EXHIBIT 99.1
THIRD QUARTER STATEMENT
September 30, 2005
World Class, Community Driven.
Pavilion Bancorp, Inc.
To Our Shareholders:
Pavilion Bancorp’s first nine months of 2005 are characterized by a continued successful effort to build market share, improve loan portfolio credit quality and reduce ongoing expenses. In this regard, total loans grew by approximately $29 million from December 31, 2004, representing a significant 14.7% increase. This growth reflects the implementation of a disciplined business development program designed to expand existing banking relationships and establish new ones. The loan growth has helped to replace the approximately $11 million in loan participations that were eliminated with the October 2004 sale of the Bank of Washtenaw.
During this same period, our loan portfolio credit quality has shown continued, steady improvement. This is due to the implementation of enhanced credit approval and problem loan identification initiatives, combined with aggressive efforts to remediate existing problem loans. As always, loan portfolio credit quality remains a high priority as we grow the bank.
Regarding expense control, management continues to implement programs and initiatives designed to either improve our financial controls or to lower the ongoing non-interest expenses. This has required the incurrence of approximately $705 thousand in non-recurring expenses. These expenses include bringing our pension plan to a current funded status; increased payments to our auditing firms for contingency planning, Sarbanes-Oxley compliance and additional work related to our annual report to the SEC; the demolition and rebuilding of one of our branches in Hudson, Michigan; and the expenses associated with our recent tender offer in which we purchased 128,832 shares of our common stock.
As Pavilion Bancorp moves forward, we are confident that our organization’s commitment to meeting the needs of our customers, to supporting the communities we serve, and to providing you, our shareholders with a reasonable return on your investment, will only grow stronger. In this regard, we are pleased to confirm the Board of Director’s approval of a 24 cent per share cash dividend, which is enclosed with this statement.
On behalf of the Board of Directors, Management and Staff, we thank you for your continued support.
| Douglas L. Kapnick Chairman of the Board | Richard J. DeVries President and CEO |
This letter contains certain forward-looking statements that involve risks and uncertainties. When used in this letter, the words “believe”, “expect”, or “anticipate” and similar expressions identify forward-looking statements. Such statements are subject to certain risks and uncertainties which could cause actual results to differ materially from those expressed or implied by such forward-looking statements, including but not limited to, economic, competitive, governmental and technological factors affecting the company’s operations, markets, products, services, interest rates and fees for services. Readers are cautioned not to place undue reliance on these forward-looking statements.
| Officers: Pavilion Bancorp, Inc Douglas L. Kapnick Chairman Richard J. DeVries President and Chief Executive Officer Board of Directors Pavilion Bancorp, Inc. and Bank of Lenawee Douglas L. Kapnick Chairman, Pavilion Bancorp, Inc. President, Kapnick and Company, Inc. Emory M. Schmidt Chairman, Bank of Lenawee Vice President, Brazeway, Inc. Richard J. DeVries President and CEO Pavilion Bancorp, Inc. and Bank of Lenawee Fred R. Duncan Retired Edward J. Engle, Jr. President, Rima Manufacturing Company Dan R. Hupp President, Dan's Farm Supply | Pamela S. Fisher Corporate Secretary Executive Vice President and Chief Operating Officer Mark D. Wolfe Interim Chief Financial Officer Barbara A. Mitzel Area Manager, Consumers Energy Margaret M.S. Noe, J.D. Attorney Terence R. Sheehan Vice President and Chief Financial Officer, Brazeway, Inc. J. David Stutzman General Manager Raymond and Stutzman, LLC Dr. Marinus VanOoyen Chief of Radiology, Lenawee Health Alliance |
 World Class, Community Driven. 135 East Maumee Street Adrian, MI 49221 pavilionbancorp.com |
CONSOLIDATED BALANCE SHEETS
| (000's omitted) | (Unaudited) September 30, | |||||||
|---|---|---|---|---|---|---|---|---|
| 2005 | 2004 | |||||||
| Assets | ||||||||
| Cash and due from banks | 10,316 | $ | 3,674 | |||||
| Federal funds sold | 5,388 | |||||||
| Total cash and cash equivalents | 15,704 | 3,674 | ||||||
| Market value of securities available for sale | 29,394 | 25,081 | ||||||
| Loans held for sale | 874 | 1,507 | ||||||
| Total loans | 232,995 | 218,217 | ||||||
| Less: allowance for loan losses | (2,720 | ) | (2,396 | ) | ||||
| Net loans | 230,275 | 215,821 | ||||||
| Premises and equipment, net | 5,735 | 5,805 | ||||||
| Accrued interest receivable | 1,841 | 1,800 | ||||||
| Mortgage servicing assets | 2,980 | 2,810 | ||||||
| Other assets | 1,181 | 1,764 | ||||||
| Assets of discontinued operation | - | 76,343 | ||||||
| Total assets | $ | 287,984 | $ | 334,605 | ||||
| Liabilities and shareholders' equity | ||||||||
| Liabilities | ||||||||
| Deposits: | ||||||||
| Noninterest-bearing | $ | 46,731 | $ | 45,521 | ||||
| Interest-bearing | 181,374 | 170,785 | ||||||
| Total deposits | 228,105 | 216,306 | ||||||
| Federal funds purchased | - | 870 | ||||||
| Repurchase agreements | 13,837 | 2,284 | ||||||
| Federal Home Loan Bank advances | 8,905 | 6,586 | ||||||
| Accrued interest payable | 694 | 328 | ||||||
| Other liabilities | 2,535 | 2,652 | ||||||
| Subordinated debentures | 5,000 | 5,000 | ||||||
| Common stock subject to repurchase obligation in ESOP | 4,654 | 3,787 | ||||||
| Liabilities of discontinued operation | - | 68,883 | ||||||
| Total liabilities | 263,730 | 306,696 | ||||||
| Shareholders' equity | ||||||||
| Common stock and paid-in capital, No par value: | ||||||||
| 3,000,000 shares authorized; shares issued and | ||||||||
| outstanding 735,379 - 2005; 845,420 - 2004 | 9,056 | 10,820 | ||||||
| Retained earnings | 15,403 | 17,024 | ||||||
| Unrealized gain (loss) on securities available for sale | (205 | ) | 65 | |||||
| Total shareholders' equity | 24,254 | 27,909 | ||||||
| Total liabilities and shareholders' equity | $ | 287,984 | $ | 334,605 | ||||
CONSOLIDATED STATEMENTS OF INCOME
| (000's omitted except for earnings per share) | (Unaudited) Nine months ended September 30, | |||||||
|---|---|---|---|---|---|---|---|---|
| 2005 | 2004 | |||||||
| Interest income | ||||||||
| Loans, including fees | $ | 10,883 | $ | 10,465 | ||||
| Securities | 803 | 666 | ||||||
| Federal funds sold and other | 70 | 21 | ||||||
| Total interest income | 11,756 | 11,152 | ||||||
| Interest expense | ||||||||
| Deposits | 2,308 | 1,608 | ||||||
| Borrowed funds | 754 | 471 | ||||||
| Total interest expense | 3,062 | 2,079 | ||||||
| Net interest income | 8,694 | 9,073 | ||||||
| Provision for loan losses | 285 | 215 | ||||||
| Net interest income after | ||||||||
| provision for loan losses | 8,409 | 8,858 | ||||||
| Noninterest income | ||||||||
| Service charges on deposit accounts | 978 | 1,083 | ||||||
| Net gains on sale of loans | 1,112 | 1,168 | ||||||
| Loan servicing fees, net of amortization | 275 | 367 | ||||||
| Other income | 274 | 225 | ||||||
| 2,639 | 2,843 | |||||||
| Noninterest expense | ||||||||
| Salaries and employee benefits | 5,512 | 5,162 | ||||||
| Premises and equipment | 1,319 | 1,215 | ||||||
| Other expenses | 2,454 | 2,489 | ||||||
| 9,285 | 8,866 | |||||||
| Income before income taxes | 1,763 | 2,835 | ||||||
| Federal income tax expense | 563 | 912 | ||||||
| Net income from continuing operations | 1,200 | 1,923 | ||||||
| Discontinued operations: | ||||||||
| Income from operation of discontinued component | - | 487 | ||||||
| Provision for income taxes | - | 100 | ||||||
| Income from discontinued operation | - | 387 | ||||||
| Net income | $ | 1,200 | $ | 2,310 | ||||
| Earnings per common share: | ||||||||
| From continuing operation | $ | 1.63 | $ | 2.27 | ||||