- Quarterly Report (10-Q)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q


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

For the Quarterly period ended September 30, 2010


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

For the transition period from to

Commission file number 000-24478.

DEARBORN BANCORP, INC.

(Exact name of registrant as specified in its charter)


Michigan		38-3073622

(State or other jurisdiction of		(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)

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

Yes þ No o

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

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


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

Indicate by check mark if the registrant is a shell company, as defined in Rule 12b-2 of the Exchange Act.

Yes o No þ

Indicate the number of shares outstanding for each of the issuer’s classes of common stock, as of July 31, 2010.


Class		Shares Outstanding
Common Stock		7,685,705

DEARBORN BANCORP, INC.
INDEX


	Page
Part I. Financial Information:

Item 1. Financial Statements

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

Report of Independent Registered Public Accounting Firm		3

Condensed Consolidated Balance Sheets – September 30, 2010, December 31, 2009 and September 30, 2009		4

Condensed Consolidated Statements of Operation — For the Three And Nine Months Ended September 30, 2010 and 2009		5

Condensed Consolidated Statements of Comprehensive Loss – For the Three and Nine Months Ended September 30, 2010 and 2009		6

Condensed Consolidated Statements of Cash Flows — For the Nine Months Ended September 30, 2010 and 2009		7

Notes to Condensed Consolidated Financial Statements		9-28

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		29-48

Item 3. Quantitative and Qualitative Disclosures about Market Risk		49-52

Item 4. Controls and Procedures		53

Part II. Other Information:

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

Item 1A Risk Factors		54
Item 6. Exhibits		55

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

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

SIGNATURES		56
EX-31.1
EX-31.2
EX-32.1
EX-32.2

Report of Independent Registered Public Accounting Firm

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

We have reviewed the accompanying condensed consolidated balance sheets of Dearborn Bancorp, Inc. as of September 30, 2010 and 2009 and the related condensed consolidated statements of operation and comprehensive loss for the three-month and nine-month periods ended September 30, 2010 and 2009, and condensed consolidated statements of cash flows for the nine-month periods ended September 30, 2010 and 2009. These interim financial statements are the responsibility of the Corporation’s management.

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

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

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of December 31, 2009 and the related consolidated statements of operations, stockholders’ equity and cash flows for the year then ended (not presented herein); and in our report dated March 31, 2010, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2009 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

BKD, LLP

Indianapolis, Indiana
November 15, 2010

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

DEARBORN BANCORP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS


(Dollars, in thousands)	9/30/2010			12/31/2009			9/30/2009
ASSETS
Cash and cash equivalents
Cash and due from banks	$	7,136		$	7,803		$	17,330
Federal funds sold		56			156			6,206
Interest bearing deposits with banks		70,216			69,538			117,732

Total cash and cash equivalents		77,408			77,497			141,268

Mortgage loans held for sale		572			1,129			1,449
Securities available for sale		46,372			45,964			13,547
Securities held to maturity		250			336			363
Federal Home Loan Bank stock		3,698			3,698			3,698
Loans
Loans		760,683			833,136			862,664
Allowance for loan losses		(29,831	)		(35,125	)		(28,373	)

Net loans		730,852			798,011			834,291

Premises and equipment, net		19,415			20,194			20,477
Real estate owned		25,043			23,435			15,472
Accrued interest receivable		3,301			3,562			3,619
Other assets		9,820			12,660			8,153


Total assets	$	916,731		$	986,486		$	1,042,337


LIABILITIES
Deposits
Non-interest bearing deposits	$	87,205		$	83,873		$	89,329
Interest bearing deposits		722,213			784,082			815,625

Total deposits		809,418			867,955			904,954

Other liabilities
Securities sold under agreements to repurchase		—			—			2,302
Federal Home Loan Bank advances		63,716			63,855			73,855
Accrued interest payable		972			1,046			956
Other liabilities		2,471			1,685			2,380
Subordinated debentures		10,000			10,000			10,000

Total liabilities		886,577			944,541			994,447

COMMITMENT AND CONTINGENT LIABILITIES		—			—			—

STOCKHOLDERS’ EQUITY
Common stock — no par value 100,000,000 shares authorized, 7,685,705 at 9/30/10, 7,687,470 shares at 12/31/09 and 7,687,470 shares at 9/30/09		131,929			131,929			131,898
Accumulated deficit		(101,626	)		(89,850	)		(84,043	)
Accumulated other comprehensive income (loss)		(149	)		(134	)		35

Total stockholders’ equity		30,154			41,945			47,890


Total liabilities and stockholders’ equity	$	916,731		$	986,486		$	1,042,337

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

DEARBORN BANCORP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)


	Three Months Ended						Nine Months Ended
(In thousands, except share data)	9/30/2010			9/30/2009			9/30/2010			9/30/2009
Interest income
Interest on loans	$	11,328		$	13,135		$	34,642		$	40,231
Interest on securities, available for sale		276			33			601			467
Interest on deposits with banks		115			76			216			273
Interest on federal funds		—			2			1			14

Total interest income		11,719			13,246			35,460			40,985

Interest expense
Interest on deposits		2,578			4,806			9,046			16,262
Interest on other borrowings		285			504			858			1,523
Interest on subordinated debentures		106			110			295			320

Total interest expense		2,969			5,420			10,199			18,105

Net interest income		8,750			7,826			25,261			22,880
Provision for loan losses		500			14,185			12,403			38,522


Net interest income (loss) after provision for loan losses		8,250			(6,359	)		12,858			(15,642	)


Non-interest income
Service charges on deposit accounts		366			388			1,089			1,118
Fees for other services to customers		35			33			120			95
Gain on the sale of loans		54			37			178			253
Gain on the sale of securities		470			—			539			465
Other than temporary impairment on securities, held to maturity
Portion of loss recognized in other comprehensive income before taxes
Net impairment losses recognized in earnings		—			(387	)		—			(387	)
Gain (loss) on the sale of real estate owned		(38	)		(154	)		(6	)		(157	)
Loss on the write-down of real estate owned		(960	)		(639	)		(5,309	)		(2,499	)
Write-down of other assets		—			—			—			(100	)
Other income		91			122			271			369

Total non-interest income (loss)		18			(600	)		(3,118	)		(843	)

Non-interest expense
Salaries and employee benefits		3,050			3,159			9,247			9,657
Occupancy and equipment expense		857			903			2,488			2,753
Amortization of intangible expense		—			4,195			—			4,592
FDIC assessment		1,075			672			3,150			1,853
Advertising and marketing		42			48			102			177
Stationery and supplies		82			120			229			340
Professional services		490			234			962			598
Data processing		180			219			540			685
Defaulted loan expense		1,184			1,827			3,273			3,514
Other operating expenses		577			433			1,519			1,255

Total non-interest expense		7,537			11,810			21,510			25,424


Income (loss) before federal income tax expense		731			(18,769	)		(11,770	)		(41,909	)

Income tax expense		100			21,276			100			13,460


Net income (loss)	$	631		$	(40,045	)	$	(11,870	)	$	(55,369	)


Per share data:
Net income (loss) — basic		0.08			(5.24	)		(1.55	)		(7.24	)
Net income (loss) — diluted		0.08			(5.24	)		(1.55	)		(7.24	)

Weighted average number of shares outstanding — basic		7,645,940			7,645,940			7,645,940			7,644,785
Weighted average number of shares outstanding — diluted		7,645,940			7,645,940			7,645,940			7,644,785

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

DEARBORN BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (unaudited)


	Three Months Ended						Nine Months Ended
(In thousands)	9/30/10			9/30/09			9/30/10			9/30/09
Net loss	$	631		$	(40,045	)	$	(11,870	)	$	(55,369	)
Other comprehensive income (loss) , net of tax
Unrealized gains on securities
Unrealized holding gains (losses) arising during period		(941	)		424			(554	)		(333	)
Less: net unrealized loss on securities, held to maturity which has been recognized in income					(387	)		—			(387	)
Less: reclassification adjustment for gains included in net income		470			—			539			465
Tax effects		—			(11	)		—			88

Other comprehensive income (loss)		(471	)		26			(15	)		(167	)


Comprehensive income (loss)	$	160		$	(40,019	)	$	(11,885	)	$	(55,536	)

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

DEARBORN BANCORP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)


	Nine Months Ended
(In thousands)	9/30/2010			9/30/2009
Cash flows from operating activities
Interest and fees received	$	35,721		$	40,865
Interest paid		(10,273	)		(18,844	)
Proceeds from sale of mortgages held for sale		16,190			26,150
Origination of mortgages held for sale		(15,455	)		(25,512	)
Taxes refunded		4,074			—
(Gain) loss on sale of real estate owned		6			32
Gain on sale of securities		(539	)		465
Cash paid to suppliers and employees		(18,568	)		(16,288	)

Net cash provided by operating activities		11,156			6,868

Cash flows from investing activities
Sale of securities available for sale		52,116			49,661
Proceeds from calls, maturities and repayments of of securities available for sale		2,908			52,067
Purchases of securities available for sale		(55,444	)		(32,777	)
Purchase of Federal Home Loan Bank stock		—			(84	)
(Increase) decrease in loans, net of payments received		44,803			33,336
Proceeds from the sale of real estate owned		3,036			4,165
Purchases of property and equipment		12			(206	)

Net cash used in investing activities		47,431			106,162

Cash flows from financing activities
Net decrease in non-interest bearing deposits		3,332			8,012
Net increase in interest bearing deposits		(61,869	)		(41,453	)
Increase (decrease) in other borrowings		—			(159	)
Repayments on Federal Home Loan Bank advances		(139	)		8,836

Net cash provided by financing activities		(58,676	)		(24,764	)

Increase (decrease) in cash and cash equivalents		(89	)		88,266
Cash and cash equivalents at the beginning of year		77,497			53,002


Cash and cash equivalents at the end of year	$	77,408		$	141,268

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

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


	Nine Months Ended
(In thousands)	9/30/2010			9/30/2009
Reconciliation of net loss to net cash provided by operating activities
Net loss		($11,870	)		($55,369	)
Adjustments to reconcile net income to net cash provided by operating activities
Provision for loan losses		12,403			38,522
Depreciation and amortization expense		767			1,001
Restricted stock award expense		47			61
Stock option expense		47			54
Accretion of discount on investment securities		(123	)		(54	)
Amortization of premium on investment securities		277			237
Impairment of investment securities		—			387
Write-down of real estate owned		5,309			2,499
Amortization of intangible assets		—			595
Impairment of intangible assets		—			3,997
Decrease in mortgages held for sale		557			385
(Increase) decrease in interest receivable		261			(120	)
Decrease in interest payable		(74	)		(739	)
Decrease in other assets		2,769			14,069
Increase in other liabilities		786			1,343


Net cash provided by operating activities	$	11,156		$	6,868


Supplemental noncash disclosures:
Transfers from loans to real estate owned	$	9,953		$	12,511

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

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

A.		Accounting and Reporting Policies

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

		The condensed consolidated financial statements of the Corporation as of September 30, 2010 and 2009, and December 31, 2009 and for the three and nine month periods ended September 30, 2010 and 2009 reflect all adjustments, consisting of normal recurring items which are in the opinion of management, necessary for a fair presentation of the results for the interim period. The condensed consolidated balance sheet of the Corporation as of December 31, 2009 has been derived from the audited consolidated balance sheet as of that date. The operating results for the three and nine month periods ended September 30, 2010 are not necessarily indicative of results of operations for the entire year.

		The condensed consolidated financial statements as of September 30, 2010 and 2009, and for the three and nine month periods ended September 30, 2010 and 2009 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 2009 Annual Report on Form 10-K.

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

A.		Accounting and Reporting Policies (con’t)

		Income (Loss) Per Share

		Basic income (loss) per share is net income (loss) divided by the weighted average number of common shares outstanding during the period. Diluted income (loss) per share includes the dilutive effect of additional potential common shares issuable under stock options. Income (loss) per share is restated for all stock splits and dividends through the date of issue of the financial statements.

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


	Three Months Ended					Nine Months Ended
	9/30/2010		9/30/2009			9/30/2010			9/30/2009
Basic
Net income (loss)	$	631	$	(40,045	)	$	(11,870	)	$	(55,369	)

Weighted average common shares		7,645,940		7,645,940			7,645,940			7,644,785

Basic earnings (loss) per common share	$	0.08	$	(5.24	)	$	(1.55	)	$	(7.24	)

Diluted
Net income (loss)	$	631	$	(40,045	)	$	(11,870	)	$	(55,369	)

Weighted average common shares outstanding for basic earnings (loss) per common share		7,645,940		7,645,940			7,645,940			7,644,785

Add: Dilutive effects of assumed exercise of stock options		—		—			—			—


Average shares and dilutive potential common shares		7,645,940		7,645,940			7,645,940			7,644,785


Dilutive earnings (loss) per common share	$	0.08	$	(5.24	)	$	(1.55	)	$	(7.24	)

Stock options for 549,342 and 542,511 shares of common stock were not considered in computing diluted earnings per common share for the nine months ended September 30, 2010 and 2009, respectively, because they were antidilutive. All share and per share amounts have been adjusted for stock dividends.

	A.		Accounting and Reporting Policies (con’t)

			Current Accounting Developments

			FASB ASU 2009-16, Transfers and Servicing (Topic 860); Accounting for Transfers of Financial Assets — ASU 2009-16 requires more information about transfers of financial assets, including securitization transactions, and where entities have continued exposure to the risks related to transferred assets. The Corporation adopted ASU 2009-16 effective January 1, 2010 and adoption did not have a material effect on its financial position or results of operations.

			ASU No. 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. ASU 2010-06 revises two disclosure requirements concerning fair value measurements and clarifies two others. It requires separate presentation of significant transfers into and out of Levels 1 and 2 of the fair value hierarchy and disclosure of the reasons for such transfers. It will also require the presentation of purchases, sales, issuances, and settlements within Level 3 on a gross basis rather than a net basis. The amendments also clarify that disclosures should be disaggregated by class of asset or liability and that disclosures about inputs and valuation techniques should be provided for both recurring and non-recurring fair value measurements. The Company’s disclosures about fair value measurements are presented in Note E — Disclosures About Fair Value of Assets and Liabilities. These new disclosure requirements were effective for the period ended March 31, 2010, except for the requirement concerning gross presentation of Level 3 activity, which is effective for fiscal years beginning after December 15, 2010. There was no significant effect to the Corporation’s financial statement disclosure upon adoption of this ASU.

			ASU No. 2010-09, Subsequent Events (Topic 855) — Amendments to Certain Recognition and Disclosure Requirements. ASU 2010-09 amends the subsequent events disclosure guidance. The amendments include a definition of an SEC filer, requires an SEC filer or conduit bond obligor to evaluate subsequent events through the date the financial statements are issued, and removes the requirement for an SEC filer to disclose the date through which subsequent events have been evaluated. ASU 2010-09 was effective upon issuance for us. The impact of ASU 2010-09 on our disclosures is reflected in Subsequent Events footnote.

			FASB ASU 2010-18 — Effect of a Loan Modification When the Loan Is Part of a Pool That Is Accounted for as a Single Asset. This Update clarifies that modifications of loans that are accounted for within a pool under Subtopic 310-30, which provides guidance on accounting for acquired loans that have evidence of credit deterioration upon acquisition, do not result in the removal of those loans from the pool even if the modification would otherwise be considered a troubled debt restructuring. An entity will continue to be required to consider whether the pool of assets in which the loan is included is impaired if expected cash flows for the pool change. The amendments do not affect the accounting for loans under the scope of Subtopic 310-30 that are not accounted for within pools. Loans accounted for individually under Subtopic 310-30 continue to be subject to the troubled debt restructuring accounting provisions within Subtopic 310-40. The Corporation has adopted ASU 2010-18, but does not anticipate that its adoption will have an impact on its financial statements.

	A.		Accounting and Reporting Policies (con’t)

			ASU No. 2010-20, Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. ASU 2010-20 requires that more information be disclosed about the credit quality of a company’s loans and the allowance for loan losses held against those loans. A company will need to disaggregate new and existing disclosure based on how it develops its allowance for loan losses and how it manages credit exposures. Existing disclosures to be presented on a disaggregated basis include a roll-forward of the allowance for loan losses, the related recorded investment in such loans, the nonaccrual status of loans, and impaired loans. Additional disclosure is also required about the credit quality indicators of loans by class at the end of the reporting period, the aging of past due loans, information about troubled debt restructurings, and significant purchases and sales of loans during the reporting period by class.

			For public companies, ASU 2010-20 requires certain disclosures as of the end of a reporting period effective for periods ending on or after December 15, 2010. Other required disclosures about activity that occurs during a reporting period are effective for periods beginning on or after December 15, 2010. The Corporation anticipates that adoption of these additional disclosures will not have a material effect on its financial position or results of operations.

	B.		Securities

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


	September 30, 2010
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
US Government sponsored agency securities	$	2,007		—	$	(4	)	$	2,003
Mortgage backed securities		44,514		104		(249	)		44,369


Totals	$	46,521	$	104	$	(253	)	$	46,372


	December 31, 2009
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
US Government sponsored agency securities	$	12,759	$	20	$	(30	)	$	12,749
Corporate bonds		33,308		—		(197	)		33,111
Mortgage backed securities		101		3		—			104


Totals	$	46,168	$	23	$	(227	)	$	45,964

Securities (con’t)

The amortized cost and fair value of securities available for sale at September 30, 2010 by contractual maturity are shown below (in thousands):


	Amortized		Fair
	Cost		Value
Due in one year through five years	$	2,007	$	2,003
Mortgage backed securities		44,514		44,369


Totals	$	46,521	$	46,372

		The entire portfolio has a net unrealized loss of $149,000 at September 30, 2010, compared to net unrealized loss of $204,000 at December 31, 2009.

		Securities with unrealized losses at September 30, 2010 and December 31, 2009, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position are as follows:


	September 30, 2010
Investment category	Less than one year					One year or more				Total
	Fair		Unrealized			Fair		Unrealized		Fair		Unrealized
	Value		Loss			Value		Loss		Value		Loss
US Government sponsored entity securities	$	2,003	$	(4	)	$	—	$	—	$	2,003	$	(4	)
Mortgage backed securities		15,966		(249	)		—		—		15,966		(249	)


Total temporarily impaired	$	17,969	$	(253	)	$	—	$	—	$	17,969	$	(253	)


	December 31, 2009
Investment category	Less than one year					One year or more				Total
	Fair		Unrealized			Fair		Unrealized		Fair		Unrealized
	Value		Loss			Value		Loss		Value		Loss
US Government sponsored entity securities	$	6,657	$	(30	)	$	—	$	—	$	6,657	$	(30	)
Corporate bonds		33,111		(197	)		—		—		33,111		(197	)


Total temporarily impaired	$	39,768	$	(227	)	$	—	$	—	$	39,768	$	(227	)

Securities (con’t)

Sales of available for sale securities for the three and nine months ended September 30, 2010 and 2009 are as follows (in thousands):


	For the three months ended				For the nine months ended
	9/30/2010		9/30/2009		9/30/2010		9/30/2009
Gross Gains	$	470	$	—	$	539	$	467
Gross Losses		—		—		—		2

		Securities having a carrying value of $37,042,000 and $5,524,000 at September 30, 2010 and December 31, 2009, respectively, were pledged to secure clearing requirements and borrowings.

		The Corporation currently holds one single issuer trust preferred security that is classified as securities held to maturity. The amortized cost and fair value of securities, held to maturity are listed below (in thousands):


	September 30, 2010
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
Trust preferred securities	$	250	$	—	$	—	$	250


Totals	$	250	$	—	$	—	$	250


	December 31, 2009
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
Trust preferred securities	$	336	$	—	$	—	$	336


Totals	$	336	$	—	$	—	$	336

		The contractual maturity of this security is over five years.

		The single issuer trust preferred security was evaluated for other than temporary impairment by determining the strength of the underlying issuer and its ability to make the contractual principal and interest payments.

Loans and Allowance for Loan Losses

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


	09/30/10			12/31/09			09/30/09
Consumer loans	$	27,391		$	29,386		$	30,028
Commercial, financial, & other		126,573			144,630			154,358
Land development loans — residential property		26,668			38,472			44,997
Land development loans — non- residential property		9,374			11,644			11,604
Commercial real estate construction — residential property		11,407			13,287			15,042
Commercial real estate construction — non-residential property		17,370			20,061			20,445
Commercial real estate mortgages		501,059			531,156			539,200
Residential real estate mortgages		40,841			44,500			46,990


		760,683			833,136			862,664
Allowance for loan losses		(29,831	)		(35,125	)		(28,373	)


	$	730,852		$	798,011		$	834,291

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


	09/30/10		12/31/09		09/30/09
Troubled debt restructuring	$	39,714	$	59,420	$	46,025
Over 90 days past due and still accruing		—		—		—
Non-accrual loans		72,286		49,341		58,866

Total non-performing loans		112,000		108,761		104,891

Real estate owned		21,452		23,435		11,684
Real estate in redemption		3,591		—		3,788

Other non-performing assets		25,043		23,435		15,472

Total non-performing assets	$	137,043	$	132,196	$	120,363

The most significant proportion of the Bank’s non-performing loans continues to be in the land development and commercial real estate construction segments of the Bank’s loan portfolio. These loans comprise 9% of loans and 35% of non-accrual loans at September 30, 2010. Management has implemented a strategy to decrease the amount of loans in these segments. These loans have decreased 22% during the first nine months of 2010, while the loan portfolio has declined by 9% during the same period.

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

		The distribution of non-accrual loans by loan type (in thousands) is as follows:


	Number of
	Loans		Balance
Consumer loans		17	$	900
Commercial, financial, & other		49		13,595
Land development loans — residential property		17		15,597
Land development loans — non-residential property		1		1,318
Commercial real estate construction — residential property		10		8,621
Commercial real estate construction — non-residential property		—		—
Commercial real estate mortgages		57		29,628
Residential real estate mortgages		17		2,627


Total non-accrual loans		168	$	72,286

The increase in non-accrual loans during the period was primarily due to the downgrading of 81 loans to non-accrual status for $45,295,000 and partially offset by net charge-offs of $17,697,000 and the transfer of 28 loans to other real estate for $10,166,000. This increase was primarily due to the migration of previously identified classified loans. These loans have been identified as impaired loans and have been charged down to the value of the collateral or an appropriate reserve has been identified in the allowance for loan loss. Loans transferred to non-accrual status during 2010 in the amount of $37,880,000 were identified at December 31, 2009 as classified loans with reserves for losses established accordingly. As these loans were identified as classified loans with the appropriate risk allocation in the allowance for loan losses at December 31, 2009, the migration of these loans to non-accrual status did not have a significant impact on the allowance for loan losses. Loans transferred to non-accrual status during 2010 totaling $7,415,000 were not identified as substandard at December 31, 2009 but have deteriorated during the nine months ended September 30, 2010.

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

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


	Nine Months						Nine Months
	Ended			Year Ended			Ended
	09/30/10			12/31/09			09/30/09
Balance, beginning of year	$	35,125		$	14,452		$	14,452

Charge-offs:
Consumer loans		635			1,154			718
Commercial, financial & other		3,756			4,878			3,616
Land development loans — residential property		7,535			1,471			7,050
Land development loans — non-residential property		300			1,981			3,999
Commercial real estate construction — residential property		1,740			9,441			1,270
Commercial real estate construction — non-residential property		36			4,364			1,981
Commercial real estate mortgages		4,291			6,919			5,770
Residential real estate mortgages		232			701			691
Recoveries:
Consumer loans		47			176			171
Commercial, financial & other		113			339			247
Land development loans — residential property		39			107			42
Commercial real estate construction — residential property		1			—			—
Commercial real estate mortgages		555			61			27
Residential real estate mortgages		73			36			7


Net charge-offs (recoveries)		17,697			30,190			24,601

Provision for loan losses		12,403			50,863			38,522


Balance, end of period	$	29,831		$	35,125		$	28,373


Allowance to total loans		3.92	%		4.22	%		3.29	%


Allowance to nonperforming assets		21.77	%		26.57	%		23.57	%


Net charge-offs to average loans		2.21	%		3.40	%		2.74	%

The Bank recorded net charge-offs of $17,697,000 during the nine months ended September 30, 2010. Specific allocations of $4,058,000 were recorded on these loans at December 31, 2009. These specific allocations were assigned as of December 31, 2009 based on information that was received in early in the first quarter of 2010 but where deterioration of the credits related to events that occurred in 2009. Accordingly, the provision for loan losses related to the charge-off of these loans was recorded during the fourth quarter of 2009. Additionally, net charge-offs of $3,667,000 were due to a change in the methodology relating to the valuation of residential building lots. This change was related to the evaluation of appraisals of this type of collateral, where the appraised value of developed residential building lots was required to be discounted based on the absorption factor associated with the collateral. The remaining charge-offs of $9,972,000 were due to the further deterioration of credits during 2010 and updated appraisals received during 2010. The reserves established for classified loans are based on the information currently available to the Corporation. However, in these challenging economic conditions, information could become known in the future that could materially alter our estimate.

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

		A primary factor in the continued decline in the underlying value of our collateral and the decision to recognize these charge-offs was the continuing decline during the first nine months of 2010 in the economic environment in Southeastern Michigan. This decline in economic conditions is heavily impacted by conditions and events that impacted the automotive industry during 2009 and continues to impact the local economy. These conditions have had a negative impact on the residential real estate and commercial real estate markets in the Bank’s market area and these loans represent 80% of the Bank’s loan portfolio. These conditions have led to an increase in the Bank’s classified assets during 2010. Management has recognized this trend in our analysis of the allowance for loan losses at September 30, 2010. The allowance for loan losses was based upon management’s assessment of relevant factors, including loan growth, types and amounts of non-performing loans, historical and anticipated loss experience on such types of loans, and current economic conditions. If collateral values continue to decline, additions to the allowance for loan losses will be required and will have an adverse effect on the Corporation’s earnings through increases to the provision for loan losses.

		The aggregate balance in impaired loans are as follows (in thousands):


	09/30/10		12/31/09		09/30/09
Impaired loans with no allocated allowance for loan losses	$	71,136	$	83,226	$	114,226
Impaired loans with allocated allowance for loan losses		42,394		43,553		—


Total	$	113,530	$	126,779	$	114,226


Amount of the allowance for loan loss allocated	$	9,976	$	10,715	$	—

		These loans have been evaluated under impairment standards and have been either charged down to the collateral value or the collateral value exceeds the loan balance.

D.		Incentive Stock Plans

		Incentive stock awards have been granted to officers and employees under two Incentive Stock Plans. The first plan is the 1994 Stock Option Plan. Options to buy common stock have been granted to officers and employees under the 1994 Stock Option Plan, which provides for issue of up to 738,729 shares. Exercise price is the market price at date of grant. The maximum option term is ten years, and options vest fully after six months from the date of grant.

		There were 29,391 shares forfeited during the nine months ended September 30, 2010. There were no options exercised during the nine months ended September 30, 2010. For the options outstanding at September 30, 2010, the range of exercise prices was $4.94 to $14.65 per share with a weighted-average remaining contractual term of 1.4 years. At September 30, 2010, options for 331,010 shares were exercisable at weighted average exercise price of $8.97 per share. There was no intrinsic value at September 30, 2010.

D.		Incentive Stock Plans (con’t)

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

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

		Stock Options Granted — Stock options were awarded to officers in 2005, 2006 and 2008. The incentive stock options were granted with exercise prices equal to market prices on the day of grant. At September 30, 2010, there were stock options outstanding for 170,846 shares with a weighted average exercise price of $5.46 per share.

		The Corporation recognized stock option compensation expense of $47,000 and $54,000 during the nine months ended September 30, 2010 and 2009, respectively. Compensation cost of $62,000 and $26,000 is expected to be recognized during 2010 and 2011, respectively.

		Restricted Stock Grants — Restricted stock was awarded to officers in 2005, 2006 and 2008. The restricted stock is eligible to vest three years from grant date. Upon full vesting, restricted shares are transferred to common shares. At September 30, 2010, there were 39,765 shares of restricted stock outstanding.

		The Corporation recognized restricted stock compensation expense of $47,000 and $61,000, respectively during the nine months ended September 30, 2010 and 2009, respectively. Compensation cost of $62,000 and $26,000 is expected to be recognized during 2010 and 2011, respectively.

E.		Fair Value of Assets and Liabilities

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

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

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

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

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

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

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

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

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

		Securities available for sale

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

		The following table presents the fair value measurements of the Corporation’s assets and liabilities recognized in the accompanying balance sheet measured at fair value on a recurring basis and the level within the ASC 820 fair value hierarchy in which the fair value measurements fall at September 30, 2010 and December 31, 2009 (in thousands):

Fair Value of Assets and Liabilities ( con’t)


			Quoted Prices in		Significant Other		Significant
			Active Markets for		Observable		Unobservable
	Fair		Identical Assets		Inputs		Inputs
At 9/30/2010	Value		(Level 1)		(Level 2)		(Level 3)
US Government sponsored agency securities	$	2,003	$	—	$	2,003	$	—
Mortgage backed securities		44,369		—		44,369		—


Total securities, available for sale	$	46,372	$	—	$	46,372	$	—


			Quoted Prices in		Significant Other		Significant
			Active Markets for		Observable		Unobservable
	Fair		Identical Assets		Inputs		Inputs
At 12/31/2009	Value		(Level 1)		(Level 2)		(Level 3)
US Government sponsored agency securities	$	12,749	$	—	$	12,749	$	—
Corporate bonds		33,111		—		33,111		—
Mortgage backed securities		104		—		104		—


Total securities, available for sale	$	45,964	$	—	$	45,964	$	—

		Impaired loans and other real estate owned

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

		The following table presents the fair value measurements of the Corporation’s assets and liabilities recognized in the accompanying balance sheet measured at fair value on a non-recurring basis and the level within the fair value hierarchy in which the fair value measurements fall at September 30, 2010 and December 31, 2009 (in thousands):

Fair Value of Assets and Liabilities ( con’t)


			Quoted Prices in		Significant Other		Significant
			Active Markets for		Observable		Unobservable
			Identical Assets		Inputs		Inputs
At 9/30/2010	Fair Value		(Level 1)		(Level 2)		(Level 3)
Impaired loans (collateral dependent)	$	63,676	$	—	$	—	$	63,676
Other real estate	$	13,264	$	—	$	—	$	13,264


			Quoted Prices in		Significant Other		Significant
			Active Markets for		Observable		Unobservable
			Identical Assets		Inputs		Inputs
At 12/31/2009	Fair Value		(Level 1)		(Level 2)		(Level 3)
Impaired loans (collateral dependent)	$	60,905	$	—	$	—	$	60,905
Other real estate	$	7,601	$	—	$	—	$	7,601

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


	At September 30, 2010				At December 31, 2009
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
Assets:
Cash and cash equivalents	$	77,408	$	77,408	$	77,497	$	77,497
Mortgage loans held for sale		572		581		1,129		1,146
Securities available for sale		46,372		46,372		45,964		45,964
Securities held to maturity		250		250		336		336
Federal Home Loan Bank Stock		3,698		3,698		3,698		3,698
Loans, net		760,683		757,676		833,136		829,122
Accrued interest receivable		3,301		3,181		3,562		3,562

Liabilities:
Deposits		809,418		811,006		867,955		871,177
Federal Home Loan Bank advances		63,716		64,251		63,855		64,275
Subordinated debentures		10,000		4,801		10,000		4,081
Accrued interest payable		972		941		1,046		1,046

Fair Value of Assets and Liabilities ( con’t)

Fair Value of Financial Instruments

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

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

The carrying amount approximates fair value.

Held-to-maturity Securities

Fair value is based on quoted market prices, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.

Loans Held for Sale

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

Loans

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

Deposits

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

Interest Receivable and Interest Payable

The carrying amount approximates fair value.

Federal Home Loan Bank Advances

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

Fair Value of Assets and Liabilities ( con’t)

Subordinated Debentures

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

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

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

Capital and Operating Matters

Stockholders’ equity at September 30, 2010 was $30,154,000 compared to $41,945,000 as of December 31, 2009, a decrease of $11,791,000 or 28%. The decrease was due to the net loss during the period.

Based on the respective regulatory capital ratios, the Bank is considered to be undercapitalized at September 30, 2010 and December 31, 2009.

Capital and Operating Matters (con’t)

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 September 30, 2010
Total capital (to risk weighted assets)
Consolidated		50,263		6.45	%		62,305		8.00	%		N/A		N/A
Bank		48,781		6.28	%		62,155		8.00	%		77,694		10.00	%
Tier 1 capital (to risk weighted assets)
Consolidated		40,303		5.17	%		31,153		4.00	%		N/A		N/A
Bank		38,821		5.00	%		31,078		4.00	%		46,617		6.00	%
Tier 1 capital (to average assets)
Consolidated		40,303		4.35	%		37,041		4.00	%		N/A		N/A
Bank		38,821		4.20	%		36,965		4.00	%		46,206		5.00	%

As of December 31, 2009
Total capital (to risk weighted assets)
Consolidated		63,043		7.39	%		68,264		8.00	%		N/A		N/A
Bank		61,169		7.19	%		68,105		8.00	%		85,132		10.00	%
Tier 1 capital (to risk weighted assets)
Consolidated		52,080		6.10	%		34,132		4.00	%		N/A		N/A
Bank		50,225		5.90	%		34,053		4.00	%		51,079		6.00	%
Tier 1 capital (to average assets)
Consolidated		52,080		4.98	%		41,838		4.00	%		N/A		N/A
Bank		50,225		4.81	%		41,776		4.00	%		52,220		5.00	%

The capital ratios disclosed in the middle column of the table above are minimum requirements. Due to our financial condition, the Bank entered into a formal enforcement action (“Consent Order”) with the Federal Deposit Insurance Corporation (“FDIC”) and the Office of Financial and Insurance Regulation for the State of Michigan (“OFIR”) which conveys specific actions needed to address certain findings from their examination and to address our current financial condition.

Capital and Operating Matters (con’t)

Applicable federal prompt corrective action regulations provide five classifications, including well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. Based on its regulatory capital ratios, the Bank is undercapitalized at September 30, 2010. Undercapitalized institutions are subject to close monitoring by their federal bank regulator, restrictions on asset growth and expansion, and other significantly greater regulatory restrictions than apply to well-capitalized or adequately capitalized institutions.

The Corporation needs to raise sufficient capital to return the Bank to well-capitalized status. Management is pursuing various sources of capital and estimates the need to raise approximately $50 million to be in compliance with its Consent Order with the FDIC and OFIR. Given the current economic environment, there can be no assurance the Corporation will be able to raise the estimated capital needed. Additionally, if real estate values in the Corporation’s market area continue to decline, this will negatively impact the loan portfolio and values of other real estate owned. Additional declines in real estate values would result in the need for additional provision expense resulting in increased losses and further reducing the Corporation’s and the Bank’s capital.

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

Consent Order and Federal Reserve Bank Agreement

Consent Order

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

Completion of a senior management study by an independent consultant
Plans for the reduction of delinquencies and classified assets
Plans for lending and collection policies
Plans for the reduction of loan concentrations
The revision and implementation of a comprehensive strategic plan
The revision of its Liquidity Plan and the submission of weekly liquidity reports to the FDIC and OFIR

The requirements of that consent order that are listed above were completed on a timely basis.

The Consent Order also includes a capital directive, which requires the Bank to have and maintain its level of tier 1 capital as a percentage of total assets (capital ratio) at a minimum of 9% and its level of qualifying total capital as a percentage of risk-weighted assets (total risk-based capital ratio) at a minimum of 12% . These ratios are in excess of the statutory minimums to be well-capitalized. At September 30, 2010, the Bank’s capital ratio was 4.20% and the Bank’s total risk-based capital ratio was 6.28%.

Additionally, the Bank is prohibited from declaring or paying any cash dividends without prior written consent of the FDIC.

As a result of the loss recorded during 2009, the capitalization status of the Bank declined from “well capitalized” to “undercapitalized.” As a result of the decline in the Bank’s capitalization level, the Bank is limited in its utilization of brokered deposits. The Bank is also restricted in the setting of deposit interest rates. Additionally, there are limitations in the borrowing terms and capacity with the Federal Reserve Bank. The Bank submitted a Capital Restoration Plan (“CRP”) to the FDIC and OFIR on December 15, 2009, due to our undercapitalized status based on our September 30, 2009 regulatory report of condition and income. An amended CRP was submitted to the FDIC and OFIR on May 18, 2010.

Federal Reserve Board Agreement

On June 15, 2010, the Corporation entered into a written agreement with the Federal Reserve Bank of Chicago (the “FRB”). The FRB Agreement prohibits the Corporation and the Bank from taking any of the following actions without the FRB’s prior written approval: (i) declaring or paying any dividends; (ii) taking dividends from the Bank; (iii) making any distributions of interest, principal or other sums on the Corporation’s subordinated debentures; (iv) incurring, increasing or guaranteeing any debt; or (v) repurchasing or redeeming any shares of its stock.

Under the FRB Agreement, the Corporation was required to submit a written capital plan (“Plan”) to the FRB by August 15, 2010 to maintain sufficient capital, on a consolidated basis. This Plan was submitted by the Corporation in July of 2010. The Corporation received notification that the Plan was not accepted by the FRB and that a revised Plan was to be submitted to the FRB by December 1, 2010. The Plan shall, at a minimum, include: (a) the Corporation’s current and future capital requirements in compliance with FRB Regulation Y and the applicable capital adequacy guidelines for the Bank issued by the FDIC; (b) the adequacy of the Bank’s capital, taking into account the volume of classified credits, concentrations of credit, Allowance for Loan Losses, current and projected growth, and projected retained earnings; (c) the source and timing of additional funds necessary to fulfill the Corporation’s and Bank’s future capital requirements; (d) supervisory requests for additional capital at the Bank or the requirements of any supervisory action imposed on the Bank by the FDIC; and (e) the requirements of FRB Regulation Y that the Corporation serve as a source of strength to the Bank.

ITEM 2. —

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements (within the meaning of the Private Securities Litigation Reform Act of 1995) that are based on current expectations. Words such as “anticipates,” “believes,” “estimates,” “expects,” “forecasts,” “intends,” “is likely,” “plans,” “projects,” variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions (“Future Factors”) that are difficult to predict with regard to timing, extent, likelihood and degree of occurrence. Actual results and outcomes may materially differ from what is expressed in forward-looking statements. The Corporation undertakes no obligation to update, amend or clarify forward-looking statements, whether as a result of new information, future events (whether anticipated or unanticipated), or otherwise.

Future Factors include changes in interest rates and interest rate relationships; demand for products and services; the degree of competition by traditional and non-traditional competitors; changes in banking regulation; changes in tax laws; changes in prices, levies and assessments; the impact of technological advances; governmental and regulatory policy changes; the outcomes of contingencies, trends in customer behavior as well as their ability to repay loans; actions by bank regulators; availability of capital; changes in local real estate values; changes in the national and local economy; and other factors, including risk factors disclosed in this report, the Corporation’s 2009 Annual Report on Form 10-K, or disclosed from time to time in other filings made by the Corporation with the Securities and Exchange Commission. These are representative of the Future Factors and could cause a difference between an ultimate actual outcome and a preceding forward-looking statement.

Company Overview

Dearborn Bancorp, Inc. was incorporated as a Michigan business corporation on September 30, 1992. The Corporation was formed to acquire all of the Bank’s issued and outstanding stock and to engage in the business of a bank holding company under the Bank Holding Company Act of 1956, as amended (the “Act”).

Community Bank of Dearborn (the “Bank”), a Michigan banking corporation, commenced business on February 28, 1994 in Dearborn, Michigan. On April 30, 2007, Community Bank of Dearborn was renamed Fidelity Bank. Management believes that its new name, Fidelity Bank, represents a more accurate portrayal to our customers and prospects of the financial products and services offered by the Bank and the Bank’s market area.

The Bank is the only commercial bank headquartered in Dearborn, Michigan and offers a full line of loan and deposit products and services. The Bank offers excellent customer service to its loan and deposit customers and maintains strong relationships with the communities served by the Bank. The Bank emphasizes strong loan quality, excellent customer service and efficient operations in order to maximize profitability and shareholder value.

Subsequent to the commencement of business in Dearborn, Michigan in 1994, the Bank opened five additional offices in Wayne County, Michigan. Since 2001, the Bank opened two offices in Macomb County, Michigan and in 2003, the Bank opened an office in Oakland County, Michigan.

In 2004, the Corporation acquired the Bank of Washtenaw from Pavillion Bancorp. The Bank of Washtenaw’s three banking offices, all of which are located in Washtenaw County, Michigan were successfully consolidated into the Bank.

In 2007, the Corporation acquired Fidelity Financial Corporation of Michigan (“Fidelity”), the holding company for Fidelity Bank, a commercial bank with seven offices in Oakland County, Michigan. The acquisition has significantly expanded the Bank’s presence in Oakland County, Michigan. Additionally, the Bank opened a full service banking office in Shelby Township, Michigan on April 30, 2007. The Bank currently operates seventeen banking offices in Wayne, Macomb, Oakland and Washtenaw Counties, Michigan.

The Bank has also formed two subsidiaries that offer additional or specialized services to the Bank’s customers. The Bank’s subsidiaries, their formation date and the type of services offered are listed below:


Date Formed	Name	Services Offered

August 1997	Community Bank Insurance Agency, Inc.	Limited insurance related activities

March 2002	Community Bank Audit Services, Inc.	Internal auditing and compliance
		services for financial institutions

The date opened, branch location and branch type of each branch is listed on the following page:


Date Opened	Location	Type of office
February 1994	22290 Michigan Avenue	Full service retail branch with ATM
	Dearborn, Michigan 48123	Regional lending center

December 1995	24935 West Warren Avenue	Full service retail branch
	Dearborn Heights, Michigan 48127

August 1997	44623 Five Mile Road	Full service retail branch with ATM
	Plymouth, Michigan 48170

May 2001	1325 North Canton Center Road	Full service retail branch with ATM
	Canton, Michigan 48187

December 2001	45000 River Ridge Drive	Regional lending center
	Clinton Township, Michigan 48038

November 2002	19100 Hall Road	Full service retail branch with ATM
	Clinton Township, Michigan 48038

February 2003	12820 Fort Street	Full service retail branch with ATM
	Southgate, Michigan 48195

May 2003	3201 University Drive, Suite 180	Full service retail branch
	Auburn Hills, Michigan 48326

October 2004	450 East Michigan Avenue	Full service retail branch with ATM
	Saline, Michigan 48176

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

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

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

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

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

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

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

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

The Bank’s market area consists primarily of the Metropolitan Detroit area. This is a large real estate market and the Bank’s loan portfolio accounts for less than one percent of this market. The Detroit real estate market has been negatively impacted by the unfavorable economic conditions in the State of Michigan.

The Corporation’s earnings depend primarily on net interest income. Management strives to maximize net interest income through monitoring the economic and competitive environment and making appropriate adjustments in the characteristics and pricing of our products and services.

Other factors that contribute significantly to our earnings are the maintenance of asset quality and efficient operations. Management continually monitors the quality of the loan portfolio and the impact of the economic and competitive environment and works to maintain asset quality.

The Corporation recorded net income of $631,000 during the three months ended September 30, 2010, compared to a net loss of ($40,045,000) during the same period during 2009. The Corporation recorded a net loss of ($11,870,000) during the nine months ended September 30, 2010, compared to a net loss of ($55,369,000) during the same period during 2009, a decrease in the net loss of $43,499,000 or 79%. The losses experienced during these periods were primarily due to the provision for loan losses and expenses related to the carrying costs of non-performing assets.

The Corporation reported provision for loan losses of $500,000 for the three month period ended September 30, 2010, compared to $14,185,000 for the same period in 2009, a decrease of $13,685,000 or 96%. The provision for loan losses were primarily due to net charge-offs during the three month ended September 30, 2010. Net charge-offs during the third quarter of 2010 amounted to $2,243,000. The charge-offs recorded during the third quarter of 2010 had allocations of $1,799,000 in the allowance for loan loss as of June 30, 2010. The Corporation also reported write-downs on real estate of $960,000 for the three months ended September 30, 2010, compared to $639,000 for the same period in 2009, an increase of $321,000 or 50%.

The primary factor for the decrease in the net loss during the nine month period ended September 30, 2010 was the decrease in the provision for loan loss during the nine months ended September 30, 2010, which was partially offset by an increase in write-downs to real estate during the nine months ended September 30, 2010. Additionally, the Corporation fully amortized the intangible assets and set up a valuation allowance against the Corporation’s net deferred tax asset during the nine months ended September 30, 2009.

The Corporation reported provision for loan losses of $12,403,000 for the nine month period ended September 30, 2010, compared to $38,522,000 for the same period in 2009, a decrease of $26,119,000 or 68%. The provision for loan losses were primarily due to net charge-offs during the period. However, certain loans that were charged off during 2010 had specific allocations of $4,058,000 in the allowance for loan loss at December 31, 2009. Therefore, the charge-off of these loans was already recognized in the allowance for loan losses and did not require a provision for loan loss. Additionally, charge-offs amounting to $3,667,000 were due to a change in the methodology utilized in the valuation of developed residential building lots. This change was related to the evaluation of appraisals of this type of collateral, where the appraised value of developed residential building lots was required to be discounted based on the absorption factor associated with the collateral. The Corporation reported write-downs on real estate of $5,309,000 for the nine months ended September 30, 2010, compared to $2,499,000 for the same period in 2009, an increase of $2,810,000 or 112%. Write-downs to real estate in the amount of $1,581,000 were due to a change in the methodology utilized in the valuation of developed residential building lots. This change was related to the evaluation of appraisals of this type of collateral, where the appraised value of developed residential building lots was required to be discounted based on the absorption factor associated with the collateral. The remaining write-downs on real estate were due to the decline in collateral values during 2010.

Additionally, the Corporation fully amortized the intangible assets at a cost of $4,195,000 during the nine months ended September 30, 2009. The Corporation reported FDIC assessment expense of $3,150,000 for the nine months ended September 30, 2010 compared to $1,853,000 during the same period in 2009, an increase of $1,297,000 or 70%. The Corporation also reported income tax expense of $100,000 during the nine months ended September 30, 2010, compared to $13,460,000 during the same period in 2009. Income tax expense during the nine months ended September 30, 2009 was due to a non-cash charge of $26,976,000 that was due to the recording of a valuation allowance for the entire amount of the Corporation’s net tax deferred asset and income tax benefit of $13,516,000 that was due to the pre-tax loss recorded during the nine months ended September 30, 2009.

On June 15, 2010, the Corporation entered into a written agreement with the Federal Reserve Bank of Chicago (the “FRB”). Under the FRB Agreement, the Corporation was required to submit a written capital plan (“Plan”) to the FRB by August 15, 2010 to maintain sufficient capital, on a consolidated basis. This Plan was submitted by the Corporation in July of 2010. The Corporation received notification that the Plan was not accepted by the FRB and that a revised Plan was to be submitted to the FRB by December 1, 2010.

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

Net Interest Income

2010 Compared to 2009. As noted on the chart on the following page, net interest income for the three and nine month periods ended September 30, 2010 was $8,750,000 and $25,261,000, compared to $7,826,000 and $22,880,000 for the same periods in 2009, an increase of $924,000 or 12% for the three month period and $2,381,000 or 10% for the nine month period. This increase was caused primarily by the increasing spread between interest earning assets and interest bearing liabilities. The increase in the Corporation’s net interest spread and net interest margin was primarily due to the decline in the cost on interest bearing liabilities. The Corporation’s interest rate margin was 3.89% and 3.67% for the three and nine month periods ended September 30, 2010 compared to 3.24% and 3.05% for the same periods in 2009. The Corporation’s interest rate spread was 3.74% and 3.50% for the three and nine month periods ended September 30, 2010 compared to 2.93% and 2.71% for the same periods in 2009.

Average Balances, Interest Rates and Yields. Net interest income is affected by the difference (“interest rate spread”) between rates of interest earned on interest-earning assets and rates of interest paid on interest-bearing liabilities and the relative amounts of interest-bearing liabilities and interest-earning assets. When the total of interest-earning assets approximates or exceeds the total of interest-bearing liabilities, any positive interest rate spread will generate net interest income. Financial institutions have traditionally used interest rate spreads as a measure of net interest income. Another indication of an institution’s net interest income is its “net yield on interest-earning assets” or “net interest margin,” which is net interest income divided by average interest-earning assets.

The following table sets forth certain information relating to the Corporation’s consolidated average interest-earning assets and interest-bearing liabilities and reflects the average yield on assets and average cost of liabilities for the periods indicated. Such yields and costs are derived by dividing income or expense by the average daily balance of assets or liabilities, respectively, for the periods presented. During the periods indicated, non-accruing loans, if any, are included in the loan category.


	Three months ended September 30,							Three months ended September 30,
	2010							2009
	Average				Average			Average				Average
(In thousands)	Balance		Interest		Rate			Balance		Interest		Rate
Assets
Interest-bearing deposits with banks	$	73,070	$	115		0.62	%	$	66,331	$	76		0.45	%
Federal funds sold		57		1		0.00	%		4,315		2		0.18	%
Securities, available for sale		46,617		275		2.35	%		11,532		33		1.14	%
Loans		772,662		11,328		5.82	%		876,205		13,135		5.95	%

Sub-total earning assets		892,406		11,719		5.21	%		958,383		13,246		5.48	%
Other assets		33,611							59,937


Total assets	$	926,017						$	1,018,320


Liabilities and stockholders’ equity
Interest bearing deposits	$	726,511	$	2,578		1.41	%	$	757,236	$	4,806		2.52	%
Other borrowings		73,786		391		2.10	%		86,213		614		2.83	%

Sub-total interest bearing liabilities		800,297		2,969		1.47	%		843,449		5,420		2.55	%
Non-interest bearing deposits		92,180							84,211
Other liabilities		1,947							2,095
Stockholders’ equity		31,593							88,565


Total liabilities and stockholders’ equity	$	926,017						$	1,018,320


Net interest income			$	8,750						$	7,826


Net interest rate spread						3.74	%						2.93	%


Net interest margin on earning assets						3.89	%						3.24	%


	Nine months ended September 30,							Nine months ended September 30,
	2010							2009
	Average				Average			Average				Average
(In thousands)	Balance		Interest		Rate			Balance		Interest		Rate
Assets
Interest-bearing deposits with banks	$	70,971	$	216		0.41	%	$	60,304	$	273		0.61	%
Federal funds sold		77		1		1.74	%		6,335		14		0.32	%
Securities, available for sale		48,799		601		1.65	%		40,724		467		1.53	%
Loans		799,883		34,642		5.79	%		896,849		40,231		6.00	%

Sub-total earning assets		919,730		35,460		5.15	%		1,004,212		40,985		5.46	%
Other assets		34,561							56,628


Total assets	$	954,291						$	1,060,840


Liabilities and stockholders’ equity

Interest bearing deposits	$	749,978	$	9,046		1.61	%	$	805,701	$	16,262		2.70	%
Other borrowings		73,804		1,153		2.09	%		76,596		1,843		3.22	%

Sub-total interest bearing liabilities		823,782		10,199		1.66	%		882,297		18,105		2.74	%
Non-interest bearing deposits		88,807							81,669
Other liabilities		2,030							2,040
Stockholders’ equity		39,672							94,834


Total liabilities and stockholders’ equity	$	954,291						$	1,060,840


Net interest income			$	25,261						$	22,880


Net interest rate spread						3.50	%						2.71	%


Net interest margin on earning assets						3.67	%						3.05	%

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									Nine Months Ended
	2010/2009									2010/2009
	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	$	11		$	28		$	39		$	3		$	(60	)	$	(57	)
Federal funds sold		—			(2	)		(2	)		(59	)		45			(14	)
Investment securities, available for sale		208			35			243			108			26			134
Loans		(1,520	)		(287	)		(1,807	)		(4,661	)		(928	)		(5,589	)

Total earning assets	$	(1,301	)	$	(226	)	$	(1,527	)	$	(4,609	)	$	(917	)	$	(5,526	)


Liabilities
Interest bearing deposits	$	(126	)	$	(2,102	)	$	(2,228	)	$	(2,841	)	$	(4,375	)	$	(7,216	)
Other borrowings		(67	)		(156	)		(223	)		(258	)		(432	)		(690	)

Total interest bearing liabilities	$	(193	)	$	(2,258	)	$	(2,451	)	$	(3,099	)	$	(4,807	)	$	(7,906	)


Net interest income							$	924								$	2,380


Net interest rate spread								0.80	%								0.79	%


Net interest margin on earning assets								0.65	%								0.63	%

Provision for Loan Losses

2010 Compared to 2009. The provision for loan losses was $500,000 and $12,403,000 for the three and nine month periods ended September 30, 2010, compared to $14,185,000 and $38,522,000 for the same periods in 2009, a decrease of $13,685,000 or 96% for the three month period and $26,119,000 or 68% for the nine month period.

The provision for loan losses were primarily due to net charge-offs during the period. However, certain loans that were charged off during the nine months ended September 30, 2010 had specific allocations of $4,058,000 in the allowance for loan loss at December 31, 2009. Therefore, the charge-off of these loans was already recognized in the allowance for loan losses and did not require a provision for loan loss. Additionally, charge-offs amounting to $3,667,000 during the nine month periods ended September 30, 2010 were due to a change in the methodology utilized in the valuation of developed residential building lots. This change was related to the evaluation of appraisals of this type of collateral, where the appraised value of developed residential building lots was required to be discounted based on the absorption factor associated with the collateral.

Non-accrual loans were $72,286,000 at September 30, 2010 compared to $49,341,000 at December 31, 2009, an increase of $22,945,000 during the nine months ended September 30, 2010. This increase was due to the migration of primarily previously identified classified loans. These loans have been identified as impaired loans and have been charged down to the value of the collateral or an appropriate reserve has been identified in the allowance for loan loss. Of this increase, all but approximately $7,415,000 were identified at December 31, 2009 as classified loans with reserves for losses established accordingly.

The decline in the underlying collateral for the Bank’s non-performing loans, which are primarily due to the decline in economic conditions in Southeastern Michigan has continued during the nine months ended September 30, 2010. This decline in economic conditions is heavily impacted by conditions and events that impacted the automotive industry during 2009, including the bankruptcy of two major automotive manufacturers and resulting shut down of production and layoffs of employees. These events continue to have a negative impact on the residential real estate and commercial real estate markets in the Bank’s market area. These conditions have led to an increase in the Bank’s classified assets during 2010. Management has recognized this trend in our analysis of the allowance for loan losses at September 30, 2010.

The provision for loan losses for the three and nine month periods ended September 30, 2010 is based on the internal analysis of the adequacy of the allowance for loan losses. The provision for loan losses was based upon management’s assessment of relevant factors, including types and amounts of non-performing loans, historical loss experience on such types of loans, and current economic conditions.

Non-interest Income (Loss)

2010 Compared to 2009. Non-interest income was $18,000 for the three month period ended September 30, 2010 compared to a non-interest loss of ($600,000) for the same period in 2009. The increase in non-interest income was primarily due to the increase in write-downs on other real estate during 2010. During the three months ended September 30, 2010, the Corporation recorded write-downs on real estate in the amount of $960,000 compared to $639,000 during the same period in 2009.

When these transactions related to other real estate and securities are excluded, non-interest income for the three month period ended September 30, 2010 amounts to $546,000 compared to $580,000 during the same period in 2009, a decrease of $34,000 or 6% for the period. This decrease is primarily caused by the decrease in the service charges on deposit accounts during the period in 2010.

Non-interest loss was ($3,118,000) for the nine month period ended September 30, 2010 compared to a non-interest loss of ($843,000) for the same period in 2009. The increase in non-interest loss was primarily due to the increase in write-downs on other real estate during 2010. During the nine months ended September 30, 2010, the Corporation recorded write-downs on real estate in the amount of $5,309,000 compared to $2,499,000 during the same period in 2009.

Write-downs to real estate in the amount of $1,581,000 were due to a change in the methodology utilized in the valuation of developed residential building lots. This change was related to the evaluation of appraisals of this type of collateral, where the appraised value of developed residential building lots was required to be discounted based on the absorption factor associated with the collateral. These write-downs occurred during the second quarter of 2010. The remaining write-downs on real estate were due to the decline in collateral values during 2010.

When these transactions related to other real estate and securities are excluded, non-interest income for the nine month period ended September 30, 2010 amounts to $1,658,000 compared to $1,735,000 during the same period in 2009, a decrease of $77,000 or 4% for the period. This decrease is primarily caused by the decrease in the gain on sale of loans during 2010.

Non-interest Expense

2010 Compared to 2009. Non-interest expense was $7,537,000 and $21,510,000 for the three and nine month periods ended September 30, 2010, compared to $11,810,000 and 25,424,000 for the same periods in 2009, an decrease of $4,273,000 or 36% for the three month period and $3,914,000 or 15% for the nine month period. The decrease was primarily due to complete amortization of the Corporation’s intangible assets during 2009, which was partially offset by the increase in FDIC assessment expense during 2010.

Defaulted loan expense amounted to $1,184,000 and $3,273,000 during the three and nine month periods ended September 30, 2010 compared to $1,827,000 and $3,514,000 during the same periods in 2009, a decrease of $643,000 or 35% for the three month period and $241,000 or 7% for the nine month period. This decrease in defaulted loan expense was primarily due to the payment of property taxes from current and prior years as well as insurance, legal expenses and maintenance for real estate owned during 2009.

The FDIC assessment amounted to $1,075,000 and $3,150,000 during the three and nine month periods ended September 30, 2010 compared to $672,000 and $1,853,000 during the same periods in 2009, an increase of $403,000 or 60% for the three month period and $1,297,000 or 70% for the nine month period. The increase in the FDIC assessment was due to the decline in the capitalization status to undercapitalized during the fourth quarter of 2009.

Salaries and employee benefits amounted to $3,050,000 and $9,247,000 for the three and nine month periods ended September 30, 2010, compared to $3,159,000 and $9,657,000 for the same periods in 2009, a decrease of $109,000 or 3% for the three month period and $410,000 or 4% for the nine month period. As of September 30, 2010, the number of full time equivalent employees was 192 compared to 201 as of September 30, 2009.

Income Tax Provision

2010 Compared to 2009. Income tax expense was $100,000 for the three and nine month periods ended September 30, 2010, compared to income tax expense of $21,276,000 and $13,460,000 for the same periods in 2009. During 2009, the Corporation recorded a valuation allowance against the entire amount of its deferred tax asset. The Corporation has sufficient federal income tax carryforwards to offset any provision for federal income tax.

Comparison of Financial Condition at September 30, 2010 and December 31, 2009

Assets. Total assets at September 30, 2010 were $916,731,000 compared to $986,486,000 at December 31, 2009, a decrease of $69,755,000 or 7%. The decrease was primarily due to the decrease in loans.

Interest bearing deposits with banks. Total interest bearing deposits with banks at September 30, 2010 were $70,216,000 compared to $69,538,000 at December 31, 2009, an increase of $678,000 or 1%. Interest bearing deposits with banks consists primarily of overnight deposits with the Federal Reserve Bank, business accounts with other correspondents banks and time deposits from other banks. These time deposits are fully insured and mature in less than thirty months.

Mortgage Loans Held for Sale. Total mortgage loans held for sale at September 30, 2010 were $572,000 compared to $1,129,000 at December 31, 2009, a decrease of $557,000 or 49%. This decrease was a result of the decrease 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 September 30, 2010 were $46,372,000 compared to $45,964,000 at December 31, 2009, an increase of $408,000 or 1%. The increase is the result of the fluctuation in the market value of securities, available for sale that are held by the Corporation.

The Corporation liquidated its position in an issue of a trust preferred security on which the Corporation had recorded an other than temporary impairment charge of $414,000 during 2009. The Corporation recorded a gain of $27,000 on the sale of this security.

Please refer to Note B of the Notes to Condensed Consolidated Financial Statements for the amortized cost and estimated market value of securities, available for sale. The entire portfolio has a net unrealized loss of $149,000 at September 30, 2010. The unrealized loss is reflected by an adjustment to stockholders’ equity.

Federal Home Loan Bank Stock. Federal Home Loan Bank stock was valued at $3,698,000 at September 30, 2010 and December 31, 2009.

Loans. Total loans at September 30, 2010 were $760,683,000 compared to $833,136,000 at December 31, 2009, a decrease of $72,453,000 or 9%. The decrease was primarily due to net charge-offs of $17,697,000, the transfer of loans in the amount of $10,166,000 to other real estate and normal loan amortization during the period. Management expects loan balances to continue to decline during the fourth quarter of 2010. Major categories of loans included in the loan portfolio are as follows (in thousands):


	09/30/10			12/31/09			09/30/09
Consumer loans	$	27,391		$	29,386		$	30,028
Commercial, financial, & other		126,573			144,630			154,358
Land development loans — residential property		26,668			38,472			44,997
Land development loans — non- residential property		9,374			11,644			11,604
Commercial real estate construction — residential property		11,407			13,287			15,042
Commercial real estate construction — non- residential property		17,370			20,061			20,445
Commercial real estate mortgages		501,059			531,156			539,200
Residential real estate mortgages		40,841			44,500			46,990


		760,683			833,136			862,664
Allowance for loan losses		(29,831	)		(35,125	)		(28,373	)


	$	730,852		$	798,011		$	834,291

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


	09/30/10		12/31/09		09/30/09
Troubled debt restructuring	$	39,714	$	59,420	$	46,025
Non-accrual loans		72,286		49,341		58,866

Total non-performing loans		112,000		108,761		104,891

Real estate owned		21,452		23,435		11,684
Real estate in redemption		3,591		0		3,788

Other non-performing assets		25,043		23,435		15,472

Total non-performing assets	$	137,043	$	132,196	$	120,363

The increase in non-performing loans was largely due to the increase in non-accrual loans, which amount to $72,286,000, $75,146,000 and $49,341,000 at September 30, 2010, June 30, 2010 and December 31, 2009, respectively, and were substantially offset by the decrease in loans that qualify as troubled debt restructuring, which amounted to $39,714,000, $38,530,000, and $59,420,000 at September 30, 2010, June 30, 2010 and December 31, 2009, respectively. The distribution of non-accrual loans by loan type (in thousands) is as follows:


	Number of
	Loans		Balance
Consumer Loans		17	$	900
Commercial Loans		49		13,595
Land Development — Residential		17		15,597
Land Development — Non Residential		1		1,318
Commercial Construction Loans — Residential		10		8,621
Commercial Construction Loans — Non Residential		—		—
Commercial Mortgage Loans		57		29,628
Residential Mortgages Loans		17		2,627


Totals		168	$	72,286

The increase in non-accrual loans during the period was primarily due to the downgrading of 81 loans to non-accrual status for $45,295,000 and partially offset by net charge-offs of $17,697,000 and the transfer of 28 loans to other real estate for $10,166,000. This increase was primarily due to the migration of previously identified classified loans. Loans transferred to non-accrual status during 2010 in the amount of $37,880,000 were identified at December 31, 2009 as classified loans with reserves for losses established accordingly. As these loans were identified as classified loans with the appropriate risk allocation in the allowance for loan losses at December 31, 2009, the migration of these loans to non-accrual status did not have a significant impact on the allowance for loan losses. Loans transferred to non-accrual status during 2010 totaling $7,415,000 were not identified as substandard at December 31, 2009 but have deteriorated during the nine months ended September 31, 2010. A summary of the loans transferred to non-accrual status during the nine months ended September 30, 2010 is listed below (balances, in thousands):


	Number of
	Loans		Balance
Consumer Loans		8	$	549
Commercial Loans		22		7,713
Land Development — Residential		9		11,893
Commercial Construction Loans — Residential		2		4,097
Commercial Construction Loans — Non Residential		1		333
Commercial Mortgage Loans		31		19,644
Residential Mortgages Loans		8		1,066


Totals		81	$	45,295

Loans qualifying as troubled debt restructuring amounted to $39,714,000 and $59,420,000 at September 30, 2010 and December 31, 2009, respectively. These loans qualified as troubled debt restructuring primarily due to the temporary change in payment type from principal and interest to interest only or the lengthening the amortization period of certain loans. Loans categorized as troubled debt restructuring at September 30, 2010 are in compliance with their modified terms. The specific allowance of loans categorized as troubled debt restructuring was $2,842,000 and $5,452,000 at September 30, 2010 and December 31, 2009, respectively.

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

Allowance for Loan Losses. The allowance for loan losses was $29,831,000 at September 30, 2010 compared to $35,125,000 at December 31, 2009, a decrease of $5,294,000 or 15%. The percentage of allowance for loan loss to loans was 3.92%, 4.22% and 3.29% at September 30, 2010, December 31, 2009 and September 30, 2009, respectively. The Corporation recorded net charge-offs of $17,697,000 during the nine months ended September 30, 2010. Charge-offs amounting to $3,667,000 was due to a change in the methodology utilized in the valuation of developed residential building lots. This change was related to the evaluation of appraisals of this type of collateral, where the appraised value of developed residential building lots was required to be discounted based on the absorption factor associated with the collateral. Additionally, charge-offs amounting to $4,058,000 had specific allocations in the allowance for loan loss at December 31, 2009. These specific allocations were assigned because certain charge-offs recorded during the first nine months of 2010 were based on information that was received in 2010 but was relevant to the fair value of the collateral at December 31, 2009. The remaining charge-offs, which amount to $9,972,000 were due to the deterioration of non-performing loans during the period.

A primary factor in the continued decline in the underlying value of our collateral and the decision to recognize these charge-offs was the continuing decline in the first nine months of 2010 in the economic environment in Southeastern Michigan. This decline in economic conditions is heavily impacted by conditions and events that have recently impacted the automotive industry, including the recent bankruptcy of two major automotive manufacturers and resulting shut down of production and layoffs of employees. These events have a negative impact on the residential real estate and commercial real estate markets in the Bank’s market area and these loans represent 80% of the Bank’s loan portfolio. These conditions have led to an increase in the Bank’s classified assets during 2010. Management has recognized this trend in our analysis of the allowance for loan losses at September 30, 2010. The allowance for loan losses was based upon management’s assessment of relevant factors, including loan growth, types and amounts of non-performing loans, historical and anticipated loss experience on such types of loans, and current economic conditions. If collateral values continue to decline, additions to the allowance for loan losses will be required and will have an adverse effect on the Corporation’s earnings through increases to the provision for loan losses.

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


	Nine Months						Nine Months
	Ended			Year Ended			Ended
	09/30/10			12/31/09			09/30/09
Balance, beginning of year	$	35,125		$	14,452		$	14,452

Charge-offs:
Consumer loans		635			1,154			718
Commercial, financial & other		3,756			4,878			3,616
Land development loans — residential property		7,535			1,471			7,050
Land development loans — non- residential property		300			1,981			3,999
Commercial real estate construction — residential property		1,740			9,441			1,270
Commercial real estate construction — non- residential property		36			4,364			1,981
Commercial real estate mortgages		4,291			6,919			5,770
Residential real estate mortgages		232			701			691
Recoveries:
Consumer loans		47			176			171
Commercial, financial & other		113			339			247
Land development loans — residential property		39			107			42
Land development loans — non- residential property		—			—			—
Commercial real estate construction — residential property		1			—			—
Commercial real estate construction — non- residential property		—			—			—
Commercial real estate mortgages		555			61			27
Residential real estate mortgages		73			36			7


Net charge-offs (recoveries)		17,697			30,190			24,601

Provision for loan losses		12,403			50,863			38,522


Balance, end of period	$	29,831		$	35,125		$	28,373


Allowance to total loans		3.92	%		4.22	%		3.29	%


Allowance to nonperforming assets		21.77	%		26.57	%		23.57	%


Net charge-offs to average loans		2.21	%		3.40	%		2.74	%

Premises and Equipment. Bank premises and equipment at September 30, 2010 were $19,415,000 compared to $20,194,000 at December 31, 2009, a decrease of $779,000 or 4%. The decrease is primarily due to depreciation during the period.

Other Real Estate. Other real estate at September 30, 2010 was $25,043,000 compared to $23,435,000 at December 31, 2009, an increase of $1,608,000 or 7%. The distribution of other real estate by property type is listed below (in thousands):


	Number of
Property Type	Properties		Amount
Single Family Homes		24	$	2,023
Condominium		1		727
Vacant Land		23		10,257
Commercial		10		6,172
Office/Retail		12		5,864


Total		70	$	25,043

Other real estate is comprised of real estate owned of $21,452,000 and real estate in redemption status of $3,591,000. Twelve properties with a book value of $2,499,000 are currently generating rental income.

Accrued Interest Receivable. Accrued interest receivable at September 30, 2010 was $3,301,000 compared to $3,562,000 at December 31, 2009, a decrease of $261,000 or 7%. The decrease was primarily due to the decrease in the accrued interest receivable on loans.

Other Assets . Other assets at September 30, 2010 were $9,820,000 compared to $12,660,000 at December 31, 2009, a decrease of $2,840,000 or 22%. The decrease was primarily due to the receipt of income tax refunds in the amount of $3,815,000 and $259,000 for the years ended December 31, 2006 and 2007, respectively.

Deposits. Total deposits at September 30, 2010 were $809,418,000 compared to $867,955,000 at December 31, 2009, a decrease of $58,537,000 or 7%. The following is a summary of the distribution of deposits (in thousands):


	09/30/10		12/31/09		09/30/09
Non-interest bearing:
Demand	$	87,205	$	83,873	$	89,329


Interest bearing:
Checking	$	73,670	$	83,087	$	88,820
Money market		55,581		52,412		75,962
Savings		42,312		43,343		45,665
Time, under $100,000		287,069		301,829		291,314
Time, $100,000 and over		263,581		303,411		313,864

		722,213		784,082		815,625


Total deposits	$	809,418	$	867,955	$	904,954

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

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

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

Brokered deposits are included in the Time, $100,000 and over category. Brokered deposits were $0, $17,544,000 and $36,044,000 at September 30, 2010, December 31, 2009 and September 30, 2009, respectively.

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


	09/30/10		12/31/09		09/30/09
Interest bearing checking	$	3,923	$	2,715	$	3,968
Time, $100,000 and over		3,292		4,366		7,451


Total municipal deposits	$	7,215	$	7,081	$	11,419

Federal Home Loan Bank Advances . Federal Home Loan Bank advances were $63,716,000 at September 30, 2010 compared to $63,855,000 at December 31, 2009, a decrease of $139,000. The decrease was due to the scheduled partial repayment of a Federal Home Loan Bank advance.

Accrued Interest Payable . Accrued interest payable at September 30, 2010 was $972,000 compared to $1,046,000 at December 31, 2009, a decrease of $74,000 or 7%. The decrease was primarily due to the decreasing cost of deposits.

Other Liabilities . Other liabilities at September 30, 2010 were $2,471,000 compared to $1,685,000 at December 31, 2009, an increase of $786,000 or 47%. The increase was primarily due to the increase in accrued liabilities during the period.

Subordinated Debentures . Subordinated debentures were $10,000,000 at September 30, 2010 and December 31, 2009 . On December 19, 2002, the Corporation issued $10,000,000 of floating rate obligated mandatory redeemable securities through a special purpose entity as part of a pooled offering. The securities have a term of thirty years. The Corporation may redeem the securities after five years at face value. They are considered to be Tier 1 capital for regulatory capital purposes. Debt issue costs of $300,000 have been entirely amortized. During the third quarter of 2009, the Corporation elected to defer regularly scheduled quarterly interest payments on the Corporation’s subordinated debentures. The terms of the subordinated debentures allow for the deferral of regularly scheduled quarterly interest payments for up to twenty consecutive quarters.

Capital

Stockholders’ equity at September 30, 2010 was $30,154,000 compared to $41,945,000 as of December 31, 2009, a decrease of $11,791,000 or 28%. The decrease was due to the net loss during the period.

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

The regulatory capital ratios of the Corporation’s and the Bank are presented in Note F. Based on the respective regulatory capital ratios, the Bank is considered to be undercapitalized at September 30, 2010 and December 31, 2009. The decline in the Bank’s regulatory capital position has been caused primarily by the losses sustained by the Bank.

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

Applicable federal prompt corrective action regulations provide five classifications, including well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. Based on its regulatory capital ratios at June 30, 2010, the Bank is undercapitalized. Undercapitalized institutions are subject to close monitoring by their federal bank regulator, restrictions on asset growth and expansion, and other significantly greater regulatory restrictions than apply to well-capitalized or adequately capitalized institutions.

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

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

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

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

The Corporation needs to raise sufficient capital during 2010 to return the Bank to well-capitalized status. Management is pursuing various sources of capital and estimates the need to raise approximately $50 million in capital to be in compliance with its Consent Order with the FDIC and OFIR. Given the current economic environment, there can be no assurance the Corporation will be able to raise the estimated capital needed.

PART I — FINANCIAL INFORMATION

ITEM 3. — QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Sensitivity Analysis. The Corporation has sought to manage its exposure to changes in interest rates by matching the effective maturities or repricing characteristics of the Corporation’s interest-earning assets and interest-bearing liabilities. The matching of the assets and liabilities may be analyzed by examining the extent to which the assets and liabilities are interest rate sensitive and by monitoring the expected effects of interest rate changes on net interest income.

An asset or liability is interest rate sensitive within a specific time period if it will mature or reprice within that time period. If the Corporation’s assets mature or reprice more quickly or to a greater extent that its liabilities, the Corporation’s net portfolio value and net interest income would tend to increase during periods of rising interest rates but decrease during periods of falling interest rates. If the Corporation’s assets mature or reprice more slowly or to a lesser extent than its liabilities, its net portfolio value and net interest income would tend to decrease during periods of rising interest rates but increase during periods of falling interest rates.

The matching of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are “interest rate sensitive” and by monitoring an institution’s interest rate sensitivity “gap.” An asset or liability is said to be interest rate sensitive within a specific period if it will mature or reprice within that period. The interest rate sensitivity “gap” is the difference between the amount of interest-earning assets maturing or repricing within a specific time period and the amount of interest-bearing liabilities maturing or repricing within that time period. A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities, and is considered negative when the amount of interest rate sensitive liabilities exceed the amount of interest rate sensitive assets. During a period of rising interest rates, a negative gap would be expected to adversely affect net interest income while a positive gap would be expected to result in an increase in net interest income, while conversely during a period of declining interest rates, a negative gap would be expected to result in an increase in net interest income and a positive gap would be expected to adversely affect net interest income.

Different types of assets and liabilities with the same or similar maturities may react differently to changes in overall market rates or conditions, and thus changes in interest rates may affect net interest income positively or negatively even if an institution were perfectly matched in each maturity category. Additionally, the gap analysis does not consider many factors as banking interest rates move. While the interest rate sensitivity gap is a useful measurement and contributes toward effective asset and liability management, it is difficult to predict the effect of changing interest rates solely on that measure, without accounting for alterations in the maturity or repricing characteristics of the balance sheet that occur during changes in market interest rates.

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

The following table sets forth the amounts of interest earning assets and interest bearing liabilities outstanding at September 30, 2010, 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	$	56		$	—		$	—		$	—	$	56
Interest bearing deposits with Banks		40,582			20,902			8,732			—		70,216
Mortgage loans held for sale		572			—			—			—		572
Securities available for sale		—			2,028			40			44,554		46,622
Federal Home Loan Bank stock		3,698			—			—			—		3,698
Total loans, net of non-accrual		152,708			130,256			378,494			26,749		688,207

Total earning assets		197,616			153,186			387,266			71,303		809,371

Interest bearing liabilities
Total interest bearing deposits		225,357			359,839			136,749			268		722,213
Federal Home Loan Bank advances		49,000			4,500			10,216			—		63,716
Other Borrowings		—			—			—			—		—
Subordinated debentures		10,000			—			—			—		10,000

Total interest bearing liabilities		284,357			364,339			146,965			268		795,929


Net asset (liability) funding gap		(86,741	)		(211,153	)		240,301			71,035	$	13,442


Cumulative net asset (liability) funding gap		($86,741	)		($297,894	)		($57,593	)	$	13,442

Liquidity. Liquidity refers to readily available funds to meet the needs of borrowers and depositors. Levels of liquidity are closely monitored in conjunction with loan funding requirements and deposit outflows. Adequate liquidity protects institutions from raising funds under duress at excessive expense and provides a necessary cushion for occasional unpredictable aberrations in demand. While adequate liquidity is imperative, excessive liquidity in lower yielding cash investments or other easily marketable assets reduces potential interest income. Thus, an appropriate balance must be maintained to protect the institution and at the same time, prudently maximize income opportunities. Sources of liquidity include federal funds sold, securities available for sale, loan repayments, core deposits, Federal Home Loan Bank advances and a federal funds purchase credit facility. Liquidity is continually measured and discussed. When liquidity and funding projections indicate that liquidity levels are not adequate to meet the current or projected liquidity needs of the Bank, management intends to make adjustments to improve the liquidity position.

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

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

The Corporation is currently considering other alternatives to further supplement holding company liquidity, which has decreased primarily due to the Corporation’s repurchase of common stock. One alternative that is being considered is the financing or sale/leaseback of two office buildings that are owned by the Corporation. A decision on the financing or sale/leaseback of the two office buildings that are owned by the Corporation has not been reached at this time.

The following tables provide information about the Bank’s contractual obligations and commitments at September 30, 2010 (in thousands):


	Payments Due By Period
Contractual Obligations	Less Than 1 Year		1-3 Years		3-5 Years		Over 5 Years		Total
Certificates of deposit	$	413,633	$	133,015	$	3,734	$	268	$	550,650
Long-term borrowings		53,500		10,216		—		—		63,716
Lease commitments		658		535		242		—		1,435
Subordinated debentures		—		—		—		10,000		10,000


Totals	$	467,791	$	143,766	$	3,976	$	10,268	$	625,801


	Amount Of Commitment Expiration Per Period
Unused Loan Commitments and Letters of Credit	Less Than 1 Year		1-3 Years		3-5 Years		Over 5 Years		Total
Unused loan commitments	$	26,724	$	6,838	$	5,371	$	7,404	$	46,337
Standby letters of credit		563		—		—		—		563


Totals	$	27,287	$	6,838	$	5,371	$	7,404	$	46,900

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 September 30, 2010.

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.

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

PART II — OTHER INFORMATION

ITEM 1A. RISK FACTORS

In addition to the risk factors disclosed in the Corporation’s annual report on Form 10-K for the year ended December 31, 2009, the following risk factors may affect the Corporation’s business, financial condition or results of operations. All of the risk factors should be considered in connection with evaluating the forward-looking statements contained in this report because they could cause the actual results and conditions to differ materially from those projected in forward-looking statements. The risks highlighted here and in the Corporation’s annual report are not the only ones the Corporation faces. If the adverse matters referred to in any of the risk factors actually occurs, the Corporation’s business, financial condition or operations could be adversely and materially affected. In that case, the trading price of the Corporation’s common stock could decline, and you may lose all or part of your investment.

Risks Related to Our Business

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

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

	•		Plans for the reduction of delinquencies and classified assets

	•		Plans for lending and collection policies

	•		Plans for the reduction of loan concentrations

	•		The revision and implementation of a comprehensive strategic plan

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

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

ITEM 6. EXHIBITS


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

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

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

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

DEARBORN 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: November 15, 2010

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

Exhibit Index


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

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

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

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