DEARBORN BANCORP INC /MI/ - FORM 10-Q

Attached files

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EX-31.2 - EX-31.2 - DEARBORN BANCORP INC /MI/	k50400exv31w2.htm
EX-32.1 - EX-32.1 - DEARBORN BANCORP INC /MI/	k50400exv32w1.htm
EX-32.2 - EX-32.2 - DEARBORN BANCORP INC /MI/	k50400exv32w2.htm
EX-31.1 - EX-31.1 - DEARBORN BANCORP INC /MI/	k50400exv31w1.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q


þ		Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Quarterly period ended March 31, 2011


o		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.

(Exact name of registrant as specified in its charter)


Michigan		38-3073622

(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

1360 Porter Street, Dearborn, MI 48124
(Address of principal executive office) (Zip Code)

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

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 þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files. Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company (as defined in rule 12b-2 of the 1934 Securities and Exchange Act).


Large accelerated filer o	Accelerated filer o	Non-accelerated filer o	Smaller reporting company þ
		(Do not check if a smaller reporting company)

Indicate by check mark if the registrant is a shell company, as defined in Rule 12b-2 of the Exchange Act. Yes o No þ

Indicate the number of shares outstanding for each of the issuer’s classes of common stock, as of April 30, 2011.


Class		Shares Outstanding

Common Stock		7,685,706

DEARBORN BANCORP, INC.
INDEX


	Page

Part I. Financial Information:

Item 1. Financial Statements

The following condensed consolidated financial statements of Dearborn Bancorp, Inc. and its subsidiary are included in this report:

Report of Independent Registered Public Accounting Firm		3

Condensed Consolidated Balance Sheets — March 31, 2011, December 31, 2010 and March 31, 2010		4

Condensed Consolidated Statements of Operations — For the Three Months Ended March 31, 2011 and 2010		5

Condensed Consolidated Statements of Comprehensive Loss — For the Three Months Ended March 31, 2011 and 2010		6

Condensed Consolidated Statements of Cash Flows — For the Three Months Ended March 31, 2011 and 2010		7

Notes to Condensed Consolidated Financial Statements		9-32

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		32-49

Item 3. Quantitative and Qualitative Disclosures about Market Risk		50-53

Item 4. Controls and Procedures		54

Part II. Other Information:

Pursuant to SEC rules and regulations, the following item(s) are included with the Form 10-Q Report:

Item 1A Risk Factors		55
Item 6. Exhibits		56

Pursuant to SEC rules and regulations, the following items are omitted from this Form 10-Q as inapplicable or to which the answer is negative:

Item 1. Legal Proceedings
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information

SIGNATURES		57
EX-31.1
EX-31.2
EX-32.1
EX-32.2

Report of Independent Registered Public Accounting Firm

Audit Committee, Board of Directors and Stockholders
Dearborn Bancorp, Inc.
Dearborn, Michigan

We have reviewed the accompanying condensed consolidated balance sheets of Dearborn Bancorp, Inc. as of March 31, 2011 and 2010 and the related condensed consolidated statements of operations and comprehensive loss for the three-month periods ended March 31, 2011 and 2010, and condensed consolidated statements of cash flows for the three month periods ended March 31, 2011 and 2010. These interim financial statements are the responsibility of the Corporation’s management.

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

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

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of December 31, 2010 and the related consolidated statements of operations, stockholders’ equity and cash flows for the year then ended (not presented herein); and in our report dated March 21, 2011, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of March 31, 2011 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

BKD, LLP

Indianapolis, Indiana
May 13, 2011

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

DEARBORN BANCORP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS


	Unaudited						Unaudited
(Dollars, in thousands)	3/31/2011			12/31/2010			3/31/2010
ASSETS
Cash and cash equivalents
Cash and due from banks	$	7,454		$	6,645		$	8,047
Federal funds sold		55			55			57
Interest bearing deposits with banks		95,801			87,075			70,898

Total cash and cash equivalents		103,310			93,775			79,002

Mortgage loans held for sale		749			353			758
Securities available for sale		53,117			54,811			46,267
Federal Home Loan Bank stock		3,605			3,605			3,698
Loans
Loans		718,187			735,851			813,961
Allowance for loan losses		(27,971	)		(27,971	)		(30,288	)

Net loans		690,216			707,880			783,673

Premises and equipment, net		18,969			19,195			19,973
Real estate owned		22,120			21,502			24,467
Accrued interest receivable		3,310			3,286			3,595
Other assets		1,598			11,277			9,266

Total assets	$	896,994		$	915,684		$	970,699


LIABILITIES
Deposits
Non-interest bearing deposits	$	95,076		$	88,266		$	86,407
Interest bearing deposits		699,077			723,835			765,610

Total deposits		794,153			812,101			852,017

Other liabilities
Federal Home Loan Bank advances		63,668			63,716			63,799
Accrued interest payable		1,079			1,056			956
Other liabilities		1,100			1,852			747
Subordinated debentures		10,000			10,000			10,000

Total liabilities		870,000			888,725			927,519

STOCKHOLDERS’ EQUITY
Common stock - 100,000,000 shares authorized, 7,685,706 shares at 3/31/11, 7,685,706 shares at 12/31/10 and 7,687,470 shares at 3/31/10		132,163			132,083			131,960
Retained earnings		(103,944	)		(104,099	)		(88,721	)
Accumulated other comprehensive income (loss)		(1,225	)		(1,025	)		(59	)

Total stockholders’ equity		26,994			26,959			43,180

Total liabilities and stockholders’ equity	$	896,994		$	915,684		$	970,699

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

DEARBORN BANCORP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)


	Three Months Ended			Three Months Ended
(In thousands, except share data)	3/31/2011			3/31/2010
Interest income
Interest on loans	$	10,369		$	11,778
Interest on securities, available for sale		442			168
Interest on deposits with banks		136			37
Interest on federal funds		1			1

Total interest income		10,948			11,984

Interest expense
Interest on deposits		2,119			3,543
Interest on other liabilities		260			386

Total interest expense		2,379			3,929

Net interest income		8,569			8,055
Provision for loan losses		1,395			100

Net interest income after provision for loan losses		7,174			7,955

Non-interest income
Service charges on deposit accounts		318			343
Fees for other services to customers		35			36
Gain on the sale of loans		22			58
Gain on the sale of securities		—			69
Loss on the sale of real estate owned		(76	)		(11	)
Loss on the write-down of real estate owned		(326	)		(656	)
Other income		102			102

Total non-interest income (loss)		75			(59	)

Non-interest expense
Salaries and employee benefits		3,190			3,119
Occupancy and equipment expense		782			854
FDIC assessment		950			950
Advertising and marketing		33			27
Stationery and supplies		79			72
Professional services		213			166
Data processing		194			186
Defaulted loan expense		1,180			1,035
Other operating expenses		474			359

Total non-interest expense		7,095			6,768


Income before federal income tax expense		154			1,128
Income tax expense		—			—

Net income	$	154		$	1,128


Per share data:
Net income — basic	$	0.02		$	0.15
Net income — diluted	$	0.02		$	0.15

Weighted average number of shares outstanding — basic		7,645,940			7,687,470
Weighted average number of shares outstanding — diluted		7,645,940			7,687,470

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

DEARBORN BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (unaudited)


	Three Months Ended			Three Months Ended
(In thousands)	03/31/2011			03/31/2010
Net income	$	154		$	1,128
Other comprehensive income , net of tax
Unrealized gains on securities
Unrealized holding gains (losses) arising during period		(200	)		45
Less: reclassification adjustment for gains included in net income		—			69
Tax effects		—			39

Other comprehensive income (loss)		(200	)		75

Comprehensive income (loss)	$	(46	)	$	1,203

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

DEARBORN BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS


	Three Months Ended March 31,
(In thousands)	2011			2010
Cash flows from operating activities
Interest and fees received	$	10,924		$	11,951
Interest paid		(2,356	)		(4,019	)
Proceeds from sale of mortgages held for sale		2,983			4,654
Origination of mortgages held for sale		(3,357	)		(4,225	)
Taxes refunded		7,248			4,074
Loss on sale of real estate owned		(76	)		(11	)
Gain on sale of securities		—			(69	)
Cash paid to suppliers and employees		(3,997	)		(7,331	)

Net cash provided by operating activities		11,369			5,024

Cash flows from investing activities
Sale of securities available for sale		—			8,289
Proceeds from calls, maturities and repayments of securities available for sale		915			2,514
Purchases of securities available for sale		—			(10,689	)
Decrease in loans, net of payments received		14,656			11,666
Proceeds from the sale of real estate owned		593			742
Purchases of property and equipment		(2	)		(47	)

Net cash provided by investing activities		16,162			12,475

Cash flows from financing activities
Net decrease in non-interest bearing deposits		6,810			2,534
Net increase in interest bearing deposits		(24,758	)		(18,472	)
Repayments on Federal Home Loan Bank advances		(48	)		(56	)

Net cash used in financing activities		(17,996	)		(15,994	)

Increase in cash and cash equivalents		9,535			1,505
Cash and cash equivalents at the beginning of period		93,775			77,497

Cash and cash equivalents at the end of period	$	103,310		$	79,002

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

DEARBORN BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)


	Three Months Ended March 31,
(In thousands)	2011			2010
Reconciliation of net loss to net cash provided by operating activities
Net loss	$	154		$	1,128
Adjustments to reconcile net income to net cash provided by operating activities
Provision for loan losses		1,395			100
Depreciation expense		228			268
Restricted stock award expense		66			16
Stock option expense		15			16
Accretion of discount on investment securities		—			(41	)
Amortization of premium on investment securities		579			105
Write-down of real estate owned		326			798
(Increase) decrease in mortgages held for sale		(396	)		371
Increase in interest receivable		(24	)		(33	)
Increase (decrease) in interest payable		23			(90	)
Decrease in other assets		9,755			3,324
Increase in other liabilities		(752	)		(938	)


Net cash provided by operating activities	$	11,369		$	5,024


Supplemental noncash disclosures:
Transfers from loans to real estate owned	$	1,613		$	2,572

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

A. Accounting and Reporting Policies

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

The condensed consolidated financial statements of the Corporation as of March 31, 2011 2010 and December 31, 2010 and for the three month periods ended March 31, 2011 and 2010 reflect all adjustments, consisting of normal recurring items which are in the opinion of management, necessary for a fair presentation of the results for the interim period. The condensed consolidated balance sheet of the Corporation as of December 31, 2010 has been derived from the audited consolidated balance sheet as of that date. The operating results for the three month period ended March 31, 2011 are not necessarily indicative of results of operations for the entire year.

The condensed consolidated financial statements as of March 31, 2011 and 2010, and for the three month periods ended March 31, 2011 and 2010 included herein have been prepared by the Corporation, without an audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in interim financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. These financial statements should be read in conjunction with the financial statements and notes thereon included in the Corporation’s 2010 Annual Report on Form 10-K.

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

A. Accounting and Reporting Policies (con’t)

Income (Loss) 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.

Factors in the basic and diluted income per share calculation follow (in thousands, except share and per share data):


	Three Months Ended
	3/31/2011		3/31/2010
Basic
Net income	$	154	$	1,128
Weighted average common shares		7,645,940		7,645,940
Basic earnings per common share	$	0.02	$	0.15

Diluted
Net income	$	154	$	1,128
Weighted average common shares outstanding		7,645,940		7,645,940
Weighted average common shares	$	0.02	$	0.15

Stock options for 541,621 and 511,717 shares of common stock were not considered in computing diluted earnings per common share for the three months ended March 31, 2011 and 2010, respectively, because they were antidilutive.

A. Accounting and Reporting Policies (con’t)

ASU No. 2010-20, Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. In July 2010, the Financial Accounting Standards board (“FASB”) issued ASU No. 2010-20, Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. ASU 2010-20 requires that more information be disclosed about the credit quality of a company’s loans and the allowance for loan losses held against those loans. A company is required to disaggregate new and existing disclosure based on how it develops its allowance for loan losses and how it manages credit exposures. Existing disclosures to be presented on a disaggregated basis include a roll-forward of the allowance for loan losses, the related recorded investment in such loans, the nonaccrual status of loans, and impaired loans. Additional disclosure is also required about the credit quality indicators of loans by class at the end of the reporting period, the aging of past due loans, information about troubled debt restructurings, and significant purchases and sales of loans during the reporting period by class. For public companies, ASU 2010-20 requires certain disclosures as of the end of a reporting period effective for periods ending on or after December 15, 2010. Other required disclosures about activity that occurs during a reporting period are effective for periods beginning on or after December 15, 2010. The Corporation adopted the applicable required additional disclosures effective December 31, 2010 and the disclosure of activity during the three months ended March 31, 2011, and adoption of these additional disclosures did not have a material effect on its financial position or results of operations.

Receivables: In April 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-02 “Receivables (Topic 310) — A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring.” ASU 2011-02 clarifies whether loan modifications constitute troubled debt restructuring. In evaluating whether a restructuring constitutes a troubled debt restructuring, a creditor must separately conclude that both of the following exist: (a) the restructuring constitutes a concession; and (b) the debtor is experiencing financial difficulties. ASU 2011-02 is effective for the first interim and annual period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption. We are assessing the impact of ASU 2011-02 on our financial condition, results of operations, and disclosures.

B. Securities

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


	March 31, 2011
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
Government sponsored enterprises (GSE) - mortgage backed securities	$	54,092	$	1	$	(1,226	)	$	52,867
Other securities		250		—		—			250


Totals	$	54,342	$	1	$	(1,226	)	$	53,117


	December 31, 2010
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
Government sponsored enterprises (GSE) - mortgage backed securities	$	55,586	$	1	$	(1,026	)	$	54,561
Other securities		250		—		—			250


Totals	$	55,836	$	1	$	(1,026	)	$	54,811

The amortized cost and fair value of securities available for sale at March 31, 2011 by contractual maturity are shown below (in thousands):


	Amortized		Fair
	Cost		Value
Due in over ten years	$	250	$	250
GSE — mortgage backed securities		54,092		52,867


Totals	$	54,342	$	53,117

The entire portfolio has a net unrealized loss of $1,225,000 at March 31, 2011 compared to net unrealized loss of $1,025,000 at December 31, 2010.

Securities with unrealized losses at March 31, 2011 and December 31, 2010, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position are as follows:

B. Securities (con’t)


	March 31, 2011
	Less than one year					One year or more				Total
	Fair		Unrealized			Fair		Unrealized		Fair		Unrealized
Investment category	Value		Loss			Value		Loss		Value		Loss
GSE — mortgage backed securities	$	52,842	$	(1,226	)		—		—	$	52,842	$	(1,226	)

Total temporarily impaired	$	52,842	$	(1,226	)	$	—	$	—	$	52,842	$	(1,226	)


	December 31, 2010
	Less than one year					One year or more				Total
	Fair		Unrealized			Fair		Unrealized		Fair		Unrealized
Investment category	Value		Loss			Value		Loss		Value		Loss
GSE — mortgage backed securities	$	54,526	$	(1,026	)		—		—	$	54,526	$	(1,026	)

Total temporarily impaired	$	54,526	$	(1,026	)	$	—	$	—	$	54,526	$	(1,026	)

The unrealized losses on the Corporation’s investments at December 31, 2010 were caused by interest rate increases. Additionally, these securities are issued by an agency of the United States of America and are backed fully by the United States Government. Because the Corporation does not intend to sell the investments and it is not more likely than not the Corporation will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Corporation does not consider those investments to be other-than-temporarily impaired at March 31, 2011.

Sales of available for sale securities for the three months ended March 31, 2011 and 2010 are as follows (in thousands):


	For the three months ended
	3/31/2011		3/31/2010
Gross Gains	$	—	$	69
Gross Losses		—		—

C. Loans and Allowance for Loan Losses

Major segments of loans included in the loan portfolio are as follows (in thousands):


	3/31/11			12/31/10			3/31/10
Consumer loans	$	25,477		$	25,871		$	28,623
Commercial, financial and other		106,859			121,015			141,338
Construction and land development		52,402			55,126			78,777
Commercial real estate mortgages		495,919			495,501			521,701
Residential real estate mortgages		37,530			38,338			43,522


Total Loans		718,187			735,851			813,961

Allowance for loan losses		(27,971	)		(27,971	)		(30,288	)


Loans, net	$	690,216		$	707,880		$	783,673

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


	3/31/11		12/31/10		3/31/10
Troubled debt restructuring	$	48,499	$	48,527	$	31,737
Over 90 days past due and still accruing		236		—		1,127
Non-accrual loans		71,953		66,563		81,163

Total non-performing loans		120,688		115,090		114,027

Real estate owned		22,120		21,502		24,467
Other repossessed assets		—		—		—

Other non-performing assets		22,120		21,502		24,467

Total non-performing assets	$	142,808	$	136,592	$	138,494

The most significant proportion of the Bank’s non-performing loans continues to be in the commercial real estate mortgages segment of the Bank’s loan portfolio. These loans comprise 69% of loans and 48% of non-accrual loans at March 31, 2011.

C. Loans and Allowance for Loan Losses (con’t)

The collectability of all loans is monitored regularly by management. Interest income on mortgage and commercial loans is generally discontinued at the time the loan is 90 days delinquent unless the credit is well-secured and in process of collection. Consumer loans are typically charged off no later than 180 days past due. In all cases, loans are placed on non-accrual or charged-off at an earlier date if collection of principal or interest is considered doubtful. Once a loan has returned to performing status for a period of six months, it will be returned to accrual status. Delinquency status reports are reviewed by senior loan managers and individual loan officers on a weekly basis. The circumstances of these accounts are discussed and appropriate action to be taken is determined.

The following is a summary of non-accrual loans (in thousands):


	3/31/11		12/31/10		3/31/10
Consumer loans	$	2,179	$	1,533	$	924
Commercial, financial, & other		13,617		13,688		12,749
Land development loans — residential property		10,890		11,904		23,260
Land development loans — non- residential property		1,943		1,734		1,558
Commercial real estate construction — residential property		7,302		7,763		9,573
Commercial real estate construction — non- residential property		258		317		2,870
Commercial real estate mortgages		34,802		28,458		27,863
Residential real estate mortgages		962		1,166		2,366


Total non-accrual loans	$	71,953	$	66,563	$	81,163

The increase in non-accrual loans during the three months ended March 31, 2011 was primarily due to the downgrading of 24 loans to non-accrual status for $9,477,000 and partially offset by net charge-offs of $1,395,000 and the transfer of 5 loans to other real estate for $1,613,000. This increase was primarily due to the migration of previously identified classified loans. These loans have been identified as impaired loans and have been charged down to the value of the collateral or an appropriate reserve has been identified in the allowance for loan loss. Loans transferred to non-accrual status during 2011 in the amount of $9,348,000 were identified at December 31, 2010 as classified loans with reserves for losses established accordingly. As these loans were identified as classified loans with the appropriate risk allocation in the allowance for loan losses at December 31, 2010, the migration of these loans to non-accrual status did not have a significant impact on the allowance for loan losses.

An aging analysis of loans at March 31, 2011 and December 31, 2010 is listed below (in thousands):

Loans and Allowance for Loan Losses (con’t)

At March 31, 2011


					90 Days
	30 - 59		60 - 89		or More
	Days		Days		Past Due or				Total
	Past Due		Past Due		Non-Accrual		Current		Loans
Consumer loans	$	25	$	217	$	2,179	$	23,056	$	25,477
Commercial, financial and other		1,890		1,153		15,881		87,935		106,859
Land Development Residential		—		—		8,357		11,392		19,749
Land Development Non Residential		4,231		—		1,943		3,422		9,596
Commercial Construction — Residential		1,017		—		6,819		1,999		9,835
Commercial Construction — Non-Residential		—		—		258		12,964		13,222
Commercial real estate mortgages		2,840		6,278		35,790		451,011		495,919
Residential real estate mortgages		388		—		962		36,180		37,530


Total Loans	$	10,391	$	7,648	$	72,189	$	627,959	$	718,187

At December 31, 2010


					90 Days
	30 - 59		60 - 89		or More
	Days		Days		Past Due or				Total
	Past Due		Past Due		Non-Accrual		Current		Loans
Consumer loans	$	47	$	168	$	1,533	$	24,123	$	25,871
Commercial, financial and other		951		524		15,729		103,811		121,015
Land Development Residential		—		—		9,111		13,214		22,325
Land Development Non Residential		4,000		—		1,734		4,236		9,970
Commercial Construction — Residential		—		—		7,763		2,500		10,263
Commercial Construction — Non-Residential		—		—		317		12,251		12,568
Commercial real estate mortgages		4,478		8,134		29,210		453,679		495,501
Residential real estate mortgages		—		—		1,166		37,172		38,338


Total Loans	$	9,476	$	8,826	$	66,563	$	650,986	$	735,851

Impaired loans and non-performing loans are defined differently. Impaired loans are loans for which the collection of principal and interest according to the contractual terms of the agreement is not probable. Non-performing loans include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.

C. Loans and Allowance for Loan Losses (con’t)

A loan is considered impaired when, based on current information and events, it is probable that the Corporation will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Loan relationships that are rated substandard and are on non-accrual status are considered to be impaired. All impaired loans over $500,000 are individually evaluated. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed.

Impairment is measured on a loan-by-loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent. Impaired loans over $500,000 are evaluated at least quarterly and the impairment or shortfall is a component of the Corporation’s allowance for loan losses. The impairment of a loan is determined by assessing the underlying value of the collateral that supports a loan or the present value of expected future cash flows discounted at the loan’s effective interest rate.

Impaired loans consist of non-accrual loans and loans classified as troubled debt restructurings. Troubled debt restructurings are loans that have been restructured in some manner due to the financial need of the borrower. Interest is accrued on the outstanding balance of troubled debt restructurings.. Payments on non-accrual loans are recorded as principal payments by the Corporation. Payments on troubled debt restructurings are recorded as normal loan payments of principal and interest by the Corporation.

An analysis of impaired loans by loan type at March 31, 2011 and December 31, 2010 (in thousands) is listed below:

Loans and Allowance for Loan Losses (con’t)

Loans at March 31, 2011


							Average
	Unpaid						Investment		Interest
	Principal		Recorded		Specific		In Impaired		Income
	Balance		Investment		Allowance		Loans		Recognized
Without a specific valuation allowance
Consumer loans	$	2,532	$	2,179	$	—	$	1,856	$	—
Commercial, financial and other		19,255		13,703		—		15,088		20
Construction and land development		24,664		17,402		—		17,556		67
Commercial real estate mortgages		45,394		40,144		—		38,481		199
Residential real estate mortgages		1,027		962		—		1,064		—


Total	$	92,872	$	74,390	$	—	$	74,045	$	286


With a specific valuation allowance
Consumer loans	$	—	$	—	$	—	$	—	$	—
Commercial, financial and other		4,202		4,202		228		4,056		18
Construction and land development		21,473		20,259		6,064		19,278		72
Commercial real estate mortgages		20,713		21,601		6,035		21,114		57
Residential real estate mortgages		—		—		—		—		—


Total	$	46,388	$	46,062	$	12,327	$	44,448	$	147


Total
Consumer loans	$	2,532	$	2,179	$	—	$	1,856	$	—
Commercial, financial and other		23,457		17,905		228		19,144		38
Construction and land development		46,137		37,661		6,064		36,834		139
Commercial real estate mortgages		66,107		61,745		6,035		59,595		256
Residential real estate mortgages		1,027		962		—		1,064		—


Total Impaired Loans	$	139,260	$	120,452	$	12,327	$	118,493	$	433

Loans at December 31, 2010


							Average
	Unpaid						Investment		Interest
	Principal		Recorded		Specific		In Impaired		Income
	Balance		Investment		Allowance		Loans		Recognized
Without a specific valuation allowance
Consumer loans	$	1,886	$	1,533	$	—	$	1,102	$	—
Commercial, financial and other		22,412		16,472		—		17,827		125
Construction and land development		31,156		17,709		—		22,530		96
Commercial real estate mortgages		41,773		36,818		—		38,794		927
Residential real estate mortgages		1,323		1,166		—		2,181		—


Total	$	98,550	$	73,698	$	0	$	82,434	$	1,148


With a specific valuation allowance
Consumer loans	$	—	$	—	$	—	$	—	$	—
Commercial, financial and other		3,910		3,910		1,135		3,933		90
Construction and land development		18,364		18,296		5,280		10,976		240
Commercial real estate mortgages		22,174		20,628		4,310		17,545		497
Residential real estate mortgages		—		—		—		—		—


Total	$	44,448	$	42,834	$	10,725	$	32,454	$	827


Total
Consumer loans	$	1,886	$	1,533	$	—	$	1,102	$	—
Commercial, financial and other		26,322		20,382		1,135		21,760		215
Construction and land development		49,520		36,005		5,280		33,506		336
Commercial real estate mortgages		63,947		57,446		4,310		56,339		1,424
Residential real estate mortgages		1,323		1,166		—		2,181		—


Total Loans	$	142,998	$	116,532	$	10,725	$	114,888	$	1,975

C.		Loans and Allowance for Loan Losses (con’t)

		The Corporation utilizes a rating system to assign a risk rating to all loans in the loan portfolio. The rating system used consists of classification grading from one through nine which identifies the inherent risk associated with a loan. These risk ratings are assigned by the loan officer and subsequently reviewed by the First Vice President — Credit. Subsequently, each loan is regularly reviewed by the First Vice President — Credit. The frequency of this review is dependent on the current risk rating and the balance of the loan.

		Excellent Quality (Pass)

		Borrower may be a privately held company with a strong balance sheet, consistent earnings, and worthy of unsecured credit. Leverage and liquidity are average to slightly better than average within industry. History of profitable operations, but conditions exist that would suggest borrower’s earnings could temporarily decline due to market or economic conditions. Cash flow is adequate and profit margins are slightly above average within the industry.

		Good Quality (Pass)

		Subject to normal degree of risk. Cash flow adequate to service debt, but is susceptible to some deterioration due to seasonal or economic fluctuations. Balance sheet contains some leverage, and liquidity could be temporarily tight. There could be some asset concentration.

		Satisfactory Quality (Pass)

		Reasonable risk. Some unfavorable characteristics would be reliance on single product or major customer concentration, volatility of earnings or increasing leverage which is still within normal industry parameters.

		Acceptable Risk (Pass)

		More unpredictability in earnings and cash flow. Borrower may have experienced modest and presumably temporary losses (less than 10% of capital), however cash flow is still sufficient to meet debt service. Leverage and liquidity are below normal industry standards. Secondary source of repayment may be limited.

		Watch

		A Watch asset is not considered “rated” or “classified” for regulatory purpose, but is considered a criticized asset, which bears watching due to some modest deterioration in financial performance or external threats, such as lawsuit, environmental issue, or potential loss of a significant customer. The following points are characteristics which a Monitor asset may exhibit: financial condition has taken a negative turn and may be temporarily strained; borrower may have experienced recent losses from operations up to 20% of net worth, cash flow may be insufficient to service debt in the most recent six month period. This rating also applies to all other real estate loans performing at a level slightly under the parameters as originally underwritten.

C.		Loans and Allowance for Loan Losses (con’t)

		Special Mention

		A Special Mention asset has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan, or in the institution’s credit position at some future date. Special Mention assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification. The following are some of the attributes of a Special Mention credit: loans are currently protected, but are potentially weak due to negative trends in the balance sheet or income statement; there is a lack of effective control over the collateral or documentation deficiencies exists; there is a potential risk of payment default; management’s ability to cope with the current financial condition is questioned; collateral coverage is becoming strained but is still acceptable; operating losses may exceed 20% of capital. This rating applies to all other real estate loans performing at a level significantly under the level as originally underwritten.

		Substandard

		This grade includes “Substandard” loans in accordance with regulatory guidelines. Loans categorized in this grade possess a well defined credit weakness and the likelihood of repayment from the primary source is uncertain. Significant financial deterioration has occurred and very close attention is warranted to ensure the full repayment without loss. Collateral coverage may be marginal. All non-accrual loans will be rated “7” or worse.

		Doubtful

		This grade includes “Doubtful” loans in accordance with regulatory guidelines. Such loans have been placed on non-accrual status and may be heavily dependent upon collateral possessing a value that is difficult to determine or based upon some near-term event which lacks clear certainty. These loans have all of the weaknesses of those classified as Substandard however, based on existing conditions, these weaknesses make full collection of the principal balance highly improbable.

		Loss

		Assets classified as Loss are determined to be uncollectible based on current facts. Accordingly, they should be classified as “Loss” and promptly charged off.

		Loans segregated by risk category based on internally assigned risk ratings at March 31, 2011 and December 31, 2010 are listed below (in thousands):

At March 31, 2011


			Special						Total
	Pass		Mention		Substandard		Doubtful		Loans
Consumer loans	$	22,407	$	59	$	2,530	$	481	$	25,477
Commercial, financial and other		71,818		14,026		20,642		374		106,860
Land Development Residential		5,719		1,910		11,618		502		19,749
Land Development Non Residential		2,032		1,027		6,537		—		9,596
Commercial Construction — Residential		108		—		9,727		—		9,835
Commercial Construction — Non-Residential		996		—		12,226		—		13,222
Commercial real estate mortgages		335,090		47,316		112,689		823		495,918
Residential real estate mortgages		35,158		763		1,609		—		37,530


Total Loans	$	473,328	$	65,101	$	177,578	$	2,180	$	718,187

Loans and Allowance for Loan Losses (con’t)

At December 31, 2010


			Special						Total
	Pass		Mention		Substandard		Doubtful		Loans
Consumer loans	$	22,988	$	—	$	2,798	$	85	$	25,871
Commercial, financial and other		77,076		14,298		29,641		—		121,015
Land Development Residential		9,456		1,511		11,358		—		22,325
Land Development Non Residential		3,571		4,035		2,364		—		9,970
Commercial Construction — Residential		47		—		10,216		—		10,263
Commercial Construction — Non-Residential		281		—		12,287		—		12,568
Commercial real estate mortgages		338,194		56,410		100,897		—		495,501
Residential real estate mortgages		35,750		771		1,817		—		38,338


Total Loans	$	487,363	$	77,025	$	171,378	$	85	$	735,851

		The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to income. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Charge-offs are recommended by the First Vice President — Credit and approved by the Senior Vice President & Head of Lending or the President of the Corporation.

		The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

		Loans have various types and levels of risk. All loans have repayment risk. Real estate loans also have valuation risk, as the value of the underlying collateral can decline for various reasons. Commercial real estate loans have historically involved more risk than residential loans, because loan balances are greater and repayment is dependent upon the borrower’s operations. Other types of commercial loans are typically secured by other assets. Commercial real estate loans and other commercial loans typically have personal guarantees provided by the borrowers. Management addresses these various types and levels of risk by utilizing a stringent underwriting and loan approval process. Management has instituted a diligent loan monitoring process and formed a special assets department, which is responsible for managing most non-performing loans. The special assets department meets on a bi-weekly basis with the President , Senior Vice President & Head of Lending and the First Vice President-Credit to discuss loans in the special assets portfolios.

C.		Loans and Allowance for Loan Losses (con’t)

		The allowance consists of allocated and general components. The allocated component relates to loans that are classified as impaired. For those loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers nonclassified loans and is based on historical charge-off experience and expected loss given default derived from the Corporation’s internal risk rating process. Other adjustments may be made to the allowance for pools of loans after an assessment of internal or external influences on credit quality that are not fully reflected in the historical loss or risk rating data.

		Activity in the allowance for loan losses during the three months ended March 31, 2011 by loan type is further described below (in thousands):

For the three months ended March 31, 2011


				Commercial ,			Construction		Commercial		Residential
				Financial			and Land		Real Estate		Real Estate
	Consumer			& Other			Development		Mortgages		Mortgages			Total
Balance at January 1, 2011	$	1,115		$	6,571		$	7,870	$	12,102	$	313		$	27,971

Provision for loan losses		130			(523	)		972		891		(75	)		1,395

Charge-offs		—			136			534		795		99			1,564
Recoveries		8			11			140		10		—			169


Net Charge-offs		(8	)		125			394		785		99			1,395


Balance at March 31, 2011	$	1,253		$	5,923		$	8,448	$	12,208	$	139		$	27,971

C.		Loans and Allowance for Loan Losses (con’t)

		The Loan portfolio and allowance for loan losses segregated by evaluation methodology at March 31, 2011 and December 31, 2010 is further described below (in thousands):


	Allowance For Loan Losses Evaluated at March 31, 2011
			Commercial ,		Construction		Commercial		Residential
			Financial		and Land		Real Estate		Real Estate
	Consumer		& Other		Development		Mortgages		Mortgages		Total
Individually Evaluated For Impairment	$	—	$	228	$	6,064	$	6,035	$	—	$	12,327

Collectively Evaluated For Impairment		1,253		5,695		2,384		6,173		139		15,644


Allowance for loan losses	$	1,253	$	5,923	$	8,448	$	12,208	$	139	$	27,971


	Loans Evaluated at March 31, 2011
			Commercial ,		Construction		Commercial		Residential
			Financial		and Land		Real Estate		Real Estate
	Consumer		& Other		Development		Mortgages		Mortgages		Total
Individually Evaluated For Impairment	$	2,179	$	17,905	$	37,661	$	61,745	$	962	$	120,452

Collectively Evaluated For Impairment		23,298		88,954		18,842		430,073		36,568		597,735


Total loans	$	25,477	$	106,859	$	56,503	$	491,818	$	37,530	$	718,187


	Allowance For Loan Losses Evaluated at December 31, 2010
			Commercial ,		Construction		Commercial		Residential
			Financial		and Land		Real Estate		Real Estate
	Consumer		& Other		Development		Mortgages		Mortgages		Total
Individually Evaluated For Impairment	$	—	$	373	$	5,280	$	5,072	$	—	$	10,725

Collectively Evaluated For Impairment		1,136		6,292		2,036		7,438		344		17,246


Allowance for loan losses	$	1,136	$	6,665	$	7,316	$	12,510	$	344	$	27,971


	Loans Evaluated at December 31, 2010
			Commercial ,		Construction		Commercial		Residential
			Financial		and Land		Real Estate		Real Estate
	Consumer		& Other		Development		Mortgages		Mortgages		Total
Individually Evaluated For Impairment	$	1,533	$	20,382	$	36,005	$	57,446	$	1,166	$	116,532

Collectively Evaluated For Impairment		24,338		100,633		19,121		438,055		37,172		619,319


Total loans	$	25,871	$	121,015	$	55,126	$	495,501	$	38,338	$	735,851

D. Incentive Stock Plans

		Incentive stock awards have been granted to officers and employees under two Incentive Stock Plans. The first plan is the 1994 Stock Option Plan. Options to buy common stock have been granted to officers and employees under the 1994 Stock Option Plan, which provides for issue of up to 738,729 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.

		There was no activity in the shares or options of the plan during the three months ended March 31, 2011. For the options outstanding at March 31, 2011, the range of exercise prices was $7.69 to $14.65 per share with a weighted-average remaining contractual term of 1.3 years. At March 31, 2011, options for 242,991 shares were exercisable at weighted average exercise price of $10.25 per share. There was no intrinsic value at March 31, 2011.

		During 2005, the Corporation initiated the 2005 Long-Term Incentive Plan. Under this plan, up to 347,248 shares may be granted to officers and employees of the Bank. This plan provides that stock awards may take the form of any combination of options, restricted shares, restricted share units or performance awards.

		The administration of the plan, including the granting of awards and the nature of those awards is determined by the Corporation’s Compensation Committee. The Corporation’s Board of Directors approved grants of stock options and restricted stock in 2005, 2006 and 2008. The awards have a term of ten years and typically vest fully three years from the grant date. In order for vesting to occur with some grants, the Corporation must meet certain performance criteria over the vesting period. The expected compensation cost of the 2005 plan is being calculated assuming the Corporation’s attainment of “target” performance goals over the vesting period of the awards. The actual cost of these awards could range from zero to 100% of the currently recorded compensation cost, depending on the Corporation’s actual performance. The awards granted in 2005 and 2006 did have such performance criteria. The awards granted in 2008 did not have performance criteria.

		Stock Options Granted — Stock options were awarded to officers in 2005, 2006 and 2008. The incentive stock options were granted with exercise prices equal to market prices on the day of grant. At March 31, 2011, there were stock options outstanding for 258,865 shares with a weighted average exercise price of $4.17 per share.

		The Corporation recognized stock option compensation expense of $15,000 during the three months ended March 31, 2011 and 2010. Compensation cost of $98,000 and $36,000 is expected to be recognized during 2011 and 2012, respectively.

		Restricted Stock Grants — Restricted stock was awarded to officers in 2005, 2006 and 2008. The restricted stock is eligible to vest three years from grant date. Upon full vesting, restricted shares are transferred to common shares. At March 31, 2011, there were 39,765 shares of restricted stock outstanding.

D.		Incentive Stock Plans (con’t)

		The Corporation recognized restricted stock compensation expense of $66,000 and $16,000, respectively during the three months ended March 31, 2011, respectively. Compensation cost of $176,000 and $0 is expected to be recognized during 2011 and 2012, respectively.

E. Fair Value of Assets and Liabilities

		The Corporation has adopted fair value guidance which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements.

		Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

		A fair value hierarchy was also established which requires an entity to maximize the use of observable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

	Level 1 —		Quoted prices in active markets for identical assets or liabilities.

	Level 2 —		Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Observable inputs may include available credit information and bond terms and conditions of similar securities, market spreads, cash flow analysis and market concensus prepayment speeds.

			Level 2 securities include U.S. government sponsored enterprise mortgage-backed securities. Level 2 securities are valued by a third party pricing service commonly used in the banking industry utilizing observable inputs. The pricing provider utilizes evaluated pricing models that vary based on asset class. These models incorporate available market information including quoted prices of securities with similar characteristics and, because many fixed-income securities do not trade on a daily basis, apply available information through processes such as benchmark curves, benchmarking of like securities, sector grouping and matrix pricing. In addition, model processes, such as an option adjusted spread model is used to develop prepayment and interest rate scenarios for securities with prepayment features.

	Level 3 —		Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

E.		Fair Value of Assets and Liabilities ( con’t)

		Following is a description of the valuation methodologies used for instruments measured at fair value on a recurring basis and recognized in the accompanying balance sheets, as well as the general classification of such instruments pursuant to our valuation hierarchy.

		Securities available for sale

		Fair values of securities, available for sale are estimated by a third party using inputs that are observable or that can be corroborated by observable market data and, therefore, are classified within Level 2 of the valuation hierarchy.

		The following table presents the fair value measurements of the Corporation’s assets recognized in the accompanying balance sheet measured at fair value on a recurring basis and the level within the ASC 820 fair value hierarchy in which the fair value measurements fall at March 31, 2011 and December 31, 2010 (in thousands):

At 03/31/2011


					Significant
			Quoted Prices in		Other		Significant
			Active Markets for		Observable		Unobservable
	Fair		Identical Assets		Inputs		Inputs
	Value		(Level 1)		(Level 2)		(Level 3)
GSE — mortgage backed securities	$	52,867	$	—	$	52,867	$	—
Other securities		250		—		250		—


Total securities, available for sale	$	53,117	$	—	$	53,117	$	—

At 12/31/2010


					Significant
			Quoted Prices in		Other		Significant
			Active Markets for		Observable		Unobservable
	Fair		Identical Assets		Inputs		Inputs
	Value		(Level 1)		(Level 2)		(Level 3)
GSE — mortgage backed securities	$	54,561	$	—	$	54,561	$	—
Other securities		250		—		250		—


Total securities, available for sale	$	54,811	$	—	$	54,811	$	—

E.		Fair Value of Assets and Liabilities ( con’t)

		Impaired loans and other real estate owned

		Fair value adjustments for impaired and non-accrual loans typically occur when there is evidence of impairment. Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected. The measurement of loss associated with impaired loans can be based on either the observable market price of the loan or the fair value of the collateral. The Company measures fair value based on the value of the collateral securing the loans. Collateral may be in the form of real estate or personal property including equipment and inventory. The value of the collateral is determined based on internal estimates as well as third party appraisals or non-binding broker quotes. These measurements were classified as Level 3. The fair value of the Corporation’s other real estate owned is determined using Level 3 inputs, which include current and prior appraisals and estimated costs to sell.

		The following table presents the fair value measurements of the Corporation’s assets and liabilities recognized in the accompanying balance sheet measured at fair value on a non-recurring basis and the level within the fair value hierarchy in which the fair value measurements fall at March 31, 2011 and December 31, 2010 (in thousands):

At 03/31/2011


					Significant
			Quoted Prices in		Other		Significant
			Active Markets for		Observable		Unobservable
			Identical Assets		Inputs		Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)
Impaired loans (collateral dependent)	$	69,234	$	—	$	—	$	69,234
Other real estate	$	12,442	$	—	$	—	$	12,442

At 12/31/2010


					Significant
			Quoted Prices in		Other		Significant
			Active Markets for		Observable		Unobservable
			Identical Assets		Inputs		Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)
Impaired loans (collateral dependent)	$	66,977	$	—	$	—	$	66,977
Other real estate	$	10,003	$	—	$	—	$	10,003

E.		Fair Value of Assets and Liabilities ( con’t)

		The carrying amounts and estimated fair value of principal financial assets and liabilities were as follows (in thousands):


	At March 31, 2011				At December 31, 2010
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
Assets:
Cash and cash equivalents	$	103,310	$	103,310	$	93,775	$	93,775
Mortgage loans held for sale		749		761		353		356
Securities available for sale		53,117		53,117		54,836		54,811
Federal Home Loan Bank Stock		3,605		3,605		3,605		3,605
Loans		718,187		717,469		735,851		734,106
Accrued interest receivable		3,310		3,310		3,286		3,286

Liabilities:
Deposits		794,153		796,968		812,101		815,582
Federal Home Loan Bank advances		63,668		63,926		63,716		64,060
Subordinated debentures		10,000		5,005		10,000		4,718
Accrued interest payable		1,079		1,079		1,216		1,216

		Fair Value of Financial Instruments

		The following methods and assumptions were used by the Corporation in estimating its fair value disclosure for financial instruments:

		Cash and Cash Equivalents, Securities Sold Under Agreements to Repurchase, Interest-bearing Deposits and Federal Home Loan Bank Stock

		The carrying amount approximates fair value.

		Loans Held for Sale

		Fair value is based upon the quoted price for the sale of those loans.

E.		Fair Value of Assets and Liabilities ( con’t)

		Loans

		The fair value of loans is estimated by discounting the future cash flows using the market rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Loans with similar characteristics were aggregated for purposes of the calculations. The carrying amount of accrued interest approximates its fair value.

		Deposits

		Deposits include demand deposits, savings accounts, NOW accounts and certain money market deposits. The carrying amount approximates fair value. The fair value of fixed-maturity time deposits is estimated using a discounted cash flow calculation that applies the rates currently offered for deposits of similar remaining maturities.

		Interest Receivable and Interest Payable

		The carrying amount approximates fair value.

		Federal Home Loan Bank Advances

		Rates currently available to the Corporation for debt with similar terms and remaining maturities are used to estimate the fair value of existing debt. Fair value of long-term debt is based on quoted market prices or dealer quotes for the identical liability when traded as an asset in an active market. If a quoted market price is not available, an expected present value technique is used to estimate fair value.

		Subordinated Debentures

		Rates currently available to the Corporation for debt with similar terms and remaining maturities are used to estimate the fair value of existing debt.

		Commitments to Originate Loans, Forward Sale Commitments, Letters of Credit and Lines of Credit

		The fair value of commitments to originate loans is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of forward sale commitments is estimated based on current market prices for loans of similar terms and credit quality. The fair values of letters of credit and lines of credit are based on fees currently charged for similar agreements or on the estimated cost to terminate or otherwise settle the obligations with the counterparties at the reporting date. The fair value of such arrangements are not considered material to this presentation.

F. Capital and Operating Matters

		Stockholders’ equity at March 31, 2011 was $26,994,000 compared to $26,959,000 as of December 31, 2010, an increase of $35,000. The increase was primarily due to net income during the period.

		Based on the respective regulatory capital ratios, the Bank is considered to be undercapitalized at March 31, 2011 and December 31, 2010.

		The following is a presentation of the Corporation’s and Bank’s regulatory capital ratios (in thousands):


											Minimum
											To Be Well Capitalized
						Minimum for Capital					Under Prompt Corrective
	Actual					Adequacy Purposes					Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of March 31, 2011
Total capital (to risk weighted assets)
Consolidated		47,543		6.54	%		58,189		8.00	%		N/A		N/A
Bank		47,640		6.55	%		58,179		8.00	%		72,724		10.00	%
Tier 1 capital (to risk weighted assets)
Consolidated		38,219		5.25	%		29,095		4.00	%		N/A		N/A
Bank		38,316		5.27	%		29,090		4.00	%		43,634		6.00	%
Tier 1 capital (to average assets)
Consolidated		38,219		4.21	%		36,304		4.00	%		N/A		N/A
Bank		38,316		4.23	%		36,239		4.00	%		45,299		5.00	%

As of December 31, 2010
Total capital (to risk weighted assets)
Consolidated		47,591		6.34	%		60,012		8.00	%		N/A		N/A
Bank		46,169		6.17	%		59,902		8.00	%		74,877		10.00	%
Tier 1 capital (to risk weighted assets)
Consolidated		37,984		5.06	%		30,006		4.00	%		N/A		N/A
Bank		36,580		4.89	%		29,951		4.00	%		44,926		6.00	%
Tier 1 capital (to average assets)
Consolidated		37,984		4.09	%		37,135		4.00	%		N/A		N/A
Bank		36,580		3.95	%		37,077		4.00	%		46,346		5.00	%

F. Capital and Operating Matters (con't)

		The capital ratios disclosed in the middle column of the table above are minimum requirements. Due to our financial condition, the Bank entered into a formal enforcement action (“Consent Order”) with the Federal Deposit Insurance Corporation (“FDIC”) and the Office of Financial and Insurance Regulation for the State of Michigan (“OFIR”) which conveys specific actions needed to address certain findings from their examination and to address our current financial condition. The Consent Order includes a capital directive, which requires the Bank to have and maintain its level of tier 1 capital as a percentage of total assets (capital ratio) at a minimum of 9% and its level of qualifying total capital as a percentage of risk-weighted assets (total risk-based capital ratio) at a minimum of 12%. These ratios are in excess of the statutory minimums to be well-capitalized.

		Applicable federal prompt corrective action regulations provide five classifications, including well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. Based on its regulatory capital ratios, the Bank is undercapitalized at March 31, 2011. Undercapitalized institutions are subject to close monitoring by their federal bank regulator, restrictions on asset growth and expansion, and other significantly greater regulatory restrictions than apply to well-capitalized or adequately capitalized institutions.

		The Corporation needs to raise sufficient capital to be in compliance with the Consent Order. Management is pursuing various sources of capital and estimates the need to raise approximately $40 million to be in compliance with its Consent Order with the FDIC and OFIR. Given the current economic environment, there can be no assurance the Corporation will be able to raise the estimated capital needed. Additionally, if real estate values in the Corporation’s market area continue to decline, this will negatively impact the loan portfolio and values of other real estate owned. Additional declines in real estate values would result in the need for additional provision expense resulting in increased losses and further reducing the Corporation’s and the Bank’s capital.

		Failure to meet minimum capital requirements can initiate certain mandatory, and possibly discretionary, action by the regulators that, if undertaken, could have a direct material effect on the Corporation’s financial statements and raise substantial doubt about the Corporation’s ability to continue as a going concern.

G. Consent Order and Federal Reserve Bank Agreement

		Consent Order

		Due to our financial condition, the Federal Deposit Insurance Corporation (“FDIC”) and the Office of Financial and Insurance Regulation for the State of Michigan (“OFIR”) required that our Board of Directors sign a formal enforcement action (“Consent Order”) with the FDIC and OFIR which conveys specific actions needed to address certain findings from their examination and to address our current financial condition. We entered into the Consent Order on February 12, 2010, which contains a list of requirements that are to be met by specific dates. Certain requirements are listed below:

G. Consent Order and Federal Reserve Bank Agreement (con't)

•

Completion of a senior management study by an independent consultant

	•		Plans for the reduction of delinquencies and classified assets

	•		Plans for lending and collection policies

	•		Plans for the reduction of loan concentrations

	•		The revision and implementation of a comprehensive strategic plan

	•		The revision of its Liquidity Plan and the submission of weekly liquidity reports to the FDIC and OFIR

		The Consent Order also includes a capital directive, which requires the Bank to have and maintain its level of tier 1 capital as a percentage of total assets (capital ratio) at a minimum of 9% and its level of qualifying total capital as a percentage of risk-weighted assets (total risk-based capital ratio) at a minimum of 12%. These ratios are in excess of the statutory minimums to be well-capitalized. At March 31, 2011, the Bank’s total risk-based capital ratio was 6.36%. Additionally, the Bank is prohibited from declaring or paying any cash dividends without prior written consent of the FDIC.

		The Bank submitted a Capital Restoration Plan (“CRP”) to the FDIC and OFIR on December 15, 2009, due to our undercapitalized status based on our September 30, 2009 regulatory report of condition and income. This CRP was rejected because capital has not been successfully raised within the 120 days of the issuance of the consent order. An amended CRP was submitted on May 24, 2010. This CRP was also rejected because capital has not been successfully raised. The CRP addresses, among other things, the steps management will take to cause our capital levels to return to the minimum level to be adequately capitalized.

		The Bank is currently undercapitalized. Failure to meet the minimum ratios set forth in the Consent Order could result in regulators taking additional enforcement action against us. With the exception of raising additional capital, management believes that it has met all of the provisions of the consent order.

		Federal Reserve Board Agreement

		Due to our financial condition, the Federal Reserve Bank of Chicago (“FRB”) required that our Board of Directors sign a formal enforcement action (“Consent Order”) with the FRB which conveys specific actions needed to address certain findings from their examination and to address our current financial condition. We entered into the Written Order on June 15, 2010, which contains certain requirements that are to be met by specific dates, including the submission of a capital plan, the submission of annual cash flow projections and the submission of quarterly update reports.

		With the exception of raising additional capital, management believes that it has met all of the provisions of the written order.


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

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

		Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements (within the meaning of the Private Securities Litigation Reform Act of 1995) that are based on current expectations. 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. Actual results and outcomes may materially differ from what is expressed in 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; actions by bank regulators; availability of capital; changes in local real estate values; changes in the national and local economy; and other factors, including risk factors disclosed in this report, the Corporation’s 2010 Annual Report on Form 10-K, or disclosed from time to time in other filings made by the Corporation with the Securities and Exchange Commission. These are representative of the Future Factors and could cause a difference between an ultimate actual outcome and a preceding forward-looking statement.

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 company 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”), the holding company for Fidelity Bank, a commercial bank with seven offices in Oakland County, Michigan. The acquisition has significantly expanded the Bank’s presence in Oakland County, Michigan. 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

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

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, Michigan 48176

October 2004	250 West Eisenhower Parkway	Full service retail branch with ATM
	Ann Arbor, Michigan 48103	Regional lending center

December 2004	1360 Porter Street	Loan production office
	Dearborn, Michigan 48123	Regional lending center

January 2007	1040 E. Maple	Full service retail branch with ATM
	Birmingham, Michigan 48009	Regional lending center

January 2007	3681 W. Maple	Full service retail branch with ATM
	Bloomfield Township, Michigan 48301

January 2007	30700 Telegraph	Full service retail branch with ATM
	Bingham Farms, Michigan 48025

January 2007	20000 Twelve Mile Road	Full service retail branch with ATM
	Southfield, Michigan 48076

January 2007	200 Galleria Officenter	Full service retail branch with ATM
	Southfield, MI 48076

April 2007	7755 23 Mile Road	Full service retail branch with ATM
	Shelby Township, Michigan 48075

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 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 Corporation recorded net income of $154,000 during the three months ended March 31, 2011, compared to a net income of $1,128,000 during the same period during 2010. The net income was primarily the result of net interest income, partially offset by costs related to non-performing assets, such as the provision for loan losses and write-downs to real estate owned.

The Corporation reported provision for loan losses of $1,395,000 for the three month period ended March 31, 2011, compared to $100,000 for the same period in 2010, an increase of $1,295,000. The provision for loan losses were primarily due to net charge-offs during the three month ended March 31, 2011. Net charge-offs during the first quarter of 2011 amounted to $1,395,000. The charge-offs recorded during the first quarter of 2011 had allocations of $396,000 in the allowance for loan loss as of December 31, 2010. The difference between the charge-offs recorded during the three months ended March 31, 2011 and the allocation in the allowance for loan losses at December 31, 2010 was primarily due to full charge-offs taken on loans which are not specifically analyzed because the outstanding balance of those loans were less than $500,000. These loans were assigned an allocation based on historical charge-offs. The Corporation’s policy is to specifically analyze all impaired loans with a balance over $500,000. The Corporation also reported write-downs on real estate of $326,000 for the three months ended March 31, 2011 compared to $656,000 for the same period in 2010, a decrease of $330,000 or 50%.

As a result of the loss recorded during 2009, the capitalization status of the Bank declined from “well capitalized” to “undercapitalized.” As a result of the decline in the Bank’s capitalization level, the Bank is limited in its utilization of brokered deposits. The Bank is also restricted in the setting of deposit interest rates. Additionally, there are limitations in the borrowing terms and capacity with the Federal Reserve Bank. The Bank submitted a Capital Restoration Plan (“CRP”) to the FDIC and OFIR on December 15, 2009, due to our undercapitalized status based on our September 30, 2009 regulatory report of condition and income. An amended CRP was submitted to the FDIC and OFIR on May 18, 2010. This CRP was rejected because capital has not been successfully raised within the 120 days of the issuance of the consent order. An amended CRP was submitted on May 24, 2010. This CRP was also rejected because capital has not been successfully raised. The CRP addresses, among other things, the steps management will take to cause our capital levels to return to the minimum level to be adequately capitalized.

Due to our financial condition, the Federal Reserve Bank of Chicago (“FRB”) required that our Board of Directors sign a formal enforcement action (“Consent Order”) with the FRB which conveys specific actions needed to address certain findings from their examination and to address our current financial condition. We entered into the Written Order on June 15, 2010, which contains certain requirements that are to be met by specific dates, including the submission of a capital plan, the submission of annual cash flow projections and the submission of quarterly update reports.

Management continues to supplement its Special Assets Department, which is responsible for the management of most non-performing loans and the liquidation of real estate owned. During 2011, the Bank will continue to focus on the reduction of non-performing assets. The Special Assets Department was created in 2008 to evaluate and manage the special assets portfolio effectively and to reduce the amount of non-performing assets. In 2009 and 2010, additional resources were provided to this department by adding a Special Assets Manager in 2009 and additional loan officer in 2009 and 2010 in this department. The reduction of non-performing assets is a primary objective of management and is critical to the future success of the Corporation.

Net Interest Income

2011 Compared to 2010. As noted on the chart on the following page, net interest income for the three month period ended March 31, 2011 was $8,569,000, compared to $8,055,000 for the same period in 2010, an increase of $514,000 or 6% for the period. This increase was caused primarily by the decline in the cost of liabilities. Similarly, the increase in the Corporation’s net interest spread and net interest margin was primarily due to the decline in the cost on interest bearing liabilities. The Corporation’s interest rate margin was 3.96% for the three month period ended March 31, 2011 compared to 3.47% for the same period in 2010. The Corporation’s interest rate spread was 3.84% for the three month period ended March 31, 2011 compared to 3.27% for the same period in 2010.

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 March 31, 2011							Three months ended March 31, 2010
	Average				Average			Average				Average
(In thousands)	Balance		Interest		Rate			Balance		Interest		Rate
Assets
Interest bearing deposits with banks	$	93,261	$	136		0.59	%	$	65,286	$	37		0.23	%
Federal funds sold		55		1		7.37	%		119		1		3.41	%
Securities, available for sale		54,131		442		3.31	%		49,835		168		1.37	%
Loans		729,132		10,369		5.77	%		826,719		11,778		5.78	%

Sub-total earning assets		876,579		10,948		5.07	%		941,959		11,984		5.16	%
Other assets		31,030							31,949


Total assets	$	907,609						$	973,908


Liabilities and stockholders’ equity
Interest bearing deposits	$	712,596	$	2,119		1.21	%	$	769,744	$	3,543		1.87	%
Other borrowings		73,692		260		1.43	%		73,828		386		2.12	%

Sub-total interest bearing liabilities		786,288		2,379		1.23	%		843,572		3,929		1.89	%
Non-interest bearing deposits		90,050							84,327
Other liabilities		2,993							2,442
Stockholders’ equity		28,278							43,567


Total liabilities and stockholders’ equity	$	907,609						$	973,908


Net interest income			$	8,569						$	8,055


Net interest rate spread						3.84	%						3.27	%


Net interest margin on earning assets						3.96	%						3.47	%

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.


	2011/2010
	Change in Interest Due to:
	Average			Average			Net
(In thousands)	Balance			Rate			Change
Assets
Interest bearing deposits with banks	$	40		$	59		$	99
Federal funds sold		(1	)		1			—
Investment securities, available for sale		33			241			274
Loans		(1,388	)		(21	)		(1,409	)

Total earning assets		($1,316	)	$	280			($1,036	)


Liabilities
Interest bearing deposits		($159	)		($1,265	)		($1,424	)
Other borrowings		1			(127	)		(126	)

Total interest bearing liabilities		($159	)		($1,391	)		($1,550	)


Net interest income							$	514


Net interest rate spread								0.57	%


Net interest margin on earning assets								0.49	%

Provision for Loan Losses

2011 Compared to 2010. The provision for loan losses was $1,395,000 for the three month period ended March 31, 2011, compared to $100,000 for the same period in 2010, an increase of $1,295,000 or 1295% for the period. The provision for loan losses were primarily due to net charge-offs during the period, which amounted to $1,395,000 for the period and was substantiated by management’s internal analysis of the adequacy of the allowance for loan losses.

Non-accrual loans were $71,953,000 at March 31, 2011 compared to $66,563,000 at December 31, 2010, an increase of $5,390,000 during the three months ended March 31, 2011. This increase was due to the migration of primarily previously identified classified loans. These loans have been identified as impaired loans and have been charged down to the value of the collateral or an appropriate reserve has been identified in the allowance for loan loss. Of this increase, all but approximately $1,183,000 were identified at December 31, 2010 as classified loans with reserves for losses established accordingly.

The decline in the economic environment in Southeastern Michigan during 2009 and 2010 has negatively impacted many or the Bank’s commercial borrowers. This decline in economic conditions is heavily impacted by conditions and events that have recently impacted the automotive industry, including the bankruptcy of two major automotive manufacturers and resulting shut down of production and layoffs of employees. These two automotive manufacturers were reorganized in 2009. Subsequently, the domestic automotive manufacturing industry and the economic environment in Southeastern Michigan began to show signs of improvement during the second half of 2010. However, this improvement in the economic environment in Southeastern Michigan has not yet led to an improvement in the level of delinquent or non-performing loans in the Bank’s loan portfolio or to an increase in the underlying collateral value of our loan portfolio or holdings of other real estate. Management has recognized this trend in our analysis of the allowance for loan losses at March 31, 2011.

The adequacy of the allowance 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)

2011 Compared to 2010. Non-interest income was $75,000 for the three month period ended March 31, 2011 compared to a non-interest loss of ($59,000) for the same period in 2010. The increase in non-interest income was primarily due to the decline in the amount of write-downs on other real estate during 2011. During the three months ended March 31, 2011, the Corporation recorded write-downs on real estate in the amount of $326,000 compared to $656,000 during the same period in 2010.

When transactions related to other real estate and securities are excluded, non-interest income for the three month period ended March 31, 2011 amounted to $477,000 compared to $539,000 during the same period in 2010, a decrease of $62,000 or 11% for the period. This decrease is primarily caused by the decrease in the service charges on deposit accounts and the gain on the sale of loans during the period in 2011.

Non-interest Expense

2011 Compared to 2010. Non-interest expense was $7,095,000 for the three month period ended March 31, 2011, compared to $6,768,000 for the same period in 2010, an increase of $327,000 or 5% during the period. The increase was primarily due to the increase in defaulted loan expense and insurance expense during the period.

Salaries and employee benefits amounted to $3,190,000 for the three month period ended March 31, 2011, compared to $3,119,000 for the same period in 2010, an increase of $71,000 or 2% for the period. As of March 31, 2011, the number of full time equivalent employees was 190 compared to 195 as of March 31, 2010.

Income Tax Provision

2011 Compared to 2010. Income tax expense was $0 for the three month periods ended March 31, 2011 and 2010. Management recorded a valuation allowance on the Corporation’s deferred tax asset during 2009. This valuation allowance amounted to $30,428,000 at March 31, 2011. Until this valuation allowance is retired, the Corporation will not record any income tax expense or benefit.

Comparison of Financial Condition at March 31, 2011 and December 31, 2010

Assets. Total assets at March 31, 2011 were $896,994,000 compared to $915,684,000 at December 31, 2010, a decrease of $18,690,000 or 2%. The decrease was primarily due to the decrease in loans.

Interest bearing deposits with banks. Total interest bearing deposits with banks at March 31, 2011 were $95,801,000 compared to $87,075,000 at December 31, 2010, an increase of $8,726,000 or 10%. Interest bearing deposits with banks consists primarily of overnight deposits with the Federal Reserve Bank, business accounts with other correspondents banks and time deposits from other banks. These time deposits are fully insured and mature in less than thirty months.

Mortgage Loans Held for Sale. Total mortgage loans held for sale at March 31, 2011 were $749,000 compared to $353,000 at December 31, 2010, an increase of $396,000 or 112%. This increase was a result of the increase in the level of residential real estate mortgage loans waiting to be purchased by mortgage correspondents.

Securities — Available for Sale. Total securities, available for sale, at March 31, 2011 were $53,117,000 compared to $54,811,000 at December 31, 2010, a decrease of $1,694,000 or 3%. The decrease is primarily due to principal payments received on mortgage backed securities.

Please refer to Note B of the Notes to Condensed Consolidated Financial Statements for the amortized cost and estimated market value of securities, available for sale. The entire portfolio has a net unrealized loss of $1,225,000 at March 31, 2011. The unrealized loss is reflected by an adjustment to stockholders’ equity.

Federal Home Loan Bank Stock. Federal Home Loan Bank stock was valued at $3,605,000 at March 31, 2011 and December 31, 2010.

Loans. Total loans at March 31, 2011 were $718,187,000 compared to $735,851,000 at December 31, 2010, a decrease of $17,664,000 or 2%. The decrease was primarily due to net charge-offs of $1,395,000, the transfer of loans in the amount of $1,613,000 to other real estate and normal loan amortization during the period. Management expects loan balances to continue to decline during 2011. Major categories of loans included in the loan portfolio are as follows (in thousands):


	3/31/11			12/31/10			3/31/10
Consumer loans	$	25,477		$	25,871		$	28,623
Commercial, financial, & other		106,859			121,015			141,338
Land development loans — residential property		19,749			21,975			36,089
Land development loans — non-residential property		9,596			9,970			9,711
Commercial real estate construction — residential property		9,835			10,613			12,164
Commercial real estate construction — non-residential property		13,222			12,568			20,813
Commercial real estate mortgages		495,919			495,501			521,701
Residential real estate mortgages		37,530			38,338			43,522


		718,187			735,851			813,961
Allowance for loan losses		(27,971	)		(27,971	)		(30,288	)


	$	690,216		$	707,880		$	783,673

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


	3/31/11		12/31/10		3/31/10
Troubled debt restructuring	$	48,499	$	48,527	$	31,737
Over 90 days past due and still accruing		236		—		1,127
Non-accrual loans		71,953		66,563		81,163

Total non-performing loans		120,688		115,090		114,027

Real estate owned		22,120		21,502		24,467
Other repossessed assets		—		—		—

Other non-performing assets		22,120		21,502		24,467

Total non-performing assets	$	142,808	$	136,592	$	138,494

The increase in non-performing loans was largely due to the increase in non-accrual loans, which amount to $71,953,000 and $66,563,000 at March 31, 2011 and December 31, 2010, respectively. The distribution of non-accrual loans by loan type (in thousands) is as follows:


	Number of
	Loans		Balance
Consumer loans		23	$	2,179
Commercial, financial, & other		44		13,617
Land development loans — residential property		13		10,890
Land development loans — non-residential property		3		1,943
Commercial real estate construction — residential property		7		7,302
Commercial real estate construction — non-residential property		1		258
Commercial real estate mortgages		62		34,802
Residential real estate mortgages		13		962


Total non-accrual loans		166	$	71,953

The increase in non-accrual loans during the period was primarily due to the downgrading of 24 loans to non-accrual status for $9,477,000 and partially offset by net charge-offs of $1,395,000 and the transfer of 5 loans to other real estate for $1,613,000. This increase was primarily due to the migration of previously identified classified loans. These loans have been identified as impaired loans and have been charged down to the value of the collateral or an appropriate reserve has been identified in the allowance for loan loss. Loans transferred to non-accrual status during 2011 in the amount of $9,348,000 were identified at December 31, 2010 as classified loans with reserves for losses established accordingly. As these loans were identified as classified loans with the appropriate risk allocation in the allowance for loan losses at December 31, 2010, the migration of these loans to non-accrual status did not have a significant impact on the allowance for loan losses.

A summary of the loans transferred to non-accrual status during the three months ended March 31, 2011 is listed below (balances, in thousands):


	Number of
	Loans		Balance
Consumer loans		5	$	656
Commercial, financial, & other		6		687
Land development loans — residential property		2		455
Land development loans — non residential property		1		210
Commercial real estate mortgages		8		7,353
Residential real estate mortgages		2		116


Total non-accrual loans		24	$	9,477

Loans qualifying as troubled debt restructuring amounted to $48,499,000 and $48,526,000 at March 31, 2011 and December 31, 2010, respectively. These loans qualified as troubled debt restructuring primarily due to the temporary change in payment type from principal and interest to interest only or the lengthening the amortization period of certain loans. Loans categorized as troubled debt restructuring at March 31, 2011 are in compliance with their modified terms. The specific allowance of loans categorized as troubled debt restructuring was $6,023,000 and $6,310,000 at March 31, 2011 and December 31, 2010, respectively.

The most significant proportion of the Bank’s non-performing loans continues to be in the land development and commercial real estate construction segments of the Bank’s loan portfolio. These loans comprise 8% of loans and 28% of non-accrual loans at March 31, 2011. Management has implemented a strategy to decrease the amount of loans in these segments. These loans have decreased 5% during the first three months of 2011, while the loan portfolio has declined by 2% during the same period.

Management has identified substandard loans over $500,000. These loans are individually discussed by management and strategies are developed and implemented to manage these loans most effectively. Additionally, these loans have been evaluated under ASC 310-40 and appropriate reserve has been set up in the allowance for loan losses.

Allowance for Loan Losses. The allowance for loan losses was $29,971,000 at March 31, 2011 and December 31, 2010. The percentage of allowance for loan loss to loans was 3.89%, 3.80% and 3.72 at March 31, 2011, December 31, 2010 and March 31, 2010, respectively. The Corporation recorded net charge-offs of $1,395,000 during the three months ended March 31, 2011. The loans charged off during the three months ended March 31, 2011 has allocation in the allowance for loan losses at December 31, 2010 amounting to $396,000.

Management has recognized this trend in our analysis of the allowance for loan losses at March 31, 2011. The allowance for loan losses was based upon management’s assessment of relevant factors, including loan growth, types and amounts of non-performing loans, historical and anticipated loss experience on such types of loans, and current economic conditions. If collateral values continue to decline, additions to the allowance for loan losses will be required and will have an adverse effect on the Corporation’s earnings through increases to the provision for loan losses.

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


	Three Months			Year			Three Months
	Ended			Ended			Ended
	03/31/11			12/31/10			03/31/10
Balance, beginning of year	$	27,971		$	35,125		$	35,125

Charge-offs:
Consumer loans		—			1,019			342
Commercial, financial & other		136			6,385			1,521
Land development loans — residential property		157			1,887			1,292
Land development loans — non-residential property		—			36			229
Commercial real estate construction — residential property		319			10,046			906
Commercial real estate construction — non-residential property		58			300			36
Commercial real estate mortgages		795			4,455			558
Residential real estate mortgages		99			276			109
Recoveries:
Consumer loans		8			203			23
Commercial, financial & other		11			330			15
Land development loans — residential property		89			43			9
Land development loans — non-residential property		—			—			—
Commercial real estate construction — residential property		51			1			1
Commercial real estate construction — non-residential property		—			—			—
Commercial real estate mortgages		10			622			8
Residential real estate mortgages		—			73			—


Net charge-offs (recoveries)		1,395			23,132			4,937

Provision for loan losses		1,395			15,978			100


Balance, end of period	$	27,971		$	27,971		$	30,288


Allowance to total loans		3.89	%		3.80	%		3.72	%


Allowance to nonperforming assets		23.18	%		24.30	%		26.56	%


Net charge-offs to average loans		0.19	%		2.94	%		0.60	%

Premises and Equipment. Bank premises and equipment at March 31, 2011 were $18,969,000 compared to $19,195,000 at December 31, 2010, a decrease of $226,000 or 1%. The decrease is primarily due to depreciation during the period.

Other Real Estate. Other real estate at March 31, 2011 was $22,120,000 compared to $21,502,000 at December 31, 2010, an increase of $618,000 or 3%. The distribution of other real estate by property type is listed below (in thousands):


	Number of
Property Type	Properties		Amount
Single Family Homes		21	$	1,539
Multi-Family		2		550
Condominium		21		1,341
Vacant Land		25		11,187
Commercial		10		3,490
Office/Retail		7		4,013


Total		86	$	22,120

Other real estate is comprised of real estate owned of $19,188,000 and real estate in redemption status of $2,933,000. Thirteen properties with a book value of $2,055,000 are currently generating rental income.

Accrued Interest Receivable. Accrued interest receivable at March 31, 2011 was $3,310,000 compared to $3,286,000 at December 31, 2010, an increase of $24,000 or 1%. The increase was primarily due to the increase in the accrued interest receivable on loans.

Other Assets. Other assets at March 31, 2011 were $1,598,000 compared to $11,277,000 at December 31, 2010, a decrease of $9,679,000 or 86%. The decrease was primarily due to the receipt of income tax refunds for 2004 through 2007 in the amount of $7,248,000.

Deposits. Total deposits at March 31, 2011 were $794,153,000 compared to $812,101,000 at December 31, 2010, a decrease of $17,948,000 or 2%. The following is a summary of the distribution of deposits (in thousands):


	03/31/11		12/31/10		03/31/10
Non-interest bearing:
Demand	$	95,075	$	88,267	$	86,407


Interest bearing:
Checking	$	71,853	$	73,107	$	79,566
Money market		56,274		53,499		57,864
Savings		43,101		41,214		44,992
Time, under $100,000		277,615		291,478		296,370
Time, $100,000 and over		250,235		264,536		286,818

		699,078		723,834		765,610


Total deposits	$	794,153	$	812,101	$	852,017

The decrease in deposits was primarily due to the decrease in brokered time deposits during a period of decreasing interest rates and the accelerated liquidation of a wholesale money market deposit program by management. Management continues to implement a strategy to change the mix of the deposit portfolio by limiting its exposure to wholesale deposits and focusing on retail deposits.

The Bank has implemented a strategy to utilize retail deposits as the primary funding for the Bank’s growth. Public funds and secured borrowings are also utilized as funding sources. The mix of these sources is determined by the Bank’s Asset and Liability Committee.

Public funds consist of interest checking and time deposits of local governmental units. They are the result of strong relationships between the Bank and the communities in the Bank’s marketing area.

Brokered deposits are included in the Time, $100,000 and over category. Brokered deposits were $0, $0 and $8,767,000 at March 31, 2011, December 31, 2010 and March 31, 2010, respectively.

The following is a summary of the distribution of municipal deposits (in thousands):


	03/31/11		12/31/10		03/31/10
Interest bearing checking	$	2,795	$	2,940	$	2,485
Time, $100,000 and over		3,496		3,546		4,368


Total municipal deposits	$	6,291	$	6,486	$	6,853

Federal Home Loan Bank Advances. Federal Home Loan Bank advances were $63,668,000 at March 31, 2011 compared to $63,716,000 at December 31, 2010, a decrease of $48,000. The decrease was due to the scheduled partial repayment of a Federal Home Loan Bank advance.

Accrued Interest Payable. Accrued interest payable at March 31, 2011 was $1,079,000 compared to $1,056,000 at December 31, 2010, an increase of $23,000 or 2%. The increase was primarily due to the timing of deposit maturies.

Other Liabilities. Other liabilities at March 31, 2011 were $1,100,000 compared to $1,852,000 at December 31, 2010, a decrease of $752,000 or 41%. The decrease was primarily due to the decrease in accrued liabilities during the period.

Subordinated Debentures. Subordinated debentures were $10,000,000 at March 31, 2011 and December 31, 2010. On December 19, 2002, the Corporation issued $10,000,000 of floating rate obligated mandatory redeemable securities through a special purpose entity as part of a pooled offering. The securities have a term of thirty years. The Corporation may redeem the securities after five years at face value. They are considered to be Tier 1 capital for regulatory capital purposes. Debt issue costs of $300,000 have been entirely amortized. During the third quarter of 2009, the Corporation elected to defer regularly scheduled quarterly interest payments on the Corporation’s subordinated debentures. The terms of the subordinated debentures allow for the deferral of regularly scheduled quarterly interest payments for up to twenty consecutive quarters.

Capital

Stockholders’ equity at March 31, 2011 was $26,994,000 compared to $26,959,000 as of December 31, 2010, an increase of $35,000. The increase was due to net income during the period.

The Corporation has experienced large net losses during 2008, 2009 and 2010 due to the continued decline in economic conditions in Southeastern Michigan. The recent bankruptcy of two major automotive manufacturers and resulting shut down of production and layoffs of employees have negatively affected the operating results even though the Corporation does not have any direct exposure to the automotive industry. Additionally, economic conditions have continued to erode the value of residential real estate and commercial real estate in the Bank’s market area causing write-downs in the real estate owned portfolio further contributing to net losses.

The regulatory capital ratios of the Corporation’s and the Bank are presented in Note F. Based on the respective regulatory capital ratios, the Bank is considered to be undercapitalized at March 31, 2011 and December 31, 2010. The decline in the Bank’s regulatory capital position has been caused primarily by the losses sustained by the Bank.

The capital ratios disclosed in the middle column of the table in Note F are minimum requirements. Higher capital ratios may be required by federal and state bank regulators if warranted by the particular circumstances or risk profiles of specific institutions.

Applicable federal prompt corrective action regulations provide five classifications, including well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. Based on its regulatory capital ratios at March 31, 2011, the Bank is undercapitalized. Undercapitalized institutions are subject to close monitoring by their federal bank regulator, restrictions on asset growth and expansion, and other significantly greater regulatory restrictions than apply to well-capitalized or adequately capitalized institutions.

Without the prior approval of the FDIC, the Bank is prohibited from paying any dividend, or making any other capital distribution to, the Corporation. The Bank is also forbidden to pay any management fee to the Corporation. These restrictions may materially adversely affect the cash flow of the Corporation.

Any proposed addition of any individual to the board of directors of the Corporation or the Bank, or the proposed employment of any individual as a senior executive officer of either, is subject to 30 days’ prior written notice to, and the absence of disapproval by, the FDIC. Moreover, an application to, and approval by, the FDIC will be required before the Bank may (i) enter into any agreement with any current or former director, officer, employee, or shareholder of the Bank or the Corporation (or any other current or former institution affiliated party of either) for a golden parachute payment or excess nondiscriminatory severance pay plan or arrangement (within the meaning of applicable FDIC regulations), or (ii) make any golden parachute payments or excess nondiscriminatory severance pay plan payments to any such persons.

In addition, unless consistent with an approved capital restoration plan and accompanied by a proportionate improvement in its capital ratios which will allow it to become adequately capitalized in a reasonable time, the Bank may not permit any increase, from quarter to quarter, in its average total assets. Further, unless the FDIC has approved its capital restoration plan, the Bank is implementing that plan, and the FDIC finds the proposed action is consistent with the plan, the Bank may not, directly or indirectly, acquire any company, depository institution or additional branch office, or engage in any new line of business.

The Bank is also prohibited from accepting funds obtained, directly or indirectly, by or through any deposit broker. Further, the Bank may not accept employee benefit plan deposits.

The Corporation needs to raise sufficient capital during 2011 to return the Bank to well-capitalized status. Management is pursuing various sources of capital and estimates the need to raise approximately $40 million in capital to be in compliance with its Consent Order with the FDIC and OFIR. Given the current economic environment, there can be no assurance the Corporation will be able to raise the estimated capital needed.

PART I — FINANCIAL INFORMATION

ITEM 3. — QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Sensitivity Analysis. The Corporation has sought to manage its exposure to changes in interest rates by matching 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.

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 many factors as banking interest rates move. While the interest rate sensitivity gap is a useful measurement and contributes toward effective asset and liability management, it is difficult to predict the effect of changing interest rates solely on that measure, without accounting for alterations in the maturity or repricing characteristics of the balance sheet that occur during changes in market interest rates.

During periods of rising interest rates, the Corporation’s assets tend to have prepayments that are slower than those in an interest rate sensitivity gap and would increase the negative gap position. Conversely, during a period of declining interest rates, the Corporation’s assets would tend to prepay faster than originally expected thus decreasing the negative gap position. In addition, some of the Corporation’s assets, such as adjustable rate mortgages, have caps on the amount by which their interest rates can change in any single period, and therefore may not reprice as quickly as liabilities in the same maturity category.

The following table sets forth the amounts of interest earning assets and interest bearing liabilities outstanding at March 31, 2011, which are expected to mature or reprice in each of the time periods shown below.


	Interest Rate Sensitivity Period
	1-90			91-365			1-5			Over
(In thousands)	Days			Days			Years			5 Years		Total
Earning assets
Federal funds sold	$	55		$	—		$	—		$	—	$	55
Interest bearing deposits with Banks		52,814			8,311			34,676			—		95,801
Mortgage loans held for sale		749			—			—			—		749
Securities available for sale		0			5			21			53,091		53,117
Federal Home Loan Bank stock		3,605			—			—			—		3,605
Total loans, net of non-accrual		142,286			145,303			333,045			25,599		646,233

Total earning assets		199,509			153,619			367,742			78,690		799,560

Interest bearing liabilities
Total interest bearing deposits		175,076			361,222			162,516			263		699,077
Federal Home Loan Bank advances		53,500			—			10,168			—		63,668
Other Borrowings		—			—			—			—		—
Subordinated debentures		10,000			—			—			—		10,000

Total interest bearing liabilities		238,576			361,222			172,684			263		772,745


Net asset (liability) funding gap		(39,067	)		(207,603	)		195,058			78,427	$	26,815


Cumulative net asset (liability) funding gap		($39,067	)		($246,670	)		($51,612	)	$	26,815

Liquidity. 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 include federal funds sold, securities available for sale, loan repayments, core deposits, Federal Home Loan Bank advances and a federal funds purchase credit facility. Liquidity is continually measured and discussed. When liquidity and funding projections indicate that liquidity levels are not adequate to meet the current or projected liquidity needs of the Bank, management intends to make adjustments to improve the liquidity position.

The Corporation reduced its reliance on federal funds lines of credit as a primary source of funds during the second and third quarters of 2008. During the third quarter of 2008, the credit environment became very unstable and the ability to use unsecured federal funds lines of credit became very limited. As the Corporation had already reduced its reliance upon these lines of credit as a funding source, the Corporation was not significantly affected. However, this situation has affected management’s process of maintaining adequate levels of liquidity. As this source of overnight funding has decreased significantly, management has increased the amount of cash and cash equivalents in order to maintain an adequate level of liquidity. Management has also increased the amount of securities, available for sale and interest bearing deposits with banks that can be utilized as collateral against short-term borrowings. The increase in the amount of cash and cash equivalents and securities, available for sale is funded primarily with deposits and decreases in loans.

During the third quarter of 2009, the Corporation elected to defer regularly scheduled quarterly interest payments on the Corporation’s subordinated debentures for the purpose of supplementing holding company liquidity. The terms of the subordinated debentures allow for the deferral of regularly scheduled quarterly interest payments for up to twenty consecutive quarters. The deferral of interest on the subordinated debentures will result in a corresponding annual deferral of distributions on the trust preferred securities of approximately $500,000, based on current interest rates.

The following tables provide information about the Bank’s contractual obligations and commitments at March 31, 2011 (in thousands):

Contractual Obligations


	Payments Due By Period
	Less Than 1 Year		1-3 Years		3-5 Years		Over 5 Years		Total

Certificates of deposit	$	439,338	$	75,945	$	9,091	$	3,476	$	527,850
Long-term borrowings		53,668		10,000		—		—		63,668
Lease commitments		522		420		161		—		1,103
Subordinated debentures		—		—		—		10,000		10,000


Totals	$	493,528	$	86,365	$	9,252	$	13,476	$	602,621

Unused Loan Commitments and Letters of Credit


	Amount Of Commitment Expiration Per Period
	Less Than 1 Year		1-3 Years		3-5 Years		Over 5 Years		Total

Unused loan commitments	$	23,108	$	7,178	$	4,225	$	7,059	$	41,570
Standby letters of credit		375		12		—		—		387


Totals	$	23,483	$	7,190	$	4,225	$	7,059	$	41,957

Item 4. Controls and Procedures

Disclosure Controls and Procedures — As of the end of the period covered by this report, the registrant carried out an evaluation, under the supervision and with the participation of management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the registrant’s disclosure controls and procedures. Based on the review of the disclosure controls of the registrant, the Chief Executive Officer and the Chief Financial Officer have concluded that the registrant’s disclosure controls and procedures were effective as of March 31, 2011.

Internal Controls Over Financial Reporting — There has been no change in the registrant’s internal control over financial reporting that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect the registrant’s internal control over financial reporting.

PART II — OTHER INFORMATION

ITEM 1A. RISK FACTORS

In addition to the risk factors disclosed in the Corporation’s annual report on Form 10-K for the year ended December 31, 2010, the following risk factors may affect the Corporation’s business, financial condition or results of operations. All of the risk factors should be considered in connection with evaluating the forward-looking statements contained in this report because they could cause the actual results and conditions to differ materially from those projected in forward-looking statements. The risks highlighted here and in the Corporation’s annual report are not the only ones the Corporation faces. If the adverse matters referred to in any of the risk factors actually occurs, the Corporation’s business, financial condition or operations could be adversely and materially affected. In that case, the trading price of the Corporation’s common stock could decline, and you may lose all or part of your investment.

Risks Related to Our Business

We are subject to restrictions and conditions of a Consent Order issued by the FDIC and OFIR, and an FRB Written Agreement. We have incurred and expect to continue to incur significant additional regulatory compliance expense in connection with these enforcement actions, Failure to comply with the Consent Order or the FRB Written Agreement could result in additional enforcement action against us, including the imposition of further operating restrictions and monetary penalties.

The FDIC and OFIR have issued a Consent Order with Fidelity Bank and the Company has entered into an FRB Written Agreement. The Consent Order contains a number of significant directives, including higher capital requirements, requirements to reduce the level of our classified assets, operating restrictions and restrictions on dividend payments by the Bank. These restrictions may impede our ability to operate our own business. Certain directives are listed below:

	•		Plans for the reduction of delinquencies and classified assets

	•		Plans for lending and collection policies

	•		Plans for the reduction of loan concentrations

	•		The revision and implementation of a comprehensive strategic plan

	•		The revision of its Liquidity Plan and the submission of weekly liquidity reports to the FDIC and OFIR

With the exception of raising additional capital, management believes that it has met all of the provisions of the Consent Order and the Written Order.

If we fail to comply with the terms and conditions of the Consent Order or the FRB Written Agreement, the appropriate regulatory authority could take additional enforcement action against us, including the imposition further operating restrictions and monetary penalties. We could also be directed to seek a merger partner. We have incurred and expect to continue to incur significant additional regulatory compliance expense in connection with the enforcement actions, and we will incur ongoing expenses attributable to compliance with the terms of the enforcement actions. Although we do not expect it, it is possible regulatory compliance expenses related to the enforcement actions could have a material adverse impact on us in the future. In addition, our ability to independently make certain changes to our business is restricted by the terms of the Consent Order and the FRB Written Agreement, which could negatively impact the scope and flexibility of our business activities. While we believe that we will be able to take actions that will result in the Consent Order and the FRB Written Agreement being terminated in the future, we cannot guarantee that such actions will result in the termination of the Consent Orders and / or the FRB Written Agreement. Further, the imposition of the Consent Order and the FRB Written Agreement may make it more difficult to attract and retain qualified employees.

ITEM 6. EXHIBITS


Exhibit 31.1		CEO Certification. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

Exhibit 31.2		CFO Certification. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

Exhibit 32.1		CEO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Exhibit 32.2		CFO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	Dearborn Bancorp, Inc. (Registrant)
	/s/ John E. Demmer
	John E. Demmer
	Chairman


	/s/ Michael J. Ross
	Michael J. Ross
	President and Chief Executive Officer


	/s/ Jeffrey L. Karafa
	Jeffrey L. Karafa
	Treasurer and Chief Financial Officer

Date: May 13, 2011

Exhibit Index


Exhibit		Description
31.1		CEO Certification. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		CFO Certification. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		CEO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		CFO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

DEARBORN BANCORP INC /MI/ - FORM 10-Q - May 13, 2011

Attached files

DEARBORN BANCORP INC /MI/ Reports