Exhibit 99.1
To Our Shareholders:
In the first quarter of 2006, Pavilion Bancorp continued to build market share, grow its loan portfolio and move forward with initiatives designed to increase shareholder value. Total loans have grown by approximately $21 million, a portfolio increase of nearly 10% from March 31, 2005. Net income and earnings per share have also increased very significantly when compared to the same period last year, with gains of approximately 56% and 87%, respectively.
Although we are pleased with this progress, our focus remains on further enhancing the return our shareholders receive on their investments. As such, we have completed a comparative analysis of our performance against that of our peer banks. This information gives us an objective financial barometer by which we can gauge how Pavilion Bancorp is doing in fundamental areas including operating expenses, income and net interest margin. It has also provided us with the data necessary to make some key strategic decisions.
When reviewing the comparative peer bank information, it became evident that the area where Pavilion Bancorp differed most from its peers was in that of personnel expenses. On average, across our peer banks, personnel expenses accounted for approximately 1.8% of average assets. For Pavilion Bancorp, personnel expenses accounted for approximately 2.6% of average assets. To bring these expenses more closely in line with those of other banks our size, we have recently instituted a reduction in force of 18 Full-Time Equivalents (FTE), which brings us to a total of 99 FTE. This action will result in a pre-tax savings for the Bank of Lenawee of approximately $251,000 in 2006, and an annual pre-tax savings of approximately $654,000 thereafter. In the first quarter of 2006, we have absorbed a one-time expense of $229,000 related to this reduction in force.*
In addition to our continued expense control initiatives, on the revenue generation side of the business, we have formed two strategic alliances—one with Private Bank of Bloomfield Hills, Michigan, and the other with a local Raymond James office to provide asset management and brokerage services, respectively, to our customers.
Today, Pavilion Bancorp is poised to take full advantage of our ability to grow the bank, and enjoy the benefits of the high margins and non-interest income that we derive from the markets we serve. In the months ahead, we anticipate that the introduction of new products and services coupled with continued success in our business development endeavors will earn us more opportunities to serve both our customers and our communities.
It is also our intent to provide our shareholders with a strong return on their investment. 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 compares to the one-time expense of $264,000 related to the reduction in force instituted in the first quarter of 2005.
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.
CONSOLIDATED BALANCE SHEETS
(000's omitted)
| Unaudited
March 31, |
|---|
| 2006 | 2005 |
|---|
| Assets | | | | | |
| Cash and due from banks | | $ 11,017 | | $ 6,695 | |
| Federal funds sold | | - | | 11,930 | |
|
| |
| |
| Total cash and cash equivalents | | 11,017 | | 18,625 | |
Market value of securities available for sale | | 27,836 | | 31,899 | |
Loans held for sale | | 1,158 | | 812 | |
| Total loans | | 234,341 | | 213,449 | |
| Allowance for loan and lease losses | | (2,596 | ) | (2,505 | ) |
|
| |
| |
| Net loans | | 231,745 | | 210,944 | |
Premises and equipment, net | | 6,454 | | 5,579 | |
| Accrued interest receivable | | 1,808 | | 1,590 | |
| Mortgage servicing assets | | 2,814 | | 2,948 | |
| Other assets | | 1,110 | | 1,580 | |
|
| |
| |
| Total assets | | $ 283,942 | | $ 273,977 | |
|
| |
| |
| Liabilities and shareholders' equity | |
Liabilities | |
| Deposits: | |
| Noninterest - bearing | | $ 46,011 | | $ 43,395 | |
| Interest - bearing | | 176,777 | | 173,449 | |
|
| |
| |
| Total deposits | | 222,788 | | 216,844 | |
| Federal funds purchased | | 590 | | - | |
| Repurchase agreements-customers | | 3,818 | | 3,849 | |
| Repurchase agreements-financial institutions | | 10,000 | | - | |
| Federal Home Loan Bank advances | | 8,901 | | 9,110 | |
| Subordinated debentures | | 5,000 | | 5,000 | |
| Accrued interest payable | | 989 | | 417 | |
| Other liabilities | | 2,230 | | 2,281 | |
| Common stock subject to repurchase obligation in ESOP | | 2,989 | | 4,654 | |
|
| |
| |
| Total liabilities | | 257,305 | | 242,155 | |
Shareholders' equity | |
Common stock and paid-in capital, No par value: | |
| 3,000,000 shares authorized; shares issued and | |
| outstanding 736,765 - 2006; 858,981 - 2005 | | 10,751 | | 10,342 | |
| Retained earnings | | 16,187 | | 21,766 | |
| Unrealized gain (loss) on securities available for sale | | (301 | ) | (286 | ) |
|
| |
| |
| Total shareholders' equity | | 26,637 | | 31,822 | |
|
| |
| |
| Total liabilities and shareholders' equity | | $ 283,942 | | $ 273,977 | |
|
| |
| |
CONSOLIDATED STATEMENTS OF INCOME
(000's omitted except for earnings per share)
| Unaudited
Three Months Ended March 31, |
|---|
| 2006 | 2005 |
|---|
| Interest income | | | | | |
| Loans, including fees | | $4,144 | | $3,335 | |
| Securities | | 251 | | 264 | |
| Federal funds sold and other | | 85 | | 37 | |
|
| |
| |
| Total interest income | | 4,480 | | 3,636 | |
Interest expense | |
| Deposits | | 1,143 | | 637 | |
| Subordinated debentures | | 105 | | 84 | |
| Other borrowed funds | | 308 | | 99 | |
|
| |
| |
| Total interest expense | | 1,556 | | 820 | |
Net interest income | | 2,924 | | 2,816 | |
| Provision for loan losses | | - | | 30 | |
|
| |
| |
| Net interest income after | |
| provision for loan losses | | 2,924 | | 2,786 | |
Noninterest income | |
| Service charges on deposit accounts | | 316 | | 295 | |
| Gains on sales of loans | | 241 | | 312 | |
| Loan servicing fees, net of amortization | | 34 | | 194 | |
| Other | | 116 | | 138 | |
|
| |
| |
| Total other income | | 707 | | 939 | |
Noninterest expense | |
| Compensation and employee benefits | | 1,884 | | 2,100 | |
| Premises and equipment | | 411 | | 346 | |
| Other | | 767 | | 882 | |
|
| |
| |
| Total other expenses | | 3,062 | | 3,328 | |
|
| |
| |
| Income before income taxes | | 569 | | 397 | |
| Federal income tax expense | | 169 | | 138 | |
|
| |
| |
| Net income | | $ 400 | | $ 259 | |
|
| |
| |
| Earnings per common share: | | $ 0.54 | | $ 0.30 | |
