##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-QSB
 þ
    
    QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2006
 OR
 o
    
    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
  MICHIGAN
    
    38-3412321(State of other jurisdiction of
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)6600 Highland Road, Waterford, MI
    
    48327(Address of principal executive offices)
    
    (Zip Code)
  
 þ o
 o o
 1,245,722
 o þ




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##### 



INDEX
 PageNumber(s)Part I
    
    Financial Information (unaudited):Item 1.Condensed Consolidated Financial Statements
    
    
    3Notes to Condensed Consolidated Financial Statements
    
    
    7Item 2.Managements Discussion and
Analysis of Financial Condition and Results of Operations
    
    
    14Item 3.Controls & Procedures
    
    
    24Part II.
    
    Other InformationItem 1.Legal Proceedings
    
    
    25Item 2.Changes in Securities and Use of Proceeds
    
    
    25Item 3.Defaults Upon Senior Securities
    
    
    25Item 4.Submission of Matters to a Vote of Securities Holders
    
    
    25Item 5.Other Information
    
    
    25Item 6.Exhibits and Reports on Form 8-K
    
    
    25Signatures
    
    
    
    
    26Certificate of the Chief Executive Officer to Section 302Certificate of the Chief Financial Officer to Section 302Certificate of the CEO and CFO to Section 906
  2




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##### Table of Contents



Part I Financial Information (unaudited)
 
 June 30,
    
    
    December 31,2006
    
    
    2005(Unaudited)ASSETSCash and cash equivalentsTotal cash and due from banks
    
    $
    6,117
    
    
    $
    3,305Federal funds sold
    
    
    9,850
    
    
    
    4,785Total cash and cash equivalents
    
    
    15,967
    
    
    
    8,090Securities available for sale, at fair value
    
    
    48,009
    
    
    
    48,982Loans held for sale
    
    
    217
    
    
    
    314LoansTotal loans
    
    
    140,601
    
    
    
    133,230Less: Allowance for loan losses
    
    
    (1,560
    )
    
    
    (1,930
    )Net loans
    
    
    139,041
    
    
    
    131,300Banking premises and equipment
    
    
    4,824
    
    
    
    3,911Deferred tax asset
    
    
    846
    
    
    
    851Interest receivable and other assets
    
    
    2,317
    
    
    
    2,128Total assets
    
    $
    211,221
    
    
    $
    195,576LIABILITIES AND SHAREHOLDERS EQUITYDepositsNoninterest-bearing
    
    
    25,656
    
    
    
    23,633Interest-bearing
    
    
    151,891
    
    
    
    137,699Total deposits
    
    
    177,547
    
    
    
    161,332Advances from Federal Home Loan Bank of Indianapolis
    
    
    10,200
    
    
    
    10,200Junior subordinated debentures held by
unconsolidated subsidiary trust
    
    
    4,000
    
    
    
    4,000Interest payable and other liabilities
    
    
    2,191
    
    
    
    1,493Total liabilities
    
    
    193,938
    
    
    
    177,025Minority interest in consolidated subsidiary
    
    
    3,299
    
    
    
    3,420Shareholders equityCommon stock, no par value: 10,000,000 shares
authorized; 1,245,722 shares issued
and outstanding as of June 30, 2006 and
December 31, 2005
    
    
    6,163
    
    
    
    6,163Capital surplus
    
    
    6,163
    
    
    
    6,163Restricted stock  unearned compensation
    
    
    (61
    )
    
    
    (85
    )Retained earnings
    
    
    3,058
    
    
    
    3,610Accumulated other comprehensive loss
    
    
    (1,339
    )
    
    
    (720
    )Total shareholders equity
    
    
    13,984
    
    
    
    15,131Total liabilities and shareholders equity
    
    $
    211,221
    
    
    $
    195,576
  3




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##### Table of Contents



Three Months
    
    
    Three Months
    
    
    Six Months
    
    
    Six MonthsEnded
    
    
    Ended
    
    
    Ended
    
    
    EndedJune 30, 2006
    
    
    June 30, 2005
    
    
    June 30, 2006
    
    
    June 30, 2005Interest IncomeLoans, including fees
    
    $
    2,698
    
    
    $
    2,285
    
    
    $
    5,123
    
    
    $
    4,386SecuritiesTaxable
    
    
    446
    
    
    
    303
    
    
    
    883
    
    
    
    591Tax-exempt
    
    
    87
    
    
    
    74
    
    
    
    174
    
    
    
    168Federal funds sold
    
    
    89
    
    
    
    37
    
    
    
    156
    
    
    
    54Total interest income
    
    
    3,320
    
    
    
    2,699
    
    
    
    6,336
    
    
    
    5,199Interest ExpenseDeposits
    
    
    1,432
    
    
    
    997
    
    
    
    2,682
    
    
    
    1,871Borrowings
    
    
    228
    
    
    
    173
    
    
    
    445
    
    
    
    318Total interest expense
    
    
    1,660
    
    
    
    1,170
    
    
    
    3,127
    
    
    
    2,189Net Interest Income
    
    
    1,660
    
    
    
    1,529
    
    
    
    3,209
    
    
    
    3,010Provision for loan losses
    
    
    534
    
    
    
    260
    
    
    
    1,366
    
    
    
    355Net interest income After provision for loan losses
    
    
    1,126
    
    
    
    1,269
    
    
    
    1,843
    
    
    
    2,655Noninterest incomeGain on sale of securities
    
    
    
    
    
    
    
    
    
    
    3
    
    
    
    1Gain on sale of loans
    
    
    12
    
    
    
    28
    
    
    
    34
    
    
    
    75Service charges and other fees
    
    
    154
    
    
    
    221
    
    
    
    354
    
    
    
    412Other income
    
    
    
    
    
    
    4
    
    
    
    2
    
    
    
    9Total noninterest income
    
    
    166
    
    
    
    253
    
    
    
    393
    
    
    
    497Noninterest expenseSalaries and benefits
    
    
    839
    
    
    
    783
    
    
    
    1,630
    
    
    
    1,527Occupancy expense
    
    
    280
    
    
    
    201
    
    
    
    534
    
    
    
    384Computer and data processing expenses
    
    
    68
    
    
    
    87
    
    
    
    219
    
    
    
    165Advertising and public relations
    
    
    110
    
    
    
    57
    
    
    
    141
    
    
    
    102Professional fees
    
    
    120
    
    
    
    74
    
    
    
    254
    
    
    
    168Supplies
    
    
    30
    
    
    
    17
    
    
    
    59
    
    
    
    41Other expense
    
    
    216
    
    
    
    177
    
    
    
    358
    
    
    
    360Total noninterest expense
    
    
    1,663
    
    
    
    1,396
    
    
    
    3,195
    
    
    
    2,747Income/(loss) before federal income tax expense
and minority interest
    
    
    (370
    )
    
    
    126
    
    
    
    (959
    )
    
    
    405Federal income tax expense/(benefit)
    
    
    (113
    )
    
    
    10
    
    
    
    (280
    )
    
    
    110Income/(loss) before minority interest
    
    
    (257
    )
    
    
    116
    
    
    
    (679
    )
    
    
    295Minority
interest in net loss of consolidated subsidiary
    
    
    (59
    )
    
    
    
    
    
    
    (127
    )
    
    
    Net income/(loss)
    
    $
    (198
    )
    
    $
    116
    
    
    $
    (552
    )
    
    $
    295Basic earnings/(loss) per share
    
    $
    (.16
    )
    
    $
    .11
    
    
    $
    (.44
    )
    
    $
    0.28Diluted earnings/(loss) per share
    
    $
    (.16
    )
    
    $
    .11
    
    
    $
    (.44
    )
    
    $
    0.27
  4




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##### Table of Contents



AccumulatedOther
    
    
    TotalCommon
    
    
    Capital
    
    
    Unearned
    
    
    Retained
    
    
    Comprehensive
    
    
    StockholdersStock
    
    
    Surplus
    
    
    Comp.
    
    
    Earnings
    
    
    Loss
    
    
    EquityBalance, December 31, 2005
    
    $
    6,163
    
    
    $
    6,163
    
    
    $
    (85
    )
    
    $
    3,610
    
    
    $
    (720
    )
    
    $
    15,131Recognition of
compensation for
restricted stock award
    
    
    
    
    
    
    
    
    
    
    24
    
    
    
    
    
    
    
    
    
    
    
    24Comprehensive income:Net loss for the six
months ended June 30,
2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (552
    )
    
    
    
    
    
    
    (552
    )Change in unrealized loss
on securities available
for sale net of tax of
($319)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (619
    )
    
    
    (619
    )Net comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (552
    )
    
    
    (619
    )
    
    
    (1,171
    )Balance, June 30, 2006
    
    $
    6,163
    
    
    $
    6,163
    
    
    $
    (61
    )
    
    $
    3,058
    
    
    $
    (1,339
    )
    
    $
    13,984
 5




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##### Table of Contents



Six Months
    
    
    Six MonthsEnded
    
    
    EndedJune 30,
    
    
    June 30,2006
    
    
    2005Net Cash Provided by Operating Activities:Net cash provided by/(used in) operating activities
    
    $
    2,029
    
    
    $
    267Cash Flows from Investing Activities:Net increase in loans
    
    
    (9,107
    )
    
    
    (17,884
    )Purchase of available-for-sale securities
    
    
    (3,214
    )
    
    
    (3,255
    )Proceeds from sales of available-for-sale securities
    
    
    3,171
    
    
    
    10,073Property and equipment expenditures
    
    
    (1,096
    )
    
    
    (560
    )Net cash used in/(provided by) investing activities
    
    
    (10,246
    )
    
    
    (11,626
    )Cash Flows from Financing Activities:Increase in deposits
    
    
    16,215
    
    
    
    22,715Resources used by minority interest
    
    
    (121
    )
    
    
    Net cash provided by financing activities
    
    
    16,094
    
    
    
    22,715Net increase in cash and cash equivalents
    
    
    7,877
    
    
    
    11,356Cash and cash equivalents at beginning of period
    
    
    8,090
    
    
    
    3,865Cash and cash equivalents at end of period
    
    $
    15,967
    
    
    $
    15,221Supplemental Cash Flow Information  Cash paid for:Interest
    
    
    2,847
    
    
    
    2,150Taxes
    
    
    
    
    
    
    211
  6




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##### Table of Contents



NOTE 1  BASIS OF FINANCIAL STATEMENT PRESENTATION
    NOTE 2  PRINCIPLES OF CONSOLIDATION
 .
  NOTE 3  STOCK BASED COMPENSATION
   7




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##### Table of Contents



NOTE 3  STOCK BASED COMPENSATION (CONTINUED)
  Three Months
    
    Six MonthsEnded June 30,
    
    Ended June 30,2005
    
    2005As reported net income available to
common stockholders
    
    $
    116
    
    
    $
    295Less stock-based compensation expense
determined under fair value method 
net of tax
    
    
    4
    
    
    
    8$
    112
    
    
    $
    287Pro forma net incomeAs reported earnings per share
    
    $
    0.11
    
    
    $
    0.28Pro forma earnings per share
    
    $
    0.11
    
    
    $
    0.27As reported earnings per diluted share
    
    $
    0.11
    
    
    $
    0.27Pro forma earnings per diluted share
    
    $
    0.10
    
    
    $
    0.27
   2006
    
    2005Weighted
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    AverageNumber
    
    Exercise
    
    Number
    
    Exerciseof shares
    
    Price
    
    of shares
    
    PriceOptions outstanding Beginning of Year
    
    
    49,536
    
    
    $
    9.09
    
    
    
    49,536
    
    
    $
    9.09Options granted  Employee Plan
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Options exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Options expired
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Options Outstanding  End of Period
    
    
    49,536
    
    
    $
    9.09
    
    
    
    49,536
    
    
    $
    9.09
 8




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##### Table of Contents



NOTE 3  STOCK BASED COMPENSATION (CONTINUED)
  Stock Options Outstanding and ExercisableWeightedAverage
    
    WeightedRange of
    
    
    
    
    
    Remaining
    
    Average
    
    AggregateExercise
    
    Number of
    
    Contractual
    
    Exercise
    
    IntrinsicPrices
    
    Shares
    
    Life
    
    Price
    
    ValueContingent
    
    $
    9.09
    
    
    
    24,060
    
    
    2.4 years
    
    $
    9.09
    
    
    $
    106,105Non-contingent
    
    $
    9.09
    
    
    
    25,476
    
    
    2.4 years
    
    $
    9.09
    
    
    
    112,349
 NOTE 4  EARNINGS PER SHARE
   Three Months
    
    Six MonthsEnded June 30,
    
    Ended June 30,2006
    
    2005
    
    2006
    
    2005Net income/(loss)
available to common
stockholders
    
    $
    (198
    )
    
    $
    116
    
    
    $
    (552
    )
    
    $
    295Average number of common
shares outstanding
    
    
    1,246
    
    
    
    1,049
    
    
    
    1,246
    
    
    
    1,047Effect of dilutive options
    
    
    19
    
    
    
    27
    
    
    
    18
    
    
    
    28Average number of common
shares outstanding used
to calculate diluted
earnings/(loss) per
common share
    
    
    1,265
    
    
    
    1,076
    
    
    
    1,264
    
    
    
    1,075Number of antidilutive
stock options excluded
from diluted earnings per
share computation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 9




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##### Table of Contents



NOTE 5  SECURITIES
  Available for Sale
 Gross
    
    
    Gross
    
    
    EstimatedAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    MarketCost
    
    
    Gains
    
    
    Losses
    
    
    ValueJune 30, 2006 (unaudited)U.S. Treasury securities and obligations of
U.S. government corporations and agencies
    
    $
    8,339
    
    
    $
    
    
    
    $
    204
    
    
    $
    8,135Mortgage-backed securities
    
    
    27,740
    
    
    
    
    
    
    
    1,183
    
    
    
    26,557Collateralized mortgage obligations
    
    
    3,218
    
    
    
    
    
    
    
    151
    
    
    
    3,067Obligations of state and political subdivisions
    
    
    10,631
    
    
    
    
    
    
    
    381
    
    
    
    10,250$
    49,928
    
    
    $
    
    
    
    $
    1,919
    
    
    $
    48,009December 31, 2005U.S. Treasury securities and obligations of
U.S. government corporations and agencies
    
    $
    7,842
    
    
    $
    
    
    
    $
    61
    
    
    $
    7,781Mortgage-backed securities
    
    
    28,044
    
    
    
    3
    
    
    
    663
    
    
    
    27,384Collateralized mortgage obligations
    
    
    3,508
    
    
    
    
    
    
    
    110
    
    
    
    3,398Obligations of state and political subdivisions
    
    
    10,677
    
    
    
    
    
    
    
    258
    
    
    
    10,419$
    50,071
    
    
    $
    3
    
    
    $
    1,092
    
    
    $
    48,982
 NOTE 6  LOANS
  June 30,2006
    
    
    December 31,(unaudited)
    
    
    2005Commercial
    
    $
    21,596
    
    
    $
    24,316Real estate:Commercial
    
    
    76,576
    
    
    
    62,776Residential
    
    
    16,027
    
    
    
    14,976Construction
    
    
    24,265
    
    
    
    28,764Total real estate
    
    
    116,868
    
    
    
    106,516Consumer
    
    
    2,138
    
    
    
    2,398Total
    
    $
    140,601
    
    
    $
    133,230
 10




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##### Table of Contents



NOTE 6  LOANS (CONTINUED)
  Three Months
    
    
    Six MonthsEnded June 30,
    
    
    Ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Balance  Beginning of period
    
    $
    2,118
    
    
    $
    1,363
    
    
    $
    1,930
    
    
    $
    1,280Provision charged to operations
    
    
    534
    
    
    
    260
    
    
    
    1,366
    
    
    
    355Charge-offs
    
    
    (1,115
    )
    
    
    (117
    )
    
    
    (1,766
    )
    
    
    (130
    )Recoveries
    
    
    23
    
    
    
    
    
    
    
    30
    
    
    
    1Balance  End of period
    
    $
    1,560
    
    
    $
    1,506
    
    
    $
    1,560
    
    
    $
    1,506Allowance for loan losses to
total Loans
    
    
    1.12
    %
    
    
    1.16
    %
    
    
    1.12
    %
    
    
    1.16
    %
 NOTE 7  DEPOSITS
  June 30,2006
    
    
    December 31,(Unaudited)
    
    
    2005Non-interest bearing demand deposit accounts
    
    $
    25,656
    
    
    $
    23,633Interest-bearing demand deposit accounts
    
    
    5,515
    
    
    
    5,981Savings accounts
    
    
    4,663
    
    
    
    4,730Money market accounts
    
    
    57,255
    
    
    
    60,179Certificates of deposit
    
    
    84,458
    
    
    
    66,809Total deposits
    
    $
    177,547
    
    
    $
    161,332
 NOTE 8  FHLB ADVANCES
  11




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##### Table of Contents



NOTE 9  MINIMUM REGULATORY CAPITAL REQUIREMENTS
   For Capital
    
    To beActual
    
    Adequacy Purposes
    
    Well-CapitalizedRatio
    
    
    
    
    
    Ratio
    
    
    
    
    
    RatioAmount
    
    (Percent)
    
    Amount
    
    (Percent)
    
    Amount
    
    (Percent)As of June 30, 2006:Total risk-based
capital (to risk
weighted assets)CSB
    
    $
    15,097
    
    
    
    10.19
    
    
    $
    11,849
    
    
    
    8.00
    
    
    $
    14,811
    
    
    
    10.00HVSB
    
    
    7,568
    
    
    
    75.78
    
    
    
    799
    
    
    
    8.00
    
    
    
    999
    
    
    
    10.00Consolidated
    
    
    20,810
    
    
    
    13.09
    
    
    
    12,718
    
    
    
    8.00
    
    
    
    15,898
    
    
    
    10.00Tier I Capital (to
risk weighted assets)CSB
    
    $
    13,609
    
    
    
    9.19
    
    
    $
    5,925
    
    
    
    4.00
    
    
    $
    8,887
    
    
    
    6.00HVSB
    
    
    7,496
    
    
    
    75.06
    
    
    
    399
    
    
    
    4.00
    
    
    
    559
    
    
    
    6.00Consolidated
    
    
    19,250
    
    
    
    12.11
    
    
    
    6,359
    
    
    
    4.00
    
    
    
    9,539
    
    
    
    6.00Tier I Capital (to
average assets)CSB
    
    $
    13,609
    
    
    
    7.28
    
    
    $
    7,479
    
    
    
    4.00
    
    
    $
    9,348
    
    
    
    5.00HVSB
    
    
    7,496
    
    
    
    40.40
    
    
    
    742
    
    
    
    4.00
    
    
    
    928
    
    
    
    5.00Consolidated
    
    
    19,250
    
    
    
    9.46
    
    
    
    8,136
    
    
    
    4.00
    
    
    
    10,170
    
    
    
    5.00As of December 31, 2005:Total risk-based
capital (to
risk-weighted assets)CSB
    
    $
    15,516
    
    
    
    10.99
    
    
    $
    11,291
    
    
    
    8.00
    
    
    $
    14,113
    
    
    
    10.00HVSB
    
    
    7,803
    
    
    
    144.97
    
    
    
    431
    
    
    
    8.00
    
    
    
    538
    
    
    
    10.00Consolidated
    
    
    21,780
    
    
    
    14.82
    
    
    
    11,759
    
    
    
    8.00
    
    
    
    14,699
    
    
    
    10.00Tier I Capital (to
risk weighted assets)CSB
    
    $
    13,753
    
    
    
    9.74
    
    
    $
    5,645
    
    
    
    4.00
    
    
    $
    8,468
    
    
    
    6.00HVSB
    
    
    7,771
    
    
    
    144.37
    
    
    
    215
    
    
    
    4.00
    
    
    
    323
    
    
    
    6.00Consolidated
    
    
    19,850
    
    
    
    13.50
    
    
    
    5,879
    
    
    
    4.00
    
    
    
    8,819
    
    
    
    6.00Tier I Capital (to
average assets)CSB
    
    $
    13,753
    
    
    
    7.62
    
    
    $
    7,221
    
    
    
    4.00
    
    
    $
    9,027
    
    
    
    5.00HVSB
    
    
    7,771
    
    
    
    62.43
    
    
    
    498
    
    
    
    4.00
    
    
    
    622
    
    
    
    5.00Consolidated
    
    
    19,850
    
    
    
    12.58
    
    
    
    6,311
    
    
    
    4.00
    
    
    
    7,888
    
    
    
    5.00
 12




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##### Table of Contents



NOTE 10  STANDBY AND COMMERCIAL LETTERS OF CREDIT AND FINANCIAL GUARANTEES
   June 30, 2006(Unaudited)
    
    December 31, 2005Commitments to grant loans
    
    $
    11,585
    
    
    $
    6,902Unfunded commitments under lines of credit
    
    
    22,887
    
    
    
    18,649Commercial and standby letters of credit
    
    
    211
    
    
    
    169
 NOTE 11  RECENT ACCOUNTING PRONOUNCEMENTS
    13




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Item 2
 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
  Forward Looking Statements
  General
  14




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##### Table of Contents



Critical Accounting Policies
  Comparison of Financial Condition at June 30, 2006 and December 31, 2005
 rd
    15




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##### Table of Contents



rd
  16




---



##### Table of Contents



June 30,
    
    
    December 31,2006
    
    
    2005(unaudited)(dollars in thousands)Nonaccrual loansSecured by real estate
    
    $
    677
    
    
    $
    1,066Secured by other than real estate
    
    
    239
    
    
    
    Loans 90 days past due and still accruingSecured by real estate
    
    
    221
    
    
    
    989Secured by other than real estate
    
    
    270
    
    
    
    424Total nonperforming loans
    
    
    1,407
    
    
    
    2,479Foreclosed and repossessed assets
    
    
    182
    
    
    
    205Total nonperforming assets
    
    $
    1,589
    
    
    $
    2,684Nonperforming assets to total loans
    
    
    1.13
    %
    
    
    2.01
    %Nonperforming assets to total assets
    
    
    0.75
    %
    
    
    1.37
    %
      17




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##### Table of Contents



st nd
    Comparison of Operating Results for the Three Months Ended June 30, 2006 and 2005
  18




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##### Table of Contents



dollars in thousands)
 3 Months ended June 30, 2006
    
    3 Months ended June 30, 2005Average
    
    
    
    
    
    Yield/
    
    Average
    
    
    
    
    
    Yield/Balance
    
    Interest
    
    Cost
    
    Balance
    
    Interest
    
    CostAssets:Short term investment
    
    $
    6,287
    
    
    $
    89
    
    
    
    5.66
    %
    
    $
    3,982
    
    
    $
    37
    
    
    
    3.72
    %Securities:Taxable
    
    
    40,093
    
    
    
    446
    
    
    
    4.45
    %
    
    
    29,847
    
    
    
    303
    
    
    
    4.06
    %Tax-exempt
    
    
    10,663
    
    
    
    87
    
    
    
    3.26
    %
    
    
    11,116
    
    
    
    74
    
    
    
    2.66
    %Loans
    
    
    134,866
    
    
    
    2,698
    
    
    
    8.00
    %
    
    
    121,968
    
    
    
    2,285
    
    
    
    7.49
    %Total earning assets/total
interest income
    
    
    191,909
    
    
    
    3,320
    
    
    
    6.92
    %
    
    
    166,912
    
    
    
    2,699
    
    
    
    6.47
    %Cash and due from banks
    
    
    3,909
    
    
    
    
    
    
    
    
    
    
    
    3,684Unrealized (loss) on AFS securities
    
    
    (1,242
    )
    
    
    
    
    
    
    
    
    
    
    (462
    )Allowance for loan loss
    
    
    (1,949
    )
    
    
    
    
    
    
    
    
    
    
    (1,346
    )All other assets
    
    
    6,801
    
    
    
    
    
    
    
    
    
    
    
    4,345Total assets
    
    
    199,429
    
    
    
    
    
    
    
    
    
    
    
    173,133Liabilities and Stockholders EquityInterest bearing deposits:MMDA, Savings/NOW accounts
    
    
    68,042
    
    
    
    538
    
    
    
    3.16
    %
    
    
    64,633
    
    
    
    491
    
    
    
    3.04
    %Time
    
    
    71,891
    
    
    
    894
    
    
    
    4.98
    %
    
    
    55,458
    
    
    
    506
    
    
    
    3.65
    %Fed Funds Purchased
    
    
    2,611
    
    
    
    33
    
    
    
    4.99
    %
    
    
    1,046
    
    
    
    4
    
    
    
    1.68
    %FHLB Advances
    
    
    10,200
    
    
    
    112
    
    
    
    4.39
    %
    
    
    12,200
    
    
    
    107
    
    
    
    3.50
    %Trust Preferred Securities
    
    
    4,000
    
    
    
    82
    
    
    
    8.24
    %
    
    
    4,000
    
    
    
    62
    
    
    
    6.18
    %Other borrowings
    
    
    18
    
    
    
    1
    
    
    
    22.86
    %
    
    
    8
    
    
    
    
    
    
    
    0.00
    %Total interest bearing
liabilities/interest expense
    
    
    156,761
    
    
    
    1,660
    
    
    
    4.23
    %
    
    
    137,344
    
    
    
    1,170
    
    
    
    3.41
    %Noninterest bearing deposits
    
    
    23,022
    
    
    
    
    
    
    
    
    
    
    
    22,202All other liabilities
    
    
    4,658
    
    
    
    
    
    
    
    
    
    
    
    1,281Stockholders Equity:Unrealized holding (loss)
    
    
    (833
    )
    
    
    
    
    
    
    
    
    
    
    (294
    )Common Stock, Surplus, Retained Earnings
    
    
    15,820
    
    
    
    
    
    
    
    
    
    
    
    12,601Total liabilities and stockholders equity
    
    
    199,429
    
    
    
    
    
    
    
    
    
    
    
    173,133Interest spread
    
    
    
    
    
    
    1,660
    
    
    
    2.69
    %
    
    
    
    
    
    
    1,529
    
    
    
    3.06
    %Net Interest
Margin as a Percentage of AverageEarnings Assets  FTE
    
    
    191,909
    
    
    
    1,660
    
    
    
    3.46
    %
    
    
    166,912
    
    
    
    1,529
    
    
    
    3.66
    %
 19




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##### Table of Contents



Rate / Volume Analysis of Net Interest Income.
 2006 Compared to 2005Change
    
    
    
    Change
    
    
    
    ChangeDue to
    
    
    
    Due to
    
    
    
    Due to
    
    
    
    TotalRate
    
    
    
    Volume
    
    
    
    Mix
    
    
    
    Change(Dollars in thousands)Short term investment
    
    $
    19
    
    
    $
    21
    
    
    $
    12
    
    
    $
    52Investment securities  taxable
    
    
    29
    
    
    
    104
    
    
    
    10
    
    
    
    143Investment securities  tax exempt
    
    
    17
    
    
    
    (3
    )
    
    
    (1
    )
    
    
    13Loans, net of unearned income
    
    
    155
    
    
    
    242
    
    
    
    16
    
    
    
    413Total interest income
    
    
    220
    
    
    
    364
    
    
    
    37
    
    
    
    621Interest bearing deposits
    
    
    204
    
    
    
    176
    
    
    
    55
    
    
    
    435Federal funds borrowed
    
    
    9
    
    
    
    7
    
    
    
    12
    
    
    
    28FHLB advances
    
    
    27
    
    
    
    (17
    )
    
    
    (5
    )
    
    
    5Trust preferred securities
    
    
    21
    
    
    
    
    
    
    
    
    
    
    
    21Other borrowings
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    1Total interest expense
    
    
    261
    
    
    
    166
    
    
    
    63
    
    
    
    490Net interest income
    
    $
    (41
    )
    
    $
    198
    
    
    $
    (26
    )
    
    $
    131
     20




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Comparison of Operating Results for the Six Months Ended June 30, 2006 and 2005
   21




---



##### Table of Contents



dollars in thousands)
 6 Months ended June 30, 2006
    
    6 Months ended June 30, 2005Average
    
    
    
    
    
    Yield/
    
    Average
    
    
    
    
    
    Yield/Balance
    
    Interest
    
    Cost
    
    Balance
    
    Interest
    
    CostAssets:Short term investment
    
    $
    6,398
    
    
    $
    156
    
    
    
    4.88
    %
    
    $
    3,982
    
    
    $
    54
    
    
    
    2.61
    %Securities:Taxable
    
    
    40,471
    
    
    
    883
    
    
    
    4.36
    %
    
    
    29,847
    
    
    
    591
    
    
    
    3.93
    %Tax-exempt
    
    
    10,657
    
    
    
    174
    
    
    
    3.27
    %
    
    
    11,116
    
    
    
    168
    
    
    
    3.20
    %Loans
    
    
    136,783
    
    
    
    5,123
    
    
    
    7.49
    %
    
    
    121,968
    
    
    
    4,386
    
    
    
    7.05
    %Total earning assets/total
interest income
    
    
    194,309
    
    
    
    6,336
    
    
    
    6.52
    %
    
    
    166,912
    
    
    
    5,199
    
    
    
    6.15
    %Cash and due from banks
    
    
    3,785
    
    
    
    
    
    
    
    
    
    
    
    3,819Unrealized (loss) on AFS securities
    
    
    (1,376
    )
    
    
    
    
    
    
    
    
    
    
    (492
    )Allowance for loan loss
    
    
    (1,975
    )
    
    
    
    
    
    
    
    
    
    
    (1,363
    )All other assets
    
    
    7,043
    
    
    
    
    
    
    
    
    
    
    
    4,874Total assets
    
    
    201,786
    
    
    
    
    
    
    
    
    
    
    
    175,932Liabilities and Stockholders EquityInterest bearing deposits:MMDA, Savings/NOW accounts
    
    
    67,805
    
    
    
    1,064
    
    
    
    3.14
    %
    
    
    65,711
    
    
    
    900
    
    
    
    2,74
    %Time
    
    
    74,437
    
    
    
    1,618
    
    
    
    4.35
    %
    
    
    55,882
    
    
    
    971
    
    
    
    3.48
    %Fed Funds Purchased
    
    
    2,539
    
    
    
    64
    
    
    
    5.04
    %
    
    
    881
    
    
    
    12
    
    
    
    2.72
    %FHLB Advances
    
    
    10,200
    
    
    
    223
    
    
    
    4.37
    %
    
    
    12,200
    
    
    
    189
    
    
    
    3.10
    %Trust Preferred Securities
    
    
    4,000
    
    
    
    157
    
    
    
    7.85
    %
    
    
    4,000
    
    
    
    117
    
    
    
    5.85
    %Other borrowings
    
    
    15
    
    
    
    1
    
    
    
    13.33
    %
    
    
    
    
    
    
    
    
    
    
    0.00
    %Total interest bearing
liabilities/interest expense
    
    
    158,996
    
    
    
    3,127
    
    
    
    3.93
    %
    
    
    138,674
    
    
    
    2,189
    
    
    
    3.16
    %Noninterest bearing deposits
    
    
    23,282
    
    
    
    
    
    
    
    
    
    
    
    23,331All other liabilities
    
    
    4,682
    
    
    
    
    
    
    
    
    
    
    
    1,607Stockholders Equity:Unrealized holding (loss)
    
    
    (934
    )
    
    
    
    
    
    
    
    
    
    
    (318
    )Common Stock, Surplus, Retained Earnings
    
    
    15,760
    
    
    
    
    
    
    
    
    
    
    
    12,638Total liabilities and stockholders equity
    
    
    201,786
    
    
    
    
    
    
    
    
    
    
    
    175,932Interest spread
    
    
    
    
    
    
    3,209
    
    
    
    2.59
    %
    
    
    
    
    
    
    3,010
    
    
    
    2.99
    %Net Interest
Margin as a Percentage of AverageEarnings Assets  FTE
    
    
    194,309
    
    
    
    3,209
    
    
    
    3.30
    %
    
    
    169,094
    
    
    
    3,010
    
    
    
    3.56
    %
 22




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Rate / Volume Analysis of Net Interest Income.
 2006 Compared to 2005Change
    
    
    Change
    
    
    ChangeDue to
    
    
    Due to
    
    
    Due to
    
    
    TotalRate
    
    
    Volume
    
    
    Mix
    
    
    Change(Dollars in thousands)Short term investment
    
    $
    47
    
    
    $
    30
    
    
    $
    25
    
    
    $
    102Investment securities  taxable
    
    
    64
    
    
    
    205
    
    
    
    23
    
    
    
    292Investment securities  tax exempt
    
    
    3
    
    
    
    3
    
    
    
    
    
    
    
    6Loans, net of unearned income
    
    
    274
    
    
    
    436
    
    
    
    27
    
    
    
    737Total interest income
    
    
    388
    
    
    
    674
    
    
    
    75
    
    
    
    1,137Interest bearing deposits
    
    
    375
    
    
    
    351
    
    
    
    85
    
    
    
    811Federal funds borrowed
    
    
    10
    
    
    
    23
    
    
    
    19
    
    
    
    52FHLB advances
    
    
    78
    
    
    
    (31
    )
    
    
    (13
    )
    
    
    34Trust preferred securities
    
    
    40
    
    
    
    
    
    
    
    
    
    
    
    40Other borrowings
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    1Total interest expense
    
    
    503
    
    
    
    343
    
    
    
    92
    
    
    
    938Net interest income
    
    $
    (115
    )
    
    $
    331
    
    
    $
    (17
    )
    
    $
    199
    23




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##### Table of Contents



Liquidity and Capital Resources
     24




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##### Table of Contents



Capital Resources at June 30, 2006 (in thousands)
 Tier 1Leverage
    
    Tier 1
    
    Total Risk-BasedRatio
    
    Capital Ratio
    
    Capital RatioMinimum
regulatory requirement for Capital adequacy
    
    
    4.00
    %
    
    
    4.00
    %
    
    
    8.00
    %Well capitalized regulatory level
    
    
    5.00
    %
    
    
    6.00
    %
    
    
    10.00
    %CSB
    
    
    7.28
    %
    
    
    9.19
    %
    
    
    10.19
    %HVSB
    
    
    40.40
    %
    
    
    75.06
    %
    
    
    75.78
    %Consolidated
    
    
    9.46
    %
    
    
    12.11
    %
    
    
    13.09
    %
  TotalTier 1
    
    
    Tier 1
    
    
    Risk-BasedLeverage
    
    
    Capital
    
    
    Capital(in thousands of dollars)Capital balances at June 30, 2006Required regulatory capital
    
    $
    8,136
    
    
    $
    6,359
    
    
    $
    12,718Capital in excess of regulatory minimums
    
    
    11,114
    
    
    
    12,891
    
    
    
    8,092Actual capital balances
    
    $
    19,250
    
    
    $
    19,250
    
    
    $
    20,810
   25




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##### Table of Contents



Item 3 CONTROLS AND PROCEDURES
 (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.
 26




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##### Table of Contents



PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings.
  Item 1A. Risk Factors
  
 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
  VoteDirector Nominee:
    
    Term Expires
    
    For:
    
    Withheld:Bruce McIntyre
    
    2009
    
    1,100,407
    
    39,592Mark Murvay
    
    2009
    
    1,100,407
    
    39,592
 
 Item 5. Other Information.
  
 Item 6. 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.
 27




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##### Table of Contents



SIGNATURES
  CLARKSTON FINANCIAL CORPORATION/s/ Edwin L. AdlerEdwin L. AdlerChairman of the Board and Chief Executive Officer/s/ James W. DistelrathJames W. DistelrathChief Financial Officer  28




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##### Table of Contents



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.
 29