Exhibit 99.1
To Our Shareholders:
At the mid-point of 2006, the financial and organizational outlook for Pavilion Bancorp is very positive. Despite facing the industry-wide challenges of increasing cost of funds and deposit-gathering competition, Pavilion Bancorp continues to show strong growth in key performance areas.
Total loans have grown by $21.8 million, a portfolio increase of 9.8% from the same period last year, while total deposits have also increased by 12.5%. Comparing year-to-year, total assets have increased 11.4% to $302.6 million.
Throughout the second quarter, Pavilion Bancorp’s bottom line has benefited from steady growth in interest and fee income complemented by lower non-interest expenses. Net interest income continues to rise, and, although the numbers show a decrease in our non-interest income when compared to the same period in 2005, it is primarily due to lower levels of mortgage loan sales and increased amortization of the mortgage servicing rights portfolio. Most notably, net income and earnings per share have both increased by more than 50% on an annualized basis.
From these results, it is evident that many of the strategic and cost control initiatives that we have implemented over the past eighteen months are helping to increase shareholder value. For example, the reduction in force (RIF) that was executed in the first quarter of the year has had a significant positive impact in bringing our non-interest expenses more closely in line with that of our peer banks. As a result of this initiative, our personnel costs in the first six months of the year have decreased by nearly $400,000 (net of the costs associated with the RIF) when compared to the same period in 2005.
Creating further operational efficiencies remains a primary focus for our organization, as does positioning ourselves for sustainable growth and profitability. We are optimistic about Pavilion Bancorp’s future and the opportunities we have to serve Lenawee County and to increase our presence in similar markets throughout south central Michigan.
A key part of our long-term strategy is to differentiate the Pavilion Bancorp brand using innovative products and services to take better care of our customers and increase our competitive advantage. Most recently, Bank of Lenawee has introducedQuick Drop BankingandQuick Change Service– two exclusive services designed to expedite branch-based business banking transactions. Health Savings Accounts and Remote Deposit Capture services are two other new product introductions on the horizon that will support our efforts to obtain low-cost deposits.
Moving forward, we will continue to invest in the future of Pavilion Bancorp and take care of our customers and communities, while ensuring that our shareholders are satisfied with the return they receive on their investment in our organization. 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.
CONSOLIDATED BALANCE SHEETS
| (000s omitted) | (Unaudited)
June 30, |
|---|
| 2006 | 2005 |
|---|
| Assets | | | | | | | | |
| Cash and due from banks | | | $ | 11,293 | | $ | 10,005 | |
| Federal funds sold | | | | 10,240 | | | -- | |
|
| |
| |
| Total cash and cash equivalents | | | | 21,533 | | | 10,005 | |
| | | |
| Market value of securities available for sale | | | | 27,576 | | | 29,950 | |
| | | |
| Loans held for sale | | | | 372 | | | 792 | |
| Total loans | | | | 243,691 | | | 221,839 | |
| Allowance for loan and lease losses | | | | (2,694 | ) | | (2,649 | ) |
|
| |
| |
| Net loans | | | | 240,997 | | | 219,190 | |
| | | |
| Premises and equipment, net | | | | 6,563 | | | 5,626 | |
| Accrued interest receivable | | | | 1,760 | | | 1,611 | |
| Mortgage servicing assets | | | | 2,766 | | | 3,031 | |
| Other assets | | | | 1,035 | | | 1,380 | |
|
| |
| |
| Total assets | | | $ | 302,602 | | $ | 271,585 | |
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| |
| |
| | | |
| Liabilities and shareholders' equity | | |
| | | |
| Liability | | |
| Deposits: | | |
| Noninterest-bearing | | | $ | 48,783 | | $ | 42,473 | |
| Interest-bearing | | | | 183,706 | | | 164,248 | |
|
| |
| |
| Total deposits | | | | 232,489 | | | 206,721 | |
| Federal funds purchased | | | | -- | | | 4,520 | |
| Repurchase agreements-customers | | | | 3,305 | | | 5,074 | |
| Repurchase agreements-financial institutions | | | | 10,000 | | | 10,000 | |
| Federal Home Loan Bank advances | | | | 18,385 | | | 8,905 | |
| Subordinated debentures | | | | 5,000 | | | 5,000 | |
| Accrued interest payable | | | | 669 | | | 392 | |
| Other liabilities | | | | 2,574 | | | 2,322 | |
| Common stock subject to repurchase obligation in ESOP | | | | 3,076 | | | 4,654 | |
|
| |
| |
| Total liabilities | | | | 275,498 | | | 247,588 | |
| | | |
| Shareholders' equity | | |
| | | |
| Common stock and paid-in capital, No par value: | | |
| 3,000,000 shares authorized; shares issued and | | |
| outstanding 736,765 - 2006; 735,378 - 2005 | | | | 10,686 | | | 9,054 | |
| Retained earnings | | | | 16,705 | | | 15,102 | |
| Unrealized gain (loss) on securities available for sale | | | | (287 | ) | | (159 | ) |
|
| |
| |
| Total shareholders' equity | | | | 27,104 | | | 23,997 | |
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| |
| |
| | | |
| Total liabilities and shareholders' equity | | | $ | 302,602 | | $ | 271,585 | |
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| |
| |
CONSOLIDATED STATEMENTS OF INCOME
| (000's omitted except for earnings per share) | (Unaudited)
Six Months Ended June 30, | |
|---|
| 2006 | 2005 |
|---|
| Interest income | | | | | | | | |
| Loans, including fees | | | $ | 8,456 | | $ | 6,955 | |
| Securities | | | | 503 | | | 541 | |
| Federal funds sold and other | | | | 141 | | | 64 | |
|
| |
| |
| Total interest income | | | | 9,100 | | | 7,560 | |
| | | |
| Interest expense | | |
| Deposits | | | | 2,446 | | | 1,392 | |
| Subordinated debentures | | | | 214 | | | 170 | |
| Other borrowed funds | | | | 557 | | | 244 | |
|
| |
| |
| Total interest expense | | | | 3,217 | | | 1,806 | |
| | | |
| Net interest income | | | | 5,883 | | | 5,754 | |
| Provision for loan losses | | | | 105 | | | 180 | |
|
| |
| |
| | | |
| Net interest income after | | |
| provision for loan losses | | | | 5,778 | | | 5,574 | |
| | | |
| Noninterest income | | |
| Service charges on deposit accounts | | | | 656 | | | 624 | |
| Net gains on sales of loans | | | | 563 | | | 756 | |
| Loan servicing fees, net of amortization | | | | 54 | | | 271 | |
| Other | | | | 280 | | | 187 | |
|
| |
| |
| Total other income | | | | 1,553 | | | 1,838 | |
| | | |
| Noninterest expense | | |
| Compensation and employee benefits | | | | 3,458 | | | 3,825 | |
| Premises and equipment | | | | 844 | | | 877 | |
| Other | | | | 1,448 | | | 1,645 | |
|
| |
| |
| Total other expenses | | | | 5,750 | | | 6,347 | |
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| |
| |
| Income before income taxes | | | | 1,581 | | | 1,065 | |
| Federal income tax expense | | | | 486 | | | 342 | |
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| |
| |
| | | |
| Net income | | | $ | 1,095 | | $ | 723 | |
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| |
| |
| | | |
| Earnings per common share: | | | $ | 1.49 | | $ | 0.98 | |
