# Securities and
Exchange CommissionWashington, D.C. 20549

_________________

# FORM 10-Q

|X| Quarterly Report
Pursuant to Section 13 or 15(d)

of the Securities
Exchange Act of 1934

# For the quarterly
period ended June 30, 2005

or

[ ] Transition Report
Pursuant to Section 13 or 15(d)of the Securities Exchange Act of 1934

_________________

# Commission File
#000-30521

Pavilion Bancorp, Inc.(Exact
name of registrant as specified in its charter)

|Michigan             
(State or other jurisdiction of 
incorporation or organization) | 38-3088340
  (I.R.S. Employer
Identification No.)
|------------------------------------------------------------------------------------- | -------------------------------------------------

135 East Maumee
Street, Adrian, Michigan 49221(Address of principal executive offices, including Zip
Code)

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

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

Yes    |X|         No     [   ]

Indicate by check mark whether the
registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).

Yes     [   ]         No     |X|

As of August 12, 2005 there were
735,379 outstanding shares of the registrants common stock, no par value.

Page 1

---



# CROSS REFERENCE TABLE

|ITEM NO. | DESCRIPTION | PAGE NO.
|-------- | ----------- | --------

---

|                                                                                                |  | 
|----------------------------------------------------------------------------------------------- |  | 
|PART I - FINANCIAL INFORMATION                                                                  | 
|Item 1   Financial Statements (Condensed and Unaudited)                                         |  | 
|(a)     Report of Independent Registered Public Accounting Firm                                 |  | 
|(b)     Condensed Consolidated Balance Sheets                                                   |  | 
|(c)     Condensed Consolidated Statements of Income                                             |  | 
|(d)     Condensed Consolidated Statements of Changes in Shareholders' Equity                    |  | 
|(e)     Condensed Consolidated Statements of Cash Flows                                         |  | 
|(f)     Notes to Condensed Consolidated Financial Statements                                    |  | 
|                                                                                               
|Item 2    Management's Discussion and Analysis of Financial Condition and Results of Operations |  | 
|                                                                                               
|Item 3   Quantitative and Qualitative Disclosures About Market Risk                             |  | 
|                                                                                               
|Item 4   Controls and Procedures                                                                |  | 
|                                                                                               
|PART II -OTHER INFORMATION                                                                      | 
|                                                                                               
|Item 1   Legal Proceedings                                                                      |  | 
|Item 2   Unregistered Sales of Equity Securities and Use of Proceeds                            |  | 
|Item 3   Defaults Upon Senior Securities                                                        |  | 
|Item 4   Submission of Matters to a Vote of Security Holders                                    |  | 
|Item 5   Other Information                                                                      |  | 
|Item 6   Exhibits                                                                               |  | 
|                                                                                               
|Signatures                                                                                      |  | 
|                                                                                               
|Exhibit Index                                                                                   |  | 

Page 2

---



REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM

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

We have reviewed the condensed
consolidated balance sheet of Pavilion Bancorp, Inc. (the Corporation) as of
June 30, 2005, and the related condensed consolidated statements of income,
shareholders equity, and cash flows for the three and six month periods ended June
30, 2005 and 2004, 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, MichiganAugust
11, 2005

Page 3

---



# PART IFINANCIAL INFORMATION

# ITEM 1- FINANCIAL
STATEMENTS

CONDENSED CONSOLIDATED
BALANCE SHEETS  (000s omitted)

|                                                                  | June 30,2005(unaudited) | December 31,2004
|----------------------------------------------------------------- | ----------------------- | ----------------
|ASSETS                                                            |                         |                 
|Cash and due from banks                                           |                         | $   10,005      
|Securities available for sale                                     |                         | 26,675          
|Federal Home Loan Bank, Freddie Mac, FNMA stock                   |                         | 2,795           
|Federal Reserve Bank stock                                        |                         | 480             
|Loans held for sale                                               |                         | 792             
|Loans receivable, net of allowance for loan and lease losses      |                         | 219,190         
|Premises and equipment, net                                       |                         | 5,626           
|Accrued interest receivable                                       |                         | 1,611           
|Mortgage servicing rights                                         |                         | 3,031           
|Other assets                                                      |                         | 1,380           
|                                                                  |                         |                 
|Total assets                                                      |                         | $ 271,585       
|                                                                  |                         |                 
|LIABILITIES AND SHAREHOLDERS' EQUITY                              |                        
|Deposits                                                          |                        
|Noninterest bearing                                               |                         | $   45,744      
|Interest bearing                                                  |                         | 160,977         
|                                                                  |                         |                 
|Total deposits                                                    |                         | 206,721         
|Federal funds purchased                                           |                         | 4,520           
|Repurchase agreements                                             |                         | 15,074          
|Federal Home Loan Bank advances                                   |                         | 8,905           
|Accrued interest payable                                          |                         | 392             
|Other liabilities                                                 |                         | 2,322           
|Subordinated debentures                                           |                         | 5,000           
|Common stock in ESOP subject to repurchase obligation             |                         | 4,654           
|                                                                  |                         |                 
|Total liabilities                                                 |                         | 247,588         
|Shareholders' equity                                              |                        
|Common stock and paid-in capital, no par value: shares issued and |                        
|and outstanding: 735,379 at 6/30/05; 852,140 at 12/31/04          |                         | 9,054           
|Retained earnings                                                 |                         | 15,102          
|Accumulated other comprehensive loss                              |                         | (159            
|                                                                  |                         |                 
|Total shareholders' equity                                        |                         | 23,997          
|                                                                  |                         |                 
|Total liabilities and shareholders' equity                        |                         | $ 271,585       
|                                                                  |                         |                 

See accompanying notes
to the condensed consolidated financial statements

Page 4

---



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

|                                                       | Three Months EndedJune 30, | Six Months EndedJune 30,
|------------------------------------------------------ | -------------------------- | ------------------------
|
|Interest and Dividend Income                           |                            |                         
|Loans receivable, including fees                       |                            | $3,620                  
|Debt securities:                                       |                           
|Taxable                                                |                            | 201                     
|Tax - exempt                                           |                            | 42                      
|Dividend income                                        |                            | 34                      
|Federal funds sold and other                           |                            | 27                      
|                                                       |                            |                         
|Total interest and dividend income                     |                            | 3,924                   
|Interest Expense                                       |                           
|Deposits                                               |                            | 755                     
|Subordinated debentures                                |                            | 83                      
|Other borrowed funds                                   |                            | 148                     
|                                                       |                            |                         
|Total interest expense                                 |                            | 986                     
|                                                       |                            |                         
|Net interest income                                    |                            | 2,938                   
|Provision for loan losses                              |                            | 150                     
|                                                       |                            |                         
|Net interest income after provision for loan losses    |                            | 2,788                   
|Noninterest income                                     |                           
|Service charges and fees                               |                            | 329                     
|Net gains on sale of loans                             |                            | 444                     
|Loan servicing fees, net of amortization               |                            | 77                      
|Other                                                  |                            | 49                      
|                                                       |                            |                         
|                                                       |                            | 899                     
|Noninterest expense                                    |                           
|Compensation and employee benefits                     |                            | 1,725                   
|Occupancy and equipment                                |                            | 363                     
|Professional services                                  |                            | 149                     
|Outside service fees                                   |                            | 325                     
|Other                                                  |                            | 457                     
|                                                       |                            |                         
|                                                       |                            | 3,019                   
|                                                       |                            |                         
|Income from continuing operations before  income taxes |                            | 668                     
|Income taxes from continuing operations                |                            | 204                     
|                                                       |                            |                         
|Income from continuing operations                      |                            | 464                     
|                                                       |                            |                         
|Discontinued operations:                               |                           
|Income from discontinued operation (net of income      |                           
|taxes of $0, $24, $0, $40)                             |                            | -                       
|                                                       |                            |                         
|Net income                                             |                            | $   464                 
|                                                       |                            |                         
|Earnings per share from continuing operations          |                           
|Basic                                                  |                            | $  0.57                 
|                                                       |                            |                         
|Diluted                                                |                            | $  0.56                 
|                                                       |                            |                         
|Earnings per share from discontinued operations        |                           
|Basic                                                  |                            | -                       
|                                                       |                            |                         
|Diluted                                                |                            | -                       
|                                                       |                            |                         
|Net earnings per share                                 |                           
|Basic                                                  |                            | $  0.57                 
|                                                       |                            |                         
|Diluted                                                |                            | $  0.56                 
|                                                       |                            |                         
|Dividends per share                                    |                            | $  0.24                 
|                                                       |                            |                         

See accompanying notes
to condensed consolidated financial statements

Page 5

---



# PAVILION BANCORP, INC.CONDENSED
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY (unaudited)For
the periods ended June 30, 2004 and 2005

(000s omitted)

|                                             | Common 
  Stock  
 Paid-In 
 Capital | Retained 
Earnings | Accumulated 
     Other
 Comprehensive 
 Income/(Loss) | Total

Shareholders'
    Equity
|-------------------------------------------- | ------------------------------------ | ------------------ | ------------------------------------------------------ | -------------------------------
|                                             |                                      |                    |                                                        |                                
|Balance January 1, 2004                      |                                      | $ 10,675           |                                                        | $ 15,616                       
|Comprehensive income:                        |                                     
|Net income                                   |                                      | -                  |                                                        | 1,618                          
|Unrealized (losses) on securities            |                                     
|available for sale                           |                                      | -                  |                                                        | -                              
|Tax effect                                   |                                      | -                  |                                                        | -                              
|                                             |                                      |                    |                                                        |                                
|Total other comprehensive loss               |                                      | -                  |                                                        | -                              
|                                             |                                      |                    |                                                        |                                
|Total comprehensive income                   |                                      | -                  |                                                        | -                              
|Change in common stock subject to repurchase |                                      | (316               | )                                                      | -                              
|Stock option expense                         |                                      | 18                 |                                                        | -                              
|Cash dividends - $.46 per share              |                                      | -                  |                                                        | (399                           
|                                             |                                      |                    |                                                        |                                
|Balance June 30, 2004                        |                                      | $ 10,377           |                                                        | $ 16,835                       
|                                             |                                      |                    |                                                        |                                
|Balance January 1, 2005                      |                                      | $ 10,190           |                                                        | $ 21,713                       
|Comprehensive income:                        |                                     
|Net income                                   |                                      | -                  |                                                        | 723                            
|Unrealized (losses) on                       |                                     
|securities available for sale                |                                      | -                  |                                                        | -                              
|Tax effect                                   |                                      | -                  |                                                        | -                              
|                                             |                                      |                    |                                                        |                                
|Total other comprehensive loss               |                                      | -                  |                                                        | -                              
|                                             |                                      |                    |                                                        |                                
|Total comprehensive income                   |                                      | -                  |                                                        | -                              
|Change in common stock subject to repurchase |                                      | (110               | )                                                      | -                              
|Stock repurchase and retirement              |                                      | (1,566             | )                                                      | (6,952                         
|Stock option expense                         |                                      | 10                 |                                                        | -                              
|Stock options exercised                      |                                      | 530                |                                                        | -                              
|Cash dividends - $.48 per share              |                                      | -                  |                                                        | (382                           
|                                             |                                      |                    |                                                        |                                
|Balance June 30, 2005                        |                                      | $   9,054          |                                                        | $ 15,102                       
|                                             |                                      |                    |                                                        |                                

See accompanying notes
to the condensed consolidated financial statements

Page 6

---



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

|                                                     | Six Months EndedJune 30,
|---------------------------------------------------- | ------------------------
|
|Cash Flows from operating activities                 |                         
|Net income                                           |                         
|Adjustments to reconcile net income to               |                         
|net cash from operating activities                   |                         
|Depreciation                                         |                         
|Stock option expense                                 |                         
|Provision for loan losses                            |                         
|Amortization on securities available for sale        |                         
|Loss on disposal of assets                           |                         
|Amortization of mortgage servicing rights            |                         
|Origination of mortgage loans held for sale          |                         
|Proceeds from sales of mortgage loans held for sale  |                         
|Net gains on sale of mortgage loans                  |                         
|Net change in:                                       |                         
|Deferred loan origination fees                       |                         
|Accrued interest receivable                          |                         
|Other assets                                         |                         
|Accrued interest payable                             |                         
|Other liabilities                                    |                         
|                                                     |                         
|Net cash 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             |                         
|Purchase of Federal Reserve Bank stock               |                         
|Net premises and equipment expenditures              |                         
|Net increase in loans                                |                         
|Recoveries on loans charged-off                      |                         
|Net change in discontinued operation                 |                         
|                                                     |                         
|Net cash 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 repurchased                                    |                         
|Stock options exercised                              |                         
|Dividends paid                                       |                         
|                                                     |                         
|Net cash from financing activities                   |                         
|                                                     |                         
|Net (decrease) increase in cash and cash equivalents |                         
|Cash and cash equivalents at beginning of period     |                         
|                                                     |                         
|Cash and cash equivalents at end of period           |                         
|                                                     |                         
|Transfer from:                                       |                         
|Loans to foreclosed real estate                      |                         
|Cash paid for:                                       |                         
|Interest                                             |                         
|Income taxes                                         |                         

See accompanying notes
to condensed consolidated financial statements

Page 7

---



# 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 Presentation The 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,
2004.

All adjustments, consisting of normal
recurring adjustments, which in the opinion of management are necessary for a fair
presentation of the results of operations and cash flows, have been made. The results of
operations for the six months ended June 30, 2005 are not necessarily indicative of the
results that may be expected for the year ended December 31, 2005.

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.

Discontinued Operations: In
accordance with Statement of Financial Accounting Standards No. 144, on July 16, 2004
Pavilion Bancorp, Inc. announced that it had signed a definitive agreement to sell the
Bank of Washtenaw for $15,101,000 in cash. The sale was completed on October 29, 2004. In
accordance with Financial Accounting Standard 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, which became effective for the Company on January 1,
2002, the results of operations of the Bank of Washtenaw are removed from the detail line
items in the Companys condensed consolidated financial statements and presented
separately as discontinued operations. For further information, please refer
to Note 15 of the consolidated financial statements included in the Companys Annual
Report on Form 10-K for the year ended December 31, 2004.

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.

Stock Compensation:Compensation expense under stock
options is reported using the intrinsic value method. The exercise price of stock options
is generally equivalent to the market price of the underlying common stock as of the date
of grant. No stock-based compensation cost is reflected in net income for stock options
granted with an exercise price equal to or greater than the market price of the underlying
common stock at date of grant. For stock options granted below market price, compensation
expense is based upon the difference between the market price and the exercise price at
the date of grant and is recorded over the vesting period of the options. Compensation
expense actually recognized for the three and six months ended June 30, 2005 and 2004 was
not significant.

Page 8

---



The following table illustrates the
effect on net income and earnings per share if expense was measured using the fair value
recognition provisions of FASB Statement No. 123, Accounting for Stock-Based
Compensation (000s omitted, except per share data).

|                                         | Three Months EndedJune 30, | Six Months EndedJune 30,
|---------------------------------------- | -------------------------- | ------------------------
|
|Net income as reported                   |                            | $      464              
|Less:  Stock-based compensation          |                           
|expense determined under fair value      |                           
|based method                             |                            | 107                     
|                                         |                            |                         
|Pro forma net income                     |                            | $      357              
|                                         |                            |                         
|Basic earnings per share - As reported   |                            | $    0.57               
|Basic earnings per share - Pro forma     |                            | $    0.44               
|Diluted earnings per share - As reported |                            | $    0.56               
|Diluted earnings per share - Pro forma   |                            | $    0.43               

Recent Accounting
Developments:Statement of Financial Accounting
Standards (SFAS) No. 123 (revised 2004)  In December 2004, the Financial Accounting
Standards Board revised SFAS No. 123, Accounting for Stock-Based
Compensation. SFAS No. 123R establishes accounting requirements for share-based
compensation to employees and carries forward prior guidance on accounting for awards to
non-employees. The provisions of this statement will become effective January 1, 2006 for
all equity awards granted after the effective date. This statement requires a public
entity to measure cost of employee services received in exchange for an award of equity
instruments based on the grant-date fair value of the award (with limited exceptions).
That cost will be recognized over the period during which an employee is required to
provide service in exchange for the award, which is usually the vesting period. The
Company will adopt this standard effective the first quarter of 2006. Management has not
determined the impact of the standard on its results of operations, but does not expect
the standard to have a material impact on financial condition or liquidity.

# NOTE 2  STOCK
BASED COMPENSATION

Stock-based compensation expense is
determined under the fair value-based method, net of related tax effects. No stock-based
compensation cost is reflected in net income unless options granted have an exercise price
that is less than the market price of the underlying common stock at date of grant. During
2001 stock options were granted with exercise prices that were less than the fair market
value of the underlying common stock as of the grant date; therefore, the Company is
recording compensation expense for the difference between the strike price and fair market
value of the underlying common stock as of the respective grant dates for the 2001 and
earlier stock option grants. Accordingly compensation expense for these stock options has
been recorded during 2005 and 2004 based on the vesting schedules of the related stock
options.

Page 9

---



# NOTE 3  EARNINGS
PER SHARE

Earnings per common share
have been computed based on the following for the three and six months ended June 30,
2005 and 2004 (000s omitted, except antidilutive stock options):

|                                                    | Three Months Ended  
      June 30 | Six Months Ended
      June 30
|--------------------------------------------------- | ---------------------------------- | ------------------------------
|
|Net income                                          |                                    | $   464                       
|                                                    |                                    |                               
|Average  number of common shares  outstanding  used |                                   
|to calculate basic earnings per share               |                                    | 818                           
|Effect of dilutive options                          |                                    | 4                             
|                                                    |                                    |                               
|Average  number of common shares  outstanding  used |                                   
|to calculate diluted earnings per common share      |                                    | 822                           
|                                                    |                                    |                               
|Number of antidilutive  stock options excluded from |                                   
|the diluted earnings per share computation          |                                    | 5,250                         
|                                                    |                                    |                               

# NOTE 4  LOANS
RECEIVABLE

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

|                                 | June 30,2005 | December 31, 2004
|-------------------------------- | ------------ | -----------------
|                                 |              |                  
|Commercial                       |              | $ 117,503        
|Agricultural                     |              | 38,731           
|Real Estate Mortgage             |              | 23,255           
|Real Estate Construction         |              | 9,201            
|Consumer                         |              | 33,149           
|                                 |              |                  
|                                 |              | 221,839          
|Less:  allowance for loan losses |              | (2,649           
|                                 |              |                  
|Loans receivable, net            |              | $ 219,190        
|                                 |              |                  

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

|                               | Three Months Ended  
      June 30 | Six Months Ended
      June 30
|------------------------------ | ---------------------------------- | ------------------------------
|
|
|Balance at beginning of period |                                    | $ 2,505                       
|Charge-offs                    |                                    | (22                           
|Recoveries                     |                                    | 16                            
|Provision for loan losses      |                                    | 150                           
|                               |                                    |                               
|Balance at end of period       |                                    | $ 2,649                       
|                               |                                    |                               

Page 10

---



# 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 $3.1 million and $2.5 million at June 30, 2005 and
December 31, 2004, respectively.

# NOTE 6  TENDER
OFFER

On April 12, 2005, the Company
commenced a self-tender offer for up to 128,832 shares of its common stock. On May 29,
2005, the Company purchased 128,832 of its common shares at $66.00 per share pursuant to
its self tender offer, which expired May 20, 2005. Under this procedure, stockholders were
given the opportunity to sell part or all of their shares to the Company at a price of
$66.00 per share. All shares purchased in this offering received the same price. The
aggregate cost of the purchase was approximately $8.6 million, including fees and expenses
of approximately $91,000. The tender offer was financed with available cash on hand and
short-term investments.

Page 11

---



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

This discussion provides information
about the consolidated financial condition and results of operations of the Company as of
June 30, 2005 and for the three and six month periods ended June 30, 2005 and 2004 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
Statements

This 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:

|o | changes
in interest rates and interest rate relationships; demand for products and services;
|- | --------------------------------------------------------------------------------------------

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

|o | changes
in banking regulations;
|- | -------------------------------

|o | changes
in tax laws;
|- | --------------------

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

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

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

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

|o | 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
Policies

Certain 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 2004 Annual Report.

# Discontinued Operations

As previously disclosed in earlier
regulatory filings, in accordance with Statement of Financial Accounting Standards No.
144, on July 16, 2004 Pavilion Bancorp, Inc. announced that it had signed a definitive
agreement to sell the Bank of Washtenaw for $15,101,000. Sale of the Bank of Washtenaw was
initiated to concentrate the Companys resources in the Lenawee County market and
other potential markets that are more homogenous to the Banks traditional market
area. In accordance with Statement of Financial Accounting Standards 144, Accounting
for the Impairment or Disposal of Long-Lived Assets, which became effective for the
Company on January 1, 2002, the results of operations of the Bank of Washtenaw are removed
from the detail line items in the Companys condensed consolidated financial
statements and presented separately as discontinued operations. Accordingly,
the various supporting schedules contained in the MD&A are also presented with Bank of
Washtenaw-related information removed. The sale was completed on October 29, 2004. Please
refer to Note 1 to the Companys Condensed Consolidated Financial Statements for
additional information.

Page 12

---



# Allowance for Loan and
Lease Losses

The allowance for loan and lease
losses is managements estimate of losses inherent in the Banks loan and lease
portfolio. Management relies on a number of factors and sources of information in
preparing this estimate. These include, but are not limited to, internal credit analyses
and loan risk ratings, local economic conditions and trends, regulatory requirements,
collateral values, loan types and loan documentation. Accordingly, the allowance for loan
and lease losses includes a reserve calculation based on an evaluation of loans determined
to be impaired, risk ratings, historical losses, loan types and other subjective factors
management may believe to be relevant and/or material.

# Mortgage Servicing
Rights (MSR)

The Bank records the original MSR
based on market data. A periodic independent third party valuation is completed to
determine potential impairment of MSR as a result of changes in interest rates and
expected future loan repayment speeds. Significant changes in interest rates or repayment
speeds could have a significant impact on the carrying value of the MSR asset. Periodic
valuations are completed quarterly.

# Income Taxes

Deferred income tax assets and
liabilities are determined using the liability (or balance sheet) method. Under this
method, the net deferred tax asset or liability is determined based upon the tax effects
of the various temporary differences between book and tax bases of the various balance
sheet asset and liabilities and gives current recognition to changes in tax rates and
laws. Valuation allowances are established, when necessary, to reduce deferred tax assets
to the amounts expected to be realized.

# Financial Overview

Total assets increased by $12.3
million or 4.7% from December 31, 2004 to June 30, 2005. Cash and cash equivalents
decreased $1.7 million or 14.5%. Total loans, net of the allowance for loan and lease
losses, increased by $14.5 million or 7.1% from December 31, 2004 to June 30, 2005.
Investment securities available for sale decreased $1.2 million or 4.3% from December 31,
2004 to June 30, 2005. Total deposits increased $6.7 million or 3.4% from December 31,
2004 to June 30, 2005. Borrowed funds increased $16.0 million or 127.7%. Consolidated net
income for the three and six months ended June 30, 2005 was $464,000 and $723,000 compared
to $859,000 and $1.6 million for the same periods in 2004, respectively. Basic earnings
per share (EPS) for the three and six months ended June 30, 2005 were $0.57
per share and $0.87 per share, respectively. For the same periods in 2004 basic EPS were
$1.02 and $1.91, respectively. Fully diluted EPS for the three and six months ended June
30, 2005 were $0.56 per share and $0.86 per share, respectively. For the same periods in
2004 fully diluted EPS were $1.01 and $1.90, respectively.

# FINANCIAL CONDITION

# Investments and Fed
Funds Sold

Total investments in securities
available for sale were $26.7 million at June 30, 2005, compared to $27.9 million at
December 31, 2004. Investment in the Federal Reserve Bank of Chicago increased to $480,000
during the first six months of 2005. Investment in the Federal Home Loan Bank of
Indianapolis increased slightly during the same period. The Bank had no Federal Funds Sold
at June 30, 2005 or December 31, 2004.

Page 13

---



# Loans

The following table summarizes the
Banks loan portfolio and loan mix at June 30, 2005 and December 31, 2004:

# Consolidated Loans
Outstanding

(000's omitted)

|                                           | June 30, 2005 | December 31, 2004
|------------------------------------------ | ------------- | -----------------
|
|Commercial                                 |               | $ 117,503        
|Agricultural                               |               | 38,731           
|Real Estate Mortgage                       |               | 23,255           
|Real Estate Construction                   |               | 9,201            
|Consumer                                   |               | 33,149           
|                                           |               |                  
|Total loans receivable                     |               | 221,839          
|Less:  allowance for loan and lease losses |               | (2,649           
|                                           |               |                  
|Loans receivable, net                      |               | $ 219,190        
|                                           |               |                  

During the first six months of 2005,
loans, net of allowance for loan and lease losses, increased $14.5 million, or 7.1%. The
mix of the loan portfolio continues to remain relatively unchanged from prior periods. The
largest dollar increase was in the commercial loan portfolio, which grew by $8.8 million
or 8.1%. The growth in the commercial loan portfolio is in response to an improvement in
the overall economic outlook in the first six months of 2005. The other loan types,
agricultural, real estate mortgage and construction, grew moderately as well.

# Off-Balance Sheet Items

The
following is a summary of outstanding commitments by the Bank to grant loans, unfunded
commitments under lines of credit and letters of credit at June 30, 2005 and December 31,
2004:

|                                           | June 30, 2005 | December 31, 2004
|------------------------------------------ | ------------- | -----------------
|(000's omitted)Loan Category:              |               |                  
|Commitments to grant loans                 |               | $11,989          
|Unfunded commitments under lines of credit |               | 58,838           
|Commercial and standby letters of credit   |               | 3,107            
|                                           |               |                  
|Total                                      |               | $73,934          
|                                           |               |                  

Outstanding commitments to grant
loans, lines of credit and letters of credit decreased 0.7% to $73.9 million at June 30,
2005 from $74.5 million at December 31, 2004. The decrease in such off-balance sheet items
is due primarily to a reduction in unfunded commitments under lines of credit, which are
reduced as borrowers draw upon their lines The decrease in unfunded commitments under was
offset by an increase in commitments to grant loans due to increased loan demand coupled
with continued business development activities. 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 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 is shown in the table below. The
Banks classifications of nonperforming loans are generally consistent with loans
identified as impaired.

Page 14

---



The chart below shows the makeup of
the Banks nonperforming assets by type as of June 30, 2005 and 2004, and December
31, 2004.

|                                                                  | June 30,2005 | December 31,2004 | June 30,2004
|----------------------------------------------------------------- | ------------ | ---------------- | ------------
|(000's omitted)                                                   |              |                  |             
|Non-accruing loans past due                                       |              | $   676          |             
|Loans past due 90 days or more                                    |              | 1,069            |             
|                                                                  |              |                  |             
|Total nonperforming loans                                         |              | 1,745            |             
|Other real estate                                                 |              | 706              |             
|                                                                  |              |                  |             
|Total nonperforming assets                                        |              | $2,451           |             
|                                                                  |              |                  |             
|Nonperforming loans as a percent of total loans                   |              | 0.79             | %           
|Nonperforming assets as a percent of total loans                  |              | 1.10             | %           
|Nonperforming loans as a percent of the allowance for loan losses |              | 65.87            | %           

At June 30, 2005, total nonperforming
assets increased by $509,000 or 26.2% from December 31, 2004. The sizable increase in
loans past due 90 days or more is related to one large commercial/agricultural
relationship, which the Bank feels they are adequately secured and backed by a guarantee
from the Farm Service Agency (a Federal Agency). Loans past due 90 days and still accruing
are loans that management considers to be adequately collateralized to support continued
accrual of interest. The Bank is closely monitoring and managing nonperforming loans to
determine and implement corrective action to improve the quality of nonperforming assets.
Nonperforming assets as a percentage of total loans have increased to 1.10% at June 30,
2005 compared to 0.94% and 0.87% at December 31, 2004 and June 30, 2004, respectively.
This increase is primarily due to the reasons discussed above.

The activity in the allowance for
loan and losses for the three months ended June 30, 2005 and 2004 and the six months ended
June 30, 2005 and 2004 is presented in the following table:

|                          | Three Months Ended June 30, | Six Months Ended June 30,
|------------------------- | --------------------------- | -------------------------
|
|Beginning balance         |                             | $ 2,505                  
|Loan charge-offs          |                             | (22                      
|Loan recoveries           |                             | 16                       
|                          |                             |                          
|Net loan charge-offs      |                             | (6                       
|Provision for loan losses |                             | 150                      
|                          |                             |                          
|Ending balance            |                             | $ 2,649                  
|                          |                             |                          

The Bank increased its funding of
provision for loan losses during the first half of 2005 over the same period in 2004 based
on managements assessment of the adequacy of the allowance for loan and lease
losses. The need for additional reserves increased with the overall growth in the loan
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.

Page 15

---



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
Funds

Total deposits increased $6.7 million
or 3.4% during the first six months to $206.7 million at June 30, 2005 from $200.0 million
at December 31, 2004. Noninterest-bearing deposits increased $1.5 million, or 3.5% to
$45.7 million at June 30, 2005 from $44.2 million at December 31, 2004. Interest-bearing
deposits increased $5.2 million, or 3.3% to $161.0 million at June 30, 2005 from $155.8
million at December 31, 2004. Specifically, certificates of deposit
(CDs) with balances of $100,000 and greater increased $17.3 million, or
52.6% to $50.1 million at June 30, 2005 from $32.8 million at December 31, 2004. The
increase is attributable to a greater amount of local municipal CDs 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 decreased $0.7 million, or 1.7%, to $37.3 million at
June 30, 2005 from $38.0 million at December 31, 2004. Other interest-bearing deposits,
including savings and NOW accounts, decreased $11.4 million, or 13.4% to $73.6 million at
June 30, 2005 from $85.0 at December 31, 2004.

Borrowed funds increased by $16.0
million, or 127.7%, to $28.5 million at June 30, 2005 from $12.5 million at December 31,
2004. The increase was necessitated by the sizable growth in the loan portfolio.

# Capital

During the first half of 2005, equity
capital decreased by $7.9 million, primarily as a result of the tender offer completed in
May 2005. The number of outstanding shares at December 31, 2004 of 852,140 decreased to
735,379 at June 30, 2005, as a result of the repurchase of approximately 15% of the shares
outstanding at December 31, 2004. Management monitors the capital levels of the Company
and the Bank to provide for current and future business opportunities and to meet
regulatory guidelines for well capitalized institutions. Well
capitalized institutions are eligible for reduced FDIC premiums, and also enjoy
other reduced regulatory restrictions.

# Results of Operations

# Net Income

Continuing Operations
 Income from continuing operations for
the three months ended June 30, 2005 declined $286,000, or 38.1% to $464,000 compared to
$750,000 for the same period in 2004. Basic earnings per share (EPS)
attributable to continuing operations for the three months ended June 30, 2005 were $0.57
compared to $0.89 for the same period in 2004. Diluted EPS for the three months ended June
30, 2005 were $0.56 compared to $0.88 for the same period in 2004.

Page 16

---



Income from continuing operations for
the six months ended June 30, 2005 declined $0.7 million, or 49.1% to $0.7 million
compared to $1.4 million for the same period in 2004. Basic earnings per share
(EPS) attributable to continuing operations for the six months ended June 30,
2005 were $0.87 compared to $1.68 for the same period in 2004. Diluted EPS for the six
months ended June 30, 2005 were $0.86 compared to $1.67 for the same period in 2004.

Discontinued Operations-

On October 29, 2004, the Company
completed the sale of its former subsidiary, the Bank of Washtenaw (discontinued
operation or discontinued component). All activity attributable to Bank
of Washtenaw is presented as a separate item within the Companys financial
statements. Income attributable to discontinued operations for the three and six months
ended June 30, 2004 was $109,000 and $198,000, respectively. Basic and diluted EPS
attributable to discontinued operations for the three and six months ended June 30, 2004
were $0.13 and $0.23, respectively.

Combined On a combined basis net income for
the three months ended June 30, 2005 decreased $395,000, or 46.0% to $464,000 compared to
$859,000 for the same period in 2004. Basic EPS for the three months ended June 30, 2005
were $0.57 compared to $1.02 for the same period in 2004. Diluted EPS for the three months
ended June 30, 2005 were $0.56 compared to $1.01 for the same period in 2004.

On a combined basis net income for
the six months ended June 30, 2005 decreased $0.9 million, or 55.3% to $0.7 million
compared to $1.6 million for the same period in 2004. Basic EPS for the six months ended
June 30, 2005 were $0.87 compared to $1.91 for the same period in 2004. Diluted EPS for
the six months ended June 30, 2005 were $0.86 compared to $1.90 for the same period in
2004.

# Net Interest Margin

Following are the net interest margin
calculations for the three and six months ended June 30, 2005 and 2004:

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

Page 17

---



|                                    | Six months ended
|----------------------------------- | ----------------
|
|
|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 June 30, 2005 to 6.27% from 6.14% as compared to the same
period in the prior year. Much of the increase was due to increases in the yield in the
loan portfolio with the prime rate changes within the last twelve months. The yield on
loans receivable increased to 6.72% for the three months ended June 30, 2005 from 6.58%
for the same period in 2004. The consumer loan portfolio had the greatest increase in
yield as it is primarily a variable rate portfolio.

Page 18

---



The Companys interest rate
spread decreased for the three months ended June 30, 2005 to 4.18% from 4.70% for the same
period in 2004. This decrease is due to the increase in the rates paid on interest-bearing
liabilities, which increased to 2.09% for the three months ended June 30, 2005 from 1.44%
for the same period in 2004, which was expected with the increasing rate environment. Rate
increases within the deposit categories were driven primarily by competition within the
local market to maintain and attract customers.

The yield on interest-earning assets
decreased for the six months ended June 30, 2005 to 6.15% from 6.26% for the same period
in 2004. The decrease primarily was in the yield on loans receivable which decreased to
6.65% for the six months ended June 30, 2005 from 6.74% for the same period in 2004. Much
of the decrease was due to the reduction in the Business Manager portfolio from an average
balance of $2.1 million in the first half of 2004 to $0.4 million in the first half of
2005. The Business Manager was a high yield product and its decline accounted for a
significant portion of the decrease in loan yield. Removing the effective yield of the
Business Manager product the yield on loans receivable for the first six months of 2005
would have been 6.65% compared to 6.60% for the same period in 2004. Additionally, local
market competition is keeping the rates on new loan production near the prime rate, which
is slowing the rate of increase on loan yields.

The Companys interest rate
spread decreased for the six months ended June 30, 2005 to 4.19% from 4.71% for the same
period in 2004. This decrease is due primarily to the increase in the rates paid on
interest-bearing liabilities, which increased to 1.96% for the six months ended June 30,
2005 from 1.55% for the same period in 2004, which was expected with the increasing rate
environment as well as of the influence of competition within the local market. The
Companys net interest margin remains quite strong, and management continues to take
steps to neutralize some portion of this risk.

# Noninterest Income

Total non-interest income decreased
$0.1 million or 12.4% to $0.9 million for the three months ended June 30, 2005 compared to
$1.0 million for the same period in 2004. All categories of non-interest income decreased
somewhat in the current quarter. Service charges on deposit accounts declined $41,000. A
decline in gains on residential mortgage loan sales accounted for approximately $32,000 of
the decrease. Loan servicing fees, net of amortization, declined $29,000 due to increased
levels of amortization of the servicing asset.

For the six months ended June 30,
2005, total non-interest income declined 6.7% to $1.8 million, compared to $2.0 million
for the same period in 2004. The most significant decrease was in the net gains on sale of
loans, which decreased 12.6% or $109,000 due to a reduction in mortgage volume. Mortgage
loan sales were down approximately 37.2% in the first half of 2005 compared to the same
period in 2004, as the volume from mortgage refinances has been significantly reduced due
to the rising rates for the mortgage loan products in 2005. The reduction in marketing
gains on sale of mortgage loans was offset by increased value in the mortgage servicing
rights capitalized resulting in the net reduction of 12.6%. Loan servicing fees, net of
amortization increased $47,000 for the first half of the year with increases in the
mortgage servicing portfolio. Service charges and fees on deposit accounts decreased
$85,000 for the first half of 2005 compared to the same period in 2004.

# Noninterest Expense

For the three months ended June 30,
2005, total non-interest expense increased $0.1 million or 4.1% to $3.0 million from $2.9
million for the same period in 2004. The most significant increase was in outside service
fees expense which was up $211,000 for the three months ended June 30, 2005 compared to
the same period in 2004, which was due in large part to the costs associated with the
Tender Offer. Additionally, the Bank incurred costs associated with the conversion of
certain electronic banking functions to a new service bureau. In addition, professional
services expense increased $41,000 for the quarter ended June 30, 2005 compared to the
same period last year, which was also due in large part to the costs associated with the
Tender Offer. Other noninterest expense decreased approximately $155,000 over the prior
year as a result of overall cost reductions.

Total non-interest expenses for the
six months ended June 30, 2005 increased approximately $0.6 million or 10.7% to $6.3
million from $5.7 million during the same period in 2004. An increase in salaries and
employee benefits of approximately $473,000 or 14.1% was the primary factor contributing
to the overall increase. The salaries and employee benefit increase in the first half of
2005 is largely attributable to a Reduction-in-Force plan (RIF) that was
developed with the goal of increasing operational efficiency. The Bank eliminated various
staff positions in the first quarter of 2005, and severance packages were provided to
employees affected by the RIF. The aggregate cost of these severance packages totaled
approximately $264,000. This total cost included $137,000 in wages, $70,000 in pension
costs, and $57,000 in medical insurance costs. Fees for professional services also
increased approximately $158,000 or 80.6% in the first half of 2005 compared to the same
period in 2004. This increase was due to increased payments to the Companys auditing
and consulting firms for services related to contingency planning, for Sarbanes-Oxley
compliance and for additional work related to the Companys annual report. In
addition, legal and accounting costs were incurred in connection with the Tender Offer
that was completed in the second quarter of 2005.

Page 19

---



# Federal Income Tax

The provision for federal income tax
was $204,000 or 30.5% of pretax income from continuing operations for the three month
period ended June 30, 2005, compared to $348,000 or 31.7% for the same period in 2004. The
reduction in the income tax provision reflects the decrease in net income generated in the
three months ended June 30, 2005 versus the same period in 2004. The provision for federal
income tax was $342,000 or 32.1% of pretax income from continuing operations for the six
month period ended June 30, 2005, compared to $661,000 or 31.8% for the same period in
2004. The cause of the reduction in income tax provision for the six months ended June 30,
2005 is substantially the same as noted above. The difference between the statutory rate
and the effective tax rate is due to tax-exempt income and non-deductible expenses.

# Liquidity and Capital
Resources

Liquidity 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.

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

The Companys most liquid assets
are cash and short-term investments. The levels of these assets are dependent on the
Companys operating, financing, lending and investing activities during any given
period. At June 30, 2005, cash and short-term investments totaled $10.0 million and
securities classified as available for sale totaled $26.7 million. However,
available-for-sale securities with a market value of $16.2 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 $242,000 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 $6.7
million for the six months ended June 30, 2005. Deposit flows are affected by the overall
level of interest rates, the interest rates and products offered by the Bank and its local
competitors and other factors. To help fund the increased loan demand, the Bank has
increased its level of public funds CDs.

The Banks borrowing position
increased during the first half of 2005 to $28.5 million as of June 30, 2005 up from $12.5
million at December 31, 2004. As of June 30, 2005, the Bank had the ability to borrow a
total of $21.2 million from the FHLB based upon the amount of collateral pledged, of which
$8.9 million was outstanding at that date. The Bank has contractual payments due on FHLB
advances totaling $2.0 million in the fourth quarter of 2005. In addition to the FHLB, the
Bank had available borrowings on a line-of-credit of $10.0 million from a correspondent
bank, of which $4.5 million had been drawn upon at June 30, 2005. The Bank also had
outstanding advances on repurchase agreements totaling $15.1 million at June 30, 2005,
based on the collateral pledged. Additional advances could be obtained through repurchase
agreements provided additional collateral is pledged. Repurchase agreements are terminable
upon demand.

20

---



At June 30, 2005, the Bank had
outstanding commitments to fund loans of $12.0 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.

On May 29, 2005, the Company
purchased 128,832 of its common shares at $66.00 per share pursuant to its self tender
offer, which expired May 20, 2005. The aggregate cost of the purchase was approximately
$8.6 million, including fees and expenses of approximately $91,000. The Company utilized
available cash and short-term investments to fund this transaction. 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.

At June 30, 2005 and December 31,
2004, the Company and the Bank exceeded all regulatory minimum capital requirements and
are considered to be well capitalized.

|                                         | Actual | Minimum RequiredForCapital AdequacyPurposes | Minimum Required to be
 Well-Capitalized Under
   Prompt Corrective
   Action Regulations
|---------------------------------------- | ------ | ------------------------------------------- | -----------------------------------------------------------------------------------------
|
|June 30, 2005                            |        |                                             |                                                                                          
|Total capital (to risk weighted assets)  |       
|Consolidated                             |        | $36.5                                       |                                                                                          
|Bank of Lenawee                          |        | $31.9                                       |                                                                                          
|Tier 1 Capital (to risk weighted assets) |       
|Consolidated                             |        | $33.8                                       |                                                                                          
|Bank of Lenawee                          |        | $29.2                                       |                                                                                          
|Tier 1 Capital (to average assets)       |       
|Consolidated                             |        | $33.8                                       |                                                                                          
|Bank of Lenawee                          |        | $29.2                                       |                                                                                          
|                                        
|December 31, 2004                        |       
|Total Capital (to risk weighted assets)  |       
|Consolidated                             |        | $43.9                                       |                                                                                          
|Bank of Lenawee                          |        | $30.8                                       |                                                                                          
|Tier 1 Capital (to risk weighted assets) |       
|Consolidated                             |        | $41.4                                       |                                                                                          
|Bank of Lenawee                          |        | $28.3                                       |                                                                                          
|Tier 1 Capital (to average assets)       |       
|Consolidated                             |        | $41.4                                       |                                                                                          
|Bank of Lenawee                          |        | $28.3                                       |                                                                                          

Page 21

---



# 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.

The Company has not experienced a
material change in its financial instruments that are sensitive to changes in interest
rates since December 31, 2004, 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 Interim 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.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(c) |  | Change in Management. See Report on Form 8-K dated March 9, 2005
               announcing the resignation of the Companys Chief Financial Officer.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------

# PART IIOTHER 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 their 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.

Page 22

---



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

|Period           | Total Number of SharesPurchased | Average Price Paid Per Share | Total Number of Shares
  Purchased as part of
   Publicly AnnouncedPlans or Programs |       
|---------------- | ------------------------------- | ---------------------------- | ------------------------------------------------------------------------------------ | ------
|4/1/05 - 4/30/05 |                                 | -                            |                                                                                      |       
|5/1/05 - 5/31/05 |                                 | 128,832                      |                                                                                      | $66.00
|6/1/05 - 6/30/05 |                                 | -                            |                                                                                      |       
|                 |                                 |                              |                                                                                      |       
|Total            |                                 | 128,832                      |                                                                                      | $66.00
|                 |                                 |                              |                                                                                      |       

| | (1) | These shares were repurchased pursuant to a self-tender offer that was announced
                    on April 12, 2005. The Board of Directors of Pavilion Bancorp Inc. authorized a
                    repurchase of 15% of the total shares outstanding at December 31, 2004 or
                    128,832 shares, with an option to purchase an additional 2% or 17,178 shares of
                    stock at $66.00 per share. The offer expired on May 20, 2005, and shortly
                    thereafter these shares were repurchased. The Company did not elect to
                    repurchase the additional 2%.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# ITEM 3  DEFAULTS
UPON SENIOR SECURITIES  None

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

The annual meeting of our
shareholders was held on April 21, 2005. At that meeting, the following matters were
submitted to a vote of the shareholders. There were 852,770 voting shares outstanding on
March 7, 2005, the record date for the meeting. 723,048 shares or 85% voted as follows:

|                                                             |  |         | 
|------------------------------------------------------------ |  | ------- | 
|Directors nominated for
             terms expiring in 2008: |  | For     | 
|Douglas L. Kapnick                                           |  | 699,569 | 
|Terence Sheehan                                              |  | 707,446 | 
|Marinus VanOoyen                                             |  | 707,446 | 
|                                                            
|Selection of Auditors for 2005                               |  | For     | 
|Plante & Moran, PLLC                                         |  | 719,763 | 

# ITEM 5  OTHER
INFORMATION  None

# ITEM 6  EXHIBITS

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

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

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

Page 23

---



|32.1 | Certificate
of the Chief Executive  Officer and the Interim 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 24

---



# SIGNATURES

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

|Date:      August 12, 2005 
Date:      August 12, 2005 | Pavilion Bancorp, Inc.
/s/ Richard J. DeVries                
Richard J. DeVries
President and Chief Executive Officer
/s/ Mark D. Wolfe                     
Mark D. Wolfe
Interim Chief Financial Officer
|------------------------------------------------------ | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Page 25

---



EXHIBIT INDEX

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

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

|31.2 | Certificate
 of the  Interim  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 Interim 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 26

---