
Bank's non-performing loans, which are primarily due to the decline in economic
conditions in Southeastern Michigan. This decline in economic conditions is
heavily impacted by conditions and events that have recently impacted the
automotive industry during the first half of 2009, including the recent
bankruptcy of two major automotive manufacturers and resulting shut down of
production and layoffs of employees. These events will have a negative impact on
the residential real estate and commercial real estate markets in the Bank's
market area. These conditions have led to an increase in the Bank's classified
assets during 2009. Management has recognized this trend in our analysis of the
allowance for loan losses at June 30, 2009.
Regulatory requirements, documented in the in the discussion of Impaired Loans
in the Glossary of the FFIEC Call Report Instructions dictate that any
collateral deficiency on impaired loans that are collateral dependent must be
immediately charged off. A collateral deficiency exists where the loan balance
exceeds the value of the underlying collateral. As of June 30, 2009, the
collateral deficiency of all collateral dependent impaired loans has been
charged off.
Net charge-offs of $12,873,000 or 79% of year-to-date net charge-offs were based
on current valuations of the underlying collateral during these challenging
economic conditions. These valuations are as of a certain date and there is a
possibility that the valuation of this collateral will improve as economic
conditions improve.
The provision for loan losses for the three month period ended June 30, 2009 is
based on the internal analysis of the adequacy of the allowance for loan losses.
The provision for loan losses was based upon management's assessment of relevant
factors, including types and amounts of non-performing loans, historical loss
experience on such types of loans, and current economic conditions.
Non-interest Income (Loss)
2009 Compared to 2008. Non-interest income (loss) was ($571,000) and ($243,000)
for the three and six month periods ended June 30, 2009, compared to ($55,000)
and $56,000 for the same periods in 2008. The decrease in non-interest income
was primarily due to the write-down of other real estate during 2009 and
partially offset by the gain recognized on the sale of securities during the
period.
When these transactions related to real estate owned, other assets and
securities are excluded, non-interest income for the three and six month periods
ended June 30, 2009 amounts to $697,000 and $1,255,000 compared to $514,000 and
$1,060,000 during the same period in 2008, an increase of $183,000 or 36% for
the three month period and $195,000 or 18% for the six month period. This
increase is primarily caused by the increase in other income.
Non-interest Expense
2009 Compared to 2008. Non-interest expense was $7,103,000 and $13,614,000 for
the three and six month periods ended June 30, 2009, compared to $6,428,000 and
$12,666,000 for the same periods in 2008, an increase of $675,000 or 10% for the
three month period and $948,000 or 7% for the six month period. The increase was
primarily due to defaulted loan expense and the FDIC assessment. Defaulted loan
expense amounted to $926,000 and $1,687,000 during the three and six month
periods ended June 30, 2009 compared to $511,000 and $946,000 during the same
periods in 2008, an increase of $415,000 or 81% for the three month period and
$741,000 or 78% for the six month period. This increase in defaulted loans
expense was primarily due to the payment of property taxes, insurance, legal
expenses and maintenance in 2009 for real estate owned. The FDIC assessment
. . .
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