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, 2006.

Commission file number 000-24478.

DEARBORN BANCORP, INC.

(Exact name of registrant as specified in its charter)

Michigan	38-3073622
(State or other jurisdiction of	(I.R.S. Employer Identification No.)
incorporation or organization)

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, 2006.

Class	Shares Outstanding
Common Stock	5,594,223

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

Large accelerated filer o          Accelerated filer þ          Non-accelerated filer o

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

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:
Report of Independent Registered Public Accounting Firm		3
Consolidated Balance Sheets — June 30, 2006, December 31, 2005 and June 30, 2005		4
Consolidated Statements of Income — For the Three and Six Months Ended June 30, 2006 and 2005		5
Consolidated Statements of Comprehensive Income — For the Three and Six Months Ended June 30, 2006 and 2005		6
Consolidated Statements of Cash Flows — For the Six Months Ended June 30, 2006 and 2005		7-8
Notes to Consolidated Financial Statements		9-14
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Liquidity and Capital		15-29
Item 3. Quantitative and Qualitative Disclosures about Market Risk		30-32
Item 4. Controls and Procedures		33
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		34
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		35
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, 2006 and 2005 and the related consolidated statements of income and comprehensive income and comprehensive income for the three and six month periods ended June 30, 2006 and 2005 and the related statements of cash flows for the six month periods ended June 30, 2006 and 2005. 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, 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 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
July 31, 2006

3

DEARBORN BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS (unaudited)

(Dollars, in thousands)	06/30/06			12/31/05			06/30/05
ASSETS
Cash and cash equivalents
Cash and due from banks	$	8,091		$	7,118		$	7,655
Federal funds sold		8,520			2,268			6,419
Interest bearing deposits with banks		107			69			6,359
Total cash and cash equivalents		16,718			9,455			20,433
Mortgage loans held for sale		1,174			1,041			2,373
Securities, available for sale		27,038			17,153			19,498
Federal Home Loan Bank stock		1,293			1,293			1,293
Loans
Loans		696,052			657,037			635,718
Allowance for loan losses		(7,154	)		(6,808	)		(6,616	)
Net loans		688,898			650,229			629,102
Premises and equipment, net		14,092			13,792			14,004
Real estate owned		—			663			1,082
Goodwill		5,473			5,473			7,093
Other intangible assets		2,166			2,291			825
Accrued interest receivable		2,652			2,586			2,065
Other assets		2,986			2,521			2,725
Total assets	$	762,490		$	706,497		$	700,493
LIABILITIES
Deposits
Non-interest bearing deposits	$	59,976		$	59,652		$	64,393
Interest bearing deposits		552,294			522,786			516,222
Total deposits		612,270			582,438			580,615
Other liabilities
Federal funds purchased		24,500			—			—
Securities sold under agreements to repurchase		310			1,615			3,201
Federal Home Loan Bank advances		25,588			25,588			25,614
Other liabilities		260			960			889
Accrued interest payable		1,912			1,683			1,319
Subordinated debentures		10,000			10,000			10,000
Total liabilities		674,840			622,284			621,638
STOCKHOLDERS’ EQUITY
Common stock - 10,000,000 shares authorized, 5,677,923 shares at 06/30/06, 5,683,061 shares at 12/31/05; and 5,601,226 shares at 06/30/05		87,224			83,684			78,685
Retained earnings		460			573			214
Accumulated other comprehensive loss		(34	)		(44	)		(44	)
Total stockholders’ equity		87,650			84,213			78,855
Total liabilities and stockholders’ equity	$	762,490		$	706,497		$	700,493

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)	06/30/06			06/30/05			06/30/06			06/30/05
Interest income
Interest on loans, including fees	$	12,678		$	10,318		$	24,624		$	20,020
Interest on securities, available for sale		152			160			315			300
Interest on federal funds		153			79			221			127
Interest on deposits with banks		79			81			146			83
Total interest income		13,062			10,638			25,306			20,530
Interest expense
Interest on deposits		5,578			3,491			10,451			6,377
Interest on other borrowings		313			302			633			588
Interest on subordinated debentures		215			180			410			320
Total interest expense		6,106			3,973			11,494			7,285
Net interest income		6,956			6,665			13,812			13,245
Provision for loan losses		155			279			312			743
Net interest income after provision for loan losses		6,801			6,386			13,500			12,502
Non-interest income
Service charges on deposit accounts		166			166			323			316
Fees for other services to customers		13			17			26			49
Gain on the sale of loans		94			204			175			334
Gain (loss) on the sale of real estate owned		(49	)		1			(103	)		88
Other than temporary impairment of securities		—			(696	)		—			(696	)
Other income		8			14			19			16
Total non-interest income		232			(294	)		440			107
Non-interest expenses
Salaries and employee benefits		2,445			2,339			4,877			4,646
Commissions on the origination of loans		26			66			65			131
Occupancy and equipment expense		595			613			1,225			1,247
Intangible expense		62			39			125			77
Advertising and marketing		113			109			201			223
Stationery and supplies		89			96			161			185
Professional services		175			180			358			379
Data processing		131			113			256			229
Other operating expenses		282			399			608			680
Total non-interest expenses		3,918			3,954			7,876			7,797
Income before income tax provision		3,115			2,138			6,064			4,812
Income tax provision		1,059			726			2,062			1,635
Net income	$	2,056		$	1,412		$	4,002		$	3,177
Per share data:
Net income — basic	$	0.36		$	0.25		$	0.70		$	0.57
Net income — diluted	$	0.34		$	0.24		$	0.67		$	0.53
Weighted average number of shares outstanding — basic		5,704,053			5,595,546			5,700,807			5,582,474
Weighted average number of shares outstanding - diluted		5,992,923			5,973,382			5,996,150			5,975,647

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)	06/30/06			06/30/05			06/30/06			06/30/05
Net income	$	2,056		$	1,412		$	4,002		$	3,177
Other comprehensive income, net of tax
Unrealized gains (losses) on securities
Unrealized holding gains (losses) arising during period		4			(95	)		15			233
Less: reclassification adjustment for losses included in net income		—			696			—			696
Tax effects		(1	)		(203	)		(5	)		(315	)
Other comprehensive income		3			398			10			614
Comprehensive income	$	2,059		$	1,810		$	4,012		$	3,791

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

6

DEARBORN BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Six Months Ended
(In thousands)	6/30/06			6/30/05
Cash flows from operating activities
Interest and fees received	$	25,240		$	20,155
Interest paid		(11,264	)		(7,073	)
Proceeds from sale of mortgage loans held for sale		11,517			21,295
Origination of mortgage loans held for sale		(11,475	)		(21,642	)
Taxes paid		(2,700	)		(1,580	)
Gain/(loss) on sale of real estate owned		(103	)		88
Cash paid to suppliers and employees		(6,736	)		(7,977	)
Net cash provided by operating activities		4,479			3,266
Cash flows from investing activities
Proceeds from calls, maturities and repayments of securities available for sale		8,783			5,348
Purchases of securities available for sale		(18,621	)		(3,535	)
Purchase of Federal Home Loan Bank stock		—			(171	)
Increase in loans, net of payments received		(38,981	)		(48,167	)
Purchases of property and equipment		(774	)		(1,342	)
Net cash used in investing activities		(49,593	)		(47,867	)
Cash flows from financing activities
Net increase in non-interest bearing deposits		324			1,328
Net increase in interest bearing deposits		29,508			38,407
Net increase in Federal Home Loan Bank advances		—			5,000
Net increase in federal funds payable		24,500			—
Decrease in other borrowings		(1,305	)		(914	)
Purchase of common stock		(878	)		—
Exercise of stock options		170			344
Tax benefit of stock options exercised		58			—
Net cash provided by financing activities		52,377			44,165
Increase (decrease) in cash and cash equivalents		7,263			(436	)
Cash and cash equivalents at the beginning of the period		9,455			20,869
Cash and cash equivalents at the end of the period	$	16,718		$	20,433

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

7

DEARBORN BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

	Six Months Ended
(In thousands)	6/30/06			6/30/05
Reconciliation of net income to net cash provided by operating activities
Net income	$	4,002		$	3,177
Adjustments to reconcile net income to net cash provided by operating activities Provision for loan losses		312			743
Depreciation and amortization expense		474			462
Restricted stock award expense		52			—
Stock option expense		23			—
Accretion of discount on investment securities		(39	)		(21	)
Amortization of premium on investment securities		7			18
Amortization of intangible assets		125			77
Increase in mortgage loans held for sale		(133	)		(681	)
Increase in interest receivable		(66	)		(176	)
Increase in interest payable		229			212
(Increase) decrease in other assets		193			(209	)
Decrease in other liabilities		(700	)		(336	)
Net cash provided by operating activities	$	4,479		$	3,266
Supplemental noncash disclosures:
Transfers from loans to real estate owned	$	39		$	1,850

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

8

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, 2006 and 2005, and December 31, 2005 and for the three and six month periods ended June 30, 2006 and 2005 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, 2006 and 2005, and for the three and six month periods ended June 30, 2006 and 2005 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 2005 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 and determining the fair value of securities and other financial instruments and assessing other than temporary impairments of securities.

9

A. Accounting and Reporting Policies (continued)

The Corporation adopted FAS 123, Revised on January 1, 2006. 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 the 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 in 2006. 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. Options granted under the 2005 Long Term Incentive Plan were “variable”, as defined by FAS 123. Upon adoption of FAS 123, Revised, the remaining unrecognized fair value of these options at the grant date will be expensed over the remaining service period. Any income tax benefit for the exercise of stock options in excess of income tax expense for financial reporting purposes will be classified as a cash inflow for financing activities and a cash outflow for operating activities in the statement of cash flows. For additional information regarding the Corporation’s incentive stock plans, refer to Note C.

10

B. Securities Available For Sale

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

	June 30, 2006
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
US Treasury securities	$	24,263	$	3	($	51	)	$	24,215
Corporate debt securities		2,355		—		—			2,355
Mortgage backed securities		472		—		(4	)		468
Totals	$	27,090	$	3	($	55	)	$	27,038

	December 31, 2005
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
US Treasury securities	$	16,665	$	—	($	68	)	$	16,597
Mortgage backed securities		555		2		(1	)		556
Totals	$	17,220	$	2	($	69	)	$	17,153

The amortized cost and fair value of securities available for sale at June 30, 2006 by contractual maturity are shown below (in thousands):

	Amortized		Fair
	Cost		Value
Due in three months or less	$	3,000	$	2,995
Due in three months through one year		1,001		991
Due in over one year through five years		20,262		20,229
Due in over five years		2,355		2,355
Mortgage backed securities		472		468
Totals	$	27,090	$	27,038

11

The entire portfolio has a net unrealized loss of $52,000 at June 30, 2006. Securities with unrealized losses at June 30, 2006, aggregated by investment category and the length of time that the securities have been in a continuous loss position are as follows:

Investment category	Fair Value		Unrealized Loss
US treasury securities	$	16,795	($	51	)
Mortgage backed securities		468		(4	)
Total temporarily impaired	$	17,263	($	55	)
Length of time in a continuous loss position	Fair Value		Unrealized Loss
Less than one year	$	13,278	($	40	)
One to three years		3,985		(15	)
Total temporarily impaired	$	17,263	($	55	)

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.

12

C. Stock Incentive 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. No further options grants may be made under this plan.

A summary of the option activity in the 1994 Plan follows:

						Weighted
	Available					Average
	For		Options			Exercise
	Grant		Outstanding			Price
Outstanding at January 1, 2006		—		492,510		$	8.40
Exercised		—		(33,861	)		5.53
Outstanding at June 30, 2006		—		458,649		$	8.61

For the options outstanding at June 30, 2006, the range of exercise prices was $4.39 to $15.38 per share with a weighted-average remaining contractual term of 5.0 years. At June 30, 2006, 458,649 options were exercisable at weighted average exercise price of $8.61 per share. There were 16,633 antidilutive options outstanding for the quarter ended June 30, 2006. There were no antidilutive options for the quarter ended June 30, 2005. The intrinsic value of options exercised during the six months ended June 30, 2006 was approximately $570,000 and the intrinsic value of options outstanding at June 30, 2006 was approximately $6,233,000.

During 2005, the Corporation initiated the 2005 Long-Term Incentive Plan. Under this plan, up to 330,750 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. In October of 2005, the Corporation’s Board of Directors approved grants of stock options and restricted stock. The awards have a term of ten years and typically vest fully three years from the grant date. In order for vesting to occur, 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 options. The actual cost of these awards could range from zero to 150% of the currently recorded compensation cost, depending on the Corporation’s actual performance.

13

C. Incentive Stock Plans (con’t)

Stock Options Granted — The incentive stock options were granted with exercise prices equal to market prices on the day of grant. At June 30, 2006, there were 16,631 stock options granted with a weighted average exercise price of $21.87. These options are eligible to vest fully on June 30, 2008.

During the six months ended June 30, 2006, the Corporation recognized stock option compensation expense of $23,000. The stock options vest on June 30, 2008. Compensation cost of $45,000, $43,000 and $22,000 is expected to be recognized during 2006, 2007 and 2008, respectively.

Restricted Stock Grants — Restricted stock totaling 12,231 shares were granted to officers on October 12, 2005. The restricted stock vests on June 30, 2008. Compensation cost of $52,000 and a tax benefit of $18,000 was recognized during the six months ended June 30, 2006. Compensation cost of $104,000, $104,000 and $52,000 is expected to be recognized during 2006, 2007 and 2008, respectively.

FAS 123, Revised, adopted January 1, 2006 requires certain additional disclosures beyond what was included in the Corporation’s 2005 Annual Report. The intrinsic value of options exercised during 2003, 2004 and 2005 were $572,000, $1,280,000 and $1,592,000, respectively. The intrinsic value of options outstanding at December 31, 2005 was $7,472,000 for options issued under the 1994 Stock Option Plan and $27,000 for options issued under the 2005 Long-Term Incentive Plan. The fair value of options vesting during 2003 and 2004 was $792,000 and $9,000, respectively. No options vested in 2005. Shares issued for option exercises are expected to come from authorized but unissued shares.

D. Effect of Newly Issued But Not Yet Effective Accounting Standards

In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109 (FIN 48), which clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements in accordance with SFAS 109, Accounting for Income Taxes. FIN 48 prescribes a recognition and measurement threshold for a tax position taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Corporation has not completed its evaluation of the impact of the adoption of FIN 48.

14

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.

15

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

16

Results of Operations

The Corporation reported net income of $2,056,000 and $4,002,000 for the three and six month periods ended June 30, 2006, compared to net income of $1,412,000 and $3,177,000 for the three and six month periods ended June 30, 2005, an increase of $644,000 or 46% for the three month period and $825,000 or 26% for the six month period. The increase in net income was primarily due to the improvement in net interest income and a write-down in the value of a security during the three months ended June 30, 2005. 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 during the period. The write-down of the security was the recognition of an other than temporary loss on a single issue of FHLMC preferred stock.

Net Interest Income

2006 Compared to 2005. As noted on the two charts on the following pages, net interest income for the three and six month periods ended June 30, 2006 was $6,956,000 and $13,812,000 compared to $6,665,000 and $13,245,000 for the same periods ended June 30, 2005, an increase of $291,000 or 4% for the three month period and $567,000 or 4% for the six month period. This increase was caused primarily by the increased volume of interest earning assets and interest bearing liabilities but offset by the decrease in the net interest rate spread. The Corporation’s interest rate spread was 3.21% and 3.29% for the three and six month periods ended June 30, 2006, compared to 3.51% and 3.64% for the same periods in 2005. The Corporation’s net interest margin was 3.88% and 3.95% for the three and six month periods ended June 30, 2006 compared to 4.00% and 4.10% for the same periods in 2005. The decrease in interest rate spread and net interest margin was primarily 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.

17

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, 2006							June 30, 2005
	Average				Average			Average				Average
(In thousands)	Balance		Interest		Rate			Balance		Interest		Rate
Assets
Interest-bearing deposits with banks	$	7,286	$	79		4.35	%	$	11,011	$	81		2.95	%
Federal funds sold		12,159		153		5.05	%		10,301		79		3.08	%
Investment securities, available for sale		13,466		152		4.53	%		20,870		160		3.08	%
Loans		686,235		12,678		7.41	%		626,105		10,318		6.61	%
Sub-total earning assets		719,146		13,062		7.29	%		668,287		10,638		6.38	%
Other assets		30,809							30,685
Total assets	$	749,955						$	698,972
Liabilities and stockholders’ equity
Interest bearing deposits	$	562,717	$	5,578		3.98	%	$	515,757	$	3,491		2.71	%
Other borrowings		38,045		528		5.57	%		39,237		482		4.93	%
Sub-total interest bearing liabilities		600,762		6,106		4.08	%		554,994		3,973		2.87	%
Non-interest bearing deposits		59,013							63,734
Other liabilities		2,357							2,057
Stockholders’ equity		87,823							78,187
Total liabilities and stockholders’ equity	$	749,955						$	698,972
Net interest income			$	6,956						$	6,665
Net interest rate spread						3.21	%						3.51	%
Net interest margin on earning assets						3.88	%						4.00	%

18

	Six Months Ended						Six Months Ended
	June 30, 2006						June 30, 2005
	Average				Average		Average				Average
(In thousands)	Balance		Interest		Rate		Balance		Interest		Rate
Assets
Interest-bearing deposits with banks	$	6,427	$	146		4.58%	$	5,761	$	83		2.91%
Federal funds sold		9,191		221		4.85%		9,280		127		2.76%
Investment securities, available for sale		15,053		315		4.22%		21,284		300		2.84%
Loans		674,979		24,624		7.36%		615,133		20,020		6.56%
Sub-total earning assets		705,650		25,306		7.23%		651,458		20,530		6.36%
Other assets		30,083						30,799
Total assets	$	735,733					$	682,257
Liabilities and stockholders’ equity
Interest bearing deposits	$	550,146	$	10,451		3.83%	$	499,167	$	6,377		2.58%
Other borrowings		38,496		1,043		5.46%		40,572		908		4.51%
Sub-total interest bearing liabilities		588,642		11,494		3.94%		539,739		7,285		2.72%
Non-interest bearing deposits		58,409						63,337
Other liabilities		1,950						2,043
Stockholders’ equity		86,732						77,138
Total liabilities and stockholders’ equity	$	735,733					$	682,257
Net interest income			$	13,812					$	13,245
Net interest rate spread						3.29%						3.64%
Net interest margin on earning assets						3.95%						4.10%

19

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
Three Months	2006/2005								2006/2005
	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	($	41	)	$	39	($	2	)	$	15		$	48	$	63
Federal funds sold		23			51		74			(3	)		97		94
Investment securities, available for sale		(83	)		75		(8	)		(135	)		150		15
Loans		1,104			1,256		2,360			2,162			2,442		4,604
Total earning assets	$	1,003		$	1,421	$	2,424		$	2,039		$	2,737	$	4,776
Liabilities
Interest bearing deposits	$	458		$	1,629	$	2,087		$	943		$	3,131	$	4,074
Other borrowings		(16	)		62		46			(58	)		193		135
Total interest bearing liabilities	$	442		$	1,691	$	2,133		$	885		$	3,324	$	4,209
Net interest income						$	291							$	567
Net interest rate spread							(0.30	%)							(0.35	%)
Net interest margin on earning assets							(0.12	%)							(0.15	%)

20

Provision for Loan Losses

2006 Compared to 2005. The provision for loan losses was $155,000 and $312,000 for the three and six month periods ended June 30, 2006, compared to $279,000 and $743,000 for the same periods in 2005, a decrease of $124,000 or 44% for the three month period and a decrease of $431,000 or 58% for the six month period. The provision for loan losses for the three and six month periods ended June 30, 2006 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 decrease in provision during 2006 was impacted by decreased loan growth during the six months ended June 30, 2006 compared to the same period in 2005 and net recoveries during the six months ended June 30, 2006 compared to modest net charge-offs during the same period in 2005.

Non-interest Income

2006 Compared to 2005. Non-interest income excluding the impairment charge in 2005 was $232,000 and $440,000 for the three and six month periods ended June 30, 2006, compared to $402,000 and $803,000 for the same periods in 2005, a decrease of $170,000 or 42% for three month period and a decrease of $363,000 or 45% for the six month period. The decrease during both periods was primarily due to the decrease in the gain on the sale of real estate owned and the gain on the sale of loans during the period. The decrease in the gain on the sale of real estate owned was due to the sale of three properties for a loss of $103,000 during the six months ended June 30, 2006, compared to the sale of two properties for a gain of $88,000 during the same period in 2005. The decrease in the gain on sale of loans was the result of decreased volume in residential lending activity during 2006.

During the second quarter of 2005, the Corporation recognized an other than temporary impairment charge of $696,000 on a single issue of FHLMC Preferred Stock. This security was sold during the third quarter of 2005.

21

Non-interest Expense

2006 Compared to 2005. Non-interest expense was $3,918,000 and $7,876,000 for the three and six month periods ended June 30, 2006, compared to $3,954,000 and $7,797,000 for the same periods in 2005, a decrease of $36,000 or 1% for the three month period and an increase of $79,000 or 1% for the six month period. The largest component of non-interest expense was salaries and employee benefits which amounted to $2,445,000 and $4,877,000 for the three month and six month periods ended June 30, 2006, compared to $2,339,000 and $4,646,000 for the same periods in 2005, an increase of $106,000 or 5% for the three month period and $231,000 or 5% for the six month period. The primary factor for the increase in salaries and benefits expense was the expansion of the retail banking department. As of June 30, 2006, the number of full time equivalent employees was 157 compared to 155 as of June 30, 2005.

The second largest component of non-interest expense was occupancy and equipment expense. Occupancy and equipment expense amounted to $595,000 and $1,225,000 for the three and six month periods ended June 30, 2006, compared to $613,000 and $1,247,000 for the same periods in 2005, a decrease of $18,000 or 3% for the three month period and $22,000 or 2% for the six month period.

Income Tax Provision

2006 Compared to 2005. Income tax expense was $1,059,000 and $2,062,000 for the three and six month periods ended June 30, 2006, compared to $726,000 and $1,635,000 for the same periods in 2005, an increase of $333,000 or 46% for the three month period and $427,000 or 26% for the six month period. The increase was primarily a result of increased pre-tax income.

22

Comparison of Financial Condition at June 30, 2006 and December 31, 2005

Assets. Total assets at June 30, 2006 were $762,490,000 compared to $706,497,000 at December 31, 2005, an increase of $55,993,000 or 8%. The increase was primarily due to the increase in loans during the period.

Federal Funds Sold. Total federal funds sold at June 30, 2006 were $8,520,000 compared to $2,268,000 at December 31, 2005, an increase of $6,252,000 or 276%. The increase was primarily due to additional funds received as a result of deposit gathering activities during the six months ended June 30, 2006. The funds are invested into overnight investments until these funds can be deployed into loans.

Interest bearing deposits with banks. Total interest bearing deposits with banks at June 30, 2006 were $107,000 compared to $69,000 at December 31, 2005, an increase of $38,000 or 55%. 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, 2006 were $1,174,000 compared to $1,041,000 at December 31, 2005, an increase of $133,000 or 13%. 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, 2006 were $27,038,000 compared to $17,153,000 at December 31, 2005, an increase of $9,885,000 or 58%. The increase was due to the purchase of securities, available for sale during 2006.

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 $52,000. The unrealized loss is reflected by an adjustment to stockholders’ equity.

Federal Home Loan Bank Stock. Federal Home Loan Bank stock was $1,293,000 at June 30, 2006 and December 31, 2005.

23

Loans. Total loans at June 30, 2006 were $696,052,000 compared to $657,037,000 at December 31, 2005, an increase of $39,015,000 or 6%. 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):

	06/30/06			12/31/05			06/30/05
Consumer loans	$	31,159		$	35,041		$	41,082
Commercial, financial, & other		116,089			110,805			132,058
Commercial real estate construction		126,538			118,358			89,572
Commercial real estate mortgages		376,970			345,536			326,332
Residential real estate mortgages		45,296			47,297			46,674
		696,052			657,037			635,718
Allowance for loan losses		(7,154	)		(6,808	)		(6,616	)
	$	688,898		$	650,229		$	629,102

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

	06/30/06		12/31/05		06/30/05
Over 90 days past due and still accruing	$	982	$	189	$	134
Non-accrual loans		3,982		984		972
Total non-performing loans		4,964		1,173		1,106
Real estate owned		—		661		1,082
Other repossessed assets		—		2		—
Other non-performing assets		—		663		1,082
Total non-performing assets	$	4,964	$	1,836	$	2,188

Non-accrual loans at June 30, 2006 were $3,982,000. The increase in non-accrual loans during the six months ended June 30, 2006 is primarily due to the downgrading of three construction loans with a balance of $2,988,000 to non-accrual status. The distribution of non-accrual loans by loan type is as follows:

	Number of
	Loans		Balance
Consumer loans		2	$	69
Commercial, financial, & other		2		303
Commercial real estate construction		1		945
Commercial real estate mortgages		6		2,354
Residential real estate mortgages		3		311
Total non-accrual loans		14	$	3,982

24

Allowance for Loan Losses. The allowance for loan losses was $7,154,000 at June 30, 2006 compared to $6,808,000 at December 31, 2005, an increase of $346,000 or 5%. The increase resulted primarily from provisions and net recoveries recorded during the six month period ended June 30, 2006. 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
	06/30/06			12/31/05			06/30/05
Balance, beginning of year	$	6,808		$	5,884		$	5,884
Allowance on loans acquired		—			—			—
Charge-offs:
Consumer loans		—			112			71
Commercial, financial & other		36			169			95
Commercial real estate construction		—			—			—
Commercial real estate mortgages		36			86			6
Residential real estate mortgages		10			—			—
Recoveries:
Consumer loans		9			37			9
Commercial, financial & other		88			131			111
Commercial real estate construction		—			—			—
Commercial real estate mortgages		19			10			9
Residential real estate mortgages		—			32			32
Net charge-offs (recoveries)		(34	)		157			11
Additions charged to operations		312			1,081			743
Balance, end of period	$	7,154		$	6,808		$	6,616
Allowance to total loans		1.03	%		1.04	%		1.04	%
Allowance to nonperforming assets		144.12	%		370.81	%		302.38	%
Net charge-offs (recoveries) to average loans		(0.01	%)		0.02	%		0.00	%

25

Premises and Equipment. Bank premises and equipment at June 30, 2006 were $14,092,000 compared to $13,792,000 at December 31, 2005, an increase of $300,000 or 2%. The increase in premises and equipment was primarily due to purchase of a building in Shelby Township, Michigan. This building will be renovated and opened as a full service branch office during the fourth quarter of 2006.

Real estate owned. Real estate owned at June 30, 2006 was $0 compared to $663,000 at December 31, 2005.

Goodwill and other intangible assets. Goodwill and other intangible assets were $7,639,000 at June 30, 2006 compared to $7,764,000 at December 31, 2005. The Bank has intangible assets for the estimated value of core deposit accounts and borrower relationships 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 was valued at $929,000 and is being amortized over a period of ten years. The borrower relationship intangible was valued to $1,620,000 and is being amortized over a period of 17 years. At June 30, 2006, the core deposit intangible and borrower relationship intangible amounted to $688,000 and $1,478,000, respectively.

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 $5.5 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. There was no impairment at December 31, 2005, when goodwill was most recently tested for impairment.

Accrued Interest Receivable. Accrued interest receivable at June 30, 2006 was $2,652,000 compared to $2,586,000 at December 31, 2005, an increase of $66,000 or 3%. The increase was primarily due to the increase in the Bank’s loan portfolio.

Other Assets. Other assets at June 30, 2006 were $2,986,000 compared to $2,521,000 at December 31, 2005, an increase of $465,000 or 18%. The decrease was primarily due to changes in deferred tax assets.

26

Deposits. Total deposits at June 30, 2006 were $612,270,000 compared to $582,438,000 at December 31, 2005, an increase of $29,832,000 or 5%. The following is a summary of the distribution of deposits (in thousands):

	06/30/06		12/31/05		06/30/05
Non-interest bearing:
Demand	$	59,976	$	59,652	$	64,393
Interest bearing:
Checking	$	107,107	$	13,413	$	14,443
Money market		21,071		26,514		59,729
Savings		47,021		69,503		74,267
Time, under $100,000		138,088		151,038		143,538
Time, $100,000 and over		239,007		262,318		224,245
		552,294		522,786		516,222
Total deposits	$	612,270	$	582,438	$	580,615

Management continues to implement a strategy to change the mix of the deposit portfolio by focusing more heavily on savings, checking 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 2006 that highlighted the Bank’s Anniversary and the introduction and promotion of an interest checking product in February 2006. Management expects deposits to grow at an increasing rate during the remainder of 2006.

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):

	06/30/06		12/31/05		06/30/05
Interest bearing checking	$	895	$	1,020	$	2,677
Time, $100,000 and over		62,571		85,236		76,997
Total municipal deposits	$	63,466	$	86,256	$	79,674

Brokered deposits are included in the Time, $100,000 and over category. Brokered deposits were $43,883,000, $45,100,000 and $22,290,000 at June 30, 2006, December 31, 2005 and June 30, 2005, respectively.

27

Federal Funds Purchased. Federal funds purchased at June 30, 2006 were $24,500,000 compared to $0 at December 31, 2005. The Bank has several federal funds lines of credit with correspondent banks that are utilized as a short term source of funding.

Securities Sold Under Agreement to Repurchase. Securities sold under agreements to repurchase at June 30, 2006 were $310,000 compared to $1,615,000 at December 31, 2005, a decrease of $1,305,000 or 81%. These repurchase agreements are secured by securities held by the Bank.

Federal Home Loan Bank Advances. Federal Home Loan Bank advances were $25,588,000 at June 30, 2006 and December 31, 2005.

Accrued Interest Payable. Accrued interest payable at June 30, 2006 was $1,912,000 compared to $1,683,000 at December 31, 2005, an increase of $229,000 or 14%. The increase was primarily due to the increasing amount of interest bearing deposits during the period.

Other Liabilities. Other liabilities at June 30, 2006 were $260,000 compared to $960,000 at December 31, 2005, a decrease of $700,000 or 73%. 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, 2006 and December 31, 2005. 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 $265,000 at June 30, 2006.

28

Capital

Stockholders’ equity at June 30, 2006 was $87,650,000 compared to $84,213,000 as of December 31, 2005, an increase of $3,437,000 or 4%. The increase in capital was primarily due net income during the period.

The Corporation’s Board of Directors approved a stock repurchase plan that authorized the repurchase of up to 262,500 shares of the Corporation’s common stock on March 21, 2006. The Corporation repurchased 39,000 shares of its common stock at an average price of $21.44 during the second quarter of 2006 under this plan.

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, 2006
Total capital (to risk weighted assets)
Consolidated	$	97,199		13.31	%	$	58,404		8.00	%	$	73,005		10.00	%
Bank		80,725		11.13	%		58,022		8.00	%		72,527		10.00	%
Tier 1 capital (to risk weighted assets)
Consolidated		90,045		12.33	%		29,202		4.00	%		43,803		6.00	%
Bank		73,571		10.14	%		29,011		4.00	%		43,516		6.00	%
Tier 1 capital (to average assets)
Consolidated		90,045		12.13	%		29,693		4.00	%		37,116		5.00	%
Bank		73,571		10.15	%		28,985		4.00	%		36,231		5.00	%
As of December 31, 2005
Total capital (to risk weighted assets)
Consolidated	$	93,281		13.29	%	$	56,147		8.00	%	$	70,184		10.00	%
Bank		75,918		10.89	%		55,756		8.00	%		69,695		10.00	%
Tier 1 capital (to risk weighted assets)
Consolidated		86,472		12.32	%		28,073		4.00	%		42,110		6.00	%
Bank		69,109		9.92	%		27,878		4.00	%		41,817		6.00	%
Tier 1 capital (to average assets)
Consolidated		86,472		12.32	%		28,074		4.00	%		35,092		5.00	%
Bank		69,109		10.09	%		27,400		4.00	%		34,250		5.00	%

Based on the respective regulatory capital ratios at June 30, 2006 and December 31, 2005, the Corporation and Bank are considered well capitalized.

29

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.

30

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, 2006, 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		$	8,520			$	—		$	—	$	—	$	8,520
Interest bearing deposits with Banks			107				—			—		—		107
Mortgage loans held for sale			1,174				—			—		—		1,174
Securities available for sale			4,057				20,534			1,979		468		27,038
Federal Home Loan Bank stock			1,293				—			—		—		1,293
Total loans, net of non-accrual			260,659				45,029			351,671		34,711		692,070
Total earning assets			275,810				65,563			353,650		35,179		730,202
Interest bearing liabilities
Total interest bearing deposits			263,048				163,688			125,558		—		552,294
Federal Home Loan Bank advances			—				10,000			15,588		—		25,588
Federal funds purchased			24,500				—			—		—		24,500
Other Borrowings			310				—			—		—		310
Subordinated debentures			10,000				—			—		—		10,000
Total interest bearing liabilities			297,858				173,688			141,146		—		612,692
Net asset (liability) funding gap			(22,048	)			(108,125	)		212,504		35,179	$	117,510
Cumulative net asset (liability) funding gap	(	$	22,048	)	(	$	130,173	)	$	82,331	$	117,510

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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, 2006 (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	$	310	$	—	$	—	$	—	$	310
Certificates of deposit		299,298		49,463		28,334		—		377,095
Long-term borrowings		34,500		15,588		—		—		50,088
Lease commitments		559		909		758		135		2,361
Subordinated debentures		—		—		—		10,000		10,000
Totals	$	334,667	$	65,960	$	29,092	$	10,135	$	439,854

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	$	135,543	$	36,483	$	4,307	$	23,761	$	200,094
Standby letters of credit		2,653		6,018		—		—		8,671
Totals	$	138,196	$	42,501	$	4,307	$	23,761	$	208,765

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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, 2006.

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.

33

PART II — OTHER INFORMATION

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

The corporation held its regular annual meeting on May 18, 2006. The only 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
David Himick		4,692,192
Jeffrey G. Longstreth		4,691,246
Michael J. Ross		4,695,076
Robert C. Schwyn		4,953,362

There were no votes against any nominee.

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

(a) 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.

(b) Two Form 8-K Reports, dated April 18, 2006 and May 16, 2006 were filed during the quarter ended June 30, 2006.

34

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 8, 2006

35

EXHIBIT INDEX.

Exhibit no.	Description of Exhibit
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.

36

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 8, 2006	/s / Michael J. Ross
	Michael J. Ross
	President and Chief Executive Officer
	Dearborn Bancorp, Inc.

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 8, 2006	/s / Jeffrey L. Karafa
	Jeffrey L. Karafa
	Chief Financial Officer and Treasurer
	Dearborn Bancorp, Inc.

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, 2006 (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 8, 2006

/s / Michael J. Ross

Michael J. Ross

President and Chief Executive Officer,

Dearborn Bancorp, Inc.

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, 2006 (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 8, 2006

/s / Jeffrey L. Karafa

Jeffrey L. Karafa

Treasurer and Chief Financial Officer,

Dearborn Bancorp, Inc.