DEAR Dearborn Bancorp, Inc. (MM)

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the Quarterly period ended March 31, 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 incorporation or organization)		(I.R.S. Employer Identification No.)

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

(313) 565-5700

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

Yes þ No o

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

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

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

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

Indicate the number of shares outstanding for each of the issuer’s classes of common stock, as of April 30, 2010.

Class		Shares Outstanding
Common Stock		7,687,470

 

 

DEARBORN BANCORP, INC.
INDEX

				Page
Part I.		Financial Information:
Item 1.		Financial Statements
		The following condensed consolidated financial statements of Dearborn Bancorp, Inc. and its subsidiary are included in this report:
		Report of Independent Registered Public Accounting Firm			3
		Condensed Consolidated Balance Sheets — March 31, 2010, December 31, 2009 and March 31, 2009			4
		Condensed Consolidated Statements of Operations — For the Three Months Ended March 31, 2010 and 2009			5
		Condensed Consolidated Statements of Comprehensive Loss — For the Three Months Ended March 31, 2010 and 2009			6
		Condensed Consolidated Statements of Cash Flows — For the Three Months Ended March 31, 2010 and 2009		7-8
		Notes to Condensed Consolidated Financial Statements		9-26
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations		27-43
Item 3.		Quantitative and Qualitative Disclosures about Market Risk		44-47
Item 4.		Controls and Procedures			48
Part II.		Other Information:
Pursuant to SEC rules and regulations, the following item(s) are included with the Form 10-Q Report:
		Item 6. Exhibits			49
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 1A Risk Factors
		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					50
EX-31.1
EX-31.2
EX-32.1
EX-32.2

Report of Independent Registered Public Accounting Firm

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

We have reviewed the accompanying condensed consolidated balance sheets of Dearborn Bancorp, Inc. as of March 31, 2010 and 2009 and the related condensed consolidated statements of operations and comprehensive income (loss) and condensed consolidated statements of cash flows for the three-month periods ended March 31, 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 consolidated condensed 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
May 17, 2010

PART I — FINANCIAL INFORMATION

ITEM 1.		FINANCIAL STATEMENTS

DEARBORN BANCORP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

		(Unaudited)								(Unaudited)
(Dollars, in thousands)		3/31/2010				12/31/2009				3/31/2009
ASSETS
Cash and cash equivalents
Cash and due from banks		$	8,047			$	7,803			$	11,881
Federal funds sold			57				156				6,841
Interest bearing deposits with banks			70,898				69,538				53,262
Total cash and cash equivalents			79,002				77,497				71,984
Mortgage loans held for sale			758				1,129				3,009
Securities available for sale			45,931				45,964				45,368
Securities held to maturity			336				336				0
Federal Home Loan Bank stock			3,698				3,698				3,614
Loans
Loans			813,961				833,136				900,055
Allowance for loan losses			(30,288	)			(35,125	)			(18,632	)
Net loans			783,673				798,011				881,423
Premises and equipment, net			19,973				20,194				21,001
Real estate owned			24,467				23,435				14,624
Other intangible assets			—				—				4,394
Accrued interest receivable			3,595				3,562				3,920
Other assets			9,266				12,660				24,407
Total assets		$	970,699			$	986,486			$	1,073,744
LIABILITIES
Deposits
Non-interest bearing deposits		$	86,407			$	83,873			$	80,624
Interest bearing deposits			765,610				784,082				826,955
Total deposits			852,017				867,955				907,579
Other liabilities
Securities sold under agreements to repurchase			—				—				2,268
Federal Home Loan Bank advances			63,799				63,855				54,955
Accrued interest payable			956				1,046				1,372
Other liabilities			747				1,685				606
Subordinated debentures			10,000				10,000				10,000
Total liabilities			927,519				944,541				976,780
COMMITMENT AND CONTINGENT LIABILITIES			—				—				—
STOCKHOLDERS’ EQUITY
Common stock — no par value 20,000,000 shares authorized, 7,687,470 at 3/31/10, 7,687,470 shares at 12/31/09 and 7,696, 204 shares at 3/31/09			131,960				131,929				131,825
Accumulated deficit			(88,721	)			(89,850	)			(34,923	)
Accumulated other comprehensive income (loss)			(59	)			(134	)			62
Total stockholders’ equity			43,180				41,945				96,964
Total liabilities and stockholders’ equity		$	970,699			$	986,486			$	1,073,744

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

DEARBORN BANCORP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

		Three Months Ended				Three Months Ended
(In thousands, except share data)		3/31/2010				3/31/2009
Interest income
Interest on loans		$	11,778			$	13,810
Interest on securities, available for sale			168				256
Interest on deposits with banks			37				94
Interest on federal funds			1				6
Total interest income			11,984				14,166
Interest expense
Interest on deposits			3,543				5,998
Interest on other liabilities			386				651
Total interest expense			3,929				6,649
Net interest income			8,055				7,517
Provision for loan losses			100				10,727
Net interest income (loss) after provision for loan losses			7,955				(3,210	)
Non-interest income
Service charges on deposit accounts			343				355
Fees for other services to customers			36				25
Gain on the sale of loans			58				56
Gain on the sale of securities			69				195
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			—				—
Gain (loss) on the sale of real estate owned			(11	)			29
Loss on the write-down of real estate owned			(656	)			(354	)
Other income			102				22
Total non-interest income (loss)			(59	)			328
Non-interest expense
Salaries and employee benefits			3,119				3,290
Occupancy and equipment expense			854				934
Amortization of intangible expense			—				198
FDIC assessment			950				348
Advertising and marketing			27				70
Stationery and supplies			72				111
Professional services			166				191
Data processing			186				228
Defaulted loan expense			1,035				761
Other operating expenses			359				380
Total non-interest expense			6,768				6,511
Income (loss) before federal income tax expense			1,128				(9,393	)
Income tax expense (benefit)			—				(3,144	)
Net income (loss)		$	1,128				($6,249	)
Per share data:
Net income (loss) — basic			0.15				(0.81	)
Net income (loss) — diluted			0.15				(0.81	)
Weighted average number of shares outstanding — basic			7,687,470				7,696,204
Weighted average number of shares outstanding — diluted			7,687,470				7,696,204

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

DEARBORN BANCORP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (unaudited)

		Three Months Ended				Three Months Ended
(In thousands)		03/31/10				03/31/09
Net income (loss)		$	1,128				($6,249	)
Other comprehensive income , net of tax
Unrealized gains on securities
Unrealized holding gains (losses) arising during period			45				(407	)
Less: reclassification adjustment for gains included in net income			69				195
Tax effects			39				72
Other comprehensive income (loss)			75				(140	)
Comprehensive income (loss)		$	1,203				($6,389	)

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

DEARBORN BANCORP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

		Three Months Ended
(In thousands)		3/31/2010				3/31/2009
Cash flows from operating activities
Interest and fees received		$	11,951			$	13,745
Interest paid			(4,019	)			(6,972	)
Proceeds from sale of mortgages held for sale			4,654				6,990
Origination of mortgages held for sale			(4,225	)			(8,062	)
Taxes refunded			4,074				—
Loss on sale of real estate owned			(11	)			29
Gain on sale of securities			(69	)			(195	)
Cash paid to suppliers and employees			(7,331	)			(5,090	)
Net cash provided by operating activities			5,024				445
Cash flows from investing activities
Sale of securities available for sale			8,289				10,230
Proceeds from calls, maturities and repayments of securities available for sale			2,514				49,014
Purchases of securities available for sale			(10,689	)			(20,709	)
(Increase) decrease in loans, net of payments received			11,666				20,211
Proceeds from the sale of real estate owned			742				928
Purchases of property and equipment			(47	)			(64	)
Net cash provided by investing activities			12,475				59,610
Cash flows from financing activities
Net decrease in non-interest bearing deposits			2,534				(693	)
Net increase in interest bearing deposits			(18,472	)			(30,123	)
Increase (decrease) in repurchase agreements			—				(193	)
Repayments on Federal Home Loan Bank advances			(56	)			(10,064	)
Net cash used in financing activities			(15,994	)			(41,073	)
Increase in cash and cash equivalents			1,505				18,982
Cash and cash equivalents at the beginning of period			77,497				53,002
Cash and cash equivalents at the end of period		$	79,002			$	71,984

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)

		Three Months Ended
(In thousands)		3/31/2010				3/31/2009
Reconciliation of net income to net cash provided by operating activities
Net income (loss)		$	1,128				($6,249	)
Adjustments to reconcile net income to net cash
Provided by operating activities
Provision for loan losses			100				10,727
Depreciation and amortization expense			268				335
Restricted stock award expense			16				22
Stock option expense			16				19
Accretion of discount on investment securities			(41	)			33
Amortization of premium on investment securities			105				—
Write-down of real estate owned			798				561
Amortization of intangible assets			—				198
(Increase) decrease in mortgages held for sale			371				(1,175	)
Increase in interest receivable			(33	)			(421	)
Decrease in interest payable			(90	)			(323	)
(Increase) decrease in other assets			3,324				(2,851	)
Increase (decrease) in other liabilities			(938	)			(431	)
Net cash provided by operating activities		$	5,024			$	445
Supplemental noncash disclosures:
Transfers from loans to real estate owned		$	2,572			$	6,456

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 March 31, 2010 and 2009, and December 31, 2009 and for the three month period ended March 31, 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 month periods ended March 31, 2010 are not necessarily indicative of results of operations for the entire year.
		The condensed consolidated financial statements as of March 31, 2010 and 2009, and for the three month period ended March 31, 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
		3/31/2010				3/31/2009
Basic
Net income (loss)		$	1,128				($6,249	)
Weighted average common shares			7,687,470				7,696,204
Basic earnings per common share		$	0.15				($0.81	)
Diluted
Net income (loss)		$	1,128				($6,249	)
Weighted average common shares outstanding for basic earnings per common share			7,687,470				7,696,204
Add: Dilutive effects of assumed exercise of stock options			—				—
Average shares and dilutive potential common shares			7,687,470				7,696,204
Dilutive earnings per common share		$	0.15				($0.81	)

Stock options for 511,717 and 619,742 shares of common stock were not considered in computing diluted earnings per common share for the three months ended March 31, 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)
		Effect of Newly Issued Accounting Standards
		FASB ASC Topic 860-10, Accounting for Transfers of Financial Assets (“SFAS 166”), and No. 167, Amendments to FASB ASC 810-10 (“SFAS 167”). In June 2009, the Financial Accounting Standards Board (“FASB”) issued FASB ASC Topic 860-10 and FASB ASC 810-10, which change the way entities account for securitizations and special-purpose entities, and will have a material effect on how banking organizations account for off-balance sheet vehicles. The new standards amend Statement of FASB ASC 860-10, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, and FASB ASC 810-10, Consolidation of Variable Interest Entities. Both FASB ASC Topic 860-10 and FASB ASC Topic 810-10 were effective January 1, 2010 for companies reporting earnings on a calendar-year basis .
		On January 21, 2010, the Board of Governors of the Federal Reserve System issued final risk-based capital rules related to the adoption of these accounting standards by financial institutions. FAS 166 and FAS 167 make substantive changes to how banking organizations account for many items, including securitized assets, that had been previously excluded from their balance sheets. Banking organizations affected by FAS 166 and FAS 167 generally will be subject to higher risk-based regulatory capital requirements intended to better align risk-based capital requirements with the actual risks of certain exposures.
		The Corporation has adopted these standards, and takes into account in our internal capital planning processes the impact of these standards. We continue to assess whether additional capital may be necessary to support the risks associated with off-balance-sheet vehicles affected by the new accounting standards. The implementation of these standards did not have a material impact on the Corporation’s financial statements.
		FASB ASU 2010-09, Subsequent Event – Amendments to Certain Recognition and Disclosure Requirements. On February 24, 2010, FASB issued Accounting Standards Update (ASU) 2010-09, Subsequent Event – Amendments to Certain Recognition and Disclosure Requirements. The ASU establishes separate subsequent event recognition criteria and disclosure requirements for U.S. Securities and Exchange Commission (“SEC”) filers. Effective with the release date, the financial statements of SEC filers will no longer disclose either the date through which subsequent events were reviewed or that subsequent events were evaluated through the date financial statements were issued. The requirement to evaluate subsequent events through the date of issuance is still in place. Only the disclosure is affected.
		The ASU also removes the requirement to make those disclosures in financial statements revised for either a correction of an error or a retrospective application of an accounting change. SEC filers are defined in the update as entities required to file or to furnish their financial statements with either the SEC or another appropriate agency (such as the Federal Deposit Insurance Corporation or Office of Thrift Supervision) under Section 12(i) of the Securities and Exchange Act of 1934, as amended.

B.

Securities

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

		March 31, 2010
						Gross				Gross
		Amortized				Unrealized				Unrealized				Fair
		Cost				Gains				Losses				Value
US Government sponsored agency securities		$	2,009			$	—				($6	)		$	2,003
Corporate bonds			43,895				11				(67	)			43,839
Mortgage backed securities			86				3				—				89
Totals		$	45,990			$	14				($73	)		$	45,931

		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

The amortized cost and fair value of securities available for sale at March 31 2010 by contractual maturity are shown below (in thousands):

		Amortized				Fair
		Cost				Value
Due in one year through five years		$	45,904			$	45,842
Mortgage backed securities			86				89
Totals		$	45,990			$	45,931

The entire portfolio has a net unrealized loss of $59,000 at March 31, 2010. The Corporation does not hold or utilize derivatives.

B.

Securities (con’t)

Securities with unrealized losses at March 31, 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:

		March 31, 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				($6	)		$	—			$	—			$	2,003				($6	)
Corporate bonds			35,188				(67	)			—				—				35,188				(67	)
Total temporarily impaired		$	37,191				($73	)		$	—			$	—			$	37,191				($73	)

		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	)

Sales of available for sale securities for the three months ended March 31, 2010 and 2009 are as follows (in thousands):

		For the three months ended
		3/31/2010				3/31/2009
Gross Gains		$	69			$	195
Gross Losses			—				—

Securities having a carrying value of $16,413,000 and $5,524,000 at March 31, 2010 and December 31, 2009, respectively, were pledged to secure clearing requirements and borrowings.

B.

Securities (con’t)

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

		March 31, 2010
						Gross				Gross
		Amortized				Unrealized				Unrealized				Fair
		Cost				Gains				Losses				Value
Trust preferred securities		$	336			$	21			$	—			$	357
Totals		$	336			$	21			$	—			$	357

		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 these securities are over five years.

The single issuer trust preferred securities were 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.

One issuer of a trust preferred security the Corporation holds is a bank holding company, headquartered in Michigan that owns commercial banks in several states. The Corporation received a third party valuation of this security and noted the cost basis exceeded the fair value of the security. Upon further analysis, the Corporation noted that the underlying issuer commenced deferral of interest payments on this trust preferred security for up to a period of five years. This issuer has been negatively impacted by the downturn in the economy and the asset quality issues that have impacted the financial services industry in the Michigan market. Various subsidiary banks held by this issuer have been downgraded to adequately-capitalized status as of March 31, 2010. The Corporation believes that based upon the continued deterioration of asset quality and regulatory capital ratio of this issuer results in an other-than-temporary impairment that is credit related. As a result, the Corporation recorded an other-than-temporary impairment charge of $414,000 during 2009.

Credit losses on debt securities held		Amount
Balance, January 1, 2010		$	414
Additions related to other than temporary
Losses not previously recognized			—
Balance, March 31, 2010		$	414

C.

Loans and Allowance for Loan Losses

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

		03/31/10				12/31/09				03/31/09
Consumer loans		$	28,623			$	29,386			$	31,000
Commercial, financial, & other			141,338				144,630				161,138
Land development loans — residential property			36,089				38,472				50,028
Land development loans — non residential property			9,711				11,644				15,914
Commercial real estate construction — residential property			12,164				13,287				15,687
Commercial real estate construction — non residential property			20,813				20,061				25,716
Commercial real estate mortgages			521,701				531,156				548,692
Residential real estate mortgages			43,522				44,500				51,880
			813,961				833,136				900,055
Allowance for loan losses			(30,288	)			(35,125	)			(18,632	)
		$	783,673			$	798,011			$	881,423

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

		3/31/10				12/31/09				03/31/09
Troubled debt restructuring, accruing		$	31,737			$	59,420			$	19,506
Over 90 days past due and still accruing			1,127				—				—
Non-accrual loans			81,163				49,341				55,148
Total non-performing loans			114,027				108,761				74,654
Real estate owned			24,467				23,435				14,624
Other repossessed assets			—				—				—
Other non-performing assets			24,467				23,435				14,624
Total non-performing assets		$	138,494			$	132,196			$	89,278

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 10% of loans and 46% of non accrual loans at March 31, 2010. Management has implemented a strategy to decrease the amount of loans in these segments. These loans have decreased 6% during the first quarter of 2010, while the loan portfolio has declined by 2% during the same period.

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

C.

Loans and Allowance for Loan Losses (con’t)

		Number of
		Loans				Balance
Consumer loans			16			$	924
Commercial, financial, & other			43				12,749
Land development loans — residential property			21				23,260
Land development loans — non residential property			2				1,558
Commercial real estate construction — residential property			15				9,573
Commercial real estate construction — non residential property			2				2,870
Commercial real estate mortgages			55				27,863
Residential real estate mortgages			14				2,366
Total non-accrual loans			168			$	81,163

		The increase in non-accrual loans during the period was primarily due to the downgrading of 34 loans to non-accrual status for $32,315,000 and partially offset by net charge-offs of $4,937,000 and the transfer of 6 loans to other real estate for $2,572,000. This increase was primarily due to the migration of previously identified classified loans. Of this increase, all but approximately $2,600,000 were identified at December 31, 2009 as classified loans with reserves for losses established accordingly.
		The following is an analysis of the allowance for loan losses (in thousands):

		Three Months								Three Months
		Ended				Year Ended				Ended
		03/31/10				12/31/09				03/31/09
Balance, beginning of year		$	35,125			$	14,452			$	14,452
Charge-offs:
Consumer loans			342				1,154				116
Commercial, financial & other			1,521				4,878				1,108
Land development loans — residential property			1,292				9,441				2,881
Land development loans — non residential property			229				4,364				197
Commercial real estate construction — residential property			906				1,471				64
Commercial real estate construction — non residential property			36				1,981				176
Commercial real estate mortgages			558				6,919				2,113
Residential real estate mortgages			109				701				25
Recoveries:
Consumer loans			23				176				3
Commercial, financial & other			15				339				105
Land development loans — residential property			9				107				—
Commercial real estate construction — residential property			1				—				—
Commercial real estate mortgages			8				61				25
Residential real estate mortgages			—				36				—
Net charge-offs (recoveries)			4,937				30,190				6,547
Provision for loan losses			100				50,863				10,727
Balance, end of period		$	30,288			$	35,125			$	18,632
Allowance to total loans			3.72	%			4.22	%			2.07	%
Allowance to nonperforming assets			26.56	%			32.30	%			24.96	%
Net charge-offs to average loans			0.60	%			3.41	%			0.71	%

C.		Loans and Allowance for Loan Losses (con’t)
		The Bank recorded net charge-offs of $4,937,000 during the three months ended March 31, 2010. Specific allocations of $4,058,000 were recorded on these loans at December 31, 2009. These specific allocations were assigned because most of the charge-offs recorded during the first quarter of 2010 were based on information that was received in 2010 but where deterioration of the credit related to events that occurred in 2009. The remaining net charge-offs, which amount to $879,000 were on smaller balance loans that had a reserve for loan losses allocated to the loan based on their respective risk grading at December 31, 2009. As a result of these allocation recognized at December 31, 2009, it was determined no additional provision was needed related to these loans during the first quarter of 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.
		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 three 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 during 2009 and continue 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 79% 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 March 31, 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):

		03/31/10				12/31/09				03/31/09
Impaired loans with no allocated allowance for loan losses		$	88,079			$	83,226			$	95,499
Impaired loans with allocated allowance for loan losses			26,074				43,553				12,600
Total		$	114,153			$	126,779			$	108,099
Amount of the allowance for loan loss allocated		$	6,827			$	10,715			$	4,915

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 24,000 shares forfeited during the three months ended March 31, 2010. There were no options exercised during the three months ended March 31, 2010. For the options outstanding at March 31, 2010, the range of exercise prices was $4.28 to $14.65 per share with a weighted-average remaining contractual term of 1.9 years. At March 31, 2010, options for 336,398 shares were exercisable at weighted average exercise price of $8.89 per share. There was no intrinsic value at March 31, 2010.
		During 2005, the Corporation initiated the 2005 Long-Term Incentive Plan. Under this plan, up to 347,248 shares may be granted to officers and employees of the Bank. This plan provides that stock awards may take the form of any combination of options, restricted shares, restricted share units or performance awards.
		The administration of the plan, including the granting of awards and the nature of those awards is determined by the Corporation’s Compensation Committee. The Corporation’s Board of Directors approved grants of stock options and restricted stock in 2005, 2006 and 2008. The awards have a term of ten years and typically vest fully three years from the grant date. In order for vesting to occur with some grants, the Corporation must meet certain performance criteria over the vesting period. The expected compensation cost of the 2005 plan is being calculated assuming the Corporation’s attainment of “target” performance goals over the vesting period of the awards. The actual cost of these awards could range from zero to 100% of the currently recorded compensation cost, depending on the Corporation’s actual performance. The awards granted in 2005 and 2006 did have such performance criteria. The awards granted in 2008 did not have performance criteria.
		Stock Options Granted — Stock options were awarded to officers in 2005, 2006 and 2008. The incentive stock options were granted with exercise prices equal to market prices on the day of grant. At March 31, 2010, there were stock options outstanding for 190,846 shares with a weighted average exercise price of $5.33 per share.
		The Corporation recognized stock option compensation expense of $16,000 and $19,000 during the three months ended March 31, 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 March 31, 2010, there were 41,530 shares of restricted stock outstanding.

D.		Incentive Stock Plans (con’t)
		The Corporation recognized restricted stock compensation expense of $16,000 and $22,000, respectively during the three months ended March 31, 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. 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.

E.		Fair Value of Assets and Liabilities ( con’t)
		Following is a description of the valuation methodologies used for instruments measured at fair value on a recurring basis and recognized in the accompanying balance 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 March 31, 2010, December 31, 2009 and March 31, 2009 (in thousands):

						Quoted Prices in				Significant Other				Significant
						Active Markets for				Observable				Unobservable
						Identical Assets				Inputs				Inputs
At 3/31/2010		Fair Value				(Level 1)				(Level 2)				(Level 3)
US Government sponsored agency securities		$	2,003			$	—			$	2,003			$	—
Corporate bonds			43,839				—				43,839				—
Mortgage backed securities			89				—				89				—
Total securities, available for sale		$	45,931			$	—			$	45,931			$	—

						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)
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			$	—

						Quoted Prices in				Significant Other				Significant
						Active Markets for				Observable				Unobservable
						Identical Assets				Inputs				Inputs
At 3/31/2009		Fair Value				(Level 1)				(Level 2)				(Level 3)
US Government sponsored agency securities		$	28,657			$	—			$	28,657			$	—
Corporate bonds			15,205				—				15,205				—
Municipal securities			1,335				—				1,335				—
Mortgage backed securities			171				—				171				—
Total securities, available for sale		$	45,368			$	—			$	45,368			$	—

E.		Fair Value of Assets and Liabilities ( con’t)
		Impaired loans and other real estate owned
		Fair value adjustments for impaired and non-accrual loans typically occur when there is evidence of impairment. Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected. The measurement of loss associated with impaired loans can be based on either the observable market price of the loan or the fair value of the collateral. The Company measures fair value based on the value of the collateral securing the loans. Collateral may be in the form of real estate or personal property including equipment and inventory. The value of the collateral is determined based on internal estimates as well as third party appraisals or non-binding broker quotes. These measurements were classified as Level 3. The fair value of the Company’s other real estate owned is determined using Level 3 inputs, which include current and prior appraisals and estimated costs to sell.
		The following table presents the fair value measurements of the Corporation’s assets and liabilities recognized in the accompanying balance sheet measured at fair value on a non-recurring basis and the level within the fair value hierarchy in which the fair value measurements fall at March 31, 2010, December 31, 2009 and March 31, 2009 (in thousands):

										Significant
						Quoted Prices in				Other				Significant
						Active Markets for				Observable				Unobservable
						Identical Assets				Inputs				Inputs
At 3/31/2010		Fair Value				(Level 1)				(Level 2)				(Level 3)
Loans		$	58,280			$	—			$	—			$	58,280
Other real estate		$	9,490			$	—			$	—			$	9,490

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

										Significant
						Quoted Prices in				Other				Significant
						Active Markets for				Observable				Unobservable
						Identical Assets				Inputs				Inputs
At 3/31/2009		Fair Value				(Level 1)				(Level 2)				(Level 3)
Loans		$	11,461			$	—			$	—			$	11,461
Other real estate		$	2,094			$	—			$	—			$	2,094

E.		Fair Value of Assets and Liabilities ( con’t)
		The carrying amounts and estimated fair value of principal financial assets and liabilities were as follows:

		At March 31, 2010								At December 31, 2009
		Carrying				Fair				Carrying				Fair
		Amount				Value				Amount				Value
Assets:
Cash and cash equivalents		$	79,002			$	79,002			$	77,497			$	77,497
Mortgage loans held for sale			758				769				1,129				1,146
Securities available for sale			45,931				45,931				45,964				45,964
Federal Home Loan Bank Stock			3,698				3,698				3,698				3,698
Loans, net			813,961				829,122				833,136				829,122
Accrued interest receivable			3,595				3,595				3,562				3,562
Liabilities:
Deposits			852,017				856,075				867,955				871,177
Federal Home Loan Bank advances			63,799				64,291				63,855				64,275
Subordinated debentures			10,000				4,081				10,000				4,081
Accrued interest payable			956				956				1,046				1,046