# UNITED STATES SECURITIES AND
EXCHANGE COMMISSION Washington, D.C. 20549 _________________

# FORM 10-Q

[X]     QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934

# For the quarterly
period ended June 30, 2007

or

[__]     TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934_________________

# Commission File
#000-30521

PAVILION BANCORP,
INC. (Exact name of
registrant as specified in its charter)

|Michigan
(State or Other Jurisdiction of
Incorporation or Organization) | 38-3088340
(I.R.S. EmployerIdentification No.)
|----------------------------------------------------------------------- | ----------------------------------------------

135 East Maumee
Street, Adrian, Michigan 49221(Address of Principal
Executive Offices, including Zip Code)

Registrants
telephone number, including area code:(517) 265-5144, Fax (517) 265-3926

Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for shorter periods
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 large accelerated filer, an accelerated filer, or a non-accelerated filer.
See definition of accelerated filer and large accelerated filer (in Rule 12b-2
of the Exchange Act). (Check one:)

Large Accelerated Filer
[__]     Accelerated Filer [__]     Non-Accelerated Filer  [ X ]

Indicate by check mark whether the
registrant is a shell company (as defined in Rule 126-2 of the Exchange Act).

Yes [__]       No [ X ]

As of August 13, 2007 there were
725,957 outstanding shares of the registrants common stock, no par value.

Page 1

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# CROSS REFERENCE TABLE

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|Item 6.       |             |         
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|Signatures    |             |         
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|Exhibit Index |             |         

Page 2

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REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM

Shareholders and Board of DirectorsPavilion
Bancorp, Inc.Adrian, Michigan

We have reviewed the condensed
consolidated balance sheet of Pavilion Bancorp, Inc. (the Corporation) as of
June 30, 2007, and the related condensed consolidated statements of income,
changes in shareholders equity, and cash flows for the three and six month periods ended June
30, 2007 and 2006, included in the Corporations SEC Form 10-Q. These interim
financial statements are the responsibility of the Corporations management.

We conducted our reviews in
accordance with the standards established by the Public Company Accounting Oversight Board
(United States). A review of interim financial information consists principally of
applying analytical procedures to financial data and making inquiries of persons
responsible for financial and accounting matters. It is substantially less in scope than
an audit conducted in accordance with auditing standards of the Public Company Accounting
Oversight Board, the objective of which is the expression of an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not
aware of any material modifications that should be made to the condensed consolidated
interim financial statements for them to be in conformity with generally accepted
accounting principles in the United States of America.

/s/ Plante & Moran,
PLLC

Auburn Hills, Michigan

Page 3

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# PART I FINANCIAL INFORMATION

ITEM 1- FINANCIAL
STATEMENTS

CONDENSED CONSOLIDATED
BALANCE SHEETS(000s omitted)

|                                                             | June 30,2007 | December 31,2006
|------------------------------------------------------------ | ------------ | ----------------
|                                                             |              |                 
|
|                                                             |              |                 
|ASSETS                                                       |              |                 
|Cash and due from banks                                      |              |                 
|Federal funds sold                                           |              |                 
|                                                             |              |                 
|Total cash and cash equivalents                              |              |                 
|                                                             |              |                 
|Securities available for sale                                |              |                 
|Federal Home Loan Bank, Freddie Mac, FNMA stock              |              |                 
|Federal Reserve Bank stock                                   |              |                 
|Loans held for sale                                          |              |                 
|Loans receivable, net of allowance for loan and lease losses |              |                 
|Premises and equipment, net                                  |              |                 
|Accrued interest receivable                                  |              |                 
|Mortgage servicing rights                                    |              |                 
|Other assets                                                 |              |                 
|                                                             |              |                 
|                                                             |              |                 
|Total assets                                                 |              |                 
|                                                             |              |                 
|                                                             |              |                 
|LIABILITIES AND SHAREHOLDERS' EQUITY                         |              |                 
|Deposits                                                     |              |                 
|Noninterest bearing                                          |              |                 
|Interest bearing                                             |              |                 
|                                                             |              |                 
|Total deposits                                               |              |                 
|                                                             |              |                 
|Federal funds purchased                                      |              |                 
|Repurchase agreements                                        |              |                 
|Federal Home Loan Bank advances                              |              |                 
|Accrued interest payable                                     |              |                 
|Other liabilities                                            |              |                 
|Common stock in ESOP subject to repurchase obligation        |              |                 
|                                                             |              |                 
|Total liabilities                                            |              |                 
|                                                             |              |                 
|Shareholders' equity                                         |              |                 
|Common stock and paid-in capital, no par value: shares       |              |                 
|issued and and outstanding: 725,935 at June 30, 2007;        |              |                 
|725,206 at December 31, 2006                                 |              |                 
|Retained earnings                                            |              |                 
|Accumulated other comprehensive loss                         |              |                 
|                                                             |              |                 
|Total shareholders' equity                                   |              |                 
|                                                             |              |                 
|                                                             |              |                 
|Total liabilities and shareholders' equity                   |              |                 
|                                                             |              |                 

---

See accompanying notes
to the condensed consolidated financial statements

Page 4

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CONDENSED CONSOLIDATED
STATEMENTS OF INCOME (unaudited)(000s
omitted, except per share data)

|                                                    | Three months endedJune 30, | Six  months endedJune 30,
|--------------------------------------------------- | -------------------------- | -------------------------
|                                                    |                            |                          
|                                                    |                            |                          
|                                                    |                            |                          
|Interest and dividend income                        |                            |                          
|Loans receivable, including fees                    |                            |                          
|Debt securities:                                    |                            |                          
|Taxable                                             |                            |                          
|Tax - exempt                                        |                            |                          
|Dividend income                                     |                            |                          
|Federal funds sold and other                        |                            |                          
|                                                    |                            |                          
|Total interest and dividend income                  |                            |                          
|                                                    |                            |                          
|Interest expense                                    |                            |                          
|Deposits                                            |                            |                          
|Subordinated debentures                             |                            |                          
|Other borrowed funds                                |                            |                          
|                                                    |                            |                          
|Total interest expense                              |                            |                          
|                                                    |                            |                          
|                                                    |                            |                          
|Net interest income                                 |                            |                          
|                                                    |                            |                          
|Provision for loan losses                           |                            |                          
|                                                    |                            |                          
|                                                    |                            |                          
|Net interest income after provision for loan losses |                            |                          
|                                                    |                            |                          
|Noninterest income                                  |                            |                          
|Service charges and fees                            |                            |                          
|Net gain on sale of loans                           |                            |                          
|Loan servicing fees, net of amortization            |                            |                          
|Other income (loss)                                 |                            |                          
|                                                    |                            |                          
|                                                    |                            |                          
|Noninterest expense                                 |                            |                          
|Compensation and employee benefits                  |                            |                          
|Occupancy and equipment                             |                            |                          
|Professional services                               |                            |                          
|Marketing                                           |                            |                          
|Outside service fees                                |                            |                          
|Postage and delivery services                       |                            |                          
|Director and shareholders                           |                            |                          
|Loan and collection                                 |                            |                          
|State taxes                                         |                            |                          
|Other                                               |                            |                          
|                                                    |                            |                          
|                                                    |                            |                          
|                                                    |                            |                          
|Income before  income taxes                         |                            |                          
|Income taxes                                        |                            |                          
|                                                    |                            |                          
|Net income                                          |                            |                          
|                                                    |                            |                          
|                                                    |                            |                          
|Net earnings per share                              |                            |                          
|Basic                                               |                            |                          
|                                                    |                            |                          
|Diluted                                             |                            |                          
|                                                    |                            |                          
|Dividends per share                                 |                            |                          
|                                                    |                            |                          

---

See accompanying notes
to condensed consolidated financial statements

Page 5

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# PAVILION BANCORP, INC.CONDENSED CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY (unaudited) For the periods ended June
30, 2006 and 2007

|Common
 Stock 
Paid-In
Capital               | Retained
Earnings | Accumulated  
Other
Comprehensive
Income/(Loss) | Total        
Shareholders'
Equity
|-------------------------------------------- | ----------------- | ----------------------------------------------- | ----------------------------------
|                                             |                   |                                                 |                                   
|Balance January 1, 2006                      |                   |                                                 | $                                 
|Comprehensive income:                        |                   |                                                
|Net income                                   |                   |                                                 |                                   
|Unrealized gain on securities                |                   |                                                
|available for sale                           |                   |                                                 |                                   
|Tax effect                                   |                   |                                                 |                                   
|                                             |                   |                                                 |                                   
|Total other comprehensive loss               |                   |                                                 |                                   
|                                             |                   |                                                 |                                   
|Total comprehensive income                   |                   |                                                 |                                   
|                                             |                   |                                                
|Change in common stock subject to repurchase |                   |                                                 |                                   
|Stock option expense                         |                   |                                                 |                                   
|Stock options exercised                      |                   |                                                 |                                   
|Cash dividends - $.48 per share              |                   |                                                 |                                   
|                                             |                   |                                                 |                                   
|Balance June 30, 2006                        |                   |                                                 | $                                 
|                                             |                   |                                                 |                                   
|                                             |                   |                                                
|Balance January 1, 2007                      |                   |                                                 | $                                 
|Comprehensive income:                        |                   |                                                
|Net income                                   |                   |                                                 |                                   
|Unrealized gain on securities                |                   |                                                
|available for sale                           |                   |                                                 |                                   
|Tax effect                                   |                   |                                                 |                                   
|                                             |                   |                                                 |                                   
|Total other comprehensive income             |                   |                                                 |                                   
|                                             |                   |                                                 |                                   
|Total comprehensive income                   |                   |                                                 |                                   
|                                             |                   |                                                
|Change in common stock subject to repurchase |                   |                                                 |                                   
|Stock option expense                         |                   |                                                 |                                   
|Stock options exercised                      |                   |                                                 |                                   
|Cash dividends - $.51 per share              |                   |                                                 |                                   
|                                             |                   |                                                 |                                   
|Balance June 30, 2007                        |                   |                                                 | $                                 
|                                             |                   |                                                 |                                   

---

See accompanying notes
to the condensed consolidated financial statements

Page 6

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CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS (unaudited)(000s omitted)

|                                                        | Six
months endedJune 30,
|------------------------------------------------------- | ------------------------
|                                                        |                         
|                                                       
|                                                        |                         
|Cash Flows from operating activities                    |                         
|Net income                                              |                         
|Adjustments to reconcile net income to                  |                         
|net cash from operating activities                      |                         
|Depreciation                                            |                         
|Stock option expense                                    |                         
|Provision for loan losses                               |                         
|Amortization on securities available for sale           |                         
|Gain on disposal of assets                              |                         
|Loss on sales of securities available for sale          |                         
|Amortization of mortgage servicing rights               |                         
|Origination of mortgage loans held for sale             |                         
|Proceeds from sales of mortgage loans held for sale     |                         
|Net gains on sale of mortgage loans                     |                         
|Net change in:                                          |                         
|Deferred loan origination fees                          |                         
|Accrued interest receivable                             |                         
|Other assets                                            |                         
|Accrued interest payable                                |                         
|Other liabilities                                       |                         
|                                                        |                         
|Net cash provided by operating activities               |                         
|                                                        |                         
|                                                        |                         
|Cash flows from investing activities                    |                         
|Securities available for sale:                          |                         
|Maturities, calls and principal payments                |                         
|Sales of securities available for sale                  |                         
|Purchases                                               |                         
|Purchase of Federal Home Loan Bank stock                |                         
|Proceeds from the disposition of premises and equipment |                         
|Net premises and equipment expenditures                 |                         
|Net decrease (increase) in loans                        |                         
|Recoveries on loans charged-off                         |                         
|                                                        |                         
|Net cash used in investing activities                   |                         
|                                                        |                         
|                                                        |                         
|Cash flows from financing activities                    |                         
|Net change in deposits                                  |                         
|Net change in short term borrowings                     |                         
|Proceeds from Federal Home Loan Bank advances           |                         
|Repayments of Federal Home Loan Bank advances           |                         
|Net Change in Common Stock ESOP                         |                         
|Stock options exercised                                 |                         
|Dividends paid                                          |                         
|                                                        |                         
|Net cash (used in) provided by financing activities     |                         
|                                                        |                         
|Net (decrease) increase in cash and cash equivalents    |                         
|Cash and cash equivalents at beginning of period        |                         
|                                                        |                         
|                                                        |                         
|Cash and cash equivalents at end of period              |                         
|                                                        |                         
|                                                        |                         
|Transfer from:                                          |                         
|Loans to foreclosed real estate                         |                         
|Cash paid for:                                          |                         
|Interest                                                |                         
|Income taxes                                            |                         

See accompanying notes
to condensed consolidated financial statements

Page 7

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NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

NOTE 1 
PRINCIPLES OF CONSOLIDATION AND NATURE OF OPERATIONS

The accounting and reporting policies
of Pavilion Bancorp, Inc. (the Company) and its wholly-owned subsidiary, Bank
of Lenawee (the Bank), conform to accounting principles generally accepted in
the United States of America and to general practice within the banking industry. The
following describes the significant accounting and reporting policies which are employed
in the preparation of the consolidated financial statements.

Basis of Financial
Statement PresentationThe accompanying unaudited
consolidated interim financial statements have been prepared in conformity with accounting
principles generally accepted in the United States of America and with the instructions to
Form 10-Q. Accordingly, certain information and disclosures required by the 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 Pavilion Bancorp, Inc. and the notes thereto
included in the Companys annual report on Form 10-K for the year ended December 31,
2006.

All adjustments, consisting of normal
recurring adjustments, which in the opinion of management are necessary for a fair
presentation of the results of operations and cash flows, have been made. The results of
operations for the six months ended June 30, 2007 are not necessarily indicative of the
results that may be expected for the year ended December 31, 2007.

Principles of Consolidation:
The consolidated financial statements include the accounts of the Company, the Bank and
the Banks wholly-owned subsidiaries, Pavilion Mortgage Company and Pavilion
Financial Services, Inc. All significant inter-company balances and transactions have been
eliminated in consolidation.

Nature of Operations and Industry
Segments: The Company is a one-bank holding company which conducts limited business
activities. The Bank performs the majority of business activities.

The Bank provides a full range of
banking services to individuals, agricultural businesses, commercial businesses and light
industries located in its service area. The Bank maintains a diversified loan portfolio,
including loans to individuals for home mortgages, automobiles and personal expenditures,
and loans to business enterprises for current operations and expansion. The Bank offers a
variety of deposit products, including checking accounts, savings accounts, money market
accounts, individual retirement accounts and certificates of deposit. Pavilion Mortgage
Company originates personal mortgage loans, and the majority of the mortgage loans
originated are sold on the secondary market. Pavilion Financial Services, Inc. owns an
interest in a title insurance agency. While the Company monitors the revenue stream of
various Company products and services, operations are managed and financial performance is
evaluated on a Company-wide basis. Accordingly, all of the Companys banking
operations are considered by management to be aggregated into one operating segment. The
principal markets for the Banks financial services are the communities in which the
Bank is located and the areas immediately surrounding these communities. The Bank serves
these markets through its offices located in Lenawee and Hillsdale Counties in Michigan.

Recent Accounting
Developments:

Establishing Standards
on Measuring Fair ValueIn September 2006, the FASB issued
SFAS 157, Fair Value Measurements. SFAS 157 defines fair value,
establishes a framework for measuring fair value in accordance with U.S. GAAP, and expands
disclosures about fair value measurements. The Statement clarifies that the exchange price
is the price in an orderly transaction between market participants to sell an asset or
transfer a liability at the measurement date. The statement emphasizes that fair value is
a market-based measurement and not an entity-specific measurement. The statement
establishes a fair value hierarchy used in fair value measurements and expands the
required disclosures of assets and liabilities measured at fair value. Management will be
required to adopt this statement beginning in 2008. The adoption of this standard is not
expected to have a material impact on the Companys financial condition, results of
operations or liquidity.

Page 8

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Fair Value OptionIn February 2007, the FASB issued
SFAS 159 The Fair Value Option for Financial Assets and FinancialLiabilities. SFAS 159 permits entities to choose to measure financial
instruments and certain other items at fair value that are not currently required to be
measured at fair value. The decision to elect the fair value option may be applied
instrument by instrument, is irrevocable and is applied to the entire instrument and not
to only specified risks, specific cash flows or portions of that instrument. An entity is
restricted to choosing the dates to elect the fair value option for an eligible item.
Adoption of SFAS 159 is effective for the Company on January 1, 2008. Early adoption is
permitted, provided the entity also elects to apply the provisions of SFAS 157
Fair Value Measurements. Management of the Company is currently
evaluating the potential impact of SFAS 159 on the Companys financial condition,
results of operations and liquidity.

NOTE 2  EARNINGS
PER SHARE

Earnings per common share have been
computed based on the following for the three and six months ended June 30, 2007 and 2006
(000s omitted, except antidilutive stock options):

|                                                                                                        | Three months endedJune 30 | Six  months endedJune 30
|------------------------------------------------------------------------------------------------------- | ------------------------- | ------------------------
|                                                                                                        |                           |                         
|                                                                                                        |                           |                         
|                                                                                                        |                           |                         
|Net income                                                                                              |                           |                         
|                                                                                                        |                           |                         
|Average number of common shares  outstanding  used to calculate basic earnings per share                |                           |                         
|                                                                                                        |                           |                         
|Effect of dilutive options                                                                              |                           |                         
|                                                                                                        |                           |                         
|                                                                                                        |                           |                         
|Average  number  of  common  shares  outstanding  used  to  calculate diluted earnings per common share |                           |                         
|                                                                                                        |                           |                         
|                                                                                                        |                           |                         
|Number  of  antidilutive  stock  options  excluded  from the  diluted earnings per share computation    |                           |                         
|                                                                                                        |                           |                         

Page 9

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NOTE 3  LOANS
RECEIVABLE

Loans receivable consist of the
following (000s omitted):

|                                           | June 30,2007 | December 31,2006
|------------------------------------------ | ------------ | ----------------
|                                           |              |                 
|Commercial                                 |              |                 
|Agricultural                               |              |                 
|Residential mortgage                       |              |                 
|Residential construction                   |              |                 
|Home equity lines of credit                |              |                 
|Consumer                                   |              |                 
|                                           |              |                 
|                                           |              |                 
|Less:  allowance for loan and lease losses |              |                 
|                                           |              |                 
|Loans receivable, net                      |              |                 
|                                           |              |                 

Activity in the allowance for loan
and lease losses for the three and six months ended June 30, are as follows (000s
omitted):

|                               | Three months endedJune 30 | Six  months endedJune 30
|------------------------------ | ------------------------- | ------------------------
|                               |                           |                         
|                               |                           |                         
|                               |                           |                         
|Balance at beginning of period |                           |                         
|Charge-offs                    |                           |                         
|Recoveries                     |                           |                         
|Provision for loan losses      |                           |                         
|                               |                           |                         
|Balance at end of period       |                           |                         
|                               |                           |                         

NOTE 4  STANDBY
AND COMMERCIAL LETTERS OF CREDIT AND FINANCIAL GUARANTEES

The Bank 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, standby letters of credit, and commercial letters 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 Banks exposure to credit
loss is represented by the contractual amount of these commitments. The Bank follows the
same credit policies in making commitments as it does for on-balance-sheet instruments.

The total contractual amounts of
commercial and standby letters of credit and financial guarantees were $2.9 million
and $2.4 million at June 30, 2007 and December 31, 2006, respectively.

Page 10

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ITEM 2 
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This discussion provides information
about the consolidated financial condition and results of operations of the Company as of
June 30, 2007 and for the three and six month periods ended June 30, 2007 and 2006 and
should be read in conjunction with the Companys Condensed Consolidated Financial
Statements and the notes thereto, appearing in Part 1, Item 1 of this document.

Forward-Looking
StatementsThis discussion and analysis of
financial condition and results of operations and other sections of this Form 10-Q contain
forward looking statements that are based on managements beliefs, assumptions,
current expectations, estimates and projections about the financial services industry, the
economy and about the Company itself. Words such as anticipates,
believes, estimates, expects, forecasts,
foresee, intends, is likely, plans,
projects, variations of such words and similar expressions are intended to
identify such forward-looking statements. These statements are not guarantees of future
performance and involve certain risks, uncertainties and assumptions (Future
Factors) that are difficult to predict with regard to timing, extent, likelihood and
degree of occurrence. Therefore, actual results and outcomes may materially differ from
what may be expressed or forecast in such forward-lookingstatements. Furthermore,
the Company undertakes no obligation to update, amend or clarify forward-looking
statements, whether as a result of new information, future events or otherwise. Future
Factors include:

| |  | changes
in interest rates and interest rate relationships;
| | - | ----------------------------------------------------------

| |  | demand
for products and services;
| | - | ---------------------------------

| |  | the
degree of competition by traditional and non-traditional competitors;
| | - | -------------------------------------------------------------------------

| |  | strategic
decisions, such as decisions related to the opening of a new branch office;
| | - | -------------------------------------------------------------------------------------

| |  | changes
in banking regulations;
| | - | -------------------------------

| |  | changes
in tax laws;
| | - | --------------------

| |  | changes
in prices, levies and assessments;
| | - | ------------------------------------------

| |  | the
impact of technology, governmental and regulatory policy changes;
| | - | ---------------------------------------------------------------------

| |  | the
outcome of pending and future litigation and contingencies;
| | - | ---------------------------------------------------------------

| |  | trends
in customer behavior as well as their ability to repay loans; and
| | - | ------------------------------------------------------------------------

| |  | changes
in the national  and local  economies  and, in  particular,  the  Southeast  Michigan
 real estate market.
| | - | ------------------------------------------------------------------------------------------------------------------

These are representative of the
Future Factors that could cause a difference between an actual outcome and a
forward-looking statement.

Critical Accounting
PoliciesCertain of the Companys
accounting policies are important to the portrayal of the Companys financial
condition, since they require management to make difficult, complex or subjective
judgments, some of which may relate to matters that are inherently uncertain. Estimates
associated with these policies are susceptible to material changes as a result of changes
in facts and circumstances. Facts and circumstances which could affect these judgments
include, but without limitation, changes in interest rates, in the performance of the
economy or in the financial condition of borrowers. Management believes that its critical
accounting policies include determining the allowance for loan and lease losses,
determining the fair value of securities and other financial instruments, the valuation of
mortgage servicing rights and deferred tax and tax provision estimates. The Companys
critical accounting policies are described in the financial section of its 2006 Annual
Report.

Financial OverviewTotal assets decreased by $3.8
million or 1.3% from December 31, 2006 to June 30, 2007. Cash and cash equivalents
decreased by $4.7 million or 27.1%. Loans receivable, net of the allowance for loan and
lease losses, decreased by $715,000 or 0.3% from December 31, 2006 to June 30, 2007.
Investment securities available for sale decreased $508,000 or 2.8% from December 31, 2006
to June 30, 2007. Total deposits decreased by $4.1 million or 1.8% from December 31, 2006
to June 30, 2007. Borrowed funds decreased $164,000 or 0.7%. Basic earnings per share
(EPS) for the three and six months ended June 30, 2007 were $0.98 per share
and $1.64 per share, respectively. For the same periods in 2006 basic EPS was $0.95 and
$1.49, respectively. Fully diluted EPS for the three and six months ended June 30, 2007
were $0.98 per share and $1.64 per share, respectively. For the same periods in 2006 fully
diluted EPS were $0.94 and $1.48 per share, respectively.

Page 11

---



FINANCIAL CONDITION

InvestmentsTotal investments securities
available-for-sale decreased $508,000 or 2.8% to $17.3 million at June 30, 2007, compared
to $17.8 million at December 31, 2006. The decrease in investment securities is primarily
attributable to maturities and repayments during the first half of 2007.  Equity investment in the Federal
Home Loan Bank of Indianapolis (FHLBI) remained unchanged at $2.1 million at
June 30, 2007 and December 31, 2006. Investment in Federal Reserve Bank (FRB)
stock also remained unchanged at $630,000 as of June 30, 2007 and December 31, 2006. The
Company had no held-to-maturity securities as of June 30, 2007 and December 31, 2006.

LoansThe following table summarizes the
Banks loan portfolio and loan mix at June 30, 2007 and December 31, 2006:

|Consolidated Loans
Outstanding            
|------------------------------------------
|(000s omitted)                           
|                                          
|                                          
|                                          
|Commercial                                
|Agricultural                              
|Residential mortgage                      
|Residential construction                  
|Home equity lines of credit               
|Consumer                                  
|                                          
|Total loans receivable                    
|Less:  allowance for loan and lease losses
|                                          
|Loans receivable, net                     
|                                          

During the first six months of 2007,
loans, net of allowance for loan and lease losses, decreased $715,000, or 0.3%. The mix of
the loan portfolio continues to remain relatively unchanged from the prior year. The
commercial portfolio decreased by $426,000 or 0.3% and the agriculture portfolio increased
by $4.4 million or 11.0% from December 31, 2006 to June 2007. The increase in the
agricultural portfolio is consistent with the increasing demand for beans and corn by the ethanol and bio-diesel
producers within the Bank's market area.  The residential mortgage loan portfolio decreased by $2.0
million or 6.7% due to decreasing loan demand as a result of increasing rates and the
slowing of the real estate market within the Banks areas of operation. The
residential construction loan portfolio decreased approximately $515,000, or 4.7%, as some
of the more recent loans have not fully drawn and reduced building activity. Home
equity lines of credit decreased approximately $1.6 million, or 8.4%, as customers look to
move from variable rate home equity lines to more fixed rate mortgage products. Consumer
loans decreased slightly in the first six months of 2007 as well, as repayments outpaced
demand for new loans.

Off-Balance Sheet ItemsThe following is a summary of
outstanding commitments by the Bank to grant loans, unfunded commitments under lines of
credit and letters of credit at June 30, 2007 and December 31, 2006:

|June 30, 2007                               | December 31, 2006
|------------------------------------------- | -----------------
|                                            |                  
|Loan Category:                              |                  
|Commitments to originate or refinance loans |                  
|Unfunded commitments under lines of credit  |                  
|Commercial and standby letters of credit    |                  
|                                            |                  
|Total                                       |                  
|                                            |                  

Page 12

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Outstanding commitments to originate
or refinance loans increased $1.6 million, or 19.4%, to $10.0 million at June 30, 2007
from $8.4 million at December 31, 2006. This increase in commitments to originate or
refinance loans is due primarily to continued business development activities. Unfunded
commitments under lines of credit decreased $1.3 million or 2.2% to $56.7 million as of
June 30, 2007 from $58.0 million at December 31, 2006. This decrease is primarily due to
increased draw activity on existing lines of credit, which has reduced the amount
available for draw. Commercial and standby letters of credit have increased $455,000 in
the first six months of 2007.

Credit QualityThe Bank continues to monitor the
asset quality of the loan portfolio utilizing its Chief Credit Officer who, combined with
external loan review specialists, periodically submits reports to the Chief Executive
Officer, Chief Financial Officer, Chief Lending Officer and to the Board of Directors
regarding the credit quality of the loan portfolio. This review is independent of the
loan approval process. Also, management continues to monitor delinquencies, nonperforming
assets and potential problem loans to assess the continued quality of the Banks loan
portfolios.

Nonperforming loans are comprised of
(1) loans accounted for on a nonaccrual basis, (2) loans contractually past due 90 days or
more as to interest or principal payments (but not included in the nonaccrual loans in (1)
above) and (3) other nonperforming loans including real estate held for redemption, which
is classified within (1) or (2) above dependent upon the respective collateralized
position. The aggregate amount of nonperforming loans, in thousands of dollars, is shown
in the table below. The Banks classifications of nonperforming loans are generally
consistent with loans identified as impaired.  Management believes that the non performing
loans are either adequately secured by collateral or that an appropriate reserve amount has
been established to offset potential losses.

The chart below shows the composition
of the Banks nonperforming assets by type as of June 30, 2007 and 2006, and December
31, 2006.

|June 30,2007                                                                | December 31,2006 | June 30,2006
|--------------------------------------------------------------------------- | ---------------- | ------------
|                                                                            |                  |             
|Non-accruing loans past due                                                 |                  |             
|Loans past due 90 days or more still accruing                               |                  |             
|                                                                            |                  |             
|Total nonperforming loans                                                   |                  |             
|Other real estate                                                           |                  |             
|                                                                            |                  |             
|Total nonperforming assets                                                  |                  |             
|                                                                            |                  |             
|                                                                            |                  |             
|Nonperforming loans as a percent of total loans                             |                  |             
|Nonperforming assets as a percent of total assets                           |                  |             
|Nonperforming loans as a percent of the allowance for loan and lease losses |                  |             

At June 30, 2007, total nonperforming
loans increased by $424,000 or 12.5% from December 31, 2006. The Bank is closely
monitoring and managing nonperforming loans to determine and implement corrective action
to improve the quality of nonperforming assets. Non-accruing loans increased $700,000 to
$3.4 million as of June 30, 2007 up from $2.7 million as of December 31, 2006. The
increase was primarily in residential real estate loans. Loans past due 90 days and still
accruing are loans that management considers to be adequately collateralized to support
continued accrual of interest. Nonperforming assets as a percentage of total assets have
increased to 1.36% at June 30, 2007 compared to 1.21% at December 31, 2006. The increase
relates primarily to the increase in non-accruing loans discussed above. Nonperforming
loans as a percentage of the allowance for loan and lease losses increased to 128.75% as
of June 30, 2007 compared to 120.55% and 99.96% as of December 31, 2006 and June 30, 2006,
respectively. As discussed above, the increase in nonperforming loans is primarily in
residential real estate loans. Approximately $578,000 of the nonperforming loans at June
30, 2007 represent agricultural loans that are fully guaranteed by the Farm Service
Agency. An additional $315,000 of the non-performing loans is partially guaranteed (75%)
by the Small Business Association. Management believes that the non performing loans are either
adequately secured by collateral or that an appropriate reserve amount has been established
to offset potential losses.

Page 13

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The activity in the allowance for
loan and lease losses for the three months ended June 30, 2007 and 2006 and the six months
ended June 30, 2007 and 2006 is presented in the following table:

|                          | Three months ended June 30 | Six  months ended June 30
|------------------------- | -------------------------- | -------------------------
|                          |                            |                          
|                          |                            |                          
|                          |                            |                          
|Beginning balance         |                            |                          
|Loan charge-offs          |                            |                          
|Loan recoveries           |                            |                          
|                          |                            |                          
|Net loan charge-offs      |                            |                          
|Provision for loan losses |                            |                          
|                          |                            |                          
|                          |                            |                          
|Ending balance            |                            |                          
|                          |                            |                          
|Net charge-off rate       |                            |                          
|                          |                            |                          

The Bank increased its funding of
provision for loan losses during the first half of 2007 over the same period in 2006 based
on managements assessment of the overall credit quality of the loan portfolio and
the adequacy of the loan loss reserve. The total loan portfolio increased to $245.6
million as of June 30, 2007 compared to $243.7 million outstanding as of June 30, 2006.
Management is continuing to monitor credits with the increase in the level of
non-performing loans. Management discusses problem credits in periodic loan committee
meetings. Problem credits are also monitored by the Board of Directors during monthly
reviews of the Banks Watch List. Management is actively calling on past due loans
before the loans reach 30 days past due. Management is also proactively calling on
troubled industry clients, including construction contractors, manufacturing clients, etc.

The Bank maintains an allowance for
loan and lease losses believed to be sufficient to absorb estimated probable credit losses
inherent in the loan portfolio, recognizing the imprecision inherent in the process of
estimating credit losses. The allowance represents managements estimate of probable
net loan charge-offs in the portfolio at each balance sheet date. The allowance contains
provisions for probable losses that have been identified relating to specific borrowing
relationships as well as probable losses believed to be inherent in the loan portfolio
without specific identification of loan relationships.

The amount of provision for loan
losses recognized by the Bank is based on managements evaluation as to the amounts
required to maintain an allowance adequate to provide for potential losses inherent in the
loan portfolio. The level of the allowance is dependent upon the total amount of
classified loans, past due and non-performing loans, historical charge-off experience,
general economic conditions and managements assessment of potential losses based
upon internal credit evaluation of the loan portfolio and particular loans. In determining
the provision for loan losses, management first determines the estimated allowance
required for any specifically identified classified loans. Management then estimates
potential charge-offs based on historical experience. Management also evaluates the
general loan portfolio for credit risk based upon, but not limited to, the criteria noted
above, and allocates an amount believed to be sufficient to cover estimated loan
charge-offs inherent in the general loan portfolio. Management may then add, at its
discretion, an allocation amount to adjust for current economic conditions, any additional
perceived credit risk in the portfolio and any other information that management considers
relevant.

Deposits and Borrowed
FundsTotal deposits decreased $4.1 million
or 12.1% during the first six months to $231.8 million at June 30, 2007 from $235.9
million at December 31, 2006. Noninterest-bearing deposits decreased $1.4 million, or 3.1%
to $44.9 million at June 30, 2007 from $46.3 million at December 31, 2006.
Interest-bearing deposits decreased $2.7 million, or 1.4% to $186.9 million at June 30,
2007 from $189.7 million at December 31, 2006. Specifically, certificates of deposit
(CDs) with balances of $100,000 and greater (Jumbo CDs) decreased
$1.1 million, or 2.9% to $71.1 million at June 30, 2007 from $72.2 million at December 31,
2006. The decrease in Jumbo CDs is attributable to a the Banks reduced
reliance on brokered deposits and public funds for providing its financing. Certificates
of Deposit with balances under $100,000 increased $3.4 million, or 7.8% to $46.6 million
at June 30, 2007 from $43.2 million at December 31, 2006. This increase is the result of
business development efforts within the local communities and the Banks expansion
into Hillsdale County during the first half of 2007. Other interest-bearing deposits,
including savings and NOW accounts, decreased $4.0 million, or 5.5% to $69.2 million at
June 30, 2007 from $73.2 million at December 31, 2006.

Page 14

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Borrowed funds decreased by $163,000,
or 1% to $25.0 million at June 30, 2007 from $25.2 million at December 31, 2006.
Management elected to not renew a $5.0 million repurchase agreement with CitiGroup that
matured in June 2007. The funding was replaced with an FHLBI loan.

CapitalDuring the first half of 2007, equity
capital increased by $880,000, reflecting current year
earnings as well as the exercise of stock options. The number of outstanding shares at
December 31, 2006 of 725,206 increased to 725,935 at June
30, 2007, as a result of exercise of stock options by the Banks Directors. The Bank
continues to maintain sufficient risk-based capital levels to remain categorized as
well-capitalized under federal regulatory requirements. Well
capitalized institutions are eligible for reduced FDIC premiums, and also enjoy
other reduced regulatory restrictions. Management monitors the capital levels of the
Company and the Bank to provide for current and future business opportunities.

Results of Operations

Net IncomeNet income for the three months ended
June 30, 2007 increased $21,000, or 3.0% to $716,000 compared to $695,000 for the same
period in 2006. Basic earnings per share (EPS) attributable to continuing
operations for the three months ended June 30, 2007 were $0.98 compared to $0.95 for the
same period in 2006. Diluted EPS for the three months ended June 30, 2007 were $0.98
compared to $0.94 for the same period in 2006.

Net income for the six months ended
June 30, 2007 increased $100,000, or 9.31% to $1.2 million compared to $1.1 million for the
same period in 2006. Basic earnings per share (EPS) attributable to continuing
operations for the six months ended June 30, 2007 were $1.64 compared to $1.49 for the
same period in 2006. Diluted EPS for the six months ended June 30, 2007 were $1.64
compared to $1.48 for the same period in 2006.

Page 15

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Net Interest MarginFollowing are the net interest margin
calculations for the three and six months ended June 30, 2007 and 2006:

|                                                            | Three months ended
|----------------------------------------------------------- | ------------------
|                                                           
|                                                            |                   
|(000s omitted)                                             |                   
|                                                            |                   
|Interest-earning assets:                                    |                   
|Loans receivable (1)                                        |                   
|Securities available for sale (3)                           |                   
|Federal funds sold                                          |                   
|Equity securities (2)                                       |                   
|Interest-earning balances with other financial institutions |                   
|                                                            |                   
|Total interest-earning assets                               |                   
|Noninterest-earning assets:                                 |                   
|Cash and due from financial institutions                    |                   
|Premises and equipment, net                                 |                   
|Other assets                                                |                   
|                                                            |                   
|Total assets                                                |                   
|                                                            |                   
|Interest-bearing liabilities:                               |                   
|Interest-bearing demand deposits                            |                   
|Savings deposits                                            |                   
|Time deposits                                               |                   
|Subordinated debentures                                     |                   
|Other borrowings                                            |                   
|                                                            |                   
|Total int.-bearing liabilities                              |                   
|Demand deposits                                             |                   
|Other liabilities                                           |                   
|                                                            |                   
|Total liabilities                                           |                   
|Shareholders' equity                                        |                   
|                                                            |                   
|Total liabilities and shareholders' equity                  |                   
|                                                            |                   
|Net interest income                                         |                   
|                                                            |                   
|Interest rate spread (4)                                    |                   
|                                                            |                   
|Net interest margin (5)                                     |                   
|                                                            |                   
|Ratio of interest-earning assets                            |                   
|to interest-bearing liabilities                             |                   
|                                                            |                   

Page 16

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|                                                            | Six months ended
|----------------------------------------------------------- | ----------------
|                                                           
|                                                            |                 
|(000s omitted)                                             |                 
|                                                            |                 
|Interest-earning assets:                                    |                 
|Loans receivable (1)                                        |                 
|Securities available for sale (3)                           |                 
|Federal funds sold                                          |                 
|Equity securities (2)                                       |                 
|Interest-earning balances with other financial institutions |                 
|                                                            |                 
|Total interest-earning assets                               |                 
|Noninterest-earning assets:                                 |                 
|Cash and due from financial institutions                    |                 
|Premises and equipment, net                                 |                 
|Other assets                                                |                 
|                                                            |                 
|Total assets                                                |                 
|                                                            |                 
|Interest-bearing liabilities:                               |                 
|Interest-bearing demand deposits                            |                 
|Savings deposits                                            |                 
|Time deposits                                               |                 
|Subordinated debentures                                     |                 
|Other borrowings                                            |                 
|                                                            |                 
|Total int.-bearing liabilities                              |                 
|Demand deposits                                             |                 
|Other liabilities                                           |                 
|                                                            |                 
|Total liabilities                                           |                 
|Shareholders' equity                                        |                 
|                                                            |                 
|Total liabilities and shareholders' equity                  |                 
|                                                            |                 
|Net interest income                                         |                 
|                                                            |                 
|Interest rate spread (4)                                    |                 
|                                                            |                 
|Net interest margin (5)                                     |                 
|                                                            |                 
|Ratio of interest-earning assets                            |                 
|to interest-bearing liabilities                             |                 
|                                                            |                 

|(1) | Non-accrual
loans and overdrafts are included in the average balances of loans.
|--- | -------------------------------------------------------------------------------

|(2) | Includes
Federal Home Loan Bank and Federal Reserve Bank stock.
|--- | ---------------------------------------------------------------

|(3) | Interest
          income on tax-exempt securities has not been adjusted to a taxable equivalent
          basis.
|--- | -----------------------------------------------------------------------------------------------------------------

|(4) | Interest
rate spread is the difference between rates of interest-earning assets           and
rates of interest paid on interest-bearing liabilities
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | Net interest margin is the net interest income divided by average
          interest-earning assets.
|--- | ----------------------------------------------------------------------------------------------------

The yield on interest-earning assets
increased for the quarter ended June 30, 2007 to 7.50% from 6.91% as compared to the same
period in the prior year. Much of the increase was due to increases in the yield in the
loan portfolio with the prime rate changes within the last twelve months. The yield on
loans receivable increased to 7.82% for the three months ended June 30, 2007 from 7.32%
for the same period in 2006. The commercial lending portfolio had the greatest increase in
yield as it is largely a variable rate portfolio followed by the consumer loan portfolio
which is also largely comprised of variable rate loans. The yield for the mortgage
portfolio increased as well for the three months ended June 30, 2007 when compared to the
same period in 2006.

Page 17

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The Companys interest rate
spread increased for the three months ended June 30, 2007 to 3.90% from 3.75% for the same
period in 2006. This increase is due to the increase in yield on earning assets outpacing
the increase on rates paid on interest-bearing liabilities. Rate increases within the
deposit categories were driven by increases in short-term interest rates as well as
competition within the local market to maintain and attract customers. The Company
benefited from repayment of the subordinated debentures in December 2006, which had a
weighted rate of 8.74% for the second quarter of 2006.

The yield on interest-earning assets
increased for the six months ended June 30, 2007 to 7.41% from 6.84% for the same period
in 2006. The increase primarily was in the yield on loans receivable which increased to
7.78% for the six months ended June 30, 2007 from 7.28% for the same period in 2006. As
indicated above, much of this increase was due to the increases to the prime lending rate
within the last twelve months.

The Companys interest rate
spread increased for the six months ended June 30, 2007 to 3.81% from 3.78% for the same
period in 2006. As discussed above, this increase is due primarily to the increase in
yield on earning assets outpacing the increase on the rates paid on interest-bearing
liabilities.

Noninterest Income
Total non-interest income increased
$10,000 or 1.2% to $856,000 for the three months ended June 30, 2007 compared to $846,000
for the same period in 2006. Service charges and fees increased $19,000 with the increase
in income related to merchant services. Net gains on sale of loans decreased by $95,000 or
29.5% to $227,000 from $322,000 for the same period in 2006, which was consistent with a
decrease in mortgage loan sales. Loan servicing fees, net of amortization, increased
$8,000 due to lower levels of amortization of the servicing asset in the second quarter of
2007 due in part to managements decision to increase the amortization time frame for
30-year mortgage servicing right assets to eight years from seven years in June 2007. The
decision was based upon an independent valuation of the Banks mortgage servicing
right assets that indicated that the amortization speed for the 30 year assets was
outpacing repayment and payoff speeds. Other income for the three months ended June 30,
2007 was $38,000, which is primarily comprised of a $32,000 gain on sale of a property
that was previously held as other real estate by the Bank.

For the six months ended June 30,
2007, total non-interest income declined 0.7% to $1.54 million, compared to $1.55 million
for the same period in 2006. The most significant decrease was in the net gains on sale of
loans, which decreased 32.33% or $182,000 due to a reduction in mortgage volume. Mortgage
loan production has been reduced due to the continued rise in rates for the mortgage loan
products in 2007 and a slowing of the local real estate market. Loan servicing fees, net
of amortization decreased $6,000 for the first half of the year due to increased levels
of amortization of the mortgage servicing asset in the first quarter of 2007 compared to
the first quarter of 2006. Service charges and fees increased $95,000 for the first half
of 2007 compared to the same period in 2006 with the increase in income from merchant
services. Other income for the six months ended June 30, 2007 was $43,000, which is
primarily comprised of a $32,000 gain on sale of a property that was previously held as
other real estate by the Bank.

Noninterest Expense
For the three months ended June 30,
2007, total non-interest expense increased $61,000 or 2.3% to $2.75 million from $2.68
million for the same period in 2006. The most significant increase was in occupancy and
equipment expense, which increased $81,000 or 22.3% to $445,000 from $364,000 for the same
period in 2006. The increase is primarily due to costs associated with the opening of new
branches in Hillsdale, Michigan during the first quarter of 2007 and Tecumseh, Michigan
during the second quarter of 2007 Compensation and employee benefits expense for the three
months ended June 30, 2007 decreased by $25,000 or 1.6% to $1.5 million compared to $1.6
million for the same period in 2006. The reduction can be primarily attributed to
increased efficiencies that have allowed management to elect to not fill some open
positions. Professional services expense decreased by $68,000 or 48.6 % to $72,000 down
from $140,000 for the same period in 2006. The decrease is the result of the decision to
bring the Sarbanes-Oxley compliance project in-house and the reduced reliance on outside
consultants by management. Marketing expense increased by $19,000 or 52.8% during the
three months ended June 30, 2007 to $55,000 from $36,000 for the same period in 2006. The
increase can be attributed to additional marketing efforts necessitated by the opening of
the new branches previously mentioned. State taxes increased by $19,000 or 54.8% to
$42,000 for the three month period ended June 30, 2007 compared to $23,000 for the same
period in 2006.  $10,000 of the increase can be attributed to state taxes due in Ohio
and Indiana.  Other expense increased by $19,000 or 19.0% to
$119,000 during the three months ended June 30, 2007.

Page 18

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Noninterest expense for the six
months ended June 30, 2007 was $5.5 million, compared to $5.8 million for the same period
in 2006, a decrease of approximately $211,000 or 3.7%. Compensation and employee benefits
decreased $307,000 or 8.9%, to $3.2 million for the six months ended June 30, 2007
compared to $3.5 million for the same period in 2006. The reduction in compensation and
benefit expense for can be attributed to improved efficiencies realized by the
organization allowing for the same amount of work to be accomplished by fewer employees
and a 2006 Reduction-in-Force plan (RIF), in which the Bank eliminated various
staff positions in an effort to improve the Banks operational efficiency. In certain
circumstances, severance packages were provided to employees affected by the RIF, which
affected compensation cost. Occupancy and equipment costs increased by $158,000 or 21.8%
for the six months ended June 30, 2007 increasing to $883,000 from $725,000 for the same
period in 2006. The increased costs can be primarily attributed to the Banks opening
of two new branches in Tecumseh and Hillsdale. The costs for professional services
declined by $116,000 for the six months ended June 30, 2007 to $157,000, in part due to
managements reduced reliance on third-party consultants. State taxes increased by $57,000
or 103.6% to $112,000 for the six month period ended June 30, 2007 compared to $55,000 for
the same period in 2006, $24,000 of the increase can be attributed to state taxes due in
Ohio and Indiana.  Other expense increased by $43,000 or 22.6% to $233,000 during the
three months ended June 30, 2007.  The increase can be partially attributed
to a $12,000 increase in scheduled donations over the same time period in 2006.

Federal Income TaxThe provision for federal income tax
was $328,000 for the three month period ended June 30, 2007, compared to $317,000 for the
same period in 2006. The increase in the income tax provision reflects the increase in net
income generated in the three months ended June 30, 2007 versus the same period in 2006
and the Banks decreased holding of tax-exempt municipal bonds. The provision for
federal income tax was $575,000 for the six month period ended June 30, 2007, compared to
$486,000 for the same period in 2006. The cause of the increase in income tax provision
for the six months ended June 30, 2007 is substantially the same as noted above.

Liquidity and Capital
ResourcesLiquidity is the ability to meet
current and future financial obligations, including the ability to have funds available to
respond to the needs of depositors and borrowers as well as maintaining the flexibility to
take advantage of investment opportunities. The Companys primary sources of funds
consist of deposit inflows, loan repayments, maturities and sales of investment securities
and borrowings from the FHLBI. While maturities and scheduled amortization of loans and
securities are predictable sources of funds, deposit flows and mortgage prepayments are
greatly influenced by general interest rates, economic conditions and competition.

Liquidity management is both a daily
and long-term responsibility of management. The Company adjusts its investments in liquid
assets based upon managements assessment of (1) expected loan demand, (2) expected
deposit flows, (3) yields available on interest-earning deposits and securities, and (4)
the objectives of its asset/liability management program. Excess liquid assets are
invested generally in interest-earning overnight deposits and short- and immediate-term
U.S. Government and agency obligations.

The Companys most liquid assets
are cash and short-term investments. The levels of these assets are dependent on the
Companys operating, financing, lending and investing activities during any given
period. At June 30, 2007, cash and short-term investments totaled $12.5 million and
securities classified as available for sale totaled $17.3 million. However,
available-for-sale securities with a market value of $3.0 million were pledged as
collateral for Treasury Tax & Loan accounts and repurchase agreements and therefore
were not available for liquidity needs. The amortized cost of the available-for-sale
securities was more than the fair value at quarter end, primarily as the result of
increasing interest rates, which resulted in an unrealized loss of $81,000 within the
investment portfolio. This unrealized loss, however, is normal given interest rate changes
and does not represent a permanent impairment of value to the investment portfolio. The
unrealized losses were 5% or less of their respective amortized cost basis. Management
does not consider such an unrealized loss a material risk to the Companys capital.
Management does not believe the sale of any of the Companys securities would
materially affect the overall financial condition of the Company. Management believes it
has sufficient liquidity and sources to meet its obligations without the sale of
securities.

Page 19

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Financing activities consist
primarily of activity in deposit accounts, overnight borrowings from our correspondent
banks and FHLBI advances. The Bank experienced a net decrease in total deposits of $4.1
million for the six months ended June 30, 2007 from December 31, 2006. Deposit flows are
affected by the overall level of interest rates, products offered by the Bank and its
local competitors, as well as other factors.

The Banks borrowing position
remained relatively unchanged during the first half of 2007 from $25.1 million at December
31, 2006 to $25.0 million as of June 30, 2007. As of June 30, 2007, the Bank had the
ability to borrow a total of $14.3 million from the FHLBI based upon the amount of
collateral pledged, of which $12.7 million was outstanding at that date. In addition to
the FHLBI, the Bank had available borrowings on a line-of-credit of $10 million from a
correspondent bank, which had only $11,000 available to draw as of June 30, 2007. The Bank
also had outstanding advances on repurchase agreements totaling $2.4 million at June 30,
2007, based on the collateral pledged. Additional advances could be obtained through
repurchase agreements provided additional collateral is pledged. Repurchase agreements are
terminable upon demand.

At June 30, 2007, the Bank had
outstanding commitments to fund loans of $10.0 million, of which $6.0 million had fixed
interest rates. The Bank believes that it will have sufficient funds available to meet its
current loan commitments. Loan commitments, in recent periods, have been funded through
liquidity and through FHLBI borrowings. Based on the foregoing, the Company considers its
liquidity and capital resources sufficient to meets its outstanding short-term and
long-term needs.

The Company is subject to various
regulatory capital requirements administered by the Federal Deposit Insurance Corporation
including a risk-based capital measure. The risk-based capital guidelines include both a
definition of capital and a framework for calculating risk-weighted assets by assigning
balance sheet assets and off-balance sheet items to broad risk categories.

Page 20

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At June 30, 2007 and December 31,
2006, the Bank exceeded all regulatory minimum capital requirements. Beginning in the
first quarter of 2006, the Company became exempt from the Capital Guidelines, as the Board
of Governors of the Federal Reserve System increased the asset size threshold from $150
million to $500 million in consolidated assets for determining whether a Bank Holding
Company may qualify for an exemption from the Capital Guidelines. Under the revised
regulatory financial reporting requirements, the Company will only be required to file
parent-only financial data on a semi-annual basis. This change only impacts the Company
and the Bank will continue to file necessary regulatory reports. The Bank continues to
maintain sufficient risk-based capital levels to remain categorized as
well-capitalized under federal regulatory requirements.

|                                         | Actual | Minimum Required For Capital Adequacy Purposes | Minimum Required to be
Well-Capitalized Under
Prompt Corrective
Action Regulations
|---------------------------------------- | ------ | ---------------------------------------------- | ----------------------------------------------------------------------------------
|
|                                         |        |                                                |                                                                                   
|June 30, 2007                            |        |                                                |                                                                                   
|Total Capital (to risk weighted assets)  |        |                                               
|Bank of Lenawee                          |        |                                                | $                                                                                 
|Tier 1 Capital (to risk weighted assets) |        |                                               
|Bank of Lenawee                          |        |                                                | $                                                                                 
|Tier 1 Capital (to average assets)       |        |                                               
|Bank of Lenawee                          |        |                                                | $                                                                                 
|                                         |        |                                               
|December 31, 2006                        |        |                                               
|Total Capital (to risk weighted assets)  |        |                                               
|Bank of Lenawee                          |        |                                                | $                                                                                 
|Tier 1 Capital (to risk weighted assets) |        |                                               
|Bank of Lenawee                          |        |                                                | $                                                                                 
|Tier 1 Capital (to average assets)       |        |                                               
|Bank of Lenawee                          |        |                                                | $                                                                                 

ITEM 3 
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Companys primary market
risk exposure is interest rate risk and liquidity risk. All of the Companys
transactions are denominated in U.S. dollars with no specific foreign exchange exposure.
The Company has a limited exposure to commodity prices related to agricultural loans. Any
impacts that changes in foreign exchange rates and commodity prices would have on interest
rates are assumed to be insignificant.

Interest rate risk (IRR) is the
exposure of a banking organizations financial condition to adverse movements in
interest rates. Accepting this risk can be an important source of profitability and
shareholder value; however, excessive levels of IRR could pose a significant threat to our
earnings and capital base. Accordingly, effective risk management that maintains IRR at
prudent levels is essential to the Companys safety and soundness. The Board of
Directors has instituted a policy setting limits on the amount of interest rate risk that
may be assumed. Management provides information to the Board of Directors on a monthly
basis detailing interest rate risk estimates and activities to control such risk.

Evaluating a financial
institutions exposure to changes in interest rates includes assessing both the
adequacy of the management process used to control IRR and the organizations
quantitative level of exposure. When assessing the IRR management process, the Company
seeks to ensure that appropriate policies, procedures, management information systems and
internal controls are in place to maintain IRR at prudent levels with consistency and
continuity. Evaluating the quantitative level of IRR exposure requires the Company to
assess the existing and potential future effects of changes in interest rates on its
consolidated financial condition, including capital adequacy, earnings, liquidity, and,
where appropriate, asset quality.

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The Company has not experienced a
material change in its financial instruments that are sensitive to changes in interest
rates since December 31, 2006, which information can be located in the Companys
annual report on Form 10-K.

ITEM 4  CONTROLS
AND PROCEDURES

| | (a) | Evaluation of Disclosure Controls and Procedures. As of June 30, 2007, an
               evaluation was performed under the supervision and with the participation of the
               Companys management, including the Chief Executive Officer (CEO) and Chief
               Financial Officer (CFO), of the effectiveness of the design and operation of the
               Companys disclosure controls and procedures (as defined in Exchange Act
               Rules 13a  15(e) and 15d  15(e)). Based on that evaluation, the
               Companys management, including the CEO and CFO, concluded that the
               Companys disclosure controls and procedures were adequate and effective as
               of June 30, 2007, 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-Q 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.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# PART II

# OTHER INFORMATION

ITEM 1  LEGAL
PROCEEDINGSThe Company is not involved in any
material legal proceedings. The Companys wholly-owned subsidiary, Bank of Lenawee,
is involved in ordinary routine litigation incident to its business; however, no such
proceedings are expected to result in any material adverse effect on the operations or
earnings of the Bank. Neither the Bank nor the Company are involved in any proceedings to
which any director, principal officer, affiliate thereof, or person who owns of record or
beneficially five percent (5%) or more of the outstanding stock of the Company or the
Bank, or any associate of the foregoing, is a party or has a material interest adverse to
the Company or the Bank.

ITEM 1A  RISK
FACTORSThere have been no material changes
in the risk factors applicable to the Company from those disclosed in its annual report on
Form 10-K for the year ended December 31, 2006.

ITEM 2 
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

| | (c) | During
the three-month period ended June 30, 2007, the Company repurchased the following shares
of its common stock:
| | --- | --------------------------------------------------------------------------------------------------------------------

|Period     | (a) Total Numberof SharesPurchased | (b)  Average PricePaid per Share | (c) Total Numberof Shares
Purchased as Partof PubliclyAnnounced Plansor Programs | (d) Maximum
Number (orAppropriate DollarValue) of SharesThat May Yet be
Purchased Underthe Plans orPrograms
|---------- | ---------------------------------- | -------------------------------- | -------------------------------------------------------------------------------- | -----------------------------------------------------------------------------------------------------------
|           |                                    |                                  |                                                                                  |                                                                                                            
|           |                                    |                                  |                                                                                  |                                                                                                            
|April 2007 |                                    |                                  |                                                                                  | 0                                                                                                          
|May 2007   |                                    |                                  |                                                                                  | 992                                                                                                        
|June 2007  |                                    |                                  |                                                                                  | 1,618                                                                                                      

These shares of common
stock were purchased by the Company in satisfaction of its obligations under its Employee
Stock Ownership and 401(k) Savings Plan to repurchase shares of common stock distributed
to a Plan participant upon request by such a participant.  Pursuant to the terms of the
Plan, the price paid by the Company is the most recent appraised value of the Company's
common stock.

ITEM 3  DEFAULTS
UPON SENIOR SECURITIES  None

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ITEM 4 
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 

The annual meeting of our
shareholders was held on April 20, 2007. At that meeting, the following matters were
submitted to a vote of the shareholders. There were 727,852 voting shares outstanding on
March 9, 2007, the record date for the meeting. 552,771 shares or 76% voted as follows:

| | Directors elected forterms expiring in 2010:         | For                     | Against              | Withheld
| | ---------------------------------------------------- | ----------------------- | -------------------- | --------
| | Dan R. Hupp      
Barbara A. Mitzel
Emory M. Schmidt | 535,077
535,077
535,077 | 17,694
17,694
17,694 | 000     

The terms of office for incumbent
Directors Douglas Kapnick, Richard DeVries, Terence Sheehan, Marinus Van Ooyen, Edward
Engle, Margaret Noe, and David Stutzman continued after the meeting. Fred R. Duncan
elected to retire from the Board of Directors, effective April 20, 2007. No person has
yet been nominated to fill the vacancy left by Mr. Duncans retirement. The
Nominating/Corporate Governance Committee of the Companys Board of Directors is in
the process of considering potential candidates for recommendation to the Board of
Directors.

| | Selection of Auditors for 2007
Plante & Moran, PLLC | For
544,985 | Against
3,276 | Withheld
4,510
| | --------------------------------------------------- | ----------- | ------------- | --------------

ITEM 5  OTHER
INFORMATION 

Attached to this Form 10-Q as
Exhibits 10.1 and 10.2 are amendments to the respective employment agreements for
Richard J. DeVries, the President and CEO of the Company and the Bank, and Mark D. Wolfe,
the CFO of the Company and the Bank.  Each of these amendments was executed July 18,
2007, and is hereby incorporated by reference.  In addition to these amendments, Mr.
Wolfes annual salary was increased by $5,000 effective June 4, 2007.

ITEM 6  EXHIBITS

| | Listing
of Exhibits (numbered as in Item 601 of Regulation S-K):
| | ----------------------------------------------------------------

| | 10.1 | Employment
Agreement Amendment for Richard J. DeVries dated July 18, 2007.
| | ---- | --------------------------------------------------------------------------

| | 10.2 | Employment
Agreement Amendment for Mark D. Wolfe dated July 18, 2007.
| | ---- | ---------------------------------------------------------------------

| | 10.3 | Second
Amendment to the Lenawee Bancorp, Inc. 1996 Stock Option Plan.
| | ---- | ---------------------------------------------------------------------

| | 10.4 | First
Amendment to the Lenawee Bancorp, Inc. 2001 Stock Option Plan.
| | ---- | --------------------------------------------------------------------

| | 31.1 | Certificate
 of the Chief  Executive  Officer of  Pavilion  Bancorp,  Inc.  pursuant  to
                           Section 302 of the Sarbanes-Oxley Act of 2002.
| | ---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 31.2 | Certificate
 of the Chief  Financial  Officer of  Pavilion  Bancorp,  Inc.  pursuant  to
                           Section 302 of the Sarbanes-Oxley Act of 2002.
| | ---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 32.1 | Certificate
of the Chief Executive  Officer and the Chief Financial  Officer of Pavilion
                           Bancorp,  Inc.  pursuant to 18 U.S.C.  Section 1350, as
adopted  pursuant to Section 906                            of the Sarbanes-Oxley Act of
2002.
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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# SIGNATURES

Pursuant to the requirements of the
Securities Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.

|Date:      August 13, 2007
Date:      August 13, 2007 |  | Pavilion Bancorp, Inc./s/ Richard J. DeVries
Richard J. DeVriesPresident and Chief Executive Officer
/s/ Mark D. Wolfe
Mark D. WolfeSenior Vice President and Chief Financial Officer
|----------------------------------------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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EXHIBIT INDEX

|Exhibit | Description
|------- | -----------

|10.1 | Employment
Agreement Amendment for Richard J. DeVries, dated July 18, 2007.
|---- | ---------------------------------------------------------------------------

|10.2 | Employment
Agreement Amendment for Mark D. Wolfe, dated July 18, 2007.
|---- | ----------------------------------------------------------------------

|10.3 | Second
Amendment to the Lenawee Bancorp, Inc. 1996 Stock Option Plan.
|---- | ---------------------------------------------------------------------

|10.4 | First
Amendment to the Lenawee Bancorp, Inc. 2001 Stock Option Plan.
|---- | --------------------------------------------------------------------

|31.1 | Certificate
of the Chief Executive Officer of Pavilion  Bancorp,  Inc. pursuant to Section 302 of
                  the Sarbanes-Oxley Act of 2002.
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------

|31.2 | Certificate
of the Chief Financial Officer of Pavilion  Bancorp,  Inc. pursuant to Section 302 of
                  the Sarbanes-Oxley Act of 2002.
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------

|32.1 | Certificate
of the Chief Executive  Officer and the Chief Financial  Officer of Pavilion Bancorp,
Inc.                      pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the                     Sarbanes-Oxley Act of 2002.
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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