Exhibit 99.1
August 10, 2007
To Our Shareholders:
In spite of continued challenging economic conditions, Pavilion Bancorp finished the first six months of 2007 with improved financial performance and some significant strategic accomplishments.
Earnings for the six months ended June 30, 2007 were $1,195,000, an increase of 9.13% over the same period in 2006, reflecting improvements in net interest margin, deposit fee income, and expense reductions. Total loans decreased by $4,612,000, reflecting the slower economy and the bank’s proactive efforts to divest itself of potential problem loans. Nevertheless, net interest margin improved from a year-to-date level of 4.42% for the six months ended June 30, 2006, to the higher level of 4.56% for the same period in 2007. This demonstrates our continued effort to price both assets and liabilities in a manner that is beneficial to bank performance.
Total fee income remained flat, due principally to the weak mortgage origination market. This weakness was offset by our ability to increase fee income on deposit accounts, which rose 9.74% in the first six months of 2007, compared to the same period in 2006.
Another highlight of performance is our continued focus on non-interest expense reduction, which declined to $5,539,000 in the first six months of 2007 from a level of $5,750,000 for the same period in 2006. This constitutes an improvement of $211,000 or 3.67%.
All of these improvements led to earnings per share of $1.64 for the first six months of 2007 versus $1.49 for the same period in 2006. This is an increase of 10.35% and reflects our continued commitment, notwithstanding the difficult economic conditions, to render enhanced performance for our shareholders.
We are pleased to announce that the Pavilion Bancorp Board of Directors has approved a quarterly cash dividend for shareholders of $0.26 per share. This constitutes a $0.01 increase over the first quarter’s dividend and is an indication of our confidence in the strategic direction and performance of the bank. Your dividend is enclosed, for your convenience, with this statement.
In the area of strategic accomplishments, we continue to expand our branch franchise, having opened the new Tecumseh, Michigan branch on June 26, 2007. This full service branch enjoys an advantageous location on M-50 (Chicago Boulevard) in Tecumseh, with high visibility and traffic count. We continue to grow the new Hillsdale, Michigan branch, which opened in January of 2007, and are doing an increasing amount of commercial lending business in Angola, Indiana.
Our overall strategy is to grow in markets that are characterized by ‘Seeds, Sand, and Students’. ‘Seeds’ represent a rural, agricultural element. ‘Sand’ represents an abundance of lakefront properties. ‘Students’ represents the presence of colleges and universities. Wherever these three factors are found together, the economy tends to be more stable and less inclined to fluctuate with economic swings. Lenawee and Hillsdale Counties in Michigan, and Steuben County in Indiana, are our three primary markets, and each enjoys all three of these factors. Our diversification into Steuben County provides business development opportunities in one of the fastest growing counties in the state of Indiana.
On behalf of the Board of Directors, Management and Staff, we sincerely appreciate your continued support and look forward to exploring ways to further enhance the value of your investment.
Sincerely,
/s/ Douglas L. Kapnick
Douglas L. Kapnick
Chairman |
/s/ Richard J. DeVries
Richard J. DeVries
President & 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
| (000's omitted) | Unaudited
June 30, | |
|---|
| 2007 | | 2006 | |
|---|
|
| |
| |
| | | | | | | | | |
| Assets | | |
| Cash and due from banks | | | $ | 12,547 | | $ | 11,293 | |
| Federal funds sold | | | | - | | | 10,240 | |
|
| |
| |
| Total cash and cash equivalents | | | | 12,547 | | | 21,533 | |
| | | |
| Market value of securities available for sale | | | | 20,003 | | | 27,576 | |
| | | |
| Loans held for sale | | | | 470 | | | 372 | |
| Total loans | | | | 245,564 | | | 243,691 | |
| Allowance for loan and lease losses | | | | (2,967 | ) | | (2,694 | ) |
|
| |
| |
| Net loans | | | | 242,597 | | | 240,997 | |
| | | |
| Premises and equipment, net | | | | 10,270 | | | 6,563 | |
| Accrued interest receivable | | | | 1,986 | | | 1,760 | |
| Mortgage servicing assets | | | | 2,347 | | | 2,766 | |
| Other assets | | | | 980 | | | 1,035 | |
|
| |
| |
| Total assets | | | $ | 291,200 | | $ | 302,602 | |
|
| |
| |
| | | |
| Liabilities and shareholders' equity | | |
| | | |
| Liabilities | | |
| Deposits: | | |
| Noninterest - bearing | | | $ | 44,867 | | $ | 48,783 | |
| Interest - bearing | | | | 186,935 | | | 183,706 | |
|
| |
| |
| Total deposits | | | | 231,802 | | | 232,489 | |
| Federal funds purchased | | | | 9,989 | | | - | |
| Repurchase agreements-customers | | | | 2,376 | | | 3,305 | |
| Repurchase agreements-financial institutions | | | | - | | | 10,000 | |
| Federal Home Loan Bank advances | | | | 12,657 | | | 18,385 | |
| Subordinated debentures | | | | - | | | 5,000 | |
| Accrued interest payable | | | | 722 | | | 669 | |
| Other liabilities | | | | 2,122 | | | 2,574 | |
| Common stock subject to repurchase obligation in ESOP | | | | 2,716 | | | 3,076 | |
|
| |
| |
| Total liabilities | | | | 262,384 | | | 275,498 | |
| | | |
| Shareholders' equity | | |
| | | |
| Common stock and paid-in capital, No par value: | | |
| 3,000,000 shares authorized; shares issued and | | |
| outstanding 725,935 - 2007; 736,765 - 2006 | | | | 10,637 | | | 10,686 | |
| Retained earnings | | | | 18,233 | | | 16,705 | |
| Unrealized gain (loss) on securities available for sale | | | | (54 | ) | | (287 | ) |
|
| |
| |
| Total shareholders' equity | | | | 28,816 | | | 27,104 | |
|
| |
| |
| | | |
| Total liabilities and shareholders' equity | | | $ | 291,200 | | $ | 302,602 | |
|
| |
| |
CONSOLIDATED STATEMENTS OF INCOME
| (000's omitted except for earnings per share) | Unaudited
Six Months Ended June 30, | | |
|---|
| 2007 | | 2006 | |
|---|
|
| |
| |
| | | | | | | | | |
| Interest income | | |
| Loans, including fees | | | $ | 9,234 | | $ | 8,456 | |
| Securities | | | | 403 | | | 503 | |
| Federal funds sold and other | | | | 204 | | | 141 | |
|
| |
| |
| Total interest income | | | $ | 9,841 | | $ | 9,100 | |
| | | |
| Interest expense | | |
| Deposits | | | | 3,427 | | | 2,446 | |
| Subordinated debentures | | | | - | | | 214 | |
| Other borrowed funds | | | | 354 | | | 557 | |
|
| |
| |
| Total interest expense | | | | 3,781 | | | 3,217 | |
| | | |
| Net interest income | | | $ | 6,060 | | $ | 5,883 | |
| Provision for loan losses | | | | 293 | | | 105 | |
|
| |
| |
| | | |
| Net interest income after | | |
| provision for loan losses | | | | 5,767 | | | 5,778 | |
| | | |
| Noninterest income | | |
| Service charges on deposit accounts | | | | 1,070 | | | 975 | |
| Gains on sales of loans | | | | 381 | | | 563 | |
| Loan Servicing fees, net of amortization | | | | 48 | | | 54 | |
| Other | | | | 43 | | | (39 | ) |
|
| |
| |
| Total other income | | | | 1,542 | | | 1,553 | |
| | | |
| Noninterest expense | | |
| Compensation and employee benefits | | | | 3,151 | | | 3,458 | |
| Premises and equipment | | | | 883 | | | 725 | |
| Other | | | | 1,505 | | | 1,567 | |
|
| |
| |
| Total other expenses | | | | 5,539 | | | 5,750 | |
|
| |
| |
| Income before income taxes | | | | 1,770 | | | 1,581 | |
| Federal income tax expense | | | | 575 | | | 486 | |
|
| |
| |
| | | |
| Net income | | | $ | 1,195 | | $ | 1,095 | |
|
| |
| |
| | | |
| Earnings per common share: | | | $ | 1.64 | | $ | 1.49 | |
