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

# FORM 10-Q

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

# For the quarterly
period ended March 31, 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 ofIncorporation or Organization) | 38-3088340(I.R.S. EmployerIdentification No.)
|---------------------------------------------------------------------- | ---------------------------------------------

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

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

Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for shorter periods
that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

Yes |X|       No [_]

Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.
See definition of accelerated filer and large accelerated filer (in Rule 12b-2
of the Exchange Act). (Check one:)

Large Accelerated Filer
[_]     Accelerated Filer [_]     Non-Accelerated Filer  |X|

Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes [_]       No |X|

As of May 15, 2006 there were 736,765
outstanding shares of the registrants common stock, no par value.

Page 1

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# CROSS REFERENCE TABLE



# 

|ITEM
NO.                    | DESCRIPTION | PAGE NO.
|--------------------------- | ----------- | --------
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|Item 1                      |             |         
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|Item 2                      |             |         
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|Item 3                      |             |         
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|Item 4                      |             |         
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|                            |             |         
|PART II - OTHER INFORMATION |             |         
|                            |             |         
|Item 1                      |             |         
|Item 1A.                    |             |         
|Item 2                      |             |         
|Item 3                      |             |         
|Item 4                      |             |         
|Item 5                      |             |         
|Item 6                      |             |         
|                            |             |         
|Signatures                  |             |         
|                            |             |         
|Exhibit Index               |             |         

Page 2

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REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM

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

We have reviewed the condensed
consolidated balance sheet of Pavilion Bancorp, Inc. (the Corporation) as of
March 31, 2006, and the related condensed consolidated statements of income,
shareholders equity, and cash flows for the three month periods ended March 31, 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, MichiganMay
15, 2006

Page 3

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# PART I FINANCIAL INFORMATION

# ITEM 1- FINANCIAL
STATEMENTS

CONDENSED CONSOLIDATED
BALANCE SHEETS(000s omitted)

|                                                             | March 31,2006(unaudited) | December 31,2005
|------------------------------------------------------------ | ------------------------ | ----------------
|                                                             |                          |                 
|ASSETS                                                       |                          |                 
|Cash and due from banks                                      |                          |                 
|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 outstanding:  736,765 at March 31, 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

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

|                                                    | Three Months EndedMarch 31,
|--------------------------------------------------- | ---------------------------
|                                                   
|                                                    |                            
|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

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# CONDENSED  CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY (unaudited)For the periods
ended March 31, 2005 and 2006

|Common Stock Paid-In Capital                 | Retained Earnings | Accumulated Other Comprehensive Income/(Loss) | Total Shareholders' 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 option expense                         |                   |                                               |                           
|Stock options exercised                      |                   |                                               |                           
|Cash dividends - $.24 per share              |                   |                                               |                           
|                                             |                   |                                               |                           
|Balance March 31, 2005                       |                   |                                               | $                         
|                                             |                   |                                               |                           
|                                             |                   |                                              
|Balance January 1, 2006                      |                   |                                               | $                         
|Comprehensive income:                        |                   |                                              
|Net income                                   |                   |                                               |                           
|Unrealized gains on securities               |                   |                                              
|available for sale                           |                   |                                               |                           
|Tax effect                                   |                   |                                               |                           
|                                             |                   |                                               |                           
|Total other comprehensive income             |                   |                                               |                           
|                                             |                   |                                               |                           
|Total comprehensive income                   |                   |                                               |                           
|                                             |                   |                                              
|Stock option expense                         |                   |                                               |                           
|Stock options exercised                      |                   |                                               |                           
|Cash dividends - $.24 per share              |                   |                                               |                           
|                                             |                   |                                               |                           
|Balance March 31, 2006                       |                   |                                               | $                         
|                                             |                   |                                               |                           

---

See accompanying notes
to the condensed consolidated financial statements

Page 6

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

|                                                    | Three Months EndedMarch 31,
|--------------------------------------------------- | ---------------------------
|                                                    |                            
|                                                   
|                                                    |                            
|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       |                            
|Amortization of mortgage servicing rights           |                            
|Origination of mortgage loans held for sale         |                            
|Proceeds from sales of mortgage loans held for sale |                            
|Net gain 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            |                            
|Purchases                                           |                            
|Purchase of Federal Home Loan Bank Stock            |                            
|Net premises and equipment expenditures             |                            
|Net decrease (increase) in loans                    |                            
|Recoveries on loans charged-off                     |                            
|                                                    |                            
|Net cash provided by (used in) investing activities |                            
|                                                    |                            
|Cash flows from financing activities                |                            
|Net change in deposits                              |                            
|Net change in short term borrowings                 |                            
|Proceeds from FHLB advances                         |                            
|Repayments of FHLB advances                         |                            
|Stock options exercised                             |                            
|Dividends paid                                      |                            
|                                                    |                            
|Net cash (used in) provided by financing activities |                            
|                                                    |                            
|Net increase in cash and cash equivalents           |                            
|Cash and cash equivalents at beginning of period    |                            
|                                                    |                            
|                                                    |                            
|Cash and cash equivalents at end of period          |                            
|                                                    |                            
|                                                    |                            
|Transfer from:                                      |                            
|Loans to foreclosed real estate                     |                            
|Cash paid for:                                      |                            
|Interest                                            |                            
|Income taxes                                        |                            

---

See accompanying notes
to condensed consolidated financial statements

Page 7

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# NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

# NOTE 1  PRINCIPLES
OF CONSOLIDATION AND NATURE OF OPERATIONS

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

Basis of Financial
Statement PresentationThe accompanying unaudited
consolidated interim financial statements have been prepared in conformity with accounting
principles generally accepted in the United States of America and with the instructions to
Form 10-Q. Accordingly, certain information and disclosures required by the accounting
principles generally accepted in the United States of America for complete financial
statements are not included herein. The interim financial statements should be read in
conjunction with the financial statements of Pavilion Bancorp, Inc. and the notes thereto
included in the Companys annual report on Form 10-K for the year ended December 31,
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 three months ended March 31, 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.  Adoption of this statement is not expected to have a material effect on the results of operations or financial condition of the Company.

Page 8

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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.

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 March 31, 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 March 31, 2006, and changes during the quarter then ended is presented
below:

|Options                            | Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term | Aggregate Intrinsic Value
|---------------------------------- | ------ | ------------------------------- | ------------------------------------------- | -------------------------
|                                   |        |                                 |                                             |                          
|Outstanding, January 1, 2006       |        |                                 |                                             | 30,791                   
|Granted                            |        |                                 |                                             | -                        
|Exercised                          |        |                                 |                                             | (1,386                   
|Forfeited or expired               |        |                                 |                                             | -                        
|                                   |        |                                 |                                             |                          
|Outstanding, March 31, 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 our first 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 March 31, 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.

Page 9

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The summary of the status of the
Companys nonvested shares as of March 31, 2006, and changes during the quarter then
ended, is presented below:

|Nonvested Shares             | Shares | Weighted
  Average
 Grant Date
 Fair Value
|---------------------------- | ------ | ------------------------------------------
|                             |        |                                           
|Nonvested at January 1, 2006 |        | 5,692                                     
|Granted                      |        | -                                         
|Vested                       |        | (1,618                                    
|                             |        |                                           
|Forfeited                    |        | -                                         
|                             |        |                                           
|Nonvested at March 31, 2006  |        | 4,074                                     
|                             |        |                                           

Options outstanding and exercisable
at March 31, 2006 were as follows:

|                          | Outstanding | Exercisable
|------------------------- | ----------- | -----------
|                          |             |            
|
|$17.00 - $24.00           |             | 3,339      
|$34.00 - $42.00           |             | 4,851      
|$48.00 - $52.00           |             | 15,965     
|$55.00 - $61.00           |             | 5,250      
|                          |             |            
|Outstanding at period end |             | 29,405     
|                          |             |            

The following table illustrates the effect
on net income and earnings per share as of and for the three months ended March 31, 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)

|                                                                | Three Months Ended
    March 31,
|--------------------------------------------------------------- | --------------------------------
|
|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                          |                                 

Page 10

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As of March 31, 2006, there was
$36,000, 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.

# NOTE 3  EARNINGS
PER SHARE

Earnings per common share have been
computed based on the following for the three months ended March 31, 2006 and 2005
(000s omitted, except antidilutive stock options):

|                                             | 2006 | 2005  
|-------------------------------------------- | ---- | ------
|Net income                                   |      | $400  
|                                             |      |       
|Average number of common shares outstanding  |     
|used to calculate basic earnings per share   |      | 737   
|                                             |      |       
|Effect of dilutive options                   |      | 1     
|                                             |      |       
|Average number of common shares outstanding  |     
|used to calculate diluted earnings per       |     
|common share                                 |      | 738   
|                                             |      |       
|Number of antidilutive stock options         |     
|excluded from the diluted earnings per share |     
|computation                                  |      | 21,215
|                                             |      |       

# NOTE 4  LOANS
RECEIVABLE

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

|                                          | March 31,
  2006 | December 31,
    2005
|----------------------------------------- | ---------------- | ---------------------
|                                          |                  |                      
|Commercial                                |                  | $124,166             
|Agricultural                              |                  | 38,026               
|Residential mortgage                      |                  | 29,573               
|Residential construction                  |                  | 10,877               
|Home equity lines of credit               |                  | 19,688               
|Consumer                                  |                  | 12,211               
|                                          |                  |                      
|                                          |                  | 234,541              
|Less: allowance for loan and lease losses |                  | 2,596                
|                                          |                  |                      
|Loans receivable, net                     |                  | $231,945             
|                                          |                  |                      

Page 11

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Activity in the allowance for loan
losses for the quarters ended March 31, are as follows (000s omitted):

|                               | 2006 | 2005  
|------------------------------ | ---- | ------
|Balance at beginning of period |      | $2,683
|Charge-offs                    |      | (97   
|Recoveries                     |      | 10    
|Provision for loan losses      |      | -     
|                               |      |       
|Balance at end of period       |      | $2,596
|                               |      |       

# 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 $3.0 million
and $3.1 million at March 31, 2006 and December 31, 2005, respectively.

Page 12

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

This discussion provides information
about the consolidated financial condition and results of operations of the Company as of
March 31, 2006 and for the three month periods ended March 31, 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 determining the allowance for loan losses, determining the
fair value of securities and other financial instruments, the valuation of mortgage
servicing rights and deferred tax and tax provision estimates. The Companys critical
accounting policies are described in the financial section of its 2005 Annual Report.

Financial OverviewTotal assets decreased by $3.4
million or 1.2% from December 31, 2005 to March 31, 2006. Cash and due from banks
increased $201,000 or 1.8%. Loans receivable, net of the allowance for loan and lease
losses, decreased by $3.0 million or 1.3% from December 31, 2005 to March 31, 2006.
Investment securities available for sale decreased $1.0 million or 3.9% from December 31,
2005 to March 31, 2006. Total deposits increased $12.6 million or 6.0% from December 31,
2005 to March 31, 2006. Borrowed funds decreased $16.3 million or 41.1%. Consolidated net
income for the three months ended March 31, 2006 was $400,000 compared to $259,000 for the
same period in 2005. Basic earnings per share (EPS) and fully diluted EPS for
the three months ended March 31, 2006 were $0.54 per share and $0.54 per share,
respectively. For the same period in 2005 basic and fully diluted EPS were $0.30 and
$0.30, respectively.

Page 13

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# FINANCIAL CONDITION

InvestmentsTotal investments securities
available-for-sale decreased 3.9%, or $1.0 million, to $24.4 million at March 31, 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 (FHLB) remains unchanged at $2.8 million at
March 31, 2006 and December 31, 2005. Investment in Federal Reserve Bank (FRB)
stock also remains unchanged at $630,000 as of March 31, 2006 and December 31, 2005. The
Company had no held-to-maturity securities as of March 31, 2006 and December 31, 2005.

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

# Consolidated Loans
Outstanding

|March 31, 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 three months of
2006, loans, net of allowance for loan losses, decreased $3.0 million, or 1.3%. The mix of
the loan portfolio continues to remain relatively unchanged from prior periods. The
Commercial and Agricultural loan portfolios decreased by $1.2 million or 1.0% and $0.8
million or 1.9%, respectively. The decrease in these portfolios is due primarily to the
seasonal pay downs of lines of credit. Management expects these portfolios to increase
once again in the second quarter of 2006. The residential mortgage loan portfolio grew by
$1.5 million or 5.2% due to increased demand for bridge loans as well as business
development efforts. Residential construction loan portfolio decreased approximately $1.0
million, or 8.6%, as construction activity tapers off during the winter months. Home
equity lines of credit decreased approximately $1.0 million, or 4.9%, as customers look to
move from variable rate home equity lines to more fixed rate mortgage products. Consumer
loans decreased slightly in the current first quarter of 2006 as well as repayments
outpaced demand for new loans. Management expects increases to the loan portfolios in the
second quarter as demand for loans has increased, as demonstrated in the commitments to
originate loans discussed below.

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 March 31, 2006 and December 31,
2005:

|March 31, 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                                       |                  
|                                            |                  

Page 14

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Outstanding commitments to originate
or refinance loans increased $3.4 million, or 47.1%, to $10.8 million at March 31, 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 and commercial and
standby letters of credit have remained relatively stable in the first quarter of 2006.
Management does not expect that all commitments will result in funded loans.

# Credit Quality

The Bank continues to monitor the
asset quality of the loan portfolio utilizing a senior loan review officer who, combined
with external loan review specialists, periodically submits reports to the Chief Executive
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 March 31, 2006 and 2005, and
December 31, 2005.

|(000's omitted)                                                | March 31,2006 | December 31,2005 | March 31,2005
|-------------------------------------------------------------- | ------------- | ---------------- | -------------
|Non-accruing loans past due                                    |               | $1,043           |              
|Loans past due 90 days or more still accruing                  |               | 792              |              
|                                                               |               |                  |              
|Total nonperforming loans                                      |               | 1,835            |              
|Other real estate                                              |               | 354              |              
|                                                               |               |                  |              
|Total nonperforming assets                                     |               | $2,189           |              
|                                                               |               |                  |              
|Nonperforming loans as a percent of total loans                |               | 0.78             | %            
|Nonperforming assets as a percent of total assets              |               | 0.77             | %            
|Nonperforming loans as a percent of the allowance for loan and |              
|lease losses                                                   |               | 70.69            | %            

At March 31, 2006, total
nonperforming assets decreased by $136,000 or 5.8% 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. 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
remained relatively consistent at 0.77% at March 31, 2006 compared to 0.81% and 0.75% at
December 31, 2005 and March 31, 2005, respectively. Nonperforming loans as a percentage of
the allowance for loan and lease losses increased to 70.69% as of March 31, 2006 compared
to 66.19% and 53.57% as of December 31, 2005 and March 31, 2005, respectively.
Approximately $487,000 of the nonperforming loans at March 31, 2006 represent agricultural
loans that are fully guaranteed by the Farm Service Agency and management believes that
they are adequately reserved.

Activity in the allowance for loan
and lease losses for the three months ended March 31, 2006 and 2005 follows:

|(000's omitted)                | Three Months Ended
     March 31,
|------------------------------ | ---------------------------------
|
|Balance at beginning of period |                                  
|Charge-offs                    |                                  
|Recoveries                     |                                  
|Provision for loan losses      |                                  
|                               |                                  
|Balance at end of period       |                                  
|                               |                                  

Page 15

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The Bank decreased its funding of
provision for loan losses during the first quarter 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 loan portfolio has increased to $234.9 million as of March 31, 2006 compared
to $210.9 million outstanding as of March 31, 2005. The credit quality of the portfolio
has improved significantly as of March 31, 2006 compared to March 31, 2005. The level of
adversely criticized and classified loans has decreased to $14.3 million as of March 31,
2006 down from $21.0 million as of March 31, 2005. The level of overall delinquencies
within the loan portfolio has also improved to 1.2% of outstanding loans as of March 31,
2006 compared to 2.0% of outstanding loans as of March 31, 2005. Management believes that
the level of allowance is appropriate given the improved 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.

Deposits and Borrowed
FundsTotal deposits increased $12.6
million or 6.0% during the quarter to $223.3 million at March 31, 2006 from $210.7 million
at December 31, 2005. Noninterest-bearing deposits increased $1.2 million, or 2.6% to
$46.5 million at March 31, 2006 from $45.3 million at December 31, 2005. Interest-bearing
deposits increased $11.4 million, or 6.9% to $176.8 million at March 31, 2006 from $165.4
million at December 31, 2005. Specifically, certificates of deposit
(CDs) with balances of $100,000 and greater increased $8.5 million, or
15.4% to $63.6 million at March 31, 2006 from $55.1 million at December 31, 2005. The
increase in 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 that longer term CDs.
Certificates of Deposit with balances under $100,000 increased $0.7 million, or 2.1%, to
$37.6 million at March 31, 2006 from $36.9 million at December 31, 2005. Other
interest-bearing deposits, including savings and NOW accounts, increased $2.2 million, or
2.9% to $75.6 million at March 31, 2006 from $73.4 at December 31, 2005. The increase is
attributable to continuing business development efforts.

Borrowed funds decreased by $16.3
million, or 41.1%, to $23.3 million at March 31, 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 quarter of 2006,
equity capital increased by $270,000, reflecting current quarter earnings as well as the
exercise of stock options. The number of outstanding shares at December 31, 2005 of
735,379 increased to 736,765 at March 31, 2006, as a result of the exercise of stock
options. 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.

Page 16

---



# Results of Operations

Net IncomeNet income for the three months ended
March 31, 2006 increased $141,000, or 54.4% to $400,000 compared to $259,000 for the same
period in 2005. Basic earnings per share (EPS) for the three months ended
March 31, 2006 were $0.54 compared to $0.30 for the same period in 2005. Diluted EPS for
the three months ended March 31, 2006 were $0.54 compared to $0.30 for the same period in
2005. The increase in earnings per share is due to the 54.4% improvement in net income
combined with a decrease in the average number of shares outstanding. The average number
of outstanding shares decreased as a result of the tender offer that occurred in the
second quarter of 2005.

The increase in income resulted
primarily from an improvement in net interest income and marginal decrease in noninterest
expense for the three months period ended March 31, 2006. Net interest income increased
$108,000, or 3.8%, to $2.9 million for the three months ended March 31, 2006 compared to
$2.8 million for the same period in 2005. This improvement is due primarily to increased
yields earned on loans receivable. Noninterest expense decreased $266,000, or 8.0%, to
$3.1 million for the three months ended March 31, 2006 compared to $3.3 million for the
same period in 2005. Among other factors, this decrease was largely due to a decrease in
compensation and benefits expense resulting from the Banks prior year reduction in
workforce.

Page 17

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Net Interest MarginThe following table shows the year to
date daily average balances for interest earning assets and interest bearing liabilities,
interest earned or paid, and the annualized effective rate or yield, for the three month
periods ended March 31, 2006 and 2005.

|                                         | 2006 | 2005
|---------------------------------------- | ---- | ----
|(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 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 March 31, 2006 to 6.76% from 6.03% as compared to the same
period in the prior year. This increase is due primarily to increases in the prime lending
rate over the last 12 months. The yield earned on loans receivable increased to 7.23% for
the first quarter of 2006 compared to 6.57% for the same period in 2005. The cost of funds
on interest bearing liabilities increased for the quarter ended March 31, 2006 as compared
to the same period during the prior year due to the increasing rate environment. In
addition, the Companys loan growth exceeded the growth in core deposits, thereby
increasing reliance on higher cost short term borrowings and public certificates of
deposit. The interest rate paid on the subordinated debt has increased to 8.52% for the
first quarter of 2006 up from 6.81% for the same period of 2005. This increase placed
upward pressure on the cost of funds. This increase in cost of funds caused the
compression in the Companys net interest margin of 26 basis points to 4.41% for the
three months ended March 31, 2006 compared to 4.67% for the same period in 2005.
Management is focused on development of the core deposit base in the coming year to reduce
the reliance on short term borrowings. In addition, management is considering redemption
of the subordinated debt, which is callable in December 2006. Despite the margin
compression in the first quarter of 2006, the Companys net interest margin remains
quite strong, and management continues to take steps to neutralize some portion of this
risk.

Page 18

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Noninterest IncomeTotal noninterest income decreased
$232,000, or 24.7%, to $707,000 for the quarter ended March 31, 2006 compared to $939,000
for the same period in 2005. Service charges on deposit accounts increased $21,000, or
7.1%, to $316,000 million for the three months ended March 31, 2006 compared to $295,000
for the same period in 2005. The increase in fee income was due in large part to increased
volume of customer overdraft activity. Fee income related to debit card activity also
increased with a larger number of cards issued. Net gains on sale of loans decreased 22.8%
or $71,000 to $241,000 in the first quarter of 2006 compared to $312,000 for the same
period in 2005 due to a reduction in mortgage volume. Mortgage loan sales were down
approximately 17.4% in 2006 to $10.5 million for the first quarter compared to $12.8
million for the same period in 2005. Loan servicing fees, net of amortization, decreased
$160,000, or 82.5%, to $34,000 for the three months ended March 31, 2006 compared to
$194,000 for the same period in 2005. This decrease is due to increased levels of
amortization of the Companys mortgage servicing asset. Other non-interest income
decreased $22,000, or 15.9%, to $116,000 for the three months ended March 31, 2006
compared to $138,000 for the same period in 2005. In the first quarter of 2006, management
charged down one foreclosed property by $34,000 for continued declines in estimated
collateral value. This adjustment was the primary cause of the decline in other
noninterest income.

Noninterest ExpenseNoninterest expense for the three
months ended March 31, 2006 was $3.1 million, compared to $3.3 million for the same period
in 2005, a decrease of approximately $266,000 or 8.0%. Compensation and employee benefits
decreased $216,000, or 10.3%, to $1.9 million for the three months ended March 31, 2006
compared to $2.1 million for the same period in 2005. First quarters of both 2006 and 2005
were impacted by Reduction-in-Force plans (RIF) that were developed with the
goal of increasing operational efficiency. The Bank eliminated various staff positions in
the first quarter of 2006 and 2005, and severance packages were provided to employees
affected by the RIF. The aggregate cost of the RIF plans were approximately $210,000 and
$264,000 for the quarters ended March 31, 2006 and 2005, respectively. Occupancy and
equipment costs remained relatively consistent at $361,000 and $346,000 for the quarters
ended March 31, 2006 and 2005, respectively. Fees for professional services decreased
approximately $72,000 or 35.1% to $133,000 in the first quarter of 2006 compared to
$205,000 for the same period in 2005. The three months ended March 31, 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. Marketing expense increased by $20,000, or 58.8%,
for the three months ended March 31, 2006 to $54,000 compared to $34,000 for the same
period in 2005. This increase is due to increased business development efforts and new
marketing programs. Other operating expenses decreased approximately $38,000, or 23.8%,
for the three months ended March 31, 2006 to $122,000 compared to $160,000 for the same
period in 2005. This decrease is due to managements focus on cost reductions.

Federal Income Tax
ExpenseThe provision for federal income tax
increased $31,000, or 22.5%, to $169,000 (29.7% of pretax income) for the three months
ended March 31, 2006 compared to $138,000 (34.8% of pretax income) for the same period in
2005. The increase in federal income tax provision is primarily attributable to the
increased level of earnings.

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 FHLB. 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.

Page 19

---



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 March 31, 2006, cash and short-term investments totaled $11.5 million and
securities classified as available for sale totaled $24.4 million. However,
available-for-sale securities with a market value of $13.6 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 $457,000 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.
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.

Financing activities consist
primarily of activity in deposit accounts, overnight borrowings from our correspondent
banks and FHLB advances. The Bank experienced a net increase in total deposits of $12.6
million for the 3 months ended March 31, 2006. Deposit flows are affected by the overall
level of interest rates, products offered by the Bank and its local competitors as well as
other factors.

The Banks borrowing position
decreased during the first quarter of 2006 from $39.6 million at December 31, 2005
compared to the balance of $23.3 million as of March 31, 2006. As of March 31, 2006, the
Bank had the ability to borrow a total of $21.9 million from the FHLB based upon the
amount of collateral pledged, of which $8.9 million was outstanding at that date. In
addition to the FHLB, the Bank had available borrowings on a line-of-credit of $10 million
from a correspondent bank, of which $590,000 had been drawn upon as of March 31, 2006. The
Bank also had outstanding advances on repurchase agreements totaling $13.8 million at
March 31, 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 March 31, 2006, the Bank had
outstanding commitments to fund loans of $10.8 million, of which $8.1 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 FHLB borrowings. Based on the foregoing, the Company considers its
liquidity and capital resources sufficient to meets its outstanding short-term and
long-term needs.

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

Page 20

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At March 31, 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 will be 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
|---------------------------------------- | ------ | ---------------------------------------------- | -----------------------------------------------------------------------------------
|
|                                         |        |                                                |                                                                                    
|March 31, 2006                           |        |                                                |                                                                                    
|Total Capital (to risk weighted assets)  |        |                                               
|Bank of Lenawee                          |        |                                                | $                                                                                  
|Tier 1 Capital (to risk weighted assets) |        |                                               
|Bank of Lenawee                          |        |                                                | $                                                                                  
|Tier 1 Capital (to average assets)       |        |                                               
|Bank of Lenawee                          |        |                                                | $                                                                                  
|                                         |        |                                               
|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.

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The Company has not experienced a
material change in its financial instruments that are sensitive to changes in interest
rates since December 31, 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. The Companys
               Chief Executive Officer and Chief Financial Officer, after evaluating the
               effectiveness of the companys disclosure controls and procedures (as
               defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the
               period covered by this Form 10-Q Quarterly Report, have concluded that the
               Companys disclosure controls and procedures were adequate and effective to
               ensure that material information relating to the company would be made known to
               them by others within the company, particularly during the period in which this
               Form 10-Q Quarterly Report was being prepared.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (b) | Changes in Internal Controls. During the period covered by this report,
               there have been no changes in the Companys internal control over financial
               reporting that have materially affected or are reasonably likely to materially
               affect the Companys internal control over financial reporting.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# PART II OTHER INFORMATION

ITEM 1  LEGAL
PROCEEDINGS The 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.

# ITEM 2 
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS  None

# ITEM 3  DEFAULTS
UPON SENIOR SECURITIES  None

# ITEM 4  SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS  None

# ITEM 5  OTHER
INFORMATION  None

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# ITEM 6  EXHIBITS

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

| | 10 | Supplemental
 Retirement  Agreement  and Release between  Pavilion  Bancorp,  Inc., Bank of Lenawee,  and  Pamela  S.
                            Fisher,  dated April 24, 2006 (as  previously  disclosed in
the Current  Report on Form                             8-K filed by the registrant on
April 20, 2006).
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

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# SIGNATURES

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

|Date:      May  15, 2006
Date:      May  15, 2006 |  | Pavilion Bancorp, Inc./s/ Richard J. DeVries
Richard J. DeVriesPresident and Chief Executive Officer/s/ Mark D. Wolfe
Mark D. WolfeChief Financial Officer
|------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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EXHIBIT INDEX

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

|10 | Supplemental
 Retirement  Agreement  and Release between Pavilion Bancorp,  Inc., Bank of Lenawee, and Pamela S. Fisher,  dated
                  April  24,  2006  (as  previously  disclosed  in the  Current  Report
 on Form  8-K  filed by the                   registrant on April 20, 2006).
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

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