SOUTHERN MICHIGAN BANCORP INC - FORM 10-K - EX-99.1 - SOUTHERN MICHIGAN BANCORP EXHIBIT 99.1 TO FORM 10-K

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10-K - SOUTHERN MICHIGAN BANCORP FORM 10-K - SOUTHERN MICHIGAN BANCORP INC	smb10k_032610.htm
EX-21 - SOUTHERN MICHIGAN BANCORP EXHIBIT 21 TO FORM 10-K - SOUTHERN MICHIGAN BANCORP INC	smbex21_032610.htm
EX-18 - SOUTHERN MICHIGAN BANCORP EXHIBIT 18 TO FORM 10-K - SOUTHERN MICHIGAN BANCORP INC	smbex18_032610.htm
EX-2.2 - SOUTHERN MICHIGAN BANCORP EXHIBIT 2.2 TO FORM 10-K - SOUTHERN MICHIGAN BANCORP INC	smbex22_032610.htm
EX-10.3 - SOUTHERN MICHIGAN BANCORP EXHIBIT 10.3 TO FORM 10-K - SOUTHERN MICHIGAN BANCORP INC	smbex103_032610.htm
EX-32 - SOUTHERN MICHIGAN BANCORP EXHIBIT 32 TO FORM 10-K - SOUTHERN MICHIGAN BANCORP INC	smbex32_032610.htm
EX-23 - SOUTHERN MICHIGAN BANCORP EXHIBIT 23 TO FORM 10-K - SOUTHERN MICHIGAN BANCORP INC	smbex23_032610.htm
EX-24 - SOUTHERN MICHIGAN BANCORP EXHIBIT 24 TO FORM 10-K - SOUTHERN MICHIGAN BANCORP INC	smbex24_032610.htm
EX-31.1 - SOUTHERN MICHIGAN BANCORP EXHIBIT 31.1 TO FORM 10-K - SOUTHERN MICHIGAN BANCORP INC	smbex311_032610.htm
EX-99.2 - SOUTHERN MICHIGAN BANCORP EXHIBIT 99.2 TO FORM 10-K - SOUTHERN MICHIGAN BANCORP INC	smbex992_032610.htm
EX-31.2 - SOUTHERN MICHIGAN BANCORP EXHIBIT 31.2 TO FORM 10-K - SOUTHERN MICHIGAN BANCORP INC	smbex312_032610.htm
EX-99.3 - SOUTHERN MICHIGAN BANCORP EXHIBIT 99.3 TO FORM 10-K - SOUTHERN MICHIGAN BANCORP INC	smbex993_032610.htm

EXHIBIT 99.1

Financial Summary

For the Year	2009		2008

Net interest income	$	16,538,000	$	17,740,000
Provision for loan losses		2,725,000		5,080,000
Non-interest income		7,172,000		6,363,000
Non-interest expense		18,970,000		18,970,000
Net income		1,936,000		813,000

Per Share

Basic earnings		$0.84		$0.36
Diluted earnings		0.84		0.36
Cash dividends declared		0.20		0.80

At Year End

Assets	$	462,409,000	$	474,996,000
Gross loans		333,079,000		335,310,000
Allowance for loan loss		6,075,000		7,104,000
Deposits		380,905,000		394,043,000
Other borrowings		10,832,000		12,492,000
Shareholders' equity		45,734,000		44,416,000

Ratios

Return on average assets		0.41%		0.17%
Return on average equity		4.29%		1.77%
Total risk-based capital ratio		11.91%		10.98%
ALLL as percentage of loans		1.82%		2.12%

Southern Michigan Bancorp, Inc. is a bank holding company. The Company's wholly-owned subsidiary, Southern Michigan Bank & Trust (SMB&T) offers individuals, businesses, institutions and governmental agencies a full range of commercial banking services primarily in the southern Michigan communities in which they are located and in areas immediately surrounding these communities.

Southern Michigan Bancorp, Inc. Annual Report 1

To Our Shareholders

Last year at this time, our country was in the midst of a severe economic crisis, the likes of which we had not witnessed for at least several decades. The financial services industry was in an equally fragile state as we confronted the effects of rising unemployment, escalating defaults on loan obligations, government bailouts and an uncertain future.

Notwithstanding the particular challenges for restoring Michigan's economic vitality, our nation's overall economic conditions appear to be stabilizing. The financial services industry, slowly and deliberately, is adjusting to the new realities of the distressed balance sheets of commercial borrowers, punitive and costly new regulatory burdens and more restrictive credit and capital markets.

Southern's 2009 financial results

Southern's board and management team established a strategic approach last year that focused on improving operational efficiencies, reducing expenses and identifying selective revenue opportunities. Their efforts and diligence resulted in Southern earning $1,936,000, or $.84 per share for 2009. Our 2009 earnings more than doubled 2008 results of $813,000, or $.36 per share. Net income for the fourth quarter of 2009 totaled $685,000, or $.29 per share, compared with a net loss of $758,000, or $.33 per share for the same period in 2008. Southern's net interest margin, at 4.14 percent for 2009, was exceptional when compared with its peers.

Our successes throughout 2009 were the result of carefully identified and implemented strategies that encompassed:

	•	a fully phased-in integration of our FNB affiliate bank that eliminated approximately $500,000 of redundant expenses;
	•	continuation of wage and benefits freezes resulting in a reduction of $780,000, or 7.4 percent, in salaries and benefits costs;
	•	elimination of $14.2 million of high cost, non-core deposits that enabled Southern to maintain its traditionally strong net interest margin; and
	•	working with business and individual borrowers to mitigate potential problems, resulting in a reduction of non-performing loans to $7.6 million, or 2.28 percent of loans at year-end 2009, compared with $9.2 million, or 2.73 percent of loans at year-end 2008.

Southern's expense control initiatives offset higher costs associated with managing non-performing assets. Our financial performance throughout 2009 was all the more noteworthy given that FDIC deposit insurance premiums increased $676,000 to $855,000, an increase of 378 percent over 2008 premium costs of $179,000. Banks categorized as "well capitalized", such as Southern, experienced dramatic increases in deposit insurance assessments. In addition, the FDIC required a three year prepayment by Southern of deposit insurance premiums at year end of $2.4 million to cover the costs of bank failures.

Overall asset quality continued to improve throughout 2009. Non-performing loans declined by 17 percent, or $1.6 million, to $7.6 million as of year-end 2009. We added $2,725,000 to the provision for loan losses during the year resulting in a year-end allowance of $6,075,000, or 1.82 percent of loans. Southern's allowance at year-end 2008 was $7,104,000, or 2.12 percent of loans. The reduction was attributable to declines in non-performing loans and to improvements in overall credit quality that enabled decreases in specific reserves.

2 Southern Michigan Bancorp, Inc. Annual Report

Consolidated assets as of December 31, 2009 were $462 million compared with $475 million at year-end 2008. For 2009, the return on average assets was .41 percent while return on average equity was 4.29 percent, both of which substantially exceeded last year's totals of .17 percent and 1.77 percent, respectively. Equally important, Southern's Tier 1 Capital Ratio of 10.65 percent and Total Risk-Based Capital Ratio of 11.91 percent at December 31, 2009 far exceeded the minimum thresholds to be categorized as "well-capitalized" under applicable regulations.

Where we go from here

The volatility and uncertainty of our economy does not afford us the luxury of planning too far into the future. However, Southern's management team and directors are preparing for the potential impact of inordinately higher federal budget deficits, minimal near-term job growth, changes in banking competition and greater regulatory costs and oversight. Our efforts throughout 2010 will emphasize:

Pictures of:

Marshall Branch
Marshall, Michigan

Coldwater Main Office
Coldwater, Michigan

Three Rivers Main Office
Three Rivers, Michigan

	•	exploring options to further control expenses and to maximize operational efficiencies;
	•	leveraging our personalized service capabilities with development of value-added products to meet the financial service needs of underserved individual and business clients; and
	•	evaluating strategic expansion opportunities that are likely to emerge with additional bank failures and forced consolidations.

Our 2009 Annual Report spotlights Southern's banking relationships with three different clients. Radiology Consultants, PLC is one of our newest banking clients and wanted to refinance their commercial real estate debt which led to additional bank services as well. Crossroads Veterinary Clinic and Dr. Sands have been a part of the Southern banking family for three decades. This relationship is testimony to the importance of trust in the banker-client partnership. Hoffman Ag Service and Duane Hoffman required a bank which understood his business needs and its future; Southern's personalized approach to service delivery was what he was looking for. I invite you to read about how they built their successful businesses and the role Southern played in partnering with them.

I continue to value your confidence, especially during these challenging and unsettling times.

Sincerely,

John H. Castle,
Chairman and Chief Executive Officer

Southern Michigan Bancorp, Inc. Annual Report 3

"They gave us better rates, a better plan and have been easier to work with. The numbers were there, and this move saved a significant amount of money. Switching was not a hard choice to make."
	-Rocky Baxter office manager, Radiology Consultants, PLC

When Radiology Consultants, PLC wanted to refinance the mortgage on their Battle Creek medical building, they didn't look beyond their own back yard - literally.
That's where they discovered a branch of Southern Michigan Bank & Trust adjacent to their growing medical practice. The group of seven radiologists and eleven staff members provide a wide variety of radiology services, including CT scans, general diagnostic X-rays, ultrasounds, mammograms, MRIs and related services in partnership with two area hospitals.
When the group wanted to refinance their medical building, their longtime bank was unable to come up with a suitable program.
"But Southern did," said Rocky Baxter, business manager of Radiology Consultants. "They gave us better rates, a better plan and have been easier to work with. The numbers were there, and this move saved a significant amount of money. Switching was not a hard choice to make."
Since Radiology Consultants moved their bank relationship in July 2009, Southern has handled all of their business accounts, as well as commercial loans and a new health savings account program. Baxter thinks the practice may be a little high maintenance, but Vice President and Commercial Lender Deb Davis and her team at Southern disagree.
"This is a good situation for both of us; a win-win for the bank and the customer," said Deb. "We are able to offer competitive terms and make decisions efficiently, in a manner that bigger banks just cannot." She continued, "We are a Michigan bank. Businesses like this are our bread and butter, and we work hard to treat them right."
Baxter agrees, saying that someone from the practice is at Southern every day, and that Deb and her team have been "...hands down very responsive." Whether right next door like Radiology Consultants or across town, customers find they have a good neighbor in Southern Michigan Bank & Trust.

Pictures of:

Radiology Consultants, PLC

Opposite page:
Deb Davis, vice president/
commercial lender, meets
with (from left) Dr. Steven
Yuill, Dr. James Timmons,
Dr. Robert Zick, and Dr.
William Coughlin at
Radiology Consultants, PLC.

Southern Michigan Bancorp, Inc. Annual Report 5

"Hometown community banks are very important. They understand their customers. They understand the business of their customers, and they become friends of yours."
	-William C. Sands, DVM owner, Crossroads Veterinary Clinic

When Dr. William Sands built his first veterinary clinic in Three Rivers more than 30 years ago, his father bought him the land and a local community bank financed the building.
Three years ago, when he and his team - two other veterinarians and 10 employees - realized they had outgrown the original clinic, they again wanted to work with their local community bank, Southern Michigan Bank & Trust.
The new Crossroads Veterinary Clinic, which opened its doors in September 2007, is nearly four times the square footage of that original clinic and boasts five exam rooms, an in-house lab and pharmacy area, two surgical suites with a large treatment area, large recovery facility, spacious waiting area and a "comfort room" where clients can sit with pets before they are put to sleep.
Sands is delighted with the new space - and working with Southern to make it reality.
"Everyone was helpful in getting us going," he recalled. "They understood where I was coming from, what I was doing, and the loan process was easy."
That's just what Robert Hungerford, vice president at Southern likes to hear. He notes that Dr. Sands had a dream and Southern was proud to help turn it into a reality.
"Bill had a vision to have a new and updated facility in order to better serve clients in the Three Rivers area," Hungerford explained. "He looked to us to put it together for him. With that in mind, we got to work. Today, he and his staff enjoy a first-rate facility that provides high quality veterinary care to area families."
Sands also relies on Southern for a revolving line of credit, cash management services and checking and savings accounts. He appreciates the ease of online banking, saying that he is "constantly" online transferring money, paying bills, or otherwise managing business accounts.
"Hometown community banks are very important," he said. "They understand their customers. They understand the business of their customers, and they become friends of yours. They are people you know and they know you - and they know they can trust you and you can trust them. That relationship is critical."

Pictures of:

Crossroads Veterinary Clinic

Opposite page:
Robert Hungerford, vice
president / commercial
lender and Sally Cotton,
first vice president / senior
branch administration officer
meet with Dr. Sands
(center) at Crossroads
Veterinary Clinic.

Southern Michigan Bancorp, Inc. Annual Report 7

"Agriculture is cyclical...Farmers make a big investment in the spring, but don't get paid until fall, so there's a lot riding on the table and a lot at risk. Being able to work with someone like Doug who has that background makes it much easier."
	-Duane Hoffman vice president, Hoffman Ag Service, Ltd.

Hoffman Ag Service, Ltd. supplies are farmers with seed, fertilizer and chemicals and operates an elevator, providing a market for delivery and sale of grain for local producers.
A third-generation agribusinessman, Duane Hoffman knows that agriculture is fundamentally different than most businesses. Banks know it, too.
That's why when it came time for Hoffman Ag Service to invest in a new seed warehouse, they turned to Southern Michigan Bank & Trust and Doug Kiessling, vice president and a farmer himself.
"Agriculture is cyclical," noted Hoffman, who began his banking relationship with Southern in 2008. "Farmers make a big investment in the spring, but don't get paid until fall, so there is a lot riding on the table and a lot at risk. Being able to work with someone like Doug who has that background makes it so much easier."
The result has been a new, 9,000-square foot seed warehouse that allows the company to add new capabilities and services for customers, including seed treatment areas. The new facility, which opened last year, features five bulk bins where the company can store different varieties of bulk seed.
"It was a pretty big capital investment for us," Hoffman said. "It's our second spring and we love it."
And Kiessling certainly understands how he feels. A self-proclaimed farm boy at heart, he is pleased to be involved in agriculture through the lending side. He has known Duane and his father, Vaughn, all his life and, as a farmer, brings a thorough understanding of the industry to the table.
"Agricultural lending has been a very important part of Southern's loan portfolio for years," Kiessling said. "We have provided credit to local agribusinesses and farmers for over a century, even when many commercial banks would not."
Kiessling noted, "at Southern we have experts who understand how it's done. We are proud to be an integral part of agriculture in Southwest Michigan."

Pictures of:

Hoffman Ag Service, Ltd.

Opposite page:
Doug Kiessling, vice
president / commercial
lender (on right) meets with
Duane Hoffman and tours
the facilities at Hoffman Ag
Service with Duane and his
father, Vaughn Hoffman.

8 Southern Michigan Bancorp, Inc. Annual Report

	Southern Michigan Bancorp, Inc. Board of Directors

Pictures of: Cassopolis Branch Cassopolis, Michigan Battle Creek Branch Battle Creek, Michigan	Marcia S. Albright Cequent Electrical Products, Inc. Dean Calhoun Coldwater Veneer, Inc. John S. Carton Retired Business Executive John H. Castle Chairman & CEO of SMB, Inc. and SMB&T H. Kenneth Cole Hillsdale College Robert L. Hance Midwest Energy Gary H. Hart Infinisource, Inc. Nolan E. (Rick) Hooker Hooker Oil / Best American Car Washes Gregory J. Hull Farmer Thomas E. Kolassa HUB International, Inc. Donald J. Labrecque Labrecque Management Brian P. McConnell Burr Oak Tool, Inc. Thomas D. Meyer Meyer Ventures, LLC Kurt G. Miller President of SMB, Inc. and SMB&T Freeman E. Riddle Spoor-Parlin, Inc.

Executive Officers of Southern Michigan Bancorp, Inc.	Executive Officers of Southern Michigan Bank & Trust

John H. Castle Chairman & Chief Executive Officer Kurt G. Miller President Danice L. Chartrand Senior Vice President / Chief Financial Officer	John H. Castle Chairman & Chief Executive Officer Kurt G. Miller President Danice L. Chartrand Senior Vice President / Chief Financial Officer

10 Southern Michigan Bancorp, Inc. Annual Report

Officers of Southern Michigan Bank & Trust

COMMERCIAL LOANS David Clow Senior Vice President / Head of Commercial Lending Eric Anglin Vice President Ric Baker Vice President Deborah Davis Vice President Nick Grabowski Vice President Sarah Headley Vice President Robert Hungerford Vice President Doug Kiessling Vice President Joan Trenary Vice President Tom Swoish Vice President Jason Williams Vice President Cindy Woolner Assistant Vice President / Special Assets Manager Marcia McClellan Administration Officer RESIDENTIAL & CONSUMER LOANS Jamie Smoker Senior Vice President / Head of Residential & Consumer Lending Rick Feller Vice President Phyllis Wingate Vice President / Head of Retail Loan Operations DeAnne Hawley Assistant Vice President / Retail Loan Officer Shari Kline Assistant Vice President / Retail Loan Officer	Diane Krimmel Retail Loan Officer Judie Ratering Mortgage Officer Desiree Kauffman Mortgage Originator* Connie Swain Collections Manager* Debbie Leer Collections Officer LOAN REVIEW Trisha Pawloski Assistant Vice President/ Loan Review Officer TRUST DEPARTMENT Mary Guthrie Senior Vice President / Senior Trust Officer David Rumsey Vice President / Senior Investment Officer Jean Winans Vice President / Senior Trust Officer Susan White Vice President / Trust Officer INVESTMENTS Melissa Barlow Vice President/ Senior Investment Officer Jared Hoffmaster Investment Sales Officer RETAIL BANKING SERVICES Sally Cotton First Vice President / Senior Branch Administration Officer ATHENS BRANCH Marcia Carman Branch Manager BATTLE CREEK BRANCH Claudia Murch Assistant Vice President / Branch Manager CAMDEN BRANCH Lori Neill Branch Supervisor*	COLDWATER MAIN & EAST CHICAGO BRANCHES Veronica Hannah Assistant Vice President / Branch Manager CASSOPOLIS BRANCH Janet Nosich Branch Manager CENTREVILLE BRANCH Paul Harker Branch Manager CONSTANTINE BRANCH Lorraine Fifer Branch Manager HILLSDALE BRANCH Ann Marie Bentley Assistant Vice President/ Regional Branch Manager MARSHALL BRANCH Annette Campau Assistant Vice President / Community Bank Officer MENDON BRANCH Doreen Tobin Assistant Vice President / Regional Branch Manager NORTH ADAMS BRANCH Leonce Towers Branch Supervisor* TEKONSHA BRANCH Dawn Copas Branch Manager THREE RIVERS MAIN BRANCH Sharon Bachinski Assistant Vice President / Regional Branch Manager THREE RIVERS WESTLAND BRANCH Lynette Lorenz Branch Manager UNION CITY BRANCH Ken Brooks Vice President / Regional Branch Manager	ACCOUNTING Sara Herrmann Vice President / Finance INFORMATION SYSTEMS Jeff Kiersey First Vice President / Network and Systems Manager Matt Siefken Network and Systems Officer OPERATIONS Kelli Talbot First Vice President Operations Christine Hagaman Vice President / Compliance Officer Paul Mahle Assistant Vice President/ Senior Data Processing Officer Vikki Kline Information Systems Officer Jamie Tobalske Electronic Services Officer MARKETING Patty Parker Vice President *Non Officer Position

Southern Michigan Bancorp, Inc. Annual Report 11

Shareholder Information

Annual Meeting

The annual meeting of Southern Michigan Bancorp, Inc. will be
held on May 13, 2010 at 4:00 p.m. at the Dearth Community
Center on the Branch County Fairgrounds in Coldwater, Michigan.

Market Information

The Trust Department of Southern Michigan Bank & Trust acts as
the transfer and dividend paying agent for the Company's stock.
For information concerning the Company's stock, call the Trust
Department at (517) 279-5503 or (800) 379-7628.

Market Makers

Boenning & Scattergood
Powell, Ohio
(866) 326-8113

Howe Barnes Investments, Inc.
Chicago, Illinois
(312) 655-2954 or
(800) 800-4693

Stifel, Nicolaus & Company, Inc.
Grand Rapids, Michigan
(800) 676-0477

Hilliard Lyons, Inc.
Coldwater, Michigan
(517) 278-4333 or
(800) 211-5257

Robert Baird & Company
Grand Rapids, Michigan
(616) 459-4491 or
(800) 888-6200

12 Southern Michigan Bancorp, Inc. Annual Report

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