10-Q

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the Quarterly period ended June 30, 2005.

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)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ  No o

Indicate the number of shares outstanding for each of the issuer’s classes of common stock, as of July 31, 2005.

Class	Shares Outstanding
Common Stock	5,080,130

Indicate by check mark whether the registrant is an accelerated filer (as defined in rule 12b-2 of the Securities and Exchange Act of 1934).

Yes o  No þ

DEARBORN BANCORP, INC.

INDEX

	Page
Part I. Financial Information:
Item 1. Financial Statements
The following consolidated financial statements of Dearborn Bancorp, Inc. and its subsidiary included in this report are:
Independent Accountants’ Report		3
Consolidated Balance Sheets — June 30, 2005, December 31, 2004 and June 30, 2004		4
Consolidated Statements of Income — For the Three and Six Months Ended June 30, 2005 and 2004		5
Consolidated Statements of Comprehensive Income — For the Three and Six Months Ended June 30, 2005 and 2004		6
Consolidated Statements of Cash Flows — For the Six Months Ended June 30, 2005 and 2004		7
Notes to Consolidated Financial Statements		8-13
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Liquidity and Capital		14-28
Item 3. Quantitative and Qualitative Disclosures about Market Risk		29-31
Item 4. Controls and Procedures		32
Part II. Other Information:
Pursuant to SEC rules and regulations, the following item(s) are included with the Form 10-Q Report:
Item 4. Submission of Matters to a Vote of Security Holders		33
Item 6. Exhibits and Reports on Form 8-K
Pursuant to SEC rules and regulations, the following items are omitted from this Form 10-Q as inapplicable or to which the answer is negative:
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults upon Senior Securities
Item 5 Other Information
SIGNATURES		34
CEO Certification Pursuant to Section 302
CFO Certification Pursuant to Section 302
CEO Certification Pursuant to Section 906
CFO Certification Pursuant to Section 906

2

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Shareholders
Dearborn Bancorp, Inc.
Dearborn, Michigan

We have reviewed the consolidated balance sheets of Dearborn Bancorp, Inc. as of June 30, 2005 and the related consolidated statements of income and comprehensive income for the three and six months ended June 30, 2005 and 2004 and the related consolidated statements of cash flows for the six month periods ended June 30, 2005 and 2004. These financial statements are the responsibility of the company’s management.

We conducted our review in accordance with standards established by 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. Accordingly, we do not express such an opinion.

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

/s/ Crowe Chizek and Company LLC  

Grand Rapids, Michigan
August 2, 2005

3

DEARBORN BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS (unaudited)

(Dollars, in thousands)	06/30/05			12/31/04			06/30/04
ASSETS
Cash and cash equivalents
Cash and due from banks	$	7,655		$	5,946		$	7,759
Federal funds sold		6,419			12,640			3,422
Interest bearing deposits with banks		6,359			2,283			125
Total cash and cash equivalents		20,433			20,869			11,306
Mortgage loans held for sale		2,373			1,692			1,415
Securities, available for sale		19,498			21,075			12,859
Federal Home Loan Bank stock		1,293			1,122			1,098
Loans
Loans		635,718			587,562			439,776
Allowance for loan loss		(6,616	)		(5,884	)		(4,894	)
Net loans		629,102			581,678			434,882
Premises and equipment, net		14,004			13,124			10,404
Real estate owned		1,082			138			207
Goodwill		7,093			7,080			—
Other intangible assets		825			902			—
Accrued interest receivable		2,065			1,889			1,431
Other assets		2,725			3,093			1,850
Total assets	$	700,493		$	652,662		$	475,452
LIABILITIES
Deposits
Non-interest bearing deposits	$	64,393		$	63,065		$	41,565
Interest bearing deposits		516,222			477,815			364,265
Total deposits		580,615			540,880			405,830
Other liabilities
Securities sold under agreements to repurchase		3,201			4,115			—
Federal Home Loan Bank advances		25,614			20,614			20,638
Accrued interest payable		1,319			1,107			823
Other liabilities		889			1,342			886
Subordinated debentures		10,000			10,000			10,000
Total liabilities		621,638			578,058			438,177
STOCKHOLDERS’ EQUITY
Common stock - 10,000,000 shares authorized, 5,080,130 shares at 06/30/05, 5,033,713 shares at 12/31/04; and 3,458,300 shares at 06/30/04		78,685			74,918			37,286
Retained earnings		214			344			187
Accumulated other comprehensive loss		(44	)		(658	)		(198	)
Total stockholders’ equity		78,855			74,604			37,275
Total liabilities and stockholders’ equity	$	700,493		$	652,662		$	475,452

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

4

DEARBORN BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME (unaudited)

	Three Months Ended						Six Months Ended
(In thousands, except share and per share data)	06/30/05			06/30/04			06/30/05			06/30/04
Interest income
Interest on loans, including fees	$	10,318		$	6,750		$	20,020		$	13,154
Interest on securities, available for sale		160			67			300			138
Interest on federal funds		79			22			127			38
Interest on deposits with banks		81			10			83			17
Total interest income		10,638			6,849			20,530			13,347
Interest expense
Interest on deposits		3,491			1,703			6,377			3,363
Interest on other borrowings		302			231			588			462
Interest on subordinated debentures		180			100			320			223
Total interest expense		3,973			2,034			7,285			4,048
Net interest income		6,665			4,815			13,245			9,299
Provision for loan losses		279			281			743			505
Net interest income after provision for loan losses		6,386			4,534			12,502			8,794
Non-interest income
Service charges on deposit accounts		166			136			316			268
Fees for other services to customers		17			46			49			58
Gain on the sale of loans		204			231			334			374
Gain (loss) on the sale of other real estate		1			(3	)		88			(3	)
Other than temporary impairment of securities		(696	)		—			(696	)		—
Other income		14			9			16			28
Total non-interest income		(294	)		419			107			725
Non-interest expenses
Salaries and employee benefits		2,339			1,852			4,646			3,669
Commissions on the origination of loans		66			87			131			150
Occupancy and equipment expense		613			365			1,247			724
Intangible expense		39			—			77			—
Advertising and marketing		109			80			223			157
Stationery and supplies		96			73			185			144
Professional services		180			99			379			214
Data processing		113			76			229			147
Other operating expenses		399			216			680			434
Total non-interest expenses		3,954			2,848			7,797			5,639
Income before income tax provision		2,138			2,105			4,812			3,880
Income tax provision		726			715			1,635			1,316
Net income	$	1,412		$	1,390		$	3,177		$	2,564
Per share data:
Net income — basic	$	0.28		$	0.40		$	0.63		$	0.75
Net income — diluted	$	0.26		$	0.36		$	0.59		$	0.68
Weighted average number of shares outstanding — basic		5,074,978			3,444,881			5,063,122			3,431,394
Weighted average number of shares outstanding — diluted		5,418,218			3,810,506			5,419,207			3,779,934

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

5

DEARBORN BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)

	Three Months Ended						Six Months Ended
(In thousands)	06/30/05			06/30/04			06/30/05			06/30/04
Net income	$	1,412		$	1,390		$	3,177		$	2,564
Other comprehensive income (loss), net of tax
Unrealized gains (losses) on securities
Unrealized holding gains (losses) arising during period		(95	)		(38	)		233			(334	)
Less: reclassification adjustment for losses included in net income		696			—			696			—
Tax effects		(203	)		14			(315	)		114
Other comprehensive income/(loss)		398			(24	)		614			(220	)
Comprehensive income	$	1,810		$	1,366		$	3,791		$	2,344

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

6

DEARBORN BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

	Six Months Ended
(In thousands)	6/30/05			6/30/04
Cash flows from operating activities
Interest and fees received	$	20,155		$	13,368
Interest paid		(7,073	)		(3,695	)
Taxes paid		(1,580	)		(840	)
Proceeds from sale of mortgages held for sale		21,295			22,946
Origination of mortgages held for sale		(21,642	)		(22,622	)
Cash paid to suppliers and employees		(7,889	)		(5,424	)
Net cash provided by operating activities		3,266			3,733
Cash flows from investing activities
Proceeds from maturities of securities available for sale		5,200			4,000
Proceeds from call of securities available for sale		—			10
Proceeds from sales of securities available for sale		—			2,120
Proceeds from repayments of securities available for sale		148			265
Purchases of securities available for sale		(3,535	)		(2,649	)
Purchases of Federal Home Loan Bank stock		(171	)		(25	)
Increase in loans, net of payments received		(48,167	)		(38,743	)
Purchases of property and equipment		(1,342	)		(5,096	)
Net cash used in investing activities		(47,867	)		(40,118	)
Cash flows from financing activities
Net increase in non-interest bearing deposits		1,328			2,484
Net increase in interest bearing deposits		38,407			23,728
Net increase of Federal Home Loan Bank advances		5,000			—
Net decrease in other borrowings		(914	)		—
Stock option exercise		344			330
Net cash provided by financing activities		44,165			26,542
Decrease in cash and cash equivalents		(436	)		(9,843	)
Cash and cash equivalents at the beginning of the period		20,869			21,148
Cash and cash equivalents at the end of the period	$	20,433		$	11,305
Reconciliation of net income to net cash provided by (used in) operating activities
Net income	$	3,177		$	2,564
Adjustments to reconcile net income to net cash provided by (used in) operating activities
Provision for loan losses		743			505
Depreciation and amortization expense		462			246
Accretion of discount on investment securities		(21	)		(2	)
Amortization of premium on investment securities		18			11
Recognition of other-than-temporary loss		696			—
Net change in mortgages held for sale		(681	)		90
Net change in interest receivable		(176	)		42
Increase in interest payable		212			69
Increase in other assets		(828	)		(214	)
Net change in other liabilities		(336	)		422
Net cash provided by operating activities	$	3,266		$	3,733

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

7

DEARBORN BANCORP, INC.
FORM 10-Q (continued)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

A. Accounting and Reporting Policies

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

The consolidated financial statements of the Corporation as of June 30, 2005 and 2004, and December 31, 2004 and for the three and six month periods ended June 30, 2005 and 2004 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 operating results for the quarter are not necessarily indicative of results of operations for the entire year.

The consolidated financial statements as of June 30, 2005 and 2004, and for the three and six months ended June 30, 2005 and 2004 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 2004 Annual Report to Stockholders 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, determining the fair value of securities and other financial instruments and assessing other than temporary impairments of securities.

Basic income per share is based on weighted average common shares outstanding during the period. Diluted income per share includes the dilutive effect of additional potential common shares issuable under stock options.

8

A. Accounting and Reporting Policies (continued)

Employee compensation expense under stock option plans is reported using the intrinsic value method. No stock-based compensation cost is reflected in net income, as all options granted had an exercise price equal to or greater than the market price of the underlying common stock at date of grant. The following table illustrates the effect on net income and earnings per share if expense was measured using the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-based Compensation (in thousands, except share and per share data).

	Three Months Ended				Six Months Ended
	06/30/05		06/30/04		06/30/05		06/30/04
Net income
As reported	$	1,412	$	1,390	$	3,177	$	2,564
Less: stock-based compensation expense determined under fair value based method		—		—		—		(9	)
Pro forma	$	1,412	$	1,390	$	3,177	$	2,555
Basic income per share
As reported	$	0.28	$	0.40	$	0.63	$	0.75
Pro forma	$	0.28	$	0.40	$	0.63	$	0.74
Diluted income per share
As reported	$	0.26	$	0.36	$	0.59	$	0.68
Pro forma	$	0.26	$	0.36	$	0.59	$	0.68

No options were granted during the six months ended June 30, 2004 or 2005.

9

B. New Accounting Pronouncements

FAS 123, Revised, requires companies to record compensation cost for stock options provided to employees in return for employment service. The cost is measured at fair value of the options when granted, and this cost is expensed over the employment service period, which is normally the vesting period of the options. This will apply to awards granted or modified in fiscal years beginning after June 15, 2005. Compensation cost will also be recorded for prior option grants that vest after the date of adoption. The effect on results of operations will depend on the level of future option grants and the calculation of the fair value of the options granted at such future date, as well as the vesting periods provided, and so cannot currently be predicted. At June 30, 2005, there are no granted, but unvested options. There will be no significant effect on financial position as total equity will not change.

C. Securities Available For Sale

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

	June 30, 2005
			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Market
	Cost		Gains		Losses			Value
US Treasury securities	$	13,699	$	—	($	78	)	$	13,621
Mortgage backed securities		678		12		(2	)		688
Corporate debt securities		1,885		—		—			1,885
FHLMC preferred stock		3,304		—		—			3,304
Totals	$	19,566	$	12	($	80	)	$	19,498

	December 31, 2004
			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Market
	Cost		Gains		Losses			Value
US Treasury securities	$	15,696	$	—	($	62	)	$	15,634
Mortgage backed securities		826		25		—			851
Corporate debt securities		1,550		—		—			1,550
FHLMC preferred stock		4,000		—		(960	)		3,040
Totals	$	22,072	$	25	($	1,022	)	$	21,075

10

The amortized cost and estimated market value of securities available for sale at June 30, 2005 by contractual maturity are shown below (in thousands):

			Estimated
	Amortized		Market
	Cost		Value
Due in three months or less	$	1,998	$	1,993
Due in three months through one year		7,697		7,650
Due in over one year through five years		4,004		3,978
Due in over five years		1,885		1,885
Mortgage backed securities		678		688
FHLMC preferred stock		3,304		3,304
Totals	$	19,566	$	19,498

The entire portfolio has a net unrealized loss of $68,000 at June 30, 2005. Securities with unrealized losses at June 30, 2005, aggregated by investment category are as follows:

Investment category	Fair Value		Unrealized Loss
US treasury securities	$	13,621	($	78	)
Mortgage backed securities	$	25	($	2	)
Total temporarily impaired	$	13,646	($	80	)

These securities have been in a continuous loss position for less than 12 months.

Unrealized losses on these securities have not been recognized into income because these securities are of high credit quality, management has the intent and ability to hold these securities for the foreseeable future, and the decline in fair value is largely due to changes in interest rates. The fair value is expected to recover as the securities approach their maturity date or reset date.

The Corporation does not hold any securities in the “Held to Maturity” category nor does the Corporation hold or utilize derivatives.

The Corporation recorded an “Other Than Temporary Impairment Loss” on an investment in FHLMC Preferred Stock in the amount of $696,000 during the second quarter of 2005. Please refer to the discussion of “Other Than Temporary Impairment Loss” in Management’s Discussion and Analysis of Financial Condition and Statement of Operations for additional information.

11

D. Stock Incentive Plans

Stock Option Plan

Options to buy common stock are granted to officers and employees under a Stock Option Plan which provided for the issue of up to 775,674 shares. There are no shares available for additional grant under this plan. Exercise price is the market price at date of grant. The maximum option term is ten years, and options vest fully after six months from the date of grant. If an option expires or terminates without having been exercised, such option becomes available for future grant under the Plan.

A summary of the option activity for the six months ended June 30, 2005 is as follows:

						Weighted
	Available					Average
	for		Options			Exercise
	Grant		Outstanding			Price
Outstanding at January 1, 2005		—		567,502		$	8.75
Exercised		—		(46,555	)		7.39
Outstanding at June 30, 2005		—		520,947		$	8.87

For the options outstanding at June 30, 2005, the range of exercise prices was $4.39 to $16.96 per share with a weighted-average remaining contractual term of 5.7 years. At June 30, 2005, 520,947 options were exercisable at weighted average exercise price of $8.87 per share. Since all shares authorized for issuance under the Stock Option Plan have been granted, all future awards will be made under the Long-term Incentive Plan.

Long-Term Incentive Plan

The Corporation’s 2005 Long-Term Incentive Plan (2005 Plan) was approved by the Board of Directors on April 12, 2005 and subsequently by the shareholders of the Corporation at the annual meeting on May 17, 2005. The 2005 Plan will be administered by the Compensation Committee of the Board of Directors and may grant awards in the form of incentive stock options, non-qualified stock options, restricted shares, restricted share units, performance shares and/or performance share units. The maximum number of shares available under the 2005 Plan is 300,000.

As of June 30, 2005, there have been no grants under the 2005 Plan.

12

E. Acquisition

On October 29, 2004, the Corporation acquired the Bank of Washtenaw (“Washtenaw”), a wholly owned subsidiary of Pavillion Bancorp, Inc. for $15,100,000 in cash. The assets and liabilities of the Bank of Washtenaw at acquisition and net income derived from those assets and liabilities since the acquisition have been consolidated into the Bank. Washtenaw, which was founded in January 2001, has its main office in Saline, Michigan with a branch office and a regional lending center in Ann Arbor, Michigan. As of October 29, 2004, Washtenaw had total assets of $85,500,000, gross loans of $67,100,000 and total deposits of $66,100,000.

The acquisition has been accounted for using the purchase method of accounting, and accordingly, the purchase price has been allocated to the tangible and identified intangible assets purchased and the liabilities assumed based upon the estimated fair values at the date of acquisition. There are refinements in the process of allocating the purchase price that have not been entirely completed. Identified intangible assets and purchase accounting fair value adjustments are being amortized under various methods over the expected lives of the corresponding assets and liabilities. Goodwill will not be amortized, but will be reviewed for impairment on an annual basis. Goodwill and other intangible assets are tax deductible over 15 years. Currently, identified intangible assets subject to amortization are $825,000. Goodwill aggregates to $7,093,000.

The consolidated statements of income reflect the operating results of Washtenaw since the effective date of the acquisition. The following table presents pro forma information for the Corporation including the acquisition of Bank of Washtenaw for the six months ended June 30, 2004, as if the acquisition had occurred at the beginning of 2004.

	Six Months Ended
(In thousands, except share and per share data)	6/30/2004
Interest income	$	15,543
Interest expense		4,692
Net interest income		10,851
Provision for loan loss		505
Net interest income after provision for loan losses		10,346
Non-interest income		868
Non-interest expense		6,933
Income before income tax provision		4,281
Income tax provision		1,453
Net income	$	2,828
Basic earnings per share	$	0.82
Diluted earnings per share	$	0.75

13

PART I — FINANCIAL INFORMATION

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 that are based on management’s beliefs, assumptions, current expectations, estimates and projections about the financial services industry, the economy, and about the Corporation and Bank. Words such as “anticipates”, “believes”, “estimates”, “expects”, “forecasts”, “intends”, “is likely”, “plans”, “projects”, variations of such words and similar expressions are intended to identify such forward- looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions (“Future Factors”) that are difficult to predict with regard to timing, extent, likelihood and degree of occurrence. Therefore, actual results and outcomes may materially differ from what may be expressed or forecasted in such forward-looking statements. The Corporation undertakes no obligation to update, amend or clarify forward-looking statements, whether as a result of new information, future events (whether anticipated or unanticipated), or otherwise.

Future Factors include changes in interest rates and interest rate relationships; demand for products and services; the degree of competition by traditional and non-traditional competitors; changes in banking regulation; changes in tax laws; changes in prices, levies and assessments; the impact of technological advances; governmental and regulatory policy changes; the outcomes of contingencies; trends in customer behavior as well as their ability to repay loans; and changes in the national and local economy. These are representative of the Future Factors that could cause a difference between an ultimate actual outcome and a preceding forward-looking statement.

14

General

The Corporation was formed in 1992 and the Bank was formed in 1993. Subsequently, the Bank has opened offices in several communities in Southeastern Michigan. The Corporation acquired the Bank of Washtenaw on October 29, 2004. The three branches, previously operated by the Bank of Washtenaw have been consolidated into the operations of the Bank. The date opened, branch location and branch type of each branch is listed below:

Date Opened	Location	Type of office
February 1994	22290 Michigan Avenue Dearborn, Michigan 48124	Full service retail branch with ATM
December 1995	24935 West Warren Avenue Dearborn Heights, Michigan 48127	Full service retail branch
August 1997	44623 Five Mile Road Plymouth, Michigan 48170	Full service retail branch with ATM
May 2001	1325 North Canton Center Road Canton, Michigan 48187	Full service retail branch with ATM
December 2001	45000 River Ridge Drive Clinton Township, Michigan 48038	Regional lending center
November 2002	19100 Hall Road Clinton Township, Michigan 48038	Full service retail branch with ATM
February 2003	12820 Fort Street Southgate, Michigan 48195	Full service retail branch with ATM
May 2003	3201 University Drive, Suite 180 Auburn Hills, Michigan 48326	Full service retail branch Regional lending center
October 2004	450 East Michigan Avenue Saline, MI 48176	Full service retail branch with ATM
October 2004	250 West Eisenhower Parkway Ann Arbor, MI 48103	Full service retail branch with ATM Regional lending center
October 2004	2180 West Stadium Blvd. Ann Arbor, MI 48103	Full service retail branch with ATM
December 2004	1360 Porter Street Dearborn, MI 48124	Loan production office Regional lending center

The Bank has also formed three 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
May 2001	Community Bank Mortgage, Inc.	Origination of commercial and residential mortgage loans
March 2002	Community Bank Audit Services, Inc.	Internal auditing and compliance services for financial institutions

15

Results of Operations

The Corporation reported net income of $1,412,000 and $3,177,000 for the three and six month periods ended June 30, 2005, compared to net income of $1,390,000 and $2,564,000 for the three and six month periods ended June 30, 2004, an increase of $22,000 or 2% for the three month period and $613,000 or 24% for the six month period. The increase in net income was primarily due to the improvement in net interest income. The improvement in net interest income was primarily due to the increase in the commercial real estate loan and commercial real estate construction loan portfolios during the period. The increase in net interest income was partially offset by the increase in non interest expense and an other than temporary impairment loss on a security.

Net Interest Income

2005 Compared to 2004. As noted on the two charts on the following pages, net interest income for the three and six month periods ended June 30, 2005 was $6,665,000 and $13,245,000 compared to $4,815,000 and $9,299,000 for the same periods ended June 30, 2004, an increase of $1,850,000 or 38% for the three month period and $3,946,000 or 42% for the six month period. This increase was caused primarily by the volume of interest earning assets and interest bearing liabilities. The Corporation’s interest rate spread was 3.51% and 3.64% for the three and six month periods ended June 30, 2005, compared to 3.98% and 3.94% for the same periods in 2004. The Corporation’s net interest margin was 4.00% and 4.10% for the three and six month periods ended June 30, compared to 4.25% and 4.21% for the same periods in 2004. The decrease in interest rate spread and net interest margin was primarily due to the increase in funds that were invested in short term investments until these funds can be deployed into loans and due to the increased cost of deposits.

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.

16

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						Three months ended
	June 30, 2005						June 30, 2004
	Average				Average		Average				Average
(In thousands)	Balance		Interest		Rate		Balance		Interest		Rate
Assets
Interest-bearing deposits with banks	$	11,011	$	81		2.95%	$	4,672	$	10		0.86%
Federal funds sold	$	10,301		79		3.08%	$	8,800		22		1.01%
Investment securities, available for sale		20,870		160		3.08%		13,449		67		2.00%
Loans		626,105		10,318		6.61%		428,498		6,750		6.34%
Sub-total earning assets		668,287		10,638		6.38%		455,419		6,849		6.05%
Other assets		30,685						19,137
Total assets	$	698,972					$	474,556
Liabilities and stockholders’ equity
Interest bearing deposits	$	515,757	$	3,491		2.71%	$	364,424	$	1,703		1.88%
Other borrowings		39,237		482		4.93%		30,638		331		4.35%
Sub-total interest bearing liabilities		554,994		3,973		2.87%		395,062		2,034		2.07%
Non-interest bearing deposits		63,734						41,692
Other liabilities		2,057						925
Stockholders’ equity		78,187						36,877
Total liabilities and stockholders’ equity	$	698,972					$	474,556
Net interest income			$	6,665					$	4,815
Net interest rate spread						3.51%						3.98%
Net interest margin on earning assets						4.00%						4.25%

17

	Six Months Ended						Six Months Ended
	June 30, 2005						June 30, 2004
	Average				Average		Average				Average
(In thousands)	Balance		Interest		Rate		Balance		Interest		Rate
Assets
Interest-bearing deposits with banks	$	5,761	$	83		2.91%	$	3,651	$	17		0.94%
Federal funds sold	$	9,280		127		2.76%	$	8,036		38		0.96%
Investment securities, available for sale		21,284		300		2.84%		14,119		138		1.98%
Loans		615,133		20,020		6.56%		420,622		13,154		6.32%
Sub-total earning assets		651,458		20,530		6.36%		446,428		13,347		6.05%
Other assets		30,799						17,411
Total assets	$	682,257					$	463,839
Liabilities and stockholders’ equity
Interest bearing deposits	$	499,167	$	6,377		2.58%	$	356,679	$	3,363		1.91%
Other borrowings		40,572		908		4.51%		30,638		685		4.52%
Sub-total interest bearing liabilities		539,739		7,285		2.72%		387,317		4,048		2.11%
Non-interest bearing deposits		63,337						39,204
Other liabilities		2,043						1,096
Stockholders’ equity		77,138						36,222
Total liabilities and stockholders’ equity	$	682,257					$	463,839
Net interest income			$	13,245					$	9,299
Net interest rate spread						3.64%						3.94%
Net interest margin on earning assets						4.10%						4.21%

18

Rate/Volume Analysis. The following table analyzes net interest income in terms of changes in the volume of interest-earning assets and interest-bearing liabilities and changes in yields and rates. The table reflects the extent to which changes in the interest income and interest expense are attributable to changes in volume (changes in volume multiplied by prior year rate) and changes in rate (changes in rate multiplied by prior year volume). Changes attributable to the combined impact of volume and rate have been allocated proportionately to changes due to volume and changes due to rate.

	Three Months Ended							Six Months Ended
			2005/2004							2005/2004
	Change in Interest Due to:							Change in Interest Due to:
	Average		Average		Net			Average		Average			Net
(In thousands)	Balance		Rate		Change			Balance		Rate			Change
Assets
Interest bearing deposits with banks	$	47	$	24	$	71		$	30	$	36		$	66
Federal funds sold		11		46		57			17		72			89
Investment securities, available for sale		57		36		93			98		64			162
Loans		3,274		294		3,568			6,361		505			6,866
Total earning assets	$	3,389	$	400	$	3,789		$	6,506	$	677		$	7,183
Liabilities
Interest bearing deposits	$	1,027	$	761	$	1,788		$	1,820	$	1,194		$	3,014
Other borrowings		—		45		151			—		(1	)		223
Total interest bearing liabilities	$	1,027	$	806	$	1,939		$	1,820	$	1,193		$	3,237
Net interest income						1,850								3,946
Net interest rate spread						(0.47	%)							(0.30	%)
Net interest margin on earning assets						(0.25	%)							(0.11	%)

Provision for Loan Losses

2005 Compared to 2004. The provision for loan losses was $279,000 and $743,000 for the three and six month periods ended June 30, 2005, compared to $281,000 and $505,000 for the same periods in 2004, a decrease of $2,000 or 1% for the three month period and an increase of $238,000 or 47% for the six month period. The provision for loan losses for the three and six month periods ended June 30, 2005 is based on the internal analysis of the adequacy of the allowance for loan losses. The provision for loan losses was based upon management’s assessment of relevant factors, including types and amounts of non-performing loans, historical loss experience on such types of loans, and current economic conditions. The increase in provision during 2005 was driven by loan growth during 2005 and impacted by net recoveries during the six months ended June 30, 2004 compared to modest net charge-offs during the same period in 2005.

19

Other Than Temporary Impairment of Securities

The Corporation recorded an “Other Than Temporary Impairment Loss” on a security in the amount of $696,000 during the second quarter of 2005 in accordance with FAS 115, “Accounting for Certain Investments in Debt and Equity Securities” and SEC Staff Accounting Bulletin 59, “Other Than Temporary Impairment of Certain Investments in Debt and Equity Securities”.

This security is an issue of 80,000 shares of FHLMC preferred stock with a par value of $50 per share. The Bank purchased this equity security in March of 2001. The security carried an initial interest rate of 4.50% until March 31, 2002. Thereafter, the interest rate reprices annually on April 1 of each year to a rate equal to the 12 month LIBOR minus 20 basis points. Additionally, the dividend on this security is 70% tax deductible. This feature increases the effective yield significantly. As interest rates declined in 2002 and 2003, the yield on this security also declined.

During 2004, management believes that the market value of this security was negatively impacted for two primary factors. The first factor was the declining interest rate environment. Short term interest rates declined during 2002 and 2003 and began to increase during 2004. The yield on this security does not react immediately to shifts in interest rates because of the annual adjustment feature. The coupon on this security did not benefit from the rise in short term interest rates during 2004 due to the timing of the coupon reset date. As the next coupon reset date approached, the market value of this security reacted positively. A repricing and market value table for selected dates is listed below:

				Market Value
	Rate			(per share)
3/23/2001		4.50	%	$	50.00
4/1/2002		2.82	%	$	50.00
4/1/2003		1.14	%	$	50.00
4/1/2004		1.14	%	$	46.25
6/30/2004		1.14	%	$	46.05
9/30/2004		1.14	%	$	39.00
12/31/2004		1.14	%	$	38.00
3/31/2005		1.14	%	$	42.75
6/30/2005		3.64	%	$	41.30

The coupon rate reset on April 1, 2005 at 3.64%. Based on the tax deductibility of the dividend, the tax equivalent yield of this security on the reset date of April 1, 2005 was 4.95%.

The second factor in the market value of this security has been the discovery of certain accounting irregularities at FHLMC and FNMA that have raised questions about the credit quality of these organizations. The timing of the decline in the market value of the security also coincides with the public announcements of these accounting irregularities that occurred.

20

Management expected that the market value of this security would continue to improve with the significant improvement in the dividend rate and the release of FHLMC’s Annual Report to Shareholders. Neither the dividend repricing on April 1, 2005, nor the issuance of FHLMC’s Annual Report on June 14, 2005 has had a significant impact on the fair market value of the security. Therefore, the Corporation recognized the “Other Than Temporary Loss” of $696,000 on June 30, 2005 and sold this security on July 22, 2005.

Non-interest Income

2005 Compared to 2004. Non-interest income excluding the impairment charge was $402,000 and $803,000 for the three and six month periods ended June 30, 2005, compared to $419,000 and $725,000 for the same periods in 2004, a decrease of $17,000 or 4% for three month period and an increase of $78,000 or 11% for the six month period. The increase during the six month period was primarily due to the increase in the gain on the sale of real estate during the period. This gain was the result of the sale of the commercial building that secured one commercial mortgage loan.

Non-interest Expense

2005 Compared to 2004. Non-interest expense was $3,954,000 and $7,797,000 for the three and six month periods ended June 30, 2005, compared to $2,848,000 and $5,639,000 for the same periods in 2004, an increase of $1,106,000 or 39% for the three month period and $2,158,000 or 38% for the six month period. The largest component of non-interest expense was salaries and employee benefits which amounted to $2,339,000 and $4,646,000 for the three month and six month periods ended June 30, 2005, compared to $1,852,000 and 3,669,000 for the same periods in 2004, an increase of $487,000 or 26% for the three month period and $977,000 or 27% for the six month period. The primary factors for the increase in salaries and benefits expense were the acquisition of the Bank of Washtenaw in October of 2004 and the expansion of the commercial lending and retail banking departments. As of June 30, 2005, the number of full time equivalent employees was 155 compared to 124 as of June 30, 2004.

The second largest component of non-interest expense was occupancy and equipment expense. Occupancy and equipment expense amounted to $613,000 and $1,247,000 for the three and six month periods ended June 30, 2005, compared to $365,000 and $724,000 for the same periods in 2004, an increase of $248,000 or 68% for the three month period and $523,000 or 72% for the six month period. The primary factor in the increase in occupancy and equipment expense was the opening of the Operations Center in Allen Park, Michigan and the relocation of the commercial lending department to the Administrative Building in Dearborn, Michigan during the fourth quarter of 2004.

Income Tax Provision

2005 Compared to 2004. Income tax expense was $726,000 and $1,635,000 for the three and six month periods ended June 30, 2005, compared to $715,000 and $1,316,000 for the same periods in 2004, an increase of $11,000 or 2% for the three month period and $319,000 or 24% for the six month period. The increase was primarily a result of increased pre-tax income.

21

Comparison of Financial Condition at June 30, 2005 and December 31, 2004

Assets. Total assets at June 30, 2005 were $700,493,000 compared to $652,662,000 at December 31, 2004, an increase of $47,831,000 or 7%. The increase was primarily due to the increase in loans during the period.

Federal Funds Sold. Total federal funds sold at June 30, 2005 were $6,419,000 compared to $12,640,000 at December 31, 2004, a decrease of $6,221,000 or 49%. The decrease was primarily due to the deployment of available funds into loans.

Interest bearing deposits with banks. Total interest bearing deposits with banks at June 30, 2005 were $6,359,000 compared to $2,283,000 at December 31, 2004, an increase of $4,076,000 or 179%. The increase was primarily due to additional funds received as a result of deposit gathering activities during the second quarter of 2005. This investment was established to provide the Corporation with an alternate short term investment option. This short term investment is a variable-rate certificate of deposit with the Federal Home Loan Bank of Indianapolis that carries a similar rate of return to federal funds sold.

Mortgage Loans Held for Sale. Total mortgage loans held for sale at June 30, 2005 were $2,373,000 compared to $1,692,000 at December 31, 2004, an increase of $681,000 or 40%. 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 June 30, 2005 were $19,498,000 compared to $21,075,000 at December 31, 2004, a decrease of $1,577,000 or 7%. The decrease was due to the sale of securities, available for sale during 2004. The funds from the sale of these securities were utilized to fund loan volume.

Please refer to Note B of the Notes to 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 $68,000. The unrealized loss is reflected by an adjustment to stockholders’ equity.

Federal Home Loan Bank Stock. Federal Home Loan Bank stock was valued at $1,293,000 at June 30, 2005, compared to $1,122,000 at December 31, 2004, an increase of $171,000 or 15%.

22

Loans. Total loans at June 30, 2005 were $635,718,000 compared to $587,562,000 at December 31, 2004, an increase of $48,156,000 or 8%. The increase was primarily due to the continued expansion of the commercial lending department during the past twelve months. Major categories of loans included in the loan portfolio are as follows (in thousands):

	6/30/05			12/31/04			6/30/04
Consumer loans	$	41,082		$	42,149		$	26,045
Commercial, financial, & other		132,058			129,103			76,067
Commercial real estate construction		89,572			72,286			55,933
Commercial real estate mortgages		326,332			296,934			235,471
Residential real estate mortgages		46,674			47,090			46,260
		635,718			587,562			439,776
Allowance for loan losses		(6,616	)		(5,884	)		(4,894	)
	$	629,102		$	581,678		$	434,882

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

	6/30/05		12/31/04		6/30/04
Over 90 days past due and still accruing	$	134	$	143	$	85
Non-accrual loans		972		2,956		1,674
Real estate owned		1,082		136		201
Other repossessed assets		—		2		6
	$	2,188	$	3,237	$	1,966

Non-accrual loans at June 30, 2005 were $972,000. The distribution of non-accrual loans by loan type is as follows:

	Number of Loans		Balance
Consumer loans		2	$	51
Commercial, financial, & other		3		485
Commercial real estate construction		—		—
Commercial real estate mortgages		5		329
Residential real estate mortgages		1		107
Total non-accrual loans		11	$	972

23

Allowance for Loan Losses. The allowance for loan losses was $6,616,000 at June 30, 2005 compared to $5,884,000 at December 31, 2004, an increase of $732,000 or 12%. The increase resulted primarily from provisions less net charge-offs recorded during the quarter. 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.

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

	Six Months Ended			Year Ended			Six Months Ended
	6/30/05			12/31/04			6/30/04
Balance, beginning of year	$	5,884		$	4,314		$	4,314
Allowance on loans acquired		—			184			—
Charge-offs:
Consumer loans		71			31			5
Commercial, financial & other		95			—			—
Commercial real estate construction		—			—			—
Commercial real estate mortgages		6			100			—
Residential real estate mortgages		—			—			32
Recoveries:
Consumer loans		9			13			11
Commercial, financial & other		111			104			40
Commercial real estate construction		—			—			—
Commercial real estate mortgages		9			—			61
Residential real estate mortgages		32			—			—
Net charge-offs (recoveries)		11			14			(75	)
Additions charged to operations		743			1,400			505
Balance, end of period	$	6,616		$	5,884		$	4,894
Allowance to total loans		1.04	%		1.00	%		1.11	%
Allowance to nonperforming assets		302.38	%		181.77	%		248.93	%
Net charge-offs (recoveries) to average loans		0.00	%		0.00	%		(0.02	%)

24

Premises and Equipment. Bank premises and equipment at June 30, 2005 were $14,004,000 compared to $13,124,000 at December 31, 2004, an increase of $880,000 or 7%. The increase in premises and equipment was primarily due to the renovation at the Bank’s Operations Center in Allen Park, Michigan, the addition of additional parking at the Bank’s Dearborn Heights branch office and the updating of equipment at several locations.

Real estate owned. Real estate owned at June 30, 2005 was $1,082,000 compared to $138,000 at December 31, 2004, an increase of $944,000 or 684%. Real estate owned at June 30, 2005 is comprised of three residential properties with an appraised value of $782,000 and a commercial building with an appraised value of $500,000. The Bank expects to realize a gain as a result of the sale of these properties during 2005.

Goodwill and other intangible assets. Goodwill and other intangible assets were $7,918,000 at June 30, 2005 compared to $7,982,000 at December 31, 2004. The Bank has intangible assets for the estimated value of core deposit accounts acquired in the acquisition of the Bank of Washtenaw. The intangible values represent the present value of the net revenue streams attributable to these intangibles. The core deposit intangible amounted to $929,000 and is being amortized over ten years.

The balance of the acquisition price in excess of the fair market value of the assets and liabilities acquired, including intangible assets, was recorded as goodwill and totaled $7.1 million. Goodwill is defined as an intangible asset with an indefinite useful life, and as such, is not amortized, but is required to be tested annually for impairment of the value. If impaired, an impairment loss must be recorded for the value equal to the excess of the asset’s carrying value over its fair value.

Accrued Interest Receivable. Accrued interest receivable at June 30, 2005 was $2,065,000 compared to $1,889,000 at December 31, 2004, an increase of $176,000 or 9%. The increase was primarily due to the increase in the Bank’s loan portfolio.

Other Assets. Other assets at June 30, 2005 were $2,725,000 compared to $3,093,000 at December 31, 2004, a decrease of $368,000 or 12%. The decrease was primarily due to changes in deferred tax assets.

25

Deposits. Total deposits at June 30, 2005 were $580,615,000 compared to $540,880,000 at December 31, 2004, an increase of $39,735,000 or 7%. The following is a summary of the distribution of deposits (in thousands):

	6/30/05		12/31/04		6/30/04
Non-interest bearing:
Demand	$	64,393	$	63,065	$	41,565
Interest bearing:
Checking	$	14,443	$	15,400	$	19,472
Money market		59,729		54,957		15,232
Savings		74,267		83,773		110,251
Time, under $100,000		143,538		124,448		74,041
Time, $100,000 and over		224,245		199,237		145,269
		516,222		477,815		364,265
Total deposits	$	580,615	$	540,880	$	405,830

Management continues to implement a strategy to change the mix of the deposit portfolio by focusing more heavily on savings and institutional deposits. The increase in deposits was primarily due to normal business development, marketing, telemarketing, referral programs and growth strategies which included a weeklong celebration in March 2005 that highlighted the Bank’s Anniversary. Management expects deposits to grow at an increasing rate during he remainder of 2005.

The Bank has enacted a strategy to utilize public funds to a higher degree. The Bank will also utilize brokered deposits. The Bank has designated a public funds officer to coordinate and manage these efforts. 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 and are considered by the Bank to be core deposits. The following is a summary of the distribution of municipal deposits (in thousands):

	6/30/05		12/31/04		6/30/04
Interest bearing checking	$	2,677	$	2,633	$	8,781
Time, $100,000 and over		76,997		71,058		57,586
Total municipal deposits	$	79,674	$	73,691	$	66,367

Brokered deposits are included in the Time, $100,000 and over category. Brokered deposits were $22,290,000, $19,190,000 and $2,380,000 at June 30, 2005, December 31, 2004 and June 30, 2004, respectively.

26

Securities Sold Under Agreement to Repurchase. Securities sold under agreements to repurchase at June 30, 2005 were $3,201,000 compared to $4,115,000 at December 31, 2004, a decrease of $914,000 or 22%. These Repurchase agreements are secured by securities held by the Bank.

Federal Home Loan Bank Advances. Federal Home Loan Bank advances at June 30, 2005 were $25,614,000, compared to $20,614,000 at December 31, 2004, an increase of $5,000,000 or 24%. The increase was due to the funding of a Federal Home Loan Bank advance of $5,000,000 during the quarter ended June 30, 2005.

Accrued Interest Payable. Accrued interest payable at June 30, 2005 was $1,319,000 compared to $1,107,000 at December 31, 2004, an increase of $212,000 or 19%. The increase was primarily due to the increasing amount of interest bearing deposits during the period.

Other Liabilities. Other liabilities at June 30, 2005 were $889,000 compared to $1,342,000 at December 31, 2004, a decrease of $453,000 or 34%. The decrease was primarily due to the decrease in expenses payable during the period.

Subordinated Debentures. Subordinated debentures were $10,000,000 at June 30, 2005 and December 31, 2004. 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. The funds from the issue of these securities were invested into securities available for sale until they can be invested into the Bank subsidiary to allow for additional growth. Debt issue costs of $300,000 have been capitalized and are being amortized over the term of the securities. Unamortized debt issuance costs were $275,000 at June 30, 2005.

27

Capital

Stockholders’ equity at June 30, 2005 was $78,855,000 compared to $74,604,000 as of December 31, 2004, an increase of $4,251,000 or 6%.

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 June 30, 2005
Total capital
(to risk weighted assets)
Consolidated		87,598		13.11	%		53,441		8.00	%		66,802		10.00	%
Bank		70,864		10.71	%		52,925		8.00	%		66,156		10.00	%
Tier 1 capital
(to risk weighted assets)
Consolidated		80,982		12.12	%		26,721		4.00	%		40,081		6.00	%
Bank		64,248		9.71	%		26,462		4.00	%		39,693		6.00	%
Tier 1 capital
(to average assets)
Consolidated		80,982		11.59	%		27,959		4.00	%		34,949		5.00	%
Bank		64,248		9.42	%		27,276		4.00	%		34,095		5.00	%
As of December 31, 2004
Total capital
(to risk weighted assets)
Consolidated		81,868		13.27	%		49,360		8.00	%		61,700		10.00	%
Bank		63,986		10.47	%		48,913		8.00	%		61,141		10.00	%
Tier 1 capital
(to risk weighted assets)
Consolidated		75,984		12.32	%		24,680		4.00	%		37,020		6.00	%
Bank		58,102		9.50	%		24,457		4.00	%		36,685		6.00	%
Tier 1 capital
(to average assets)
Consolidated		75,984		12.12	%		25,079		4.00	%		31,348		5.00	%
Bank		58,102		9.78	%		23,765		4.00	%		29,706		5.00	%

Based on the respective regulatory capital ratios at June 30, 2005 and December 31, 2004, the Corporation and Bank are considered well capitalized.

28

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.

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Different types of assets and liabilities with the same or similar maturities may react differently to changes in overall market rates or conditions, and thus changes in interest rates may affect net interest income positively or negatively even if an institution were perfectly matched in each maturity category. Additionally, the gap analysis does not consider the many factors as banking interest rates move. While the interest rate sensitivity gap is a useful measurement and contributes toward effective asset and liability management, it is difficult to predict the effect of changing interest rates solely on that measure, without accounting for alterations in the maturity or repricing characteristics of the balance sheet that occur during changes in market interest rates. During periods of rising interest rates, the Corporation’s assets tend to have prepayments that are slower than those in an interest rate sensitivity gap and would increase the negative gap position. Conversely, during a period of declining interest rates, the Corporation’s assets would tend to prepay faster than originally expected thus decreasing the negative gap position. In addition, some of the Corporation’s assets, such as adjustable rate mortgages, have caps on the amount by which their interest rates can change in any single period, and therefore may not reprice as quickly as liabilities in the same maturity category.

The following table sets forth the amounts of interest earning assets and interest bearing liabilities outstanding at June 30, 2005, 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	$	6,419	$	—		$	—	$	—	$	6,419
Interest bearing deposits with Banks		6,359		—			—		—		6,359
Mortgage loans held for sale		2,373		—			—		—		2,373
Securities available for sale		3,878		12,979			1,979		662		19,498
Federal Home Loan Bank stock		1,293		—			—		—		1,293
Total loans, net of non-accrual		290,594		22,283			296,053		25,816		634,746
Total earning assets		310,916		35,262			298,032		26,478		670,688
Interest bearing liabilities
Total interest bearing deposits		261,153		143,866			111,203		—		516,222
Federal Home Loan Bank advances		—		15,589			10,000		—		25,589
Other Borrowings		3,201		—			—		—		3,201
Trust preferred securities		10,000		—			—		—		10,000
Total interest bearing liabilities		274,354		159,455			121,203		—		555,012
Net asset (liability) funding gap		36,562		(124,193	)		176,829		26,478	$	115,676
Cumulative net asset (liability) funding gap	$	36,562	$	(87,631	)	$	89,198	$	115,676

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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 from both assets and liabilities include federal funds sold, securities available for sale, loan repayments, core deposits, Federal Home Loan Bank advances and a federal funds purchase credit facility.

The following tables provide information about the Bank’s contractual obligations and commitments at June 30, 2005 (in thousands):

Contractual Obligations

			Payments Due By Period
	Less Than		1-3		3-5		Over 5
	1 Year		Years		Years		Years		Total
Securities sold under agreements to repurchase	$	3,201	$	—	$	—	$	—	$	3,201
Certificates of deposit		256,580		95,476		15,727		—		367,783
Long-term borrowings		25		15,589		10,000		—		25,614
Lease commitments		614		1,017		865		404		2,900
Subordinated debentures		—		—		—		10,000		10,000
Totals	$	260,420	$	112,082	$	26,592	$	10,404	$	409,498
Unused Loan Commitments and Letters of Credit
			Amount Of Commitment Expiration Per Period
	Less Than		1-3		3-5		Over 5
	1 Year		Years		Years		Years		Total
Unused loan commitments	$	68,834	$	19,457	$	2,685	$	33,058	$	124,034
Standby letters of credit		1,274		3,498		992		—		5,764
Totals	$	70,108	$	22,955	$	3,677	$	33,058	$	129,798

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DEARBORN BANCORP, INC. AND SUBSIDIARY
FORM 10-Q (continued)

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 June 30, 2005.

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.

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PART II — OTHER INFORMATION

ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS

The corporation held its regular annual meeting on May 17, 2005. At this meeting, there were several matters submitted to a vote of the shareholders.

The first matter was the re-election of directors. Four directors were re-elected to serve three-year terms expiring in 2008. The voting results for each nominee were as follows:

Nominee	Total For
William J. Demmer		4,117,130
Bradley F. Keller		4,385,270
Richard Nordstrom		4,226,443
Ronnie J. Story		4,497,109

There were no votes against any nominee.

The second matter was the consideration of a proposal to approve the 2005 Long-Term Incentive Plan. This proposal passed with 69% of votes cast for the approval of the 2005 Long-Term Incentive Plan. 29% of votes cast were against the proposal and 2% abstained.

ITEM 6. EXHIBITS AND REPORTS IN FORM 8-K.

(a)	Exhibits
	Exhibit 10 (a)	2005 Long-Term Incentive Plan
	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.
(b)	Two Form 8-K Reports, dated April 19, 2005 and May 17, 2005 were filed during the quarter ended June 30, 2005.

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DEAR BORN BANCORP, INC.
FORM 10-Q (continued)

SIGNATURES

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

Dearborn Bancorp, Inc.

(Registrant)

/s/ John E. Demmer

John E. Demmer

Chairman

/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: August 10, 2005

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Exhibit Index

Exhibit no.	Exhibit Description
Exhibit 10(a)	2005 Long-Term Incentive Plan
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.

EX-31.1

DEARBORN BANCORP, INC.
FORM 10-Q (continued)

Exhibit 31.1

RULE 13a-14(a) CERTIFICATION

I, Michael J. Ross, President and Chief Executive Officer, of Dearborn Bancorp, Inc., certify that:

1. I have reviewed this report on Form 10-Q of Dearborn Bancorp, Inc. (the “registrant”);

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):

a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.

Date: August 10, 2005	/s/ Michael J. Ross
	Michael J. Ross
	President and Chief Executive Officer
	Dearborn Bancorp, Inc.

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EX-31.2

DEARBORN BANCORP, INC.
FORM 10-Q (continued)

Exhibit 31.2

RULE 13a-14(a) CERTIFICATION

I, Jeffrey L. Karafa, Chief Financial Officer and Treasurer, of Dearborn Bancorp, Inc., certify that:

1. I have reviewed this report on Form 10-Q of Dearborn Bancorp, Inc. (the “registrant”);

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):

a) all significant deficiencies in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.

Date: August 10, 2005	/s/ Jeffrey L. Karafa
	Jeffrey L. Karafa
	Chief Financial Officer and Treasurer
	Dearborn Bancorp, Inc.

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EX-32.1

DEARBORN BANCORP, INC.
FORM 10-Q (continued)

Exhibit 32.1

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

     This certification is provided pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. § 1350, and accompanies the quarterly report on Form 10-Q for the quarter ended June 30, 2005 (the “Form 10-Q”) of Dearborn Bancorp, Inc. (the “Issuer”).

     I, Michael J. Ross, President and Chief Executive Officer of the Issuer, certify that:

(i)	The Form 10-Q fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)); and
(ii)	The information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Issuer.

Dated: August 10, 2005
	/s/ Michael J. Ross
	Michael J. Ross
	President and Chief Executive Officer,
	Dearborn Bancorp, Inc.

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EX-32.2

DEARBORN BANCORP, INC.
FORM 10-Q (continued)

Exhibit 32.2

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

     This certification is provided pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. § 1350, and accompanies the quarterly report on Form 10-Q for the quarter ended June 30, 2005 (the “Form 10-K”) of Dearborn Bancorp, Inc. (the “Issuer”).

     I, Jeffrey L. Karafa, Treasurer and Chief Financial Officer of the Issuer, certify that:

(i)	The Form 10-Q fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)); and
(ii)	The information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Issuer.

Dated: August 10, 2005
	/s/ Jeffrey L. Karafa
	Jeffrey L. Karafa
	Treasurer and Chief Financial Officer,
	Dearborn Bancorp, Inc.

38