Pavilion Bancorp (PVLN) 10-K/A 2004 FY Annual report (amended)

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

_________________

FORM 10-K/A
(AMENDMENT NO. 1)

For Annual and Transaction Reports Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

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

For the fiscal year ended December 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______ to ________

Commission file number 000-30521

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

Michigan
(State or other jurisdiction of
Incorporation or organization)

135 East Maumee Street
Adrian, Michigan
(Address of principal executive offices) 38-3088340
(I.R.S. Employer Identification No.)


49221
(Zip Code)

517-265-5144; 517-265-3926 (FAX)
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: Common Stock, no par value

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 such shorter period 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K. ____

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes      No X .

State the aggregate market value of the voting and nonvoting common equity held by nonaffiliates computed by reference to the price at which the common equity was sold, or the average bid and asked prices of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter.

Aggregate Market Value as of June 30, 2004: $45,652,680

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.

Common stock outstanding at March 3, 2005: 852,770 shares.

Documents Incorporated by Reference

Portions of the Company’s Proxy Statement for the Annual Meeting of Shareholders to be held April 21, 2005 are incorporated by reference into Parts II and III of this report.

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Explanatory Note

        Pavilion Bancorp, Inc. (the "Company") is filing this Amendment No. 1 to its Annual Report on Form 10-K for the year ended December 31, 2004, which was originally filed on March 21, 2005, to include the Report of Independent Registered Public Accounting Firm issued by Crowe Chizek and Company LLC with respect to the Company's consolidated financial statements for the years ended December 31, 2003 and 2002. This Report was inadvertently omitted from the Form 10-K.

        This Amendment No. 1 does not change the Company's consolidated financial statements in any way. This Form 10-K/A does not reflect events occurring after the filing of the 2004 Form 10-K or modify or update those disclosures affected by subsequent events or discoveries.

        The following items have been amended as a result of the revisions described above:

        Part II, Item 8 - Financial Statements and Supplementary Data

        Part III, Item 15 - Exhibits and Financial Statement Schedules

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Item 8. Financial Statements and Supplementary Data.

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MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL STATEMENTS

Management is responsible for the preparation of Pavilion Bancorp, Inc.‘s (the “Company”) consolidated financial statements and related information appearing in this Annual Report. Management believes that the consolidated financial statements fairly reflect the form and substance of transactions and reasonably present Pavilion Bancorp’s financial position and results of operations and were prepared in conformity with accounting principles generally accepted in the United States of America. Management also has included in the Company’s financial statements, amounts that are based on estimates and judgments which it believes are reasonable under the circumstances.

The Company maintains a system of internal controls designed to provide reasonable assurance that all assets are safeguarded and financial records are reliable for preparing the consolidated financial statements. The Company complies with laws and regulations relating to safety and soundness which are designated by the FDIC and other appropriate federal and state banking agencies. The selection and training of qualified personnel and the establishment and communication of accounting and administrative policies and procedures are elements of this control system. The effectiveness of internal controls is monitored by a program of internal audit. Management recognizes that the cost of a system of internal controls should not exceed the benefits derived and that there are inherent limitations to be considered in the potential effectiveness of any system. Management believes that the Company’s system provides the appropriate balance between costs of controls and the related benefits.

The independent auditors have audited the Company’s consolidated financial statements in accordance with auditing standards generally accepted in the United States of America and provide an objective, independent review of the fairness of the reported operating results and financial position. The Company’s Board of Directors has established an Audit Committee composed of five non-management Directors. The Audit Committee meets periodically with the internal auditors and the independent auditors.

/s/ Richard J. DeVries
Richard J. DeVries
President and Chief Executive Officer /s/ Mark D. Wolfe
Mark D. Wolfe
Interim Chief Financial Officer

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Shareholders
Pavilion Bancorp, Inc.
Adrian, Michigan

We have audited the accompanying consolidated balance sheet of Pavilion Bancorp, Inc. as of December 31, 2003, and the related consolidated statements of income, changes in shareholders' equity and cash flows for the years ended December 31, 2003 and 2002. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Pavilion Bancorp, Inc. as of December 31, 2003, and the results of its operations and its cash flows for the years ended December 31, 2003 and 2002 in conformity with U.S. generally accepted accounting principles.

/s/ Crowe Chizek and Company LLC
Crowe Chizek and Company LLC

Grand Rapids, Michigan
January 13, 2004

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Report of Independent Registered Public Accounting Firm

To The Board of Directors and Stockholders
Pavilion Bancorp, Inc.

We have audited the accompanying balance sheet of Pavilion Bancorp, Inc. as of December 31, 2004, and the related statements of income, stockholders’ equity, and cash flow for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit. The financial statements of Pavilion Bancorp, Inc. as of December 31, 2003 and for the years ended December 31, 2003 and 2002, before the restatement described in Note 15, were audited by other auditors whose report dated January 13, 2004 expressed an unqualified opinion on those financial statements.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement preparation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the 2004 financial statements referred to above present fairly, in all material respects, the financial position of Pavilion Bancorp, Inc. at December 31, 2004, and the results of its operations and its cash flows for the year ended December 31, 2004, in conformity with accounting principles generally accepted in the United States of America.

We also audited the adjustments described in Note 15 that were applied to restate the 2003 and 2002 financial statements. In our opinion, such adjustments are appropriate and have been properly applied.

/s/ Plante & Moran, PLLC
Plante & Moran, PLLC

Auburn Hills, Michigan

March 9, 2005

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PAVILION BANCORP, INC.
CONSOLIDATED BALANCE SHEET

(000's omitted)	December 31, 2004		December 31, 2003
ASSETS
Cash and cash equivalents	$   11,700		$     9,072
Total cash and cash equivalents	11,700		9,072
Securities available for sale (Note 2)	27,886		20,435
Federal Home Loan Bank, Freddie Mac, FNMA stock	2,738		2,601
Federal Reserve Bank stock	360		381
Loans held for sale	322		433
Loans (Note 3)	207,159		209,467
Less: allowance for loan losses (Note 4)	(2,495	)	(2,302	)
Net loans	204,664		207,165
Premises and equipment - Net (Note 6)	5,727		5,410
Accrued interest receivable	1,429		1,431
Mortgage servicing rights (Note 5)	2,827		2,739
Other assets	1,669		-
Assets of discontinued operation (Note 15)	-		72,916
Total assets	$ 259,322		$ 323,382
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits
Noninterest bearing	$   44,207		$   42,715
Interest-bearing (Note 7)	155,785		159,651
Total deposits	199,992		202,366
Federal funds purchased (Note 8)	1,450		2,160
Repurchase agreements (Note 8)	2,482		1,090
Federal Home Loan Bank advances (Note 8)	8,586		7,221
Accrued interest payable	233		294
Other liabilities	5,178		9,086
Subordinated debentures (Note 9)	5,000		5,000
Common stock in ESOP subject to repurchase obligation (Note 11)	4,544		3,799
Liabilities of discontinued operation (Note 15)	-		65,842
Total liabilities	227,465		296,858
SHAREHOLDERS' EQUITY (Notes 16 and 17)
Common stock and paid-in capital, no par value: 3,000,000 shares
authorized; shares issued and outstanding: 852,140-2004; 845,420-2003	10,190		10,675
Retained earnings	21,713		15,616
Accumulated other comprehensive income (loss)	(46	)	233
Total shareholders' equity	31,857		26,524
Total liabilities and shareholders' equity	$ 259,322		$ 323,382
See accompanying notes to the consolidated financial statements.

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PAVILION BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 2004, 2003, 2002

(000's omitted, except per share data)	2004	2003		2002
Interest and Dividend Income
Loans receivable, including fees	$13,914	$ 14,029		$ 14,805
Debt securities:
Taxable	664	584		931
Tax-exempt	120	146		203
Federal funds sold	47	48		88
Dividend income	140	232		174
Total interest and dividend income	14,885	15,039		16,201
Interest Expense
Deposits	2,144	2,662		4,021
Subordinated debentures	285	249		293
Other borrowed funds	366	341		463
Total interest expense	2,795	3,252		4,777
Net interest income	12,090	11,787		11,424
Provision for Loan Losses (Note 4)	693	595		667
Net interest income after provision for loan losses	11,397	11,192		10,757
Noninterest Income
Service charges and fees	1,431	1,366		1,652
Net gain on sale of loans	1,516	5,649		4,725
Loan servicing fees, net of amortization (Note 5)	500	(1,566	)	(1,159	)
Gain on sale of available-for-sale securities	-	-		9
Other	119	391		398
Total noninterest income	3,566	5,840		5,625
Noninterest Expenses
Compensation and employee benefits (Note 11)	7,209	7,589		7,320
Occupancy and equipment	1,664	1,558		1,628
Printing, postage and supplies	500	446		433
Professional services	446	352		355
Outside services	547	723		604
Marketing and Advertising	356	172		70
Loan financing services	214	457		291
Other	873	813		683
Total noninterest expense	11,809	12,110		11,384
Income from continuing operations before income taxes	3,154	4,922		4,998
Income taxes from continuing operations (Note 10)	1,001	1,563		1,590
Income from continuing operations	2,153	3,359		3,408
Discontinued operations:
Income (loss) from disconnected operations,
net of income taxes of $162; ($49) and ($263)	562	(124	)	(553	)
Gain on sale of discontinued component, net of
income tax expense of $2,573; $0 and $0	4,417	-		-
Income (loss) from discontinued operation	4,979	(124	)	(553	)
Net Income	$  7,132	$   3,235		$   2,855
	2004	2003		2002
Earnings per share from continuing operations
Basic	$    2.54	$     3.92		$     3.85
Diluted	$    2.52	$     3.89		$     3.83
Earnings per share from discontinued operations
Basic	$    5.88	$  (0.14	)	$  (0.63	)
Diluted	$    5.82	$  (0.14	)	$  (0.62	)
Net earnings per share
Basic	$    8.42	$     3.78		$     3.23
Diluted	$    8.34	$     3.75		$     3.21

        See accompanying notes to the consolidated financial statements.

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PAVILION BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Years ended December 31, 2004, 2003, and 2002

(000's omitted)	Common Stock Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Total Shareholders Equity
Balance January 1, 2002	$ 10,187		$ 13,124		$ 252		$ 23,563
Comprehensive income:
Net income	-		2,855		-		2,855
Establish minimum pension liability	-		-		(399	)
Unrealized gains (losses) on securities	-		-		169
Tax effect	-		-		82
Total other comprehensive income	-		-		(148	)	(148	)
Total comprehensive income	-		-		-		2,707
Change in common stock subject to repurchase	344		-		-		344
Retirement of stock - 21,423 shares	(1,019	)	-		-		(1,019	)
Proceeds from sale of stock - 2,044 shares	105		-		-		105
Stock option expense	34		-		-		34
Stock options exercised	60		-		-		60
Cash dividends - $.82 per share	-		(725	)	-		(725	)
Balance December 31, 2002	9,711		15,254		104		25,069
Comprehensive income:
Net income	-		3,235		-		3,235
Net change in minimum pension liability	-		-		399
Unrealized gains (losses) on securities	-		-		(199	)
Tax effect	-		-		(71	)
Total other comprehensive income	-		-		129		129
Total comprehensive income	-		-		-		3,364
Change in common stock subject to repurchase	301		-		-		301
Retirement of stock - 28,238 shares	(1,384	)	-		-		(1,384	)
Stock option expense	43		-		-		43
Stock options exercised	60		-		-		60
Cash dividends - $1.09 per share	-		(929	)	-		(929	)
Payment of 5% stock dividend	1,944		(1,944	)	-		-
Balance December 31, 2003	10,675		15,616		233		26,524
Comprehensive income:
Net income	-		7,132		-		7,132
Unrealized gains (losses) on securities	-		-		(207	)
Tax effect	-		-		(72	)
Total other comprehensive	-		-		(279	)	(279	)
Total comprehensive income	-		-		-		6,853
Change in common stock subject to repurchase	(745	)	-		-		(745	)
Retirement of stock	(1	)	-		-		(1	)
Stock option expense	43		-		-		43
Stock options exercised	218		-		-		218
Cash dividends - $1.22 per share	-		$ (1,035	)	-		$(1,035	)
Balance December 31, 2004	$ 10,190		$ 21,713		$ (46	)	$ 31,857

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PAVILION BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
Years Ended December 31, 2004, 2003 and 2002

(000's omitted)	2004		2003		2002
Cash flows from operating activities
Net income	$   7,132		$     3,235		$     2,855
Adjustments to reconcile net income to
net cash from operating activities
Depreciation	579		830		903
Stock option expense	43		43		34
Provision for loan losses	693		808		953
Gain on sale of discontinued operation	(6,990	)	-		-
Deferred income tax benefit	997		-		-
Amortization (accretion) on investment securities
available for sale	188		292		292
Net realized (gain) loss on sales of securities	-		-		(9	)
Amortization of mortgage servicing rights	444		2,401		1,783
Origination of mortgage loans held for sale	(85,788	)	(276,648	)	(230,041	)
Proceeds from sales of mortgage loans held for sale	86,884		281,084		231,391
Net gains on sale of mortgage loans	(1,207	)	(5,822	)	(4,839	)
Net change in:
Deferred loan origination fees	-		(10	)	(102	)
Accrued interest receivable	2		181		10
Other assets	394		2,115		590
Accrued interest payable	(61	)	(65	)	(343	)
Other liabilities	(7,374	)	964		304
Net cash (used in) provided by operating activities	(4,064	)	9,407		3,782
Cash flows from Investing Activities
Proceeds from:
Maturities, calls and principal payments on
securities available for sale	8,349		16,903		18,135
Sales of securities available for sale	-		-		3,509
Federal Reserve Bank Stock	21		-		-
Proceeds from sale of discontinued operation	15,101		-		-
Purchases of:
Securities available for sale	(16,410	)	(12,614	)	(21,005	)
Federal Home Loan Bank Stock	(137	)	(97	)	-
Federal Reserve Bank Stock	-		(29	)	(13	)
Premises and equipment, net	(896	)	(672	)	(606	)
Net change in discontinued operation	-		2,850		(2,907	)
Net increase (decrease) in loans	1,726		(40,117	)	(22,983	)
Recoveries on loans charged-off	82		119		151
Net cash provided by (used in) investing activities	7,836		(33,657	)	(25,719	)
Cash flows from financing activities
Net change in deposits	(2,374	)	22,232		6,313
Net change in short term borrowings	682		3,909		1,617
Proceeds from FHLB advances	2,000		2,500		-
Repayment of FHLB advances	(635	)	(407	)	(376	)
Repurchase of common stock	-		(1,384	)	(1,019	)
Issuance of common stock	-		-		105
Stock options exercised	218		60		61
Dividends paid	(1,035	)	(929	)	(725	)
Net cash provided by (used in) financing activities	(1,144	)	25,980		5,975
Net change in cash and cash equivalents	2,628		1,730		(15,961	)
Cash and cash equivalents at beginning of year	9,072		7,342		23,303
Cash and cash equivalents at end of year	$  11,699		$    9,072		$    7,342
Supplemental schedule of noncash activities
Transfer from:
Loans to foreclosed real estate	$       914		$       491		$    1,521
Cash paid for:
Interest	$    3,894		$    4,662		$    6,372
Income taxes	$       805		$    1,395		$    1,599

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PAVILION BANCORP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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.

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 financial position and results of operations of the Bank of Washtenaw are removed from the detail line items in the Company’s consolidated financial statements and presented separately as “discontinued operations.” Please refer to Note 15 to the Company’s Consolidated Financial Statements for additional information.

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 their offices located in Lenawee and Hillsdale Counties in Michigan.

Use of Estimates: The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America. Management is required to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates and assumptions. Material estimates that are particularly susceptible to significant change in the near-term relate to the determination of the allowance for loan losses, foreclosed assets, impaired loans, deferred tax assets, mortgage servicing rights and fair value of securities and other financial instruments.

Cash and Cash Equivalents: For the purpose of the consolidated statement of cash flow cash and cash equivalents include cash on hand, demand deposits with other financial institutions, federal funds sold and commercial paper, all of which mature within 90 days.

Stock Dividend On December 19, 2003, the Company declared a 5% stock dividend payable on January 30, 2004 to shareholders as of January 16, 2004. All per share data has been restated to reflect the stock dividend.

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PAVILION BANCORP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Securities: Debt securities that management has the positive intent and ability to hold to maturity are classified as “held-to-maturity” and recorded at amortized cost. Securities not classified as held-to-maturity, including equity securities with readily determinable fair values, are classified as “available-for-sale” and recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Declines in the fair value of securities held-to-maturity and securities available-for-sale below their cost that are deemed to be other than temporary (if any) are reflected in earnings as realized losses. In estimating other-than-temporary impairment losses, management considers (1) the length of time and the extent to which the fair value has been impacted, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.

Federal Home Loan Bank Stock: Federal Home Loan Bank stock (“FHLB stock”) is considered a restricted investment security and is carried at cost. Purchases and sales of FHLB stock are made directly with the FHLB at par value.

Loans Held for Sale: Loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated fair value in the aggregate. Net unrealized losses, if any, are recognized in a valuation allowance by charges to income.

Mortgage loans held for sale are generally sold with the mortgage servicing rights retained by the Company. The carrying value of mortgage loans sold is reduced by the cost allocated to the associated mortgage servicing rights. Gains or losses on sales of mortgage loans are recognized based on the difference between the selling price and the adjusted carrying value of the related mortgage loans sold.

Loans: The Company grants mortgage, commercial and consumer loans to customers. Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are reported at their outstanding unpaid principal balances adjusted for charge-offs, the allowance for loan losses and any deferred fees or costs on originated loans. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the interest method.

Accrual of interest on loans is generally discontinued at the time a loan becomes 90 days delinquent in its payments, unless the credit is well-secured and in the process of collection. Loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful.

Uncollected accrued interest attributable to the current fiscal year on loans that are placed on nonaccrual or charged-off is reversed against interest income. Uncollected accrued interest attributable to prior fiscal year(s) is reversed against the allowance for loan losses. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual status. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Allowance for Loan Losses: The allowance for loan losses (the “allowance”) is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management determines the uncollectibility of a loan balance. Subsequent recoveries, if any, are credited to the allowance. The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectibility of the loans in light of historical experience, industry experience, regulatory guidance, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available.

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PAVILION BANCORP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

The allowance consists of specific, general, and unallocated components. The specific components relate to certain loans that are classified as doubtful, substandard, or special mention. For such loans that are also classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower that the carrying value of that loan. The general component covers classified and non-classified loans and is based on industry experience, regulatory guidance, and historical loss experience, adjusted for qualitative factors. An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower including length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of the collateral, if the loan is collateral dependent.

Large groups of homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer and residential loans for impairment disclosures.

Significant Group Concentrations of Credit Risk: Most of the Company’s activities are with customers located in Michigan. Note 2 discusses the types of securities in which the Company invests. Note 3 discusses the types of lending in which the Company engages. The Company does not have any significant concentrations to any one industry or customer.

Premises and Equipment: Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed using a combination of straight-line and accelerated methods over the estimated useful lives of the assets.

Servicing Rights: Servicing assets are recognized as separate assets when rights are acquired through purchase or through sale of financial assets. Capitalized servicing rights are reported as other assets and are amortized into noninterest expense in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets. Servicing assets are evaluated for impairment based upon the fair value of the rights as compared to amortized cost. Impairment is determined by stratifying rights by predominant characteristics, such as interest rates and terms. Fair value is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions. Impairment is recognized through a valuation allowance for an individual stratum, to the extent that fair value is less than the capitalized amount for the stratum.

Foreclosed Assets: Assets acquired through, or in lieu of, foreclosure are held-for-sale and are initially recorded at fair value (less cost to sell) at the date of the foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less cost to sell. Revenue and expenses from operations and changes in the valuation allowance are included in net expenses from foreclosed assets. Other real estate owned amounts to $715,000 and $181,000 at December 31, 2004 and 2003 and are included in other assets.

Repurchase Agreements: Substantially all repurchase agreement liabilities represent amounts advanced by various customers. Repurchase agreements are collateralized with securities owned by the Bank of Lenawee. Securities pledged as collateral for repurchase agreements are held in safekeeping at independent correspondent banks. Repurchase agreements are not covered by federal deposit insurance.

-13-

PAVILION BANCORP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Benefit Plans: A defined benefit pension plan covers substantially all employees, with benefits based on years of service and compensation prior to retirement. The Company also maintains a profit-sharing and 401(k) plan. The profit-sharing and 401(k) plan expense and the amount contributed are determined by the Board of Directors. Employee benefits are discussed further in Note 11.

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 2004, 2003 and 2002 based on the vesting schedules of the related stock options. Compensation expense for stock options was $43,000, $43,000 and $34,000 during 2004, 2003 and 2002, respectively.

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

	2004		2003		2002
Net income as reported	$      7,132		$      3,235		$      2,855
Less: Stock-based compensation expense
Determined under fair value based method	(37	)	(63	)	(61	)
Pro forma net income	$      7,095		$      3,172		$      2,794
Basic earnings per share - As Reported	$             8.42		$             3.78		$             3.23
Basic earnings per share - Pro forma	$             8.34		$             3.70		$             3.15
Diluted earnings per share - As Reported	$             8.34		$             3.75		$             3.21
Diluted earnings per share - Pro forma	$             8.30		$             3.67		$             3.13

The fair value of each option grant is estimated on the date of grant using the Black-Scholes pricing model with the following weighted-average assumptions:

	2004		2003		2002
Risk-free interest rate	3	.75%	3	.58%	4	.78%
Expected option life	8 y	ears	8 y	ears	8 y	ears
Expected dividend yield	1	.73%	1	.96%	1	.38%
Expected stock price volatility	19	.86%	22	.74%	22	.92%

Advertising Expenses: Advertising expenses are expensed as incurred.

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 on the tax effects of the various temporary differences between the book and tax bases of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws.

Earnings per Common Share: Basic earnings per share represents income available to common stockholders divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by the Company relate solely to outstanding stock options and are determined using the treasury stock method.

-14-

PAVILION BANCORP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Earnings per common share have been computed based on the following (000‘s omited):

	2004	2003	2002
Net income	$    7,132	$    3,235	$    2,855
Average number of common shares outstanding
used to calculate basic earnings per share	846,221	856,361	884,044
Effect of dilutive options	8,682	6,895	6,483
Average number of common shares outstanding
used to calculate diluted earnings per
common share	854,903	863,256	890,527

Other Comprehensive Income: Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the equity section of the balance sheet. Such items, along with net income, are components of comprehensive income.

Financial Instruments with Off-Balance Sheet Risk: Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and standby letters of credit issued to meet customers’ needs. The face amount for these items represents the exposure to loss before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded.

Fair Values of Financial Instruments: Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed separately. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates. The fair value estimates of existing on and off-balance-sheet financial instruments does not include the value of anticipated future business or values of assets and liabilities not considered financial instruments.

Reclassifications: Certain amounts appearing in the prior year’s financial statements have been reclassified to conform to the current year’s financial statements.

-15-

PAVILION BANCORP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Recent Accounting Pronouncements:

SFAS No. 123 (revised 2004): SFAS No. 123 (revised 2004), “Share-Based Payment” revises SFAS No. 123, “Accounting for Stock-Based Compensation” and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.” This statement focuses primarily on accounting for transactions in which an entity obtains an employee services in share-based payment transactions. This Statement does not address the accounting for employee share ownership plans, which are subject to AICPA Statement of Position 93-6, “Employers’ Accounting for Stock Ownership Plans.” This Statement requires an entity to recognize the cost of employee services received in share-based payment transactions and measure the cost based on a grant-date fair value of the award. The provisions of SFAS No. 123 (revised 2004) will be effective for the Company’s financial statements issued for periods beginning after June 15, 2005. The adoption of this revised Statement is not expected to have a material impact on the Company’s consolidated financial statements.

FASB Interpretation No. 46: In December 2003, the FASB issued Interpretation No. 46 (Revised 2003) “Consolidation of Variable Interest Entities,” (FIN 46-R). FIN 46-R requires that subsidiaries defined as variable interest entities be consolidated by the enterprise that will absorb the majority of the entities’ expected losses if they occur, receive a majority of the variable interest entities residual returns if they occur, or both. The Company, through fully-consolidated wholly-owned subsidiaries, sponsors a trust preferred security issuing vehicle. The Company determined that the trust preferred subsidiary meets the definition of a variable interest entity and that the Company is not the primary beneficiary of the subsidiary’s activities. There was no material impact to the results of operations as a result of applying the provisions of FIN 46-R.

EITF 03-1: In March, 2004, the Financial Accounting Standards Board ratified the consensus reached by the Emerging Issues Task Force in Issue 03-1, “The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments” (EITF 03-1). EITF 03-1 provides guidance for determining when an investment is considered impaired, whether impairment is other-than-temporary, and measurement of an impairment loss. At December 31, 2004, gross unrealized losses on available-for-sale securities was $192,000. The amount of other-than-temporary impairment to be recognized, if any, will be dependent on market conditions, management’s intent and ability to hold investments until a forecasted recovery and the finalization of the proposed guidance by the FASB. The Company had no investment securities with impairment that was deemed to be other than temporary.

-16-

PAVILION BANCORP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002

NOTE 2 — SECURITIES

The amortized cost and estimated fair market value of available-for-sale securities are as follows at December 31, 2004 and 2003 (000‘s omitted):

	Amortized Cost	Gross Unrealized Gains	Gross Unrealized Losses	Estimated Market Value
2004      U.S. Treasury & government agencies	$20,161	$    -	$     178	$19,983
Obligations of states & political subdivisions	5,821	83	10	5,894
Mortgage-backed securities	1,986	27	4	2,009
Total available for sale securities	$27,968	$110	$     192	$27,886
2003
U.S. Treasury & government agencies	$15,092	$  77	$   -	$15,169
Obligations of states & political subdivisions	2,944	221	-	3,165
Mortgage-backed securities	2,048	53	-	2,101
Total available for sale securities	$20,084	$    -	$   -	$20,435

Contractual maturities of securities at December 31, 2004 are as follows. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations. Securities not due at a single maturity date, primarily mortgage-backed securities, are shown separately (000‘s omitted):

	Available-for-Sale
	Amortized Cost	Market Value
Due in one year or less	$  1,485	$  1,495
Due from one to five years	22,539	22,389
Due from five to ten years	555	589
Due after ten years	1,403	1,404
Total debt securities	25,982	25,877
Mortgage-backed securities	1,986	2,009
Total	$27,968	$27,886

The tax benefit applicable to net realized gains and losses were minimal or none.

-17-

PAVILION BANCORP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002

NOTE 2 — SECURITIES(continued)

Information pertaining to securities with gross unrealized losses at December 31, 2004 and 2003, aggregated by investment category and length of time that individual securities have been in a continuous loss position are as follows (000‘s omitted):

At December 31, 2004	Less Than Twelve Months		Over Twelve Months
	Gross Unrealized Losses	Fair Value	Gross Unrealized Losses	Fair Value
Available-for-sale securities:
U.S. treasury & government agencies	$178	$19,983	$   -	$   -
Obligations of states & political
subdivisions	10	2,007	$   -	$   -
Mortgage-backed securities	4	567	$   -	$   -
Total available-for-sale securities	$192	$22,557	$   -	$   -

The Company had no investment securities with an unrealized loss at December 31, 2003.

Unrealized losses on securities have not been recognized into income because the issuers’ bonds are of high credit quality, the Company has the intent and ability to hold the securities for the foreseeable future, and the decline in fair value is primarily due to increased market interest rates. The fair value is expected to recover as the bonds approach the maturity date.

Proceeds from sales of debt securities for the twelve months ended 2004, 2003 and 2002 are as follows (000‘s omitted):

	2004	2003	2002
Proceeds from sales	$        -	$        -	$     3,509
Gross gains from sales	$        -	$        -	$            9
Gross losses from sales	$        -	$        -	$            -

Securities with a fair value of approximately $4,949,000 and $10,123,000 at December 31, 2004 and 2003 were pledged to secure repurchase agreements and other borrowings.

NOTE 3 – LOANS RECEIVABLE

Major categories of loans in the portfolio are as follows at December 31, 2004 and 2003 (000‘s omitted):

	2004	2003
Commercial	$108,708	$120,853
Agricultural	34,875	33,390
Real Estate Mortgage	21,685	16,630
Real Estate Construction	8,768	8,851
Consumer	33,123	29,743
Total loans receivable	$207,159	$209,467

-18-

PAVILION BANCORP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002

NOTE 3 – LOANS RECEIVABLE (continued)

Certain directors and executive officers of the Company, including associates of such persons, were loan customers of the Company during 2004 and 2003. A summary of aggregate related-party loan activity for loans aggregating $60,000 or more to any related party at December 31, 2004 and 2003 is as follows (000’s omitted):

	2004		2003
Balance at January 1	$   3,204		$   2,573
New loans	12,208		10,324
Repayments	(10,272	)	(9,530	)
Other adjustments	-		(163	)
Balance at December 31	$   5,140		$   3,204

NOTE 4 — ALLOWANCE FOR LOAN LOSSES

Activity in the allowance for loan losses for the twelve months ended December 31, 2004, 2003 and 2002 are as follows (000’s omitted):

	2004		2003		2002
Beginning balance	$ 2,302		$ 2,100		$ 1,891
Charge-offs	(582	)	(506	)	(606	)
Recoveries	82		113		148
Provision for loan losses	693		595		667
Ending balance	$ 2,495		$ 2,302		$ 2,100

Impaired loans at December 31, 2004, 2003 and 2002 are as follows (000’s omitted):

	2004	2003	2002
Impaired loans with no allowance for loan losses allocated	$     13	$       -	$     54
Impaired loans with allowance for loan losses allocated	$   900	$1,796	$1,119
Total impaired loans	$   913	$1,796	$1,173
Amount of the allowance allocated to impaired loans	$   151	$   352	$   153
Average investment in impaired loans	$1,006	$1,808	$1,195
Interest income recognized during impairment	$     14	$   125	$   101
Cash-basis interest income recognized	$       7	$       6	$     75

No additional funds are committed to be advanced in connection with impaired loans.

Nonperforming loans at December 31, 2004 and 2003 were as follows (000’s omitted):
	2004	2003
Loans past due over 90 days still on accrual	$556	$   693
Nonaccrual loans	$671	$1,459

Nonperforming loans includes both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.

-19-

PAVILION BANCORP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002

NOTE 5 — LOAN SERVICING

The Bank routinely sells to investors its originated residential mortgage loans. The unpaid principal balance of loans serviced for others was approximately $374,022,000 and $392,514,000 at December 31, 2004 and 2003 and are not included in the accompanying consolidated balance sheets. Related escrow balances were $408,000 and $835,000 December 31, 2004 and 2003.

The key economic assumptions used in determining the fair value of the mortgage servicing rights are as follows:

	December 31,
	2004		2003
Annual constant prepayment speed	10	.79	14	.49
Weighted average life (in months)	20		12
Discount rate	7	.50%	8	.67%

Activity for capitalized mortgage servicing rights was as follows (000‘s omitted):

	2004		2003		2002
Beginning balance	$ 2,739		$ 2,715		$ 2,066
Mortgage servicing rights capitalized	532		2,426		2,432
Mortgage servicing rights amortized	(444	)	(2,402	)	(1,783	)
Ending balance	$ 2,827		$ 2,739		$ 2,715

There was no valuation allowance at December 31, 2004, 2003 and 2002 for mortgage servicing rights.

NOTE 6 — PREMISES AND EQUIPMENT

Major classifications of bank premises and equipment at December 31, 2004, 2003 and 2002 are summarized as follows (000‘s omitted):

	2004		2003
Land	$      561		$      520
Buildings and improvement	6,394		6,420
Furniture and equipment	7,495		6,759
Total premises and equipment	14,450		13,699
Less: accumulated depreciation	(8,723	)	(8,289	)
Net carrying amount	$   5,727		$   5,410

Depreciation expense for the years ended December 31, 2004, 2003 and 2002 amounted to $579,000, $570,000 and $592,000, respectively. The anticipated annual expense from an operating lease is $53,000. Currently, the lease is in the fifth year of a ten year lease. Inflationary adjustments to the cost of such lease, based on changes in the Consumers Price Index, will begin in 2006.

-20-

PAVILION BANCORP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002

NOTE 7 — DEPOSITS

The following table summarizes interest-bearing deposits at December 31, 2004 and 2003 (000’s omitted):

	2004	2003
NOW accounts	$  26,693	$  26,727
Savings	58,329	59,852
Certificates of deposit:
$100,000 and over	32,788	26,883
Under $100,000	37,975	46,189
Total interest-bearing deposits	$155,785	$159,651

Stated maturities of time deposits at December 31, 2004 are as follows (000’s omitted):

2005	$46,867
2006	15,780
2007	5,193
2008	1,987
2009	936
Thereafter	-
	$70,763

NOTE 8 — BORROWED FUNDS

Borrowed funds at December 31, 2004 and 2003 are as follows (000’s omitted):

	2004	2003
Federal funds purchased	$  1,450	$  2,160
Repurchase agreements	2,482	1,090
Federal Home Loan Bank advances	8,586	7,221
Total borrowed funds	$12,518	$10,471

Federal funds purchased totaled $1,450,000 and $2,160,000 at December 31, 2004 and 2003, respectively. Federal funds purchased typically mature daily. The Bank utilizes a $10 million line of credit at a correspondent bank for this purpose. Rates on this line of credit ranged from 1.1875% to 2.50% during 2004.

Repurchase Agreements

Information concerning repurchase agreements at December 31, 2004 and 2003 are summarized as follows (000’s omitted):

	2004		2003
Amount outstanding at year-end	$  2,482		$  1,090
Weighted average interest rate at year-end	0.53	%	0.56	%
Average daily balance during the year	$  2,745		$  1,239
Weighted average interest rate during the year	0.45	%	0.54	%
Maximum month-end balance during the year	$  4,651		$  1,736

Repurchase agreements are terminable upon demand.

-21-

PAVILION BANCORP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002

NOTE 8 — BORROWED FUNDS (continued)

Federal Home Loan Bank Advances

The Company has various term advances from the Federal Home Loan Bank of Indianapolis (“FHLB”) with fixed and variable interest rates ranging from 2.50% to 6.04% at December 31, 2004 and from 2.93% to 6.04% at December 31, 2003. The weighted average interest rate at December 31, 2004 is 4.38%. Maturity dates range from January 2006 to May 2008. The weighted average remaining maturity at December 31, 2004 is 486 days, or May 1, 2006. Pursuant to collateral agreements with the FHLB, the Company pledges various qualified 1-4 family mortgage loans as collateral for advances outstanding at the FHLB. At December 31, 2004 and 2003 such pledged mortgage loans had outstanding balances of $29,933,000 and $18,374,000, respectively. Certain advances are subject to prepayment penalties and the provisions and conditions of the credit policies of the FHLB.

Scheduled principal reductions on FHLB advances at December 31, 2004 are as follows (000‘s omitted):

2004	$        -
2005	2,682
2006	4,020
2007	228
2008	1,656
Total FHLB advances	$8,586

NOTE 9 – SUBORDINATED DEBENTURES

In December 2001, Lenawee Capital Trust I (“Capital Trust”), a trust formed by the Company, closed a pooled private offering of 5,000 Trust Preferred Securities with a liquidation amount of $1,000 per security. The proceeds of the offering were loaned to the Company in exchange for junior subordinated debentures with terms similar to the Trust Preferred Securities. The sole assets of Capital Trust are the junior subordinated debentures of the Company and payment thereunder. The junior subordinated debentures and the back-up obligations, in the aggregate, constitute a full and unconditional guarantee by the Company of the obligations of Capital Trust under the Trust Preferred Securities. Distributions on the Trust Preferred Securities are payable semi-annually at a variable rate of interest and are included in interest expense in the consolidated financial statements. The variable rate of interest is equal to the sum of the six-month London Interbank Offered Rate and 3.75% with a maximum rate of 11.0% during the first five years, and the rate of interest is equal to 6.44% as of December 31, 2004. This subordinated debenture is considered Tier 1 capital (with certain limitations applicable) under current regulatory guidelines. As of December 31, 2004 and 2003, the outstanding principal balance of the subordinated debentures was $5 million. The principal balance of the subordinated debentures is presented as a liability in the financial statements.

The trust preferred securities, which mature December 8, 2031, are subject to mandatory redemption, in whole or in part, upon repayment of the subordinated debentures at maturity or their earlier redemption at the liquidation preference plus accrued but unpaid distributions. The subordinated debentures are redeemable prior to the maturity date at the option of the Company on or after December 8, 2006 at their principal amount plus accrued but unpaid interest. The subordinated debentures are also redeemable in whole or in part from time to time, upon the occurrence of specific events defined within the trust indenture. The Company has the option to defer distributions on the subordinated debentures from time to time for a period not to exceed 5 consecutive years.

-22-

PAVILION BANCORP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002

NOTE 10 – INCOME TAXES

Allocation of income taxes between current and deferred portions is as follows (000’s omitted):

	2004	2003		2002
Continuing Operations:
Current	$       4	$ 1,554		$ 1,516
Deferred	997	9		74
Total from continuing operations	1,001	1,563		1,590
Discontinued operations	2,735	(49	)	(263	)
Total	$3,736	$ 1,514		$ 1,327

Income tax expense from continuing operations calculated at the statutory federal income tax rate of 34% differs from actual income tax expense for continuing operations as follows (000‘s omitted):

	2004		2003		2002
Statutory rates	$ 1,072		$ 1,673		$ 1,700
Increase (decrease) from:
Tax-exempt securities income	(88	)	(85	)	(89	)
Non-deductible expenses	13		4		4
Other, net	4		(29	)	(25	)
	$ 1,001		$ 1,563		$ 1,590

Year-end deferred tax assets and liabilities consist of (000’s omitted):
	2004		2003		2002
Deferred tax assets
Allowance for loan losses	$    306		$    554		$    515
Net deferred loan fees	26		189		181
Pension expense	-		183		67
Minimum pension liability	-		-		136
Net unrealized losses on securities available-for-sale	23		-		-
Other	270		142		75
Total deferred tax assets	625		1,068		974
Deferred tax liabilities
Depreciation	(646	)	(399	)	(338	)
Mortgage servicing rights	(961	)	(932	)	(923	)
Net unrealized gains on securities available for sale	-		(119	)	(189	)
Prepaid expenses	(138	)	-		-
Other	(150	)	(33	)	-
Net deferred tax liabilities	(1,895	)	(1,483	)	(1,450	)
Net deferred tax liability	$(1,270	)	$  (415	)	$  (476	)

-23-

PAVILION BANCORP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002

NOTE 11 — EMPLOYEE BENEFITS

Defined Benefit Pension Plan

The Bank is a participant in the multi-employer Financial Institutions Retirement Funds (“FIRF” of the “Plan”), which covers substantially all of its officers and employees. The Plan, for all employees with one year of service, provides benefits based on basic compensation and years of service. The Bank’s contributions are determined by FIRF and generally represent the normal cost of the Plan. Specific Plan assets and accumulated benefit information for the Bank’s portion of the Plan are not available. Under the Employee Retirement Income Security Act of 1974 (“ERISA”), a contributor to a multiemployer pension plan may be liable in the event of complete or partial withdrawal for the benefit payments guaranteed under ERISA. Currently, the Bank does not intend to withdraw from the Plan, though management regularly reviews the structure of benefits offered for appropriateness and long-term cost effectiveness. The Bank was fully funded in the Plan as of December 31, 2004. The expense of the Plan allocated to the Bank for the twelve months ended December 31, 2004 and 2003 was $416,109 and $432,000, respectively. Additionally, the Bank made special underfunding payments into the Plan during 2004 and 2003 of $737,727 and $67,617, respectively.

ESOP and 401(k) Plan

The Company adopted an employee stock ownership plan, or ESOP, originally known as the Bank of Lenawee Employee Stock Ownership Plan (the “Plan”), for the purpose of acquiring outstanding shares of the Company’s predecessor, for the benefit of eligible employees. The Plan was effective as of January 1, 1984 and has received notice of qualification by the Internal Revenue Service.

In connection with the adoption of the Plan, a Trust was established to hold the shares acquired. During the period 1984 through 1994, the Company (and its predecessors) made contributions to the Trust. Such contributions consisted of both shares of employer stock or cash which was used to acquire shares of employer stock from others. When cash contributions were used to acquire employer stock from others, such shares were acquired at or below fair market value as determined from time to time by reference to market transactions or by independent appraisal. On January 1, 1995 the Company ceased making contributions to the Plan.

Effective January 1, 1996, the Company adopted an amendment to the Plan adding a so-called “cash or deferred” arrangement under Section 401(k) of the Internal Revenue Code and providing for elective contributions by employees (up to 20% of their eligible compensation) and matching contributions by the Company equal to 100% of each eligible employee’s elective contributions (but with the match capped at 2% of his or her eligible compensation). Matching contributions from the Company consist of the Company’s common shares. Since January 1, 1996, the Plan has been known as the Employee Stock Ownership and 401(k) Savings Plan. Expense relating to the 401(k) provision was $108,000, $113,000 and $110,000 in 2004, 2003 and 2002, respectively.

Accumulations of employer stock (now Company stock) allocated under the ESOP prior to 1995 continue to be allocated to employees and are to be held in the Trust until such employees become entitled to a distribution in accordance with the provisions of the Plan (normally at retirement or termination of employment for other reasons). At December 31, 2004 and 2003, the Trust held 74,494 and 75,985 of the Company’s stock, respectively. Upon distribution of shares to a participant, the participant has the right to require the Company to purchase shares at the most recent appraised value in accordance with the terms and conditions of the ESOP portion of the Plan. As such, these shares are classified as a liability in the financial statements. The appraised value of the shares of Company stock held by the Trust was $4,544,000 and $3,799,000 at December 31, 2004 and 2003, respectively.

-24-

PAVILION BANCORP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002

NOTE 11 — EMPLOYEE BENEFITS(continued)

Stock Option Plan

Stock option plans are used to reward directors and certain executive officers and provide them with an additional equity interest. Options are issued for 10 year periods and vest over five years. Information about options available for grant and options granted follows:

	Available For Grant		Options Outstanding		Weighted Average Exercise Price
Balance at January 1, 2002	44,940		36,834		$     31	.93
Options issued	(7,560	)	7,560		$     49	.05
Options exercised	-		(2,125	)	$     21	.81
Options forfeited	1,571		(1,571	)	$     43	.73
Balance at December 31, 2002	38,951		40,698		$     35	.18
Options issued	(7,140	)	7,140		$     50	.00
Options exercised	-		(2,570	)	$     23	.40
Options forfeited	-		(1,882	)	$     45	.19
Balance at December 31, 2003	31,811		43,386		$     38	.19
Options issued	(9,030	)	9,030		$     50	.71
Options exercised	-		(6,720	)	$     32	.48
Options forfeited	-		(9,135	)	$     49	.78
Balance at December 31, 2004	22,781		36,561		$     39	.37

The weighted average fair value of stock options granted was $11.43, $9.66 and $15.90 for 2004, 2003 and 2002, respectively.

Options exercisable at December 31 of each year were as follows:

	Number of Options	Weighted Average Exercise Price
2004	28,870	$     39	.07
2003	24,917	$     30	.35
2002	21,054	$     26	.55

Options outstanding at December 31, 2004 were as follows:

	Outstanding					Exercisable
Range of Exercise Prices	Number	Weighted Average Remaining Contractual Life		Weighted Average Exercise Price		Number	Weighted Average Exercise Price
$17.00 - $24.00	10,080	2	.18	$20	.83	10,080	$20	.83
$34.00 - $42.00	8,316	4	.59	$38	.10	7,900	$38	.10
$48.00 - $52.00	18,165	7	.79	$49	.65	10,890	$49	.65
Outstanding at year end	36,561	5	.51	$39	.07	28,870	$39	.07

-25-

PAVILION BANCORP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002

NOTE 12 — COMMITMENTS, OFF-BALANCE-SHEET RISK AND CONTINGENCIES

Credit-Related Financial Instruments: The Company is 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 and standby letters of credit. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the Company’s consolidated balance sheets.

The Company’s exposure to credit loss is represented by the contractual amount of these commitments. The Company follows the same credit policies in making commitments as it does for balance sheet instruments.

At December 31, 2004 and 2003, the following financial instruments were outstanding whose contract amounts represent off-balance sheet credit risk (000‘s omitted):

	2004	2003
Commitments to extend credit	$68,197	$50,661
Credit card arrangements	3,775	3,401
Commercial and standby letters of credit	2,487	2,409
	$74,459	$56,471

At December 31, 2004 and 2003 required reserves at the Federal Reserve Bank of Chicago totaled $5,716,000 and $3,144,000, respectively. These reserves do not earn interest.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The commitments for equity lines of credit may expire without being drawn upon. Therefore, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if it is deemed necessary by the Company, is based upon management’s credit evaluation of the customer.

Unfunded commitments under commercial lines of credit and revolving lines of credit are commitments for possible future extensions of credit to existing customers. These lines of credit are typically collateralized and usually carry a specified maturity date and may not be drawn upon to the total extent to which the Company is committed.

Commercial and standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party, and are used primarily to support public and private borrowing arrangements. Essentially, all letters of credit issued have expiration dates within one year. The Company generally holds collateral supporting those commitments if deemed necessary.

Lease Commitments: Future minimum lease payments under the Company’s current non-cancelable operating leases are immaterial.

Legal Contingencies: Various legal claims arise from time to time in the normal course of business which, in the opinion of management, will have no material effect on the Company’s consolidated financial statements.

-26-

PAVILION BANCORP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002

NOTE 13 – PARENT-ONLY CONDENSED FINANCIAL STATEMENTS

The following represents the condensed financial statements of Pavilion Bancorp, Inc., (“Parent”) only. The Parent-only financial information should be read in conjunction with the Company’s consolidated financial statements.

The condensed balance sheet at December 31, 2004 and 2003 is as follows (000‘s omitted):

	2004	2003
Assets
Cash and cash equivalents	$14,105	$     463
Securities available for sale	1,959	364
Investment in subsidiaries	28,178	34,785
Other	175	165
Total assets	$44,417	$35,777
Liabilities & Shareholders' Equity
Subordinated debentures	$  5,000	$  5,000
Other	3,016	454
Common stock subject to repurchase in ESOP	4,544	3,799
Shareholders' equity	31,857	26,524
Total liabilities & shareholders' equity	$44,417	$35,777

The Parent-only condensed statement of income for the years ended December 31, 2004, 2003 and 2002 is as follows (000‘s omitted):

	2004		2003		2002
Dividends from subsidiaries	$ 1,750		$ 1,750		$ 1,300
Interest income	20		14		23
Interest expense	(285	)	(249	)	(293	)
Other operating expense	(52	)	(49	)	(79	)
Income before equity in undistributed net
income of subsidiary	1,433		1,466		951
Equity in undistributed net income from
subsidiaries	1,060		1,670		1,869
Income from continuing operations before
income tax benefit	2,493		3,136		2,819
Income tax benefit	(222	)	(99	)	(35	)
Income from continuing operations	2,715		3,235		2,855
Gain on sale of discontinued operation, net of
tax	4,417		-		-
Net income	$ 7,132		$ 3,235		$ 2,855

-27-

PAVILION BANCORP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002

NOTE 13 — PARENT-ONLY CONDENSED FINANCIAL STATEMENTS (continued)

The condensed statement of cash flows for the years ended December 31, 2004, 2003 and 2002 is as follows (000‘s omitted):

	2004		2003		2002
Cash Flows from Operating Activities	$   7,312		$ 3,235		$ 2,855
Net Income
Adjustments to reconcile net income to net cash
provided by operating activities:
(Equity) excess in undistributed net income of
subsidiaries	(1,060	)	(1,668	)	(1,869	)
Gain on sale of discontinued operation	(6,990	)	-		-
Net amortization of investment securities	(1	)	(2	)	0
Stock option expense	43		43		34
Other	1,828		92		7
Net cash provided by operating activities	952		1,700		1,027
Cash Flows from Investing Activities
Investment in banking subsidiaries	-		(500	)	(3,000	)
Net proceeds from sale of discontinued operations	15,101		-		-
Purchase of securities available for sale	(1,755	)	-		-
Proceeds from maturities of securities available for sale	162		-		252
Net cash provided by (used in) investing activities	13,508		(500	)	(2,748	)
Cash Flows from Financing Activities
Repurchase of common stock	(1	)	(1,384	)	(1,019	)
Issuance of common stock	-		-		105
Stock options exercised	218		60		61
Dividends paid	(1,035	)	(929	)	(725	)
Net cash used in financing activities	(818	)	(2,253	)	(1,578	)
Net increase (decrease) in cash and cash equivalents	13,642		(1,053	)	(3,299	)
Beginning cash and cash equivalents	463		1,517		4,815
Ending cash and cash equivalents	$ 14,105		$    463		$ 1,517

-28-

PAVILION BANCORP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002

NOTE 14 — FAIR VALUES OF FINANCIAL INSTRUMENTS

The fair value of a financial instrument is the current amount that would be exchanged between willing parties, rather than in a forced liquidation. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. SFAS 107 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. The aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company. The following methods and assumptions were used to estimate fair values for financial instruments:

Cash and Cash Equivalents: The carrying amounts of cash and short-term instruments approximate fair values.

Securities, Federal Home Loan Bank Stock and Federal Reserve Bank Stock: Fair values for securities, excluding Federal Home Loan Bank of Indianapolis stock and Federal Reserve Bank of Chicago stock, are based on quoted market prices. The carrying value of FHLB and FRB stock approximate fair value based on their redemption provisions.

Loans Held for Sale: Fair values of mortgage loans held for sale are based on commitments on hand from investors or prevailing market rates.

Loans Receivable: Fair value of loans receivable are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Fair values for non-performing loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable. Loans held for sale have an estimated fair value that approximates the carrying value.

Accrued Interest Receivable: The carrying amount of accrued interest receivable approximate fair values.

Deposit Liabilities: The fair value disclosed for the various types of deposits are estimated using a discounted cash flow calculation that applies interest rates currently being offered.

Borrowed Funds: The fair value of the Company’s borrowed funds are estimated using discounted cash flow analyses based on the Company’s current incremental borrowing rates for similar borrowing arrangements.

Subordinated Debentures: The fair value of the Company’s subordinated debentures approximate the carrying value.

Accrued Interest Payable: The carrying amount of accrued interest payable approximate fair values.

-29-

PAVILION BANCORP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002

NOTE 14 - FAIR VALUES OF FINANCIAL INSTRUMENTS (continued)

The estimated fair values, and related carrying or notional amounts, of the Company’s financial instruments at December 31, 2004 and 2003 are as follows (000’s omitted):

		2004				2003
		Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial assets:
Cash and cash equivalents		$   11,700		$   11,700		$     9,072		$     9,072
Securities available-for-sale		27,886		27,886		20,435		20,435
Equities	��	3,098		3,098		2,982		2,982
Loans held for sale		322		322		433		433
Loans, net		204,664		203,960		207,165		207,869
Accrued interest receivable		1,429		1,429		1,431		1,431
Financial liabilities:
Demand and savings deposits		(129,229	)	(126,572	)	(129,294	)	(129,407	)
Time deposits		(70,763	)	(70,571	)	(73,072	)	(76,031	)
Borrowed funds		(12,518	)	(12,513	)	(10,471	)	(10,826	)
Subordinated debentures		(5,000	)	(5,000	)	(5,000	)	(5,000	)

NOTE 15 – DISCONTINUED OPERATIONS

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. 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 financial position and results of operations of Bank of Washtenaw are removed from the detail line items in the company’s financial statements and presented separately as “discontinued operations.”

The condensed balance sheet (unaudited) as of December 31, 2004 and 2003 for Bank of Washtenaw is as follows (000’s omitted):

	2004	2003
Assets
Cash & Cash Equivalents	$               -	$  7,168
Securities Available for Sale	-	141
Loans, net	-	64,593
Premises and Equipment	-	747
Other	-	267
Total Assets	$               -	$72,916
Liabilities & Shareholders' Equity
Deposits	$               -	$61,584
Other	-	4,256
Common Stock Subject to Repurchase in ESOP	-	-
Shareholders' Equity	-	7,076
Total Liabilities & Shareholders' Equity	$               -	$72,916

-30-

PAVILION BANCORP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002

NOTE 15 – DISCONTINUED OPERATIONS (continued)

The condensed income statement (unaudited) for the twelve months ended December 31, 2004 and 2003 for Bank of Washtenaw is as follows (000‘s omitted):

	2004	2003		2002
Interest income	$3,428	$ 3,917		$ 3,114
Interest expense	1,052	1,362		1,324
Net interest income	2,376	2,555		1,790
Provision for loan losses	19	213		286
Noninterest income	537	421		350
Noninterest expenses	2,170	2,936		2,670
Income (loss) before taxes	724	(173	)	(816	)
Income tax expense (benefit)	162	(49	)	(263	)
Net income (loss)	$   562	$  (124	)	$  (553	)

NOTE 16 — REGULATORY MATTERS

The Company (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s and the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators regarding components, risk weightings, and other factors. Prompt corrective action provisions are not applicable for bank holding companies. Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts, and ratios (set forth in the following table) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined) and of Tier 1 capital (as defined) to average assets (as defined).

-31-

PAVILION BANCORP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002

NOTE 16 — REGULATORY MATTERS (continued)

At December 31, 2004 the Bank was considered well-capitalized under the regulatory framework for prompt corrective action. The Company’s and the Bank’s actual capital amounts and ratios at December 31, 2004 and 2003 are presented in the following table (in millions):

	Actual				Minimum Required to be Well-Capitalized Under Prompt Corrective Action Regulations				Minimum Required to be Well-Capitalized Under Prompt Corrective Action Regulations
	Amount		Ratio		Amount		Ratio		Amount		Ratio
2004
Total capital (to risk weighted assets)
Consolidated	$  43	.9	20	.4%	$  17	.3	8	.0%	n/a		n/a
Bank of Lenawee	$  30	.8	15	.2%	$  16	.2	8	.0%	$  20	.2	10	.0%
Tier 1 Capital (to risk weighted assets)
Consolidated	$  41	.4	19	.2%	$    8	.6	4	.0%	n/a		n/a
Bank of Lenawee	$  28	.3	14	.0%	$    8	.1	4	.0%	$  12	.1	6	.0%
Tier 1 Capital (to average assets)
Consolidated	$  41	.4	13	.4%	$  12	.4	4	.0%	n/a		n/a
Bank of Lenawee	$  28	.3	10	.9%	$  10	.4	4	.0%	$  13	.0	5	.0%
2003 Total Capital (to risk weighted assets)
Consolidated	$  38	.1	13	.0%	$  23	.4	8	.0%	n/a		n/a
Bank of Lenawee	$  29	.8	13	.4%	$  17	.7	8	.0%	$  22	.2	10	.0%
Tier 1 Capital (to risk weighted assets)
Consolidated	$  35	.1	12	.0%	$  11	.7	4	.0%	n/a		n/a
Bank of Lenawee	$  27	.5	12	.6%	$    8	.9	4	.0%	$  13	.3	6	.0%
Tier 1 Capital (to average assets)
Consolidated	$  35	.1	11	.2%	$  12	.6	4	.0%	n/a		n/a
Bank of Lenawee	$  27	.5	11	.1%	$    9	.9	4	.0%	$  12	.4	5	.0%

The Company’s regulatory capital includes $5 million of subordinated debentures, issued by Lenawee Capital Trust I in December 2001, and are subject to certain limitations. Federal Reserve guidelines limit the amount of subordinated debentures which may be included in Tier 1 capital of the Company to 25% of total Tier 1 capital. At December 31, 2004 and 2003 the entire amount of subordinated debentures was included as Tier 1 capital of the Company. Please refer to Note 9 to the Company’s Consolidated Financial Statements for additional information.

NOTE 17 – RESTRICTIONS ON DIVIDENDS, LOANS AND ADVANCES

Federal and state banking regulations place certain restrictions on dividends paid and loans or advances made by the Bank to the Company. The total amount of dividends which may be paid at any date is generally limited to the retained earnings of the Bank, and loans or advances are limited to 10% of the Bank’s capital stock and surplus on a secured basis. At December 31, 2004, the Bank’s retained earnings available for the payment of dividends was $5,579,000. Accordingly, $22,599,088 of the Company’s equity in the net assets of the Bank was restricted at December 31, 2004. Funds available for loans or advances by the Bank to the Company amounted to $1,600,000.

In addition, dividends paid by the Bank to the Company would be prohibited if the effect thereof would cause the Bank’s capital to be reduced below applicable minimum capital requirements.

-32-

PAVILION BANCORP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002

NOTE 18 - QUARTERLY RESULTS OF OPERATIONS (unaudited)

The following table summarizes the Company’s quarterly results for the years ended December 31, 2004 and 2003 (000‘s omitted):

	For the Three-Month Period ended
	March 31	June 30	September 30	December 31
2004
Interest income	$3,679	$3,700	$3,766	$3,740
Interest expense	740	645	700	710
Net interest income	2,939	3,055	3,066	3,030
Provision for loan losses	64	88	63	478
Net interest income after
provision for loan losses	2,875	2,967	3,003	2,552
Noninterest income	943	1,024	874	725
Noninterest expense	2,776	2,828	3,050	3,155
Federal income tax expense	312	348	251	90
Net income for continuing operations	730	815	576	32
Discontinued operation
Income from discontinued operation	46	68	177	433
Gain on sale of discontinued operation	-	-	-	6,990
Provision (benefit) for income tax	17	24	61	2,633
Income from discontinued operation	29	44	116	4,790
Net income	$   759	$   859	$   692	$4,822
Earnings per share from
continuing operations
Basic	$  0.88	$  0.97	$  0.68	$  0.02
Diluted	$  0.87	$  0.96	$  0.67	$  0.02
Earnings per share from
discontinued operations
Basic	$  0.03	$  0.05	$  0.14	$  5.66
Diluted	$  0.03	$  0.05	$  0.14	$  5.60
Net earnings per share
Basic	$  0.91	$  1.02	$  0.82	$  5.68
Diluted	$  0.90	$  1.01	$  0.81	$  5.62

-33-

PAVILION BANCORP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002

NOTE 18 - QUARTERLY RESULTS OF OPERATIONS (unaudited)(continued)

	For the Three-Month Period ended
	March 31		June 30		September 30		December 31
2003
Interest income	$ 3,745		$ 3,768		$ 3,810		$ 3,716
Interest expense	850		870		807		725
Net interest income	2,895		2,898		3,003		2,991
Provision for loan losses	80		240		135		140
Net interest income after
provision for loan losses	2,815		2,658		2,868		2,851
Noninterest income	1,395		1,823		1,707		915
Noninterest expense	2,990		3,108		3,212		2,800
Federal income tax expense	410		423		430		300
Net income from continuing
operations	810		950		933		666
Discontinued operation
Loss from discontinued operation	(50	)	(34	)	(37	)	(52	)
Income tax benefit	(15	)	(10	)	(10	)	(14	)
Loss from discontinued operation	(35	)	(23	)	(27	)	(39	)
Net income	$    775		$    927		$    906		$    627
Earnings per share from
continuing operations
Basic	$   0.93		$   1.10		$   1.10		$   0.79
Diluted	$   0.93		$   1.09		$   1.09		$   0.78
Earnings per share from
discontinued operations
Basic	$(0.04	)	$(0.03	)	$(0.03	)	$(0.05	)
Diluted	$(0.04	)	$(0.03	)	$(0.03	)	$(0.05	)
Net earnings per share
Basic	$   0.89		$   0.08		$   1.07		$   0.74
Diluted	$   0.89		$   1.07		$   1.06		$   0.73

-34-

PAVILION BANCORP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002

NOTE 19 — SUBSEQUENT EVENT

In accordance with a Reduction-in-Force plan (“RIF”) that was developed with the goal of increasing operational efficiency, the Bank plans to eliminate various staff positions in the first quarter of 2005. Severance packages in varying amounts will be offered to employees affected by the RIF. The Bank estimates that the aggregate amount of such severance packages is approximately $250,000. A charge to earnings will be recognized in the first quarter of 2005.

-35-

PART III

Item 15. Exhibits, Financial Statement Schedules and Report on Form 8-K.

(a) 1. Financial Statements
The following consolidated financial statements of the Company and Reports of Plante & Moran, PLLC and Crowe Chizek and Company LLC, Independent Registered Public Accounting Firm, included in Item 8 “Financial Statements and Supplementary Data” of this document:
      Consolidated Balance Sheets
      Consolidated Statements of Income
      Consolidated Statements of Changes in Shareholders' Equity
      Consolidated Statements of Cash Flows
      Notes to Consolidated Financial Statements
      Reports of Plante & Moran, PLLC and Crowe Chizek and Company LLC, Independent Registered
      Public Accounting Firms

2. Financial Statement Schedules
Not applicable

3. Exhibits (Numbered in accordance with Item 601 of Regulation S-K)
The Exhibit Index is located on the final page of this report on Form 10-K.

-36-

SIGNATURES

        Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Amendment No. 1 to Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, dated November 16, 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

        Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed on November 16, 2005 by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

Signatures

/s/ Allan F. Brittain*
——————————————
Allan F. Brittain


/s/ Fred R. Duncan*
——————————————
Fred R. Duncan


/s/ William R. Gentner*
——————————————
William R. Gentner


/s/ Barbara A. Mitzel*
——————————————
Barbara A. Mitzel


/s/ Emory M. Schmidt*
——————————————
Emory M. Schmidt


/s/ J. David Stutzman*
——————————————
J. David Stutzman

*By: /s/ Richard J. DeVries
        ——————————————
        Richard J. DeVries
        Attorney in Fact /s/ Richard J. DeVries
——————————————
Richard J. DeVries


/s/ Edward J. Engle, Jr.*
——————————————
Edward J. Engle, Jr.


/s/ Douglas L. Kapnick*
——————————————
Douglas L. Kapnick


/s/ Margaret M.S. Noe*
——————————————
Margaret M.S. Noe


/s/ Terence R. Sheehan*
——————————————
Terence R. Sheehan


/s/ Marinus VanOoyen*
——————————————
Marinus VanOoyen

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EXHIBIT INDEX

        The following exhibits are filed herewith, indexed according to the applicable assigned number:

Exhibit
Number

10 Executive Bonus Plan*

13 Rule 14a-3 2004 Annual Report to Shareholders (this report, except for those portions which are expressly incorporated by reference in this filing, is furnished for the information of the Securities and Exchange Commission and is not deemed “filed”as part of this filing).

21 Subsidiaries of Registrant*

23.1 Consent of Plante & Moran, PLLC - Independent Registered Public Accounting Firm.

23.2 Consent of Crowe Chizek and Company, LLC - Independent Registered Public Accounting Firm.

24 Powers of Attorney. Contained on the signature page of this report.

31.1 Certificate of President and Chief Executive Officer of Pavilion Bancorp, Inc. pursuant to 15 U.S.C. Section 7241, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2 Certificate of Interim Chief Financial Officer of Pavilion Bancorp, Inc. pursuant to 15 U.S.C. Section 7241, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1 Certificate of President and Chief Executive 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.

32.2 Certificate of 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.

*Previously filed

        The following exhibits, indexed according to the applicable assigned number, were previously filed by the Registrant and are incorporated by reference in this Form 10-K Annual Report.

Exhibit
Number

3.1 Articles of Incorporation of the Registrant are incorporated by reference to Exhibit 3.1 of the Registrant’s Registration Statement on Form 10, as amended.

3.2 Amendment to Articles of Incorporation of Registrant incorporated by reference to Exhibit 3 of the Registrant’s Report on Form 10-Q for the quarter ended March 31, 2002.

3.3 Bylaws of the Registrant are incorporated by reference to Exhibit 3.2 of the Registrant’s Registration Statement on Form 10, as amended.

4 Form of Registrant’s Stock Certificate is incorporated by reference to Exhibit 4 of the Registrant’s Registration Statement on Form 10, as amended.

10 2001 Stock Option Plan, incorporated by reference to Appendix A to the Registrant’s Definitive Proxy Statement filed with respect to its April 18, 2001 annual meeting of shareholders.

10.1 1996 Stock Option Plan, incorporated by reference to Exhibit 10.1 to the Registrant’s Registration Statement filed on Form 10, as amended.

14. Code of Ethics, incorporated by reference to Exhibit 14 to the Company's report on Form 10-K for the year ended December 31, 2003.

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