##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2006
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
 Commission File #000-30521
 PAVILION BANCORP, INC.
  Michigan
(State or Other Jurisdiction of
Incorporation or Organization)
    
    38-3088340
(I.R.S. Employer
Identification No.)
 135 East Maumee Street, Adrian, Michigan 49221
  (517) 265-5144, Fax (517) 265-3926
  þ o
  o o þ
  o þ




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##### 



CROSS REFERENCE TABLE
 ITEM NO.
    
    DESCRIPTION
    
    PAGE NO.PART I  FINANCIAL INFORMATIONItem 1.
    
    Financial Statements (Condensed and Unaudited)(a)Report of Independent Registered Public Accounting Firm
    
    
    3(b)Condensed Consolidated Balance Sheets
    
    
    4(c)Condensed Consolidated Statements of Income
    
    
    5(d)Condensed Consolidated Statements of Changes in Shareholders Equity
    
    
    6(e)Condensed Consolidated Statements of Cash Flows
    
    
    7(f)Notes to Condensed Consolidated Financial Statements
    
    
    8Item 2.
    
    Managements Discussion and Analysis of
Financial Condition and Results of Operations
    
    
    13Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    23Item 4.
    
    Controls and Procedures
    
    
    24PART II OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    24Item 1.A.
    
    Risk Factors
    
    
    24Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    24Item 3.
    
    Defaults Upon Senior Securities
    
    
    24Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    25Item 5.
    
    Other Information
    
    
    25Item 6.
    
    Exhibits
    
    
    25Signatures
    
    
    26Exhibit Index
    
    
    27Certificate of the Chief Executive Officer to Section 302Certificate of the Chief Financial Officer to Section 302Certificate of the CEO and CFO to Section 906
  Page 2




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PART I
 FINANCIAL INFORMATION
 
 ITEM 1  FINANCIAL STATEMENTS
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 June 30,
    
    
    December 31,2006
    
    
    2005(unaudited)ASSETSCash and due from banks
    
    $
    11,293
    
    
    $
    11,308Federal funds sold
    
    
    10,240
    
    
    
    Total cash and cash equivalents
    
    
    21,533
    
    
    
    11,308Securities available for sale
    
    
    24,151
    
    
    
    25,407Federal Home Loan Bank, Freddie Mac, FNMA stock
    
    
    2,795
    
    
    
    2,795Federal Reserve Bank stock
    
    
    630
    
    
    
    630Loans held for sale
    
    
    372
    
    
    
    927Loans receivable, net of allowance for loan and lease losses
    
    
    240,997
    
    
    
    234,915Premises and equipment, net
    
    
    6,563
    
    
    
    6,135Accrued interest receivable
    
    
    1,760
    
    
    
    1,651Mortgage servicing rights
    
    
    2,766
    
    
    
    2,898Other assets
    
    
    1,035
    
    
    
    1,215Total assets
    
    $
    302,602
    
    
    $
    287,881LIABILITIES AND SHAREHOLDERS EQUITYDepositsNoninterest bearing
    
    $
    48,783
    
    
    $
    45,353Interest bearing
    
    
    183,706
    
    
    
    165,395Total deposits
    
    
    232,489
    
    
    
    210,748Federal funds purchased
    
    
    
    
    
    
    9,000Repurchase agreements
    
    
    13,305
    
    
    
    13,663Federal Home Loan Bank advances
    
    
    18,385
    
    
    
    16,901Accrued interest payable
    
    
    669
    
    
    
    667Other liabilities
    
    
    2,574
    
    
    
    2,529Subordinated debentures
    
    
    5,000
    
    
    
    5,000Common stock in ESOP subject to repurchase obligation
    
    
    3,076
    
    
    
    2,989Total liabilities
    
    
    275,498
    
    
    
    261,497Shareholders equityCommon stock and paid-in capital, no par value: shares issued and
and outstanding: 736,765 at June 30, 2006; 735,379 at
December 31, 2005
    
    
    10,686
    
    
    
    10,724Retained earnings
    
    
    16,705
    
    
    
    15,963Accumulated other comprehensive loss
    
    
    (287
    )
    
    
    (303
    )Total shareholders equity
    
    
    27,104
    
    
    
    26,384Total liabilities and shareholders equity
    
    $
    302,602
    
    
    $
    287,881
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CONDENSED CONSOLIDATED STATEMENTS OF
INCOME (unaudited)
 Three months ended
    
    
    Six months endedJune 30,
    
    
    June 30,(000s omitted, except per share data)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Interest and dividend incomeLoans receivable, including fees
    
    $
    4,312
    
    
    $
    3,620
    
    
    $
    8,456
    
    
    $
    6,955Debt securities:Taxable
    
    
    179
    
    
    
    201
    
    
    
    365
    
    
    
    398Tax  exempt
    
    
    25
    
    
    
    42
    
    
    
    49
    
    
    
    75Dividend income
    
    
    48
    
    
    
    34
    
    
    
    89
    
    
    
    68Federal funds sold and other
    
    
    56
    
    
    
    27
    
    
    
    141
    
    
    
    64Total interest and dividend income
    
    
    4,620
    
    
    
    3,924
    
    
    
    9,100
    
    
    
    7,560Interest expenseDeposits
    
    
    1,303
    
    
    
    755
    
    
    
    2,446
    
    
    
    1,392Subordinated debentures
    
    
    109
    
    
    
    83
    
    
    
    214
    
    
    
    167Other borrowed funds
    
    
    249
    
    
    
    148
    
    
    
    557
    
    
    
    247Total interest expense
    
    
    1,661
    
    
    
    986
    
    
    
    3,217
    
    
    
    1,806Net interest income
    
    
    2,959
    
    
    
    2,938
    
    
    
    5,883
    
    
    
    5,754Provision for loan losses
    
    
    105
    
    
    
    150
    
    
    
    105
    
    
    
    180Net interest income after provision for loan losses
    
    
    2,854
    
    
    
    2,788
    
    
    
    5,778
    
    
    
    5,574Noninterest incomeService charges and fees
    
    
    340
    
    
    
    329
    
    
    
    656
    
    
    
    624Net gains on sale of loans
    
    
    322
    
    
    
    444
    
    
    
    563
    
    
    
    756Loan servicing fees, net of amortization
    
    
    20
    
    
    
    77
    
    
    
    54
    
    
    
    271Other
    
    
    164
    
    
    
    49
    
    
    
    280
    
    
    
    187846
    
    
    
    899
    
    
    
    1,553
    
    
    
    1,838Noninterest expenseCompensation and employee benefits
    
    
    1,574
    
    
    
    1,725
    
    
    
    3,458
    
    
    
    3,825Occupancy and equipment
    
    
    364
    
    
    
    363
    
    
    
    725
    
    
    
    709Professional services
    
    
    140
    
    
    
    199
    
    
    
    273
    
    
    
    404Marketing
    
    
    36
    
    
    
    76
    
    
    
    90
    
    
    
    110Outside service fees
    
    
    265
    
    
    
    284
    
    
    
    550
    
    
    
    541Postage and delivery services
    
    
    71
    
    
    
    75
    
    
    
    152
    
    
    
    165Director and shareholders
    
    
    47
    
    
    
    62
    
    
    
    110
    
    
    
    120Loan and collection
    
    
    68
    
    
    
    83
    
    
    
    147
    
    
    
    161Other
    
    
    123
    
    
    
    152
    
    
    
    245
    
    
    
    3122,688
    
    
    
    3,019
    
    
    
    5,750
    
    
    
    6,347Income before income taxes
    
    
    1,012
    
    
    
    668
    
    
    
    1,581
    
    
    
    1,065Income taxes
    
    
    317
    
    
    
    204
    
    
    
    486
    
    
    
    342Net income
    
    $
    695
    
    
    $
    464
    
    
    $
    1,095
    
    
    $
    723Net earnings per shareBasic
    
    $
    0.95
    
    
    $
    0.57
    
    
    $
    1.49
    
    
    $
    0.87Diluted
    
    $
    0.94
    
    
    $
    0.56
    
    
    $
    1.48
    
    
    $
    0.86Dividends per share
    
    $
    0.24
    
    
    $
    0.24
    
    
    $
    0.48
    
    
    $
    0.48
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PAVILION BANCORP, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY (unaudited)
 For the periods ended June 30, 2005 and 2006
 Common
    
    
    
    
    
    
    AccumulatedStock
    
    
    
    
    
    
    Other
    
    
    TotalPaid-In
    
    
    Retained
    
    
    Comprehensive
    
    
    Shareholders(000's omitted)
    
    Capital
    
    
    Earnings
    
    
    Income/(Loss)
    
    
    EquityBalance January 1, 2005
    
    $
    10,190
    
    
    $
    21,713
    
    
    $
    (46
    )
    
    $
    31,857Comprehensive income:Net income
    
    
    
    
    
    
    723
    
    
    
    
    
    
    
    723Unrealized (losses) on securities
available for sale
    
    
    
    
    
    
    
    
    
    
    (171
    )Tax effect
    
    
    
    
    
    
    
    
    
    
    (58
    )Total other comprehensive loss
    
    
    
    
    
    
    
    
    
    
    (113
    )
    
    
    (113
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    610Change in common stock subject to
repurchase
    
    
    (110
    )
    
    
    
    
    
    
    
    
    
    
    (110
    )Stock repurchase and retirement
    
    
    (1,566
    )
    
    
    (6,952
    )
    
    
    
    
    
    
    (8,518
    )Stock option expense
    
    
    10
    
    
    
    
    
    
    
    
    
    
    
    10Stock options exercised
    
    
    530
    
    
    
    
    
    
    
    
    
    
    
    530Cash dividends  $.48 per share
    
    
    
    
    
    
    (382
    )
    
    
    
    
    
    
    (382
    )Balance June 30, 2005
    
    $
    9,054
    
    
    $
    15,102
    
    
    $
    (159
    )
    
    $
    23,997Balance January 1, 2006
    
    $
    10,724
    
    
    $
    15,963
    
    
    $
    (303
    )
    
    $
    26,384Comprehensive income:Net income
    
    
    
    
    
    
    1,095
    
    
    
    
    
    
    
    1,095Unrealized gain on securities
available for sale
    
    
    
    
    
    
    
    
    
    
    24Tax effect
    
    
    
    
    
    
    
    
    
    
    (8
    )Total other comprehensive income
    
    
    
    
    
    
    
    
    
    
    16
    
    
    
    16Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,111Change in common stock subject to
repurchase
    
    
    (87
    )
    
    
    
    
    
    
    
    
    
    
    (87
    )Stock option expense
    
    
    11
    
    
    
    
    
    
    
    
    
    
    
    11Stock options exercised
    
    
    38
    
    
    
    
    
    
    
    
    
    
    
    38Cash dividends  $.48 per share
    
    
    
    
    
    
    (353
    )
    
    
    
    
    
    
    (353
    )Balance June 30, 2006
    
    $
    10,686
    
    
    $
    16,705
    
    
    $
    (287
    )
    
    $
    27,104
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CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS (unaudited)
 Six months endedJune 30,(000s omitted)
    
    2006
    
    
    2005Cash Flows from operating activitiesNet income
    
    $
    1,095
    
    
    $
    723Adjustments to reconcile net income to
net cash from operating activitiesDepreciation
    
    
    335
    
    
    
    335Stock option expense
    
    
    11
    
    
    
    10Provision for loan losses
    
    
    105
    
    
    
    180Amortization on securities available for sale
    
    
    12
    
    
    
    17Loss on disposal of assets
    
    
    
    
    
    
    28Loss on sales of securities
    
    
    9
    
    
    
    Amortization of mortgage servicing rights
    
    
    427
    
    
    
    199Origination of mortgage loans held for sale
    
    
    (24,122
    )
    
    
    (31,895
    )Proceeds from sales of mortgage loans held for sale
    
    
    24,945
    
    
    
    31,778Net gains on sale of mortgage loans
    
    
    (563
    )
    
    
    (756
    )Net change in:Deferred loan origination fees
    
    
    (19
    )
    
    
    (30
    )Accrued interest receivable
    
    
    (109
    )
    
    
    (182
    )Other assets
    
    
    41
    
    
    
    289Accrued interest payable
    
    
    2
    
    
    
    159Other liabilities
    
    
    36
    
    
    
    (2,560
    )Net cash provided by (used in) operating activities
    
    
    2,205
    
    
    
    (1,705
    )Cash flows from investing activitiesSecurities available for sale:Maturities, calls and principal payments
    
    
    1,266
    
    
    
    4,200Sales of securities available for sale
    
    
    990
    
    
    
    199Purchases
    
    
    (996
    )
    
    
    (3,165
    )Purchase of Federal Home Loan Bank stock
    
    
    
    
    
    
    (57
    )Purchase of Federal Reserve Bank stock
    
    
    
    
    
    
    (120
    )Net premises and equipment expenditures
    
    
    (763
    )
    
    
    (262
    )Net increase in loans
    
    
    (6,074
    )
    
    
    (14,724
    )Recoveries on loans charged-off
    
    
    45
    
    
    
    48Net cash used in investing activities
    
    
    (5,532
    )
    
    
    (14,080
    )Cash flows from financing activitiesNet change in deposits
    
    
    21,741
    
    
    
    6,729Net change in short term borrowings
    
    
    (9,358
    )
    
    
    15,662Proceeds from Federal Home Loan Bank advances
    
    
    17,700
    
    
    
    3,000Repayments of Federal Home Loan Bank advances
    
    
    (16,216
    )
    
    
    (2,681
    )Stock repurchased
    
    
    
    
    
    
    (8,518
    )Stock options exercised
    
    
    38
    
    
    
    530Dividends paid
    
    
    (353
    )
    
    
    (632
    )Net cash from financing activities
    
    
    13,552
    
    
    
    14,090Net increase (decrease) in cash and cash equivalents
    
    
    10,225
    
    
    
    (1,695
    )Cash and cash equivalents at beginning of period
    
    
    11,308
    
    
    
    11,700Cash and cash equivalents at end of period
    
    $
    21,533
    
    
    $
    10,005Transfer from:Loans to foreclosed real estate
    
    $
    139
    
    
    $
    Cash paid for:Interest
    
    $
    3,215
    
    
    $
    1,647Income taxes
    
    $
    385
    
    
    $
    2,240
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
 NOTE 1
 PRINCIPLES OF CONSOLIDATION AND NATURE OF OPERATIONS
  Basis of Financial Statement Presentation
   Principles of Consolidation
 Nature of Operations and Industry Segments
  Recent Accounting Developments
 Accounting for Uncertainty in Income Taxes
  Page 8




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Servicing of Financial Assets
  NOTE 2
 STOCK BASED COMPENSATION
     Page 9




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Weighted
    
    
    Weighted Average
    
    
    AggregateAverage
    
    
    Remaining
    
    
    IntrinsicOptions
    
    Shares
    
    
    Exercise Price
    
    
    Contractual Term
    
    
    ValueOutstanding, January 1, 2006
    
    
    30,791
    
    
    $
    45.56Granted
    
    
    
    
    
    
    Exercised
    
    
    (1,386
    )
    
    
    17.65Forfeited or expired
    
    
    
    
    
    
    Outstanding, June 30, 2006
    
    
    29,405
    
    
    $
    46.88
    
    
    
    5.6
    
    
    $
    107,220Options exercisable, end of
period
    
    
    25,331
    
    
    $
    45.44
    
    
    
    5.3
    
    
    $
    107,220
   WeightedAverageGrant DateNonvested Shares
    
    Shares
    
    
    Fair ValueNonvested at January 1, 2006
    
    
    5,692
    
    
    $
    13.86Granted
    
    
    
    
    
    
    Vested
    
    
    (1,618
    )
    
    
    14.23Forfeited
    
    
    
    
    
    
    Nonvested at June 30, 2006
    
    
    4,074
    
    
    $
    13.71
  Outstanding
    
    
    ExercisableWeightedAverage
    
    
    Weighted
    
    
    
    
    
    
    WeightedRange of
    
    
    
    
    
    Remaining
    
    
    Average
    
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    Contractual
    
    
    Exercise
    
    
    
    
    
    
    ExercisePrices
    
    Number
    
    
    Life
    
    
    Price
    
    
    Number
    
    
    Price$17.00 - $24.00
    
    
    3,339
    
    
    
    1.2
    
    
    $
    23.36
    
    
    
    3,339
    
    
    $
    23.36$34.00 - $42.00
    
    
    4,851
    
    
    
    3.2
    
    
    $
    38.64
    
    
    
    4,851
    
    
    $
    38.64$48.00 - $52.00
    
    
    15,965
    
    
    
    6.3
    
    
    $
    49.66
    
    
    
    13,991
    
    
    $
    49.57$55.00 - $61.00
    
    
    5,250
    
    
    
    8.6
    
    
    $
    61.00
    
    
    
    3,150
    
    
    $
    61.00Outstanding at
period end
    
    
    29,405
    
    
    
    5.6
    
    
    $
    46.88
    
    
    
    25,331
    
    
    $
    45.44
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For the three months ended
    
    
    For the six months endedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net income as reported
    
    $
    695
    
    
    $
    464
    
    
    $
    1,095
    
    
    $
    723Add: Stock-based compensation expense
included in reported net income, net of
related tax effects
    
    
    3
    
    
    
    2
    
    
    
    7
    
    
    
    7Deduct: Total stock-based compensation
expense determined under fair value
based method for all awards, net of
related tax effects
    
    
    (3
    )
    
    
    (2
    )
    
    
    (7
    )
    
    
    (48
    )Pro forma net income
    
    $
    695
    
    
    $
    464
    
    
    $
    1,095
    
    
    $
    682Basic earnings per share  As reported
    
    $
    0.95
    
    
    $
    0.57
    
    
    $
    1.49
    
    
    $
    0.87Basic earnings per share  Pro forma
    
    $
    0.95
    
    
    $
    0.57
    
    
    $
    1.49
    
    
    $
    0.82Diluted earnings per share  As reported
    
    $
    0.94
    
    
    $
    0.56
    
    
    $
    1.48
    
    
    $
    0.86Diluted earnings per share  Pro forma
    
    $
    0.94
    
    
    $
    0.56
    
    
    $
    1.48
    
    
    $
    0.81
  NOTE 3  EARNINGS PER SHARE
  Three months ended
    
    
    Six months endedJune 30
    
    
    June 302006
    
    
    2005
    
    
    2006
    
    
    2005Net income
    
    $
    695
    
    
    $
    464
    
    
    $
    1,095
    
    
    $
    723Average number of common
shares outstanding used
to calculate basic
earnings per share
    
    
    737
    
    
    
    818
    
    
    
    737
    
    
    
    836Effect of dilutive options
    
    
    1
    
    
    
    4
    
    
    
    1
    
    
    
    5Average number of common
shares outstanding used
to calculate diluted
earnings per common share
    
    
    738
    
    
    
    822
    
    
    
    738
    
    
    
    841Number of antidilutive
stock options excluded
from the diluted earnings
per share computation
    
    
    21,215
    
    
    
    5,250
    
    
    
    21,215
    
    
    
    5,250
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NOTE 4
 LOANS RECEIVABLE
  June 30,
    
    
    December 31,2006
    
    
    2005Commercial
    
    $
    129,432
    
    
    $
    125,378Agricultural
    
    
    41,523
    
    
    
    38,778Residential mortgage
    
    
    30,830
    
    
    
    28,113Residential construction
    
    
    9,596
    
    
    
    11,902Home equity lines of credit
    
    
    19,663
    
    
    
    20,693Consumer
    
    
    12,647
    
    
    
    12,734243,691
    
    
    
    237,598Less: allowance for loan and lease losses
    
    
    (2,694
    )
    
    
    (2,683
    )Loans receivable, net
    
    $
    240,997
    
    
    $
    234,915
  Three months ended
    
    
    Six months endedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Balance at beginning of period
    
    $
    2,596
    
    
    $
    2,505
    
    
    $
    2,683
    
    
    $
    2,495Charge-offs
    
    
    (42
    )
    
    
    (22
    )
    
    
    (139
    )
    
    
    (74
    )Recoveries
    
    
    35
    
    
    
    16
    
    
    
    45
    
    
    
    48Provision for loan losses
    
    
    105
    
    
    
    150
    
    
    
    105
    
    
    
    180Balance at end of period
    
    $
    2,694
    
    
    $
    2,649
    
    
    $
    2,694
    
    
    $
    2,649
 NOTE 5  STANDBY AND COMMERCIAL LETTERS OF CREDIT AND FINANCIAL GUARANTEES
    Page 12




---



##### Table of Contents



ITEM 2  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  Forward-Looking Statements
  
    
    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.
  Critical Accounting Policies
  Financial Overview
  Page 13




---



##### Table of Contents



FINANCIAL CONDITION
 Investments
  Loans
  Consolidated Loans Outstanding
 June 30, 2006
    
    
    December 31, 2005Percent of
    
    
    
    
    
    
    Percent of(000s omitted)
    
    Amount
    
    
    Loans
    
    
    Amount
    
    
    LoansCommercial
    
    $
    129,432
    
    
    
    53.1
    %
    
    $
    125,378
    
    
    
    53.4
    %Agricultural
    
    
    41,523
    
    
    
    17.0
    %
    
    
    38,778
    
    
    
    16.3
    %Residential mortgage
    
    
    30,830
    
    
    
    12.7
    %
    
    
    28,113
    
    
    
    11.8
    %Residential construction
    
    
    9,596
    
    
    
    3.9
    %
    
    
    11,902
    
    
    
    5.0
    %Home equity lines of credit
    
    
    19,663
    
    
    
    8.1
    %
    
    
    20,693
    
    
    
    8.7
    %Consumer
    
    
    12,647
    
    
    
    5.2
    %
    
    
    12,734
    
    
    
    4.8
    %Total loans receivable
    
    
    243,691
    
    
    
    100.0
    %
    
    
    237,598
    
    
    
    100.0
    %Less: allowance for loan and lease losses
    
    
    (2,694
    )
    
    
    
    
    
    
    (2,683
    )Loans receivable, net
    
    $
    240,997
    
    
    
    
    
    
    $
    234,915
  Off-Balance Sheet Items
  (000s omitted)
    
    June 30, 2006
    
    
    December 31, 2005Loan Category:Commitments to originate or refinance loans
    
    $
    20,806
    
    
    $
    7,370Unfunded commitments under lines of credit
    
    
    55,727
    
    
    
    61,242Commercial and standby letters of credit
    
    
    2,540
    
    
    
    3,051Total
    
    $
    79,073
    
    
    $
    71,663
 Page 14




---



##### Table of Contents



Credit Quality
    June 30,
    
    
    December 31,
    
    
    June 30,(000s omitted)
    
    2006
    
    
    2005
    
    
    2005Non-accruing loans past due
    
    $
    2,021
    
    
    $
    1,104
    
    
    $
    676Loans past due 90 days or more still accruing
    
    
    672
    
    
    
    672
    
    
    
    1,069Total nonperforming loans
    
    
    2,693
    
    
    
    1,776
    
    
    
    1,745Other real estate
    
    
    235
    
    
    
    549
    
    
    
    706Total nonperforming assets
    
    $
    2,928
    
    
    $
    2,325
    
    
    $
    2,451Nonperforming loans as a percent of total loans
    
    
    1.11
    %
    
    
    0.75
    %
    
    
    0.79
    %Nonperforming assets as a percent of total assets
    
    
    0.97
    %
    
    
    0.81
    %
    
    
    1.10
    %Nonperforming loans as a percent of the
allowance for loan and lease losses
    
    
    99.96
    %
    
    
    66.19
    %
    
    
    65.87
    %
  Page 15




---



##### Table of Contents



Three months ended June 30,
    
    
    Six months ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Beginning balance
    
    $
    2,596
    
    
    $
    2,505
    
    
    $
    2,683
    
    
    $
    2,495Loan charge-offs
    
    
    (42
    )
    
    
    (22
    )
    
    
    (139
    )
    
    
    (74
    )Loan recoveries
    
    
    35
    
    
    
    16
    
    
    
    45
    
    
    
    48Net loan charge-offs
    
    
    (7
    )
    
    
    (6
    )
    
    
    (94
    )
    
    
    (26
    )Provision for loan losses
    
    
    105
    
    
    
    150
    
    
    
    105
    
    
    
    180Ending balance
    
    $
    2,694
    
    
    $
    2,649
    
    
    $
    2,694
    
    
    $
    2,649Net charge-off rate
    
    
    0.01
    %
    
    
    0.01
    %
    
    
    0.08
    %
    
    
    0.02
    %
    Deposits and Borrowed Funds
  Page 16




---



##### Table of Contents



Capital
  Results of Operations
 Net Income
   Page 17




---



##### Table of Contents



Net Interest Margin
  Three months endedJune 30, 2006
    
    
    June 30, 2005Average
    
    
    Interest
    
    
    
    
    
    
    Average
    
    
    InterestOutstanding
    
    
    Earned/
    
    
    Yield/
    
    
    Outstanding
    
    
    Earned/
    
    
    Yield/(000s omitted)
    
    Balance
    
    
    Paid
    
    
    Rate
    
    
    Balance
    
    
    Paid
    
    
    RateInterest-earning assets:Loans receivable (1)
    
    $
    236,185
    
    
    $
    4,312
    
    
    
    7.32
    %
    
    $
    215,986
    
    
    $
    3,620
    
    
    
    6.72
    %Securities available for sale (3)
    
    
    24,263
    
    
    
    204
    
    
    
    3.37
    %
    
    
    28,135
    
    
    
    243
    
    
    
    3.46
    %Federal funds sold
    
    
    4,249
    
    
    
    53
    
    
    
    5.00
    %
    
    
    3,330
    
    
    
    26
    
    
    
    3.13
    %Equity securities (2)
    
    
    3,425
    
    
    
    48
    
    
    
    5.62
    %
    
    
    3,203
    
    
    
    34
    
    
    
    4.26
    %Interest-earning balances with other financial
institutions
    
    
    200
    
    
    
    3
    
    
    
    6.02
    %
    
    
    179
    
    
    
    1
    
    
    
    2.24
    %Total interest-earning assets
    
    
    268,322
    
    
    
    4,620
    
    
    
    6.91
    %
    
    
    250,833
    
    
    
    3,924
    
    
    
    6.27
    %Noninterest-earning assets:Cash and due from financial institutions
    
    
    9,851
    
    
    
    
    
    
    
    
    
    
    
    8,429Premises and equipment, net
    
    
    6,553
    
    
    
    
    
    
    
    
    
    
    
    5,577Other assets
    
    
    5,692
    
    
    
    
    
    
    
    
    
    
    
    4,764Total Assets
    
    $
    290,418
    
    
    
    
    
    
    
    
    
    
    $
    269,603Interest-bearing liabilities:Interest-bearing demand deposits
    
    $
    45,587
    
    
    
    207
    
    
    
    1.82
    %
    
    $
    54,184
    
    
    
    173
    
    
    
    1.28
    %Savings deposits
    
    
    28,921
    
    
    
    26
    
    
    
    0.36
    %
    
    
    32,010
    
    
    
    27
    
    
    
    0.34
    %Time deposits
    
    
    105,917
    
    
    
    1,070
    
    
    
    4.05
    %
    
    
    81,851
    
    
    
    555
    
    
    
    2.72
    %Subordinated debentures
    
    
    5,000
    
    
    
    109
    
    
    
    8.74
    %
    
    
    5,000
    
    
    
    83
    
    
    
    6.66
    %Other borrowings
    
    
    25,613
    
    
    
    249
    
    
    
    3.90
    %
    
    
    16,148
    
    
    
    148
    
    
    
    3.68
    %Total int.-bearing liabilities
    
    
    211,038
    
    
    
    1,661
    
    
    
    3.16
    %
    
    
    189,193
    
    
    
    986
    
    
    
    2.09
    %Demand deposits
    
    
    46,373
    
    
    
    
    
    
    
    
    
    
    
    42,845Other liabilities
    
    
    6,154
    
    
    
    
    
    
    
    
    
    
    
    7,346Total liabilities
    
    
    263,565
    
    
    
    
    
    
    
    
    
    
    
    239,384Shareholders equity
    
    
    26,853
    
    
    
    
    
    
    
    
    
    
    
    30,219Total liabilities and shareholders
Equity
    
    $
    290,418
    
    
    
    
    
    
    
    
    
    
    $
    269,603Net interest income
    
    
    
    
    
    $
    2,959
    
    
    
    
    
    
    
    
    
    
    $
    2,938Interest rate spread (4)
    
    
    
    
    
    
    
    
    
    
    3.75
    %
    
    
    
    
    
    
    
    
    
    
    4.18
    %Net interest margin (5)
    
    
    
    
    
    
    
    
    
    
    4.42
    %
    
    
    
    
    
    
    
    
    
    
    4.70
    %Ratio of interest-earning assets
to interest-bearing liabilities
    
    
    1.27
    
    
    
    
    
    
    
    
    
    
    
    1.33
 Page 18




---



##### Table of Contents



Six months endedJune 30, 2006
    
    
    June 30, 2005Average
    
    
    Interest
    
    
    
    
    
    
    Average
    
    
    InterestOutstanding
    
    
    Earned/
    
    
    Yield/
    
    
    Outstanding
    
    
    Earned/
    
    
    Yield/(000s omitted)
    
    Balance
    
    
    Paid
    
    
    Rate
    
    
    Balance
    
    
    Paid
    
    
    RateInterest-earning assets:Loans receivable (1)
    
    $
    234,373
    
    
    $
    8,456
    
    
    
    7.28
    %
    
    $
    211,025
    
    
    $
    6,955
    
    
    
    6.65
    %Securities available for sale (3)
    
    
    24,698
    
    
    
    414
    
    
    
    3.38
    %
    
    
    28,445
    
    
    
    473
    
    
    
    3.35
    %Federal funds sold
    
    
    5,655
    
    
    
    135
    
    
    
    4.81
    %
    
    
    4,927
    
    
    
    63
    
    
    
    2.58
    %Equity securities (2)
    
    
    3,425
    
    
    
    89
    
    
    
    5.24
    %
    
    
    3,160
    
    
    
    68
    
    
    
    4.34
    %Interest-earning balances with
other financial institutions
    
    
    228
    
    
    
    6
    
    
    
    5.31
    %
    
    
    219
    
    
    
    1
    
    
    
    0.92
    %Total interest-earning assets
    
    
    268,379
    
    
    
    9,100
    
    
    
    6.84
    %
    
    
    247,776
    
    
    
    7,560
    
    
    
    6.15
    %Noninterest-earning assets:Cash and due from financial
institutions
    
    
    9,433
    
    
    
    
    
    
    
    
    
    
    
    9,213Premises and equipment, net
    
    
    6,438
    
    
    
    
    
    
    
    
    
    
    
    5,627Other assets
    
    
    5,792
    
    
    
    
    
    
    
    
    
    
    
    4,756Total Assets
    
    $
    290,042
    
    
    
    
    
    
    
    
    
    
    $
    267,372Interest-bearing liabilities:Interest-bearing demand deposits
    
    $
    46,621
    
    
    
    402
    
    
    
    1.74
    %
    
    $
    55,426
    
    
    
    303
    
    
    
    1.10
    %Savings deposits
    
    
    29,185
    
    
    
    51
    
    
    
    0.35
    %
    
    
    32,201
    
    
    
    55
    
    
    
    0.34
    %Time deposits
    
    
    102,454
    
    
    
    1,993
    
    
    
    3.92
    %
    
    
    79,689
    
    
    
    1,034
    
    
    
    2.62
    %Subordinated debentures
    
    
    5,000
    
    
    
    214
    
    
    
    8.63
    %
    
    
    5,000
    
    
    
    167
    
    
    
    6.74
    %Other borrowings
    
    
    28,602
    
    
    
    557
    
    
    
    3.93
    %
    
    
    13,851
    
    
    
    247
    
    
    
    3.60
    %Total int.-bearing liabilities
    
    
    211,862
    
    
    
    3,217
    
    
    
    3.06
    %
    
    
    186,167
    
    
    
    1,806
    
    
    
    1.96
    %Demand deposits
    
    
    45,579
    
    
    
    
    
    
    
    
    
    
    
    42,061Other liabilities
    
    
    5,691
    
    
    
    
    
    
    
    
    
    
    
    7,948Total liabilities
    
    
    263,132
    
    
    
    
    
    
    
    
    
    
    
    236,176Shareholders equity
    
    
    26,910
    
    
    
    
    
    
    
    
    
    
    
    31,196Total liabilities and shareholders
Equity
    
    $
    290,042
    
    
    
    
    
    
    
    
    
    
    $
    267,372Net interest income
    
    
    
    
    
    $
    5,883
    
    
    
    
    
    
    
    
    
    
    $
    5,754Interest rate spread (4)
    
    
    
    
    
    
    
    
    
    
    3.78
    %
    
    
    
    
    
    
    
    
    
    
    4.19
    %Net interest margin (5)
    
    
    
    
    
    
    
    
    
    
    4.42
    %
    
    
    
    
    
    
    
    
    
    
    4.68
    %Ratio of interest-earning assets
to interest-bearing liabilities
    
    
    1.27
    
    
    
    
    
    
    
    
    
    
    
    1.33
 
 (1)
    
    Non-accrual loans and overdrafts are included in the average balances of loans.(2)
    
    Includes Federal Home Loan Bank and Federal Reserve Bank stock.(3)
    
    Interest income on tax-exempt securities has not been adjusted to a taxable equivalent basis.(4)
    
    Interest rate spread is the difference between rates of interest-earning assets and rates of
interest paid on interest-bearing liabilities(5)
    
    Net interest margin is the net interest income divided by average interest-earning assets.  Page 19




---



##### Table of Contents



Noninterest Income
   Noninterest Expense
   Page 20




---



##### Table of Contents



st
 Federal Income Tax
  Liquidity and Capital Resources
    Page 21




---



##### Table of Contents



Page 22




---



##### Table of Contents



Minimum Required
    
    Minimum Required to beFor
    
    Well-Capitalized UnderCapital Adequacy
    
    Prompt CorrectiveActual
    
    Purposes
    
    Action RegulationsAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    RatioJune 30, 2006Total Capital (to risk weighted assets)Bank of Lenawee
    
    $
    34.6
    
    
    
    13.2
    %
    
    $
    20.9
    
    
    
    38.0
    %
    
    $
    26.1
    
    
    
    310.0
    %Tier 1 Capital (to risk weighted
assets)Bank of Lenawee
    
    $
    31.9
    
    
    
    12.2
    %
    
    $
    10.4
    
    
    
    34.0
    %
    
    $
    15.7
    
    
    
    36.0
    %Tier 1 Capital (to average assets)Bank of Lenawee
    
    $
    31.9
    
    
    
    11.0
    %
    
    $
    11.6
    
    
    
    34.0
    %
    
    $
    14.5
    
    
    
    35.0
    %December 31, 2005Total Capital (to risk weighted assets)
Consolidated
    
    $
    37.3
    
    
    
    15.2
    %
    
    $
    19.6
    
    
    
    38.0
    %
    
    
    n/a
    
    
    
    n/aBank of Lenawee
    
    $
    33.3
    
    
    
    13.7
    %
    
    $
    19.4
    
    
    
    38.0
    %
    
    $
    24.3
    
    
    
    310.0
    %Tier 1 Capital (to risk weighted
assets)Consolidated
    
    $
    34.7
    
    
    
    14.1
    %
    
    $
    9.8
    
    
    
    34.0
    %
    
    
    n/a
    
    
    
    n/aBank of Lenawee
    
    $
    30.6
    
    
    
    12.6
    %
    
    $
    9.7
    
    
    
    34.0
    %
    
    $
    14.5
    
    
    
    36.0
    %Tier 1 Capital (to average assets)Consolidated
    
    $
    34.7
    
    
    
    12.4
    %
    
    $
    11.2
    
    
    
    34.0
    %
    
    
    n/a
    
    
    
    n/aBank of Lenawee
    
    $
    30.6
    
    
    
    10.7
    %
    
    $
    11.5
    
    
    
    34.0
    %
    
    $
    14.3
    
    
    
    35.0
    %
 
 ITEM 3  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    Page 23




---



##### Table of Contents



ITEM 4
 CONTROLS AND PROCEDURES
 (a)
    
    Evaluation of Disclosure Controls and Procedures. As of June 30, 2006,
an evaluation was performed under the supervision and with the participation of the
Companys management, including the Chief Executive Officer (CEO) and Chief Financial
Officer (CFO), of the effectiveness of the design and operation of the Companys
disclosure controls and procedures [(as defined in Exchange Act Rules 13a  15(e) and
15d  15(e))]. Based on that evaluation, the Companys management, including the CEO
and CFO, concluded that the Companys disclosure controls and procedures were adequate
and effective as of June 30, 2006, to ensure that material information relating to the
Company would be made known to them by others within the Company, particularly during
the period in which this Form 10-Q was being prepared.(b)
    
    Changes in Internal Controls. During the period covered by this
report, there have been no changes in the Companys internal control over financial
reporting that have materially affected or are reasonably likely to materially affect
the Companys internal control over financial reporting.
 
 PART II
 OTHER INFORMATION
 
 ITEM 1  LEGAL PROCEEDINGS
  
 ITEM 1A  RISK FACTORS
  
 ITEM 2
 UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS - None
 
 ITEM 3
 DEFAULTS UPON SENIOR SECURITIES - None
 Page 24




---



##### Table of Contents



ITEM 4  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 
  Directors nominated forterms expiring in 2009:
    
    For
    
    Against
    
    WithheldRichard J. DeVries
    
    
    497,214
    
    
    
    29,784
    
    
    
    0Edward J. Engle, Jr.
    
    
    503,552
    
    
    
    23,446
    
    
    
    0Margaret M. S. Noe
    
    
    513,563
    
    
    
    13,435
    
    
    
    0J. David Stutzman
    
    
    502,815
    
    
    
    24,183
    
    
    
    0
  Selection of Auditors for 2006
    
    For
    
    Against
    
    WithheldPlante & Moran, PLLC
    
    
    522,272
    
    
    
    2,416
    
    
    
    2,310
 
 ITEM 5
 OTHER INFORMATION - None
 
 ITEM 6  EXHIBITS
  31.1
    
    Certificate of the Chief Executive Officer of Pavilion Bancorp, Inc. pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certificate of the Chief Financial Officer of Pavilion Bancorp, Inc. pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certificate of the Chief Executive Officer and the Chief Financial Officer of
Pavilion Bancorp, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
 Page 25




---



##### Table of Contents



SIGNATURES
  Pavilion Bancorp, Inc.Date: August 10, 2006
    
    /s/ Richard J. DeVries

Richard J. DeVriesPresident and Chief Executive OfficerDate: August 10, 2006
    
    /s/ Mark D. Wolfe

Mark D. WolfeChief Financial Officer
 Page 26




---



##### Table of Contents



Exhibit
    
    Description31.1
    
    Certificate of the Chief Executive Officer of Pavilion Bancorp, Inc. pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.31.2
    
    Certificate of the Chief Financial Officer of Pavilion Bancorp, Inc. pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.32.1
    
    Certificate of the Chief Executive Officer and the Chief Financial Officer of Pavilion
Bancorp, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
 Page 27