# SECURITIES AND
EXCHANGE COMMISSIONWashington, D.C. 20549

_________________

# FORM 10-QSB

[X] QUARTERLY REPORT UNDER
SECTION 13 OR 15(dOF THE SECURITIES
EXCHANGE ACT OF 1934

For the quarterly period
ended September 30, 2006

OR[ ] 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(Exact name of small business issuer as specified in its charter)

|MICHIGAN
(State or other jurisdiction ofincorporation or organization) | 38-3412321
(I.R.S. Employer Identification No.)
|---------------------------------------------------------------------- | -----------------------------------------------

6600 Highland Road,
Waterford, MI 48327(Address of principal
executive offices) (Zip Code)

Registrants telephone number, including area code: (248) 922-6940

______________________________

Check whether the issuer: (1) has
filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the past 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes X No

Indicate by check mark
whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes _____ No X

The number of shares outstanding of
each of the issuers classes of common stock, as of the latest practicable date:
1,245,722 shares of the Companys Common Stock (no par value) were outstanding
as of November 13, 2006.

Transitional Small
Business Disclosure Format (check one):  Yes  No X

1

---

INDEX

|Part I
Part IISignatures | Financial Information (unaudited):Item 1.
Condensed Consolidated Financial Statements
Notes to Condensed Consolidated Financial StatementsItem 2.Management's Discussion and Analysis of
Financial Condition and Results of OperationsItem 3.
Controls & Procedures
Other InformationItem 1.
Legal ProceedingsItem 2.
Changes in Securities and Use of ProceedsItem 3.
Defaults Upon Senior SecuritiesItem 4.
Submission of Matters to a Vote of Securities HoldersItem 5.
Other InformationItem 6.
Exhibits and Reports on Form 8-K | PageNumbers
37142425252525252526
|------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | --------------------------------

2

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# Part I    Financial
Information (unaudited)

CLARKSTON FINANCIAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
September 30, 2006 (unaudited) and December 31, 2005
(dollars in thousands)

|                                                                 | September 30,
2006 | December 31,
2005
|---------------------------------------------------------------- | ------------------ | -----------------
|                                                                 |                    |                  
|                                                                 |                    |                  
|ASSETS                                                           |                    |                  
|                                                                 |                    |                  
|Cash and cash equivalents                                        |                    |                  
|Total cash and due from banks                                    |                    |                  
|Federal funds sold                                               |                    |                  
|                                                                 |                    |                  
|Total cash and cash equivalents                                  |                    |                  
|                                                                 |                    |                  
|Securities available for sale, at fair value                     |                    |                  
|                                                                 |                    |                  
|Loans held for sale                                              |                    |                  
|                                                                 |                    |                  
|Loans                                                            |                    |                  
|Total loans                                                      |                    |                  
|Less: Allowance for loan losses                                  |                    |                  
|                                                                 |                    |                  
|Net loans                                                        |                    |                  
|                                                                 |                    |                  
|Banking premises and equipment                                   |                    |                  
|Deferred tax asset                                               |                    |                  
|Interest receivable and other assets                             |                    |                  
|                                                                 |                    |                  
|Total assets                                                     |                    |                  
|                                                                 |                    |                  
|                                                                 |                    |                  
|LIABILITIES AND SHAREHOLDERS' EQUITY                             |                    |                  
|                                                                 |                    |                  
|Deposits                                                         |                    |                  
|Noninterest-bearing                                              |                    |                  
|Interest-bearing                                                 |                    |                  
|                                                                 |                    |                  
|Total deposits                                                   |                    |                  
|                                                                 |                    |                  
|Advances from Federal Home Loan Bank of Indianapolis             |                    |                  
|Junior subordinated debentures held by                           |                    |                  
|unconsolidated subsidiary trust                                  |                    |                  
|Federal funds purchased                                          |                    |                  
|Interest payable and other liabilities                           |                    |                  
|                                                                 |                    |                  
|Total liabilities                                                |                    |                  
|                                                                 |                    |                  
|Minority interest in consolidated subsidiary                     |                    |                  
|                                                                 |                    |                  
|Shareholders' equity                                             |                    |                  
|Common stock, no par value: 10,000,000 shares authorized;        |                    |                  
|1,245,722 shares issued and outstanding as of September 30, 2006 |                    |                  
|and December 31, 2005                                            |                    |                  
|Capital surplus                                                  |                    |                  
|Restricted stock - unearned compensation                         |                    |                  
|Retained earnings                                                |                    |                  
|Accumulated other comprehensive loss                             |                    |                  
|                                                                 |                    |                  
|Total shareholders' equity                                       |                    |                  
|                                                                 |                    |                  
|Total liabilities and shareholders' equity                       |                    |                  
|                                                                 |                    |                  

See accompanying notes
to consolidated financial statements

3

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CLARKSTON FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF INCOME
Three and Nine Month Periods Ended September 30, 2006 and September 30, 2005
(dollars in thousands, except per share data)
(unaudited)

|                                                         | Three Months
Ended
Sept. 30, 2006 | Three Months
Ended
Sept. 30, 2005 | Nine Months
Ended
Sept. 30, 2006 | Nine Months
Ended
Sept. 30, 2005
|-------------------------------------------------------- | --------------------------------- | --------------------------------- | -------------------------------- | --------------------------------
|                                                         |                                   |                                   |                                  |                                 
|                                                         |                                   |                                   |                                  |                                 
|Interest Income                                          |                                   |                                  
|Loans, including fees                                    |                                   |                                   | $                                | 2,907                           
|Securities                                               |                                   |                                  
|Taxable                                                  |                                   |                                   |                                  | 435                             
|Tax-exempt                                               |                                   |                                   |                                  | 86                              
|Federal funds sold                                       |                                   |                                   |                                  | 122                             
|                                                         |                                   |                                   |                                  |                                 
|Total interest income                                    |                                   |                                   |                                  | 3,550                           
|                                                         |                                   |                                  
|Interest Expense                                         |                                   |                                  
|Deposits                                                 |                                   |                                   |                                  | 1,571                           
|Borrowings                                               |                                   |                                   |                                  | 215                             
|                                                         |                                   |                                   |                                  |                                 
|Total interest expense                                   |                                   |                                   |                                  | 1,786                           
|                                                         |                                   |                                  
|Net Interest Income                                      |                                   |                                   |                                  | 1,764                           
|                                                         |                                   |                                  
|Provision for loan losses                                |                                   |                                   |                                  | 269                             
|                                                         |                                   |                                   |                                  |                                 
|                                                         |                                   |                                  
|Net interest income                                      |                                   |                                  
|After provision for loan losses                          |                                   |                                   |                                  | 1,495                           
|                                                         |                                   |                                  
|Noninterest income                                       |                                   |                                  
|Gain on sale of securities                               |                                   |                                   |                                  | --                              
|Gain on sale of loans                                    |                                   |                                   |                                  | 17                              
|Service charges and other fees                           |                                   |                                   |                                  | 163                             
|Other income                                             |                                   |                                   |                                  | (9                              
|                                                         |                                   |                                   |                                  |                                 
|Total noninterest income                                 |                                   |                                   |                                  | 171                             
|                                                         |                                   |                                  
|Noninterest expense                                      |                                   |                                  
|Salaries and benefits                                    |                                   |                                   |                                  | 808                             
|Occupancy expense                                        |                                   |                                   |                                  | 259                             
|Computer and data processing expenses                    |                                   |                                   |                                  | 103                             
|Advertising and public relations                         |                                   |                                   |                                  | 57                              
|Professional fees                                        |                                   |                                   |                                  | 141                             
|Supplies                                                 |                                   |                                   |                                  | 22                              
|Other expense                                            |                                   |                                   |                                  | 151                             
|                                                         |                                   |                                   |                                  |                                 
|Total noninterest expense                                |                                   |                                   |                                  | 1,541                           
|                                                         |                                   |                                   |                                  |                                 
|                                                         |                                   |                                  
|Income/(loss) before federal income tax expense          |                                   |                                   |                                  | 125                             
|and minority interest                                    |                                   |                                  
|                                                         |                                   |                                  
|Federal income tax expense/(benefit)                     |                                   |                                   |                                  | 86                              
|                                                         |                                   |                                   |                                  |                                 
|                                                         |                                   |                                  
|Income/(loss) before minority interest                   |                                   |                                   |                                  | 39                              
|                                                         |                                   |                                   |                                  |                                 
|                                                         |                                   |                                  
|Minority interest in net loss of consolidated subsidiary |                                   |                                   |                                  | (66                             
|                                                         |                                   |                                   |                                  |                                 
|                                                         |                                   |                                  
|Net income/(loss)                                        |                                   |                                   | $                                | 105                             
|                                                         |                                   |                                   |                                  |                                 
|                                                         |                                   |                                  
|Basic earnings/(loss) per share                          |                                   |                                   | $                                | 0.08                            
|                                                         |                                   |                                   |                                  |                                 
|Diluted earnings/(loss) per share                        |                                   |                                   | $                                | 0.08                            
|                                                         |                                   |                                   |                                  |                                 

See accompanying notes
to consolidated financial statements.

4

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CLARKSTON FINANCIAL
CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
Nine Month Period ended September 30, 2006
(dollars in thousands)
(unaudited)

|                              | Common
Stock | Capital
Surplus | Unearned
Comp. | Retained
Earnings | Accumulated
Other
Comprehensive
Loss | Total
Stockholders'
Equity
|----------------------------- | ------------ | --------------- | -------------- | ----------------- | ------------------------------------ | --------------------------
|                              |              |                 |                |                   |                                      |                           
|                              |              |                 |                |                   |                                      |                           
|Balance, December 31, 2005    |              |                 | $              | 6,163             |                                      | $                         
|                              |              |                
|Recognition of compensation   |              |                
|for restricted stock award    |              |                 |                |                   |                                      |                           
|                              |              |                
|Comprehensive income:         |              |                
|                              |              |                
|Net loss for the nine months  |              |                
|ended September 30, 2006      |              |                 |                |                   |                                      |                           
|                              |              |                
|Change in unrealized loss on  |              |                
|securities available for sale |              |                
|net of tax of ($76)           |              |                 |                |                   |                                      |                           
|                              |              |                 |                |                   |                                      |                           
|                              |              |                
|Net comprehensive loss        |              |                 |                |                   |                                      |                           
|                              |              |                 |                |                   |                                      |                           
|                              |              |                
|Balance, September 30, 2006   |              |                 | $              | 6,163             |                                      | $                         
|                              |              |                 |                |                   |                                      |                           

5

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CLARKSTON FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
Nine Month Periods ended September 30, 2006 and September 30, 2005
(dollars in thousands)
(unaudited)

|                                                     | Nine Months
Ended
Sept. 30,
2006 | Nine Months
Ended
Sept. 30,
2005
|---------------------------------------------------- | -------------------------------- | --------------------------------
|                                                     |                                  |                                 
|                                                     |                                  |                                 
|Net Cash Provided by Operating Activities:           |                                  |                                 
|Net cash provided by operating activities            |                                  |                                 
|                                                     |                                  |                                 
|Cash Flows from Investing Activities:                |                                  |                                 
|Net increase in loans                                |                                  |                                 
|Purchase of available-for-sale securities            |                                  |                                 
|Proceeds from sales of available-for-sale securities |                                  |                                 
|Property and equipment expenditures                  |                                  |                                 
|                                                     |                                  |                                 
|Net cash provided by investing activities            |                                  |                                 
|                                                     |                                  |                                 
|Cash Flows from Financing Activities:                |                                  |                                 
|Increase in deposits                                 |                                  |                                 
|Increase in federal funds purchased                  |                                  |                                 
|Repayments of advances from Federal Home  Loan Bank  |                                  |                                 
|Proceeds from sale of stock                          |                                  |                                 
|Resources used/(provided) by minority interest       |                                  |                                 
|                                                     |                                  |                                 
|Net cash provided by financing activities            |                                  |                                 
|                                                     |                                  |                                 
|Net increase in cash and cash equivalents            |                                  |                                 
|Cash and cash equivalents at beginning of period     |                                  |                                 
|                                                     |                                  |                                 
|                                                     |                                  |                                 
|Cash and cash equivalents at end of period           |                                  |                                 
|                                                     |                                  |                                 
|                                                     |                                  |                                 
|Supplemental Cash Flow Information - Cash paid for:  |                                  |                                 
|Interest                                             |                                  |                                 
|Taxes                                                |                                  |                                 
|                                                     |                                  |                                 
|Significant Noncash Activities:                      |                                  |                                 
|Transfers from loans to repossessed assets           |                                  |                                 

See accompanying notes
to consolidated financial statements.

6

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# NOTE 1  BASIS OF
FINANCIAL STATEMENT PRESENTATION

The accompanying unaudited
consolidated interim financial statements have been prepared in conformity with accounting
principles generally accepted in the United States of America with the instructions to
Form 10-QSB. Accordingly, certain information and disclosures required by accounting
principles generally accepted in the United States of America for complete financial
statements are not included herein. The interim financial statements should be read in
conjunction with the financial statements of Clarkston Financial Corporation (the
Company) and the notes thereto included in the Companys annual report on
Form 10-KSB for the year ended December 31, 2005.

All adjustments, consisting of normal
recurring adjustments, which in the opinion of management are necessary for a fair
presentation of financial position, results of operations, and cash flows, have been made.
The results of operations for the three and nine month periods ended September 30, 2006
are not necessarily indicative of the results that may be expected for the year ended
December 31, 2006.

Certain amounts in prior
periods financial statements have been reclassified to conform to the current
periods presentation.

# NOTE 2  PRINCIPLES
OF CONSOLIDATION

The Corporation is a Michigan
Corporation and the holding company for Clarkston State Bank (CSB) and Huron Valley State
Bank (HVSB). The consolidated financial statements include the accounts of the
Company, its wholly owned subsidiary Clarkston State Bank and its majority owned
subsidiary Huron Valley State Bank. All significant intercompany transactions are
eliminated in consolidation.

The Company also owns all of the
common stock of Clarkston Capital Trust I. This is a grantor trust that issued trust
preferred securities and is not consolidated with the Company per FASB Interpretation No.
46.

# NOTE 3  STOCK
BASED COMPENSATION

The Company has two stock-based
compensation plans. Under the employees Stock Compensation Plan (Employee
Plan), the Company may grant options or issue restricted stock to key employees for
up to 27,500 shares of common stock, of which 15,153 shares of common stock are available
for grant. Under the 1998 Founding Directors Stock Option Plan (Director
Plan), the Company may grant options for up to 82,500 shares of common stock, of
which 10,580 shares of common stock are available for grant. Under both plans, there is a
minimum vesting period of between one to three years before the options may be exercised,
and all options expire 10 years after the date of their grant. Certain options (contingent
options) under both plans vest on an accelerated basis upon the achievement of various
future financial and operational goals. All such options vest 9.5 years after the date of
grant regardless of achievement of future goals. Under both plans, the exercise price of
each option equals the market price of the Companys common stock on the date of
grant.

Prior to January 1, 2006, the
Company accounted for stock awards and options under the recognition and measurement
principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and
related interpretations. The Company has adopted the fair value recognition provisions of
Statement of Financial Standards (SFAS) No. 123 (R), Share Based Payment
effective January 1, 2006 using the modified-prospective transition method. SFAS
No. 123(R), Share Based Payment, established a fair value method of accounting for
stock options whereby compensation expense would be recognized based on the computed fair
value of the options on the grant date.

7

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# NOTE 3  STOCK
BASED COMPENSATION (CONTINUED)

The Company recognizes compensation
expense related to restricted stock awards over the period the services are performed. No
options were granted during 2006. The Company determined that implementation of SFAS
No. 123(R) did not have a material impact on the financial results of the Company.
The Company has provided below pro forma disclosures of net income and earnings per share
for the three and nine months ended September 30, 2005, as if the Company had applied the
fair value recognition provisions of SFAS No. 123 to stock-based employee
compensation (in thousands, except per share data):

|                                                       | Three Months
Ended Sept. 30, | Nine Months
Ended Sept. 30,
|------------------------------------------------------ | ---------------------------- | ---------------------------
|                                                       |                              |                            
|                                                       |                             
|                                                       |                              |                            
|                                                       |                              |                            
|As reported net income available to                    |                              |                            
|common stockholders                                    |                              |                            
|                                                       |                              |                            
|Less stock-based compensation expense determined under |                              |                            
|fair value method -  net of tax                        |                              |                            
|                                                       |                              |                            
|                                                       |                              |                            
|Pro forma net income                                   |                              |                            
|                                                       |                              |                            
|                                                       |                              |                            
|As reported earnings per share                         |                              |                            
|Pro forma earnings per share                           |                              |                            
|As reported earnings per diluted share                 |                              |                            
|Pro forma earnings per diluted share                   |                              |                            

Compensation expense in the pro forma
disclosures is not indicative of future amounts, as options vest over several years and
additional grants may be made each year.

The following table summarizes stock
option transactions for both plans and the related average exercise prices for the three
month periods ended September 30:

|                                       | 2006 | 2005
|-------------------------------------- | ---- | ----
|                                       |      |     
|                                       |      |     
|                                       |      |     
|                                       |      |     
|Options outstanding- Beginning of Year |      |     
|                                       |      |     
|Options granted - Employee Plan        |      |     
|Options exercised                      |      |     
|Options expired                        |      |     
|                                       |      |     
|                                       |      |     
|Options Outstanding - End of Period    |      |     

8

---



# NOTE 3  STOCK
BASED COMPENSATION (CONTINUED)

The following table shows summary
information about fixed stock options outstanding at September 30, 2006:

|               | Stock Options Outstanding and Exercisable
|-------------- | -----------------------------------------
|               |                                          
|               |                                          
|               |                                          
|Contingent     |                                          
|Non-contingent |                                          

# NOTE 4  EARNINGS
PER SHARE

Basic earnings per share represents
income available to common stockholders divided by the weighted-average number of common
shares outstanding during the period. Diluted earnings per share reflects additional
common shares that would have been outstanding if dilutive potential common shares had
been issued, as well as any adjustment to income that would result from the assumed
issuance. Potential common shares that may be issued by the Company relate solely to
outstanding stock options and are determined using the treasury stock method.

Earnings per share have been computed
based on the following: (in dollars in thousands)

|                                              | Three Months
Ended September 30, | Nine Months
Ended September 30,
|--------------------------------------------- | -------------------------------- | -------------------------------
|                                              |                                  |                                
|                                              |                                  |                                
|                                              |                                  |                                
|                                              |                                  |                                
|Net income/(loss)available to common          |                                  |                                
|stockholders                                  |                                  |                                
|                                              |                                  |                                
|Average number of common shares               |                                  |                                
|outstanding                                   |                                  |                                
|Effect of dilutive options                    |                                  |                                
|                                              |                                  |                                
|                                              |                                  |                                
|Average number of common shares               |                                  |                                
|outstanding used to calculate diluted         |                                  |                                
|earnings/(loss) per common share              |                                  |                                
|                                              |                                  |                                
|                                              |                                  |                                
|Number of antidilutive stock options excluded |                                  |                                
|from diluted earnings per share computation   |                                  |                                
|                                              |                                  |                                

9

---



# NOTE 5  SECURITIES

The Bank does not have any securities in
its portfolio that are classified as held to maturity. All securities are classified as
available for sale and the amortized cost and fair values of those securities are as
follows (dollars in thousands):

# Available for Sale

|                                                | Amortized
Cost | Gross
Unrealized
Gains | Gross
Unrealized
Losses | Estimated
Market
Value
|----------------------------------------------- | -------------- | ---------------------- | ----------------------- | ----------------------
|                                                |                |                        |                         |                       
|                                                |                |                        |                         |                       
|September 30, 2006 (unaudited)                  |                |                       
|U.S. Treasury securities and obligations of     |                |                       
|U.S. government corporations and agencies       |                |                        | $                       | 8,345                 
|Mortgage-backed securities                      |                |                        |                         | 26,538                
|Collateralized mortgage obligations             |                |                        |                         | 3,095                 
|Obligations of state and political subdivisions |                |                        |                         | 10,608                
|                                                |                |                        |                         |                       
|                                                |                |                        | $                       | 48,586                
|                                                |                |                        |                         |                       
|                                                |                |                       
|December 31, 2005                               |                |                       
|U.S. Treasury securities and obligations of     |                |                       
|U.S. government corporations and agencies       |                |                        | $                       | 7,842                 
|Mortgage-backed securities                      |                |                        |                         | 28,044                
|Collateralized mortgage obligations             |                |                        |                         | 3,508                 
|Obligations of state and political subdivisions |                |                        |                         | 10,677                
|                                                |                |                        |                         |                       
|                                                |                |                        | $                       | 50,071                
|                                                |                |                        |                         |                       

# NOTE 6  LOANS

Loans are as follows (dollars in
thousands):

|                  | September 30,
2006
(unaudited) | December 31,
2005
|----------------- | ------------------------------ | -----------------
|                  |                                |                  
|                  |                                |                  
|Commercial        |                                |                  
|                  |                                |                  
|Real estate:      |                                |                  
|Commercial        |                                |                  
|Residential       |                                |                  
|Construction      |                                |                  
|                  |                                |                  
|Total real estate |                                |                  
|                  |                                |                  
|Consumer          |                                |                  
|                  |                                |                  
|                  |                                |                  
|Total             |                                |                  
|                  |                                |                  

10

---



# NOTE 6  LOANS
(CONTINUED)

Activity in the allowance for loan
losses is as follows (dollars in thousands):

|                                   | Three Months
Ended September 30, | Nine Months
Ended September 30,
|---------------------------------- | -------------------------------- | -------------------------------
|                                   |                                  |                                
|                                   |                                  |                                
|                                   |                                  |                                
|                                   |                                  |                                
|Balance - Beginning of period      |                                  |                                
|Provision charged to operations    |                                  |                                
|Charge-offs                        |                                  |                                
|Recoveries                         |                                  |                                
|                                   |                                  |                                
|Balance - End of period            |                                  |                                
|                                   |                                  |                                
|                                   |                                  |                                
|Allowance for loan losses to total |                                  |                                
|loans                              |                                  |                                

# NOTE 7  DEPOSITS

Deposits are summarized as follows (dollars
in thousands):

|                                             | Sept. 30,
2006
(Unaudited) | December 31,
2005
|-------------------------------------------- | -------------------------- | -----------------
|                                             |                            |                  
|                                             |                            |                  
|Non-interest bearing demand deposit accounts |                            |                  
|Interest-bearing demand deposit accounts     |                            |                  
|Savings accounts                             |                            |                  
|Money market accounts                        |                            |                  
|Certificates of deposit                      |                            |                  
|                                             |                            |                  
|                                             |                            |                  
|Total deposits                               |                            |                  
|                                             |                            |                  

# NOTE 8  FHLB
ADVANCES

The Company has various term advances
from the Federal Home Loan Bank of Indianapolis (FHLB) with fixed and variable
interest rates ranging from 3.75% to 4.86% at September 30, 2006 and December 31, 2005.
The weighted average interest rate at September 30, 2006 and December 31, 2005 is 4.35%.
Maturity dates range from November 2006 to October 2010. The weighted average remaining
maturity at September 30, 2006 is 782 days, or August 20, 2008. Advances from the FHLB are
collateralized by qualifying investment securities with estimated market values of
$11,021,000 and $12,210,000 at September 30, 2006 and December 31, 2005. The advances are
due in full at maturity and the fixed rate advances are subject to a prepayment penalty if
repaid prior to maturity.

11

---



# NOTE 9  MINIMUM
REGULATORY CAPITAL REQUIREMENTS

Banks and bank holding companies are
subject to regulatory capital requirements administered by federal banking agencies.
Capital adequacy guidelines and, additionally for Banks, prompt corrective action
regulations, involve quantitative measures of assets, liabilities, and certain
off-balance-sheet items calculated under regulatory accounting practices. Capital amounts
and classifications are also subject to qualitative judgments by regulators. Failure to
meet capital requirements can initiate regulatory action. The prompt corrective action
regulations provide five classifications, well capitalized, adequately capitalized,
undercapitalized and critical undercapitalized, although these terms are not used to
represent overall financial condition. If adequately capitalized, regulatory approval is
required to accept brokered deposits. If undercapitalized, capital distributions are
limited, as is asset growth and expansion, and plans for capital restoration are required.
The Banks and the Company were well-capitalized as of September 30, 2006 and December 31,
2005.

The Banks and Companys
actual capital amounts and ratios as of September 30, 2006 and December 31, 2005 are
presented in the following table (dollars in thousands):

|                          | Actual | For Capital
Adequacy Purposes | To be
Well-Capitalized
|------------------------- | ------ | ----------------------------- | ----------------------
|                          |        |                               |                       
|                          |        |                               |                       
|                          |        |                               |                       
|                          |        |                               |                       
|As of September 30, 2006: |        |                              
|Total risk-based capital  |        |                              
|(to risk weighted assets) |        |                              
|CSB                       |        |                               | $                     
|HVSB                      |        |                               |                       
|Consolidated              |        |                               |                       
|Tier I Capital            |        |                              
|(to risk weighted assets) |        |                              
|CSB                       |        |                               | $                     
|HVSB                      |        |                               |                       
|Consolidated              |        |                               |                       
|Tier I Capital            |        |                              
|(to average assets)       |        |                              
|CSB                       |        |                               | $                     
|HVSB                      |        |                               |                       
|Consolidated              |        |                               |                       
|As of December 31, 2005:  |        |                              
|Total risk-based capital  |        |                              
|(to risk-weighted assets) |        |                              
|CSB                       |        |                               | $                     
|HVSB                      |        |                               |                       
|Consolidated              |        |                               |                       
|Tier I Capital            |        |                              
|(to risk weighted assets) |        |                              
|CSB                       |        |                               | $                     
|HVSB                      |        |                               |                       
|Consolidated              |        |                               |                       
|Tier I Capital            |        |                              
|(to average assets)       |        |                              
|CSB                       |        |                               | $                     
|HVSB                      |        |                               |                       
|Consolidated              |        |                               |                       

12

---



# NOTE 10  STANDBY
AND COMMERCIAL LETTERS OF CREDIT AND FINANCIAL GUARANTEES

The Company is a party to
credit-related financial instruments with off-balance-sheet risk in the normal course of
business to meet the financing needs of its customers. These financial instruments include
commitments to extend credit, commercial and standby letters of credit, and unfunded
commitments under lines of credit. Such commitments involve, to varying degrees, elements
of credit and interest rate risk in excess of the amount recognized in the consolidated
balance sheet. The Companys exposure to credit loss is represented by the
contractual amount of these commitments. The Company follows the same credit policies in
making commitments as it does for on-balance-sheet instruments.

At September 30, 2006 and December
31, 2005, the following financial instruments were outstanding whose contract amounts
represent credit risk (dollars in thousands):

|                                           | September 30, 2006
(Unaudited) | December 31, 2005
|------------------------------------------ | ------------------------------ | -----------------
|                                           |                                |                  
|                                           |                                |                  
|Commitments to grant loans                 |                                |                  
|Unfunded commitments under lines of credit |                                |                  
|Commercial and standby letters of credit   |                                |                  

# NOTE 11  RECENT
ACCOUNTING PRONOUNCEMENTS

In
February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Instruments,
which is an amendment of SFAS No: 133 and 140. SFAS No. 155 allows financial instruments
that have embedded derivatives to be accounted for as a whole (eliminating the need to
bifurcate the derivative from its host) if the holder elects to account for the whole
instrument on a fair value basis. The Statement also establishes a requirement to evaluate
interests in securitized financial assets to identify interests that are freestanding
derivatives or that are hybrid financial instruments that contain an embedded derivative
requiring bifurcation and clarifies that concentrations of credit risk in the form of
subordination are not embedded derivatives. SFAS No. 155 is effective for all financial
instruments acquired or issued after the beginning of an entitys first fiscal year
that begins after September 15, 2006. Adoption of this statement is not expected to have a
material effect on results of operations or financial condition of the Company.

In
March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial
Assets- an amendment of FASB Statement No. 140 . SFAS No.156 requires an entity to
recognize a servicing asset or servicing liability each time it undertakes an obligation
to service a financial asset by entering into a servicing contract in specific situations.
Additionally, the servicing asset or servicing liability shall be initially measured at
fair value; however, an entity may elect the amortization method or fair
value method for subsequent balance sheet reporting periods. SFAS No.156 is
effective as of an entitys first fiscal year beginning after September 15,
2006. Early adoption is permitted as of the beginning of an entitys fiscal year,
provided the entity has not yet issued financial statements, including interim financial
statements, for any period of that fiscal year. Adoption of this statement is not expected
to have a material effect on results of operations or financial condition of the Company.

In
July 2006, the FASB issued FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxesan interpretation of FASB Statement No. 109 (FIN
48), which clarifies the accounting for uncertainty in tax positions. This Interpretation
requires that the Company recognize in the financial statements, the impact of a tax
position, if that position is more likely than not of being sustained on audit, based on
the technical merits of the position. The provisions of FIN 48 are effective as of the
beginning of our 2007 fiscal year, with the cumulative effect of the change in accounting
principle recorded as an adjustment to opening retained earnings. The adoption of FIN 48 is not expected to have a material effect
on the Company's financial statements.

13

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# Item 2

# MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS
OF OPERATIONS

The following analysis discusses
changes in the financial condition and results of operations of the Company for the
periods presented and should be read in conjunction with the Companys Consolidated
Financial Statements and notes thereto, appearing in Part I, Item 1 of this document.

Forward Looking Statements

This
report includes forward-looking statements as that term is used in the
securities laws. All statements regarding the Companys expected financial position,
business and strategies are forward-looking statements. In addition, the words
anticipates, believes, estimates, seeks,
expects, plans, intends, and similar expressions, as
they relate to the Company and its management, are intended to identify forward-looking
statements. The presentation and discussion of the provision and allowance for loan and
lease losses, determining the fair value of securities and other financial instruments,
the valuation of mortgage servicing rights and statements concerning future profitability
or future growth or increases, are examples of inherently forward looking statements in
that they involve judgments and statements of belief as to the outcome of future events.
The Companys ability to predict results or the actual effect of future plans or
strategies is inherently uncertain. Factors which could have a material adverse affect on
the Companys operations and future prospects include, but are not limited to,
changes in: interest rates, general economic conditions, legislative/regulatory changes,
monetary and fiscal policies of the U.S. Government, including policies of the U.S.
Treasury and the Federal Reserve Board, the quality or composition of the loan or
investment portfolios, demand for loan products, deposit flows, competition, demand for
financial services in the Companys market area and accounting principles, policies
and guidelines. These risks and uncertainties should be considered in evaluating
forward-looking statements and undue reliance should not be placed on such statements.
Further information concerning the Company and its business, including additional factors
that could materially affect the Companys financial results, is included in its
filings with the Securities and Exchange Commission.

General

Clarkston Financial Corporation (the
Company, us or we) is a Michigan corporation
incorporated on May 18, 1998. The Company is the bank holding company for Clarkston
State Bank (CSB) and Huron Valley State Bank (HVSB) (collectively
the Banks). CSB commenced operations on January 4, 1999, and HVSB commenced
operations on August 15, 2005. The Banks are chartered by the State of Michigan with
depository accounts insured by the Federal Deposit Insurance Corporation. As such, our
primary business is concentrated in a single industry segment  commercial banking.
The Banks provide a full range of banking services to individuals, commercial businesses
and industries located in their service areas. The Banks maintain diversified loan
portfolios, including loans to individuals for home mortgages, automobiles and personal
expenditures, and loans to business enterprises for current operations and expansion. The
Banks also offer a variety of deposit products, including checking accounts, savings
accounts, money market accounts, individual retirement accounts and certificates of
deposit.

The principal markets for financial
services provided are in the northern Oakland County communities in which the Banks are
located and the areas immediately surrounding these communities. The Banks serve these
markets through 7 locations in or near their communities. The Banks do not have any
material foreign assets or income.

14

---



Our principal source of revenue is
interest and fees on loans. On a consolidated basis, interest and fees on loans accounted
for 76.8% of total revenue year to date in 2006 compared to 77.3% year to date in 2005.
The share of total revenue from interest and fees on loans decreased in the current year
as a result of slower growth in the loan portfolio resulting in elevated federal funds
sold and investment securities. Revenue share of interest from investments (including
Federal Funds sold), increased to 17.8%, from 14.6% year over year. Noninterest income in
total declined from 8.1% to 5.4% in 2006 and 2005, respectively. The decrease in
noninterest incomes share of revenue is due primarily to decreased deposit service
charges and fees, and to a lesser extent decreased mortgage loan sales volume.

The formation of HVSB in 2005 was a
significant event for Clarkston Financial Corporation. We own 55% of the outstanding
shares of common stock of HVSB. The remaining 45% is owned by private investors. We expect
to recognize operating losses from HVSB in the near term as the Bank grows out of the de
novo stage.

Critical Accounting
Policies

As of September 30, 2006, there have
been no material changes in the disclosures regarding critical accounting policies as
disclosed in the Companys Form 10-K for the year ended December 31, 2005. The
Companys critical accounting policies are described in the financial section of its
2005 Annual Report. Management believes its critical accounting policies relate to the
valuation of the allowance for loan losses, income taxes and stock-based compensation.

Comparison of Financial
Condition at September 30, 2006 and December 31, 2005

Our
total assets increased by $23.3 million or 11.9% to $218.9 million at September 30, 2006,
from $195.6 million at December 31, 2005. The addition of HVSB in the 3rd
quarter of 2005 has contributed significantly to our asset growth, providing $27.7 million
in total assets. We anticipate that our assets will continue to grow during 2006.

Cash
and cash equivalents, which include federal funds sold and short-term investments,
increased $5.0 million or 61.7% to $13.1 million at September 30, 2006 from $8.1 million
at December 31, 2005. This increase is due to loan growth lagging deposit growth at both
banks and the maintenance of the excess funds being kept liquid in anticipation of
redeployment into the loan portfolios.

Securities
decreased $1.7 million or 3.5% to $47.3 million at September 30, 2006 from $49.0 million
at December 31, 2005. The decrease in securities was due primarily to principal paydowns
on mortgage backed securities. The Company continues to have excellent liquidity and will
monitor its level of securities to ensure proper liquidity is maintained. While there are
a number of securities that have market values less than 95% of the book value, and could
be construed as impaired relative to market value, management has the intent and ability
to hold these specific securities until maturity and no loss is expected to be realized on
these securities. As a result, the value of these securities have not been written down as
of September 30, 2006.

Total
portfolio loans increased by $19.0 million or 14.3% to $152.2 million at September 30,
2006 from $133.2 million at December 31, 2005. Approximately $7.6 million of the growth
was from Huron Valley State Bank, with the remainder of the growth coming from Clarkston
State Bank. This growth rate is slightly behind our consolidated business plan and a
similar rate is expected to continue throughout 2006. The difficult economic climate in
Michigan, staffing issues and competitive pressures in the banks contiguous markets
has created a challenging environment in which to make loans. Total loan growth continues
to be driven by the commercial real estate portfolio which increased $21.2 million, or
33.8% over the balance at December 31, 2005. This large increase was partially offset by a
$2.3 million, or 8.0% decrease in the construction portfolio and a $1.9 million, or 7.8%
decrease in the commercial and industrial portfolio. The decrease in the commercial and
industrial portfolio was caused primarily by charge-offs of approximately $400,000 and the
paydown or payoff of a number of larger credits. The residential real estate portfolio
contributed positively showing a 13.3%, or $2.0 million increase from December 31, 2005.
This increase was primarily in home equity loans, as the majority of the 1st
mortgages written by the Banks are sold in the secondary market. The Banks loan
policies are conservative in relation to home equity loans, generally not permitting
combined loan to values of greater than 90%. There was a slight decrease in consumer loans
from December 31, 2005. The banks continue to focus on real estate lending, evidenced by
the fact that 83.8% of the loan portfolio is secured by some type of real estate.
Management views that this is prudent at the current time given the uncertainty of the
local economy, especially as it relates to small businesses.

15

---



The nonperforming loan balance shown
below as of September 30, 2006 is made up of 12 relationships, an increase from the 9
relationships in the prior quarter. Charge-offs totaled only $17,000 for the quarter, a
reduction of $1.1 million or 98.5% over the prior quarter.  Additionally, a large
recovery was made from a loan that had been charged off in the prior quarter in the amount
of $236,000. In addition, interest and fees were collected in excess of the principal
balance. Additional recoveries were also received, in accordance with the guarantors
previous representations, on another credit charged off in the prior quarter due
to the statutory debt regulations in Michigan. During the third quarter an
independent consultant completed a loan review of all commercial relationships greater than $250,000.
  The results were favorable, with a small
number of downgrades, but no significant deficiencies noted. In conjunction with the
third party review, senior management reviewed all other credits in the portfolio with
balances greater than $50,000. This review noted no major deficiencies or troublesome
lending patterns. In addition, the credit policy has been completely rewritten to address
shortfalls that may have contributed to previous credit problems. A reorganization of the
lending area is also in process, whereby the credit function will be separated and
centrally managed at the Holding Company level for both subsidiary institutions. We believe the new
structure will allow the Company to better manage its credit risk.

During the quarter, the Bank
experienced a significant increase (70.2%) in nonperforming loans. Two new relationships
appeared in the nonperforming portfolio in the current quarter, both of which were secured
by real estate. Two credits migrated from greater than 90 past due and still accruing to
nonaccrual, totaling $220,000. In accordance with our policy, loans that are well secured
and in the process of collection are not put on non-accrual status. All loans greater than
90 days delinquent, regardless of accrual status, are included on managements watch
list and monitored monthly. Management is working through these credits and believes that
any losses inherent in these credits are adequately reserved for in the allowance for loan
loss.

16

---



The table below shows the composition
and amount of our nonperforming assets.

|                                          | September 30,
2006 | December 31,
2005
|----------------------------------------- | ------------------ | -----------------
|                                          |                    |                  
|                                          |                    |                  
|(dollars in thousands)                    |                    |                  
|                                          |                    |                  
|Nonaccrual loans                          |                    |                  
|Secured by real estate                    |                    |                  
|Secured by other than real estate         |                    |                  
|Loans 90 days past due and still accruing |                    |                  
|Secured by real estate                    |                    |                  
|Secured by other than real estate         |                    |                  
|                                          |                    |                  
|Total nonperforming loans                 |                    |                  
|                                          |                    |                  
|Foreclosed and repossessed assets         |                    |                  
|                                          |                    |                  
|Total nonperforming assets                |                    |                  
|                                          |                    |                  
|Nonperforming assets to total loans       |                    |                  
|Nonperforming assets to total assets      |                    |                  

The
allowance for loan losses as of September 30, 2006 was $2.1 million representing
approximately 1.35% of total portfolio loans outstanding, compared to $1.9 million, or
1.45% of loans outstanding as of December 31, 2005. Management believes that the high risk
credits are appropriately reserved for and are all being monitored appropriately. This
contention is supported by the results of the portfolio review discussed above. At the
same time, the economic climate in the Banks home state is not favorable and the
possibility for additional losses caused by this economic weakness still exists. We
believe that the allowance for loan losses is sufficient to cover losses inherent in the
portfolio.

The
loan loss allowance represents managements assessment of both current and future
losses inherent within the loan portfolio. Consideration is also given to off-balance
sheet items that may involve credit risk, such as commitments to extend credit. This
analysis is conducted on a quarterly basis utilizing a methodology that has been employed
since our inception. The methodology employed utilizes several factors to determine the
appropriateness of the allowance. Specifically, historical loss experience, financial
condition of borrowers, collateral adequacy, credit risk rating system and current
economic conditions are incorporated in this analysis.

The
primary risk element considered by management regarding each installment and residential
real estate loan is the lack of timely payments. We have a reporting system that monitors
past due loans and have adopted policies to pursue our creditors rights in order to
preserve our position. The primary risk elements concerning commercial loans are the
financial condition of the borrower, the sufficiency of the collateral and lack of timely
payment. Management has a policy of requesting and reviewing annual financial statements
from its commercial loan customers and periodically reviews the existence and value of
collateral for selected loans.

The
adequacy of the allowance is based on the application of our credit risk rating system
which identifies problem credits and ranks loans by specific categories. Moreover, we use
peer comparisons and industry data for similar type loans to further assess the proper
level of the loan loss allowance.

Total
premises and equipment increased $900,000, or 23.1% to $4.8 million at September 30, 2006
from $3.9 million at December 31, 2005. This increase is due to the purchase of the
building from which the holding company operates from a company controlled by the
Chairman. This purchase was made at the fair market value of the property. CSB operates a
retail branch out of this building and it was determined to be cost efficient to purchase
the building.

17

---



Total
deposit balances increased $20.6 million or 12.8% to $181.9 million at September 30, 2006
from $161.3 million at December 31, 2005. The largest increase in terms of percentage was
seen in time deposits which increased 42.2%, or $28.2 million since December 31, 2005.
This increase was offset by a $6.0 million, or 10.0% decrease in the money market
portfolio. Demand and other savings accounts saw a slight 4.7% decrease from $34.3 million
at December 31, 2005 to $32.7 million at September 30, 2006. The local market for deposits
is extremely competitive, and we continue to focus on gathering lower cost savings and DDA
accounts to fund our future growth and reduce our reliance on higher cost time deposits.
While the deposit mix is trending unfavorably, the cost of funds is rising at a slower
rate than the yield on earning assets, improving the net interest margin. Reevaluation of
pricing structures of certain deposit accounts is the primary cause of this. Additionally,
HVSB is utilizing aggressive time deposit promotions to build their customer base and
generate community awareness, which has decreased the profitability of the time deposit
portfolio. Management is hopeful that these aggressive time deposit campaigns will produce
more profitable lasting relationships, including but not limited to demand deposit
accounts. These campaigns are generally short-term in nature and are typically rolled into
the current offering rate at the time of maturity depending on the net cash position of
the institution.

CSB
is a member of the Federal Home Loan Bank of Indianapolis, and utilizes advances from this
institution to bolster liquidity. At September 30, 2006, we have $10.2 million in advances
outstanding. No repayments or additional advances occurred during the quarter. The Company
continues to view the FHLB as a source of liquidity and may borrow additional funds as
market conditions dictate.

We
have no other off-balance sheet liabilities other than commitments to extend credit in the
form of letters and lines of credit.

As
of September 30, 2006, we had retained earnings of $3.2 million compared to $3.6 million
at December 31, 2005 which was the result of a net loss of $447,000. Accumulated other
comprehensive income saw a decrease of $147,000, or 20.4%. This decrease was primarily the
result of changes in interest rates causing a decrease in the market value of the
Companys security portfolio. We do not believe that the value of any of the
securities in the portfolio are permanently impaired.

Comparison of Operating Results
for the Three Months Ended September 30, 2006 and 2005

Our
net income was $105,000, or $0.08 per diluted share for the third quarter of 2006
compared to a net loss of $421,000, or $0.35 per diluted share for the third quarter of
2005. The increased profitability was primarily due to reduced provision for loan loss and
the related tax effect and increased net interest income.

Net
interest income increased 15.5% or $236,000 from $1.53 million in the third quarter of
2005 to $1.76 million for 2006. Both elevated balances in average earning assets and
favorable interest rates contributed to the increased net interest income, but were
somewhat offset by an unfavorable change in the interaction of changes in rates and
portfolio mixes, which caused a $77,000 decrease in net interest income. Balances in
average earning assets increased by 7.8% to $196.0 million at September 30, 2006 from
$181.9 million at September 30, 2005. This growth in earning assets was funded mostly by
interest bearing deposits, the average balance of which increased by 8.4%, or $11.1
million. These increases effectively added $47,000 to the margin. Growth in loans provided
50% of the increase in earning assets, with increases in securities (primarily at HVSB)
and fed funds sold providing the remainder of the increase. Virtually all of this growth
in interest bearing deposits was in time deposits which grew $18.6 million, or 32.0%. This
growth in time deposits was offset by a $7.4 million decrease in non-time interest bearing
deposits. Increasing rates added $283,000 to net interest income, with the cost of
interest bearing funds increasing 84 basis points, while the yield on earning assets
increased by 103 basis points. The net interest margin increased from 3.36% for the
quarter ended September 30, 2005 to 3.60% for the same period in 2006. During the current
quarter management of Clarkston State Bank lowered the rate paid on money market accounts to get it more
in line with the market.  This decrease, during a time of rising rates elsewhere, was the biggest
individual cause of the increased margin.  The pricing on various other deposit products and
the mix of assets carried by the Bank are being evaluated by management.

18

---



The following schedule presents the
average daily balances, interest income, interest expense and average rates earned and
paid for the Companys major categories of assets, liabilities, and
shareholders equity for the periods indicated (dollars in thousands):

|                                           | 3 Months ended Sept. 30,
2006 | 3 Months ended Sept. 30,
2005
|------------------------------------------ | ----------------------------- | -----------------------------
|                                           |                               |                              
|
|                                           |                               |                              
|Assets:                                    |                               |                              
|Short term investment                      |                               |                              
|Securities:                                |                               |                              
|Taxable                                    |                               |                              
|Tax-exempt                                 |                               |                              
|Loans                                      |                               |                              
|                                           |                               |                              
|Total earning assets/total                 |                               |                              
|interest income                            |                               |                              
|Cash and due from banks                    |                               |                              
|Unrealized (loss) on AFS securities        |                               |                              
|Allowance for loan loss                    |                               |                              
|All other assets                           |                               |                              
|                                           |                               |                              
|Total assets                               |                               |                              
|Liabilities and Stockholders' Equity       |                               |                              
|Interest bearing deposits:                 |                               |                              
|MMDA, Savings/NOW accounts                 |                               |                              
|Time                                       |                               |                              
|Fed Funds Purchased                        |                               |                              
|FHLB Advances                              |                               |                              
|Trust Preferred Securities                 |                               |                              
|Other borrowings                           |                               |                              
|                                           |                               |                              
|Total interest bearing                     |                               |                              
|liabilities/interest expense               |                               |                              
|Noninterest bearing deposits               |                               |                              
|All other liabilities                      |                               |                              
|Stockholders' Equity:                      |                               |                              
|Unrealized holding (loss)                  |                               |                              
|Common Stock, Surplus, Retained Earnings   |                               |                              
|                                           |                               |                              
|Total liabilities and stockholders' equity |                               |                              
|Interest spread                            |                               |                              
|Net Interest Margin as a                   |                               |                              
|Percentage of Average                      |                               |                              
|Earnings Assets - FTE                      |                               |                              

19

---



Rate
/ Volume Analysis of Net Interest Income.The following schedule presents the dollar
amount of changes in interest income and expense for major components of earning assets
and interest-bearing liabilities, distinguishing between changes related to outstanding
balances and changes due to interest rates.

|                                   | For the 3 months ended2006 Compared to 2005 | 
|---------------------------------- | ------------------------------------------- | 
|                                   |                                             | 
|                                   |                                             | 
|                                   |                                             | 
|                                  
|                                   |                                             | 
|Short term investment              |                                             | 
|Investment securities - taxable    |                                             | 
|Investment securities - tax exempt |                                             | 
|Loans, net of unearned income      |                                             | 
|                                   |                                             | 
|Total interest income              |                                             | 
|                                   |                                             | 
|Interest bearing deposits          |                                             | 
|Federal funds borrowed             |                                             | 
|FHLB advances                      |                                             | 
|Trust preferred securities         |                                             | 
|Other borrowings                   |                                             | 
|                                   |                                             | 
|Total interest expense             |                                             | 
|                                   |                                             | 
|Net interest income                |                                             | 
|                                   |                                             | 

Total
provision for loan losses was $269,000 for the third quarter ended September 30, 2006,
compared to $908,000 for the third quarter of 2005. The higher level of charge-offs in
the preceeding few quarters relative to the Companys history have adversely affected
the Companys historical loss ratios resulting in additional provision for loan
losses. The provision for the quarter ended September 30, 2005 was inflated due to large
charge-offs and a large specific reserve. Management believes that the provision for the current quarter is more
indicative of the amounts which will be required in the foreseeable future.

The
level of the provision made in connection with the loans reflects the amount necessary to
maintain the allowance for loan losses at an adequate level, based upon Clarkston State
Banks current analysis of probable incurred losses in its loan portfolio, with
respect to loans held at September 30, 2006. Bank management is continuing to evaluate the
financial condition of the borrowers and the value of the collateral.

Non-interest
income decreased $39,000, or 18.6% for the third quarter of 2006 compared to the same
period in 2005. This decrease is somewhat evenly split between service charges on deposit
accounts, gains/losses on sales of mortgage loans and other non-interest income. The
reduction in service charges is primarily due to reduction in the amount of NSF income.
The decrease is due primarily to the prior period being higher than normal. Management at
the Bank subsidiaries has actively worked with the customers who were habitually
overdrawing their accounts to either help them better manage their funds or help them to
find another bank because management feels that the reduction in credit risk is worth the
reduction in deposit (primarily NSF) fees. The Companys large checking account
portfolio continues to generate fees, though a review of these fees relative to our local
market peers may result in the modification of our fee structure. It is, however,
anticipated that any modification of the fee structure will result in increased fee
income. The decrease in other income is due to a loss of $19,000 incurred on the sale of a
piece of other real estate, partially offset by rental income from the leases on space in
the holding companys building.

20

---



Non-interest
expense was $1.5 million for the third quarter of 2006, unchanged from the second quarter
of 2005. The fact that HVSB is now operating as a fully staffed bank is the primary cause
of the increase in operating expenses. Salary and benefit costs increased $116,000, or
16.8%. Occupancy expense has increased $50,000, or 23.9% mostly as a result of HVSB and
additional real estate taxes related to CSBs newest branch. The decreases seen in
advertising and supplies can be attributed to the opening of HVSB inflating the September
30, 2005 amounts. As Huron Valley State Bank and the mortgage operation gain critical
mass, we anticipate our efficiency ratio to improve to the levels more common throughout
our history. The ratio for the quarter ended September 30, 2006 improved to 79.6% from
89.1% at September 30, 2005.

Comparison of Operating Results
for the Nine Months Ended September 30, 2006 and 2005

Our
net loss was $447,000, or $0.36 per diluted share for the nine months ended September 30,
2006 compared to a net loss of $126,000, or $0.11 per diluted share for the same period in
2005. The net loss was caused primarily by increased loan loss provisions, reduced
non-interest income and operating expenses related to HVSB being open and fully staffed,
while last year it was operating with limited staff as a loan center.

Net
interest income increased 9.5% or $430,000 from $4.54 million in nine months ended
September 30, 2005 to $4.97 million for 2006. The primary contributor to the increase was
elevated balances in average earning assets, which increased by 13.3% to $197.6 million at
September 30, 2006 from $174.5 million at September 30, 2005. This effectively added
$634,000 to the margin. This increase in earning assets was funded primarily with interest
bearing deposits which increased $19.9 million, or 15.8%, effectively reducing the margin
by $359,000. The majority of this increase was in time deposits, which grew $22.0 million,
or 38.6%. Growth in loans provided approximately 50% of the increase in earning assets,
with increases in securities (primarily at HVSB) and fed funds sold providing the
remainder of the increase. Increasing rates increased net interest income by $77,000, as
the cost of interest bearing funds increased 74 basis points, while the yield on earning
assets only increased by 53 basis points. Additionally, the interaction of changes in
rates and portfolio mixes caused an $88,000 increase in net interest income. The net
interest margin decreased from 3.47% for the nine months ended September 30, 2005 to 3.35%
for the same period in 2006. The decrease in margin is primarily due to the first two
quarters of the year.  As can be seen abaove, the margin increased in the current quarter
over the same period last year. As discussed above, the misalignment of the money market rate
in the first two quarters relative to the market is the primary cause of the depressed margin
in those quarters.

21

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The following schedule presents the
average daily balances, interest income, interest expense and average rates earned and
paid for the Companys major categories of assets, liabilities, and
shareholders equity for the periods indicated (dollars in thousands):

|                                           | 9 Months ended Sept. 30,
2006 | 9 Months ended Sept. 30,
2005
|------------------------------------------ | ----------------------------- | -----------------------------
|                                           |                               |                              
|                                           |                               |                              
|                                           |                               |                              
|Assets:                                    |                               |                              
|Short term investment                      |                               |                              
|Securities:                                |                               |                              
|Taxable                                    |                               |                              
|Tax-exempt                                 |                               |                              
|Loans                                      |                               |                              
|                                           |                               |                              
|Total earning assets/total                 |                               |                              
|interest income                            |                               |                              
|Cash and due from banks                    |                               |                              
|Unrealized (loss) on AFS securities        |                               |                              
|Allowance for loan loss                    |                               |                              
|All other assets                           |                               |                              
|                                           |                               |                              
|Total assets                               |                               |                              
|Liabilities and Stockholders' Equity       |                               |                              
|Interest bearing deposits:                 |                               |                              
|MMDA, Savings/NOW accounts                 |                               |                              
|Time                                       |                               |                              
|Fed Funds Purchased                        |                               |                              
|FHLB Advances                              |                               |                              
|Trust Preferred Securities                 |                               |                              
|Other borrowings                           |                               |                              
|                                           |                               |                              
|Total interest bearing                     |                               |                              
|liabilities/interest expense               |                               |                              
|Noninterest bearing deposits               |                               |                              
|All other liabilities                      |                               |                              
|Stockholders' Equity:                      |                               |                              
|Unrealized holding (loss)                  |                               |                              
|Common Stock, Surplus, Retained Earnings   |                               |                              
|                                           |                               |                              
|Total liabilities and stockholders' equity |                               |                              
|Interest spread                            |                               |                              
|Net Interest Margin as a                   |                               |                              
|Percentage of Average                      |                               |                              
|Earnings Assets - FTE                      |                               |                              

22

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Rate
/ Volume Analysis of Net Interest Income.The following schedule presents the dollar
amount of changes in interest income and expense for major components of earning assets
and interest-bearing liabilities, distinguishing between changes related to outstanding
balances and changes due to interest rates.

|                                   | For the 9 months ended | 
|---------------------------------- | ---------------------- | 
|                                  
|                                   |                        | 
|                                   |                        | 
|                                   |                        | 
|
|                                   |                        | 
|Short term investment              |                        | 
|Investment securities - taxable    |                        | 
|Investment securities - tax exempt |                        | 
|Loans, net of unearned income      |                        | 
|                                   |                        | 
|Total interest income              |                        | 
|                                   |                        | 
|Interest bearing deposits          |                        | 
|Federal funds borrowed             |                        | 
|FHLB advances                      |                        | 
|Trust preferred securities         |                        | 
|Other borrowings                   |                        | 
|                                   |                        | 
|Total interest expense             |                        | 
|                                   |                        | 
|Net interest income                |                        | 
|                                   |                        | 

Total
provision for loan losses was $1.6 million for the nine months ended September 30, 2006,
compared to $1.3 million for the same period in 2005. The higher level of charge-offs over
the past two years relative to the Companys history have adversely affected the
Companys historical loss ratios resulting in additional provision for loan losses.
Additionally, the increased non-performing loan portfolio has required additional. The
non-performing loan portfolio is discussed in more detail in the comparison of financial
condition section of this report.

The
level of the provision made in connection with the loans reflects the amount necessary to
maintain the allowance for loan losses at an adequate level, based upon Clarkston State
Banks current analysis of probable incurred losses in its loan portfolio, with
respect to loans held at September 30, 2006. Bank management is continuing to evaluate the
financial condition of the borrowers and the value of the collateral.

Non-interest
income decreased $143,000, or 20.2% for the nine months ended September 30, 2006 compared
to the same period in 2005. The largest portion of the change in non-interest income was
due to reduced fees on deposit accounts, which decreased $70,000, or 11.9% relative to the
same quarter in the prior year. This decrease is due in part to the third quarter of 2005
being higher than normal due to a small number of customers. Management at the Bank
subsidiaries has actively worked with the customers who were habitually overdrawing their
accounts to either help them better manage their funds or help them to find another bank.
Management feels that the reduction in credit risk is worth the reduction in deposit
(primarily NSF) fees. The effect of this was from the 4th quarter of 2005 through the current
quarter.  The Companys large checking account portfolio continues to generate fees, though a
review of these fees relative to our local market peers may result in the modification of
our fee structure. It is, however, anticipated that any modification of the fee structure
will result in increased fee income. Reduced gains on sales of mortgage loans also
contributed to the decrease in non-interest income, falling 53.2%, to $51,000 for the nine
months ended September 30, 2006 compared to $109,000 for the same period in 2005. Local
real estate market conditions are very poor contributing to very low purchase business,
and long-term rates are still above those seen in the preceding few years reducing chances
for refinance business. An experienced mortgage banking team has been assembled and
management hopes that as local market conditions stabilize that this volume will pick up
providing more opportunities for fee income.

23

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Non-interest
expense was $4.7 million for the nine months ended September 30, 2006, a $400,000 or 9.3%
increase over the nine months ended September 30, 2005 when non-interest expense was $4.3
million. The fact that HVSB is now operating as a fully staffed bank is the primary cause
of the increase in operating expenses, with the exception of professional fees, which
increased $98,000, or 33.0% over 2005, mostly due to expenses related to collecting on
troubled credits. Salary and benefit costs increased $200,000, or 9.1%. Occupancy expense
has increased $200,000, or 33.7% as a result of HVSB and additional real estate taxes
related to CSBs newest branch. The increases seen in advertising, supplies and
outside processing can be attributed to the addition of HVSB. As Huron Valley State Bank
and the mortgage operation gain critical mass, we anticipate our efficiency ratio to
improve to the levels more common throughout our history. The ratio for the nine months
ended September 30, 2006 increased to 85.5% from 81.9% at September 30, 2005.

Liquidity and Capital
Resources

The
Company obtained its initial equity capital in an initial public offering of its common
stock in November 1998. We have successfully grown through our first five years of
operation. In December 2003, we completed an offering of $4.0 million of cumulative
preferred securities (Trust Preferred Securities) to further support the
Companys growth.

In
July 2005, the Company completed a rights offering which allowed each holder of the
Companys common stock as of the June 6, 2005 record date to purchase 1 additional
share of common stock for every 4 shares held, while also offering an opportunity to
purchase a limited number of shares above their basic subscription right (the
over-subscription privilege). A total of 165,776 shares were purchased in the rights
offering (63.2% of the 262,192 shares offered). Of the 165,776 shares purchased, 127,183
shares were basic subscriptions and 38,593 shares were over-subscriptions. The Company
received approximately $2,856,000 in net proceeds in connection with the rights offering,
which was used to purchase a majority interest in Huron Valley State Bank.

Also
in July 2005, 28,000 shares were sold to one investor through the community offering
provisions of the rights offering. These shares were sold at $18.00, netting the Company
$504,000.

Management
believes that its current capital will provide us with adequate capital to support our
expected level of deposit and loan growth and to otherwise meet our capital requirements
for the next year.

24

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Capital Resources at
September 30, 2006 (in thousands)

|                                   | Tier 1
Leverage
Ratio | Tier 1
Capital Ratio | Total Risk-Based
Capital Ratio
|---------------------------------- | --------------------- | -------------------- | ------------------------------
|                                   |                       |                      |                               
|                                   |                       |                      |                               
|Minimum regulatory requirement for |                       |                     
|Capital adequacy                   |                       |                      |                               
|Well capitalized regulatory level  |                       |                      |                               
|CSB                                |                       |                      |                               
|HVSB                               |                       |                      |                               
|Consolidated                       |                       |                      |                               

The following  table
shows the dollar amounts by which the Company's  capital (on a consolidated  basis)
exceeds current regulatory requirements on a dollar-enumerated basis:

|                                         | Tier 1
Leverage | Tier 1
Capital | Total
Risk-Based
Capital
|---------------------------------------- | --------------- | -------------- | ------------------------
|                                         |                 |                |                         
|                                        
|                                         |                 |                |                         
|Capital balances at September 30, 2006   |                 |               
|Required regulatory capital              |                 |                | $                       
|Capital in excess of regulatory minimums |                 |                |                         
|                                         |                 |                |                         
|Actual capital balances                  |                 |                | $                       
|                                         |                 |                |                         

The
liquidity of a financial institution reflects its ability to provide funds to meet loan
requests, to accommodate possible outflows of deposits and to take advantage of interest
rate market opportunities. Our sources of liquidity include our borrowing capacity with
the Federal Home Loan Bank, loan payments by our borrowers, maturity and sales of our
securities available for sale, growth of our deposits and deposit equivalents and various
capital resources. Liquidity management involves the ability to meet the cash flow
requirements of our customers. Our customers may be either borrowers with credit needs or
depositors wanting to withdraw funds. We believe our liquidity position is sufficient to
meet these needs.

As indicated by the consolidated
statement of cash flows for the nine months ended September 30, 2006, operating activities
generated $1.4 million. Normal operations were the primary generator of cash in the
current year, notwithstanding the large provision for loan loss. In addition, deposit
generation, federal funds purchased and security sales provided $20.6 million, $3.5
million and $4.5 million in cash to our operation, respectively. The primary uses of funds
in the current year were loan fundings of $20.5 million, purchases of securities of $3.2
million and the purchase of our corporate office location of $1.0 million.

25

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# Item 3 CONTROLS AND
PROCEDURES

| | (a) | Evaluation of Disclosure Controls and Procedures. The Companys
               Chief Executive Officer and Chief Financial Officer, after evaluating the
               effectiveness of the Company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
               Companys disclosure controls and procedures were adequate and effective to
               ensure that material information relating to the Company would be made known to
               them by others within the Company, 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 Companys internal control over financial
               reporting that have materially affected or are reasonably likely to materially
               affect the Companys internal control over financial reporting.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

26

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# PART II  OTHER
INFORMATION

# Item 1.     Legal
Proceedings.

From
time to time, we may be involved in various legal proceedings that are incidental to our
business. In our opinion, we are not a party to any current legal proceedings that are
material to our financial condition, either individually or in the aggregate.

# Item 1A.     Risk Factors

As
of September 30, 2006, there have been no material changes in the discussion pertaining to
risk factors as disclosed in the Companys Form 10-K for the year ended
December 31, 2005.

# Item 2.     Changes in
Securities and Use of Proceeds.

None.

# Item 3.     Defaults Upon
Senior Securities.

None.

# Item 4.     Submission of Matters
to a Vote of Securities Holders

None.

# Item 5.     Other
Information.

None.

# Item 6.     Exhibits.

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 | 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 | 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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SIGNATURES

In
accordance with the requirements of the Securities Exchange Act of 1934, as amended, the
Registrant has duly caused this Quarterly Report on Form 10-QSB for the quarter ended
September 30, 2006, to be signed on its behalf by the undersigned, thereunto duly
authorized.

| |  | CLARKSTON FINANCIAL CORPORATION/s/ Edwin L. Adler
Edwin L. AdlerChairman of the Board and Chief Executive Officer
| |  | -------------------------------------------------------------------------------------------------------------------------------

| |  | /s/ James W. Distelrath
James W. DistelrathChief Financial Officer
| |  | --------------------------------------------------------------------------------

DATE:     November 13,
 2006

28

---



EXHIBIT LIST

| | 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