_________________
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2007
OR
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to ________
Commission file number: 333-63685
CLARKSTON FINANCIAL CORPORATION
(Exact name of small business issuer as specified in its charter)
| MICHIGAN (State of other jurisdiction of incorporation or organization) | 38-3412321 (I.R.S. Employer Identification No.) |
6600 Highland Road, Waterford, MI 48327
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (248) 922-6940
_________________
Check whether the issuer: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 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 X No
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2) of the Exchange Act). Yes No X
The number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:1,262,279 shares of the Corporation’s Common Stock (no par value) were outstanding as of May 15, 2007.
Transitional Small Business Disclosure Format (check one): Yes No X
Part I Part II Signatures | Financial Information (unaudited): Item 1. Condensed Consolidated Financial Statements Notes to Condensed Consolidated Financial Statements Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 3. Controls & Procedures Other Information Item 1. Legal Proceedings Item 2. Changes in Securities and Use of Proceeds Item 3. Defaults Upon Senior Securities Item 4. Submission of Matters to a Vote of Securities Holders Item 5. Other Information Item 6. Exhibits and Reports on Form 8-K | Page Numbers 3 7 16 25 26 26 26 26 26 26 27 |
2
CLARKSTON FINANCIAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
March 31, 2007 (unaudited) and December 31, 2006
(000‘s omitted)
| March 31, 2007 | December 31, 2006 | |||||||
|---|---|---|---|---|---|---|---|---|
| (unaudited) | ||||||||
| ASSETS | ||||||||
| Cash and cash equivalents | ||||||||
| Total cash and due from banks | $ | 5,645 | $ | 5,848 | ||||
| Federal funds sold | 3,352 | 7,472 | ||||||
| Total cash and cash equivalents | 8,997 | 13,320 | ||||||
| Securities available for sale, at fair value | 41,455 | 43,864 | ||||||
| Loans held for sale | 969 | 120 | ||||||
| Loans | 154,887 | 157,715 | ||||||
| Allowance for loan losses | (2,593 | ) | (2,750 | ) | ||||
| Net loans | 152,294 | 154,965 | ||||||
| Banking premises and equipment | 6,292 | 4,730 | ||||||
| Interest receivable and other assets | 3,756 | 3,379 | ||||||
| Total assets | $ | 213,763 | $ | 220,378 | ||||
| LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||
| Deposits | ||||||||
| Noninterest-bearing | 20,928 | 23,922 | ||||||
| Interest-bearing | 154,198 | 158,119 | ||||||
| Total deposits | 175,126 | 182,041 | ||||||
| Federal Home Loan Bank advances | 15,200 | 15,200 | ||||||
| Junior subordinated debentures | 4,000 | 4,000 | ||||||
| Interest payable and other liabilities | 1,304 | 1,176 | ||||||
| Total liabilities | 195,630 | 202,417 | ||||||
| Minority interest in consolidated subsidiary | 3,127 | 3,195 | ||||||
| Shareholders' equity | ||||||||
| Common stock, no par value: | ||||||||
| Authorized - 10,000,000 shares | ||||||||
| Issued and outstanding - 1,262,279 shares at March 31, 2007 and | ||||||||
| December 31, 2006, respectively | 6,245 | 6,245 | ||||||
| Paid-in capital | 6,245 | 6,245 | ||||||
| Restricted stock - unearned compensation | (30 | ) | (38 | ) | ||||
| Retained earnings | 3,031 | 2,898 | ||||||
| Accumulated other comprehensive loss | (485 | ) | (584 | ) | ||||
| Total shareholders' equity | 15,006 | 14,766 | ||||||
| Total liabilities and shareholders' equity | $ | 213,763 | $ | 220,378 | ||||
See accompanying notes to consolidated financial statements
3
CLARKSTON FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF INCOME
Three Month Periods Ended March 31, 2007 and March 31, 2006
(000‘s omitted, except per share data)
(unaudited)
| Three Months Ended March 31, 2007 | Three Months Ended March 31, 2006 | |||||||
|---|---|---|---|---|---|---|---|---|
| Interest Income | ||||||||
| Interest and fees on loans | $ | 2,989 | $ | 2,409 | ||||
| Interest on investment securities: | ||||||||
| Taxable securities | 400 | 437 | ||||||
| Tax-exempt securities | 72 | 87 | ||||||
| Interest on federal funds sold | 89 | 67 | ||||||
| Total interest income | 3,550 | 3,000 | ||||||
| Interest Expense | ||||||||
| Deposits | 1,628 | 1,250 | ||||||
| Borrowings | 277 | 217 | ||||||
| Total interest expense | 1,905 | 1,467 | ||||||
| Net Interest Income | 1,645 | 1,533 | ||||||
| Provision for loan losses | 17 | 832 | ||||||
| Net interest income- After provision for loan losses | 1,628 | 701 | ||||||
| Other Operating Income (Loss) | ||||||||
| Service fees on loan and deposit accounts | 181 | 200 | ||||||
| Gain/(loss) on sale of securities | (2 | ) | 3 | |||||
| Gain on sale of loans | 62 | 38 | ||||||
| Other income | 7 | 2 | ||||||
| Total other operating income | 248 | 243 | ||||||
| Other Operating Expenses | ||||||||
| Salaries and employee benefits | 967 | 791 | ||||||
| Occupancy | 212 | 254 | ||||||
| Advertising | 62 | 73 | ||||||
| Outside processing | 136 | 109 | ||||||
| Professional fees | 146 | 134 | ||||||
| Supplies | 22 | 27 | ||||||
| Other | 237 | 145 | ||||||
| Total other operating expenses | 1,782 | 1,533 | ||||||
| Income/(loss)- before income taxes and minority interest | 94 | (589 | ) | |||||
| Income Tax Expense/(Benefit) | 37 | (167 | ) | |||||
| Income/(loss) - Before minority interest | 57 | (422 | ) | |||||
| Minority interest | (73 | ) | (68 | ) | ||||
| Net income/(loss) | $ | 130 | $ | (354 | ) | |||
| Income (Loss) per Share of Common Stock | ||||||||
| Basic | $ | 0.10 | $ | (0.28 | ) | |||
| Fully diluted | $ | 0.10 | $ | (0.28 | ) | |||
See accompanying notes to consolidated financial statements.
4
CLARKSTON FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
Three Month Period ended March 31, 2007
(000‘s omitted)
(unaudited)
| Common Stock | Capital Surplus | Unearned Comp. | Retained Earnings | Accumulated Other Comprehensive Loss | Total Stockholders' Equity | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Balance, December 31, 2006 | $ | 6,245 | $ | 6,245 | $ | (38 | ) | $ | 2,898 | $ | (584 | ) | $ | 14,766 | ||||||
| Recognition of compensation for | ||||||||||||||||||||
| restricted stock award | 8 | 8 | ||||||||||||||||||
| Comprehensive income: | ||||||||||||||||||||
| Net income | 130 | 130 | ||||||||||||||||||
| Change in unrealized loss on | ||||||||||||||||||||
| securities available for sale | ||||||||||||||||||||
| net of tax of $48 | 99 | 99 | ||||||||||||||||||
| Net comprehensive loss | 130 | 99 | 229 | |||||||||||||||||
| Balance, March 31, 2007 | $ | 6,245 | $ | 6,245 | $ | (30 | ) | $ | 3,031 | $ | (485 | ) | $ | 15,006 | ||||||
5
CLARKSTON FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
Three Month Periods ended March 31, 2007 and March 31, 2006
(000‘s omitted)
(unaudited)
| Three Months Ended March 31, 2007 | Three Months Ended March 31, 2006 | |||||||
|---|---|---|---|---|---|---|---|---|
| Net Cash Provided by Operating Activities: | ||||||||
| Net cash provided by/(used in) operating activities | $ | (401 | ) | $ | 5,151 | |||
| Cash Flows from Investing Activities: | ||||||||
| Net (increase)/decrease in loans | 2,202 | (6,733 | ) | |||||
| Purchase of securities available-for-sale | -- | (3,214 | ) | |||||
| Proceeds from sale of securities available-for-sale | 2,016 | 2,024 | ||||||
| Proceeds from maturity of securities available-for-sale | 500 | -- | ||||||
| Premises and equipment expenditures | (1,657 | ) | (1,059 | ) | ||||
| Resources provided by minority interest | (68 | ) | (60 | ) | ||||
| Net cash provided by/(used in) investing activities | 2,993 | (9,042 | ) | |||||
| Cash Flows from Financing Activities: | ||||||||
| Net increase/(decrease) in deposits | (6,915 | ) | 2,464 | |||||
| Net cash provided by/(used in) financing activities | (6,915 | ) | 2,464 | |||||
| Net decrease in cash and cash equivalents | (4,323 | ) | (1,427 | ) | ||||
| Cash and cash equivalents- beginning of period | 13,320 | 8,090 | ||||||
| Cash and cash equivalents- end of period | $ | 8,997 | $ | 6,663 | ||||
| Supplemental Cash Flow Information - Cash paid for: | ||||||||
| Interest | 1,992 | 1,433 | ||||||
| Taxes | 20 | -- | ||||||
| Significant Noncash Activities: | ||||||||
| Transfers from loans to repossessed assets | 452 | -- | ||||||
See accompanying notes to consolidated financial statements.
6
The accompanying unaudited consolidated interim financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America with the instructions to Form 10-QSB. Accordingly, certain information and disclosures required by accounting principles generally accepted in the United States of America for complete financial statements are not included herein. The interim financial statements should be read in conjunction with the financial statements of Clarkston Financial Corporation (the “Corporation”) and the notes thereto included in the Corporation’s annual report on Form 10-KSB for the year ended December 31, 2006.
All adjustments, consisting of normal recurring adjustments, which in the opinion of management are necessary for a fair presentation of financial position, results of operations, and cash flows, have been made. The results of operations for the three month period ended March 31, 2007 are not necessarily indicative of the results that may be expected for the year ended December 31, 2007.
Certain amounts in prior period’s financial statements have been reclassified to conform to the current period’s presentation.
The consolidated financial statements include the accounts of Clarkston Financial Corporation (the “Corporation”), its wholly owned subsidiary, Clarkston State Bank (“CSB”) and its majority owned subsidiary, Huron Valley State Bank (“HVSB”). The subsidiaries are collectively referred to as “the Banks”. All significant intercompany transactions are eliminated in consolidation.
The Corporation also owns all of the common stock of Clarkston Capital Trust I. This is a grantor trust that issued trust preferred securities and is not consolidated with the Corporation per FASB Interpretation No. 46.
The Corporation has two stock-based compensation plans. Under the employees’ Stock Compensation Plan (“Employee Plan”), the Corporation may grant options or issue restricted stock to key employees for up to 27,500 shares of common stock, of which 15,403 shares of common stock are available for grant. Under the 1998 Founding Directors Stock Option Plan (“Director Plan”), the Corporation may grant options for up to 82,500 shares of common stock, of which 7,920 shares of common stock are available for grant. Under both plans, there is a minimum vesting period of between one to three years before the options may be exercised, and all options expire 10 years after the date of their grant. Certain options (contingent options) under both plans vest on an accelerated basis upon the achievement of various future financial and operational goals. All such options vest 9.5 years after the date of grant regardless of achievement of future goals. Under both plans, the exercise price of each option equals the market price of the Corporation’s common stock on the date of grant.
7
The Corporation adopted the fair value recognition provisions of Statement of Financial Standards (SFAS) No. 123 (R), Share Based Payment effective January 1, 2006 using the modified-prospective transition method. SFAS No. 123(R), Share Based Payment, established a fair value method of accounting for stock options whereby compensation expense would be recognized based on the computed fair value of the options on the grant date. The Corporation recognizes compensation expense related to restricted stock awards over the period the services are performed. No options were granted during 2006. The Corporation determined that implementation of SFAS No. 123(R) did not have a material impact on the financial results of the Corporation.
The following table summarizes stock option transactions for both plans and the related average exercise prices for the three month periods ended March 31:
| 2007 | 2006 | |||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Number of Shares | Weighted Average Exercise Price | Intrinsic Value | Number of Shares | Weighted Average Exercise Price | Intrinsic Value | |||||||||||||||
| Options Outstanding- Beginning of period | 35,522 | $ | 9.09 | 49,536 | $ | 9.09 | ||||||||||||||
| Options granted - Employee plan | -- | -- | -- | -- | ||||||||||||||||
| Options exercised | -- | -- | -- | -- | ||||||||||||||||
| Options expired | -- | -- | -- | -- | ||||||||||||||||
| Options Outstanding- End of period | 35,522 | $ | 9.09 | $ | 131,787 | 49,536 | $ | 9.09 | $ | 258,082 | ||||||||||
The following table shows summary information about fixed stock options outstanding at March 31, 2007:
| Stock Options Outstanding and Exercisable | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Range of Exercise Prices | Number of Shares | Weighted Average Remaining Contractual Life | Weighted Average Exercise Price | Aggregate Intrinsic Value | |||||||||||||
| Contingent | $ | 9.09 | 16,040 | 1.6 years | $ | 9.09 | $ | 59,508 | |||||||||
| Non-contingent | $ | 9.09 | 19,482 | 1.6 years | $ | 9.09 | $ | 72,278 | |||||||||
The aggregate intrinsic value of outstanding options shown in the table above represents the total pretax intrinsic value (i.e., the difference between the Corporation’s closing stock prices of $12.80 and $13.75 on March 31, 2007 and 2006, respectively and the exercise price on, times the number of shares) that would have been received by the option holders had all option holders exercised their options on March 31, 2007 and 2006. This amount changes based on the fair market value of the Corporation’s stock.
No options were exercised during the first quarter of 2007 or 2006.
8
The following table summarizes the activity of restricted stock awards for the years ended March 31,:
| 2007 | 2006 | |||||||
|---|---|---|---|---|---|---|---|---|
| Available for Grant - Beginning of period | $ | 15,403 | $ | 15,153 | ||||
| Granted | -- | -- | ||||||
| Forfeited | -- | -- | ||||||
| Available for Grant - End of period | $ | 15,403 | $ | 15,153 | ||||
The total compensation cost charged to income under these plans was $8,000 and $13,100 for 2007 and 2006, respectively. The total income tax benefit recognized in the income statement related to stock-based compensation was $2,700 and $4,500 for 2007 and 2006, respectively.
Restricted stock awarded is subject to restrictions on sale, transfer, or assignment for the duration of the employee’s life. Holders of restricted stock generally may forfeit ownership of all or a portion of their award if employment is terminated before the end of the vesting period. The units are not performance related and generally vest 33 percent annually on each anniversary date of the respective grant dates. Units are forfeited if the grantee terminates employment prior to vesting.
9
Basic earnings per share represents income available to common stockholders divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by the Corporation relate solely to outstanding stock options and are determined using the treasury stock method.
Earnings per share have been computed based on the following (000‘s omitted):
| Three Months Ended March 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2007 | 2006 | |||||||
| Net income/(loss) available to common | ||||||||
| stockholders | $ | 130 | $ | (354 | ) | |||
| Average number of common shares | ||||||||
| outstanding | 1,262 | 1,246 | ||||||
| Effect of dilutive options | 12 | 19 | ||||||
| Average number of common shares | ||||||||
| outstanding used to calculate diluted | ||||||||
| earnings/(loss) per common share | 1,274 | 1,265 | ||||||
| Number of antidilutive stock options excluded | ||||||||
| from diluted earnings per share computation | -- | -- | ||||||
10
The Bank does not have any securities in its portfolio that are classified as held to maturity. All securities are classified as available for sale and the amortized cost and fair values of those securities are as follows (000‘s omitted):
| Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Market Value | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| March 31, 2007 (unaudited) | ||||||||||||||
| U.S. Treasury securities and obligations of | ||||||||||||||
| U.S. government corporations and agencies | $ | 5,893 | $ | 12 | $ | 27 | $ | 5,878 | ||||||
| Mortgage-backed securities | 24,524 | 13 | 478 | 24,059 | ||||||||||
| Collateralized mortgage obligations | 2,874 | -- | 63 | 2,811 | ||||||||||
| Obligations of state and political subdivisions | 8,879 | 3 | 175 | 8,707 | ||||||||||
| $ | 42,170 | $ | 28 | $ | 743 | $ | 41,455 | |||||||
| December 31, 2006 | ||||||||||||||
| U.S. Treasury securities and obligations of | ||||||||||||||
| U.S. government corporations and agencies | $ | 7,353 | $ | 8 | $ | 40 | $ | 7,321 | ||||||
| Mortgage-backed securities | 25,496 | 5 | 561 | 24,940 | ||||||||||
| Collateralized mortgage obligations | 2,977 | -- | 85 | 2,892 | ||||||||||
| Obligations of state and political subdivisions | 8,899 | 3 | 191 | 8,711 | ||||||||||
| $ | 44,725 | $ | 17 | $ | 877 | $ | 43,864 | |||||||
Loans are as follows (000‘s omitted):
| March 31, 2007 (unaudited) | December 31, 2006 | |||||||
|---|---|---|---|---|---|---|---|---|
| Commercial loans | $ | 20,858 | $ | 23,917 | ||||
| Mortgage loans | ||||||||
| Commercial | 94,563 | 91,007 | ||||||
| Residential | 18,830 | 19,331 | ||||||
| Construction | 18,472 | 21,206 | ||||||
| Consumer | 2,164 | 2,254 | ||||||
| Total | $ | 154,887 | $ | 157,715 | ||||
11
Activity in the allowance for loan losses is as follows (000‘s omitted):
| Three Months Ended March 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2007 | 2006 | |||||||
| Balance - Beginning of period | $ | 2,750 | $ | 1,930 | ||||
| Provision charged to operations | 17 | 832 | ||||||
| Charge-offs | (526 | ) | (651 | ) | ||||
| Recoveries | 352 | 7 | ||||||
| Balance - End of period | $ | 2,593 | $ | 2,118 | ||||
| Allowance for loan losses to total | ||||||||
| loans | 1.67 | % | 1.52 | % | ||||
Deposits are summarized as follows (000‘s omitted):
| March 31, 2007 (Unaudited) | December 31, 2006 | |||||||
|---|---|---|---|---|---|---|---|---|
| Interest checking | $ | 5,005 | $ | 5,418 | ||||
| Savings | 4,613 | 4,183 | ||||||
| Money market | 49,942 | 52,004 | ||||||
| Certificates of deposit | 94,638 | 96,514 | ||||||
| Total deposits | $ | 154,198 | $ | 158,119 | ||||
The Corporation has various term advances from the Federal Home Loan Bank of Indianapolis (“FHLB”) with fixed and variable interest rates ranging from 3.75% to 5.58% at March 31, 2007 and December 31, 2006. The weighted average interest rate at March 31, 2007 was 4.83% and at December 31, 2006 was 4.92%. Maturity dates range from April 2007 to October 2010. The weighted average remaining maturity at March 31, 2007 is 393 days, or April 27, 2008. Advances from the FHLB are collateralized by qualifying investment securities with estimated market values of $15,062,000 and $16,300,000 at March 31, 2007 and December 31, 2006. The advances are due in full at maturity and the fixed rate advances are subject to a prepayment penalty if repaid prior to maturity.
12
Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for Banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action. The prompt corrective action regulations provide five classifications, well capitalized, adequately capitalized, undercapitalized and critical undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and plans for capital restoration are required. The Banks and the Corporation were well-capitalized as of March 31, 2007 and December 31, 2006.
The Banks’ and Corporation’s actual capital amounts and ratios as of March 31, 2007 and December 31, 2006 are presented in the following table (000‘s omitted):
| Actual | For Capital Adequacy Purposes | To be Well-Capitalized | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Amount | Ratio (Percent) | Amount | Ratio (Percent) | Amount | Ratio (Percent) | |||||||||||||||
| As of March 31, 2007: | ||||||||||||||||||||
| Total risk-based capital | ||||||||||||||||||||
| (to risk weighted assets) | ||||||||||||||||||||
| CSB | $ | 16,057 | 10.46 | $ | 12,284 | 8.00 | $ | 15,355 | 10.00 | |||||||||||
| HVSB | 7,246 | 39.62 | 1,463 | 8.00 | 1,829 | 10.00 | ||||||||||||||
| Consolidated | 21,647 | 12.51 | 13,849 | 8.00 | 17,311 | 10.00 | ||||||||||||||
| Tier I Capital | ||||||||||||||||||||
| (to risk weighted assets) | ||||||||||||||||||||
| CSB | $ | 14,131 | 9.20 | $ | 6,142 | 4.00 | $ | 9,213 | 6.00 | |||||||||||
| HVSB | 7,098 | 38.81 | 732 | 4.00 | 1,097 | 6.00 | ||||||||||||||
| Consolidated | 19,478 | 11.25 | 6,924 | 4.00 | 10,387 | 6.00 | ||||||||||||||
| Tier I Capital | ||||||||||||||||||||
| (to average assets) | ||||||||||||||||||||
| CSB | $ | 14,131 | 7.49 | $ | 7,550 | 4.00 | $ | 9,438 | 5.00 | |||||||||||
| HVSB | 7,098 | 26.49 | 1,072 | 4.00 | 1,340 | 5.00 | ||||||||||||||
| Consolidated | 19,478 | 9.06 | 8,600 | 4.00 | 10,750 | 5.00 | ||||||||||||||
| As of December 31, 2006: | ||||||||||||||||||||
| Total risk-based capital | ||||||||||||||||||||
| (to risk-weighted assets) | ||||||||||||||||||||
| CSB | $ | 15,858 | 10.05 | $ | 12,622 | 8.00 | $ | 15,778 | 10.00 | |||||||||||
| HVSB | 7,387 | 45.69 | 1,293 | 8.00 | 1,617 | 10.00 | ||||||||||||||
| Consolidated | 21,534 | 12.28 | 14,030 | 8.00 | 17,537 | 10.00 | ||||||||||||||
| Tier I Capital | ||||||||||||||||||||
| (to risk weighted assets) | ||||||||||||||||||||
| CSB | $ | 13,878 | 8.80 | $ | 6,311 | 4.00 | $ | 9,467 | 6.00 | |||||||||||
| HVSB | 7,256 | 44.88 | 647 | 4.00 | 970 | 6.00 | ||||||||||||||
| Consolidated | 19,335 | 11.02 | 7,015 | 4.00 | 10,522 | 6.00 | ||||||||||||||
| Tier I Capital | ||||||||||||||||||||
| (to average assets) | ||||||||||||||||||||
| CSB | $ | 13,878 | 7.44 | $ | 7,464 | 4.00 | $ | 9,329 | 5.00 | |||||||||||
| HVSB | 7,256 | 34.22 | 848 | 4.00 | 1,060 | 5.00 | ||||||||||||||
| Consolidated | 19,335 | 9.26 | 8,354 | 4.00 | 10,442 | 5.00 | ||||||||||||||
13
The Corporation is a party to credit-related financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, commercial and standby letters of credit, and unfunded commitments under lines of credit. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheet. The Corporation’s exposure to credit loss is represented by the contractual amount of these commitments. The Corporation follows the same credit policies in making commitments as it does for on-balance-sheet instruments.
At March 31, 2007 and December 31, 2006, the following financial instruments were outstanding whose contract amounts represent credit risk (000‘s omitted):
| March 31, 2007 (Unaudited) | December 31, 2006 | |||||||
|---|---|---|---|---|---|---|---|---|
| Commitments to grant loans | $ | 3,564 | $ | 11,933 | ||||
| Unfunded commitments under lines of credit | 25,376 | 25,238 | ||||||
| Commercial and standby letters of credit | 75 | 108 | ||||||
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS No. 157 enhances existing guidance for measuring assets and liabilities using fair value. Prior to the issuance of SFAS No. 157, guidance for applying fair value was incorporated in several accounting pronouncements. SFAS No. 157 provides a single definition of fair value, together with a framework for measuring it, and requires additional disclosure about the use of fair value to measure assets and liabilities. SFAS No. 157 also emphasizes that fair value is a market-based measurement, not an entity-specific measurement, and sets out a fair value hierarchy with the highest priority being quoted prices in active markets. Under SFAS No. 157, fair value measurements are disclosed by level within that hierarchy. While SFAS No. 157 does not add any new fair value measurements, it does change current practice. Changes to practice include: (1) a requirement for an entity to include its own credit standing in the measurement of its liabilities; (2) a modification of the transaction price presumption; (3) a prohibition on the use of block discounts when valuing large blocks of securities for broker-dealers and investment companies; and (4) a requirement to adjust the value of restricted stock for the effect of the restriction even if the restriction lapses within one year. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Corporation has not determined the impact of adopting SFAS No. 157 on its financial statements.
14
In February 2007, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (SFAS 159). SFAS No. 159 provides companies with an option to report selected financial assets and liabilities at fair value. SFAS No. 159‘s objective is to reduce both complexity in accounting for financial instruments and the volatility in earnings caused by measuring related assets and liabilities differently. SFAS No. 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. SFAS No. 159 requires companies to provide additional information that will help investors and other users of financial statements to more easily understand the effect of the company’s choice to use fair value on its earnings. It also requires entities to display the fair value of those assets and liabilities for which the company has chosen to use fair value on the face of the balance sheet. SFAS No. 159 is effective as of the beginning of an entity’s first fiscal year beginning after November 15, 2007. Early adoption is permitted as of the beginning of the previous fiscal year provided that the entity makes that choice in the first 120 days of that fiscal year and also elects to apply the provisions of Statement No. 157. The Company did not early adopt SFAS No. 159. The Company has not determined the impact of adopting SFAS No. 159 will have on its financial statements.
15
The following analysis discusses changes in the financial condition and results of operations of the Corporation for the periods presented and should be read in conjunction with the Corporation’s Consolidated Financial Statements and notes thereto, appearing in Part I, Item 1 of this document.
Forward Looking Statements
This report includes “forward-looking statements” as that term is used in the securities laws. All statements regarding the Corporation’s expected financial position, business and strategies are forward-looking statements. In addition, the words “anticipates,” “believes,” “estimates,” “seeks,” “expects,” “plans,” “intends,” and similar expressions, as they relate to the Corporation and its management, are intended to identify forward-looking statements. The presentation and discussion of the provision and allowance for loan and lease losses, determining the fair value of securities and other financial instruments, the valuation of mortgage servicing rights and statements concerning future profitability or future growth or increases, are examples of inherently forward looking statements in that they involve judgments and statements of belief as to the outcome of future events. The Corporation’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse affect on the Corporation’s operations and future prospects include, but are not limited to, changes in: interest rates, general economic conditions, legislative/regulatory changes, monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board, the quality or composition of the loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in the Corporation’s market area and accounting principles, policies and guidelines. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Further information concerning the Corporation and its business, including additional factors that could materially affect the Corporation’s financial results, is included in its filings with the Securities and Exchange Commission.
General
Clarkston Financial Corporation (the “Corporation”, “us” or “we”) is a Michigan corporation incorporated on May 18, 1998. The Corporation is the bank holding company for Clarkston State Bank (“CSB”) and Huron Valley State Bank (“HVSB”) (collectively the “Banks”). CSB commenced operations on January 4, 1999, and HVSB commenced operations on August 15, 2005. The Banks are chartered by the State of Michigan with depository accounts insured by the Federal Deposit Insurance Corporation. As such, our primary business is concentrated in a single industry segment — commercial banking. The Banks provide a full range of banking services to individuals, commercial businesses and industries located in their service areas. The Banks maintain diversified loan portfolios, including loans to individuals for home mortgages, automobiles and personal expenditures, and loans to business enterprises for current operations and expansion. The Banks also offer a variety of deposit products, including checking accounts, savings accounts, money market accounts, individual retirement accounts and certificates of deposit.
The principal markets for financial services provided are in the northern Oakland County communities in which the Banks are located and the areas immediately surrounding these communities. The Banks serve these markets through 5 locations in or near their communities. The Banks do not have any material foreign assets or income.
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Our principal source of revenue is interest and fees on loans. On a consolidated basis, interest and fees on loans accounted for 78.7% of total revenue year to date in 2007 compared to 74.3% year to date in 2006. The share of total revenue from interest and fees on loans increased in the current period as a result of a conscious effort to invest a larger portion of our funding in the loan portfolio and reduce the investment portfolio as a percent of earning assets. Therefore, revenue share of interest from investments (including Federal Funds sold), decreased to 14.7%, from 18.2% year over year. Noninterest income in total declined from 7.5% to 6.5% in 2007 and 2006, respectively. The decrease in noninterest income’s share of revenue is due primarily to decreased deposit service charges and fees, partially offset by increased mortgage loan sales volume.
Critical Accounting Policies
As of March 31, 2007, there have been no material changes in the disclosures regarding critical accounting policies as disclosed in the Corporation’s Form 10-K for the year ended December 31, 2006. The Corporation’s critical accounting policies are described in the financial section of its 2006 Annual Report. Management believes its critical accounting policies relate to the valuation of the allowance for loan losses, income taxes and stock-based compensation.
Comparison of Financial Condition at March 31, 2007 and December 31, 2006
Our total assets decreased by $6.6 million or 3.0% to $213.8 million at March 31, 2007, from $220.4 million at December 31, 2006. Significant decreases in cash and equivalents, investment securities and to a lesser extent net loans caused the decrease in total assets, offset partially by increases in premises and equipment and loans held for sale.
Cash and cash equivalents, which include federal funds sold and short-term investments, decreased $4.3 million or 32.3% to $9.0 million at March 31, 2007 from $13.3 million at December 31, 2006. The primary cause of the decrease was, as mentioned above, a conscious effort to invest more of our funding in higher yielding assets in order to increase the net interest margin.
Securities decreased $2.4 million or 5.5% to $41.5 million at March 31, 2007 from $43.9 million at December 31, 2006. The decrease in securities was split between paydowns on mortgage backed securities and the sale and maturity of securities. The runoff of some high cost deposits was funded in part by the sale of investments and lack of reinvestment of matured dollars in the portfolio, in accordance with our net interest margin strategy discussed briefly above. The Corporation continues to have excellent liquidity and will monitor its level of securities to ensure proper liquidity is maintained. While there are a number of securities that have market values less than 95% of the book value, and could be construed as impaired relative to market value, management has the intent and ability to hold these specific securities until maturity and no loss is expected to be realized on these securities. As a result, the Corporation has not recognized any permanent impairment as of March 31, 2007.
17
Total portfolio loans decreased by $2.8 million or 1.8% to $154.9 million at March 31, 2007 from $157.7 million at December 31, 2006. HVSB’s portfolio grew $1.6 million during the 1st quarter of 2007, and CSB's portfolio declined $4.4 million. The difficult economic climate in Michigan, and competitive pressures in the banks’ contiguous markets has created a challenging environment in which to make loans.
The commercial real estate portfolio was the only portfolio showing an increase at March 31, 2007, rising $3.6 million, or 4.0% over the balance at December 31, 2006. This increase was offset by a $2.7 million, or 12.7% decrease in the construction portfolio and a $3.0 million, or 12.6% decrease in the commercial and industrial portfolio. The majority of the reduction in outstanding balances resulted from the payoff of credits which management deemed to carry elevated risk. The residential real estate and consumer loan portfolios declined slightly to $18.8 million and $2.2 million at March 31, 2007, respectively. Approximately 70% of the residential real estate portfolio is in home equity loans, as the majority of the 1st mortgages written by the Banks are sold in the secondary market. The Banks’ loan policies are conservative in relation to home equity loans, generally not permitting combined loan to values of greater than 90%. The banks continue to focus on real estate lending, evidenced by the fact that 85.2% of the loan portfolio is secured by some type of real estate. Management views that this is prudent at the current time given the uncertainty of the local economy, especially as it relates to small businesses.
The nonperforming loan balance shown below as of March 31, 2007 is made up of nine relationships, a decrease from twelve relationships in the prior quarter. As can be seen in the table in note six, gross charge-offs for the quarter were $526,000, an increase from the $107,000 taken in the prior quarter. The gross recoveries of $352,000 resulted primarily from the resolution of two problem credits and continued payments on another impaired relationship which was satisfactorily resolved subsequent to the end of the quarter. In addition, the credit policy has been completely rewritten to address shortfalls that may have contributed to previous credit problems. Additionally, a reorganization of the lending area has been completed, with the credit function now centrally managed at the Holding Company level for both subsidiary institutions. Management believes the new structure will allow us to better manage our credit risk ongoing and in the future.
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The table below shows the composition and amount of our nonperforming assets.
| March 31, 2007 | December 31, 2006 | |||||||
|---|---|---|---|---|---|---|---|---|
| (unaudited) | ||||||||
| (000's omitted) | ||||||||
| Nonaccrual loans | ||||||||
| Secured by real estate | $ | 2,219 | $ | 2,216 | ||||
| Secured by other than real estate | 286 | 215 | ||||||
| Loans 90 days past due and still accruing | ||||||||
| Secured by real estate | 125 | 835 | ||||||
| Secured by other than real estate | -- | 20 | ||||||
| Total nonperforming loans | 2,630 | 3,286 | ||||||
| Foreclosed and repossessed assets | 452 | 3 | ||||||
| Total nonperforming assets | $ | 3,082 | $ | 3,289 | ||||
| Nonperforming loans to total loans | 1.70 | % | 2.08 | % | ||||
| Nonperforming assets to total assets | 1.45 | % | 1.49 | % | ||||
The allowance for loan losses as of March 31, 2007 was $2.6 million representing approximately 1.68% of total portfolio loans outstanding, compared to $2.8 million, or 1.78% of loans outstanding as of December 31, 2006. Management believes that the high risk credits are appropriately reserved for and are all being monitored appropriately. At the same time, the economic climate in the Banks’ home state is not favorable and the possibility for additional losses caused by this economic weakness still exists. We believe that the allowance for loan losses is sufficient to cover losses inherent in the portfolio.
Total premises and equipment increased $1.6 million, or 34.0% to $6.3 million at March 31, 2007 from $4.7 million at December 31, 2006. This increase is due to the purchase of land on which HVSB’s new main office will be constructed during 2007 from a company in which two of HVSB’s directors have an equity interest. The transaction was consummated at fair market value.
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Total deposit balances decreased $6.9 million or 3.8% to $175.1 million at March 31, 2007 from $182.0 million at December 31, 2006. The largest decreases were seen in time and money market deposits which decreased $2.1 million and $1.9 million, respectively since December 31, 2006. The savings and interest bearing checking portfolios both showed small variances which offset each other. The local market for deposits is extremely competitive, and we continue to focus on gathering savings and DDA accounts to fund our future growth and reduce our reliance on higher cost time deposits. While higher cost time deposits continue to make up a larger portion of the overall funding mix, the cost of funds is rising at a slower rate than the yield on earning assets, therefore not materially harming the net interest margin. Reevaluation of pricing structures of certain deposit accounts is the primary cause of this. Additionally, the runoff of some of the accounts acquired during HVSB’s aggressive time deposit promotions has decreased the cost of funds and is the primary contributor to the decreased time deposit balances.
As noted briefly above, management is stressing a philosophy of not growing unprofitably by funding investment securities or federal funds with high cost time deposits. Our goal is to fund our loan growth with demand or money market accounts with time deposits utilized only when larger pieces of funding are needed. The wholesale market may be used for this purpose when cost effective. The addition of a new President at HVSB and bringing the marketing function in house at the holding company level should assist us greatly in our deposit gathering efforts.
The Banks are members of the Federal Home Loan Bank of Indianapolis, and utilize advances from this institution to bolster liquidity. At March 31, 2007, we have $15.2 million in advances outstanding, all at CSB. No repayments or additional advances occurred during the quarter. The Corporation continues to view the FHLB as a source of liquidity and may borrow additional funds as market conditions dictate.
We have no other off-balance sheet liabilities other than commitments to extend credit in the form of letters and lines of credit.
As of March 31, 2007, we had retained earnings of $3.0 million compared to $2.9 million at December 31, 2006 which was the result of net income of $130,000. Accumulated other comprehensive income saw an increase of $99,000, or 17.0%. This increase was primarily the result of changes in interest rates causing an increase in the market value of the Corporation’s security portfolio. We do not believe that the value of any of the securities in the portfolio are permanently impaired.
Comparison of Operating Results for the Three Months Ended March 31, 2007 and 2006
Our net income was $130,000, or $0.10 per diluted share for the first quarter of 2007 compared to a net loss of $354,000, or $0.28 per diluted share for the first quarter of 2006. The increased profitability was primarily due to reduced provision for loan loss and increased net interest income.
Net interest income increased 7.3% or $112,000 from $1.53 million in the first quarter of 2006 to $1.65 million for 2007. Both elevated balances in average earning assets and favorable interest rates contributed to the increased net interest income. Balances in average earning assets increased 9.9% to $208.9 million at March 31, 2007 from $190.2 million at March 31, 2006. This growth in earning assets was funded primarily with time deposits where the average balance increased 38.4% to $95.8 million, with advances from FHLB also showing an increase of $5.0 million or 49.0%. The net impact of these variances effectively added $51,000 to the margin. The loan portfolio increased $23.5 million, or 17.6% on an average basis, but this increase was offset by a decrease in investments and federal funds sold of $4.7 million. The decrease in other earning assets was intentional, as part of our strategy to improve the net interest margin is growing the loan portfolio as a percent of earning assets. The cost of interest bearing funds increased 57 basis points, while the yield on earning assets increased by 49 basis points. Given the relatively large size of the earning asset portfolio, these changes caused a $60,000 increase in the net interest margin. The net interest margin decreased from 3.27% for the quarter ended March 31, 2006 to 3.19% for the same period in 2007. This was caused by several loans being placed on non-accrual during the quarter and the reversal of interest on these loans negatively impacted our net interest margin. Absent these items the net interest margin would be more in line with the prior year. In addition, during the first quarter of 2006 HVSB was still investing their initial capital, which inflated their net interest margin (and as a result the consolidated margin) for the 1st quarter of 2006.
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The following schedule presents the average daily balances, interest income, interest expense and average rates earned and paid for the Corporation’s major categories of assets, liabilities, and shareholders’ equity for the periods indicated (000‘s omitted):
| 3 Months ended March. 31, 2007 | 3 Months ended March 31, 2006 | |||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Average Balance | Interest | Yield/ Cost | Average Balance | Interest | Yield/ Cost | |||||||||||||||
| Assets: | ||||||||||||||||||||
| Short term investment | $ | 6,569 | $ | 89 | 5.49 | % | $ | 5,376 | $ | 67 | 5.05 | % | ||||||||
| Securities: | ||||||||||||||||||||
| Taxable | 36,054 | 400 | 4.44 | % | 40,243 | 437 | 4.34 | % | ||||||||||||
| Tax-exempt | 8,892 | 72 | 3.24 | % | 10,665 | 87 | 3.26 | % | ||||||||||||
| Loans | 157,444 | 2,989 | 7.70 | % | 133,943 | 2,409 | 7.29 | % | ||||||||||||
| Total earning assets/total | ||||||||||||||||||||
| interest income | 208,960 | 3,550 | 6.89 | % | 190,227 | 3,000 | 6.40 | % | ||||||||||||
| Cash and due from banks | 4,139 | 5,340 | ||||||||||||||||||
| Unrealized (loss) on AFS securities | (926 | ) | (1,116 | ) | ||||||||||||||||
| Allowance for loan loss | (2,855 | ) | (1,972 | ) | ||||||||||||||||
| All other assets | 7,681 | 6,442 | ||||||||||||||||||
| Total assets | $ | 217,000 | $ | 198,921 | ||||||||||||||||
| Liabilities and Stockholders' Equity | ||||||||||||||||||||
| Interest bearing deposits: | ||||||||||||||||||||
| MMDA, Savings/NOW accounts | 60,313 | 444 | 2.99 | % | 68,852 | 526 | 3.10 | % | ||||||||||||
| Time | 95,814 | 1,184 | 5.01 | % | 69,166 | 724 | 4.25 | % | ||||||||||||
| Fed Funds Purchased | 0 | 4 | 0.00 | % | 2,833 | 31 | 4.44 | % | ||||||||||||
| FHLB Advances | 15,200 | 191 | 5.10 | % | 10,200 | 111 | 4.41 | % | ||||||||||||
| Trust Preferred Securities | 4,000 | 82 | 8.31 | % | 4,000 | 75 | 7.60 | % | ||||||||||||
| Other borrowings | -- | -- | 0.00 | % | 19 | -- | 0.00 | % | ||||||||||||
| Total interest bearing | ||||||||||||||||||||
| liabilities/interest expense | 175,327 | 1,905 | 4.41 | % | 155,070 | 1,467 | 3.84 | % | ||||||||||||
| Noninterest bearing deposits | 21,155 | 22,848 | ||||||||||||||||||
| All other liabilities | 2,611 | 2,493 | ||||||||||||||||||
| Minority Interest | 3,171 | 3,393 | ||||||||||||||||||
| Stockholders' Equity: | ||||||||||||||||||||
| Unrealized holding (loss) | (632 | ) | (729 | ) | ||||||||||||||||
| Common Stock, Surplus, Retained Earnings | 15,368 | 15,845 | ||||||||||||||||||
| Total liabilities and stockholders' equity | $ | 217,000 | 198,921 | |||||||||||||||||
| Interest spread | 1,645 | 2.48 | % | 1,467 | 2.56 | % | ||||||||||||||
| Net Interest Margin as a | ||||||||||||||||||||
| Percentage of Average | ||||||||||||||||||||
| Earnings Assets | 208,960 | 1,645 | 3.19 | % | 190,227 | 1,467 | 3.27 | % | ||||||||||||
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Rate / Volume Analysis of Net Interest Income.The following schedule presents the dollar amount of changes in interest income and expense for major components of earning assets and interest-bearing liabilities, distinguishing between changes related to outstanding balances and changes due to interest rates. (000‘s omitted)
| For the 3 months ended March 31, 2007 Compared to 2006 | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Change Due to Rate | Change Due to Volume | Total Change | |||||||||
| Short term investment | $ | 6 | $ | 16 | $ | 22 | |||||
| Investment securities - taxable | 56 | (93 | ) | (37 | ) | ||||||
| Investment securities - tax exempt | (1 | ) | (14 | ) | (15 | ) | |||||
| Loans, net of unearned income | 139 | 441 | 580 | ||||||||
| Total interest income | 200 | 350 | 550 | ||||||||
| Interest bearing deposits | 128 | 250 | 378 | ||||||||
| Federal funds borrowed | (14 | ) | (13 | ) | (27 | ) | |||||
| FHLB advances | 19 | 61 | 80 | ||||||||
| Trust preferred securities | 7 | -- | 7 | ||||||||
| Other borrowings | -- | -- | -- | ||||||||
| Total interest expense | 140 | 298 | 438 | ||||||||
| Net interest income | $ | 60 | $ | 52 | $ | 112 | |||||
Total provision for loan losses was $17,000 for the quarter ended March 31, 2007, compared to $832,000 for the first quarter of 2006. The reduction in the size of the loan portfolio and the decrease in non-performing loans caused the reduction in the required provision. Additionally, the provision for the quarter ended March 31, 2006 was elevated due to large charge-offs and specific reserves. Management believes that the provision for the current quarter is more indicative of the amounts which will be required in the foreseeable future.
The level of the provision made in connection with the loans reflects the amount necessary to maintain the allowance for loan losses at an adequate level, based upon the Banks’ current analysis of probable incurred losses in its loan portfolio, with respect to loans held at March 31, 2007. Management is continuing to evaluate the financial condition of the borrowers and the value of the collateral.
Non-interest income increased $5,000, or 2.0% for the first quarter of 2007 compared to the same period in 2006. This increase is caused by increased gains/losses on sales of mortgage loans and offset by decreased service fees on loan and deposit accounts. Increased volume of mortgage loan sales contributed positively, showing an increase of 63.2%, or $24,000. Management is encouraged by this development, especially given the difficult residential lending environment faced locally in the first quarter. The reduction in service charges is primarily due to reduction in the amount of NSF income. The decrease in NSF income is due primarily to the prior period being higher than normal. Management at the Bank subsidiaries has actively worked with the customers who were habitually overdrawing their accounts to either help them better manage their funds or help them to find another bank because management feels that the reduction in credit risk is worth the reduction in deposit (primarily NSF) fees. The Corporation’s large checking account portfolio continues to generate fees, though a review of these fees relative to our local market peers may result in the modification of our fee structure. It is, however, anticipated that any modification of the fee structure will result in increased fee income.
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Non-interest expense was $1.8 million for the first quarter of 2007, up from $1.5 million for the first quarter of 2006. The fact that HVSB is now operating as a fully staffed bank is the primary cause of the increase in operating expenses. Salary and benefit costs increased $176,000, or 22.3%. Occupancy expense has decreased $42,000, or 16.5% mostly as a result of CSB closing 2 facilities, a loan center during the 3rd quarter of 2006 and a retail branch location during the current quarter. The increase in outside processing expense resulted from increased activity at HVSB as well as the fact that the deferral period of their contract with our primary data processor expired at the end of the 1st quarter of 2006. Professional fees are elevated relative to the prior year due to continuing collection efforts at CSB and legal costs related to the aforementioned purchase of land at HVSB. The 63.5% or $92,000 increase in other expenses is due primarily to increased accruals for FDIC assessment at both banks and some fraudulent debit card transactions resulting from malfeasance at a large national retailer. As Huron Valley State Bank and the mortgage operation gain critical mass and we work our way out of the credit quality issue we are currently in the midst of, we anticipate our efficiency ratio to improve to the levels more common throughout our history. The ratio for the quarter ended March 31, 2007 was 94.1% compared to 86.3% at March 31, 2006.
Liquidity and Capital Resources
The Corporation obtained its initial equity capital in an initial public offering of its common stock in November 1998. We have successfully grown through our first five years of operation. In December 2003, we completed an offering of $4.0 million of cumulative preferred securities (“Trust Preferred Securities”) to further support the Corporation’s growth.
In July 2005, the Corporation completed a rights offering which allowed each holder of the Corporation’s common stock as of the June 6, 2005 record date to purchase 1 additional share of common stock for every 4 shares held, while also offering an opportunity to purchase a limited number of shares above their basic subscription right (the over-subscription privilege). A total of 165,776 shares were purchased in the rights offering (63.2% of the 262,192 shares offered). Of the 165,776 shares purchased, 127,183 shares were basic subscriptions and 38,593 shares were over-subscriptions. The Corporation received approximately $2,856,000 in net proceeds in connection with the rights offering, which was used to purchase a majority interest in Huron Valley State Bank.
Also in July 2005, 28,000 shares were sold to one investor through the community offering provisions of the rights offering. These shares were sold at $18.00, netting the Corporation $504,000.
Management believes that its current capital will provide us with adequate capital to support our expected level of deposit and loan growth and to otherwise meet our capital requirements for the next year.
23
Capital Resources at March 31, 2007 (in thousands)
| Tier 1 Leverage Ratio | Tier 1 Capital Ratio | Total Risk-Based Capital Ratio | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Minimum regulatory requirement for | |||||||||||
| Capital adequacy | 4.00 | % | 4.00 | % | 8.00 | % | |||||
| Well capitalized regulatory level | 5.00 | % | 6.00 | % | 10.00 | % | |||||
| CSB | 7.49 | % | 9.20 | % | 10.46 | % | |||||
| HVSB | 26.49 | % | 38.81 | % | 39.62 | % | |||||
| Consolidated | 9.06 | % | 11.25 | % | 12.51 | % | |||||
The following table shows the dollar amounts by which our capital (on a consolidated basis) exceeds current regulatory requirements on a dollar-enumerated basis:
Total
| Tier 1 Leverage | Tier 1 Capital | Risk-Based Capital | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| (in thousands of dollars) | |||||||||||
| Capital balances at March 31, 2007 | |||||||||||
| Required regulatory capital | $ | 8,600 | $ | 6,924 | $ | 13,849 | |||||
| Capital in excess of regulatory minimums | 10,879 | 12,554 | 7,799 | ||||||||
| Actual capital balances | $ | 19,478 | $ | 19,478 | $ | 21,647 | |||||
The liquidity of a financial institution reflects its ability to provide funds to meet loan requests, to accommodate possible outflows of deposits and to take advantage of interest rate market opportunities. Our sources of liquidity include our borrowing capacity with the Federal Home Loan Bank, loan payments by our borrowers, maturity and sales of our securities available for sale, growth of our deposits and deposit equivalents and various capital resources. Liquidity management involves the ability to meet the cash flow requirements of our customers. Our customers may be either borrowers with credit needs or depositors wanting to withdraw funds. We believe our liquidity position is sufficient to meet these needs.
As indicated by the consolidated statement of cash flows for the three months ended March 31, 2007, operating activities used $401,000. Mortgage banking operations were the primary user of cash in the current year, which should give rise to continued positive contributions from that area. In addition, decreased portfolio loans and security sales and maturities provided $2.7 million, and $2.5 million in cash to our operation, respectively. The primary uses of funds in the current quarter were deposit outflows of $6.9 million, and premise and equipment expenditures (primarily the purchase of land at HVSB) of $1.7 million.
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| (a) | Evaluation of Disclosure Controls and Procedures. The Corporation’s Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of the Corporation’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Form 10-QSB Quarterly Report, have concluded that the Corporation’s disclosure controls and procedures were adequate and effective to ensure that material information relating to the Corporation would be made known to them by others within the Corporation, particularly during the period in which this Form 10-QSB Quarterly Report was being prepared. |
| (b) | Changes in Internal Controls. During the period covered by this report, there have been no changes in the Corporation’s internal control over financial reporting that have materially affected or are reasonably likely to materially affect the Corporation’s internal control over financial reporting. |
25
From time to time, we may be involved in various legal proceedings that are incidental to our business. In our opinion, we are not a party to any current legal proceedings that are material to our financial condition, either individually or in the aggregate.
As of March 31, 2007, there have been no material changes in the discussion pertaining to risk factors as disclosed in the Corporation’s Form 10-K for the year ended December 31, 2006.
None.
None.
None.
None.
| Exhibits |
| 31.1 | Certificate of the Chief Executive Officer of Clarkston Financial Corporation pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 31.2 | Certificate of the Chief Financial Officer of Clarkston Financial Corporation pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 32.1 | Certificate of the Chief Executive Officer and Chief Financial Officer of Clarkston Financial Corporation pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Quarterly Report on Form 10-QSB for the quarter ended March 31, 2007, to be signed on its behalf by the undersigned, thereunto duly authorized.
| CLARKSTON FINANCIAL CORPORATION /s/ Edwin L. Adler —————————————— Edwin L. Adler Chairman of the Board and Chief Executive Officer |
/s/ James W. Distelrath —————————————— James W. Distelrath Chief Financial Officer |
DATE: May 15, 2007
27
EXHIBIT LIST
| 31.1 | Certificate of the Chief Executive Officer of Clarkston Financial Corporation pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 31.2 | Certificate of the Chief Financial Officer of Clarkston Financial Corporation pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 32.1 | Certificate of the Chief Executive Officer and Chief Financial Officer of Clarkston Financial Corporation pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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