# UNITED STATESSECURITIES AND
EXCHANGE COMMISSIONWashington, 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 September 30, 2006

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. Employer
Identification 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 November 10, 2006 there were 731,408
outstanding shares of the registrants common stock, no par value.

Page 1

---



# CROSS REFERENCE TABLE

|ITEM NO.      | DESCRIPTION | PAGE NO.                                                                    
|------------- | ----------- | ----------------------------------------------------------------------------
|
|              |             | PART I - FINANCIAL INFORMATION                                              
|              |             |                                                                             
|Item 1        |             | Financial Statements (Condensed and Unaudited)                              
|              |             | (a)     Report of Independent Registered Public Accounting Firm             
|              |             | (b)     Condensed Consolidated Balance Sheets                               
|              |             | (c)     Condensed Consolidated Statements of Income                         
|              |             | (d)     Condensed Consolidated Statements of Changes in Shareholders' Equity
|              |             | (e)     Condensed Consolidated Statements of Cash Flows                     
|              |             | (f)     Notes to Condensed Consolidated Financial Statements                
|              |            
|Item 2        |             | Management's Discussion and Analysis of                                     
|              |             | Financial Condition and Results of Operations                               
|              |            
|Item 3        |             | Quantitative and Qualitative Disclosures About Market Risk                  
|              |            
|Item 4        |             | Controls and Procedures                                                     
|              |            
|              |            
|              |             | PART II -OTHER INFORMATION                                                  
|              |            
|Item 1        |             | Legal Proceedings                                                           
|Item 1.A.     |             | Risk Factors                                                                
|Item 2        |             | Unregistered Sales of Equity Securities and Use of Proceeds                 
|Item 3        |             | Defaults Upon Senior Securities                                             
|Item 4        |             | Submission of Matters to a Vote of Security Holders                         
|Item 5        |             | Other Information                                                           
|Item 6        |             | Exhibits                                                                    
|              |            
|Signatures    |             | 27                                                                          
|              |            
|Exhibit Index |             | 28                                                                          

Page 2

---



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
September 30, 2006, and the related condensed consolidated statements of income,
shareholders equity, and cash flows for the three and nine month periods ended
September 30, 2006 and 2005, 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, MichiganNovember
8, 2006

Page 3

---



# PART I FINANCIAL INFORMATION

ITEM 1- FINANCIAL
STATEMENTS

CONDENSED CONSOLIDATED
BALANCE SHEETS(000s omitted)

|                                                                  | September 30,
    2006     
 (unaudited) | December 31,
    2005
|----------------------------------------------------------------- | ---------------------------------------- | ---------------------
|                                                                  |                                          |                      
|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                                                 |                                          |                      
|Subordinated debentures                                           |                                          |                      
|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: 731,408 at September 30, 2006; 735,379 at        |                                          |                      
|December 31, 2005                                                 |                                          |                      
|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

---



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

|                                                    | Three months endedSeptember 30, | Nine months endedSeptember 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 gains on sale of loans                          |                                 |                               
|Loan servicing fees, net of amortization            |                                 |                               
|Other                                               |                                 |                               
|                                                    |                                 |                               
|                                                    |                                 |                               
|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                                 |                                 |                               
|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

---



PAVILION BANCORP, INC. CONDENSED  CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY (unaudited) For the periods
ended September 30, 2005 and 2006

|Common
  Stock 
 Paid-InCapital              | RetainedEarnings | AccumulatedOtherComprehensiveIncome/(Loss) | TotalShareholders'Equity
|-------------------------------------------- | ---------------- | ------------------------------------------ | ------------------------
|                                             |                  |                                            |                         
|Balance January 1, 2005                      |                  |                                            | $                       
|Comprehensive income:                        |                  |                                           
|Net income                                   |                  |                                            |                         
|Unrealized (losses) on securities            |                  |                                           
|available for sale                           |                  |                                            |                         
|Tax effect                                   |                  |                                            |                         
|                                             |                  |                                            |                         
|Total other comprehensive loss               |                  |                                            |                         
|                                             |                  |                                            |                         
|Total comprehensive income                   |                  |                                            |                         
|                                             |                  |                                           
|Change in common stock subject to repurchase |                  |                                            |                         
|Stock repurchase and retirement              |                  |                                            |                         
|Stock option expense                         |                  |                                            |                         
|Stock options exercised                      |                  |                                            |                         
|Cash dividends - $0.72 per share             |                  |                                            |                         
|                                             |                  |                                            |                         
|Balance September 30, 2005                   |                  |                                            | $                       
|                                             |                  |                                            |                         
|                                             |                  |                                           
|                                             |                  |                                           
|Balance January 1, 2006                      |                  |                                            | $                       
|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 - $0.72 per share             |                  |                                            |                         
|                                             |                  |                                            |                         
|Balance September 30, 2006                   |                  |                                            | $                       
|                                             |                  |                                            |                         

---

See accompanying notes
to the condensed consolidated financial statements

Page 6

---



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

|                                                      | Nine months endedSeptember 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         |                               
|Loss on disposal of assets                            |                               
|Loss on sales of securities                           |                               
|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 (used in) operating activities   |                               
|                                                      |                               
|                                                      |                               
|Cash flows from investing activities                  |                               
|Securities available for sale:                        |                               
|Maturities, calls and principal payments              |                               
|Sales of securities available for sale                |                               
|Purchases                                             |                               
|Redemption (purchase) of Federal Home Loan Bank stock |                               
|Purchase of Federal Reserve Bank stock                |                               
|Net premises and equipment expenditures               |                               
|Net 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         |                               
|Stock repurchased                                     |                               
|Repurchase of ESOP/401k shares                        |                               
|Stock options exercised                               |                               
|Dividends paid                                        |                               
|                                                      |                               
|Net cash from financing activities                    |                               
|                                                      |                               
|Net increase in cash and cash equivalents             |                               
|Cash and cash equivalents at beginning of period      |                               
|                                                      |                               
|                                                      |                               
|Cash and cash equivalents at end of period            |                               
|                                                      |                               
|Transfer from:                                        |                               
|Loans to foreclosed real estate                       |                               
|Cash paid for:                                        |                               
|Interest                                              |                               
|Income taxes                                          |                               

See accompanying
notes to condensed consolidated financial statements

Page 7

---



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,
2005.

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 nine months ended September 30, 2006 are not necessarily indicative of
the results that may be expected for the year ended December 31, 2006.

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 intercompany 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:

Servicing of Financial
AssetsIn March 2006, the Financial
Accounting Standards Board issued SFAS No. 156, Accounting for Servicing of Financial
Assets, an amendment of FASB Statement No. 140. SFAS No. 156 requires an entity to
recognize a servicing asset or liability each time it undertakes an obligation to service
a financial asset by entering into a servicing contract. It requires all separately
recognized servicing assets and servicing liabilities to be initially measured at fair
value. SFAS No. 156 permits an entity to choose either an amortization or fair value
measurement method for each class of separately recognized servicing assets and servicing
liabilities. It also permits a one-time reclassification of available-for-sale securities
to trading securities with recognized servicing rights. Lastly, it requires separate
presentation of servicing assets and servicing liabilities. Adoption of the initial
measurement provision of this statement is permitted as of the beginning of an
entitys fiscal year, provided the entity has not yet issued financial statements,
including interim financial statements, for any period of that fiscal year. Had the new
standard been adopted on January 1, 2006, the Companys retained earnings would have
increased by approximately $1.1 million, net of tax.

Page 8

---



Accounting for
Uncertainty in Income TaxesIn July 2006, the Financial
Accounting Standards Board issued FIN No. 48, Accounting for Uncertainty in Income Taxes.
This interpretation clarifies the accounting for uncertainty in income taxes recognized in
a companys financial statements in accordance with Statement of Financial Accounting
Standards (SFAS) No. 109, Accounting for Income Taxes. This interpretation requires that
the Company recognize in the financial statements, the impact of a tax position, if that
position is more likely than not of being sustained on audit, based on the technical
merits of the position. This interpretation is effective for fiscal years beginning after
December 15, 2006 and would be recognized with the cumulative effect of the change in
accounting principle recorded as an adjustment to beginning retained earnings. Adoption of
this interpretation is not expected to have a material effect on the results of operations
or financial condition of the Company.

Establishing Standards
on Measuring Fair ValueIn September 2006, the FASB issued
SFAS No. 157 Fair Value Measurements. SFAS No. 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.

Accounting for Defined
Benefit Pension and Other Postretirement PlansIn September 2006, the FASB issued
SFAS No. 158 Employers Accounting for Defined Benefit Pension and Other
Postretirement Plans. SFAS No. 158 amends SFAS No. 87, 88, 106, and 123(R). SFAS No.
158 requires an employer to recognize in its statement of financial position an asset for a
plans overfunded status or a liability for a plans underfunded status.
Secondly, it requires employers to measure the plan assets and obligations that determine
its funded status as of the end of the fiscal year. Lastly, employers are required to
recognize changes in the funded status of the defined benefit pension or postretirement
plan in the year that the changes occur with the changes reported in comprehensive income.
The standard is required to be adopted by entities beginning with fiscal years ending after
December 15, 2006. The Company is a participant in a multi-employer defined benefit plan,
which is not within the scope of this pronouncement. This standard is not expected to have
an impact on the Companys financial condition, results of operations or liquidity.

Quantifying Financial
Statement MisstatementsIn September 2006, the Securities and
Exchange Commission (SEC) issued Staff Accounting Bulletin No. 108 (SAB
108). SAB 108 expresses the view of the SEC regarding the process of quantifying
financial statement misstatements. This statement focuses on addressing the diversity in
practice of quantifying financial statement misstatements. The statement addresses the two
techniques commonly used in practice in accumulating and quantifying misstatements, the
Rollover Approach and the Iron Curtain Approach. The standard is
required to be adopted by the Company on January 1, 2007. The adoption of this standard is
not expected to have a material impact on financial condition, results of operations or
liquidity.

NOTE 2  STOCK
BASED COMPENSATIONIn December 2004, the Financial
Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards
(SFAS) No. 123 (revised 2004), Share-Based Payment, which requires that
compensation costs related to share-based payment transactions be recognized in the
financial statements. SFAS 123R eliminates the alternative to use the intrinsic method of
accounting provided for in Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees, which generally resulted in no
compensation expense recorded in the financial statements related to the grant of stock
options to employees or directors if certain conditions were met.

Page 9

---



On January 1, 2006, the Company
adopted SFAS 123R using the modified prospective method. SFAS 123R requires all
share-based payments to employees or non-employee directors, including stock options, to
be recognized as expense in the consolidated statement of earnings based on their fair
values. Prior to SFAS 123R, only certain pro forma disclosures were required. The amount
of compensation is measured at fair value of the options when granted, and this cost is
expensed over the required service period, which is normally the vesting period of the
options. SFAS 123R applies to awards granted or modified after January 1, 2006 or any
unvested awards outstanding at December 31, 2005. Consequently, compensation cost is
recorded for prior option grants that vest on or after January 1, 2006, the date of
adoption.

At September 30, 2006, the Company
has two stock compensation plans. Stock option plans are used to reward directors and
certain executive officers and provide them with an additional equity interest. Options
are issued for 10 year periods and vest over five years. Additionally, the options that
are awarded to a director will become fully vested when an active director reaches the age
of 62. Prior to adoption of SFAS 123R, the Company accounted for those plans under the
recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued
to Employees, and related Interpretations. Minimal stock-based employee compensation
related to the Stock Option Plans was reflected in net earnings, as substantially all
options granted under the Stock Option Plans had an exercise price equal to the market
value of the underlying common stock on the date of grant.

The fair value concepts were not
changed significantly in SFAS No. 123R; however, in adopting this Standard, companies must
choose among alternative valuation models and amortization assumptions. The Company has
elected to continue to use the Black-Scholes option pricing model and straight-line
amortization of compensation expense over the requisite service period of the grant.

The summary of option activity under
the Plan as of September 30, 2006, and changes during the nine months then ended is
presented below:

|Options                            | Shares | WeightedAverageExercise Price | Weighted AverageRemainingContractual Term | AggregateIntrinsicValue
|---------------------------------- | ------ | ----------------------------- | ----------------------------------------- | -----------------------
|                                   |        |                               |                                           |                        
|Outstanding, January 1, 2006       |        |                               |                                           | 30,791                 
|Granted                            |        |                               |                                           | -                      
|Exercised                          |        |                               |                                           | (1,386                 
|Forfeited or expired               |        |                               |                                           | -                      
|                                   |        |                               |                                           |                        
|Outstanding, September 30, 2006    |        |                               |                                           | 29,405                 
|                                   |        |                               |                                           |                        
|Options exercisable, end of period |        |                               |                                           | 25,331                 
|                                   |        |                               |                                           |                        

The aggregate intrinsic value in the
table above represents the total pretax intrinsic value (i.e., the difference between the
Companys closing stock price on the last trading day of  third quarter 2006 and
the exercise price, times the number of shares) that would have been received by the
option holders had all option holders exercised their options on September 30, 2006. Out
of the money options (options that have an exercise price that exceeds market value) are
excluded from the computation as they are assumed to have no intrinsic value. This amount
changes based on the fair market value of the Companys stock.

The summary of the status of the
Companys nonvested shares as of September 30, 2006, and changes during the nine
months then ended, is presented below:

|Nonvested Shares                | Shares | Weighted Average Grant DateFair Value
|------------------------------- | ------ | -------------------------------------
|                                |        |                                      
|Nonvested at January 1, 2006    |        |                                      
|Granted                         |        |                                      
|Vested                          |        |                                      
|Forfeited                       |        |                                      
|                                |        |                                      
|Nonvested at September 30, 2006 |        |                                      
|                                |        |                                      

Page 10

---



Options outstanding and exercisable
at September 30, 2006 were as follows:

|                          | Outstanding | Exercisable
|------------------------- | ----------- | -----------
|                          |             |            
|                          |             |            
|                          |             |            
|$17.00 - $24.00           |             |            
|$34.00 - $42.00           |             |            
|$48.00 - $52.00           |             |            
|$55.00 - $61.00           |             |            
|                          |             |            
|Outstanding at period end |             |            
|                          |             |            

The following table illustrates the effect
on net income and earnings per share as of and for the three and nine months ended
September 30, 2006 and 2005 if the Company had applied the fair value recognition
provisions of SFAS No. 123, to stock-based compensation (in thousands, except per share
data)

|                                                                                                                                         | For the three months endedSeptember 30, | For the nine months endedSeptember 30,
|---------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------- | --------------------------------------
|                                                                                                                                         |                                         |                                       
|                                                                                                                                         |                                         |                                       
|                                                                                                                                         |                                         |                                       
|Net income as reported                                                                                                                   |                                         |                                       
|Add:  Stock-based  compensation  expense
included  in reported net income, net of related tax effects                                    |                                         |                                       
|Deduct: Total stock-based compensation
expense determined  under  fair  value  based  method  for all awards, net of related tax effects |                                         |                                       
|                                                                                                                                         |                                         |                                       
|                                                                                                                                         |                                         |                                       
|Pro forma net income                                                                                                                     |                                         |                                       
|                                                                                                                                         |                                         |                                       
|                                                                                                                                         |                                         |                                       
|Basic earnings per share - As reported                                                                                                   |                                         |                                       
|Basic earnings per share - Pro forma                                                                                                     |                                         |                                       
|                                                                                                                                         |                                         |                                       
|Diluted earnings per share - As reported                                                                                                 |                                         |                                       
|Diluted earnings per share - Pro forma                                                                                                   |                                         |                                       

As of September 30, 2006, there was
$29,000, net of tax, of total unrecognized compensation cost related to nonvested
share-based compensation arrangements granted under the Plans. This cost is expected to be
fully amortized in four years, with half of the total amortization cost being recognized
within the next 18 months.

Page 11

---



NOTE 3  EARNINGS
PER SHARE

| | Earnings
per common share have been computed based on the following for the three and nine months
ended September 30, 2006 and 2005 (000s omitted, except antidilutive stock options):
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                                                                | Three months endedSeptember 30, | Nine months endedSeptember 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   |                                 |                               
|                                                                                                |                                 |                               

NOTE 4  LOANS
RECEIVABLE

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

|                                           | September 30,2006 | December 31,2005
|------------------------------------------ | ----------------- | ----------------
|                                           |                   |                 
|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 nine months ended September 30, are as follows
(000s omitted):

|                               | Three months endedSeptember 30, | Nine months endedSeptember 30,
|------------------------------ | ------------------------------- | ------------------------------
|                               |                                 |                               
|                               |                                 |                               
|Balance at beginning of period |                                 |                               
|Charge-offs                    |                                 |                               
|Recoveries                     |                                 |                               
|Provision for loan losses      |                                 |                               
|                               |                                 |                               
|Balance at end of period       |                                 |                               
|                               |                                 |                               

Page 12

---



NOTE 5  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 $2.4 million
and $3.1 million at September 30, 2006 and December 31, 2005, respectively.

Page 13

---



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
September 30, 2006 and for the three and nine month periods ended September 30, 2006 and
2005 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;
| | - | -------------------------------------------------------------------------

| |  | 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.
| | - | --------------------------------------------

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 valuation of the allowance for loan and lease losses, 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 2005 Annual Report.

Financial OverviewTotal assets increased by $10.5
million or 3.7% from December 31, 2005 to September 30, 2006. Cash and cash equivalents
increased $3.6 million or 31.8%. Loans receivable, net of the allowance for loan and lease
losses, increased by $7.6 million or 3.2% from December 31, 2005 to September 30, 2006.
Investment securities available for sale decreased $1.4 million or 5.5% from December 31,
2005 to September 30, 2006. Total deposits increased $22.6 million or 10.7% from December
31, 2005 to September 30, 2006. Borrowed funds decreased $13.2 million or 33.2%. Basic
earnings per share (EPS) for the three and nine months ended September 30,
2006 were $1.06 per share and $2.55 per share, respectively. For the same periods in 2005
basic EPS were $0.65 and $1.50, respectively. Fully diluted EPS for the three and nine
months ended September 30, 2006 were $1.06 per share and $2.54 per share, respectively.
For the same periods in 2005 fully diluted EPS were $0.65 and $1.49 per share,
respectively.

Page 14

---



FINANCIAL CONDITION

InvestmentsTotal investments securities
available-for-sale decreased 5.5%, or $1.4 million, to $24.0 million at September 30,
2006, compared to $25.4 million at December 31, 2005. The decrease in investment
securities is attributable to maturities and repayments on investments. Equity investment
in the Federal Home Loan Bank of Indianapolis (FHLBI) decreased $500,000 or
18.5% to $2.3 million at September 30, 2006 compared to $2.8 million at December 31, 2005.
Investment in Federal Reserve Bank (FRB) stock remains unchanged at $630,000
as of September 30, 2006 and December 31, 2005. The Company had no held-to-maturity
securities as of September 30, 2006 or December 31, 2005.

LoansThe following table summarizes the
Banks loan portfolio and loan mix at September 30, 2006 and December 31, 2005:

# Consolidated Loans
Outstanding

|September 30, 2006                         | December 31, 2005
|------------------------------------------ | -----------------
|                                           |                  
|                                           |                  
|                                           |                  
|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 nine months of 2006,
loans, net of allowance for loan and lease losses, increased $7.6 million, or 3.2%. The
mix of the loan portfolio continues to remain relatively unchanged from the prior year.
The commercial and agricultural loan portfolios increased by $6.0 million or 4.8% and $2.1
million or 5.6%, respectively. The increase in the commercial portfolio is due to business
development efforts. The increase in the agricultural portfolio is related to seasonal
draws on lines as well as an increase in the number of agricultural loans. The residential
mortgage loan portfolio grew by $2.6 million or 9.4% due to increased demand for bridge
loans as well as real estate development efforts. The residential construction loan
portfolio decreased approximately $2.3 million, or 19.5%, and is consistent with the
slowing in the real estate market. Home equity lines of credit decreased approximately
$0.9 million, or 4.3%, as customers look to move from variable rate home equity lines to
more fixed rate mortgage products. Consumer loans increased slightly in the first nine
months of 2006 as well, as new loans have outpaced repayments. Management expects the loan
portfolios in the fourth quarter to decrease as demand for loans slows and lines of credit
are repaid prior to the end of the calendar year.

Page 15

---



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 September 30, 2006 and December 31, 2005:

|September 30, 2006                          | December 31, 2005
|------------------------------------------- | -----------------
|                                            |                  
|Loan Category:                              |                  
|Commitments to originate or refinance loans |                  
|Unfunded commitments under lines of credit  |                  
|Commercial and standby letters of credit    |                  
|                                            |                  
|Total                                       |                  
|                                            |                  

Outstanding commitments to originate
or refinance loans increased $6.7 million, or 90.5%, to $14.1 million at September 30,
2006 from $7.4 million at December 31, 2005. This increase in commitments to originate or
refinance loans is due primarily to increased loan demand coupled with continued business
development activities. Unfunded commitments under lines of credit decreased $0.2 million
or 0.3% to $61.0 million as of September 30, 2006 from $61.2 million at December 31, 2005.
This decrease in the unfunded level 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 decreased approximately $0.7 million or 20.6% to $2.4
million as of September 30, 2006 down from $3.1 million as of December 31, 2005.
Management does not expect that all commitments will result in funded loans.

Credit QualityThe Bank continues to monitor the
asset quality of the loan portfolio utilizing the 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 each 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.

The chart below shows the composition
of the Banks nonperforming assets by type as of September 30, 2006 and 2005, and
December 31, 2005.

|September 30, 2006                                        | December 31, 2005 | September 30, 2005
|--------------------------------------------------------- | ----------------- | ------------------
|                                                          |                   |                   
|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 September 30, 2006, total
nonperforming assets increased by $236,000 or 10.2% from December 31, 2005. 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 $0.5
million to $1.6 million as of September 30, 2006 up from $1.1 million as of December 31,
2005. Of this increase, approximately $600,000 went into nonaccrual status in June 2006.
The increase was primarily in residential real estate loans, and management believes the
Bank is adequately reserved on these 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 0.86% at September 30, 2006 compared to 0.81% at December 31, 2005. 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 81.41% as of
September 30, 2006 compared to 66.19% and 42.79% as of December 31, 2005 and September 30,
2005, respectively. As discussed above, the increase in nonperforming loans is primarily
in residential real estate loans, for which management believes that the Bank is
adequately reserved. Approximately $596,000 of the nonperforming loans at September 30,
2006 represents agricultural loans that are partially guaranteed by the Farm Service
Agency and management believes that they are adequately reserved.

Page 16

---



The activity in the allowance for
loan and lease losses for the three months ended September 30, 2006 and 2005 and the nine
months ended September 30, 2006 and 2005 is presented in the following table:

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

The Bank decreased its funding of
provision for loan losses during the first nine months of 2006 over the same period in
2005 based on managements assessment of the adequacy of the allowance for loan and
lease losses. The total loan portfolio has increased to $245.3 million as of September 30,
2006 compared to $233.0 million outstanding as of September 30, 2005. 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 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, etc. Management believes that the level of
allowance is appropriate given the present credit quality of the portfolio.

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.

Page 17

---



Deposits and Borrowed
FundsTotal deposits increased $22.6
million or 10.7% during the first nine months to $233.3 million at September 30, 2006 from
$210.7 million at December 31, 2005. Noninterest-bearing deposits increased $3.9 million,
or 8.5% to $49.2 million at September 30, 2006 from $45.3 million at December 31, 2005.
Interest-bearing deposits increased $18.7 million, or 11.3% to $184.1 million at September
30, 2006 from $165.4 million at December 31, 2005. Specifically, certificates of deposit
(CDs) with balances of $100,000 and greater (Jumbo CDs) increased
$16.1 million, or 29.3%, to $71.2 million at September 30, 2006 from $55.1 million at
December 31, 2005. The increase in Jumbo CDs is attributable to a greater amount of
local municipal deposits obtained through a competitive bidding process. Generally,
municipal CDs have shorter maturity lengths and thus can reprice more often than
longer term CDs. Certificates of Deposit with balances under $100,000 increased $4.7
million, or 13.0%, to $41.6 million at September 30, 2006 from $36.9 million at December
31, 2005. This increase is the result of business development efforts within the local
communities. Other interest-bearing deposits, including savings and NOW accounts,
decreased $2.1 million, or 3.0% to $71.3 million at September 30, 2006 from $73.4 at
December 31, 2005. Management believes that this decrease represents a normal business
fluctuation.

Borrowed funds decreased by $13.2
million, or 33.2%, to $26.4 million at September 30, 2006 from $39.6 million at December
31, 2005. The increased level of deposits was used to fund the repayments of other
borrowings.

CapitalDuring the first nine months of 2006,
equity capital increased by $1.5 million, reflecting current year earnings as well as the
exercise of stock options. The number of outstanding shares at December 31, 2005 of
735,379 decreased to 731,408 at September 30, 2006, as a result of the redemption and
retirement of shares from the Companys ESOP/401k plan. 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
September 30, 2006 increased $306,000, or 64.2% to $783,000 compared to $477,000 for the
same period in 2005. Basic earnings per share (EPS) attributable to continuing
operations for the three months ended September 30, 2006 were $1.06 compared to $0.65 for
the same period in 2005. Diluted EPS for the three months ended September 30, 2006 were
$1.06 compared to $0.65 for the same period in 2005.

Net income for the nine months ended
September 30, 2006 increased $0.7 million, or 56.5% to $1.9 million compared to $1.2
million for the same period in 2005. Basic earnings per share (EPS)
attributable to continuing operations for the nine months ended September 30, 2006 were
$2.55 compared to $1.50 for the same period in 2005. Diluted EPS for the nine months ended
September 30, 2006 were $2.54 compared to $1.49 for the same period in 2005.

Page 18

---



Net Interest MarginFollowing are the net interest margin
calculations for the three and nine months ended September 30, 2006 and 2005:

|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 19

---



|Nine 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 September 30, 2006 to 7.12% from 6.48% 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 7.55% for the three months ended September 30, 2006 from
6.88% for the same period in 2005. The consumer loan portfolio had the greatest increase
in yield as it is primarily a variable rate portfolio followed by the commercial lending
portfolio which also has a significant portion of variable rate loans.

Page 20

---



The Companys interest rate
spread decreased for the three months ended September 30, 2006 to 3.58% from 4.00% for the
same period in 2005. This decrease is due to the increase in the rates paid on
interest-bearing liabilities, which increased to 3.54% for the three months ended
September 30, 2006 from 2.48% for the same period in 2005, which was expected with the
increasing rate environment. 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 yield on interest-earning assets
increased for the nine months ended September 30, 2006 to 6.93% from 6.27% for the same
period in 2005. The increase primarily was in the yield on loans receivable which
increased to 7.37% for the nine months ended September 30, 2006 from 6.73% for the same
period in 2005. 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 decreased for the nine months ended September 30, 2006 to 3.70% from 4.13% for the
same period in 2005. This decrease is due primarily to the increase in the rates paid on
interest-bearing liabilities, which increased to 3.23% for the nine months ended September
30, 2006 from 2.14% for the same period in 2005, which was expected with the increasing
rate environment as well as of the influence of competition within the local market. In
addition, the variable rate paid on the subordinated debentures continues to increase and
is at a coupon rate of 9.17% as of September 30, 2006. The subordinated debentures are
eligible for call as of December 8, 2006, and the Company has elected to redeem the
subordinated debentures on that date. Management is presently evaluating lower cost
options for funding to replace these funds. As a result of the redemption, the Company
will recognize approximately $140,000 of unamortized deferred costs as an expense at the
time of redemption. Management believes that the costs incurred as a result of the
redemption will be more than offset by the reduction in interest expense. The
Companys net interest margin remains relatively strong compared to our peers.

Noninterest IncomeTotal non-interest income decreased
$82,000 or 10.2% to $719,000 for the three months ended September 30, 2006 compared to
$801,000 for the same period in 2005. Service charges on deposit accounts decreased
$5,000. A decline in gains on residential mortgage loan sales accounted for approximately
$143,000 of the decrease, which was consistent with a decrease in mortgage banking
activity. Loan servicing fees, net of amortization, increased $20,000 due to increases in
the loan servicing portfolio. Other income increased $46,000 due primarily to fee income
earned on Merchant Visa services.

For the nine months ended September
30, 2006, total non-interest income declined 13.9% to $2.3 million, compared to $2.6
million for the same period in 2005. The most significant decrease was in the net gains on
sale of loans, which decreased 30.2% or $336,000 due to a reduction in mortgage volume.
Mortgage loan sales were down approximately 28.6% in the first nine months of 2006
compared to the same period in 2005, as the volume from mortgage production has been
significantly reduced due to the continued rise in rates for the mortgage loan products in
2006 and a slowing of the local real estate market. Loan servicing fees, net of
amortization decreased $197,000 for the first nine months of the year due to increased
levels of amortization of the mortgage servicing asset. Service charges and fees on
deposit accounts increased $27,000 for the first nine months of 2006 compared to the same
period in 2005 with the increase in transactional deposit accounts. Other income increased
$139,000 for the first nine months of 2006 due primarily to fee income earned on Merchant
Visa services, as discussed above.

Noninterest ExpenseFor the three months ended September
30, 2006, total non-interest expense decreased $404,000 or 13.7% to $2.5 million from $2.9
million for the same period in 2005. The most significant decrease was in compensation and
employee benefits, which was down $295,000 for the three months ended September 30, 2006
compared to the same period in 2005, due in large part to the cost savings associated with
Reduction-in-Force plans (RIF) which were developed with the goal of increasing
operational efficiency. The Bank eliminated various staff positions in the first quarters
of 2006 and 2005. Occupancy and equipment expenses increased by $32,000 or 9.1% to
$383,000, up from $351,000 for the same period in 2005. This increase is primarily related
to the costs associated with the new branch that was opened in the first quarter of 2006.
Professional services expense decreased by $26,000 or 17.1% to $126,000 down from $152,000
for the same period in 2005. This is due to a decrease in legal and consulting costs in
the third quarter of 2006 as compared with 2005. Marketing expense has decreased $47,000
or 67.1% to $23,000 down from $70,000 for the same period in 2005 and other noninterest
expense decreased approximately $74,000 or 32.7% over the prior year due largely to cost
reduction efforts in these areas.

Page 21

---



Noninterest expense for the nine
months ended September 30, 2006 was $8.3 million, compared to $9.3 million for the same
period in 2005, a decrease of approximately $1.0 million or 10.8%. Compensation and
employee benefits decreased $662,000 or 12.0%, to $4.9 million for the nine months ended
September 30, 2006 compared to $5.5 million for the same period in 2005. As discussed
above, the first quarters of both 2006 and 2005 were impacted by Reduction-in-Force plans
(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 increased compensation cost.
The aggregate cost of the RIF plans were approximately $210,000 and $264,000 for 2006 and
2005, respectively, and were accrued for as of March 31st of the respective
years. The decrease seen in the first nine months of 2006 was due in large part to the
cost savings associated with the aforementioned RIFs. Occupancy and equipment costs
remained relatively consistent at $1.1 million for the nine months ended September 30,
2006 and 2005, respectively. Fees for professional services decreased approximately
$157,000 or 28.2% to $399,000 in the first nine months of 2006 compared to $556,000 for
the same period in 2005. The nine months ended September 30, 2005 included higher than
expected costs associated with the Companys auditing firms for services related to
contingency planning, Sarbanes-Oxley compliance and additional work related to the
Companys 2005 annual report as well as costs associated with the tender offer
completed in the second quarter of 2005. Marketing expense decreased $67,000 or 37.2%, to
$113,000 for the nine months ended September 30, 2006 compared to $180,000 for the same
period in 2005. Other outside services increased $23,000 or 2.9% to $818,000 for the nine
months ended September 30, 2006 compared to $795,000 for the same period in 2005. Other
operating expenses decreased approximately $140,000, or 26.1%, for the nine months ended
September 30, 2006 to $397,000 compared to $537,000 for the same period in 2005. This
decrease is due to managements focus on cost reductions.

Federal Income TaxThe provision for federal income tax
was $280,000 or 26.3% of pretax income for the three month period ended September 30,
2006, compared to $220,000 or 31.6% for the same period in 2005. The increase in the
income tax provision reflects the increase in net income generated in the three months
ended September 30, 2006 versus the same period in 2005. The reduction in the effective
tax rate is the result of absorption of some of the prior year over accrual of the federal
income tax liability. The provision for federal income tax was $766,000 or 29.0% of pretax
income from continuing operations for the nine month period ended September 30, 2006,
compared to $563,000 or 31.9% for the same period in 2005. The cause of the increase in
income tax provision for the nine months ended September 30, 2006 is substantially the
same as noted above. The difference between the statutory rate and the effective tax rate
is due primarily to tax-exempt municipal income and non-deductible expenses.

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 September 30, 2006, cash and short-term investments totaled $14.9 million and
securities classified as available for sale totaled $24.0 million. However,
available-for-sale securities with a market value of $13.7 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 $256,000 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 22

---



Financing activities consist
primarily of activity in deposit accounts, overnight borrowings from our correspondent
banks and FHLBI advances. The Bank experienced a net increase in total deposits of $22.6
million for the nine months ended September 30, 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
decreased during the first nine months of 2006 from $39.6 million at December 31, 2005
compared to the balance of $26.4 million as of September 30, 2006. As of September 30,
2006, the Bank had the ability to borrow a total of $15.3 million from the FHLBI based
upon the amount of collateral pledged, of which $13.7 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 not been drawn upon as of September 30,
2006. The Bank also had outstanding advances on repurchase agreements totaling $12.8
million at September 30, 2006, 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 September 30, 2006, the Bank had
outstanding commitments to fund loans of $14.1 million, of which $10.9 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 23

---



At September 30, 2006 and December
31, 2005, the Company and 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
|---------------------------------------- | ------ | ---------------------------------------------- | ----------------------------------------------------------------------------------
|                                         |        |                                                |                                                                                   
|                                         |        |                                                |                                                                                   
|September 30, 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                          |        |                                                | $                                                                                 
|                                         |        |                                               
|December 31, 2005                        |        |                                               
|Total Capital (to risk weighted assets)  |        |                                               
|Consolidated                             |        |                                                | $                                                                                 
|Bank of Lenawee                          |        |                                                | $                                                                                 
|Tier 1 Capital (to risk weighted assets) |        |                                               
|Consolidated                             |        |                                                | $                                                                                 
|Bank of Lenawee                          |        |                                                | $                                                                                 
|Tier 1 Capital (to average assets)       |        |                                               
|Consolidated                             |        |                                                | $                                                                                 
|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.

Page 24

---



The Company has not experienced a
material change in its financial instruments that are sensitive to changes in interest
rates since December 31, 2005, 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 September 30,
               2006, 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 September 30, 2006, 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, 2005.

Page 25

---



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

|(c) | During
the three-month  period ended September 30, 2006, the Company  repurchased the following
 shares of          its common stock:
|--- | -------------------------------------------------------------------------------------------------------------------------------------

|Period                     | (a) Total Number of Shares Purchased | (b) Average Price
  Paid per Share | (c) Total Number of
Shares Purchased as
 Part of Publicly
Announced Plans or
     Programs | (d) Maximum Number
   (or Approximate
  Dollar Value) of
 Shares that May Yet
 Be Purchased Under
the Plans or Programs
|-------------------------- | ------------------------------------ | ---------------------------------- | ------------------------------------------------------------------------------------------ | -----------------------------------------------------------------------------------------------------------------------
|                           |                                      |                                    |                                                                                            |                                                                                                                        
|June 1 - June 30, 2006     |                                      |                                    |                                                                                            | 0                                                                                                                      
|August 1 - August 31, 2006 |                                      |                                    |                                                                                            | 5,357(1)                                                                                                               
|Sept. 1 - Sept. 30, 2006   |                                      |                                    |                                                                                            | 0                                                                                                                      
|                           |                                      |                                    |                                                                                            |                                                                                                                        

(1) These  shares of
common  stock were  purchased  by the  Company in  satisfaction  of its  obligation
 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  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

Page 26

---



ITEM 4 -
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - None

ITEM 5 - OTHER
INFORMATION  None

ITEM 6 - EXHIBITS

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

| | 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.
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Page 27

---



# 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:   November 10, 2006Date:   November 10, 2006 |  | Pavilion Bancorp, Inc./s/ Richard J. DeVries
Richard J. DeVriesPresident and Chief Executive Officer/s/ Mark D. Wolfe
Mark D. WolfeChief Financial Officer
|-------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Page 28

---



EXHIBIT INDEX

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

|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.
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Page 29