Annual Report (10-k)

SOMC Southern Michigan Bancorp Inc (PK)

SOMC Southern Michigan Bancorp Inc (PK)

Notizie Southern Michigan Bancorp Inc - SOMC

Notizie Southern Michigan Bancorp Inc - SOMC

La tua Cronologia

Più Attivi

Toplist

La tua Cronologia

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-K

x	Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended December 31, 2012

¨	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: 000-49772

Southern Michigan Bancorp, Inc.

(Exact Name of Registrant as Specified in its Charter)


Michigan		38-2407501
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

51 West Pearl Street Coldwater, Michigan		49036
(Address of Principal Executive Offices)		(Zip Code)

(517) 279-5500

(Registrant’s Telephone Number, Including Area Code)

Securities Registered Pursuant to Section 12(b) of the Act:


Title of Each Class		Name of Each Exchange on Which Registered
None		None

Securities registered pursuant to Section 12(g) of the Securities Exchange Act of 1934:

None

(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x

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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). 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 amendment to this Form 10-K. x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

The aggregate market value of the common stock held by non-affiliates of the registrant, computed by reference to the closing sale price of the common stock, as of June 30, 2012 was $26,623,355.

The number of shares outstanding of the registrant’s common stock, $2.50 par value, as of March 11, 2013, was 2,393,943 shares.

FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements that are based on management’s beliefs, assumptions, current expectations, estimates and projections about the financial services industry, the economy, and Southern Michigan Bancorp, Inc. Forward-looking statements are identifiable by words or phrases such as “outlook”, “plan” or “strategy”; that an event or trend “may”, “should”, “will”, “is likely”, or is “probable” to occur or “continue”, has “begun” or “is scheduled” or “on track” or that the Company or its management “anticipates”, “believes”, “estimates”, “plans”, “forecasts”, “intends”, “predicts”, “projects”, or “expects” a particular result, or is “committed”, “confident”, “optimistic” or has an “opinion” that an event will occur, or other words or phrases such as “ongoing”, “future”, “signs”, “efforts”, “tend”, “exploring”, “appearing”, “until”, “near term”, “going forward”, “starting” and variations of such words and similar expressions. Such statements are based upon current beliefs and expectations and involve substantial risks and uncertainties which could cause actual results to differ materially from those expressed or implied by such forward-looking statements. These statements include, among others, statements related to trends in our credit quality metrics, future capital levels, future charge-off levels, real estate valuation, future levels of non-performing assets and costs associated with administration and disposition of non-performing assets, the rate of asset dispositions, dividends, future growth and funding sources, future liquidity levels, future profitability levels, future FDIC assessment levels, future effects of new or changed accounting standards, the effects on earnings of changes in interest rates and the future level of other revenue sources. Management’s determination of the provision and allowance for loan losses, the appropriate carrying value of intangible assets (including goodwill and mortgage servicing rights), deferred tax assets and other real estate owned, the fair value of investment securities (including whether any impairment on any investment security is temporary or other-than-temporary and the amount of any impairment), and management’s assumptions concerning pension and other postretirement benefit plans involves judgments that are inherently forward-looking. All statements with references to future time periods are forward-looking. All of the information concerning interest rate sensitivity is forward-looking. Our ability to successfully implement new programs and initiatives, increase efficiencies, respond to declines in collateral values and credit quality, maintain our current level of deposits and other sources of funding, and improve profitability is not entirely within our control and is not assured. The future effect of changes in the real estate, financial and credit markets and the national and regional economy on the banking industry, generally, and Southern Michigan Bancorp, Inc., specifically, are also inherently uncertain. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions (“risk factors”) that are difficult to predict with regard to timing, extent, likelihood and degree of occurrence. Therefore, actual results and outcomes may materially differ from what may be expressed or forecasted in such forward-looking statements.

Risk factors include, but are not limited to, the risk factors described in “Item 1A – Risk Factors” of this report. These and other factors are representative of the risk factors that may emerge and could cause a difference between an ultimate actual outcome and a preceding forward-looking statement. We undertake no obligation to update or revise our forward-looking statements to reflect developments that occur or information obtained after the date of this report.

PART I

Item 1.

Business

As used in this report, the terms “Southern,” the “Company,” “we,” “our,” and “us” mean Southern Michigan Bancorp, Inc. and its subsidiaries, unless the context indicates another meaning. The terms “Southern Michigan Bank” and the “Bank” means Southern Michigan Bank & Trust.

General

Southern Michigan Bancorp, Inc. is a bank holding company registered under the Bank Holding Company Act of 1956. Southern was incorporated on March 1, 1982, as a Michigan corporation. Southern acquired all of the capital stock of Southern Michigan Bank & Trust, a Michigan state-chartered bank, in November 1982. Southern is also the parent company of Southern Michigan Bancorp Capital Trust I, a Delaware statutory trust. Southern Michigan Bank is the parent company of FNB Financial Services, Inc., a Michigan corporation.

Our business, which we conduct primarily through the Bank, is concentrated in a single industry segment - commercial banking. We offer a variety of deposit, payment, credit and other financial services to all types of customers. These services include time, savings, and demand deposits, safe deposit services, and automated teller machine services. Loans, including both commercial and consumer, are extended primarily on a secured basis to corporations, partnerships and individuals. Commercial lending covers such categories as business, industrial, agricultural, construction, inventory and real estate. Consumer lending covers direct and indirect loans to purchasers of residential real property and consumer goods. We offer trust and investment services, which include investment management, trustee services, IRA rollovers and retirement plans, institutional and personal custody, estate settlement, wealth management, estate planning assistance, wealth transfer planning assistance, charitable gift planning assistance, and cash management custody. We operate 15 banking offices located in Battle Creek, Camden, Centreville, Coldwater, Constantine, Hillsdale, Marshall, Mendon, Tekonsha, Three Rivers, and Union City, Michigan.

On December 1, 2007, we completed the acquisition of FNB Financial Corporation (“FNB”) and its subsidiary bank, FNB Financial. On April 24, 2009, FNB Financial was consolidated with and into the Bank.

At December 31, 2012, on a consolidated basis, we had assets of $528.9 million, deposits of $444.2 million, a net loan portfolio of $364.2 million, trust assets under management totaling $214.8 million, and shareholders’ equity of $54.6 million. During 2012, 2011, and 2010, our interest income accounted for approximately 71%, 71% and 70%, respectively, of our operating revenues and our non-interest income accounted for 29%, 29% and 30%, respectively, of our operating revenues. Additional information about our consolidated financial condition as of December 31, 2012 and 2011 and the results of our operations for the three years ended December 31, 2012, may be found throughout this report, including in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in the consolidated financial statements and related notes, which information is here incorporated by reference.

We have no material foreign loans, assets or activities. No material part of our business is dependent on a single customer or very few customers, the loss of which would have a material adverse effect on us.

Our headquarters and administrative offices are located at 51 West Pearl Street, Coldwater, Michigan 49036, and our telephone number is (517) 279-5500. Our internet website address is www.smb-t.com. We make available free of charge through our website the periodic reports and amendments to those reports that we are required to file or furnish with the SEC as soon as reasonably practicable after filing or furnishing such reports with the SEC. The information on our website address is not incorporated by reference into this report, and the information on the website is not part of this report.

Competition

Our business is highly competitive. Our primary market areas are the southwest Michigan communities in which the Bank is located and in areas immediately surrounding these communities. We face significant competition from commercial banks, saving and loan associations, credit unions, commercial and consumer finance companies, insurance companies and leasing companies. We also face competition from money market mutual funds, investment and brokerage firms and nonfinancial institutions, which provide many of the financial services we offer. Many of our non-bank competitors are not subject to the same extensive federal regulations that govern bank holding companies and banks. Such non-bank competitors may, as a result, have certain advantages over us in providing some services. The principal methods of competition that we face are price (interest rates paid on deposits, interest rates charged on borrowings and fees charged for services) and service (convenience and quality of services rendered to customers).

Supervision and Regulation

We are extensively regulated and are subject to a comprehensive regulatory framework that imposes restrictions on our activities, minimum capital requirements, lending and deposit restrictions, dividend restrictions, and numerous other requirements. This system of regulation is primarily intended for the protection of depositors, federal deposit insurance funds and the banking system as a whole, rather than for the protection of shareholders and creditors of Southern. Many of these laws and regulations have undergone significant change in recent years and are likely to change in the future. Future legislative or regulatory changes, or changes in enforcement practices or court rulings, may have a significant and potentially adverse impact on our operations and financial condition. Our non-bank subsidiaries are also subject to various federal and state laws and regulations.

Recent Regulatory Developments

Dodd-Frank Act : The Dodd-Frank Act was signed into law by President Obama on July 21, 2010. The Dodd-Frank Act represents a comprehensive overhaul of the financial services industry within the United States, established the new federal Consumer Financial Protection Bureau (CFPB), and requires the CFPB and other federal agencies to implement many new and significant rules and regulations. The CFPB has issued significant new regulations that impact consumer mortgage lending and servicing. Those regulations will become effective in January 2014. In addition, the CFPB is drafting regulations that will change the disclosure requirements and forms used under the Truth in Lending Act and Real Estate Settlement and Procedures Act. Compliance with these new laws and regulations and other regulations under consideration by the CFPB will likely result in additional costs, which could be significant and could adversely impact the Company’s results of operations, financial condition or liquidity.

Deposit Insurance : The FDIC has finalized changes to its deposit insurance assessment base effective April 1, 2011, which uses average consolidated total assets less average tangible equity as the assessment base instead of quarterly deposits. Additional information about these changes may be found below under the heading “Southern Michigan Bank.”

On November 12, 2009, the FDIC adopted a final rule on assessment regulations to require depository institutions to prepay their quarterly risk-based assessments for the fourth quarter of 2009, and for all of 2010, 2011 and 2012, on December 30, 2009. The projected assessment base for each quarter represented the September 30, 2009 assessment base increased quarterly by a 5 percent annual growth rate. This rule, and the Bank’s corresponding December 30, 2009 premium payment, resulted in a prepaid assessment for the Bank of $0.8 million and $1.2 million at December 31, 2012 and 2011, respectively. The FDIC will apply quarterly premiums against the prepaid assessment through June 30, 2013 at which time they will refund to the Bank any remaining prepaid assessment.

Under the Dodd-Frank Act, FDIC deposit insurance coverage available to depositors was permanently increased to $250,000. The temporary unlimited guarantee under the Dodd-Frank Act applicable to all funds in noninterest bearing transaction accounts expired on December 31, 2012.

Debit Card Interchange Fees and Routing : The Federal Reserve Board in June 2011 issued a rule to implement a provision in the Dodd-Frank Act that requires it to set debit-card interchange fees so they are “reasonable and proportional” to the cost of the transaction incurred by the card issuer. The rule could result in a significant reduction in banks’ debit-card interchange revenue. Though the rule technically does not apply to institutions with less than $10 billion, there is concern that the price controls will harm community banks, such as Southern Michigan Bank, which will be pressured by the marketplace to lower their own interchange rates.

Southern

Southern is subject to supervision and regulation by the Federal Reserve System. Our activities are generally limited to owning or controlling Southern Michigan Bank and engaging in such other activities as the Federal Reserve System may determine to be closely related to banking. Prior approval of the Federal Reserve System, and in some cases various other government agencies, is required for us to acquire control of any additional bank holding companies, banks or other operating subsidiaries. We are subject to periodic examination by the Federal Reserve System, and are required to file with the Federal Reserve System periodic reports of our operations and such additional information as the Federal Reserve System may require.

Under Federal Reserve System policy, we are expected to act as a source of financial strength to the Bank and to commit resources to support the Bank. In addition, if the Michigan Office of Financial and Insurance Regulation (“ OFIR ”) deems the Bank’s capital to be impaired, OFIR may require the Bank to restore its capital by a special assessment on us as the Bank’s only shareholder. If we failed to pay any assessment, our directors would be required, under Michigan law, to sell the shares of the Bank’s stock owned by us to the highest bidder at either a public or private auction and use the proceeds of the sale to restore the Bank’s capital.

Southern is a legal entity separate and distinct from the Bank. There are legal limitations on the extent to which the Bank may lend or otherwise supply funds to us, which indirectly limit our ability to pay dividends to our shareholders. Payment of dividends to us by the Bank, our principal source of funds, is subject to various state and federal regulatory limitations. Under the Michigan Banking Code of 1999, the Bank’s ability to pay dividends to us is subject to the following restrictions:

•

A bank may not declare or pay a dividend if a bank’s surplus would be less than 20% of its capital after payment of the dividend.

•

A bank may not declare a dividend except out of net income then on hand after deducting its losses and bad debts.

•

A bank may not declare or pay a dividend until cumulative dividends on preferred stock, if any, are paid in full.

•

A bank may not pay a dividend from capital or surplus.

Federal law generally prohibits a bank from making any capital distribution (including payment of a dividend) or paying any management fee to its parent company if the depository institution would thereafter be undercapitalized. The FDIC may prevent an insured bank from paying dividends if the bank is in default of payment of any assessment due to the FDIC. In addition, the FDIC may prohibit the payment of dividends by a bank, if such payment is determined, by reason of the financial conditions of the bank, to be an unsafe and unsound banking practice.

In a policy statement, the Federal Reserve Board has expressed its view that a bank holding company should not pay cash dividends if its net income available to shareholders for the past four quarters, net of dividends paid during that period, is not sufficient to fully fund the dividends, its prospective rate of earnings retention is not consistent with capital needs and overall current and prospective financial condition, or it will not meet, or is in danger of not meeting, its minimum regulatory capital adequacy ratios. The Federal Reserve Board also possesses enforcement powers over bank holding companies and their non-bank subsidiaries to prevent or remedy actions that represent unsafe or unsound practices or violations of applicable statutes and regulations. Among these powers is the ability to proscribe the payment of dividends by banks and bank holding companies. Additional information on restrictions on payment of dividends by us and the Bank may be found under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note P of our consolidated financial statements, which information is here incorporated by reference.

The Federal Reserve Board uses capital adequacy guidelines in its examination and regulation of bank holding companies. If capital falls below minimum guidelines, a bank holding company may, among other items, be denied approval to acquire or establish additional banks or non-bank businesses.

Southern Michigan Bank

Southern Michigan Bank is chartered under Michigan law and is subject to regulation by OFIR. Michigan banking laws place restrictions on various aspects of banking, including permitted activities, loan interest rates, branching, payment of dividends, and capital and surplus requirements.

The Bank’s deposits are insured by the FDIC to the extent provided by law. From time to time, the Bank is required to pay deposit insurance premiums to the Deposit Insurance Fund. The FDIC finalized changes to its deposit insurance assessment base effective April 1, 2011, which now uses average consolidated total assets less average tangible equity as the assessment base instead of quarterly deposits. Under this new calculation, most well-capitalized banks will pay 5 to 9 basis points annually, increasing to 35 basis points for banks that pose significant supervisory concerns. This base rate may be adjusted for the level of unsecured debt and brokered deposits, resulting in adjusted rates ranging from 2.5 to 9 basis points annually for most well-capitalized banks to 30 to 45 basis points for banks that pose significant supervisory concerns. As of December 31, 2012 the Bank’s annual assessment rate under these guidelines was 7.36 basis points compared to 7.9 basis points at December 31, 2011.

The FDIC Improvement Act of 1991 established a system of prompt corrective action to resolve the problems of undercapitalized banks. Under this system, federal banking regulators have established five capital categories: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized, in which all institutions are placed. The FDIC has also specified by regulation the relevant capital levels for each of the categories.

The FDIC is required to take specified mandatory supervisory actions and is authorized to take other discretionary actions with respect to banks in the three undercapitalized categories. The severity of the action depends upon the capital category in which the bank is placed. Subject to a narrow exception, the FDIC must generally appoint a receiver or conservator for a bank that is critically undercapitalized. A bank in any of the under-capitalized categories is required to submit an acceptable capital restoration plan to its appropriate federal banking agency. An undercapitalized bank is also generally prohibited from paying any dividends, increasing its average total assets, making acquisitions, establishing any branches or engaging in any new line of business, except under an accepted capital restoration plan or with FDIC approval.

Failure to meet capital guidelines could subject a bank to a variety of enforcement remedies, including issuance of a capital directive, the termination of deposit insurance by the FDIC, a prohibition on accepting brokered deposits, and other restrictions on its business. In addition, such a bank would generally not receive regulatory approval of any application that requires the consideration of capital adequacy, such as a branch or merger application, unless the bank could demonstrate a reasonable plan to meet the capital requirement within a reasonable period of time.

As of December 31, 2012, the capital ratios of the Bank exceeded the minimum thresholds to be categorized as “well-capitalized” under applicable regulations. Note U of our consolidated financial statements provides additional information regarding our capital ratios, and is here incorporated by reference.

The Bank is a member of the Federal Home Loan Bank system. This provides certain advantages, including favorable borrowing rates for certain funds.

During 2012, the Bank paid $31,000 in Financing Corporation (“ FICO ”) assessments related to outstanding FICO bonds to the FDIC as collection agent. The FICO is a mixed-ownership government corporation established by the Competitive Equality Banking Act of 1987 whose sole purpose was to function as a financing vehicle for the now defunct Federal Savings and Loan Insurance Corporation. FICO assessments will continue in the future for the Bank.

Banks are subject to a number of federal and state laws and regulations, which have a material impact on their business. These include, among others, minimum capital requirements, state usury laws, state laws relating to fiduciaries, the Dodd-Frank Act, the Truth in Lending Act, the Truth in Savings Act, the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Expedited Funds Availability Act, the Community Reinvestment Act, the Real Estate Settlement Procedures Act, the USA PATRIOT Act, the FACT Act, the Gramm-Leach-Bliley Act, the Sarbanes-Oxley Act, the Bank Secrecy Act, electronic funds transfer laws, redlining laws, predatory lending laws, antitrust laws, environmental laws, money laundering laws and privacy laws. The instruments of monetary policy of authorities, such as the Federal Reserve System, may influence the growth and distribution of bank loans, investments and deposits, and may also affect interest rates on loans and deposits. These policies may have a significant effect on the operating results of banks.

Bank holding companies may acquire banks and other bank holding companies located in any state in the United States without regard to geographic restrictions or reciprocity requirements imposed by state banking law. Banks may also establish interstate branch networks through acquisitions of and mergers with other banks. The establishment of de novo interstate branches or the acquisition of individual branches of a bank in another state (rather than the acquisition of an out-of-state bank in its entirety) is allowed only if specifically authorized by state law.

Michigan banking laws do not significantly restrict interstate banking. The Michigan Banking Code of 1999 permits, in appropriate circumstances and with the approval of OFIR, (1) acquisition of Michigan banks by FDIC-insured banks, savings banks or savings and loan associations located in other states, (2) sale by a Michigan bank of branches to an FDIC-insured bank, savings bank or savings and loan association located in a state in which a Michigan bank could purchase branches of the purchasing entity, (3) consolidation of Michigan banks and FDIC-insured banks, savings banks or savings and loan associations located in other states having laws permitting such consolidation, (4) establishment of branches in Michigan by FDIC-insured banks located in other states, the District of Columbia or U.S. territories or protectorates having laws permitting a Michigan bank to establish a branch in such jurisdiction, and (5) establishment by foreign banks of branches located in Michigan. A Michigan bank holding company may acquire a non-Michigan bank and a non-Michigan bank holding company may acquire a Michigan bank.

Environmental Regulations

We hold title, on a temporary or permanent basis, to a number of parcels of real property. These include properties owned for branch offices and other business purposes and properties taken in or in lieu of foreclosure to satisfy loans in default. Under current federal laws, present and past owners of real property are exposed to liability for the cost of cleanup of contamination on or originating from those properties, even if they are wholly innocent of the actions that caused the contamination. These liabilities can be material and can exceed the value of the contaminated property. Although management is currently aware of no such environmental liabilities attributable to us or any of our properties, any such liabilities could have a material adverse effect on our capital expenditures, earnings, or competitive position.

Employees

As of December 31, 2012, Southern Michigan Bank employed 187 total employees equaling 173 full-time equivalent employees. Southern’s only employees as of the same date were its three executive officers (all of whom were also employed by Southern Michigan Bank).

Statistical Information

Additional statistical information describing our business appears in the following pages and in Management’s Discussion and Analysis of Financial Condition and Results of Operations and in our consolidated financial statements and related notes contained in this report.

Securities Portfolio

The carrying value of securities categorized by type at December 31 was as follows:


(Dollars in thousands)
	2012		2011		2010
U.S. government and Federal agencies	$	23,932	$	51,391	$	30,784
States and political subdivisions		34,978		33,445		25,370
Asset-backed securities		—		2,476		2,476
Mortgage-backed securities		5,615		3,032		598

Total	$	64,525	$	90,344	$	59,228

At the end of 2012 and 2011, the fair value of securities issued by the State of Michigan and all its political subdivisions totaled $28,443,000and $26,314,000, respectively. No other securities held of any other single issuer were greater than 10% of shareholders’ equity. At December 31, 2012, we had no investment in securities of issuers outside of the United States.

Presented below is the fair value of securities as of December 31, 2012 and 2011, a schedule of maturities of securities as of December 31, 2012, and the weighted average yields of securities as of December 31, 2012.


(Dollars in thousands)
	Securities maturing within:
	Less than 1 Year		1 Year - 5 Years		5 Years - 10 Years		More than 10 Years		Fair Value at Dec. 31, 2012		Fair Value at Dec. 31, 2011
U.S. government and Federal agencies	$	21,931	$	2,001	$	—	$	—	$	23,932	$	51,391
States and political subdivisions		3,940		14,603		11,721		4,714		34,978		33,445
Asset-backed securities		—		—		—		—		—		2,476
Mortgage-backed securities		—		16		106		5,493		5,615		3,032

Total securities	$	25,871	$	16,620	$	11,827	$	10,207	$	64,525	$	90,344


	Weighted average yields(1)
U.S. government and Federal agency		0.81	%	0.51	%	—	%	—	%
States and political subdivisions		2.12		2.92		3.24		3.58
Asset-backed securities		—		—		—		—
Mortgage-backed securities		—		4.88		3.42		0.57

(1)	Yields are not presented on a tax-equivalent basis. The weighted average yields are based on coupon rates for securities purchased at par value and on effective interest rates considering amortization or accretion if the securities were purchased at a premium or discount.

Loan Portfolio

Our combined loan portfolio, categorized by loan type (excluding loans held for sale) as of December 31 is presented below.


(Dollars in thousands)
	2012		2011		2010		2009		2008
Commercial and agricultural	$	82,543	$	70,056	$	58,763	$	61,855	$	74,446
Real estate - commercial		172,764		150,829		136,371		148,806		131,180
Real estate - construction		16,802		12,479		11,135		10,522		10,446
Real estate - residential		89,147		91,273		93,102		100,007		104,321
Consumer		8,349		8,167		10,153		11,889		14,917

Total loans, gross	$	369,605	$	332,804	$	309,524	$	333,079	$	335,310

We have no foreign loans.

Maturities and Sensitivities of Loans to Changes in Interest Rates

The following schedule presents the maturities of loans (excluding residential real estate and consumer loans) as of December 31, 2012. All loans over one year in maturity (excluding residential real estate and consumer loans) are also presented classified according to the sensitivity to changes in interest rates as of December 31, 2012.


(Dollars in thousands)
Loan Type	Less than 1 Year		1 Year - 5 Years		More than 5 Years		Total
Commercial, agricultural, and real estate - commercial	$	66,100	$	153,863	$	35,344	$	255,307
Real estate - construction		9,687		4,442		2,673		16,802

Totals	$	75,787	$	158,305	$	38,017	$	272,109


Loan Sensitivity to Changes in Interest Rates	1 Year - 5 Years		More than 5 Years		Total
Loans with fixed interest rates	$	157,679	$	38,017	$	195,696
Loans with floating or adjustable interest rates		626		—		626

Totals	$	158,305	$	38,017	$	196,322

Risk Elements

The objective of our credit risk strategy is to quantify and manage credit risk on an aggregate portfolio basis, and to limit the risk of loss resulting from an individual customer default. This strategy has not changed over the past five years and is based on three core principles: conservatism, diversification and monitoring. We believe that effective credit risk management begins with conservative lending practices. These practices include conservative underwriting, documentation, monitoring and collection standards. Our credit risk strategy also emphasizes diversification on an industry and customer level, regular credit examinations, and monthly management reviews of large credit exposures and credits experiencing deterioration of credit quality. Lending activities are centralized, with lending officers delegated specific authority amounts. We have annual independent reviews of the quality of our underwriting and documentation and the accuracy of risk grades.

Our credit review process and overall assessment of required allowances are based on ongoing quarterly assessments of the probable estimated losses inherent in our loan portfolio. We use these assessments in an effort to promptly identify potential problem loans within the portfolio, maintain an allowance for losses we believe to be adequate and take any necessary charge-offs. In addition to the individual review of larger commercial loans that exhibit probable or observed credit weaknesses, the commercial credit review includes the use of a risk grading system.

Loan originations are developed from a number of sources, including continuing business with depositors, borrowers and real estate developers, advertisements, solicitations by lending staff, walk-in customers, director referrals, and loan participations purchased from other financial institutions.

Commercial and agricultural loans . We make loans for commercial purposes to sole proprietorships, partnerships, corporations and other business enterprises. We make agricultural loans for the purpose of financing agricultural production, including all costs associated with growing crops or raising livestock. Commercial and agricultural loans may be secured, other than by real estate, or unsecured, requiring one single payment or on an installment repayment schedule. Commercial and agricultural loans generally have final maturities of five years or less and are made with either fixed interest rates or rates that adjust based upon the national prime rate in effect at the time of the rate change.

Commercial and agricultural lending involves certain risks relating to changes in local and national economic conditions and the resulting effect on commercial or agricultural borrowers. Such loans are subject to greater risk of default during periods of adverse economic conditions. Because such loans may be secured by equipment, inventory, accounts receivable and other non-real estate assets, the collateral may not be sufficient to ensure full payment of the loan in the event of a default. To reduce such risk, we may obtain the personal guarantees of one or more of the principals of the borrowers.

Real estate – commercial loans . We make non-residential real estate loans secured by first mortgages and/or junior mortgages on non-residential real estate, including farm land, retail stores, office buildings, warehouses, apartment buildings and other commercial properties. These loans typically have a higher degree of risk than residential lending. The increased risk is due primarily to the dependence of the borrower on the cash flow from the property or the business operated on the property to service the loan and larger individual loan amounts.

Real estate – residential loans . We make residential real estate loans secured by first mortgages on one-to-four family residences, with a majority being single family residences. These loans are typically limited in relationship to the appraised value of the real estate and improvements at the time of origination of the loan.

Real estate – construction . Construction loans are made to finance land development before erecting new structures and to finance the construction of new buildings or additions to existing buildings. Many of the construction loans we make are to owner occupants for the construction of single family homes. Other loans we make are to builders and developers for various projects.

Consumer loans . We make a variety of consumer loans to individuals for family, household and other personal purposes. We make these loans for the purpose of financing the purchase of vehicles or furniture, educational expenses, medical expenses or vacation expenses, and other consumer purposes. Consumer loans may be secured, other than by real estate, or unsecured, generally requiring repayment on an installment repayment schedule.

The following were classified as non-accrual, past due and restructured loans as of December 31:


(Dollars in thousands)
	2012		2011		2010		2009		2008
Loans accounted for on a non-accrual basis	$	5,383	$	5,703	$	5,293	$	7,585	$	8,715
Accruing loans which are contractually past due 90 days or more as to principal or interest payments		33		6		1		14		437
Accruing restructured loans		3,573		3,540		3,297		702		—

Totals		8,989	$	9,249	$	8,591	$	8,301	$	9,152

A loan is placed on nonaccrual status at the point in time at which the collectability of principal or interest is considered in doubt, typically when payments are past due over 90 days, unless the loan is both well-secured and in the process of collection. The table below illustrates interest forgone and interest recorded on nonperforming loans for the years presented.


(Dollars in thousands)
	2012		2011		2010		2009		2008
Interest on non-performing loans which would have been earned had the loans been in an accrual or performing status	$	363	$	342	$	354	$	463	$	598
Interest on non-performing loans that was actually recorded when received	$	268	$	234	$	228	$	38	$	34

Potential Problem Loans

At December 31, 2012, there were $28.4 million of loans not disclosed above pursuant to Item III.C.1. of Industry Guide 3 where known information about possible credit problems of the borrowers causes management to have serious doubts as to the ability of such borrowers to comply with the present loan repayment terms. We have allocated $758,000 in the aggregate for specific loan losses for impaired loans as of December 31, 2012. However, our entire allowance for loan losses is available for potential problem loans.

Loan Concentrations

As of December 31, 2012, there was no concentration of loans exceeding 10% of total loans which are not otherwise disclosed as a category of loans pursuant to Item III.A. of Industry Guide 3.

Other Interest Bearing Assets

As of December 31, 2012, we had no interest bearing assets that would be required to be disclosed pursuant to Item III.C.1. or 2. of Industry Guide 3 if such assets were loans.

Summary of Loan Loss Experience

The following schedule presents a summary of activity in the allowance for loan losses for the periods shown and the percentage of net charge-offs during each period to average gross loans outstanding during the period.


(Dollars in thousands)
	2012			2011			2010			2009			2008

Balance at January 1	$	5,412		$	5,694		$	6,075		$	7,104		$	5,156

Charge-offs:
Commercial and agricultural		25			63			278			1,350			1,943
Real estate – commercial		873			184			374			60			229
Real estate – construction		13			365			95			51			98
Real estate – residential		464			710			971			2,058			703
Consumer		172			239			313			407			370

Total charge-offs		1,547			1,561			2,031			3,926			3,343


Recoveries:
Commercial and agricultural		28			61			133			53			39
Real estate – commercial		3			2			6			2			10
Real estate – construction		9			43			—			—			55
Real estate – residential		55			12			108			4			9
Consumer		145			111			28			113			98

Total recoveries		240			229			275			172			211


Net charge-offs		1,307			1,332			1,756			3,754			3,132


Additions charged to operations(1)		1,350			1,050			1,375			2,725			5,080


Balance at December 31	$	5,455		$	5,412		$	5,694		$	6,075		$	7,104


Ratio of net charge-offs during the period to average loans outstanding during the period		0.38	%		0.43	%		0.55	%		1.13	%		0.94	%

(1)

The allowance for loan losses is maintained at a level which, in management’s judgment, is believed to be adequate to absorb probable incurred loan losses in the portfolio. In assessing the adequacy of the allowance, management reviews the characteristics of the loan portfolio in order to determine overall quality and risk profiles. Some factors management considers in determining the level at which the allowance is maintained include a continuing evaluation of those loans identified as being subject to possible problems in collection, results of examination by regulatory agencies, current economic conditions, historical loan loss experience, loan volume, portfolio mix, concentrations of credit and lending policies, procedures, and personnel.

During 2012 management added $1,350,000 to the allowance, during 2011 management added $1,050,000 to the allowance and during 2010 management added $1,375,000 to the allowance. The level of the provision for loan losses reflects net charge-off experience and the changes in the Michigan economy and the local real estate market, as well as other changes in the dynamics of the loan portfolio, including the level of non-accrual and potential problem loans.

The following schedule presents an allocation of the allowance for loan losses to the various loan categories as of December 31 of each year presented.


(Dollars in thousands)
	2012		2011		2010		2009		2008
Commercial (including agricultural, real estate and construction)	$	4,158	$	4,039	$	4,239	$	4,641	$	5,327
Real estate – residential (including first and junior lien holders)		1,240		1,305		1,368		1,162		1,614
Consumer		57		68		87		272		163

Total allowance	$	5,455	$	5,412	$	5,694	$	6,075	$	7,104

The Securities and Exchange Commission’s Industry Guide 3 provides for a break down of the allowance for loan losses into major loan categories. We allocate the allowance among the various categories through an analysis of the loan portfolio composition, prior loan loss experience, evaluation of those loans identified as being probable problems in collection, results of examination by regulatory agencies and current economic conditions. The entire allowance is available to absorb any losses without regard to the category or categories in which the charged off loans are classified.

The following schedule presents the stratification of the loan portfolio by category, based on the amount of loans outstanding as a percentage of total loans for the respective years ended December 31.


	2012			2011			2010			2009			2008
Commercial and agricultural		22.3	%		21.1	%		19.0	%		18.6	%		22.2	%
Real estate – commercial		46.7			45.3			44.0			44.6			39.1
Real estate – construction		4.6			3.8			3.6			3.2			3.1
Real estate – residential		24.1			27.4			30.1			30.0			31.1
Consumer		2.3			2.5			3.3			3.6			4.5

Total		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%

Deposits

The following schedule presents the average deposit balances by category and the average rates paid thereon for the respective years.


(Dollars in thousands)
	2012				2011				2010
Noninterest-bearing demand	$	71,494			$	64,760			$	58,298
Interest-bearing demand		193,339	0.26	%		173,888	0.30	%		148,968	0.35	%
Savings		54,837	0.05	%		50,789	0.09	%		47,937	0.15	%
Certificates of deposit		109,831	1.64	%		127,675	2.02	%		136,369	2.34	%

Total	$	429,501			$	417,112			$	391,572

The following table illustrates the maturities of time deposits issued in denominations of $100,000 or more as of December 31, 2012.


(Dollars in thousands)

Maturing in less than 3 months	$	6,649
Maturing in 3 to 6 months		4,044
Maturing in 6 to 12 months		7,020
Maturing in more than 12 months		21,649

Total	$	39,362

We have no foreign deposits.

Return on Equity and Assets

The following schedule presents ratios for the years ended December 31:


	2012			2011			2010
Return on assets (net income divided by average total assets)		0.84	%		0.68	%		0.65	%

Return on equity (net income divided by average equity)		8.09	%		6.80	%		6.56	%

Dividend payout ratio (dividends declared divided by net income)		20.23	%		15.23	%		15.11	%

Equity to assets ratio (average equity divided by average total assets)		10.41	%		9.96	%		9.87	%

Short Term Borrowings

Securities sold under agreements to repurchase (repurchase agreements) are direct obligations and are secured by securities held in safekeeping at a correspondent bank. Repurchase agreements are offered primarily to certain large deposit customers as deposit equivalent investments. Information relating to securities sold under agreements to repurchase is as follows (in thousands):


	2012			2011			2010
At December 31:
Outstanding balance	$	16,134		$	18,074		$	15,027
Average interest rate		0.20	%		0.24	%		0.30	%

Daily average for the year:
Outstanding balance	$	17,026		$	16,162		$	16,714
Average interest rate		0.22			0.32	%		0.30	%

Maximum outstanding at any month end	$	18,439		$	18,074		$	18,847

Item 1A.

Risk Factors

Risks Related to Southern’s Business

The economic conditions in the State of Michigan could have a material adverse effect on our results of operations and financial condition.

Our success depends primarily on the general economic conditions in the State of Michigan and the specific local markets in which we operate. Unlike larger national or other regional banks that are more geographically diversified, we provide banking and financial services to customers primarily in southwest Michigan. The local economic conditions in this area have a significant impact on the demand for our products and services, as well as the ability of our customers to repay loans, the value of the collateral securing loans and the stability of our deposit funding sources. A significant decline in general economic conditions, caused by inflation, recession, acts of terrorism, outbreak of hostilities or other international or domestic occurrences, unemployment, changes in securities, financial, or credit markets or other factors could impact these local economic conditions and, in turn, have a material adverse effect on our results of operations and financial condition.

Difficult market conditions have adversely affected the financial services industry.

The capital and credit markets have been experiencing volatility and disruption for an extended period of time. Dramatic declines in the housing market, falling home prices, increased foreclosures and unemployment have negatively impacted the credit performance of mortgage loans and construction and development loans, and resulted in significant write-downs of asset values by financial institutions. These write-downs have caused many financial institutions to seek additional capital, to merge with larger and stronger institutions and, in some cases, to fail. Reflecting concern about the stability of the financial markets generally and the strength of counterparties, many lenders and institutional investors have reduced or ceased providing funding to borrowers, including to other financial institutions.

This market turmoil and tightening of credit have led to an increased level of commercial and consumer delinquencies, lack of consumer confidence, increased market volatility and widespread reduction of business activity generally. The resulting economic pressure on consumers and commercial borrowers and lack of confidence in the financial markets has adversely affected our business, results of operations and financial condition. A worsening of these conditions would likely exacerbate the adverse effects of these difficult market conditions on us and others in the financial institutions industry. If current levels of market disruption and volatility continue or worsen, there can be no assurance that we will not experience adverse effects, which may be material, on our ability to access capital and on our business, results of operations and financial condition.

Restrictions on the Bank’s ability to pay dividends subjects Southern Michigan Bancorp to liquidity risk.

Southern Michigan Bancorp’s principal source of funds to pay cash dividends and to fund its corporate obligations is the earnings of and dividends paid by the Bank. At December 31, 2012, Southern Michigan Bancorp’s primary financial obligation was its obligation to pay interest and principal when due under its junior subordinated debt securities. If the Bank is unable to pay cash dividends to Southern Michigan Bancorp in an amount sufficient to fund its obligations and Southern Michigan Bancorp is unable to access liquidity from other sources, it may be unable to pay dividends and satisfy its financial obligations. As of December 31, 2012, the Bank could pay $9.1 million of dividends to Southern Michigan Bancorp without prior regulatory approval and Southern Michigan Bancorp had limited liquid assets. Additional information related to our liquidity position may be found in Notes P and Q to the consolidated financial statements.

If the condition of the Bank’s loan portfolio worsens, its ability to borrow funds from the Federal Home Loan Bank and Federal Reserve Bank could be adversely affected, which could materially adversely affect the Bank’s liquidity position.

As part of its liquidity management, the Bank borrows funds from the Federal Home Loan Bank and has the ability to borrow from the Federal Reserve Bank. Borrowed funds are collateralized by certain investment securities and qualifying residential and commercial real estate loans. The Bank is permitted to borrow an amount of funds up to a certain percentage of the total investment securities and loans pledged as collateral. The Federal Home Loan Bank and Federal Reserve Bank will not accept as collateral any loan that is rated as a 5 (special mention) or worse on our internal loan grading system. If the quality of the Bank’s loan portfolio worsens, the Bank could have fewer loans eligible to be pledged as collateral for borrowed funds, reducing the total amount of available funds that the Bank is permitted to borrow. A reduction in the total amount of the available funds that the Bank is permitted to borrow from the Federal Home Loan Bank and Federal Reserve Bank could materially adversely affect the Bank’s liquidity position.

We are subject to liquidity risk in our operations, which could adversely affect our ability to fund various obligations.

Liquidity risk is the possibility of being unable to meet obligations as they come due, pay deposits when withdrawn, capitalize on growth opportunities as they arise, or pay dividends because of an inability to liquidate assets or obtain adequate funding on a timely basis, at a reasonable cost and within acceptable risk tolerances. Liquidity is derived primarily from retail deposit growth and retention, principal and interest payments on loans and investment securities, net cash provided from operation and access to other funding sources. Liquidity is essential to our business. We must maintain sufficient funds to respond to the needs of depositors and borrowers. An inability to raise funds through deposits, borrowings, the sale or pledging as collateral of loans and other assets could have a material adverse effect on our liquidity. Our access to funding sources in amounts adequate to finance our activities could be impaired by factors that affect us specifically or the financial services industry in general. Factors that could detrimentally impact our access to liquidity sources include a decrease in the level of our business activity due to a market down turn or regulatory action that limits or eliminates our access to alternate funding sources. Our ability to borrow could also be impaired by factors that are nonspecific to us, such as severe disruption of the financial markets or negative expectations about the prospects for the financial services industry as a whole.

Expiration of the FDIC’s Transaction Account Guarantee Program (“TAG”) may result in a reduction of the Bank’s deposit balances.

Temporary unlimited deposit insurance coverage for noninterest-bearing transaction accounts under the Dodd-Frank Act expired on December 31, 2012. TAG, which was originally part of the Temporary Liquidity Guarantee Program of 2008, added unlimited insurance coverage to noninterest bearing accounts, regardless of balance. This temporary unlimited coverage was in addition to, and separate from, the general FDIC deposit insurance coverage of up to $250,000 available to depositors. Depending on the perceptions by depositors of the safety and soundness of banking institutions, the termination of the TAG program could result in deposit disintermediation in individual banks and in the banking industry as a whole.

If Southern’s allowance for loan losses is not sufficient to cover actual loan losses, Southern’s earnings could decrease.

Southern’s loan customers may not repay their loans according to the terms of these loans, and the collateral securing the payment of these loans may be insufficient to assure repayment. Southern may experience significant loan losses, which could have a material adverse effect on its operating results. Southern’s management makes various assumptions and judgments about the collectibility of Southern’s loan portfolio, including the creditworthiness of its borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of Southern’s loans. Southern maintains an allowance for loan losses to cover loan losses that may occur. In determining the size of the allowance, Southern relies on an analysis of its loan portfolio based on historical loss experience, volume and types of loans, trends in classification, volume and trends in delinquencies and non-accruals, national and local economic conditions, and other pertinent information.

If Southern’s assumptions are wrong, its current allowance may not be sufficient to cover loan losses, and adjustments may be necessary to allow for different economic conditions or adverse developments in Southern’s loan portfolio. Material increases to Southern’s allowance would materially decrease its net income and could materially decrease shareholders’ equity.

In certain situations, where collection efforts are unsuccessful or acceptable work-out arrangements cannot be reached, Southern may have to write off certain loans in whole or in part. In such situations, Southern may acquire real estate or other assets, if any, which secure the loans through foreclosure or other similar available remedies. In such cases, the amount owed under the defaulted loan often exceeds the value of the assets acquired.

In addition, federal and state regulators periodically review Southern’s allowance for loan losses and may require Southern to increase its provision for loan losses or recognize further loan charge-offs based on judgments different than those of Southern’s management. Any increase in Southern’s allowance for loan losses or loan charge-offs as required by these regulatory agencies could have a material negative effect on Southern’s operating results and shareholders’ equity.

Southern is subject to lending risk, which could materially adversely affect Southern’s results of operations and financial condition.

There are inherent risks associated with Southern’s lending activities. These risks include, among other things, the impact of changes in interest rates and changes in the economic conditions in the markets where Southern operates. Increases in interest rates or weakening economic conditions could adversely impact the ability of borrowers to repay outstanding loans or the value of the collateral securing these loans, which could have a material adverse effect on the Southern’s results of operations and financial condition. Competition for limited, high-quality lending opportunities and core deposits in an increasingly competitive marketplace may adversely affect our results of operations.

Southern’s loan portfolio includes a substantial percentage of commercial and industrial loans, which may be subject to greater risks than those related to residential loans.

Southern’s loan portfolio includes a substantial percentage of commercial and industrial loans. Commercial and industrial loans generally carry larger loan balances and involve a greater degree of financial and credit risks than home equity loans or residential mortgage loans. Any significant failure to pay on time by Southern’s customers would hurt Southern’s earnings. The increased financial and credit risk associated with these types of loans is a result of several factors, including the concentration of principal in a limited number of loans and borrowers, the size of loan balances, the effects of general economic conditions on income-producing properties, and the increased difficulty of evaluating and monitoring these types of loans. The repayment of loans secured by commercial real estate is typically dependent upon the successful operation of the related real estate or commercial project. If the cash flow from the project is reduced, the borrower’s ability to repay the loan may be impaired. This cash flow shortage may result in the failure to make loan payments. In such cases, Southern may be compelled to modify the terms of the loan. In addition, the nature of these loans is such that they are generally less predictable and more difficult to evaluate and monitor. As a result, repayment of these loans may, to a greater extent than residential loans, be subject to adverse conditions in the real estate market or economy.

Prepayments of loans may negatively impact Southern’s business.

Generally, customers of Southern may prepay the principal amount of their outstanding loans at any time. The speed at which such prepayments occur, as well as the size of such prepayments, are within such customers’ discretion. If customers prepay the principal amount of their loans, and Southern is unable to lend those funds to other borrowers or invest the funds at the same or higher interest rates, Southern’s interest income will be reduced. A significant reduction in interest income could have a negative impact on Southern’s results of operations and financial condition.

We may face increasing pressure from historical purchasers of our residential mortgage loans to repurchase those loans or reimburse purchasers for losses related to those loans.

We generally sell the fixed rate long-term residential mortgage loans we originate on the secondary market and retain adjustable rate mortgage loans for our portfolio. We believe that purchasers of residential mortgage loans, such as government sponsored entities, are increasing their efforts to seek to require sellers of residential mortgage loans to either repurchase loans previously sold or reimburse purchasers for losses related to loans previously sold when losses are incurred on a loan previously sold due to actual or alleged failure to strictly conform to the purchaser’s purchase criteria. As a result, we may face increasing pressure from historical purchasers of our residential mortgage loans to repurchase those loans or reimburse purchasers for losses related to those loans and we may face increasing expenses to defend against such claims. If we are required in the future to repurchase loans previously sold, reimburse purchasers for losses related to loans previously sold, or if we incur increasing expenses to defend against such claims, our financial condition and results of operations would be negatively affected, and would lower our capital ratios as a result of increasing assets and lowering income through expenses and any loss incurred.

Southern is subject to interest rate risk, which may negatively affect Southern’s earnings and the value of its assets.

Southern’s earnings and cash flows are largely dependent upon its net interest income. Net interest income is the difference between interest income earned on interest-earning assets, such as loans and securities, and interest expense paid on interest-bearing liabilities, such as deposits and borrowed funds. Interest rates are highly sensitive to many factors that are beyond Southern’s control, including general economic conditions and policies of various governmental and regulatory agencies and, in particular, the Federal Reserve Board. Changes in monetary policy, including changes in interest rates, could influence the interest Southern receives on loans and securities and the amount of interest it pays on deposits and borrowings. Such changes could also affect Southern’s ability to originate loans and obtain deposits and the fair value of Southern’s financial assets and liabilities. If the interest rates paid on deposits and other borrowings increase at a faster rate than the interest rates received on loans and other investments, Southern’s net interest income, and therefore earnings, could be adversely affected. Earnings could also be adversely affected if the interest rates received on loans and other investments fall more quickly than the interest rates paid on deposits and other borrowings.

The global market crisis has triggered a series of cuts in interest rates. During 2010, 2011 and 2012, the Federal Open Market Committee kept the target federal funds rate between 0% and 0.25% and we expect the low interest rate environment to continue in 2013. The low interest rate environment has compressed our net interest spread and reduced our spread-based revenues, which has had an adverse impact on our revenue and results of operations.

Environmental liability associated with commercial lending could result in losses.

In the course of its business, Southern may acquire, through foreclosure, properties securing loans it has originated or purchased that are in default. Particularly in commercial real estate lending, there is a risk that hazardous substances could be discovered on these properties. In this event, Southern might be required to remove these substances from the affected properties at Southern’s sole cost and expense. The cost of this removal could substantially exceed the value of affected properties. Southern may not have adequate remedies against the prior owner or other responsible parties and could find it difficult or impossible to sell the affected properties. These events could have an adverse effect on Southern’s business, results of operations and financial condition.

Loss of Southern’s Chief Executive Officer or other executive officers could adversely affect its business.

Southern’s success is dependent upon the continued service and skills of its executive officers and senior management. If Southern loses the services of these key personnel, it could have a negative impact on Southern’s business because of their skills, years of industry experience and the difficulty of promptly finding qualified replacement personnel.

Southern may need to raise additional capital in the future, but that capital might not be available on acceptable terms or at all when it is needed.

Southern is required by federal and state regulatory authorities to maintain adequate levels of capital to support its operations. Southern may need to raise additional capital to maintain its regulatory capital at desired levels or support its growth. Southern’s ability to raise additional capital will depend on conditions in the capital markets at that time, which are outside Southern’s control, and on its financial performance. Southern cannot assure you of its ability to raise additional capital on terms acceptable to Southern or at all. If Southern cannot raise additional capital when needed, its ability to maintain assets at current levels or expand its operations through organic growth and acquisitions could be materially impaired.

The Dodd-Frank Act may adversely impact Southern’s results of operations, financial condition or liquidity.

The Dodd-Frank Act was signed into law by President Obama on July 21, 2010. The Dodd-Frank Act represents a comprehensive overhaul of the financial services industry within the United States, established the new federal Consumer Financial Protection Bureau (CFPB), and requires the CFPB and other federal agencies to implement many new and significant rules and regulations. The CFPB has issued significant new regulations that impact consumer mortgage lending and servicing. Those regulations will become effective in January 2014. In addition, the CFPB is drafting regulations that will change the disclosure requirements and forms used under the Truth in Lending Act and Real Estate Settlement and Procedures Act. Compliance with these new laws and regulations and other regulations under consideration by the CFPB will likely result in additional costs, which could be significant and could adversely impact the Company’s results of operations, financial condition or liquidity.

Southern is subject to extensive regulation that could limit or restrict its activities.

Southern operates in a highly regulated industry and is subject to examination, supervision, and comprehensive regulation by various federal and state agencies. Southern’s compliance with these regulations is costly and restricts certain of its activities, including payment of dividends, mergers and acquisitions, investments, loans and interest rates charged, interest rates paid on deposits and locations of offices. Southern is also subject to capitalization guidelines established by its regulators, which require Southern to maintain adequate capital to support its growth.

The laws and regulations applicable to the banking industry could change at any time, and Southern cannot predict the effects of these changes on its business and profitability. Future regulatory changes or accounting pronouncements may increase our regulatory capital requirements or adversely affect our regulatory capital levels. Because government regulation greatly affects the business and financial results of all commercial banks and bank holding companies, Southern’s cost of compliance could adversely affect its ability to operate profitably.

Southern may be required to pay additional insurance premiums to the FDIC, which could negatively impact earnings.

Insured institution failures, as well as deterioration in banking and economic conditions, have significantly increased FDIC loss provisions, resulting in a decline in the designated reserve ratio to historical lows. The reserve ratio may continue to decline in the future. In addition, the limit on FDIC coverage has been permanently increased to $250,000. These developments have caused the premiums assessed to Southern by the FDIC to increase. Further, depending upon any future losses that the FDIC insurance fund may suffer, there can be no assurance that there will not be additional premium increases in order to replenish the fund. The FDIC may need to set a higher base rate schedule or impose special assessments due to future financial institution failures and updated failure and loss projections. In addition, a decline in the Bank’s CAMEL ratings could subject Southern to increased FDIC insurance premiums. Higher FDIC assessment rates would have an adverse impact on Southern’s results of operations.

Southern could be adversely affected by the soundness of other financial institutions, including defaults by larger financial institutions.

Southern’s ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services institutions are interrelated as a result of credit, trading, clearing, counterparty or other relationships between financial institutions. Southern has exposure to different counterparties, and Southern routinely executes transactions with counterparties in the financial industry. As a result, defaults by, or even rumors or questions about, one or more financial services institutions, or the financial services industry generally, have led to market-wide liquidity problems and could lead to losses or defaults by Southern or by other institutions. This is sometimes referred to as “systemic risk” and may adversely affect financial intermediaries, such as clearing agencies, clearing houses, banks, securities firms and exchanges, with which Southern interacts on a daily basis, and therefore could adversely affect Southern.

Many of these transactions expose Southern to credit risk in the event of default of counterparty. In addition, Southern’s credit risk may be exacerbated when the collateral held by Southern cannot be realized or is liquidated at prices not sufficient to recover the full amount of the financial instrument exposure due to Southern. There is no assurance that any such losses would not materially and adversely affect Southern’s business, results of operations or financial condition.

Competition from competing financial institutions and other financial service providers may adversely affect Southern’s profitability.

The banking business is highly competitive and Southern experiences competition in each of its markets from many other financial institutions. Southern competes with commercial banks, credit unions, savings and loan associations, mortgage banking firms, consumer finance companies, securities brokerage firms, insurance companies, money market funds, and other mutual funds, as well as other super-regional, and national financial institutions that operate offices in Southern’s primary market areas and elsewhere. In addition, some of the institutions that Southern competes against are not subject to the same regulatory restrictions as Southern, and accordingly, may have certain, inherent, cost advantages.

Southern competes with these institutions both in attracting deposits and in making loans. Price competition for loans might result in Southern originating fewer loans, or earning less on its loans, and price competition for deposits might result in a decrease in Southern’s total deposits or higher rates on its deposits. In addition, Southern has to attract its customer base from other existing financial institutions and from new residents. Many of Southern’s competitors are larger financial institutions. While Southern believes it can and does successfully compete with these other financial institutions in its primary markets, Southern may face a competitive disadvantage as a result of its smaller size, lack of geographic diversification, and inability to spread its marketing costs across a broader market. Although Southern competes by concentrating its marketing efforts in its primary markets with local advertisements, personal contacts, and greater flexibility and responsiveness in working with local customers, Southern can give no assurance that this strategy will be successful.

Evaluation of investment securities for other-than-temporary impairment involves subjective determinations and could materially impact Southern’s results of operations and financial condition.

The evaluation of impairments is a quantitative and qualitative process, which is subject to risks and uncertainties and is intended to determine whether declines in the fair value of investments should be recognized in current period earnings. The risks and uncertainties include changes in general economic conditions, the issuer’s financial condition or future recovery prospects, the effects of changes in interest rates or credit spreads and the expected recovery period. Estimating future cash flows involves incorporating information received from third-party sources and making internal assumptions and judgments regarding the future performance of the underlying collateral and assessing the probability that an adverse change in future cash flows has occurred. The determination of the amount of other-than-temporary impairments is based upon Southern’s periodic evaluation and assessment of known and inherent risks associated with the respective asset class. Such evaluations and assessments are revised as conditions change and new information becomes available. Southern’s management considers a wide range of factors about the security issuer and uses its reasonable judgment in evaluating the cause of the decline in the estimated fair value of the security and in assessing the prospects for recovery. Inherent in management’s evaluation of the security are assumptions and estimates about the operations of the issuer and its future earnings potential. Impairments to the carrying value of our investment securities may need to be taken in the future, which could have a material adverse effect on our results of operations and financial condition.

If Southern is required to write down goodwill and other intangible assets, its financial condition and results of operations would be negatively affected.

A substantial portion of the value of the merger consideration paid in connection with the merger of FNB Financial Corporation was allocated to goodwill and other intangible assets on Southern’s consolidated balance sheet. The amount of the purchase price that is allocated to goodwill and other intangible assets is determined by the excess of the purchase price over the net identifiable assets acquired. Southern is required to conduct an annual review to determine whether goodwill is impaired.

Goodwill is tested for impairment annually in the fourth quarter. An impairment test also could be triggered between annual testing dates if an event occurs or circumstances change that would more likely than not reduce the fair value below the carrying amount. Examples of those events or circumstances would include a significant adverse change in business climate; a significant unanticipated loss of customers or assets under management; an unanticipated loss of key personnel; a sustained period of poor investment performance; a significant loss of deposits or loans; a significant reduction in profitability; or a significant change in loan credit quality.

Southern cannot assure you that it will not be required to take an impairment charge in the future. Any material impairment charge would have a negative effect on Southern’s financial results and shareholders’ equity.

If Southern is required to take a valuation allowance with respect to its deferred tax assets, its financial condition and results of operations would be negatively affected.

Southern’s net deferred tax asset was $1.5 million at December 31, 2012. A valuation allowance related to deferred tax assets is required when it is considered more likely than not that all or part of the benefit related to such assets will not be realized. No valuation allowance was considered necessary at December 31, 2012. If Southern is required in the future to recognize a valuation allowance with respect to its deferred tax assets, its financial condition and results of operations would be negatively affected.

If Southern is required to take a valuation allowance with respect to its mortgage servicing rights, its financial condition and results of operations would be negatively affected.

Southern’s mortgage servicing rights were $1.2 million at December 31, 2012. No valuation allowance for capitalized mortgage servicing rights was considered necessary at December 31, 2012 because the fair value of such rights approximated or exceeded the carrying value. If Southern is required in the future to take a valuation allowance with respect to its mortgage servicing rights, its financial condition and results of operations would be negatively affected.

We hold general obligation municipal bonds in our investment securities portfolio. If one or more issuers of these bonds were to become insolvent and default on its obligations under the bonds, it could have a negative effect on our financial condition and results of operations.

The carrying value of municipal bonds held by us totaled $35.0 million at December 31, 2012, and were issued by different municipalities. There can be no assurance that the financial conditions of these municipalities will not be materially and adversely affected by future economic conditions. If one or more of the issuers of these bonds were to become insolvent and default on their obligations under the bonds, it could have a negative effect on our financial condition and results of operations.

Southern depends upon the accuracy and completeness of information about customers.

In deciding whether to extend credit to customers, Southern may rely on information provided to it by its customers, including financial statements and other financial information. Southern may also rely on representations of customers as to the accuracy and completeness of that information and, with respect to financial statements, on reports of independent auditors. Southern’s financial condition and results of operations could be negatively impacted to the extent that Southern extends credit in reliance on financial statements or other information provided by customers that is false or misleading.

Southern may be a defendant in a variety of litigation and other actions, which may have a material adverse effect on Southern’s financial condition and results of operations.

Southern and its subsidiaries may be involved from time to time in a variety of litigation arising out of their business. Southern Michigan Bank has a trust department, which may expose us to litigation or claims arising out of the Bank serving as trustee or acting in another fiduciary capacity. Southern’s insurance may not cover all claims that may be asserted against it, and any claims asserted against it, regardless of merit or eventual outcome, may harm its reputation or cause it to incur unexpected expenses, which could be material in amount. Should the ultimate expenses, judgments or settlements in any litigation exceed Southern’s insurance coverage, they could have a material adverse effect on Southern’s financial condition and results of operations. In addition, Southern may not be able to obtain appropriate types or levels of insurance in the future, nor may it be able to obtain adequate replacement policies with acceptable terms, if at all. For additional information on legal matters, see Item 3 of this report.

Attractive acquisition opportunities may not be available to Southern in the future, which may negatively impact Southern’s ability to grow its business and effectively compete in existing and new markets.

Southern may continue to consider the acquisition of other businesses. However, Southern may not have the opportunity to make suitable acquisitions on favorable terms in the future. Southern expects that other banking and financial companies, many of which have significantly greater resources than Southern does, will compete with Southern to acquire compatible businesses. This competition could increase prices for acquisitions that Southern might pursue. Also, acquisitions of regulated businesses, such as banks, are subject to various regulatory approvals. Failure to maintain regulatory compliance with the various regulations applicable to Southern could make regulatory approvals difficult to obtain. If Southern fails to receive the appropriate regulatory approvals, Southern will not be able to consummate an acquisition that Southern believes is in its best interests.

Southern may face risks with respect to future expansion and acquisitions or mergers, which include substantial acquisition costs, an inability to effectively integrate an acquired business into Southern’s operations, lower than anticipated profit levels, and economic dilution to shareholders.

Southern may seek to acquire other financial institutions or parts of those institutions and may engage in de novo branch expansion in the future. Southern may also consider and enter into new lines of business or offer new products or services. Southern may incur substantial costs to expand. An expansion may not result in the levels of profits it seeks or levels of profits comparable to or better than Southern’s historical experience. Integration efforts for any future mergers or acquisitions may not be successful, which could have a material adverse effect on Southern’s operations and financial condition. Also, Southern may issue equity securities, including Southern common stock and securities convertible into shares of Southern common stock, in connection with future acquisitions, which could cause ownership and economic dilution to its current shareholders.

Changes in accounting standards could impact Southern’s reported earnings.

Current accounting and tax rules, standards, policies and interpretations influence the methods by which financial institutions conduct business and govern financial reporting and disclosures. These laws, regulations, rules, standards, policies and interpretations are constantly evolving and may change significantly over time. Events that may not have a direct impact on Southern, such as bankruptcy of major U.S. companies, have resulted in legislators, regulators, and authoritative bodies, such as the Financial Accounting Standards Board, the Securities Exchange Commission, the Public Company Accounting Oversight Board and various taxing authorities, responding by adopting and/or proposing substantive revision to laws, regulations, rules, standards, policies and interpretations. New accounting pronouncements and varying interpretations of accounting pronouncements have occurred and may occur in the future. Southern’s financial condition and results of operations may be adversely affected by a change in accounting standards.

Unauthorized disclosure of sensitive or confidential client or customer information, whether through a breach of computer systems or otherwise, or failure or interruption of Southern’s communication or information systems, could severely harm Southern’s business.

As part of the its business, Southern collects, processes and retains sensitive and confidential client and customer information on behalf of Southern and other third parties. Despite the security measures Southern has in place for its facilities and systems, and the security measures of its third party service providers, Southern may be vulnerable to security breaches, acts of vandalism, computer viruses, misplaced or lost data, programming and/or human errors or other similar events.

Southern relies heavily on communications and information systems to conduct its business. Any failure or interruption of these systems could result in failures or disruptions in Southern’s customer relationship management, general ledger, deposit, loan and other systems. In addition, customers could lose access to their accounts and be unable to conduct financial transactions during a period of failure or interruption of these systems.

Any security breach involving the misappropriation, loss or other unauthorized disclosure of confidential customer information, whether by Southern or by its vendors, or failure or interruption of Southern ‘s communication or information systems, could severely damage Southern’s reputation, expose it to risks of regulatory scrutiny, litigation and liability, disrupt Southern’s operations, or result in a loss of customer business, the occurrence of any of which could have a material adverse effect on Southern’s business.

We continually encounter technological change, and we may have fewer resources than our competitors to continue to invest in technological improvements.

The banking industry is undergoing rapid technological changes with frequent introductions of new technology-driven products and services. In addition to better serving customers, the effective use of technology increases efficiency and enables financial institutions to reduce costs. Our future success will depend, in part, on our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands for convenience as well as to create additional efficiencies in our operations. Many of our competitors have substantially greater resources to invest in technological improvements. There can be no assurance that we will be able to effectively implement new technology-driven products and services or be successful in marketing such products and services to our customers.

Southern’s controls and procedures may fail or be circumvented.

Management regularly reviews and updates Southern’s internal controls, disclosure controls and procedures, and corporate governance policies and procedures. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. Any failure or circumvention of Southern’s controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on Southern’s business, results of operations and financial condition.

Risks Associated with Southern Common Stock

There is not an active public trading market for Southern common stock.

Southern common stock is traded in the OTCQB market. Transactions in the stock are relatively infrequent. Southern does not expect an active trading market for Southern common stock to develop in the near future. This limited market may affect a shareholder’s ability to sell shares on short notice, and the sale of a large number of shares at one time could temporarily depress the market price of our common stock.

The market price of our common stock can be volatile, which may make it more difficult to resell our common stock at a desired time and price.

Stock price volatility may make it more difficult for a shareholder to resell our common stock when a shareholder wants to and at prices a shareholder finds attractive or at all. Our stock price can fluctuate significantly in response to a variety of factors, regardless of operating results. These factors include, among other things:

•

Variations in our anticipated or actual operating results or the results of our competitors;

•

Changes in investors’ or analysts’ perceptions of the risks and conditions of our business;

•

The size of the public float of our common stock;

•

Regulatory developments, including changes in required levels and the components of regulatory capital;

•

Interest rate changes or credit loss trends;

•

Trading volume in our common stock;

•

Market conditions; and

•

General economic conditions.

Our ability to pay dividends is limited and Southern may be unable to pay future dividends.

Our ability to pay dividends is limited by regulatory restrictions and the need to maintain sufficient consolidated capital. The ability of the Bank to pay dividends to Southern Michigan Bancorp is limited by its obligations to maintain sufficient capital and by other general restrictions on dividends that are applicable to the Bank. If Southern or the Bank do not satisfy these regulatory requirements, Southern Michigan Bancorp would be unable to continue to pay dividends on its common stock. As of December 31, 2012, the Bank was able to pay $9.1 million in dividends to Southern Michigan Bancorp without prior regulatory approval. Additional information on restrictions on payment of dividends by us may be found under “Supervision and Regulation,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note P of our consolidated financial statements, which information is here incorporated by reference.

Southern may issue additional shares of its common stock in the future, which would dilute a shareholder’s ownership of Southern common stock if the shareholder did not, or was not permitted to, invest in the additional issuances.

Southern’s articles of incorporation authorize its board of directors, without shareholder approval, to, among other things, issue additional common stock. The issuance of any additional shares of Southern common stock could be substantially dilutive to a shareholder’s ownership of Southern common stock. To the extent that Southern issues convertible securities, stock appreciation rights, options or warrants to purchase Southern common stock in the future and those convertible securities, stock appreciation rights, options or warrants are exercised, Southern’s shareholders may experience further dilution. Holders of shares of Southern common stock have no preemptive rights that entitle holders to purchase their pro rata share of any offering of shares of any class or series and, therefore, Southern’s shareholders may not be permitted to invest in future issuances of Southern common stock.

Southern may issue debt and equity securities that are senior to Southern common stock as to distributions and in liquidation, which could negatively affect the value of Southern common stock.

In the future, Southern may attempt to increase its capital resources by entering into debt or debt-like financing that is unsecured or secured by all or up to all of Southern’s assets, or issuing debt or equity securities, which could include issuances of secured or unsecured commercial paper, medium-term notes, senior notes, subordinated notes, preferred stock or common stock. In the event of Southern’s liquidation, its lenders and holders of its debt securities or preferred stock would receive a distribution of Southern’s available assets before distributions to the holders of Southern common stock. Because Southern’s decision to incur debt and issue securities in future offerings will depend on market conditions and other factors beyond Southern’s control, Southern cannot predict or estimate the amount, timing or nature of its future offerings and debt financings. Further, market conditions could require Southern to accept less favorable terms for the issuance of its securities in the future. Thus, shareholders will bear the risk of Southern’s future offerings reducing the value of their shares of Southern common stock and diluting their interest in Southern.

Unless a shareholder obtains prior consent from Southern, the shareholder will not be permitted to transfer to another party the shareholder’s shares of Southern common stock if the party who would receive the shares would own of record fewer than 100 shares of Southern common stock.

Southern’s articles of incorporation provide that a shareholder may not transfer shares of Southern common stock without the consent of Southern, if, as a result of an attempted transfer, the party who would receive the shares would own fewer than 100 shares of Southern common stock. “Transfer” means any type of disposition, including a sale, gift, contribution, pledge, or other action that results in a change of record ownership of any share of Southern common stock. Southern may withhold its consent in its discretion. This restriction will limit the transferability of shares of Southern common stock and, unless a shareholder obtains Southern’s prior consent, the shareholder will be prohibited from transferring fewer than 100 shares of Southern common stock if the party who would receive the shares would own of record fewer than 100 shares of Southern common stock after the transfer.

Our common stock is not insured by any governmental entity.

Our common stock is not a deposit account or other obligation of any bank and is not insured by the FDIC or any other governmental entity. Investment in our common stock is subject to risk, including possible loss.

Anti-takeover provisions could negatively impact our shareholders.

Our articles of incorporation and the laws of Michigan include provisions which are designed to provide our board of directors with time to consider whether a hostile takeover offer is in the best interests of us and our shareholders. These provisions could discourage potential acquisition proposals and could delay or prevent a change in control. The provisions also could diminish the opportunities for a holder of our common stock to participate in tender offers, including tender offers at a price above the then-current price for our common stock. These provisions could also prevent transactions in which our shareholders might otherwise receive a premium for their shares over then-current market prices, and may limit the ability of our shareholders to approve transactions that they may deem to be in their best interests.

If an entity holds as little as a 5% interest in our outstanding securities, that entity could, under certain circumstances, be subject to regulation as a “bank holding company.”

Any entity, including a “group” composed of natural persons, owning or controlling with the power to vote 25% or more of our outstanding securities, or 5% or more if the holder otherwise exercises a “controlling influence” over us, may be subject to regulation as a “bank holding company” in accordance with the Bank Holding Company Act of 1956, as amended (the “BHC Act”). In addition, any bank holding company or foreign bank with a U.S. presence may be required to obtain the approval of the Federal Reserve Board under the BHC Act to acquire or retain 5% or more of our outstanding securities. Becoming a bank holding company imposes statutory and regulatory restrictions and obligations, such as providing managerial and financial strength for its bank subsidiaries. Regulation as a bank holding company could require the holder to divest all or a portion of the holder’s investment in our securities or those nonbanking investments that may be deemed impermissible or incompatible with bank holding company status, such as a material investment in a company unrelated to banking.

Any person not defined as a company by the BHC Act may be required to obtain the approval of the Federal Reserve Board under the Change in Bank Control Act of 1978, as amended, to acquire or retain 10% or more of our outstanding securities.

Any person not otherwise defined as a company by the BHC Act and its implementing regulations may be required to obtain the approval of the Federal Reserve Board under the Change in Bank Control Act of 1978, as amended, to acquire or retain 10% or more of our outstanding securities. Applying to obtain this approval could result in a person incurring substantial costs and time delays. There can be no assurance that regulatory approval will be obtained.

Item 1B.

Unresolved Staff Comments

None.

Item 2.

Properties

Our offices are as follows:

Southern’s and Southern Michigan Bank’s main office:

51 West Pearl Street, Coldwater, Michigan

Office is owned by Southern Michigan Bank and comprises 27,945 square feet.

Southern Michigan Bank’s branch office:

2 West Chicago Street, Coldwater, Michigan

Office is owned by Southern and comprises 16,848 square feet.

Southern Michigan Bank’s branch office (drive-thru only):

441 East Chicago Street, Coldwater, Michigan

Office is owned by Southern Michigan Bank and comprises 990 square feet.

Southern Michigan Bank’s branch office:

10 East Carlson, Hillsdale, Michigan

Office is owned by Southern Michigan Bank and comprises 4,353 square feet.

Southern Michigan Bank’s branch office:

202 North Main, Tekonsha, Michigan

Office is owned by Southern Michigan Bank and comprises 2,928 square feet.

Southern Michigan Bank’s branch office:

5350 East Beckley Road, Battle Creek, Michigan

Office is owned by Southern and comprises 14,274 square feet.

Southern Michigan Bank’s branch office:

1110 West Michigan Avenue, Marshall, Michigan

Office is owned by Southern Michigan Bank and comprises 8,788 square feet.

Southern Michigan Bank’s branch office:

225 North Broadway, Union City, Michigan

Office is owned by Southern Michigan Bank and comprises 4,542 square feet.

Southern Michigan Bank’s branch office:

107 North Main Street, Camden, Michigan

Office is owned by Southern Michigan Bank and comprises 2,375 square feet.

Southern Michigan Bank’s branch office:

88 North Main Street, Three Rivers, Michigan

Office is owned by Southern Michigan Bank and comprises approximately 14,256 square feet.

Southern Michigan Bank’s branch office:

1200 North Main Street, Three Rivers, Michigan

Office is owned by Southern Michigan Bank and comprises approximately 3,321 square feet

Southern Michigan Bank’s branch office:

225 U.S. 131, Three Rivers, Michigan

Office is owned by Southern Michigan Bank and comprises approximately 900 square feet

Southern Michigan Bank’s branch office:

235 East Main Street, Centreville, Michigan

Office is owned by Southern Michigan Bank and comprises approximately 1,945 square feet

Southern Michigan Bank’s branch office:

345 North Washington Street, Constantine, Michigan

Office is owned by Southern Michigan Bank and comprises approximately 2,400 square feet

Southern Michigan Bank’s branch office:

136 North Nottawa Road, Mendon, Michigan

Office is owned by Southern Michigan Bank and comprises approximately 2,700 square feet

Item 3.

Legal Proceedings

As of December 31, 2012, there were no material pending legal proceedings to which Southern or any of its subsidiaries were a party or to which any of their properties were subject, other than ordinary routine litigation incidental to the business of Southern and its subsidiaries.

Item 4.

Mine Safety Disclosures

Not applicable.

PART II

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Southern common stock is quoted on the OTCQB under the symbol “SOMC.” Trading activity in our common stock is relatively infrequent. Our trading volume and recent share price information can be viewed under the symbol ‘SOMC’ on certain financial websites.

The range of closing sale prices for shares of Southern common stock for each quarterly period during the past two years is as follows:


Date	High		Low

2011
1 ^st Quarter	$	13.25	$	12.00
2 ^nd Quarter		12.85		11.90
3 ^rd Quarter		12.69		11.80
4 ^th Quarter		12.55		11.05

2012
1 ^st Quarter	$	12.65	$	11.20
2 ^nd Quarter		14.50		12.50
3 ^rd Quarter		15.30		13.25
4 ^th Quarter		16.75		13.50

The prices listed above are OTCQB quotations. They reflect inter-dealer prices without retail markup, markdown or commission and may not necessarily represent actual transactions.

As of March 11, 2013, there were 2,393,943 shares of Southern common stock issued and outstanding held by 384 holders of record.

The following table summarizes cash dividends declared per share of Southern common stock during 2012 and 2011:


Quarter	2011		2012
1st Quarter	$	0.05	$	0.07
2nd Quarter		0.05		0.09
3rd Quarter		0.05		0.09
4th Quarter		0.07		0.12

Southern Michigan Bancorp’s principal source of funds to pay cash dividends is the earnings of and dividends paid by the Bank. The Bank is restricted in its ability to pay cash dividends under current laws and regulations. For additional information on restrictions on dividends, see “Supervision and Regulation,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note P to the Southern consolidated financial statements, which information is here incorporated by reference. Limitations on the ability of the Bank to pay cash dividends to Southern Michigan Bancorp could limit its ability to pay dividends in the future.

Information regarding the equity compensation plans at December 31, 2012 is included in Item 12 of this report and is here incorporated by reference.

Item 6.

Selected Financial Data

The following tables show summarized historical consolidated financial data for Southern. The tables are unaudited. The information in the tables is derived from Southern’s audited financial statements for 2008 through 2012. This information is only a summary. You should read it in conjunction with the consolidated financial statements, related notes, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and other information included in this report.


	Year Ended December 31,
Southern Michigan Bancorp, Inc.	2012		2011		2010		2009		2008
	(unaudited) (in thousands, except per share amounts)
Income Statement Data:
Net interest income	$	17,174	$	15,636	$	15,946	$	16,538	$	17,740
Provision for loan losses		1,350		1,050		1,375		2,725		5,080
Net income		4,350		3,402		3,098		1,936		813

Balance Sheet Data (period end):
Assets		528,860		509,220		493,880		462,409		474,996
Deposits		444,170		420,511		409,901		380,905		394,043
Other borrowings		1,039		7,751		10,079		10,832		12,492
Subordinated debentures		5,155		5,155		5,155		5,155		5,155
Shareholders’ equity		54,635		51,865		47,843		45,734		44,416

Common Share Summary:
Diluted earnings per share		1.84		1.46		1.34		0.84		0.36
Dividends per share		0.37		0.22		0.20		0.20		0.80
Book value per share (1)		24.27		23.12		21.42		20.59		20.09
Weighted average diluted shares outstanding		2,369,290		2,333,825		2,315,275		2,291,901		2,281,044

(1)	Calculated based on common shares outstanding at year end.

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion provides a review of the consolidated financial condition and results of operations of Southern Michigan Bancorp, Inc. (Southern) and its subsidiaries for the periods indicated. This discussion should be read in conjunction with the consolidated financial statements and related notes to the consolidated financial statements.

Overview

Southern is a Michigan corporation and a one bank holding company registered under the Bank Holding Company Act of 1956. Southern wholly owns Southern Michigan Bank & Trust (the Bank) and Southern Michigan Bancorp Capital Trust I, a Delaware statutory trust. The Bank wholly owns FNB Financial Services, Inc., a Michigan corporation.

Results of Operations

Southern’s net income for 2012 was $4,350,000 compared to $3,402,000 in 2011, an increase of $948,000, or 27.9%. Provision for loan losses of $1,350,000 was expensed in 2012, up from $1,050,000 in 2011. Non-interest income increased 10.7%, or $696,000, to $7,181,000 in 2012. Non-interest expense increased 3.1%, or $515,000, to $17,225,000 in 2012. Following is a summary of percentage changes from the prior year for various financial statement elements:


	Percent Change from Prior Year							Percent Change from Prior Year
	2012			2011				2012			2011
Net interest income		9.84	%		-1.94	%	Total assets		3.86	%		3.11	%
Provision for loan losses		28.57	%		-23.64	%	Securities available for sale		-28.58	%		52.54	%
Non-interest income		10.73	%		-6.70	%	Gross loans		11.06	%		7.52	%
Non-interest expense		3.08	%		-7.18	%	Allowance for loan losses		0.79	%		-4.95	%
Net income		27.87	%		9.81	%	Deposits		5.63	%		2.59	%
							Other borrowings		-86.60	%		-23.10	%
							Shareholders’ equity		5.34	%		8.41	%

Results of operations can be measured by various ratio analyses. Two widely recognized performance indicators are return on average equity and return on average assets. Southern’s return on average equity was 8.09% in 2012, 6.80% in 2011 and 6.56% in 2010. The return on average assets was 0.84% in 2012, 0.68% in 2011 and 0.65% in 2010.

Net Interest Income

Interest income is the total amount earned on funds invested in loans, investment securities and federal funds sold. Interest expense is the amount of interest paid on interest bearing checking and savings accounts, time deposits, short term advances, subordinated debentures and other long-term borrowings. Net interest income, on a fully taxable equivalent (FTE) basis, is the difference between interest income and interest expense adjusted for the tax benefit received on tax-exempt loan and investment securities. Net interest margin is calculated by dividing net interest income (FTE) by average interest earning assets. Net interest spread is the difference between the average yield on interest earning assets and the average cost of interest bearing liabilities. Because non-interest bearing sources of funds also support earning assets, the net interest margin exceeds the net interest spread.

The presentation of net interest income on a FTE basis is not in accordance with GAAP but is customary in the banking industry. This non-GAAP measure ensures comparability of net interest income arising from both taxable and tax-exempt loans and investment securities. The adjustments to determine tax equivalent net interest income are itemized in Table 1 below.

Net interest income is the most important source of Southern’s earnings. Changes in Southern’s net interest income are influenced by a number of factors, including changes in the level of interest earning assets, changes in the mix of interest earning assets and interest bearing liabilities, the level and direction of interest rates and the steepness of the yield curve.

For 2012, Southern’s net interest margin (FTE) was 3.78% compared to 3.60% for 2011 and 3.88% for 2010. Southern’s interest rate spread and margin both increased as cost of funds for deposits and other borrowings decreased 0.25%, from 0.98% in 2011 to 0.73% in 2012, partially offset by yields on earning assets decreasing 0.06%, from 4.44% in 2011 to 4.38% in 2012. The net effect was an increase of $1,609,000 in net interest income (FTE) compared to 2011.

In 2011, the lower interest margin was a result of reduced rates for all interest earning asset types, partially offset by reduced rates for deposits. The net effect was a decrease of $280,000 in net interest income (FTE) compared to 2010.

The following table presents a summary of net interest income (FTE) for 2012, 2011 and 2010.

Table 1. Average Balances and Tax Equivalent Interest Rates


	2012								2011								2010
(Dollars in Thousands)	Average Balance			Interest		Yield/ Rate			Average Balance			Interest		Yield/ Rate			Average Balance			Interest		Yield/ Rate
ASSETS
Interest earning assets:
Loans(1)(2)(3)	$	343,240		$	18,550		5.40	%	$	311,117		$	17,681		5.68	%	$	322,349		$	18,952		5.88	%
Taxable investment securities(4)		46,914			450		0.96			56,260			631		1.12			33,765			604		1.79
Tax-exempt investment securities(1)		31,950			1,448		4.53			27,323			1,393		5.10			21,023			1,165		5.54
Federal funds sold and other(5)		46,922			104		0.22			53,103			172		0.32			45,459			155		0.34

Total interest earning assets		469,026			20,552		4.38			447,803			19,877		4.44			422,596			20,876		4.94

Non-interest earning assets:
Cash and due from banks		3,588								11,226								11,489
Other assets(6)		49,287								49,024								49,828
Less allowance for loan losses		(5,230	)							(5,434	)							(5,757	)


Total assets	$	516,671							$	502,619							$	478,156


LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest bearing liabilities:
Demand deposits	$	193,339		$	504		0.26	%	$	173,888		$	519		0.30	%	$	148,968		$	518		0.35	%
Savings deposits		54,837			25		0.05			50,789			44		0.09			47,937			70		0.15
Time deposits		109,831			1,800		1.64			127,675			2,578		2.02			136,369			3,189		2.34
Securities sold under agreements to repurchase and overnight borrowings		17,026			38		0.22			16,171			52		0.32			16,714			50		0.30
Other borrowings		5,641			287		5.09			8,916			402		4.51			12,131			486		4.01
Subordinated debentures		5,155			163		3.16			5,155			156		3.03			5,155			157		3.05

Total interest bearing liabilities		385,829			2,817		0.73			382,594			3,751		0.98			367,274			4,470		1.22

Non-interest bearing liabilities:
Demand deposits		71,494								64,760								58,298
Other		3,897								3,866								4,197
Common stock subject to repurchase obligation		1,680								1,347								1,172
Shareholders’ equity		53,771								50,052								47,215

Total liabilities and shareholders’ equity	$	516,671							$	502,619							$	478,156

Net interest income				$	17,735							$	16,126							$	16,406

Interest rate spread							3.65	%							3.46	%							3.72	%

Net margin on interest earning assets							3.78	%							3.60	%							3.88	%

(1)	Includes tax equivalent adjustment of interest (assuming a 34% tax rate) for securities and loans of $489,000 and $72,000, respectively for 2012; $473,000 and $17,000, respectively for 2011; and $396,000 and $64,000, respectively for 2010.

(2)	Average balance includes average nonaccrual loan balances of $5,876,000 in 2012; $6,063,000 in 2011; and $7,139,000 in 2010.

(3)	Interest income includes loan fees of $288,000 in 2012; $218,000 in 2011; and $195,000 in 2010.

(4)	Average balance includes average unrealized gain of $1,372,000 in 2012; $737,000 in 2011; and $618,000 in 2010 on available for sale securities.

(5)	Includes average federal reserve deposit account balances of $38,627,000 in 2012; $50,658,000 in 2011, and $41,006,000 in 2010.

(6)	Includes $14,935,000 in 2012; $15,267,000 in 2011, and $15,612,000 in 2010 relating to goodwill and other intangible assets.

The next table sets forth for the periods indicated a summary of changes in interest income and interest expense, based upon a tax equivalent basis, resulting from changes in volume and changes in rates:

Volume Variance – change in volume multiplied by the previous year’s rate.

Rate Variance – change in rate multiplied by the previous year’s volume.

Rate/Volume Variance – change in volume multiplied by the change in rate. This variance was allocated to volume variance and rate variance in proportion to the relationship of the absolute dollar amount of the change in each.

Table 2. Changes in Tax Equivalent Net Interest Income


(Dollars in Thousands)
	2012 Compared to 2011 Increase (Decrease) Due To									2011 Compared to 2010 Increase (Decrease) Due To
	Rate			Volume			Net			Rate			Volume			Net

Interest income on:

Loans	$	(896	)	$	1,765		$	869		$	(622	)	$	(649	)	$	(1,271	)
Taxable investment securities		(84	)		(97	)		(181	)		(279	)		306			27
Tax-exempt investment securities		(165	)		220			55			(99	)		327			228
Federal funds sold and other		(50	)		(18	)		(68	)		(8	)		25			17


Total interest earning assets	$	(1,195	)	$	1,870		$	675		$	(1,008	)	$	9		$	(999	)


Interest expense on:

Demand deposits	$	(70	)	$	55		$	(15	)	$	(79	)	$	80		$	1
Savings deposits		(22	)		3			(19	)		(30	)		4			(26	)
Time deposits		(447	)		(331	)		(778	)		(417	)		(194	)		(611	)
Securities sold under agreements to repurchase and overnight borrowings		(17	)		3			(14	)		4			(2	)		2
Other borrowings		47			(162	)		(115	)		56			(140	)		(84	)
Subordinated debentures		7			—			7			(1	)		—			(1	)


Total interest bearing liabilities	$	(502	)	$	(432	)	$	(934	)	$	(467	)	$	(252	)	$	(719	)


Net interest income	$	(693	)	$	2,302		$	1,609		$	(541	)	$	261		$	(280	)

Provision for Loan Losses

The provision for loan losses is based on an analysis of the required additions to the allowance for loan losses. The provision is charged to income to bring the allowance for loan losses to a level believed adequate by management to absorb probable incurred losses in the loan portfolio. Some factors considered by management in determining the level at which the allowance is maintained include specific credit reviews, historical loan loss experience, current economic conditions and trends, results of examinations by regulatory agencies and the volume, growth and composition of the loan portfolio. The provision is adjusted quarterly to reflect changes in the factors above, as well as actual charge-off experience and any known losses. For further information, see “Allowance for Loan Losses” below.

The provision for loan losses was $1,350,000 in 2012, compared to $1,050,000 in 2011, and $1,375,000 in 2010. The higher provision in 2012 as compared to 2011 was a result of increased loan balances. The lower provisions in 2011 as compared to 2010 and 2010 as compared to 2009 resulted primarily from a continued trend of lower net loan charge-offs. In 2012, net loan charge-offs totaled $1,307,000 compared to $1,332,000 in 2011 and $1,756,000 in 2010.

Non-Interest Income

Non-interest income of $7,181,000 increased $696,000, or 10.7%, in 2012 compared to 2011. Non-interest income of $6,485,000 decreased $466,000, or 6.7%, in 2011 compared to 2010. The 2012 increase was primarily a result of an increase in net gains on loan sales which increased $873,000, or 70.7%, in 2012 compared to 2011 partially offset by a decline in service charges on deposit accounts of $337,000, or 16.6%, in 2012 compared to 2011. The 2011 decrease was primarily a result of a decline in service charges on deposit accounts which decreased $380,000, or 15.8%, in 2011 compared to 2010. The Company made changes to its overdraft protection program in July of 2010 and in June of 2011 to comply with regulatory guidance that became effective in August of 2010 and July of 2011, respectively. These changes resulted in a lower volume on non-sufficient funds items which reduced income. Southern also recorded $156,000 gain from life insurance proceeds in 2010 which did not recur in 2011 or 2012.

Trust fees of $1,126,000 in 2012 increased $6,000, or 0.5%, compared to 2011 and increased $123,000, or 12.3%, in 2011 compared to 2010. Changes to the trust department fee structure and new account relationships were the primary causes for the increase in 2011.

Net securities gains of $3,000, $29,000 and $207,000 were recognized in 2012, 2011 and 2010, respectively. The 2012 and 2011 gains resulted from securities calls.

In order to reduce the risk associated with changing interest rates, Southern regularly sells fixed rate real estate mortgage loans in the secondary market. Southern recognizes a gain at the time of the sale to the extent proceeds exceed the basis of the loan, excluding any value assigned to capitalized servicing rights. Southern originated real estate mortgage loans of $73,963,000 in 2012 compared to $41,562,000 in 2011 and $57,470,000 in 2010. Net gains on loan sales increased $873,000 in 2012 compared to 2011. Net gains on loan sales decreased $66,000 in 2011 compared to 2010.

Income and fees from automated teller machines (ATMs) and debit cards increased $132,000, or 13.0%, in 2012 compared to 2011 and $118,000, or 13.2%, in 2011 compared to 2010. Increases were primarily due to increased volumes of approved transactions.

Non-Interest Expense

Non-interest expense increased $515,000, or 3.1%, in 2012 compared to 2011 and decreased $993,000, or 5.6%, in 2011 compared to 2010.

Salaries and employee benefits expense increased $90,000, or 0.9%, in 2012 compared to 2011 and decreased $153,000, or 1.6%, in 2011 compared to 2010. At December 31, 2012, Southern had 173 full-time equivalent positions, compared to 171 and 196 at December 31, 2011 and 2010, respectively. The reduction in salaries and benefits expense in 2011, as well as full-time equivalent positions, was a result of the closure of two branches in 2011 and one branch in December 2010, as well as a concentrated effort to right-size staffing levels bank wide.

Occupancy expense decreased $198,000, or 16.6%, in 2012 compared to 2011 and decreased $159,000, or 11.8%, in 2011 compared to 2010. The decreases in 2012 and 2011 occupancy costs were primarily attributable to the aforementioned branch closures.

Equipment expense increased $64,000, or 8.5%, in 2012 compared to 2011 and decreased $139,000, or 15.5%, in 2011 compared to 2010. Depreciation expense increased $54,000 in 2012 compared to 2011, due to upgrades to the telephone system and security equipment. Depreciation expense decreased $126,000 in 2011 compared to 2010, as certain assets became fully depreciated.

Printing, postage and supplies expense decreased $44,000, or 8.9%, in 2012 compared to 2011 and decreased $96,000, or 16.2%, in 2011 compared to 2010. The decrease in 2012 was primarily a result of a number of customers opting to receive statements and notices via electronic delivery which incur no postage or printing costs. The 2011 reduction was primarily a result of outsourcing the statement rendering and mailing processes to a third party vendor during 2011.

Telecommunication expenses decreased $103,000, or 27.4%, in 2012 compared to 2011. The decrease resulted from a telephone audit completed in 2011 which identified excess telephone lines and reduced circuit costs.

Professional and outside services increased $276,000, or 30.4%, in 2012 compared to 2011 and decreased $32,000, or 3.4%, in 2011 compared to 2010. The 2012 increase was attributable to increased legal fees related to loan collections, as well as increased IT consulting fees as we researched outsourcing core system processing.

FDIC deposit assessments decreased $87,000, or 18.2%, in 2012 compared to 2011 and decreased $163,000, or 25.5%, in 2011 compared to 2010. The reductions in 2012 and 2011 were due to a formula change used to calculate the FDIC assessments. The new formula was effective April 1, 2011.

Other real estate owned (OREO) expense increased $86,000, or 58.5%, in 2012 compared to 2011 and decreased $48,000, or 24.6%, in 2011 compared to 2010. The increase in 2012 was primarily attributable to a number of larger property tax bills paid on OREO properties.

Loss on sale or write down of OREO increased $14,000, or 11.9%, in 2012 compared to 2011 and decreased $97,000, or 45.1%, in 2011 compared to 2012. There were fewer properties held and sold throughout 2011 than in 2010.

Income Taxes

Income tax provision was $1,430,000 in 2012, $959,000 in 2011 and $721,000 in 2010. Tax-exempt income continues to have a major impact on Southern’s tax expense. The benefit offsetting lower coupon rates on municipal instruments is the nontaxable feature of the income earned on such instruments. This resulted in a lower effective tax rate and reduced federal income tax expense by $358,000 in 2012, $311,000 in 2011 and $289,000 in 2010. Additional income tax information is reported in Note K to the consolidated financial statements.

Financial Condition

Total assets at December 31, 2012 totaled $528,860,000, an increase of $19,640,000, or 3.9%, from total assets of $509,220,000 at December 31, 2011. Cash and cash equivalents increased $8,149,000 and available for sale securities decreased $25,819,000 at December 31, 2012 compared to December 31, 2011. Gross loans increased $36,801,000 and deposits increased $23,659,000 at December 31, 2012 compared to December 31, 2011.

Cash and Cash Equivalents

Cash and cash equivalents at December 31, 2012 increased $8,149,000, or 19.3%, compared to balances at December 31, 2011. At December 31, 2012, Southern had balances of $36,347,000 with the Federal Reserve, compared to $29,625,000 at December 31, 2011. At December 31, 2012 and 2011, interest rate paid by the Federal Reserve exceeded the overnight federal funds rate paid by Southern’s primary correspondent bank. Cash and cash equivalents increased during 2012 primarily as a result of an increase in deposits near the end of the year.

Securities Available for Sale

The securities available for sale portfolio decreased $25,819,000, or 28.6%, from December 31, 2011 to December 31, 2012. The portfolio is monitored and securities or federal funds are purchased as deemed prudent by the Asset Liability Management Committee (ALCO). Maturities and calls were used primarily to fund loan growth during 2012.

The securities available for sale portfolio had net unrealized gains of $1,214,000 at December 31, 2012 and $1,368,000 at December 31, 2011. Management has concluded that unrealized gains and losses within the investment portfolio are temporary because management believes they are a result of market changes, rather than a reflection of credit quality.

At December 31, 2012, Southern had no investment in securities of issuers outside of the United States.

Loans

Substantially all loans are granted to customers located in Southern’s service area, which is primarily southwest Michigan. Gross loans increased $36,801,000, or 11.1%, in 2012. Gross loans increased $23,280,000, or 7.5%, in 2011. The increases in 2012 and 2011 were a result of increased loan demand, beginning primarily in the fourth quarter of 2011.

Loan commitments, consisting of unused credit card and home equity lines, available amounts on revolving lines of credit and other approved loans which have not been funded, were $79,347,000 and $77,147,000 at December 31, 2012 and 2011, respectively. A high percentage of these commitments are priced at a variable interest rate, thus minimizing Southern’s risk in a changing interest rate environment.

Nonperforming Assets

Nonperforming assets include nonaccrual loans, loans modified under troubled debt restructurings, accruing loans past due 90 days or more, and other real estate owned, which includes real estate acquired through foreclosures and deeds in lieu of foreclosure.

A loan generally is classified as nonaccrual when full collectability of principal or interest is doubtful or a loan becomes 90 days past due as to principal or interest, unless management determines that the estimated net realizable value of the collateral is sufficient to cover the principal balance and accrued interest. When interest accruals are discontinued, unpaid interest is reversed. Nonperforming loans are returned to performing status when the loan is brought current and has performed in accordance with contract terms for a period of time.

In the course of working with borrowers, Southern may choose to restructure the contractual terms of certain loans. In certain circumstances, Southern attempts to work-out an alternative payment schedule with the borrower in order to optimize collectability of the loan. Any loans that are modified are reviewed by Southern to identify if a troubled debt restructuring (“TDR”) has occurred, which is when, for economic or legal reasons related to a borrower’s financial difficulties, Southern grants a concession to the borrower that it would not otherwise consider. Terms may be modified to fit the ability of the borrower to repay in line with its current financial status and the restructuring of the loan may include the transfer of assets from the borrower to satisfy the debt, a modification of loan terms, or a combination of the two.

The following table sets forth the aggregate amount of nonperforming assets in each of the following categories:


	December 31
	2012			2011			2010
	(Dollars in thousands)
Nonaccrual loans:
Commercial and commercial real estate	$	2,950		$	3,626		$	3,755
Real estate mortgage		2,417			2,048			1,451
Consumer		16			29			87

		5,383			5,703			5,293

Loans contractually past due 90 days or more and still on accrual:
Commercial and commercial real estate		26			6			1
Real estate mortgage		—			—			—
Consumer		7			—			—

		33			6			1

Accruing loans modified under troubled debt restructurings:
Commercial and commercial real estate		2,341			1,933			1,745
Real estate mortgage		1,232			1,607			1,552
Consumer		—			—			—

		3,573			3,540			3,297


Total nonperforming loans		8,989			9,249			8,591
Other real estate owned		1,633			1,530			1,247


Total nonperforming assets	$	10,622		$	10,779		$	9,838

Nonperforming loans to year-end loans		2.43	%		2.78	%		2.78	%

Nonperforming assets to total assets		2.01	%		2.12	%		1.99	%

The balance of nonaccrual restructured loans, which is included in nonaccrual loans, was $738,000 at December 31, 2012, $694,000 at December 31, 2011 and $1,375,000 at December 31, 2010.

Nonperforming loans are subject to continuous monitoring by management and estimated losses are specifically allocated for in the allowance for loan losses where appropriate. Nonperforming loans decreased from December 31, 2011 to December 31, 2012 as a result of a decrease in nonaccrual loans. Nonperforming loans increased from December 31, 2010 to December 31, 2011 as a result of an increase in both nonaccrual loans and troubled debt restructurings. At December 31, 2012, 2011 and 2010, Southern had loans of $8,989,000, $9,881,000 and $10,766,000, respectively, which were considered impaired.

Other real estate owned of $1,633,000 at December 31, 2012, increased $103,000 from December 31, 2011. However, one commercial property was added in 2012 which accounted for 28.7% of the December 31, 2012 balance. During 2012 and 2011, loans of $2,069,000 and $892,000, respectively, were transferred to foreclosed assets. Elevated balances in other real estate continued to reflect the elevated foreclosure activity due to the poor economic conditions in Michigan.

In management’s evaluation of the loan portfolio risks, any significant future increases in nonperforming loans is dependent to a large extent on the economic environment. In a deteriorating or uncertain economy, management applies more conservative assumptions when assessing the future prospects of borrowers and when estimating collateral values. This may result in a higher number of loans being classified as nonperforming.

Allowance for Loan Losses

The allowance for loan losses is based on quarterly assessments of the probable estimated incurred losses inherent in the loan portfolio. The allowance is maintained at a level, which in management’s judgment, is believed adequate to absorb probable incurred loan losses in the loan portfolio. While management uses the information available to make these estimates, future adjustments to the allowance may be necessary due to economic, operating or regulatory conditions beyond Southern’s control.

The allowance is based on two principles of accounting: Accounting Standards Codification (ASC) 450-10, Accounting for Contingencies and ASC 310-10, Accounting by Creditors for Impairment of a Loan . The methodology used relies on several key features, including historical loss experience, specific allowances for identified problem loans and a number of other factors recommended in regulatory guidance.

The historical loss component of the allowance is based on considering historical loss experience for each loan category. The component may be adjusted for significant factors that, in management’s judgment, will affect the collectability of the portfolio. The resulting loss estimate could materially differ from the losses actually incurred in the future.

Specific allowances are established in cases where management has identified significant conditions or circumstances related to a specific loan credit. As of December 31, 2012, specific reserves totaled $758,000 compared to $984,000 at December 31, 2011, a decrease of 23.0%.

The final components of the allowance are based on management’s evaluation of conditions that are not directly measured in the historical loss component or specific allowances. The evaluation of the inherent incurred loss with respect to these conditions is subject to a higher degree of uncertainty. The conditions evaluated in connection with these components of the allowance include current economic conditions, delinquency and charge off trends, loan volume, portfolio mix, concentrations of credit and lending policies, procedures and lending personnel.

The allowance for loan losses was $5,455,000, or 1.48% of loans, at December 31, 2012 compared to $5,412,000, or 1.63% of loans, at December 31, 2011.

The allowance for loan losses at December 31, 2012 consisted of $2,808,000 from the historical loss experience component and specifically allocated reserves, leaving $2,647,000 from the other factors. This compares to $3,129,000 from the historical loss experience component and specifically allocated reserves and $2,283,000 from the other factors at December 31, 2011.

At December 31, 2012, management was not aware of any problem loan that would have a material effect on loan delinquency or loan charge-offs. Loans are subject to continual review and are given management’s attention whenever a problem situation appears to be developing.

Deposits

Deposits have traditionally represented Southern’s principal source of funds. Total deposits increased 5.6%, or $23,659,000, in 2012 compared to 2011 and 2.6%, or $10,610,000, in 2011 compared to 2010. In 2012 and 2011, deposits increased in all categories, except time deposits. The majority of deposits are derived from core client sources, relating to long term relationships with local individual, business and public clients. A small amount of brokered deposits, $2,091,000 at December 31, 2012, are maintained, but are not used to support growth. Attracting and keeping traditional deposit relationships will continue to be a focus of Southern.

Southern closed two branches during early 2011. One of the branches is supported by other branch facilities in near proximity. The other branch, Cassopolis, was located outside of Southern’s primary market area. Deposit reductions from this location since December 31, 2010 totaled $6,596,000. In addition, Southern made the strategic decision based on current liquidity levels to reduce certificate of deposit rates and specials. As a result, certificate of deposit balances from non-core customers declined slightly in 2012.

Subordinated Debentures

In March 2004, Southern Michigan Bancorp Capital Trust I, a trust formed by Southern, closed a pooled private offering of 5,000 trust preferred securities with a liquidation amount of $1,000 per security. Southern issued $5,155,000 of subordinated debentures to the trust in exchange for ownership of all of the common securities of the trust and the proceeds of the preferred securities sold by the trust. Southern is not considered the primary beneficiary of this trust, therefore the trust is not consolidated in Southern’s financial statements, but rather the subordinated debentures are shown as a liability. Southern may redeem the subordinated debentures subject to the receipt by Southern of the proper approval of the Federal Reserve, if such approval is required under applicable capital guidelines or policies of the Federal Reserve. The subordinated debentures may be redeemed on January 7, April 7, July 7 and October 7 of each year either in whole or in integrals of $1,000 at 100% of the principal amount, plus accrued and unpaid interest. The subordinated debentures mature on April 6, 2034. The subordinated debentures are also redeemable in whole but not in part, from time to time upon the occurrence of specific events defined within the trust indenture. Southern has the option to defer interest payments on the subordinated debentures from time to time for a period not to exceed 20 consecutive quarterly periods. Southern’s investment in the common stock of the trust is $155,000 and is included in other assets.

Capital Resources

Southern obtains funds for operating expenses and dividends to shareholders through dividends from the Bank. In general, the Bank pays only those amounts required to meet the liquidity requirements of Southern, while maintaining appropriate capital levels at the Bank. Capital is maintained at the Bank to support its current operations and projected future growth. See additional discussion under the section titled “Liquidity” below.

Shareholders’ equity increased $2,770,000, or 5.3%, from December 31, 2011 to December 31, 2012. It increased $4,022,000, or 8.4%, from December 31, 2010 to December 31, 2011. The increases for both 2012 and 2011 were primarily attributable to net income offset by dividends to shareholders. The 2012 increase was also offset by a $274,000 decrease of accumulated other comprehensive income, related to a decrease in unrealized gains on available for sale securities and an increase in accrued pension liability, net of related income taxes.

deposits, and other restrictions on its business. In addition, such a bank would generally not receive regulatory approval of any application that requires the consideration of capital adequacy, such as a branch or merger application, unless the bank could demonstrate a reasonable plan to meet the capital requirement within a reasonable period of time.

Regulatory agencies have determined that the capital component created by the adoption of the requirements of ASC 320-10 should not be included in Tier 1 capital. As such, net unrealized gain or loss on available for sale securities is not included in the capital ratios listed in Note U to the consolidated financial statements, nor common stock subject to repurchase obligation in Southern’s employee stock ownership plan.

Liquidity

Liquidity management involves the ability to meet the cash flow requirements of customers who may be either depositors wanting to withdraw funds or borrowers needing assurance that sufficient funds will be available to meet their credit needs. Southern maintains certain levels of liquid assets (the most liquid of which are cash and cash equivalents, federal funds sold and investment securities) in order to meet these demands. Maturing loans and investment securities are the principal sources of asset liquidity. Liquidity is monitored and closely managed by the ALCO, whose members are comprised of senior management.

Southern maintains correspondent accounts with regional and national banks for various purposes. Historically, cash sufficient to meet the operating needs of its branches is maintained at its lowest practical levels; however, the Company continues to maintain high levels of liquidity, with investment securities, federal funds and cash and cash equivalents held to improve the liquidity of the balance sheet during this period of economic uncertainty. The Company expects to maintain higher than normal levels of liquidity until economic conditions improve and more attractive investment opportunities emerge.

From time to time, Southern is a participant in the federal funds market. Federal funds are generally borrowed or sold for one-day periods. The average balance of federal funds sold was $254,000 in 2012 and $269,000 in 2011. During 2012 and 2011, Southern averaged $38,627,000 and $50,658,000, respectively, on deposit at the Federal Reserve .

In the past, Southern has used overnight federal funds lines of credit with correspondent banks as a short term source of liquidity. As of December 31, 2012, Southern had available a $3 million line of credit with a correspondent bank. As a result of the decrease in federal funds lines of credit availability, collateral has been pledged at the Federal Reserve Bank “Discount Window.” At December 31, 2012, $3 million of securities were pledged that could be used for future borrowings. In addition, Southern has $5.1 million of securities which are available to be pledged for future borrowings. Southern also has the ability to borrow $32.9 million from the Federal Home Loan Bank based on FHLB stock owned and collateral pledged.

Southern’s principal source of funds to pay cash dividends is the earnings and dividends paid by the Bank, which are restricted under current banking laws and regulations. Capital guidelines adopted by federal and state regulatory agencies and restrictions imposed by law limit the amount of cash dividends the Bank can pay to Southern. At December 31, 2012, using the most restrictive of these conditions, the aggregate cash dividends the Bank could pay Southern without prior regulatory approval was $9 million.

Impact of Inflation and Changing Prices

The majority of assets and liabilities of a financial institution are monetary in nature and differ greatly from most commercial and industrial companies that have significant investments in fixed assets or inventories. However, inflation does have an important impact on the growth of total assets in the banking industry and the resulting need to increase equity capital at higher than normal rates in order to maintain an appropriate equity-to-assets ratio. Another significant effect of inflation is on other expenses, which tend to rise during periods of general inflation.

Commitments and Off-Balance Sheet Risk

Southern maintains off balance sheet financial instruments in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, letters of credit and standby letters of credit. Loan commitments to extend credit are agreements to lend to a customer at any time, as the customer’s needs vary, as long as there is no violation of any condition established in the contract. Letters of credit are used to facilitate customers’ trade transactions. Under standby letters of credit agreements, Southern agrees to honor certain commitments in the event that its customers are unable to do so. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Because many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. At December 31, 2012, Southern had commitments of $79,347,000 for lines of credit, $1,767,000 in standby letters of credit and no commitments under commercial letters of credit outstanding.

These arrangements have credit risk essentially the same as that involved in extending loans to customers and are subject to Southern’s normal credit policies. Collateral generally consists of receivables, inventory and equipment and is obtained based on management’s credit assessment of the customer. These financial instruments are recorded when they are funded.

Interest Rate Sensitivity

Net interest income is the largest component of Southern’s earnings. Net interest income is the difference between the yield on interest earning assets and the cost of interest bearing liabilities. Management of interest rate sensitivity seeks to avoid fluctuating net interest margins and enhance consistent growth of net interest income through periods of changing interest rates.

Interest rate risk arises when the maturity or repricing characteristics of assets differ significantly from the maturity or repricing characteristics of liabilities. Accepting this risk can be an important source of profitability and shareholder value. However, excessive levels of interest rate risk could pose a significant threat to Southern’s earnings and capital base. Accordingly, effective risk management that maintains interest rate risk at prudent levels is essential to Southern’s safety and soundness.

A number of tools are used to monitor and manage interest rate risk, including income simulation and market value of equity analyses. The income simulation model is used to estimate the effect that specific interest rate changes would have on net interest income assuming 1-4% up and down ramped and shock changes to interest rates on both a static and dynamic balance sheet over a 24 month period. A 100 bp declining scenario was modeled at December 31, 2012 even though the Federal Reserve target rate remained at 0% - 0.25%. Rate declines were floored in the model so that no rate fell below zero percent. Assumptions in the simulation are based on management’s estimates, and are inherently uncertain. As a result, the models cannot predict precisely the impact of higher or lower interest rates on net interest income. The income simulation results are shown in the table below:


Ramp Change/Dynamic		% Change			Ramp Change/Static		% Change
	+400		22.01	%		+400		19.59	%
	+300		16.02	%		+300		14.19	%
	+200		9.77	%		+200		8.53	%
	+100		4.06	%		+100		3.41	%

	-100		-0.59	%		-100		-0.45	%
	-200		NA			-200		NA
	-300		NA			-300		NA
	-400		NA			-400		NA


Shock Change/Dynamic		% Change			Shock Change/Static		% Change
	+400		29.43	%		+400		27.99	%
	+300		21.59	%		+300		20.51	%
	+200		13.10	%		+200		12.34	%
	+100		4.97	%		+100		4.55	%

	-100		-0.50	%		-100		-0.35	%
	-200		NA			-200		NA
	-300		NA			-300		NA
	-400		NA			-400		NA

The market value of equity analysis estimates the change in the market value of equity using interest rate change scenarios from +4% to –4% in 1% increments. As with the income simulation analysis, a declining 100 bp was modeled at December 31, 2012. The following table illustrates the percent change in equity based on changes in market interest rates:


	change in market value of equity
4% increase in market rates		40.37	%
3% increase in market rates		31.61	%
2% increase in market rates		22.02	%
1% increase in market rates		11.51	%

No change		0.00	%

1% decrease in market rates		-11.71	%
2% decrease in market rates		NA	%
3% decrease in market rates		NA	%
4% decrease in market rates		NA	%

The results of the simulations at December 31, 2012 are outside of the guidelines set and approved by Southern’s Board of Directors, due to longer duration of non-maturity assets resulting from implementing decay rates based on Southern’s deposit portfolio, as well as an increase in non-maturity deposits. Management continues to monitor this and report the results to the Board of Directors on a quarterly basis.

Critical Accounting Policies

The discussion and analysis of the financial condition and results of operations are based upon Southern’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires Southern to make estimates and judgments that affect the reported amount of assets and liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of our financial statements. Actual results may differ from these estimates under different assumptions or conditions.

Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and potentially could result in materially different results under different assumptions and conditions.

Allowance for Loan Losses

The allowance for loan losses is maintained at a level management believes is adequate to absorb probable incurred credit losses inherent in Southern’s loan portfolio. Accounting for loan classifications, accrual status and determination of the allowance for loan losses is based on regulatory guidance. This guidance includes, but is not limited to, generally accepted accounting principles, the uniform retail credit classification and account management policy issued by the Federal Financial Institutions Examination Council, and the joint policy statement on the allowance for loan losses methodologies also issued by the Federal Financial Institutions Examination Council. Using this guidance, management estimates the allowance balance based on past loan loss experience, nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, information in regulatory examination reports, and other factors. Many of the factors listed are inherently subjective, and require the use of significant management estimates.

Fair Value Measurements

Southern uses fair value measurements to record certain financial instruments and to determine fair value disclosures. Available for sale securities are financial instruments recorded at fair value on a recurring basis. Additionally, Southern may be required to record at fair value other financial assets on a nonrecurring basis. These nonrecurring fair value adjustments typically involve write-downs of, or specific reserves against, individual assets. ASC 820-10-55, establishes a three level hierarchy for disclosure of assets and liabilities recorded at fair value. The classification of assets and liabilities within the hierarchy is based on whether the inputs to the valuation methodology used in the measurement are observable or unobservable. Observable inputs reflect market driven or market based information obtained from independent sources, while unobservable inputs reflect management estimates about market data.

The degree of management judgment involved in determining the fair value of a financial instrument is dependent upon the availability of quoted market prices or observable market data. For financial instruments that trade actively and have quoted market prices or observable market data, there is minimal subjectivity involved in measuring fair value. When observable market prices and data are not fully available, management’s judgment is necessary to estimate fair value. In addition, changes in the market conditions may reduce the availability of quoted prices or observable data. When market data is not available, management uses valuation techniques that require more judgment to estimate the appropriate fair value measurement. Fair value is discussed further in Note A under the heading “Fair Values of Financial Instruments” and in Note T, “Fair Value Measurements”, of the notes to the consolidated financial statements.

Mortgage Servicing Rights

Mortgage servicing rights represent the allocated value of servicing loans that are sold with servicing retained by Southern. Servicing rights are expensed in proportion to, and over the period of, estimated net servicing revenues. Management’s accounting treatment of loan servicing rights is estimated utilizing a discounted cash flow model to determine the value of its servicing rights. The valuation model utilizes mortgage prepayment speeds, the remaining life of the mortgage pool, delinquency rates, our cost to service loans, and other factors to determine the cash flow that we will receive from serving each grouping of loans. These cash flows are then discounted based on current interest rate assumptions to arrive at the fair value for the right to service those loans.

Acquisition Intangibles

Generally accepted accounting principles require a determination of the fair value of all of the assets and liabilities of an acquired entity, and recording of their fair value on the date of acquisition. A variety of means are employed in determination of fair value, including the use of discounted cash flow analysis, market comparisons, and projected future revenue streams. Once valuations have been adjusted, the net difference between the price paid for the acquired company and the value of its balance sheet is recorded as goodwill. Goodwill is subject to an impairment analysis, performed at least annually. Southern has elected to perform its annual goodwill impairment test as of November 30 each year. Such test was performed by an independent third-party.

MANAGEMENT ’ S RESPONSIBILITY FOR FINANCIAL REPORTING

Management of Southern Michigan Bancorp, Inc. has prepared and is responsible for the accompanying consolidated financial statements and for their integrity and objectivity. In the opinion of management, the financial statements, which necessarily include amounts based on management’s estimates and judgments, have been prepared in conformity with accounting principles generally accepted in the United States of America, on a consistent basis. Management also prepared the other information in the Annual Report and is responsible for its accuracy and consistency with the financial statements.

The 2012 consolidated financial statements have been audited by the independent accounting firm of CliftonLarsonAllen LLP, which was given unrestricted access to all financial records and related data, including minutes of all meetings of shareholders, the board of directors and committees of the board. Management believes that all representations made to the independent auditors during their audit were valid and appropriate. CliftonLarsonAllen LLP’s auditor’s report is presented on the following page.

MANAGEMENT ’ S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management of Southern is responsible for establishing and maintaining adequate internal control over financial reporting, as defined under Rule 15-d-15(f) of the Exchange Act. Southern’s internal control system is designed to provide reasonable assurance to Southern’s management and Board of Directors regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles, and includes those policies and procedures that (1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of Southern; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of Southern are being made only in accordance with authorizations of management and directors of Southern; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of Southern’s assets that could have a material effect on the financial statements.

All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Further, because of changes in conditions, the effectiveness of internal control may change over time.

Southern’s management, with the participation of the Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of internal control over financial reporting as of December 31, 2012. In making this assessment, management used the criteria for effective internal control over financial reporting set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in “Internal Control-Integrated Framework”. Based on this assessment, management believes that, as of December 31, 2012, Southern’s internal control over financial reporting was effective based on those criteria.

There were no changes in Southern’s internal control over financial reporting that occurred during the year ended December 31, 2012 that have materially affected, or that are reasonably likely to materially affect, Southern’s internal control over financial reporting.


/s/ John H. Castle				/s/ Danice L. Chartrand

John H. Castle				Danice L. Chartrand
Chairman and Chief Executive Officer				Chief Financial Officer

February 8, 2013

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

Item 8.

Financial Statements and Supplementary Data

S OUTHERN M ICHIGAN B ANCORP , I NC .

R EPORT OF I NDEPENDENT R EGISTERED P UBLIC A CCOUNTING F IRM

LOGO

Shareholders and Board of Directors

Southern Michigan Bancorp, Inc.

Coldwater, Michigan

We have audited the accompanying consolidated balance sheets of Southern Michigan Bancorp, Inc. and its subsidiaries as of December 31, 2012 and 2011, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2012. These consolidated financial statements are the responsibility of the Corporation’s management. Our responsibility is to express an opinion on these consolidated 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 Southern Michigan Bancorp, Inc. and its subsidiaries as of December 31, 2012 and 2011, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2012 in conformity with accounting principles generally accepted in the United States of America.

LOGO

Toledo, Ohio

March 28, 2013

S OUTHERN M ICHIGAN B ANCORP , I NC .

C ONSOLIDATED B ALANCE S HEETS

(In thousands, except share data)


	December 31,
	2012			2011
ASSETS
Cash	$	3,545		$	3,531
Due from banks		46,789			38,654

Cash and cash equivalents		50,334			42,185
Federal funds sold		276			287
Securities available for sale		64,525			90,344
Loans held for sale		1,776			1,088
Loans, net of allowance for loan losses of $5,455 - 2012 ($5,412 - 2011)		364,150			327,392
Premises and equipment, net		12,419			12,546
Accrued interest receivable		2,059			2,148
Cash surrender value of life insurance		10,644			10,312
Goodwill		13,422			13,422
Other intangible assets, net		1,341			1,666
Other assets		7,914			7,830

Total Assets	$	528,860		$	509,220


LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities
Deposits
Non-interest bearing	$	87,013		$	61,930
Interest bearing		357,157			358,581

Total deposits		444,170			420,511
Securities sold under agreements to repurchase and overnight borrowings		16,134			18,074
Accrued expenses and other liabilities		5,662			4,568
Other borrowings		1,039			7,751
Subordinated debentures		5,155			5,155
Common stock subject to repurchase obligation in Employee Stock Ownership Plan, 125,125 shares outstanding in 2012 (115,170 shares in 2011)		2,065			1,296

Total Liabilities		474,225			457,355


Shareholders’ equity
Preferred stock, 100,000 shares authorized; none issued or outstanding		—			—
Common stock, $2.50 par value:
Authorized – 4,000,000 shares
Issued – 2,375,975 shares in 2012 (2,358,599 shares in 2011)
Outstanding (other than ESOP shares) – 2,250,850 shares in 2012 (2,243,429 shares in 2011)		5,627			5,609
Additional paid-in capital		17,700			18,278
Retained earnings		31,046			27,576
Accumulated other comprehensive income, net		297			571
Unearned Employee Stock Ownership Plan shares		(35	)		(169	)

Total Shareholders’ Equity		54,635			51,865

Total Liabilities and Shareholders’ Equity	$	528,860		$	509,220

The accompanying notes are an integral part of the consolidated financial statements.

S OUTHERN M ICHIGAN B ANCORP , I NC .

C ONSOLIDATED S TATEMENTS OF I NCOME

(In thousands, except per share data)


	Year ended December 31,
	2012		2011		2010
Interest income:
Loans, including fees	$	18,478	$	17,664	$	18,888
Securities:
Taxable		450		631		604
Tax-exempt		959		920		769
Other		104		172		155

Total interest income		19,991		19,387		20,416
Interest expense:
Deposits		2,329		3,141		3,777
Other		488		610		693

Total interest expense		2,817		3,751		4,470

Net Interest Income		17,174		15,636		15,946
Provision for loan losses		1,350		1,050		1,375

Net Interest Income after Provision for Loan Losses		15,824		14,586		14,571


Non-interest income:
Service charges on deposit accounts		1,695		2,032		2,412
Trust fees		1,126		1,120		997
Net securities gains		3		29		207
Net gains on loan sales		2,108		1,235		1,301
Earnings on life insurance assets		332		347		349
ATM and debit card fee income		1,147		1,015		897
Gain on life insurance proceeds		—		—		156
Other		770		707		632

Total non-interest income		7,181		6,485		6,951


Non-interest expense:
Salaries and employee benefits		9,713		9,623		9,776
Occupancy, net		996		1,194		1,353
Equipment		821		757		896
Printing, postage and supplies		452		496		592
Telecommunication		273		376		386
Professional and outside services		1,185		909		941
Software maintenance		555		435		410
Amortization of other intangibles		325		339		350
ATM expenses		422		371		333
Advertising and marketing		316		224		270
FDIC deposit assessments		390		477		640
Other real estate owned expenses		233		147		195
Loss on sale or write down of other real estate owned		132		118		215
Other		1,412		1,244		1,346

Total non-interest expense		17,225		16,710		17,703

Income before income taxes		5,780		4,361		3,819
Income tax provision		1,430		959		721

Net Income	$	4,350	$	3,402	$	3,098

Basic Earnings Per Common Share	$	1.84	$	1.46	$	1.34

Diluted Earnings Per Common Share	$	1.84	$	1.46	$	1.34

The accompanying notes are an integral part of the consolidated financial statements.

S OUTHERN M ICHIGAN B ANCORP , I NC .

C ONSOLIDATED S TATEMENTS OF C OMPREHENSIVE I NCOME

(In thousands, except per share data)


	Year Ended December 31,
	2012			2011			2010

Net Income	$	4,350		$	3,402		$	3,098


Other Comprehensive Income (Loss):
Unrealized gain (loss) on available for sale securities		(151	)		1,256			(287	)
Accrued pension liability		(261	)		(106	)		(53	)
Reclassification adjustments for net realized gains included in net income		(3	)		(29	)		(207	)

		(415	)		1,121			(547	)
Income tax effect		(141	)		382			(186	)


Other comprehensive income (loss)		(274	)		739			(361	)


Total Comprehensive Income	$	4,076		$	4,141		$	2,737

The accompanying notes are an integral part of the consolidated financial statements.

S OUTHERN M ICHIGAN B ANCORP , I NC .

C ONSOLIDATED S TATEMENTS OF C HANGES IN S HAREHOLDERS ’ E QUITY

(In thousands, except number of shares and per share data)

Years ended December 31, 2012, 2011 and 2010


	Common Stock			Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss), Net			Unearned ESOP Shares			Total
Balance at January 1, 2010	$	5,553		$	18,363		$	22,062		$	193		$	(437	)	$	45,734
Net income for 2010								3,098									3,098
Net change in other comprehensive income items											(361	)					(361	)
Cash dividends declared - $.20 per share								(468	)								(468	)
Issuance of restricted stock (18,325 shares of common stock at $10.10 per share)		46			(46	)											—
Vesting of restricted stock					79												79
Restricted stock forfeiture (1,018 shares)		(2	)		2												—
Change in common stock subject to repurchase		(14	)		(440	)											(454	)
Reduction of ESOP obligation														140			140
Stock option expense					75												75


Balance at December 31, 2010		5,583			18,033			24,692			(168	)		(297	)		47,843
Net income for 2011								3,402									3,402
Net change in other comprehensive income items											739						739
Cash dividends declared - $.22 per share								(518	)								(518	)
Issuance of restricted stock (18,525 shares of common stock at $12.70 per share)		46			(46	)											—
Vesting of restricted stock					105												105
Restricted stock forfeiture (643 shares)		(2	)		2												—
Change in common stock subject to repurchase		(18	)		121												103
Reduction of ESOP obligation														128			128
Stock option expense					63												63


Balance at December 31, 2011		5,609			18,278			27,576			571			(169	)		51,865
Net income for 2012								4,350									4,350
Net change in other comprehensive income items											(274	)					(274	)
Cash dividends declared - $.37 per share								(880	)								(880	)
Issuance of restricted stock (18,125 shares of common stock at $11.20 per share)		45			(45	)											—
Vesting of restricted stock					171												171
Stock options exercised (760 shares)		2			4												6
Restricted stock forfeiture (1,082 shares)		(3	)		3												—
Change in common stock subject to repurchase		(26	)		(743	)											(769	)
Reduction of ESOP obligation														134			134
Stock option expense					32												32


Balance at December 31, 2012	$	5,627		$	17,700		$	31,046		$	297		$	(35	)	$	54,635

The accompanying notes are an integral part of the consolidated financial statements.

S OUTHERN M ICHIGAN B ANCORP , I NC .

C ONSOLIDATED S TATEMENTS OF C ASH F LOWS

(In thousands)


	Year ended December 31,
	2012			2011			2010
Operating Activities
Net income	$	4,350		$	3,402		$	3,098
Adjustments to reconcile net income to net cash from operating activities:
Provision for loan losses		1,350			1,050			1,375
Depreciation of premises and equipment		923			869			995
Deferred income taxes		(122	)		150			175
Amortization of other intangible assets		325			339			350
Net amortization of available-for-sale securities		588			952			586
Stock option and restricted stock grant compensation expense		203			168			154
Net gains on security calls and sales		(3	)		(29	)		(207	)
Loans originated for sale		(73,963	)		(41,562	)		(57,470	)
Proceeds on loans sold		75,383			44,346			56,739
Net gains on loan sales		(2,108	)		(1,235	)		(1,301	)
Net loss from sale or write down of other real estate owned		132			118			215
Gain on life insurance proceeds		—			—			(156	)
Net loss (gain) on disposal of premises and equipment		(9	)		7			29
Net change in obligation under ESOP		134			128			140
Net change in:
Accrued interest receivable		89			(41	)		(53	)
Cash surrender value		(332	)		(347	)		(349	)
Other assets		282			628			826
Accrued expenses and other liabilities		713			44			383

Net cash from operating activities		7,935			8,987			5,529


Investing Activities
Activity in available for sale securities:
Proceeds on securities sold		—			—			7,445
Proceeds from maturities and calls		42,686			38,493			48,172
Purchases		(17,606	)		(69,305	)		(58,770	)
Net change in federal funds sold		11			(12	)		2,265
Proceeds from life insurance		—			—			421
Loan originations and payments, net		(40,177	)		(25,504	)		20,254
Proceeds from sale of other real estate owned		1,834			481			1,239
Proceeds from sale of equipment		62			58			91
Proceeds from sale of FHLB stock		—			176			169
Additions to premises and equipment		(849	)		(881	)		(800	)

Net cash from investing activities		(14,039	)		(56,494	)		20,486


Financing Activities
Net change in deposits		23,659			10,610			28,996
Net change in securities sold under agreements to repurchase and overnight borrowings		(1,940	)		3,047			228
Proceeds from other borrowings		—			—			5,000
Repayments of other borrowings		(6,712	)		(2,328	)		(5,753	)
Stock options exercised		6			—			—
Cash dividends paid		(760	)		(470	)		(467	)

Net cash from financing activities		14,253			10,859			28,004


Net change in cash and cash equivalents		8,149			(36,648	)		54,019
Beginning cash and cash equivalents		42,185			78,833			24,814

Ending cash and cash equivalents	$	50,334		$	42,185		$	78,833

The accompanying notes are an integral part of the consolidated financial statements.

S OUTHERN M ICHIGAN B ANCORP , I NC .

N OTES T O C ONSOLIDATED F INANCIAL S TATEMENTS

N OTE A – N ATURE OF O PERATIONS AND S IGNIFICANT A CCOUNTING P OLICIES

Nature of Operations and Industry Segments: Southern Michigan Bancorp, Inc. (the Company) is a Michigan corporation and registered bank holding company under the Bank Holding Company Act of 1956. The Company’s business is concentrated in a single operating segment: commercial banking. The Company’s wholly-owned subsidiary bank, Southern Michigan Bank & Trust (the Bank), offers individuals, businesses, institutions and government agencies a full range of commercial banking services primarily in the southwest Michigan communities in which the Bank is located and in areas immediately surrounding these communities. The Bank makes commercial and consumer loans to customers. The majority of loans are secured by business assets, commercial and residential real estate, and consumer assets. There are no foreign loans.

Principles of Consolidation: The consolidated financial statements include the accounts of the Company and the Bank after elimination of significant inter-company balances and transactions. The Bank owns FNB Financial Services, which conducts a brokerage business. During 2004, the Company formed a special purpose trust, Southern Michigan Bancorp Capital Trust I for the sole purpose of issuing trust preferred securities. Under generally accepted accounting principles, the trust is not consolidated into the financial statements of the Company.

Use of Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Estimates that are more susceptible to change in the near term include the allowance for loan losses, deferred tax assets, fair values of securities and other financial instruments and pension and post retirement benefit obligations.

Securities: Management determines the appropriate classification of securities at the time of purchase. If management has the intent and the Company has the ability at the time of purchase to hold securities until maturity, they are classified as held to maturity and carried at amortized historical cost. Securities to be held for indefinite periods of time and not intended to be held to maturity are classified as available for sale and carried at fair value, with unrealized gains and losses reported in other comprehensive income or loss, net of tax. Securities classified as available for sale include securities that management intends to use as part of its asset/liability management strategy and that may be sold in response to changes in interest rates, prepayment risk, and other factors.

Premiums and discounts on securities are recognized in interest income using the level yield method over the estimated life of the security. Gains and losses on the sale of available for sale securities are determined using the specific identification method. Securities are written down to fair value and reflected as a loss when a decline in fair value is not temporary. In estimating other than temporary losses, management considers: (1) the length of time and extent that fair value has been less than cost, (2) the financial condition and near term prospects of the issuer, and (3) the fact that the Company has the intention and the ability to hold the security to maturity.

Loans Held for Sale: Loans held for sale are reported at the lower of cost or market value in the aggregate. Net unrealized losses are recorded in a valuation allowance by charges to income.

Loans: Loans are reported at the principal balance outstanding, net of unearned interest, deferred loan fees and costs, and an allowance for loan losses. Interest income is reported on the interest method and includes amortization of net deferred loan fees and costs over the loan term.

Interest income is not reported when full loan repayment is in doubt, typically when payments are past due over 90 days, unless the loan is both well secured and in the process of collection. Past due status is based on the contractual terms of the loan. All interest accrued but not received for these loans is reversed against interest income. Payments received on such loans are reported as principal reductions until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest contractually due are brought current and future payments are reasonably assured.

S OUTHERN M ICHIGAN B ANCORP , I NC .

N OTES T O C ONSOLIDATED F INANCIAL S TATEMENTS ( CONTINUED )

N OTE A – N ATURE OF O PERATIONS AND S IGNIFICANT A CCOUNTING P OLICIES ( CONTINUED )

Allowance for Loan Losses: The allowance for loan losses is a valuation allowance for probable incurred credit losses, increased by the provision for loan losses and decreased by charge-offs net of recoveries. Estimating the risk of loss and the amount of loss on any loan is necessarily subjective. Management estimates the allowance balance based on past loan loss experience, nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, information in regulatory examination reports, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged-off. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired.

Loan impairment is reported when full payment under the loan terms is not expected. Impairment is evaluated in total for smaller-balance loans of similar nature, such as residential mortgage and consumer loans, and on an individual loan basis for other loans. If a loan is determined to be impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s effective interest rate or at the fair value of collateral if repayment is expected solely from the collateral. Loans are evaluated for impairment when payments are delayed, typically 90 days or more, or when it is probable, in the judgment of management, that all principal and interest amounts will not be collected according to the original terms of the loan.

Consumer loans are typically charged-off no later than 120 days past due. Real estate mortgage loans in the process of collection are charged-off on or before they become 365 days past due. Commercial loans are charged-off promptly upon the determination that all or a portion of any loan balance is uncollectible. In all cases, loans are placed on nonaccrual status or charged-off at an earlier date if collection of principal or interest is considered doubtful.

Under certain circumstances, the Bank may provide borrowers relief through loan restructurings. A restructuring of debt constitutes a troubled debt restructuring (TDR) if the Bank, for economic or legal reasons related to the borrower’s financial difficulties, grants a concession to the borrower that it would not otherwise consider. Concessions may include reduction of interest rates, extension of maturity dates, forgiveness of principal or interest due, or acceptance of other assets in full or partial satisfaction of the debt. TDR loans typically present an elevated level of credit risk as the borrowers are not able to perform according to the original contractual terms. Loans that are reported as TDRs are considered impaired and measured for impairment, as previously described. TDR loans that have performed as agreed under the restructured terms for a period of 12 months or longer may cease to be reported as a TDR loan. However, the loan continues to be individually evaluated for impairment.

Premises and Equipment: Premises and equipment are stated at cost, less accumulated depreciation. Depreciation is computed principally using straight line or accelerated methods over their estimated useful lives. The estimated useful lives are 10 to 40 years for buildings and improvements and 3 to 10 years for furniture and equipment. These assets are reviewed for impairment when events indicate their carrying amount may not be recoverable from future undiscounted cash flows. Maintenance, repairs and minor alterations are charged to current operations as expenditures occur. Major improvements are capitalized. Land is carried at cost.

Mortgage Servicing Rights: Mortgage servicing rights, included in other assets, represent the allocated value of mortgage servicing rights retained on loans sold. Mortgage servicing rights are expensed in proportion to, and over the period of, estimated net servicing revenues.

Impairment is evaluated based on the fair value of the rights, using groupings of the underlying loans as to interest rates and then, secondarily, as to geographic and prepayment characteristics. Any impairment of a grouping is reported as a valuation allowance.

S OUTHERN M ICHIGAN B ANCORP , I NC .

N OTES T O C ONSOLIDATED F INANCIAL S TATEMENTS ( CONTINUED )

N OTE A – N ATURE OF O PERATIONS AND S IGNIFICANT A CCOUNTING P OLICIES ( CONTINUED )

Transfers of Financial Assets: Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Bank, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Bank does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

The transfer of a participating interest in a financial asset must have all of the following characteristics: (1) from the date of transfer, it must represent a proportionate ownership interest in the financial asset, (2) from the date of transfer, all cash flows received, except cash flows allocated as compensation for servicing or other services performed, must be divided proportionately among participating interest holders in the amount equal to their share ownership, (3) the rights of each participating interest holder must have the same priority, and (4) no party has the right to pledge or change the entire financial asset unless all participating interest holders agree to do so.

Company Owned Life Insurance: The Company has purchased life insurance policies on certain key executives. Company owned life insurance is recorded at its net cash surrender value, or the amount that can be realized.

Goodwill and Other Intangible Assets: Goodwill results from business acquisitions and represents the excess of the purchase price over the fair value of acquired tangible assets and liabilities and identifiable intangible assets. Goodwill is assessed at least annually for impairment and any such impairment is recognized in the period identified. Impairment exists when a reporting unit’s carrying value of goodwill exceeds its fair value, which is determined through a two-step impairment test. Step 1 includes the determination of the carrying value of the single reporting unit, including the existing goodwill and intangible assets, and estimating the fair value of the reporting unit. If the carrying amount of a reporting unit exceeds its fair value, a second step to the impairment test is required.

The Company’s most recent annual impairment analysis as of November 30, 2012, indicated that the Step 2 analysis was not required.

Intangible assets with definite useful lives are amortized over their estimated useful lives to their estimated residual values. Goodwill is the only intangible asset with an indefinite life on the Company’s balance sheet. Other intangible assets consist of core deposit intangible assets arising from past acquisitions. They are initially measured at fair value and then amortized on an accelerated method over their estimated useful lives, which is 10 years.

Other Real Estate Owned: Other real estate owned was $1,633,000 and $1,530,000 at December 31, 2012 and 2011, respectively, and is included in other assets. Other real estate owned is comprised of properties acquired through a foreclosure proceeding or acceptance of a deed in lieu of foreclosure. These properties are initially recorded at fair value less estimated cost to sell at the date of foreclosure, establishing a new cost basis. After foreclosure, valuations are periodically performed by management and other real estate owned is carried at the lower of carrying amount or fair value less estimated cost to sell. Expenses, gains and losses on disposition, and reductions in carrying value are reported as non-interest expense.

Stock Based Compensation: The Company has adopted the requirements of “share-based payment transactions”, using the modified prospective transition method. Under this method, the Company recognizes compensation cost for stock based compensation for all new or modified grants.

See Note M regarding the various assumptions used in computing the compensation expense.

Advertising Costs: Advertising costs are expensed as incurred.

S OUTHERN M ICHIGAN B ANCORP , I NC .

N OTES T O C ONSOLIDATED F INANCIAL S TATEMENTS ( CONTINUED )

N OTE A – N ATURE OF O PERATIONS AND S IGNIFICANT A CCOUNTING P OLICIES ( CONTINUED )

Income Taxes: The income tax provision is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. Benefits from tax positions taken or expected to be taken in a tax return are not recognized if the likelihood that the tax position would be sustained upon examination by a taxing authority is considered to be 50% or less. Any interest and penalties resulting from the filing of the income tax returns is included in the provision for income taxes.

Cash Flow Definition: For purposes of the consolidated statements of cash flows, the Company considers cash and due from banks as cash and cash equivalents. The Company reports net cash flows for customer loan and deposit transactions and short term borrowings with a maturity of 90 days or less.

Earnings and Dividends Per Common Share: Basic earnings per common share is based on net income divided by the weighted average number of common shares outstanding during the period. ESOP shares are considered outstanding for this calculation unless unearned. Diluted earnings per common share reflects the dilutive effect of any additional potential common shares issuable under stock options. Earnings and dividends per share are restated for all stock splits and stock dividends through the date of issuance of the financial statements.

Comprehensive Income: Comprehensive income consists of net income and other comprehensive income or loss. Other comprehensive income or loss includes the net change in unrealized gains and losses on securities available for sale and the changes in the funded status of the pension plan, each net of tax, which are also recognized as a separate component of shareholders’ equity.

Employee Stock Ownership Plan (ESOP): The cost of shares issued to the ESOP but not yet allocated to participants is shown as a reduction to shareholders’ equity. Compensation expense is based on the market price of shares as they are committed to be released to participants’ accounts. Dividends on allocated ESOP shares reduce retained earnings; dividends on unearned ESOP shares reduce debt and accrued interest.

Fair Values of Financial Instruments: Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in Note S. 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 such estimates.

Concentrations of Credit Risk: The Company grants commercial, real estate and installment loans to customers mainly in southwest Michigan. Commercial loans include loans collateralized by commercial real estate, business assets and agricultural loans collateralized by crops and farm equipment. Commercial loans make up approximately 74% of the loan portfolio at December 31, 2012 (71% at December 31, 2011) and such loans are expected to be repaid from cash flow from operations of businesses. Residential mortgage loans make up approximately 24% of the loan portfolio at December 31, 2012 (27% at December 31, 2011) and are collateralized by mortgages on residential real estate. Consumer loans make up approximately 2% of the loan portfolio at December 31, 2012 (2% at December 31, 2011) and are primarily collateralized by consumer assets.

Operating Segments: While the chief decision-makers monitor the revenue streams of the various products and services, operations are managed and financial performance is evaluated on a Company wide basis. Operating segments are aggregated into one as operating results for all segments are similar. Accordingly, all of the financial service operations are considered by management to be aggregated in one reportable operating segment: commercial banking.

S OUTHERN M ICHIGAN B ANCORP , I NC .

N OTES T O C ONSOLIDATED F INANCIAL S TATEMENTS ( CONTINUED )

N OTE A – N ATURE OF O PERATIONS AND S IGNIFICANT A CCOUNTING P OLICIES ( CONTINUED )

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 customer 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. Commitments may include interest rates determined prior to funding the loan (rate lock commitments). Rate lock commitments on loans intended to be sold are considered to be derivatives. Such commitments were not material at December 31, 2012 and 2011.

Cash Balances: The Company maintains deposits with other correspondent banks. Certain of these deposits may exceed FDIC insured limits.

Loss Contingencies: Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there are any such matters outstanding as of December 31, 2012 that will have a material future adverse effect on the consolidated financial statements.

Subsequent Events: Management evaluated subsequent events through the date the consolidated financial statements were issued. Events or transactions occurring after December 31, 2012, but prior to when the consolidated financial statements were issued, that provided additional evidence about conditions that existed at December 31, 2012, have been recognized in the consolidated financial statements for the year ended December 31, 2012. Events or transactions that provided evidence about conditions that did not exist at December 31, 2012, but arose before the consolidated financial statements were issued, have not been recognized in the consolidated financial statements for the year ended December 31, 2012.

Reclassifications: Certain items in the 2011 and 2010 consolidated financial statements have been reclassified to conform to the current year presentation.

Adoption of New Accounting Standards: . In May 2011, the Financial Accounting Standards Board (FASB) issued ASU No. 2011-04 Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. The amendments in ASU 2011-04 generally represent clarifications of Topic 820, but also include some instances where a particular principle or requirement for measuring fair value or disclosing information about fair value measurements has changed. ASU 2011-04 results in common principles and requirements for measuring fair value and for disclosing information about fair value measurements in accordance with U.S. GAAP and IFRSs. The amendments in ASU 2011-04 are to be applied prospectively. ASU 2011-04 was adopted effective January 1, 2012, but did not have any impact on the Company’s consolidated financial position or results of operations.

In June 2011, FASB issued ASU No. 2011-05 Amendments to Topic 220, Comprehensive Income. Under the amendments in ASU 2011-05, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. Either option requires the entity to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendments in ASU 2011-05 do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income.

The Company adopted ASU 2011-05 for the first quarter of 2012 and elected to present the components of other comprehensive income in a separate statement. The adoption of ASU 2011-05 did not have any impact on the Company’s consolidated financial condition or results of operations.

S OUTHERN M ICHIGAN B ANCORP , I NC .

N OTES T O C ONSOLIDATED F INANCIAL S TATEMENTS ( CONTINUED )

N OTE A – N ATURE OF O PERATIONS AND S IGNIFICANT A CCOUNTING P OLICIES ( CONTINUED )

In September 2011, FASB issued ASU 2011-08, Intangibles – Goodwill and Other (Topic 350) Testing Goodwill for Impairment . The amendments in ASU 2011-08 give the entity the option of first assessing qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after the assessment, the entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. The amendments in ASU 2011-08 are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The Company elected to continue to have an independent valuation performed as of November 30, 2012 to assess goodwill impairment. As a result, ASU 2011-08 had no impact on the Company’s 2012 consolidated financial statements.

In December 2011, FASB issued ASU 2011-11, Disclosures about Offsetting Assets and Liabilities , amending ASC Topic 210 requiring an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effects of those arrangements on its financial position. ASU 2011-11 is effective for annual and interim periods beginning on or after January 1, 2013. The Company has not yet determined what, if any, financial statement impact the adoption of ASU 2011-11 will have.

In July 2012, the FASB amended existing guidance relating to testing indefinite-lived intangible assets for impairment. The amendment permits an assessment of qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, it is concluded that it is not more likely than not that the indefinite-lived intangible asset is impaired, then no further action is required. However, after the same assessment, if it is concluded that it is more like than not that the indefinite-lived intangible asset is impaired, then a quantitative impairment test should be performed whereby the fair value of the indefinite-lived intangible asset is compared to the carrying amount. The amendments in this guidance are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. While early adoption is permitted, the Company expects to adopt this guidance in 2013 and has not yet determined what, if any, impact the adoption will have on its consolidated financial statements.

S OUTHERN M ICHIGAN B ANCORP , I NC .

N OTES T O C ONSOLIDATED F INANCIAL S TATEMENTS ( CONTINUED )

N OTE B – B ASIC AND D ILUTED E ARNINGS P ER C OMMON S HARE

A reconciliation of the numerators and denominators of basic and diluted earnings per common share for the years ended December 31, 2012, 2011 and 2010 is presented below:


	2012			2011			2010
Basic Earnings Per Common Share

Net income (in thousands)	$	4,350		$	3,402		$	3,098


Weighted average common shares outstanding		2,374,831			2,350,180			2,339,490

Less: Unallocated ESOP shares		(11,839	)		(20,733	)		(27,851	)


Weighted average common shares outstanding for basic earnings per common share		2,362,992			2,329,447			2,311,639


Basic earnings per common share	$	1.84		$	1.46		$	1.34


Diluted Earnings Per Common Share

Net income (in thousands)	$	4,350		$	3,402		$	3,098


Weighted average common shares outstanding for basic earnings per common share		2,362,992			2,329,447			2,311,639

Add: Dilutive effects of assumed exercises of stock options		6,298			4,378			3,636


Average shares and dilutive potential of common shares outstanding		2,369,290			2,333,825			2,315,275


Diluted earnings per common share	$	1.84		$	1.46		$	1.34

Stock options for 185,426, 199,961 and 196,394 shares of common stock were not considered in computing diluted earnings per share for 2012, 2011 and 2010, respectively, because they were anti-dilutive.

S OUTHERN M ICHIGAN B ANCORP , I NC .

N OTES T O C ONSOLIDATED F INANCIAL S TATEMENTS ( CONTINUED )

N OTE C - S ECURITIES

Year end investment securities were as follows (in thousands):


Available for Sale, December 31, 2012	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Federal agencies	$	15,985	$	45	$	—		$	16,030
U.S. government sponsored entities and agencies		7,848		54		—			7,902
States and political subdivisions		33,889		1,112		(23	)		34,978
Mortgage-backed securities		5,589		26		—			5,615

Total	$	63,311	$	1,237	$	(23	)	$	64,525


Available for Sale, December 31, 2011	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Federal agencies	$	28,303	$	132	$	—		$	28,435
U.S. government sponsored entities and agencies		22,855		101		—			22,956
States and political subdivisions		32,324		1,124		(3	)		33,445
Asset-backed securities		2,487		—		(11	)		2,476
Mortgage-backed securities		3,007		25		—			3,032

Total	$	88,976	$	1,382	$	(14	)	$	90,344

Securities with unrealized losses at December 31, 2012 and 2011 that have not been recognized in income are as follows (in thousands):


2012	Continued Unrealized Loss for Less than 12 Months					Continued Unrealized Loss for 12 Months or More				Total
Description of Securities	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
States and political subdivisions	$	3,492	$	(23	)	$	—	$	—	$	3,492	$	(23	)

Total temporarily impaired	$	3,492	$	(23	)	$	—	$	—	$	3,492	$	(23	)


2011	Continued Unrealized Loss for Less than 12 Months					Continued Unrealized Loss for 12 Months or More					Total
Description of Securities	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
States and political subdivisions	$	1,005	$	(3	)	$	—	$	—		$	1,005	$	(3	)
Mortgage-backed securities		—		—			2,487		(11	)		2,487		(11	)

Total temporarily impaired	$	1,005	$	(3	)	$	2,487	$	(11	)	$	3,492	$	(14	)

The Bank had 13 securities in an unrealized loss position at December 31, 2012, all for a period of less than 12 months. Unrealized losses have not been recognized into income as management believes the issuers are of sound credit quality, management has no intent to sell the securities, the Company has the ability to hold the securities to maturity and the decline in fair value is largely due to changes in market interest rates. The fair value is expected to recover as the bonds approach their maturity date.

S OUTHERN M ICHIGAN B ANCORP , I NC .

N OTES T O C ONSOLIDATED F INANCIAL S TATEMENTS ( CONTINUED )

N OTE C – S ECURITIES ( CONTINUED )

The proceeds from sales of securities and the associated gains are listed below (in thousands):


	2012		2011		2010
Proceeds	$	—	$	—	$	7,445
Gross gains		—		—		206

The tax provision related to gross realized gains was $70,000 for 2010.

Gains on calls of securities were $3,000, $29,000 and $1,000 for 2012, 2011 and 2010, respectively.

The amortized cost and fair value of the investment securities portfolio are shown by contractual maturity. Contractual maturities of debt securities at year-end 2012 were as follows (in thousands):


	Amortized Cost		Fair Value
Due in one year or less	$	25,735	$	25,871
Due from one to five years		16,162		16,604
Due from five to ten years		11,316		11,721
Due after ten years		4,509		4,714
Mortgage-backed securities		5,589		5,615

Total	$	63,311	$	64,525

Securities not due at a single maturity date, primarily mortgage-backed securities, are shown separately. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

Securities with a carrying value of $28,234,000 and $32,089,000, respectively, were pledged as collateral for repurchase accounts and for other purposes at year-end 2012 and 2011.

At December 31, 2012 and 2011, the fair value of securities issued by the State of Michigan and all its political subdivisions totaled $28,443,000 and $26,314,000, respectively. No other securities of any single issuer were greater than 10% of shareholders’ equity.

Investments in the Federal Home Loan Bank of Indianapolis stock totaled $1,701,000 at December 31, 2012 and 2011 and are included in other assets because such investments are considered restricted. Such investments are recorded at cost and evaluated for impairment.

At December 31, 2012, the Company had no investment in securities of issuers outside of the United States.

N OTE D – L OANS A ND A LLOWANCE F OR L OAN L OSSES

Loans at year-end were as follows (in thousands):


	2012			2011

Commercial	$	82,543		$	70,056
Real estate - commercial		172,764			150,829
Real estate - construction		16,802			12,479
Consumer		8,349			8,167
Real estate mortgage		89,147			91,273

		369,605			332,804
Less allowance for loan losses		(5,455	)		(5,412	)

Loans, net	$	364,150		$	327,392

S OUTHERN M ICHIGAN B ANCORP , I NC .

N OTES T O C ONSOLIDATED F INANCIAL S TATEMENTS ( CONTINUED )

N OTE D – L OANS A ND A LLOWANCE F OR L OAN L OSSES ( CONTINUED )

Credit Risk Elements:

Construction loans are underwritten utilizing independent appraisals, sensitivity analysis of absorption, vacancy and lease rates and financial analysis of the developers and property owners. Construction loans are generally based upon estimates of costs and value associated with completion of the project. Construction loans often involve the disbursement of funds with repayment substantially dependent on the success of the ultimate project. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, general economic conditions and the availability of long-term financing. The Bank typically requires guarantees on these loans. The Bank’s construction loans are secured primarily by properties located in its primary market area.

The Bank originates 1 – 4 family real estate and consumer loans utilizing credit reports to supplement the underwriting process. The Bank’s manual underwriting standards for 1 – 4 family loans are generally in accordance with Federal Home Loan Mortgage Corporation and loan policy manual underwriting guidelines. Properties securing 1 – 4 family real estate loans are appraised by fee appraisers, which are independent of the loan origination function and have been approved by management. The loan-to-value ratios normally do not exceed 80% without credit enhancements such as mortgage insurance. The Bank will lend up to 100% of the lesser of the appraised value or purchase price for conventional 1 – 4 family real estate loans, provided private mortgage insurance is obtained. The underwriting standards for consumer loans include a determination of the applicant’s payment history on other debts and an assessment of their ability to meet existing obligations and payments on the proposed loan. To monitor and manage loan risk, policies and procedures are developed and modified, as needed by management. This activity, coupled with smaller loan amounts that are spread across many individual borrowers, minimizes risk. Additionally, market conditions are reviewed by management on a regular basis. The Bank’s 1 – 4 family real estate loans are secured primarily by properties located in its primary market area.

Commercial and agricultural real estate loans are subject to underwriting standards and processes similar to commercial and agricultural operating loans, in addition to those unique to real estate loans. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial and agricultural real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Loan to value is generally 75% of the lower of the cost or value of the assets. Appraisals on properties securing these loans are generally performed by fee appraisers approved by the Commercial Loan Committee. Because payments on commercial and agricultural real estate loans are often dependent on the successful operation or management of the properties, repayment of such loans may be subject to adverse conditions in the real estate market or the economy. Management monitors and evaluates commercial and agricultural real estate loans based on collateral and risk rating criteria. The Bank typically requires guarantees on these loans. The Bank’s commercial and agricultural real estate loans are secured primarily by properties located in its primary market area.

Commercial and agricultural operating loans are underwritten based on the Bank’s examination of current and projected cash flows to determine the ability of the borrower to repay their obligations as agreed. This underwriting includes the evaluation of cash flows of the borrower, underlying collateral, if applicable, and the borrower’s ability to manage its business activities. The cash flows of borrowers and the collateral securing these loans may fluctuate in value after the initial evaluation. A first priority lien on the general assets of the business normally secures these types of loans. Loan to value limits vary and are dependent upon the nature and type of the underlying collateral and the financial strength of the borrower. Crop and hail insurance is required for most agricultural borrowers. Loans are generally guaranteed by the principal(s). The Bank’s commercial and agricultural operating lending is principally in its primary market area.

S OUTHERN M ICHIGAN B ANCORP , I NC .

N OTES T O C ONSOLIDATED F INANCIAL S TATEMENTS ( CONTINUED )

N OTE D – L OANS A ND A LLOWANCE FOR L OAN L OSSES ( CONTINUED )

The Bank has an internal credit analyst who reviews and validates credit risk on a periodic basis, as well as an internal loan review performed throughout the year. Results of the credit analyst are presented to management. Internal loan reviews are presented to management and the Audit Committee. The credit analysis and loan review processes complement and reinforce the risk identification and assessment decisions made by lenders and credit personnel, as well as the Bank’s policies and procedures.

At December 31, 2012 and 2011, certain directors and executive officers of the Company, including their associates and companies in which they are principal owners, were indebted to the Bank. The following is a summary of activity of loans (in thousands) exceeding $60,000 in the aggregate to these individuals and their associates. All of these loans were made in the ordinary course of business, were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable loans with persons not related to the Company and did not involve more than the normal risk of collectability or present other unfavorable features. None of these loans were in default at December 31, 2012. Other changes include adjustments for loans applicable to one reporting period that are excludable from the other reporting period.


	2012			2011			2010

Balance at January 1	$	13,542		$	14,099		$	16,578
New loans, including renewals		5,306			11,230			7,805
Repayments		(4,626	)		(11,659	)		(10,192	)
Other changes, net		58			(128	)		(92	)

Balance at December 31	$	14,280		$	13,542		$	14,099

The unpaid principal balance of mortgage loans serviced for others, which are not included on the consolidated balance sheet, was $197,238,000 and $168,025,000 at December 31, 2012 and 2011, respectively.

Activity for capitalized mortgage servicing rights, included in other assets, was as follows (in thousands):


	2012			2011			2010

Balance at January 1	$	969		$	868		$	753
Additions		641			412			371
Amortized to expense		(367	)		(311	)		(256	)

Balance at December 31	$	1,243		$	969		$	868

No valuation allowance for capitalized mortgage servicing rights was considered necessary at December 31, 2012 or 2011 because the estimated fair value of such rights exceeded the carrying value.

Changes in the allowance for loan losses for the years ended December 31 were as follows (in thousands):


	2012			2011			2010

Balance at January 1	$	5,412		$	5,694		$	6,075
Provision for loan losses		1,350			1,050			1,375
Loans charged off		(1,547	)		(1,561	)		(2,031	)
Recoveries		240			229			275

Net charge-offs		(1,307	)		(1,332	)		(1,756	)


Balance at December 31	$	5,455		$	5,412		$	5,694

In evaluating the allowance for loan losses, loans are analyzed based on the department originating the loan (commercial, mortgage or consumer), which in some instances may be different than how the loans are categorized for regulatory reporting purposes. Consequently, loan groupings may vary within the disclosures.

S OUTHERN M ICHIGAN B ANCORP , I NC .

N OTES T O C ONSOLIDATED F INANCIAL S TATEMENTS ( CONTINUED )

N OTE D – L OANS AND A LLOWANCE F OR L OAN L OSSES ( CONTINUED )

The following is an analysis of the allowance for loan losses by portfolio segment based on impairment method as of and for the years ended December 31, 2012 and 2011 (in thousands):


	Commercial including Commercial Real Estate			Consumer			Real Estate Mortgage 1 ^st Lien			Real Estate Mortgage Junior Lien			Total
December 31, 2012
Balance at January 1	$	4,039		$	68		$	1,155		$	150		$	5,412
Provision for loan losses		1,038			9			249			54			1,350
Loans charged off		(1,084	)		(40	)		(341	)		(82	)		(1,547	)
Recoveries		165			20			42			13			240

Balance at December 31	$	4,158		$	57		$	1,105		$	135		$	5,455


Ending balance individually evaluated for impairment	$	534			—		$	224			—		$	758

Ending balance collectively evaluated for impairment		3,624			57			881			135			4,697


Total	$	4,158		$	57		$	1,105		$	135		$	5,455


December 31, 2011

Balance at January 1	$	4,239		$	87		$	1,211		$	157		$	5,694
Provision for loan losses		498			14			433			105			1,050
Loans charged off		(875	)		(71	)		(498	)		(117	)		(1,561	)
Recoveries		177			38			9			5			229

Balance at December 31	$	4,039		$	68		$	1,155		$	150		$	5,412


Ending balance individually evaluated for impairment	$	744			—		$	240			—		$	984

Ending balance collectively evaluated for impairment		3,295			68			915			150			4,428


Total	$	4,039		$	68		$	1,155		$	150		$	5,412

Commercial loans also include demand deposit loan account charge-offs and recoveries amounting to $132,000 and $125,000, respectively, for the year ended December 31, 2012 and $167,000 and $72,000, respectively, for the year ended December 31, 2011.

S OUTHERN M ICHIGAN B ANCORP , I NC .

N OTES T O C ONSOLIDATED F INANCIAL S TATEMENTS ( CONTINUED )

N OTE D – L OANS A ND A LLOWANCE F OR L OAN L OSSES (C ONTINUED )

The following is a summary of the recorded investment in loans, by portfolio segment and based on impairment method, as of December 31, 2012 and 2011 (in thousands):


	Commercial including Commercial Real Estate		Consumer		Real Estate Mortgage 1 ^st Lien		Real Estate Mortgage Junior Lien		Total
December 31, 2012:
Ending balance individually evaluated for impairment	$	5,964	$	17	$	2,879	$	129	$	8,989

Ending balance collectively evaluated for impairment		276,539		7,884		64,143		12,050		360,616


Ending balance	$	282,503	$	7,901	$	67,022	$	12,179	$	369,605


December 31, 2011:
Ending balance individually evaluated for impairment	$	6,440	$	29	$	3,326	$	86	$	9,881

Ending balance collectively evaluated for impairment		237,263		7,800		64,927		12,933		322,923


Ending balance	$	243,703	$	7,829	$	68,253	$	13,019	$	332,804

The following tables present loans individually evaluated for impairment by class of loans as of December 31, 2012 and December 31, 2011 (in thousands):


December 31, 2012	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated

With no related allowance recorded:

Commercial	$	492	$	492	$	—
Real estate - commercial		2,599		2,194		—
Real estate - construction		80		80		—
Consumer		16		16		—
Real estate mortgage		1,835		1,698		—

With an allowance recorded:
Commercial		482		423		37
Real estate - commercial		1,590		1,561		122
Real estate - construction		188		188		161
Consumer		—		—		—
Real estate mortgage		2,337		2,337		438


Total	$	9,619	$	8,989	$	758

S OUTHERN M ICHIGAN B ANCORP , I NC .

N OTES T O C ONSOLIDATED F INANCIAL S TATEMENTS ( CONTINUED )

N OTE D – L OANS AND A LLOWANCE F OR L OAN L OSSES (C ONTINUED )


December 31, 2011	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated

With no related allowance recorded:

Commercial	$	135	$	135	$	—
Real estate - commercial		2,808		2,649		—
Real estate - construction		244		232		—
Consumer		29		29		—
Real estate mortgage		2,999		2,485		—

With an allowance recorded:
Commercial		804		744		26
Real estate - commercial		1,434		1,403		490
Real estate - construction		—		—		—
Consumer		—		—		—
Real estate mortgage		2,204		2,204		468


Total	$	10,657	$	9,881	$	984

Information regarding impaired loans at December 31 follows (in thousands):


	2012		2011		2010

Average balance of impaired loans during the year	$	9,486	$	10,530	$	11,719

Cash basis interest income recognized during the year	$	252	$	250	$	345

Interest income recognized during the year	$	268	$	285	$	396

The Company’s loan portfolio also includes certain loans that have been modified in a TDR, where economic concessions have been granted to borrowers who have experienced or are expected to experience financial difficulties. These concessions typically result from the Company’s loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions.

When the Company modifies a loan, management evaluates any possible concession based on the present value of expected future cash flows, discounted at the contractual interest rate of the original loan agreement, except when the sole source of repayment for the loan is the liquidation of collateral. In these cases, management uses the current fair value of the collateral, less selling costs. If management determines that the value of the modified loan is less than the recorded investment in the loan (net of previous charge-offs and deferred loan fees or costs), impairment is recognized through an allowance estimate or a charge-off to the allowance.

S OUTHERN M ICHIGAN B ANCORP , I NC .

N OTES T O C ONSOLIDATED F INANCIAL S TATEMENTS ( CONTINUED )

N OTE D – L OANS A ND A LLOWANCE F OR L OAN L OSSES (C ONTINUED )

The following table summarizes the number and volume of TDRs the Company has recorded in its loan portfolio as of December 31, 2012 and 2011, as well as the number of TDR loans added each year and the amount of specific reserves in the allowance for loan losses relating to TDRs (dollars in thousands):


	Total						Added During the Year
December 31, 2012	Number of Loans		Amount		Specific Reserves Allocated		Number of Loans		Amount		Specific Reserves Allocated

Commercial		6	$	740	$	37		1	$	98	$	—
Real estate - commercial		7		2,088		122		2		518		11
Real estate - construction		—		—		—		—		—		—
Real estate - mortgage		17		1,483		117		2		92		30
Consumer		—		—		—		—		—		—


Total		30	$	4,311	$	276		5	$	708	$	41


December 31, 2011

Commercial		5	$	733	$	23		2	$	267	$	11
Real estate - commercial		5		1,619		13		2		455		13
Real estate - construction		—		—		—		—		—		—
Real estate - mortgage		21		1,882		181		13		1,182		112
Consumer		—		—		—		—		—		—


Total		31	$	4,234	$	217		17	$	1,904	$	136

The modification of the terms of loans that resulted in a TDR included one or a combination of the following: a reduction of the stated interest rate of the loan or an extension of the maturity date or amortization period. The post-modified loan balance for TDR’s was essentially the same as the pre-modified balance.

The Company has not committed to lend any additional funds to these borrowers.

There was one $30,000 real estate mortgage TDR in default of its modified terms as of December 31, 2012. No charge off or specific reserve was recorded for this loan through December 31, 2012.

The following table presents the aging of the recorded investment in past due and nonaccrual loans as of December 31, 2012 and December 31, 2011 by class of loans (in thousands):


December 31, 2012	Loans Past Due Accruing Interest
	30-59 Days		60-89 Days		Over 90 Days		Total		Loans on Non-Accrual		Loans Not Past Due or Non-Accrual		Total

Commercial	$	46	$	—	$	—	$	46	$	492	$	82,005	$	82,543
Real estate - commercial		199		62		—		261		2,189		170,314		172,764
Real estate - construction		10		—		26		36		269		16,497		16,802
Consumer		22		6		7		35		16		8,298		8,349
Real estate mortgage		442		109		—		551		2,417		86,179		89,147


Total	$	719	$	177	$	33	$	929	$	5,383	$	363,293	$	369,605

S OUTHERN M ICHIGAN B ANCORP , I NC .

N OTES T O C ONSOLIDATED F INANCIAL S TATEMENTS ( CONTINUED )

N OTE D – L OANS A ND A LLOWANCE F OR L OAN L OSSES (C ONTINUED )


December 31, 2011	Loans Past Due Accruing Interest
	30-59 Days		60-89 Days		Over 90 Days		Total		Loans on Non-Accrual		Loans Not Past Due or Non-Accrual		Total

Commercial	$	182	$	120	$	6	$	308	$	413	$	69,335	$	70,056
Real estate - commercial		538		144		—		682		2,982		147,165		150,829
Real estate - construction		—		—		—		—		231		12,248		12,479
Consumer		22		4		—		26		29		8,112		8,167
Real estate mortgage		1,476		780		—		2,256		2,048		86,969		91,273


Total	$	2,218	$	1,048	$	6	$	3,272	$	5,703	$	323,829	$	332,804

Credit Quality Indicators:

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt, such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis includes all loans from the commercial loan department. This analysis is performed at least annually. The Company uses the following definitions for risk ratings:

Pass: Loans classified as pass have no existing or known potential weaknesses deserving of management’s close attention.

Special Mention: Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the Company’s credit position at some future date.

Substandard: Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

Doubtful: Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

As of December 31, 2012 and December 31, 2011, based on the most recent analysis performed, the risk category of loans by class of loans was as follows (in thousands):


December 31, 2012	Pass		Special Mention		Substandard		Doubtful		Not Risk Rated		Total

Commercial	$	72,521	$	8,993	$	1,029	$	—	$	—	$	82,543
Real estate - commercial		156,105		10,755		4,971		—		933		172,764
Real estate - construction		10,572		869		359		—		5,002		16,802
Real estate - mortgage		9,797		2,483		2,533		—		74,334		89,147
Consumer		—		—		—		—		8,349		8,349


Total	$	248,995	$	23,100	$	8,892	$	—	$	88,618	$	369,605

S OUTHERN M ICHIGAN B ANCORP , I NC .

N OTES T O C ONSOLIDATED F INANCIAL S TATEMENTS ( CONTINUED )

N OTE D – L OANS A ND A LLOWANCE F OR L OAN L OSSES (C ONTINUED )


December 31, 2011	Pass		Special Mention		Substandard		Doubtful		Not Risk Rated		Total

Commercial	$	59,492	$	5,855	$	4,709	$	—	$	—	$	70,056
Real estate - commercial		128,405		14,681		7,437		—		306		150,829
Real estate - construction		5,547		2,542		520		—		3,870		12,479
Real estate - mortgage		7,399		3,177		2,743		—		77,954		91,273
Consumer		—		—		—		—		8,167		8,167


Total	$	200,843	$	26,255	$	15,409	$	—	$	90,297	$	332,804

N OTE E – P REMISES AND E QUIPMENT , N ET

Premises and equipment, net at December 31 consisted of (in thousands):


	2012			2011

Land	$	2,362		$	2,362
Buildings and improvements		17,025			16,854
Furniture and equipment		8,628			10,255

		28,015			29,471
Less accumulated depreciation		(15,596	)		(16,925	)

Totals	$	12,419		$	12,546

Depreciation of premises and equipment charged to operations was $923,000, $869,000 and $995,000 in 2012, 2011 and 2010, respectively.

Rent expense under operating leases amounted to $110,000, $50,000 and $42,000 in 2012, 2011 and 2010, respectively.

Lease commitments under noncancelable operating equipment leases at December 31, 2012 were as follows (in thousands):


2013	$	136
2014		107
2015		107
2016		107
2017		27
Thereafter		6

Total	$	490

N OTE F – I NTANGIBLE A SSETS

Acquired core deposit intangible assets as of December 31 were as follows (in thousands):


	2012			2011

Gross carrying amount	$	3,122		$	3,122
Accumulated amortization		(1,781	)		(1,456	)

Unamortized balance	$	1,341		$	1,666

Amortization of core deposit intangible assets for the years ended December 31, 2012, 2011 and 2010 was $325,000, $339,000 and $350,000, respectively.

Estimated future amortization of core deposit intangible assets for each of the years subsequent to December 31, 2012 is as follows (in thousands):


2013	$	296
2014		284
2015		272
2016		260
2017		229

S OUTHERN M ICHIGAN B ANCORP , I NC .

N OTES T O C ONSOLIDATED F INANCIAL S TATEMENTS ( CONTINUED )

N OTE G – D EPOSITS

The carrying amount of domestic deposits at year-end follows (in thousands):


	2012		2011

Non-interest bearing checking	$	87,013	$	61,930
Interest bearing checking		119,241		110,153
Savings		55,478		53,468
Money market accounts		78,953		74,996
Time deposits		103,485		119,964

Totals	$	444,170	$	420,511

The carrying amount of time deposits over $100,000 was $35,962,000 and $42,358,000 at December 31, 2012 and 2011, respectively. Interest expense on time deposits over $100,000 was $584,000, $898,000 and $979,000 for the years ended December 31, 2012, 2011 and 2010, respectively.

At year-end 2012, scheduled maturities of time deposits were as follows for the years ending December 31 (in thousands):


2013	$	46,424
2014		36,470
2015		12,924
2016		4,680
2017		2,979
Thereafter		8

Total	$	103,485

Related party deposits were $17,781,000 and $24,522,000 at December 31, 2012 and 2011, respectively.

N OTE H – O THER B ORROWINGS

Other borrowings at December 31, 2012 and 2011 included $1,039,000 and $6,117,000, respectively, of advances from the Federal Home Loan Bank (FHLB) of Indianapolis. Advances outstanding at December 31, 2012 require payments through December 31, 2013 with fixed interest rates ranging from 4.29% to 4.57%, with a weighted average rate of 4.30%. Principal is due at maturity for the advances.

All of the advances are secured by blanket collateral agreements with the FHLB, which gives the FHLB an unperfected security interest in certain one-to-four family mortgage, home equity, and commercial real estate loans. Eligible FHLB loan collateral at December 31, 2012 and 2011 was approximately $66,870,000 and $75,048,000, respectively.

On December 29, 2009, the Company entered into a Business Loan agreement with Great Lakes Bankers Bank (GLBB), consisting of a $3,000,000 term loan, subject to sub-participation of at least $2,100,000 with banks mutually acceptable to both parties, maturing in five years with a variable rate equal to the New York Prime, as published in the Wall Street Journal, with a floor of four and one-half (4.5%) percent and monthly principal and interest payments amortized over five years. Outstanding borrowings under the loan amounted to $1,439,000 at December 31, 2011. In December 2012, the loan was fully paid off without penalty.

Other borrowings at December 31, 2011 also included a loan from a local community bank with a balance of $195,000. In December 2012, the loan was fully paid off without penalty.

S OUTHERN M ICHIGAN B ANCORP , I NC .

N OTES T O C ONSOLIDATED F INANCIAL S TATEMENTS ( CONTINUED )

N OTE I – S ECURITIES S OLD U NDER A GREEMENTS TO R EPURCHASE AND O VERNIGHT B ORROWINGS


	2012			2011
At December 31:
Outstanding balance	$	16,134		$	18,074
Average interest rate		0.20	%		0.24	%

Daily average for the year:
Outstanding balance	$	17,026		$	16,162
Average interest rate		0.22	%		0.32	%

Maximum outstanding at any month end	$	18,439		$	18,074

At December 31, 2012, the Bank had a $3,000,000 line of credit arrangement available to purchase federal funds, with no outstanding borrowings.

N OTE J – S UBORDINATED D EBENTURES A ND T RUST P REFERRED S ECURITIES

In March 2004, Southern Michigan Bancorp Capital Trust I, 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 Company issued $5,155,000 of subordinated debentures to the trust in exchange for ownership of all of the common securities of the trust and the proceeds of the preferred securities sold by the trust. The Company is not considered the primary beneficiary of this trust, therefore the trust is not consolidated in the Company’s financial statements, but rather the subordinated debentures are shown as a liability. The Company may redeem the subordinated debentures, subject to the receipt by the Company of the proper approval of the Federal Reserve, if such approval is required under applicable capital guidelines or policies of the Federal Reserve. The subordinated debentures may be redeemed on January 7, April 7, July 7 and October 7 of each year either in whole or in integrals of $1,000 at 100% of the principal amount, plus accrued and unpaid interest. The subordinated debentures mature on April 6, 2034. The subordinated debentures are also redeemable in whole, but not in part, from time to time upon the occurrence of specific events defined within the trust indenture. The Company has the option to defer interest payments on the subordinated debentures from time to time for a period not to exceed 20 consecutive quarters.

The $5,000,000 in trust preferred securities may be included in Tier I capital (with certain limitations applicable) under current regulatory guidelines and interpretations. The trust preferred securities and subordinated debentures have a variable rate of interest equal to the three month London Interbank Offered Rate (LIBOR) plus 2.75%. The rate at December 31, 2012 was 3.09%. Interest expense related to the subordinated debentures amounted to $163,000 in 2012, $156,000 in 2011, and $157,000 in 2010. The Company’s investment in the common stock of the trust is $155,000 and is included in other assets.

N OTE K – I NCOME T AXES

Income tax provision (credit) consists of the following (in thousands):


	2012			2011		2010

Current	$	1,552		$	809	$	546
Deferred		(122	)		150		175

Total income tax provision	$	1,430		$	959	$	721

The deferred income tax provision (credit) consists of the tax effect of temporary differences, including a credit of $207,000 in 2010 resulting from the utilization of net operating loss carryforwards.

S OUTHERN M ICHIGAN B ANCORP , I NC .

N OTES T O C ONSOLIDATED F INANCIAL S TATEMENTS ( CONTINUED )

N OTE K – I NCOME T AXES ( CONTINUED )

Income tax provision calculated at the statutory federal income tax rate of 34% differs from actual income tax provision as follows (in thousands):


	2012			2011			2010

Income tax at statutory rate	$	1,965		$	1,483		$	1,298
Tax-exempt interest income, net		(358	)		(311	)		(289	)
Earnings on life insurance assets, including gain from proceeds in 2010		(113	)		(118	)		(172	)
Low income housing partnership tax credits		(127	)		(127	)		(127	)
Write-off capital loss carryforward		—			—			60
Change in valuation allowance		—			—			(54	)
Other items, net		63			32			5

Totals	$	1,430		$	959		$	721

Deferred tax assets and liabilities consist of the following at December 31 (in thousands):


	2012			2011
Deferred tax assets:
Allowance for loan losses	$	1,425		$	1,134
Deferred compensation and supplemental retirement liability		835			769
Pension liability		259			170
Nonaccrual loan interest		292			252
Tax credit carryforwards		387			655
Stock based compensation		189			175
Other		172			157

Total deferred tax assets		3,559			3,312


Deferred tax liabilities:
Mortgage servicing rights		(423	)		(329	)
Goodwill		(211	)		(211	)
Purchase accounting adjustments		(533	)		(646	)
Net unrealized gain on available for sale securities		(413	)		(465	)
Depreciation		(310	)		(296	)
Other		(165	)		(124	)

Total deferred tax liabilities		(2,055	)		(2,071	)

Net deferred tax assets, included in other assets	$	1,504		$	1,241

At December 31, 2012, the Company has available alternative minimum tax credit carryforwards of $387,000, which may be utilized in the future to the extent computed regular tax exceeds the alternative minimum tax.

The Company and its subsidiaries file U.S. federal and certain state tax returns. In general, tax returns are no longer subject to tax examinations by tax authorities for years before 2010.

The Company believes that it had no significant uncertain tax positions as of December 31, 2012 and 2011.

S OUTHERN M ICHIGAN B ANCORP , I NC .

N OTES T O C ONSOLIDATED F INANCIAL S TATEMENTS ( CONTINUED )

N OTE L – B ENEFIT P LANS

Defined Benefit Pension Plan:

Effective December 31, 2009, The Southern Michigan Bank & Trust Pension Plan was fully frozen. The Company uses a December 31 measurement date for the plan.

Information about the pension plan is as follows (in thousands):


	2012			2011

Change in projected benefit obligation:
Beginning benefit obligation	$	(2,096	)	$	(2,214	)
Interest cost		(107	)		(124	)
Actuarial loss		(244	)		(166	)
Benefits paid		89			408

Ending benefit obligation		(2,358	)		(2,096	)


Change in plan assets, at fair value:
Beginning plan assets		1,449			1,744
Actual return		57			57
Employer contributions		313			82
Benefits paid		(89	)		(408	)
Plan expenses paid		(26	)		(26	)

Ending plan assets		1,704			1,449


Net amount recognized in accrued expenses and other liabilities–funded status	$	(654	)	$	(647	)

The accumulated benefit obligation for the defined benefit pension plan was $2,358,000 and $2,096,000 at December 31, 2012 and 2011, respectively.

The components of pension expense and related actuarial assumptions were as follows (in thousands):


	2012			2011			2010

Components of net periodic benefit cost:
Service cost, including plan expenses	$	26		$	26		$	26
Interest cost		107			124			130
Expected return on plan assets		(99	)		(105	)		(114	)
Recognized net actuarial loss		24			17			3
Settlement adjustment		—			92			36

Net periodic benefit cost	$	58		$	154		$	81

At December 31, 2012 and 2011, net actuarial losses of $763,000 and $502,000, respectively, have not yet been recognized as a component of net periodic benefit cost. The estimated net loss that will be amortized from accumulated other comprehensive income into net periodic benefit cost for 2013 is $40,000.

Weighted average assumptions for determining projected benefit obligation and net periodic benefit cost were as follows:


	2012			2011			2010
Discount rate on benefit obligation		4.0	%		5.0	%		5.5	%
Long-term expected rate of return on plan assets		6.0	%		7.0	%		7.0	%
Rate of compensation increase		N/A			N/A			N/A

S OUTHERN M ICHIGAN B ANCORP , I NC .

N OTES T O C ONSOLIDATED F INANCIAL S TATEMENTS ( CONTINUED )

N OTE L – B ENEFIT P LANS ( CONTINUED )


Asset Category	Target Allocation 2013			Percentage of Plan Assets at Year-end						Weighted Average Expected Long-Term Rate of Return - 2012
Asset Category	Target Allocation 2013			2012			2011

Equity securities		0	%		0	%		0	%		0	%
Debt securities		0	%		0	%		0	%		0	%
Cash and time certificates		100	%		100	%		100	%		.20	%

		100	%		100	%		100	%		.20	%

The pension plan assets are managed by the Bank’s Trust Department. A written investment policy which we believe meets the standards of the prudent investor rule is followed. In addition, Main Street Advisors, of Chicago, has provided investment advisory services, guidance and expertise.

Investments or debt obligations of Southern Michigan Bancorp, Inc. are not allowed as holdings within the plan.

The plan’s investment objective at December 31, 2012 is primarily fixed income investments with a target of 90% time certificates and 10% cash. The allocation percentages may be reduced or increased depending upon market conditions and interest rates. Due to the plan being frozen, the investment allocations have been established with shorter term objectives.

The investments in the plan are managed for the benefit of the participants. They are structured to meet the cash flow necessary to pay retiring employees. ERISA guidelines for diversification of the investments are followed in all material respects and giving due consideration to the plan’s frozen status.

Fair Value of Plan Assets: Fair value is the exchange price that would be received for an asset in the principal or most advantageous market for the asset in an orderly transaction between market participants on the measurement date.

The Company uses the following methods and significant assumptions to estimate the fair value of each type of financial instrument:

Debt Securities: The fair values for investment securities are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3). Discounted cash flows are calculated using spread to swap and LIBOR curves that are updated to incorporate loss severities, volatility, credit spread and optionality. During times when trading is more liquid, broker quotes are used (if available) to validate the model. Rating agency and industry research reports as well as defaults and deferrals on individual securities are reviewed and incorporated into the calculations.

The fair value of the plan assets at December 31, 2012 amounted to $1,704,000 consisting of cash and time certificates with fair value measured using quoted prices in active markets (Level 1). There were no plan assets measured at fair value using significant unobservable inputs (Level 3) as of or for the years ended December 31, 2012 or 2011.

The Company expects to contribute $123,000 to the plan in 2013.

S OUTHERN M ICHIGAN B ANCORP , I NC .

N OTES T O C ONSOLIDATED F INANCIAL S TATEMENTS ( CONTINUED )

N OTE L – B ENEFIT P LANS ( CONTINUED )

At December 31, 2012, estimated future benefit payments from the plan were as follows for the years ending December 31 (in thousands):


2013	$	115
2014		37
2015		34
2016		150
2017		505
2018 – 2022		833

Employee Stock Ownership Plan: The Company has an employee stock ownership plan (ESOP) for substantially all full-time employees. The Plan includes a 401(k) provision with the Company’s matching contribution provided in Company stock. The Board of Directors determines the Company’s contribution level annually. Assets of the plan are held in trust by the Bank and administrative costs of the plan are borne by the Company. Expense charged to operations for contributions to the plan totaled $242,000, $253,000 and $299,000 in 2012, 2011and 2010, respectively.

Shares held by the ESOP at year-end are as follows:


	2012		2011

Allocated shares		125,125		115,170
Unallocated shares		6,195		15,402


Total ESOP shares		131,320		130,572

The fair value of the allocated shares held by the ESOP is $2,065,000 and $1,296,000 at December 31, 2012 and 2011, respectively. Upon distribution of shares to a participant, the participant has the right to require the Company to purchase shares at their fair value in accordance with terms and conditions of the plan. As such, these shares are not classified in shareholders’ equity as permanent equity. In 2008, the ESOP obtained a loan for $609,000 to purchase 28,500 shares. The balance of the loan at December 31, 2012 and 2011 was $35,000 and $169,000, respectively.

Deferred Compensation Plan: Directors and certain officers of the Bank may defer a portion of their director fees or compensation in a non-qualified deferred compensation plan. An account is established for each participant in the plan and credited with the participant’s annual deferred compensation plus interest based on the stated rate determined annually. Upon retirement, participants receive the balance in their account over 15 years. Participants also continue to earn interest during retirement based on their remaining account balance. Participants are immediately vested in their account balances. The plan is intended to be funded by certain bank-owned life insurance contracts. The interest rate paid on deferred compensation balances as of December 31, 2012 ranged from 4.53% to 12.98%. There were no new participants in the plan during 2012. Deferred compensation expense was $219,000, $232,000 and $245,000 in 2012, 2011 and 2010, respectively. The liability for deferred compensation benefits was $2,098,000 and $1,984,000 at December 31, 2012 and 2011, respectively, and is included in accrued expenses and other liabilities in the accompanying consolidated balance sheets.

S OUTHERN M ICHIGAN B ANCORP , I NC .

N OTES T O C ONSOLIDATED F INANCIAL S TATEMENTS ( CONTINUED )

N OTE L – B ENEFIT P LANS ( CONTINUED )

Supplemental Retirement Plans: The Bank also maintains a supplemental retirement plan (SERP) to provide annual payments to certain current and former executives subsequent to their retirement. Benefits under the SERP were frozen effective December 31, 2008. Expense associated with the SERP totaled $14,000, $15,000 and $28,000 in 2012, 2011 and 2010, respectively. Liabilities associated with the SERP totaled $187,000 and $207,000 at December 31, 2012 and 2011, respectively.

In December 2011, the Board of Directors approved the Defined Contribution Supplemental Executive Retirement Plan (2011 SERP), which is intended to provide select executive officers with a retirement benefit that is competitive with industry practices for bank executives when combined with the executive’s other employer-funded retirement benefits. In contrast to the frozen SERP, the 2011 SERP is a defined contribution arrangement which gives the Bank the discretion to make a specific annual nonqualified deferred compensation contribution to the account of participating executives. Whether an annual deferred compensation contribution will be made to the account balance of a participating executive, as well as the amount of the contribution, is at the discretion of the Bank’s Board of Directors. The contribution that will be made by the Bank to the account of each executive is determined based on a percentage of base salary. Participants are generally entitled to receive payment of the benefit in their account in 120 equal monthly installments commencing at age 65. The Company’s 2012 and 2011 contributions amounted to $100,000 and $70,000 respectively. Liabilities associated with the 2011 SERP totaled $172,000 and $70,000 at December 31, 2012 and 2011, respectively.

N OTE M – S TOCK B ASED C OMPENSATION

The Company has stock based compensation plans as described below. Total compensation cost charged against income for those plans was $203,000, $168,000 and $154,000 in 2012, 2011 and 2010, respectively.

On June 6, 2005, shareholders of the Company approved the Stock Incentive Plan of 2005 to advance the interest of the Company and its shareholders by affording to directors, officers and other employees of the Company an opportunity for increased stock ownership. The plan permits the grant and award of stock options, stock appreciation rights, restricted stock and stock awards. A maximum of 300,000 shares of common stock are available under the plan. The plan will be terminated June 5, 2015 or earlier if determined by the Board of Directors. At December 31, 2012, 63,792 shares were available for issuance under the plan.

On April 17, 2000, the Company approved a Stock Option Plan to advance the interests of the Company and its shareholders by affording to directors, officers and other employees of the Company an opportunity to acquire or increase their proprietary interest in the Company using stock options. Option shares authorized under the plan totaled 115,500. Options were granted with an exercise period of 10 years or less, an exercise price of not less than the fair market value of the stock on the date the options were granted, and a vesting period as determined by the Board of Directors. This plan terminated on March 20, 2010.

The fair value of each option award is estimated on the date of grant using a Black-Scholes option valuation model that uses the weighted average assumptions noted in the following table. The expected volatility and life assumptions are based on historical experience. The interest rate is based on the U.S. Treasury yield curve and the dividend yield assumption is based on the Company’s history and expected dividend payouts.


	2012			2011			2010

Risk-free interest rate		0.26	%		0.33	%		0.96	%
Expected option life		8 years			8 years			8 years
Expected stock price volatility		22.84	%		23.40	%		23.64	%
Dividend yield		2.93	%		2.99	%		3.29	%

Weighted-average fair value of options granted during year	$	1.59		$	1.86		$	1.53

S OUTHERN M ICHIGAN B ANCORP , I NC .

N OTES T O C ONSOLIDATED F INANCIAL S TATEMENTS ( CONTINUED )

N OTE M – S TOCK O PTIONS ( CONTINUED )

A summary of the activity in the plans for 2012 follows:

Stock Options


	Shares Subject to Options			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value

Outstanding at beginning of year		221,026		$	21.06
Granted		7,875			11.20
Exercised		(760	)		8.11
Forfeited		(7,690	)		21.43

Outstanding at end of year		220,451		$	20.74		3.9 years	$	235,000


Exercisable at year-end		205,101		$	21.40		3.5 years	$	165,000


	2012		2011		2010

Intrinsic value of options exercised	$	4,000		—		—
Cash received from option exercise		6,000		—		—
Tax benefit realized from option exercises		—		—		—

As of December 31, 2012, there was $10,000 of total unrecognized compensation cost related to nonvested stock options granted under the plans. The cost is expected to be recognized over a weighted average period of .75 years.

Restricted Stock – Restricted shares may be issued under the 2005 plan described above. Compensation expense is recognized over the vesting period of the shares based on the market value of the shares on the issue date. The total fair value of shares vested during the years ended December 31, 2012, 2011 and 2010 was $157,000, $91,000 and $39,000, respectively. As of December 31, 2012, there was $399,000 of total unrecognized compensation cost related to unvested shares granted under the plan. The cost is expected to be recognized over a weighted average period of 3.1 years.

A summary of activity for restricted stock for 2012 follows:


	Shares			Weighted Average Grant Date Fair Value

Nonvested at January 1, 2012		41,309		$	11.33
Granted		18,125			11.20
Vested		(12,239	)		12.83
Forfeited		(1,082	)		11.50

Nonvested at December 31, 2011		46,113		$	11.19

S OUTHERN M ICHIGAN B ANCORP , I NC .

N OTES T O C ONSOLIDATED F INANCIAL S TATEMENTS ( CONTINUED )

N OTE N – C OMMITMENTS

There are various commitments which arise in the normal course of business, such as commitments under commercial letters of credit, standby letters of credit and commitments to extend credit. These arrangements have credit risk essentially the same as that involved in extending loans to customers and are subject to the Bank’s normal credit policies. Collateral generally consists of receivables, inventory and equipment and is obtained based on management’s credit assessment of the customer.

At December 31, 2012 and 2011, the Company had no commitments under commercial letters of credit used to facilitate customers’ trade transactions.

Under standby letter of credit agreements, the Company agrees to honor certain commitments in the event that its customers are unable to do so. At December 31, 2012 and 2011, commitments under outstanding standby letters of credit were $1,767,000 and $1,690,000, respectively.

Loan commitments outstanding to extend credit are detailed below (in thousands):


	2012		2011
Fixed rate	$	3,734	$	3,475
Variable rate		75,613		73,672

Totals	$	79,347	$	77,147

The fixed rate commitments have stated interest rates ranging from 1.25% to 14.00%. The terms of the above commitments range from 1 to 121 months.

Management does not anticipate any losses as a result of the above related transactions; however, the above amount represents the maximum exposure to credit loss for loan commitments and commercial and standby letters of credit.

Certain executives of the Bank have employment contracts which have change of control clauses. The employment contracts provide for the payment of 2.99 times the officer’s base salary and bonus if the officer is terminated in the event of a change of control.

N OTE O – A CCUMULATED O THER C OMPREHENSIVE I NCOME

Accumulated other comprehensive income amounted to $297,000 at December 31, 2012 and $571,000 at December 31, 2011 consisting of the following (in thousands):


	2012			2011
Unrealized gain on available-for-sale securities, net of income taxes of $413 in 2012 and $465 in 2011	$	801		$	903
Pension liability, net of income taxes of $259 in 2012 and $170 in 2011		(504	)		(332	)

Total	$	297		$	571

N OTE P – R ESTRICTIONS O N T RANSFERS F ROM S UBSIDIARIES

Capital guidelines adopted by federal and state regulatory agencies and restrictions imposed by law limit the amount of cash dividends the Bank can pay to the Company. At December 31, 2012, using the most restrictive of these conditions, the aggregate cash dividends that the Bank could pay the Company without prior regulatory approval was approximately $9.1 million.

S OUTHERN M ICHIGAN B ANCORP , I NC .

N OTES T O C ONSOLIDATED F INANCIAL S TATEMENTS ( CONTINUED )

N OTE Q – S OUTHERN M ICHIGAN B ANCORP , I NC . (P ARENT C OMPANY O NLY ) F INANCIAL I NFORMATION

Condensed financial statements of Southern Michigan Bancorp, Inc. follow (in thousands):


Balance Sheets	December 31,
	2012		2011
Assets
Cash and cash equivalents	$	218	$	404
Investment in subsidiary bank		60,053		57,947
Investment in non banking subsidiary		186		188
Premises and equipment, net		813		844
Other assets		910		778

Total Assets	$	62,180	$	60,161


Liabilities and Shareholders’ Equity
Dividends payable	$	285	$	165
Other liabilities		40		46
Other borrowings		—		1,634
Subordinated debentures		5,155		5,155
Common stock subject to repurchase obligation in ESOP		2,065		1,296
Shareholders’ equity		54,635		51,865

Total Liabilities and Shareholders’ Equity	$	62,180	$	60,161


Statements of Income	Year ended December 31,
	2012			2011			2010

Dividends from subsidiary bank	$	2,254		$	1,437		$	1,358
Interest income		7			16			25
Interest expense		(228	)		(266	)		(300	)
Rental income from subsidiary bank		137			137			137
Other expenses		(344	)		(310	)		(290	)

		1,826			1,014			930
Federal income tax credit		(146	)		(144	)		(146	)

		1,972			1,158			1,076
Equity in net income, less dividends received from:
Subsidiary bank		2,380			2,245			2,023
Non-banking subsidiary		(2	)		(1	)		(1	)

Net Income	$	4,350		$	3,402		$	3,098

S OUTHERN M ICHIGAN B ANCORP , I NC .

N OTES T O C ONSOLIDATED F INANCIAL S TATEMENTS ( CONTINUED )

N OTE Q – S OUTHERN M ICHIGAN B ANCORP , I NC . (P ARENT C OMPANY O NLY ) F INANCIAL I NFORMATION ( CONTINUED )


Statements of Cash Flows	Year ended December 31,
	2012			2011			2010
Operating Activities
Net income	$	4,350		$	3,402		$	3,098
Adjustments to reconcile net income to net cash from operating activities:
Equity in net income, less dividends received from:
Subsidiary bank		(2,380	)		(2,245	)		(2,023	)
Non-banking subsidiary		2			1			1
Stock option and restricted stock grant compensation expense		203			168			154
Depreciation		31			32			32
Net change in obligation under ESOP		134			128			140
Other, net		(138	)		(84	)		(224	)

Net cash from operating activities		2,202			1,402			1,178


Financing Activities
Repayments of other borrowings		(1,634	)		(1,211	)		(644	)
Cash dividends paid		(760	)		(470	)		(467	)
Stock options exercised		6			—			—

Net cash from financing activities		(2,388	)		(1,681	)		(1,111	)


Net change in cash and cash equivalents		(186	)		(279	)		67
Beginning cash and cash equivalents		404			683			616


Ending cash and cash equivalents	$	218		$	404		$	683

N OTE R – S UPPLEMENTAL C ASH F LOW D ISCLOSURES

The following supplemental cash flow disclosures are provided for the years ended December 31, 2012, 2011 and 2010 (in thousands):


	2012			2011			2010

Cash paid during the year for:
Interest	$	2,840		$	3,791		$	4,527
Income taxes		1,135			590			492

Non-cash operating activities:
Change in deferred income taxes on net unrealized gain on available for sale securities		(52	)		417			(168	)
Change in deferred income taxes on pension liability		(89	)		(35	)		(18	)
Change in pension liability		261			106			53

Non-cash investing activities:
Change in unrealized gain on available for sale securities		(154	)		1,227			(494	)
Transfers from loans to other real estate owned		2,069			892			1,545

S OUTHERN M ICHIGAN B ANCORP , I NC .

N OTES T O C ONSOLIDATED F INANCIAL S TATEMENTS ( CONTINUED )

N OTE S – F AIR V ALUE I NFORMATION

The following methods and assumptions were used by the Company in estimating fair values for financial instruments, as well as an indication of where the instrument falls within the fair value hierarchy, which is described in greater detail in Note T.

Cash and cash equivalents: The carrying amount reported in the balance sheet approximates fair value resulting in a level 1 classification.

Securities available for sale: Fair values for securities available for sale are based on quoted market prices, where available. For all other securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information, and the bond’s terms and conditions, among other things. Securities are classified as either level 1, 2 or 3. See Footnote T for the hierarchy level breakdown.

Loans, net: For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values resulting in a level 3 classification. The fair values for other loans are estimated using discounted cash flows analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality resulting in a level 3 classification. The allowance for loan losses is considered to be a reasonable estimate of discount for credit quality concerns.

Loans held for sale: The fair value of loans held for sale is estimated based upon binding contracts and quotes from third party investors resulting in a level 2 classification.

Accrued interest receivable: The carrying amount reported in the balance sheet approximates fair value.

Off-balance-sheet financial instruments: The estimated fair value of off-balance-sheet financial instruments is based on current fees or costs that would be charged to enter or terminate the arrangements. The estimated fair value is not considered to be significant for this presentation.

Deposits: The fair values disclosed for demand deposits (e.g., interest and non-interest checking, passbook savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts) resulting in a level 2 classification. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of expected monthly maturities on time deposits resulting in a level 2 classification.

Securities sold under agreements to repurchase, overnight borrowings and federal funds sold: The carrying amount reported in the balance sheet approximates fair value resulting in a level 2 classification.

Other borrowings: The fair value of other borrowings is estimated using discounted cash flows analysis based on the current incremental borrowing rate for similar types of borrowing arrangements resulting in a level 2 classification.

Subordinated debentures: The carrying amount reported in the balance sheet approximates fair value of the variable-rate subordinated debentures. The fair value is estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a level 3 classification.

Accrued interest payable: The carrying amount reported in the balance sheet approximates fair value.

S OUTHERN M ICHIGAN B ANCORP , I NC .

N OTES T O C ONSOLIDATED F INANCIAL S TATEMENTS ( CONTINUED )

N OTE S – F AIR V ALUE I NFORMATION ( CONTINUED )

While these estimates of fair value are based on management’s judgment of appropriate factors, there is no assurance that if the Company had disposed of such items at December 31, 2012 and 2011, the estimated fair values would have been achieved. Market values may differ depending on various circumstances not taken into consideration in this methodology. The estimated fair values at December 31, 2012 and 2011 should not necessarily be considered to apply at subsequent dates.

In addition, other assets and liabilities that are not defined as financial instruments are not included in the following disclosures, such as property and equipment. Also, non-financial instruments typically not recognized in financial statements may have value but are not included in the following disclosures. These include, among other items, the estimated earnings power of core deposit accounts, the trained work force, customer goodwill and similar items.

The estimated fair values of the Company’s financial instruments at year end are as follows (in thousands):


	Fair Value Hierarchy	2012						2011
	Fair Value Hierarchy	Carrying Amount			Fair Value			Carrying Amount			Fair Value
Financial assets:
Cash and cash equivalents	Level 1	$	50,334		$	50,334		$	42,185		$	42,185
Federal funds sold	Level 1		276			276			287			287
Securities available for sale	See Note T		64,525			64,525			90,344			90,344
Loans held for sale	Level 3		1,776			1,776			1,088			1,088
Loans, net of allowance for loan losses	Level 3		364,150			368,715			327,392			333,283
Accrued interest receivable	Level 1		2,059			2,059			2,148			2,148

Financial liabilities:
Deposits	Level 2	$	(444,170	)	$	(445,371	)	$	(420,511	)	$	(422,493	)
Securities sold under agreements to repurchase and overnight borrowings	Level 1		(16,134	)		(16,134	)		(18,074	)		(18,074	)
Other borrowings	Level 2		(1,039	)		(1,049	)		(7,751	)		(7,860	)
Subordinated debentures	Level 3		(5,155	)		(5,155	)		(5,155	)		(5,155	)
Accrued interest payable	Level 1		(108	)		(108	)		(131	)		(131	)

The preceding table does not include net cash surrender value of life insurance and dividends payable which are also considered financial instruments. The estimated fair value of such items is considered to be their carrying amount.

Southern also has unrecognized financial instruments which relate to commitments to extend credit and standby letters of credit, as described in Note N. The contract amount of such instruments is considered to be the fair value.

S OUTHERN M ICHIGAN B ANCORP , I NC .

N OTES T O C ONSOLIDATED F INANCIAL S TATEMENTS ( CONTINUED )

N OTE T – F AIR V ALUE M EASUREMENTS

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability shall not be adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact, and (iv) willing to transact.

Fair value must be determined using valuation techniques that are consistent with the market approach, the income approach, and/or the cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert future amounts, such as cash flows or earnings, to a single present amount on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement cost). Valuation techniques should be consistently applied. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. A fair value hierarchy for valuation inputs has been established that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

Level 1 Inputs - Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

Level 2 Inputs - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds, credit risks, etc.), or inputs that are derived principally from or corroborated by market data by correlation or other means.

Level 3 Inputs - Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.

A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, follows. These valuation methodologies were applied to all of the Company’s financial and nonfinancial assets and liabilities carried at fair value.

In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality, the company’s creditworthiness, among other things, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time. The Company’s valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.

S OUTHERN M ICHIGAN B ANCORP , I NC .

N OTES T O C ONSOLIDATED F INANCIAL S TATEMENTS ( CONTINUED )

N OTE T – F AIR V ALUE M EASUREMENTS ( CONTINUED )

Securities Available for Sale. Securities classified as available for sale are reported at fair value utilizing Level 1, Level 2 and Level 3 inputs. Unadjusted quoted prices in active markets for identical assets are utilized to determine fair value at the measurement date for Level 1 securities. For all other securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information, and the bond’s terms and conditions, among other things. When there are unobservable inputs, such securities are classified as Level 3.

Securities available for sale classified as Level 3 inputs represent non-publicly traded municipal issues with limited trading activity from entities within the Company’s market area. The fair value of these investments was determined using Level 3 valuation techniques, as there is no market available to price these investment securities. The method used for determining the fair value for these investment securities included a comparison to the fair value of other investment securities valued with Level 2 inputs with similar characteristics (credit, time to maturity, call structure, etc.) and the interest yield curve for comparable debt investment securities.

Impaired Loans. The Company does not record impaired loans at fair value on a recurring basis. However, periodically, a loan is considered impaired and is reported at the fair value of the underlying collateral, less estimated costs to sell, if repayment is expected solely from the collateral or at estimated discounted cash flows if the credit is performing. Impaired loans measured at fair value typically consist of loans on nonaccrual status and loans with a portion of the allowance for loan losses allocated specific to the loan. Some loans may be included in both categories whereas other loans may only be included in one category. Collateral values are estimated using level 2 and level 3 inputs, including recent appraisals and customized discounting criteria including discounting of appraisals based on age or changes in property or market conditions. These discounts generally range from 10% to 55%. Collateral values are also discounted for estimated selling costs of 10%. Estimated cash flows are discounted considering the loan rate and current market rates and generally range from 5% to 11%. Due to the significance of the level 3 inputs, impaired loans have been classified as level 3.

Other Real Estate Owned (OREO). The Company values OREO at the fair value of the underlying collateral less expected selling costs. Collateral values are estimated primarily using discounted appraisals and reflect a market value approach. Due to the significance of unobservable inputs used in estimating fair value, OREO has been classified as level 3.

The following table summarizes financial and nonfinancial assets (there were no financial or nonfinancial liabilities) measured at fair value as of December 31, 2012 and 2011, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value (in thousands):


2012	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value

Recurring:
Securities available for sale:
Federal agencies	$	16,030	$	—	$	—	$	16,030
U.S. government sponsored entities and agencies		7,902		—		—		7,902
States and political subdivisions		—		33,231		1,747		34,978
Collateralized mortgage obligations		—		5,189		—		5,189
Mortgage-backed securities		—		426		—		426

Total available for sale	$	23,932	$	38,846	$	1,747	$	64,525


Nonrecurring:
Impaired loans	$	—	$	—	$	8,231	$	8,231
Other real estate owned:
Commercial	$	—	$	—	$	1,336	$	1,336
Residential Real Estate	$	—	$	—	$	297	$	297

S OUTHERN M ICHIGAN B ANCORP , I NC .

N OTES T O C ONSOLIDATED F INANCIAL S TATEMENTS ( CONTINUED )

N OTE T – F AIR V ALUE M EASUREMENTS (C ONTINUED )


2011	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value

Recurring:
Securities available for sale:
Federal agencies	$	28,435	$	—	$	—	$	28,435
U.S. government sponsored entities and agencies		22,956		—		—		22,956
States and political subdivisions		—		31,213		2,232		33,445
Asset-backed securities		2,476		—		—		2,476
Mortgage-backed securities		—		3,032		—		3,032

Total available for sale	$	53,867	$	34,245	$	2,232	$	90,344


Nonrecurring:
Impaired loans	$	—	$	—	$	8,897	$	8,897

Other real estate owned	$	—	$	—	$	1,530	$	1,530

Impaired loans are reported net of an allowance for loan losses of $758,000 at December 31, 2012 and $984,000 at December 31, 2011.

Other real estate owned, which is measured at the lower of carrying or fair value less costs to sell, had a net carrying amount as of December 31, 2012 of $1,633,000, which is made up of the balance of $1,825,000, net of a valuation allowance of $192,000. Other real estate owned had a net carrying amount of $1,530,000, made up of the balance of $1,599,000, net of a valuation allowance of $69,000, at December 31, 2011.

The following is a reconciliation of the beginning and ending balances of securities available for sale which are measured at fair value on a recurring basis using significant unobservable (Level 3) inputs during the years ended December 31, 2012 and 2011 (in thousands):


	2012			2011
Balance at January 1	$	2,232		$	2,992
Net maturities and calls		(450	)		(1,264	)
Unrealized net gains included in other comprehensive income		(35	)		153
Purchases		—			351
Net transfers to or from level 3		—			—


Balance at December 31	$	1,747		$	2,232

There were no transfers of financial instruments between Levels 1 and 2 during 2012 and 2011.

S OUTHERN M ICHIGAN B ANCORP , I NC .

N OTES T O C ONSOLIDATED F INANCIAL S TATEMENTS ( CONTINUED )

N OTE U – R EGULATORY M ATTERS

Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations involve quantitative measures of assets, liabilities and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action that could have a direct material adverse effect on the consolidated financial statements. Prompt corrective action provisions are not applicable to bank holding companies.

The prompt corrective action regulations provide five capital categories, including well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized or worse, regulatory approval is required to, among other things, accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and plans for capital restoration are required.

At year end, actual capital levels and minimum required levels were as follows (in thousands):


	Actual					Minimum Required For Capital Adequacy Purposes					Minimum Required To Be Well Capitalized Under Prompt Corrective Action Regulations
	Amount		Ratio			Amount		Ratio			Amount		Ratio
2012

Total capital (to risk weighted assets)
Consolidated	$	51,717		13.7	%	$	30,310		8.0	%		N/A		N/A
Bank		50,053		13.3			30,201		8.0		$	37,752		10.0	%

Tier 1 capital (to risk weighted assets)
Consolidated		46,972		12.4			15,155		4.0			N/A		N/A
Bank		45,325		12.0			15,101		4.0			22,651		6.0
Tier 1 capital (to average assets)
Consolidated		46,972		9.3			20,132		4.0			N/A		N/A
Bank		45,325		9.0			20,134		4.0			25,168		5.0

2011

Total capital (to risk weighted assets)
Consolidated	$	47,309		13.7	%	$	27,684		8.0	%		N/A		N/A
Bank		47,078		13.7			27,572		8.0		$	34,465		10.0	%
Tier 1 capital (to risk weighted assets)
Consolidated		42,970		12.4			13,842		4.0			N/A		N/A
Bank		42,756		12.4			13,786		4.0			20,679		6.0
Tier 1 capital (to average assets)
Consolidated		42,970		8.6			19,917		4.0			N/A		N/A
Bank		42,756		8.6			19,963		4.0			24,953		5.0

S OUTHERN M ICHIGAN B ANCORP , I NC .

N OTES T O C ONSOLIDATED F INANCIAL S TATEMENTS ( CONTINUED )

N OTE U – R EGULATORY M ATTERS ( CONTINUED )

Regulatory Developments: On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Act”), which brings significant financial reform. Among other things, the Act:

•

Creates a Financial Services Oversight Council to identify emerging systemic risks and improve interagency cooperation;

•

Creates a Consumer Financial Protection Agency authorized to promulgate and enforce consumer protection regulations relating to financial products, which would affect both banks and non-bank finance companies;

•

Establishes strengthened capital standards for banks and bank holding companies, and disallows trust preferred securities from being included in Tier 1 capital determination for certain financial institutions;

•

Enhances regulation of financial markets, including derivatives and securitization markets;

•

Contains a series of provisions covering mortgage loan origination standards affecting, among other things, originator compensation, minimum repayment standards and prepayments;

•

Grants the Board of Governors of the Federal Reserve System the power to regulate debit card interchange fees;

•

Prohibits certain trading activities by banks;

•

Permanently increases the maximum standards FDIC deposit insurance amount to $250,000; and

•

Creates an Office of National Insurance with the U.S. Department of Treasury.

While the provisions of the Act receiving the most public attention have generally been those more likely to affect larger institutions, the Act also contains many provisions which will affect smaller institutions, such as the Company, in substantial and unpredictable ways. Consequently, compliance with the Act’s provisions may curtail the Company’s revenue opportunities, increase its operating costs, require it to hold higher levels of regulatory capital and/or liquidity or otherwise adversely affect the Company’s business or financial results in the future. Because many aspects of the Act are subject to future rulemaking, it is difficult to precisely anticipate its overall financial impact on the Company and Bank at this time.

N OTE V – Q UARTERLY F INANCIAL D ATA ( IN THOUSANDS , EXCEPT PER SHARE DATA ) (U NAUDITED )


	Interest Income		Net Interest Income		Provision for Loan Losses		Net Income		Earnings Per Share
	Interest Income		Net Interest Income		Provision for Loan Losses		Net Income		Basic		Fully Diluted

2012
First Quarter	$	4,935	$	4,141	$	225	$	1,002	$	.43	$	.43
Second Quarter		4,969		4,253		475		1,027		.43		.43
Third Quarter		5,057		4,384		350		1,154		.49		.49
Fourth Quarter		5,030		4,396		300		1,167		.49		.49

2011
First Quarter	$	4,866	$	3,863	$	125	$	748	$	.32	$	.32
Second Quarter		4,822		3,871		375		762		.33		.33
Third Quarter		4,944		4,027		375		887		.38		.38
Fourth Quarter		5,046		4,166		175		1,005		.43		.43

S ELECTED F INANCIAL D ATA

(in thousands, except per share data)


	Year Ended December 31
	2012			2011			2010			2009			2008
Total interest income	$	19,991		$	19,387		$	20,416		$	21,938			25,929
Net interest income		17,174			15,636			15,946			16,538			17,740
Provision for loan losses		1,350			1,050			1,375			2,725			5,080
Net income		4,350			3,402			3,098			1,936			813
Per share data
Basic earnings per share		1.84			1.46			1.34			.84			.36
Diluted earnings per share		1.84			1.46			1.34			.84			.36
Cash dividends		.37			.22			.20			.20			.80
Balance sheet data:
Gross loans		369,605			332,804			309,524			333,079			335,310
Deposits		444,170			420,511			409,901			380,905			394,043
Other borrowings		1,039			7,751			10,079			10,832			12,492
Common stock subject to repurchase		2,065			1,296			1,399			945			728
Equity		54,635			51,865			47,843			45,734			44,416
Total assets		528,860			509,220			493,880			462,409			474,996
Return on average assets		.84	%		.68	%		.65	%		.41	%		.17	%
Return on average equity (1)		8.09			6.80			6.56			4.29			1.77
Dividend payout ratio (2)		20.23			15.23			15.11			24.13			227.33
Average equity to average assets (1)		10.41			9.96			9.87			9.66			9.59

(1)	Average equity used in the above table excludes common stock subject to repurchase obligation but includes average unrealized appreciation or depreciation on securities available for sale.

(2)	Dividends declared divided by net income.

C OMMON S TOCK M ARKET P RICES AND D IVIDENDS

The Company’s common stock is regularly quoted on the OTCQB under the symbol SOMC. The sale prices described below are quotations reflecting inter-dealer prices, without retail markup, markdown or commissions, and may not necessarily represent actual transactions. As of March 11, 2013, there were 2,393,943 shares of Southern common stock issued and outstanding held by 384 holders of record.

The following table sets forth the range of high and low closing sales prices and dividends declared on the Company’s common stock for the two most recent fiscal years:


	2011						2012
	Closing Price				Cash Dividends Declared		Closing Price				Cash Dividends Declared
Quarter Ended	High		Low		Cash Dividends Declared		High		Low		Cash Dividends Declared
March 31	$	13.25	$	12.00	$	.05	$	12.65	$	11.20	$	.07
June 30		12.85		11.90		.05		14.50		12.50		.09
September 30		12.69		11.80		.05		15.30		13.25		.09
December 31		12.55		11.05		.07		16.75		13.50		.12

There are restrictions that currently limit the Company’s ability to pay cash dividends. Information regarding dividend payment restrictions is described in Note P to the consolidated financial statements.

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A.

Controls and Procedures

Management of Southern is responsible for establishing and maintaining effective disclosure controls and procedures, as defined under Rule 15d-15(e) of the Securities Exchange Act of 1934. An evaluation was performed under the supervision, and with the participation, of Southern’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of Southern’s disclosure controls and procedures as of December 31, 2012. Based on and as of the time of that evaluation, Southern’s management, including the Chief Executive Officer and Chief Financial Officer, concluded that Southern’s disclosure controls and procedures were effective to ensure that information required to be disclosed by Southern in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms.

The information under the heading “Management’s Report on Internal Control Over Financial Reporting” is here incorporated by reference.

Item 9B.

Other Information

None.

PART III

Item 10.

Directors, Executive Officers and Corporate Governance

Directors and Executive Officers

Southern’s board of directors is comprised of three classes, which are as nearly equal in number as possible. Each class of directors serves a successive three-year term of office.

Biographical information concerning the persons who are directors and executive officers of Southern is presented below as of March 11, 2013. For directors, also presented below is the specific experience, qualifications, attributes or skills that led to the conclusion of the Corporate Governance and Nominating Committee and the board of directors that the person should serve as a director in light of Southern’s business and structure. Except as otherwise indicated, all of the named individuals have had the same principal employment for over five years. Executive officers are appointed annually and serve at the pleasure of the board of directors of Southern.

Nominees for Director with Terms Expiring in 2016

H. Kenneth Cole (age 64) has been a director of Southern since 1998 and a director of Southern Michigan Bank since 1998. Mr. Cole is the retired Chief Administrative Officer of Hillsdale College, a private, liberal arts college, located in Hillsdale, Michigan and is currently working part time for the College as the Secretary/Treasurer of the Hillsdale College Independence Foundation. In nominating Mr. Cole, the Corporate Governance and Nominating Committee considered as important factors Mr. Cole’s 35 years of experience in financial management positions, his experience and familiarity with financial statements and financial disclosures, his education, including an MBA in accounting, his familiarity with an important market area in which Southern competes and his years of service as a director of Southern.

Gary Hart Haberl (age 60) has been a director of Southern since 2004 and a director of Southern Michigan Bank since 2004. Mr. Haberl is President of Infinisource, Inc., a benefits administrator. In nominating Mr. Haberl, the Corporate Governance and Nominating Committee considered as important factors his 37 years of marketing experience, his extensive entrepreneurial experience in his own business ventures, his demonstrated business management and leadership background and his familiarity with an important market area in which Southern competes.

Brian P. McConnell (age 50) has been a director of Southern since 2007 and a director of Southern Michigan Bank since 2007. Mr. McConnell is President and Chief Operating Officer of Burr Oak Tool Inc., a manufacturer of production equipment for the heat transfer and tube processing industries. In nominating Mr. McConnell, the Corporate Governance and Nominating Committee considered as important factors his demonstrated business management and leadership background with a multinational manufacturing company and his familiarity with an important market area in which Southern competes.

Kurt G. Miller (age 57) has been a director of Southern since 2002 and a director of Southern Michigan Bank since 2002. Mr. Miller is President of Southern and Southern Michigan Bank. In nominating Mr. Miller, the Corporate Governance and Nominating Committee considered as important factors his extensive experience in the banking industry, his knowledge of the Southern organization and its operations through his day-to-day management and his familiarity with the various market areas in which Southern competes.

Directors with Terms Expiring in 2015

Gregory J. Hull (age 65) has been a director of Southern since 1995 and a director of Southern Michigan Bank since 1995. Mr. Hull is President of Hull Farms, Inc. and owner of Dovey’s Roost Farm. In concluding Mr. Hull should serve as a director of Southern, the Corporate Governance and Nominating Committee considered as important factors his 46 years of experience in farm management and satisfying the financial needs that are typical of many Southern agricultural customers, his familiarity with an important market area in which Southern competes and his years of service as a director of Southern.

Thomas E. Kolassa (age 65) has been a director of Southern since 1995 and a director of Southern Michigan Bank since 1995. Mr. Kolassa is a Senior Vice-President of Hub International, Inc., a North American insurance brokerage. In concluding Mr. Kolassa should serve as a director of Southern, the Corporate Governance and Nominating Committee considered as important factors his many years of entrepreneurial experience in his own business ventures, his management and leadership provide quality insights on the business types served by Southern, his familiarity with an important market area in which Southern competes and his years of service as a director of Southern.

Donald J. Labrecque (age 55) has been a director of Southern since 2004 and a director of Southern Michigan Bank since 2004. Mr. Labrecque is the President of Labrecque Management, LLC, which owns real estate and operates entertainment facilities, including a bowling center, and is President of Kegler Inc. In concluding Mr. Labrecque should serve as a director of Southern, the Corporate Governance and Nominating Committee considered as important factors his extensive entrepreneurial experience in his own business ventures, including satisfying the financial needs of those businesses that are typical of many Southern customers, and his familiarity with an important market area in which Southern competes.

Freeman E. Riddle (age 80) has been a director of Southern since 1982 and a director of Southern Michigan Bank since 1982. Mr. Riddle is the Vice-President of Spoor & Parlin, Inc., which provides agricultural machinery and services, and was previously the President of Spoor & Parlin, Inc. In concluding Mr. Riddle should serve as a director of Southern, the Corporate Governance and Nominating Committee considered as important factors his many years of entrepreneurial experience in his own business venture, his management and leadership provide quality insights on the business types served by Southern, his familiarity with an important market area in which Southern competes and his years of service as a director of Southern.

Directors with Terms Expiring in 2014

Dean Calhoun (age 54) has been a director of Southern since 2006 and a director of Southern Michigan Bank since 2006. Mr. Calhoun is President and Chief Executive Officer of Coldwater Veneer, Inc., a veneer manufacturing company, Vice-President of Altenburg Hardwood Lumber Co., Vice-President of International Wood Inc., Chief Executive Officer of Pierson-Hollowell Forest Products Inc., Chief Executive Officer of West Point Veneer, LLC, Chief Executive Officer of Breck County Hardwoods, and Chief Executive Officer of Tri-State Hardwood Co. Inc. In concluding Mr. Calhoun should serve as a director of Southern, the Corporate Governance and Nominating Committee considered as important factors his over 30 years of entrepreneurial experience in his own business ventures, his management and leadership provide quality insights on the business types served by Southern, his familiarity with an important market area in which Southern competes and his distinction as the largest shareholder of Southern common stock.

John H. Castle (age 55) has been a director of Southern since 2002 and a director of Southern Michigan Bank since 2002. Mr. Castle is Chairman of the Board and Chief Executive Officer of Southern and Southern Michigan Bank. In concluding Mr. Castle should serve as a director of Southern, the Corporate Governance and Nominating Committee considered as important factors his extensive experience in the banking industry, his knowledge of the Southern organization and its operations through his day-to-day management and his familiarity with the various market areas in which Southern competes.

Nolan E. Hooker (age 61) has been a director of Southern since 1991 and a director of Southern Michigan Bank since 1991. Mr. Hooker is the President of Best American Car Washes and President of Hooker Oil Company. In concluding Mr. Hooker should serve as a director of Southern, the Corporate Governance and Nominating Committee considered as important factors his extensive entrepreneurial experience in his own business ventures, including satisfying the financial needs of businesses that are typical of many Southern customers, his familiarity with an important market area in which Southern competes and his years of service as a director of Southern.

Directors with Terms Expiring in 2013

John S. Carton (age 72) has been a director of Southern since December 17, 2007. Mr. Carton was appointed to the board of directors pursuant to the Agreement and Plan of Merger, dated April 17, 2007, between Southern and FNB Financial Corporation. Mr. Carton is a former director of FNB Financial Corporation, which Southern acquired effective December 1, 2007. Mr. Carton had been a director of FNB Financial (f/k/a The First National Bank of Three Rivers) from 2003 until its consolidation with Southern Michigan Bank in 2009. Mr. Carton is a retired business executive. Before retirement, Mr. Carton was the owner of Pineview Golf Club, a golf course in Three Rivers, Michigan. Effective at the 2013 Annual Meeting of Shareholders, Mr. Carton is retiring under the Board’s mandatory retirement policy.

Executive Officers Who Are Not Directors

Danice L. Chartrand (age 46) is the Senior Vice-President, Chief Financial Officer, Secretary and Treasurer of Southern and Southern Michigan Bank.

Audit Committee

Southern has a separately-designated standing audit committee consisting solely of independent directors as defined by the applicable rules of the NASDAQ Stock Market. During 2012, the Audit Committee consisted of Mr. Cole (Chairman), and Messrs. Carton, Hull, Hooker and Meyer. Mr. Cole is considered an “audit committee financial expert” as defined by the SEC.

Code of Ethics

Southern has adopted a code of ethics that applies to our principal executive officer, principal financial officer, and other senior financial and accounting officers. We will provide to any person without charge, upon request, a copy of the code of ethics. To request a copy of the code of ethics, address the request to Southern Michigan Bancorp, Inc., 51 W. Pearl Street, P.O. Box 309, Coldwater, Michigan 49036, Attention Danice L. Chartrand, Secretary.

Shareholder Nomination of Directors

Under Southern’s bylaws, all shareholder nominations for director for which written proxy solicitation by the board of directors is sought, must be made in writing and delivered or mailed to Southern by December 31 of the year preceding the year in which the nomination is proposed. All other shareholder nominations for directors (i) may be made only by a shareholder entitled to vote in the election of directors at the particular meeting at which the nomination is to occur, (ii) must be made by the shareholder in person or by proxy at such meeting, and (iii) only if the shareholder delivers personally, or the Secretary of Southern otherwise receives, written notice that is in compliance with the requirements of Southern’s bylaws of the shareholder’s intent to make the nomination at least 30 days, but no more than 90 days, before the anniversary date of the record date for determination of shareholders entitled to vote in the immediately preceding annual meeting of shareholders. Nominations that are not received before the applicable deadline or that otherwise do not comply with the requirements of Southern’s bylaws will not be placed on the ballot and will be deemed void and of no effect. Southern’s board of directors believes that advance notice of nominations by shareholders will afford a meaningful opportunity to consider the qualifications of the proposed nominees and, to the extent deemed necessary or desirable by the board of directors, will provide an opportunity to inform shareholders about such qualifications.

Item 11.

Executive Compensation

SUMMARY COMPENSATION TABLE

The following table summarizes the compensation of Southern’s named executive officers.


Name and Principal Position	Year		Salary(1)		Bonus		Stock Awards (2)		Option Awards (2)		Nonequity Incentive Plan Compensation		Non- qualified Deferred Compensation Earnings		All Other Compensation (3)		Total

John H. Castle Chairman and CEO of Southern and Southern Michigan Bank		2012 2011	$	232,188 226,525	$	45,000 33,000	$	56,000 63,500	$	4,770 5,580	$	— —	$	— —	$	67,290 51,569	$ $	405,248 380,174

Kurt G. Miller President of Southern and Southern Michigan Bank		2012 2011	$	185,961 181,425	$	45,000 27,000	$	44,800 50,800	$	3,816 4,464	$	— —	$	— —	$	54,931 42,155	$	334,508 305,844

Danice L. Chartrand Senior Vice President and CFO of Southern and Southern Michigan Bank		2012 2011	$	127,152 124,051	$	23,100 15,400	$	21,000 23,812	$	1,789 2,093	$	— —	$	— —	$	23,716 15,796	$	196,757 181,152

(1)	Includes elective deferrals by employees pursuant to Section 401(k) of the Internal Revenue Code and elective deferrals pursuant to a non-qualified deferred compensation plan.

(2)

Amounts included in this column reflect the grant date fair value computed in accordance with FASB ASC Topic 718. Information regarding all forfeitures of option awards during 2012 and assumptions made in the valuation of option awards is presented in Note M to the consolidated financial statements and is here incorporated by reference.

(3)

“All Other Compensation” includes the value of Southern’s matching contributions to each executive officer in the qualified savings plan, the taxable benefit of company owned vehicles, company paid life insurance premiums (a benefit that is generally available to Southern’s salaried employees), country club memberships, contributions to the non-qualified supplemental retirement plan, and the dollar value of dividends paid on unvested restricted stock awards and option awards. None of Southern’s named executive officers received perquisites or personal benefits having an aggregate value of $10,000 or greater. The table below provides details regarding all other compensation paid to named executive officers.


	Year		Qualified Savings Plan Match		Automobile Allowance		Life and Disability Insurance Premiums		Country Club Membership		SERP		Dividends		Total

Mr. Castle		2012	$	10,000	$	1,129	$	3,753	$	1,200	$	46,438	$	4,770	$	67,290
		2011		10,406		1,118		2,696		1,300		33,979		2,070		51,569

Mr. Miller		2012	$	8,931	$	1,044	$	2,748	$	1,200	$	37,192	$	3,816	$	54,931
		2011		8,362		946		2,677		1,300		27,214		1,656		42,155

Ms. Chartrand		2012	$	5,684	$	—	$	368	$	—	$	15,894	$	1,770	$	23,716
		2011		5,385		—		356		—		9,304		751		15,796

Narrative Discussion of Summary Compensation Table

Employment Agreements

John H. Castle Employment Agreement

As an inducement for Mr. Castle’s agreement to serve as a director and Chief Executive Officer of Southern and Southern Michigan Bank, Southern entered into an employment agreement with Mr. Castle in 2004 that continues until either Southern or Mr. Castle provides notice of termination. Under this agreement, Southern agreed to:

•

pay Mr. Castle a salary of at least $168,630 per year, or as may be adjusted, less taxes and withholdings, plus possible bonuses and participation in equity plans sponsored by Southern;

•

provide Mr. Castle with the use of an automobile at the expense of Southern;

•

reimburse Mr. Castle for all documented business expenses;

•

continue to pay Mr. Castle his base salary for one year, health care continuation coverage premium for one year and outplacement assistance of up to $5,000 if Mr. Castle is terminated without cause;

•

pay Mr. Castle 2.99 times his average base salary and bonus if Mr. Castle is terminated, without cause, or quits for “good reason” following a change in control of Southern or within six months before a change in control of Southern;

•

provide Mr. Castle with four weeks of paid vacation per year;

•

provide Mr. Castle with a country club membership; and

•

provide Mr. Castle with the same health and other employee benefits provided to other executive employees of Southern and Southern Michigan Bank.

Mr. Castle agreed not to compete with Southern or Southern Michigan Bank while employed by Southern or Southern Michigan Bank and for one year following termination of Mr. Castle’s employment, unless his employment is terminated by Southern without cause or by Mr. Castle for “good reason” after a change in control of Southern or within six months before a change in control of Southern.

Kurt G. Miller Employment Agreement

As an inducement for Mr. Miller’s agreement to serve as President of Southern and Southern Michigan Bank, Southern entered into an employment agreement with Mr. Miller in 2004 on the same terms as those for Mr. Castle described above, except that Mr. Miller’s base salary was initially at least $134,905 per year, or as may be adjusted, less taxes and withholdings.

Danice L. Chartrand Retention Agreement

As an inducement for Ms. Chartrand’s agreement to serve as Chief Financial Officer of Southern and Southern Michigan Bank, Southern entered into a retention agreement with Ms. Chartrand in 2010 that continues until either Southern or Ms. Chartrand provides notice of termination, except that the agreement may not be terminated during an active change in control proposal period or for two years after a change in control.

Under this agreement, Southern agreed to continue to pay Ms. Chartrand her base salary for one year, health care continuation coverage premium for one year and outplacement assistance of up to $2,500 if Ms. Chartrand is terminated without cause or quits for “good reason” within two years following a change in control of Southern.

Material Terms of Grants

The option awards granted on January 3, 2012 are exercisable on January 3, 2014, at an exercise price of $11.20 per share. These options, if not exercised, will expire on January 3, 2022. Stock awards granted on January 3, 2012 vest over the next five years, one-fifth on each anniversary date of the award.

The option awards granted on June 20, 2011 are exercisable on June 20, 2013, at an exercise price of $12.70 per share. These options, if not exercised, will expire on June 20, 2021. Stock awards granted on June 20, 2011 vest over the next five years, one-fifth on each anniversary date of the award.

Outstanding Equity Awards at Fiscal Year-End

The following table presents the outstanding equity awards held by each of the named executive officers as of December 31, 2012.

OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END


	Option Awards								Stock Awards
Name	Number of Securities Underlying Unexercised Options (#) Exercisable (1)		Number of Securities Underlying Unexercised Options (#) Unexercisable (2)		Option Exercise Price ($)		Option Expiration Date		Number of Shares or Units of Stock that Have Not Vested (#) (3)		Market Value of Shares or Units of Stock that Have Not Vested ($)(4)

John H. Castle		1,575		—		15.72		3/17/2013
		8,925		—		20.05		1/2/2014
		8,925		—		25.89		1/2/2015
		10,500		—		22.80		12/19/2015
		9,000		—		24.58		1/29/2017
		20,000		—		23.90		4/24/2017
		4,000		—		18.00		6/17/2018
		2,000		—		7.40		1/2/2019
		3,000		—		10.10		1/27/2020
		—		3,000		12.70		6/20/2021
		—		3,000		11.20		1/3/2022
										300		4,950
										1,600		26,400
										3,000		49,500
										4,000		66,000
										5,000		82,500



Kurt G. Miller	1,575	—	15.72	3/17/2013
	6,825	—	20.05	1/2/2014
	6,825	—	25.89	1/2/2015
	8,400	—	22.80	12/19/2015
	7,200	—	24.58	1/29/2017
	18,000	—	23.90	4/24/2017
	3,200	—	18.00	6/17/2018
	1,600	—	7.40	1/2/2019
	2,400	—	10.10	1/27/2020
	—	2,400	12.70	6/20/2021
	—	2,400	11.20	1/3/2022
					240	3,960
					1,280	21,120
					2,400	39,600
					3,200	52,800
					4,000	66,000

Danice L. Chartrand	945	—	15.72	3/17/02013
	2,625	—	20.05	1/2/2014
	2,625	—	25.89	1/2/2015
	2,625	—	22.80	12/19/2015
	2,250	—	24.58	1/29/2017
	11,000	—	23.90	4/24/2017
	1,000	—	18.00	6/17/2018
	750	—	7.40	1/2/2019
	1125	—	10.10	1/27/2020
	—	1,125	12.70	6/20/2021
	—	1,125	11.20	1/3/2022
					75	1,238
					600	9,900
					1,125	18,563
					1,500	24,750
					1,875	30,938

(1)	All exercisable options are fully vested.

(2)	The non vested options granted in June 2011 and January 2012 vest on their second anniversary.

(3)	Restricted stock awards were granted in June 2008, January 2009, January 2010, June 2011 and January 2012 and vest over a five year period (20% each year)

(4)	The market value of shares reported in this column was determined by multiplying the last closing stock price of Southern at December 31, 2012 as reported on the OTC Bulletin Board ($16.50) by the number of shares reported.

Additional Narrative Disclosure

ESOP and 401(k) Plan

The Southern Michigan Bank & Trust Employee Stock Ownership Plan is qualified under Section 401(a) of the Internal Revenue Code of 1986 (the “Code”) and includes 401(k) provisions.

The purpose of the 401(k) plan is to permit Southern Michigan Bank employees, including the named executive officers, to save for retirement on a pre-tax basis. In addition to an employee’s pre-tax contributions, Southern Michigan Bank may make discretionary matching and employee stock ownership plan contributions to the 401(k) plan. If Southern Michigan Bank makes matching or employee stock ownership plan contributions to the 401(k) plan, those contributions are immediately 100% vested. Southern Michigan Bank has generally made a matching contribution to the 401(k) plan each year. All full-time employees who are 21 years of age or older are eligible to participate in the plan.

Each participant in the 401(k) plan has an account to record the participant’s interest in the plan. Amounts contributed by or on behalf of a participant are credited to his or her account. A participant’s benefit from the 401(k)

plan is equal to the vested amount in the participant’s account when he or she terminates employment with Southern Michigan Bank. The employee stock ownership portion of the plan, in part, is designed to invest primarily in Southern common stock.

Southern Michigan Bank & Trust Pension Plan

Effective December 31, 2009, The Southern Michigan Bank & Trust Pension Plan was fully frozen. The plan was partially frozen in 2006 for participants who did not meet certain age and years of service requirements. Participants who met the age and years of service requirements continued accruing benefits until the plan was fully frozen in 2009. The named executive officers did not meet the age and years of service requirements, so they did not accrue additional benefits under the plan after the partial freeze in 2006.

Before the freeze, employees were eligible to participate in the Southern Michigan Bank & Trust Pension Plan at age 21 after completing one year of service in which the employee worked at least 1,000 hours. A participant is considered vested after 5 years of vesting service. A year of vesting service is credited for each calendar year that a participant is credited with 1,000 hours of service, including years before the plan was adopted and before the participant reached age 18.

The normal retirement benefit under the plan is calculated using a benefit formula of 35% of the participant’s average compensation (reduced proportionately for less than 30 years of benefit service at normal retirement) multiplied by a fraction based on the participant’s actual years of service compared to the years of service the participant would have accumulated at normal retirement. Average compensation is defined as the highest five year annual average W-2 compensation. Normal retirement age is defined as age 65. An early retirement benefit is available for participants age 55 with 5 years of service. None of the named executive officers are eligible for early retirement benefits from the plan.

The normal form of benefit from the plan is a qualified joint and survivor annuity. Participants may elect a lump sum, life annuity with period certain or joint and survivor annuity as an optional form of benefit with spousal consent.

Supplemental Executive Retirement Plan

On December 17, 2007, the board of directors of Southern Michigan Bank adopted the Southern Michigan Bank & Trust Supplemental Executive Retirement Plan (the “ SERP ”). The board of Southern Michigan Bank designated John S. Castle, Kurt G. Miller, and Danice L. Chartrand as participants in the SERP.

Under the SERP, each participant receives a benefit equal to the difference between the pension benefit the participant would have received under the Southern Michigan Bank & Trust Pension Plan (the “ Pension Plan ”) had the Pension Plan not been frozen (i.e., participants in the Pension Plan no longer accrue benefits under the Pension Plan) effective December 31, 2006, and the pension benefit the participant actually receives from the Pension Plan. The benefits under the Plan are vested under the same schedule as the participant’s benefit under the Pension Plan and will be paid upon the participant’s termination of employment in the form of a lump sum or annuity, as elected by the participant.

In February of 2009, the board of directors froze accrual of additional benefits under the SERP as of December 31, 2008.

2011 Defined Contribution Supplemental Executive Retirement Plan

On December 27, 2011, the Board of Directors entered into a new Supplemental Executive Retirement Plan (“2011 SERP”) arrangement with John H. Castle, Kurt G. Miller and Danice L. Chartrand. The 2011 SERP is intended to provide the executives with a retirement benefit that is competitive with industry practices for bank executives when combined with the executive’s other employer-funded retirement benefits.

In contrast to the frozen 2007 Supplemental Executive Retirement Plan, the 2011 SERP is a defined contribution arrangement. This means that, rather than assuring the executives that they will receive a specific benefit amount in retirement or a benefit amount determined by a formula, the 2011 SERP provides the Bank the discretion

to make a specific annual nonqualified deferred compensation contribution to the account of each of the three executives. Subject to the performance conditions described below, whether an annual deferred compensation contribution will be made to the account balance of an executive, as well as the amount of the contribution, is and shall remain discretionary on the part of the Bank’s Board of Directors. Although the contribution rate under the 2011 SERP is not fixed and may be changed by the board of directors at any time, the contribution that will be made by the Bank to the account of each executive is expected to be 15% of base salary in the case of Messrs. Castle and Miller and 7.5% of base salary in the case of Ms. Chartrand. The executives are not permitted to make individual contributions to their 2011 SERP accounts.

The 2011 SERP provides that the executives will receive no annual contribution for any year in which the bank does not satisfy performance conditions specified by the Board. Although these may be changed by the Board, the performance conditions currently consist of ( x ) the Bank having the legal capacity under Michigan law to pay a cash dividend to its holding company, Southern Michigan Bancorp, Inc., and ( y ) declaration and payment by the Bank of a cash dividend to its holding company not being subject to the requirement for advance approval of or advance notice to the FDIC, the Federal Reserve Board or Federal Reserve Bank of Chicago, or the Michigan Office of Financial and Insurance Regulation under any formal or informal enforcement action taken by any of those regulatory agencies. If the performance conditions are not satisfied, the executives will not receive a contribution. If the performance conditions are satisfied, the Board retains discretion as to whether an annual deferred compensation contribution will be made to the account balance of an executive, as well as the amount of the contribution.

Each executive’s account balance is generally payable monthly over 10 years beginning at age 65; however, the account balance is paid out in a single lump sum if a change in control of the Bank occurs. Until the executive’s death, termination of employment or attainment of age 65, the executive’s account balance earns interest at the prime interest rate as published in The Wall Street Journal . After the executive’s death, termination of employment or attainment of age 65, interest will be credited at an annual rate equal to the yield on a 20-year corporate bond rated Aa by Moody’s.

If a change in control of the Company were to occur, however, the entire account balance would be paid to each executive in a single lump sum immediately after the change in control. The Bank would also be responsible for reimbursement of up to $500,000 of each executive’s legal expenses if the 2011 SERP change-in-control benefit is not timely paid after a change in control.

Non-Qualified Deferred Compensation

The named executive officers are eligible to participate in a non-qualified deferred compensation plan. Participants in the plan may elect to defer up to 100% of their salary and other cash compensation on an annual basis.

The plan provides that Southern will pay to each participant a lump sum or 180 equal monthly payments, as the participant elects, upon early retirement (age 60) or normal retirement (age 65), disability or a change in control of Southern. If the participant’s termination of employment occurs prior to early retirement, the participant will receive a lump sum distribution. No payments will be made before the date that is six months after termination of employment. Payments to which the participant would otherwise have been entitled during the six months will be accumulated and paid on the first day after six months following the date of participant’s termination of employment.

Under terms of the plan, if the executive officer dies while in the active service of Southern, the executive officer’s beneficiary will receive a supplemental death benefit. This supplemental death benefit will be the estimated deferral account balance at the executive officer’s normal retirement age divided by 180, payable monthly for 180 months. The estimated deferral account balance will be calculated by taking the deferral account balance on the date of death plus the average monthly contribution made over the previous 12 months, projected at the current plan interest rate (not to exceed 7%), to the executive officer’s normal retirement age. This amount will not exceed the net death benefit paid to the bank under the executive officer’s bank owned life insurance policy(s). No premiums were paid in 2012 on any named executive’s bank owned life insurance policies.

Agreements with Payments Upon Resignation, Retirement, Termination of Employment, or Change in Control

Upon a named executive officer’s termination of employment for any reason other than death, disability, retirement, or termination for cause, exercisable stock options on the date of termination may be exercised for a period of three months following termination. Unvested shares of restricted stock will automatically vest in an amount equal to the number of shares of restricted stock granted to the named executive officer multiplied by the number of full months that have elapsed since the date of grant divided by the maximum number of full months of the restricted period. Any remaining shares of restricted stock will be forfeited.

Upon a named executive officer’s death or disability, exercisable stock options on the date of death or disability may be exercised for a period of three months following death or disability. Unvested shares of restricted stock will automatically vest in full.

Upon a named executive officer’s retirement, exercisable stock options on the date of retirement may be exercised for the remaining terms of the options. Unvested shares of restricted stock will automatically vest in full.

Upon a change in control of Southern, all unvested stock options held by a named executive officer will become immediately vested and exercisable in full and all unvested shares of restricted stock held by a named executive officer will become immediately vested and nonforfeitable.

Information about the material terms of the employment agreements for John H. Castle and Kurt G. Miller and the Retention Agreement for Danice L. Chartrand that provide payments to Messrs. Castle and Miller and Ms. Chartrand upon their resignation, retirement, termination of employment or a change in control of Southern are described above under “Executive Compensation – Narrative Disclosure to Summary Compensation Table,” and is here incorporated by reference.

Compensation of Directors

Directors who are not employed by Southern or any subsidiary of Southern (“non-employee directors”) received an annual retainer of $13,325 in 2012. The Chairman of the Audit Committee received an additional $2,050 retainer. The Chairman of the Compensation Committee and the Chairman of the Corporate Governance and Nominating Committee each received an additional $1,025 retainer. Non-employee directors also received a $1,500 discretionary bonus for 2012. Directors who are employed by Southern or the Bank do not receive compensation for their services as a director.

Directors are eligible to participate in a deferred fee plan, which allows the director to defer all or part of his or her director fees. Under the deferred fee plan, directors are entitled to a supplemental death benefit, which is funded by bank owned life insurance. No premiums were paid in 2012 on any directors’ bank owned life insurance policies.

The following table summarizes the compensation of Southern’s directors who are not named executive officers.

DIRECTOR COMPENSATION


Name	Fees Earned Or Paid in Cash ($)(3)		Stock Awards ($)(2)(5)		Option Awards ($)(2)(4)		Non- Equity Incentive Plan Compensation ($)		Non- Qualified Deferred Compensation Earnings ($)		All Other Compensation ($)(6)			Total ($)

Dean Calhoun		14,825		1,680		80		—		—		150			16,735
John S. Carton		14,825		1,680		80		—		—		150			16,735
H. Kenneth Cole		16,875		1,680		80		—		—		150			18,785
Gary H. Haberl		14,825		1,680		80		—		—		1,226	(1)		17,811
Nolan E. Hooker		15,850		1,680		80		—		—		150			17,760
Gregory J. Hull		15,850		1,680		80		—		—		150			17,760
Thomas E. Kolassa		14,825		1,680		80		—		—		150			16,735
Donald J. Labrecque		14,825		1,680		80		—		—		1,380	(1)		17,965
Brian P. McConnell		14,825		1,680		80		—		—		150			16,735
Thomas D. Meyer(7)		13,325		1,680		80		—		—		150			15,235
Freeman E. Riddle		14,825		1,680		80		—		—		150			16,735

(1)	Includes $1,076 and $1,230 for Directors Haberl and Labrecque, respectively, for premiums paid for term insurance to cover supplemental death benefit.

(2)

(3)	Includes amounts deferred under deferred fee plan.

(4)	At December 31, 2012, the following option awards were outstanding: Director Calhoun 780; Directors Cole, Hooker, Hull and Kolassa 2,513; Directors Haberl and Labrecque 1,673; Director Riddle 2,198; Directors Carton and McConnell 380 and Director Meyer 305.

(5)	At December 31, 2012, 435 stock awards, representing unvested shares of restricted stock, were outstanding for each outside director except Director Meyer who had no unvested shares of restricted stock outstanding.

(6)	Includes the dollar value of dividends paid on unvested restricted stock awards and option awards and premiums paid for term insurance.

(7)	Director Meyer retired from the Board of Directors effective December 31, 2012.

Additional Narrative to Director Compensation Table

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The following tables sets forth information, as of December 31, 2012, concerning the number of shares of Southern common stock held by each entity or person known to Southern to be the beneficial owner of more than five percent of outstanding shares of Southern common stock and certain information concerning the number of shares of Southern common stock held as of December 31, 2012, by each of Southern’s directors, each of the named executive officers, and all of Southern’s directors and executive officers as a group:

Five Percent Shareholders

Amount and Nature of Beneficial

Ownership of Southern Common Stock(1)


Name and Address of Beneficial Owner	Sole Voting and Dispositive Power			Shared Voting or Dispositive Power(2)			Total Beneficial Ownership		Percent of Class(3)

Southern Michigan Bancorp, Inc. and Southern Michigan Bank & Trust 51 West Pearl Street P.O. Box 309 Coldwater, Michigan 49036		—			292,253	(4)		292,253		12.30	%

Dean Calhoun 317 Highland Drive Coldwater, Michigan 49036		770	(6)(7)		171,392			172,162		7.24	%

Gwyn R. Hartman Revocable Living Trust U/A/D 11/16/93 2317 Baypoint Way The Villages, Florida 32162		150,041	(5)		—			150,041		6.31	%

Stock Ownership By Management

Amount and Nature of Beneficial Ownership of

Southern Common Stock(1)


Name of Beneficial Owner	Sole Voting and Dispositive Power(6)		Shared Voting or Dispositive Power(2)		Stock Options(7)		Total Beneficial Ownership		Percent of Class(3)

Dean Calhoun		90		171,392		680		172,162		7.24	%
John S. Carton(8)		3,001		—		280		3,281			*
John H. Castle		20,804		180		67,925		88,909		3.64	%
Danice L. Chartrand		7,608		—		24,945		32,553		1.36	%
H. Kenneth Cole		817		—		2,413		3,230			*
Gary H. Haberl		100		10,731		1,573		12,404			*
Nolan E. Hooker		3,758		5,676		2,413		11,847			*
Gregory J. Hull		380		3,763		2,413		6,556			*
Thomas E. Kolassa		23,336		—		2,413		25,749		1.08	%
Donald J. Labrecque		3,068		—		1,573		4,641			*
Brian P. McConnell		330		2,500		280		3,110			*
Thomas D. Meyer(9)		4,208		—		205		4,413			*
Kurt G. Miller		16,831		12		56,025		72,868		3.00	%
Freeman E. Riddle		1,080		9,290		2,098		12,468			*

All directors and executive officers as a group		85,411		203,544		165,236		454,191		17.87	%

*	Less than 1%

(1)

The numbers of shares stated are based on information furnished by each person listed and include shares personally owned of record by that person and shares that under applicable regulations are considered to be otherwise beneficially owned by that person. Southern is not responsible for the accuracy of this information.

(2)

These numbers include shares as to which the listed person is legally entitled to share voting or dispositive power by reason of joint ownership, trust or other contract or property right, and shares held by spouses, certain relatives and minor children over whom the listed person may have influence by reason of relationship.

(3)	Based on a total of 2,375,975 issued and outstanding shares as of December 31, 2012, plus the number of shares subject to stock options that are currently exercisable or that will be exercisable by holders of such stock options within 60 days.

(4)

Southern Michigan Bank holds 292,253 shares in various fiduciary capacities. As a matter of internal policy, Southern Michigan Bank does not exercise any power to dispose or direct the disposition of such shares and requires authority from its customers before any disposition. Certain of the customers on whose behalf Southern Michigan Bank holds the securities have the sole right to receive and the power to direct the receipt of dividends from, or proceeds from the sale of, such shares. No single customer has an interest that relates to more than 5% of such shares. Included in the 292,253 shares are 131,320 shares which Southern Michigan Bank is the trustee of an ESOP/401(k) Plan for its employees. Of that number, 125,125 shares are allocated to employee accounts. Southern Michigan Bank holds no power to vote or direct the disposition of shares allocated to employee accounts and Southern Michigan Bank disclaims beneficial ownership of such shares.

(5)	Represents 150,041 shares held by Ms. Hartman as trustee.

(6)	Includes restricted stock shares that vest within 60 days. 90 shares for Mssrs. Calhoun, Carton, Cole, Haberl, Hooker, Hull, Kolassa, Labrecque, McConnell, Meyer and Riddle; 2,800 shares for Mr. Castle; 2,240 shares for Mr. Miller and 1,050 shares for Ms. Chartrand.

(7)	Includes shares subject to stock options that are currently exercisable or that will be exercisable within 60 days. Listed directors and executives also hold other stock options that will vest at a later date.

(8)	Mr. Carton is retiring at the 2013 annual shareholder meeting under the SMB mandatory retirement policy.

(9)	Mr. Meyer retired from the Board of Directors effective December 31, 2012.

The following table presents information regarding the equity compensation plans both approved and not approved by shareholders at December 31, 2012:


	Number of securities to be issued upon exercise of outstanding options, warrants and rights		Weighted-average exercise price of outstanding options, warrants and rights		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
	(a)		(b)		(c)
Equity compensation plans approved by shareholders (1)		220,451	$	20.74		63,792

Equity compensation plans not approved by shareholders		—		—		—

Total		220,451	$	20.74		63,792

(1)

Consists of the Stock Incentive Plan of 2005. All of shares reflected in column (c) above represents shares that may be issued other than upon the exercise of an option, warrant or right. The plan contains customary anti-dilution provisions that are applicable in the event of a stock split or certain other changes in capitalization.

Southern has no equity compensation plans not approved by shareholders.

Item 13.

Certain Relationships and Related Transactions, and Director Independence

Directors, officers, principal shareholders and their associates and family members were customers of, and had transactions (including loans and loan commitments) with, the Bank in the ordinary course of business during 2010. All such loans and commitments were made in the ordinary course of business, on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons and did not involve more than a normal risk of collectibility or present other unfavorable features. Similar transactions may be expected to take place in the ordinary course of business in the future. None of these loan relationships presently in effect were in default as of the date of this report.

We have adopted written policies to implement the requirements of Regulation O of the Federal Reserve System, which restricts the extension of credit to directors and executive officers and their family members and other related interests. Under these policies, extensions of credit that exceed regulatory thresholds must be approved by the board of directors of the Bank. We have adopted a written policy that requires the Audit Committee to review, evaluate, and approve other transactions between Southern and its affiliates or other related parties, including transactions in which a director or executive officer or immediate family member may have a direct or indirect material interest.

Except for Messrs. Castle and Miller, each director and nominee for director is independent under NASDAQ Listing Rules.

Item 14.

Principal Accountant Fees and Services

The aggregate fees billed to us by our principal accountant, CliftonLarsonAllen LLP, for the years ended December 31, 2012 and 2011 are as follows:


	2012		2011

Audit Fees(1)	$	141,387	$	140,852
Audit-Related Fees		—		—
Tax Fees(2)		18,350		19,175

	$	159,737	$	160,027

(1)	Audit fees consist of the audit of the Company’s annual consolidated financial statements, reviews of quarterly reports on Form 10-Q, meetings with the audit committee and related consultations.

(2)	Tax fees consist of tax compliance and preparation fees, related tax advice and assistance with tax examination.

The Audit Committee Charter provides the policy and procedures for the approval by the Audit Committee of all services provided by our independent auditors. The charter requires that all services provided by the independent auditors, including audit-related services and non-audit services, must be pre-approved by the Audit Committee. The charter allows the Audit Committee to delegate to one or more members of the Audit Committee the authority to approve the independent auditors’ services. The decisions of any Audit Committee member to whom authority is delegated to pre-approve services are reported to the full Audit Committee. The charter also provides that the Audit Committee has authority and responsibility to approve and authorize payment of the independent auditors’ fees. Finally, the charter sets forth certain services that the independent auditors are prohibited from providing to Southern or its subsidiaries. All of the services described above were approved by the Audit Committee. None of the tax fees were approved by the Audit Committee pursuant to the de minimus exception set forth in Section 10A(i)(1)(B) of the Securities Exchange Act of 1934, although the Audit Committee charter allows such approval.

PART IV

Item 15.

Exhibits and Financial Statement Schedules


(a)	The following documents are filed as part of this Report:

	1.	Financial Statements.

		Report of Independent Registered Public Accounting Firm of CliftonAllenLarson LLP dated March 28, 2013

		Consolidated Balance Sheets as of December 31, 2012 and 2011

		Consolidated Statements of Income for the years ended December 31, 2012, 2011 and 2010

		Consolidated Statements of Comprehensive Income for the years ended December 31, 2012, 2011 and 2010.

		Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2012, 2011 and 2010

		Consolidated Statements of Cash Flows for the years ended December 31, 2012, 2011 and 2010

		Notes to Consolidated Financial Statements

	2.	Financial Statement Schedules.

	Schedules are omitted because the required information is either inapplicable or presented in the consolidated financial statements or related notes.

	3.	Exhibits.


Exhibit Number		Document

2.1		Agreement and Plan of Merger between Southern Michigan Bancorp, Inc. and FNB Financial Corporation, dated April 17, 2007. Previously filed with the Commission on September 28, 2007 in Southern Michigan Bancorp Inc.’s Amendment No. 2 to Form S-4 Registration Statement, Exhibit 2. Here incorporated by reference.

2.2		Agreement of Consolidation between Southern Michigan Bank & Trust and FNB Financial. Previously filed with the Commission on March 26, 2010 in Southern Michigan Bancorp Inc.’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009, Exhibit 2.2. Here incorporated by reference.

3.1		Articles of Incorporation of Southern Michigan Bancorp, Inc., as amended. Previously filed with the Commission on September 28, 2007 in Southern Michigan Bancorp Inc.’s Amendment No. 2 to Form S-4 Registration Statement, Exhibit 3.1. Here incorporated by reference.

3.2		Amended and Restated Bylaws of Southern Michigan Bancorp, Inc., as amended. Previously filed with the Commission on September 28, 2007 in Southern Michigan Bancorp Inc.’s Amendment No. 2 to Form S-4 Registration Statement, Exhibit 3.2. Here incorporated by reference.

4.1		Articles of Incorporation of Southern Michigan Bancorp, Inc., as amended. Exhibit 3.1 is here incorporated by reference.

4.2		Amended and Restated Bylaws of Southern Michigan Bancorp, Inc., as amended. Exhibit 3.2 is here incorporated by reference.


Exhibit Number		Document

4.3		Long-Term Debt. The registrant has outstanding long-term debt which at the time of this report does not exceed 10% of the registrant’s total consolidated assets. The registrant agrees to furnish copies of the agreements defining the rights of holders of such long-term debt to the Securities and Exchange Commission upon request.

10.1*		Form of Employment Agreement with John H. Castle. Previously filed with the Commission on March 28, 2008 in Southern Michigan Bancorp Inc.’s Annual Report on Form 10-K for the fiscal year ended December 31, 2007, Exhibit 10.1. Here incorporated by reference.

10.2*		Form of Employment Agreement with Kurt G. Miller. Previously filed with the Commission on March 28, 2008 in Southern Michigan Bancorp Inc.’s Annual Report on Form 10-K for the fiscal year ended December 31, 2007, Exhibit 10.2. Here incorporated by reference.

10.3*		Form of Retention Agreement with Danice L. Chartrand. Previously filed with the Commission on March 26, 2010 in Southern Michigan Bancorp Inc.’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009, Exhibit 10.3. Here incorporated by reference.

10.4*		Southern Michigan Bancorp, Inc. Stock Incentive Plan of 2005. Previously filed with the Commission on March 28, 2008 in Southern Michigan Bancorp Inc.’s Annual Report on Form 10-K for the fiscal year ended December 31, 2007, Exhibit 10.5. Here incorporated by reference.

10.5*		Form of Southern Michigan Bank & Trust Deferred Compensation Agreement. Previously filed with the Commission on September 28, 2007 in Southern Michigan Bancorp Inc.’s Amendment No. 2 to Form S-4 Registration Statement, Exhibit 10.6. Here incorporated by reference.

10.6*		Form of Second Amendment to Southern Michigan Bank & Trust Deferred Compensation Agreement. Previously filed with the Commission on March 28, 2008 in Southern Michigan Bancorp Inc.’s Annual Report on Form 10-K for the fiscal year ended December 31, 2007, Exhibit 10.7. Here incorporated by reference.

10.7*		Southern Michigan Bancorp, Inc. 2000 Stock Option Plan. Previously filed with the Commission on September 28, 2007 in Southern Michigan Bancorp Inc.’s Amendment No. 2 to Form S-4 Registration Statement, Exhibit 10.7. Here incorporated by reference.

10.8*		Form of Southern Michigan Bank & Trust Director Deferred Fee Agreement. Previously filed with the Commission on September 28, 2007 in Southern Michigan Bancorp Inc.’s Amendment No. 2 to Form S-4 Registration Statement, Exhibit 10.8. Here incorporated by reference.

10.9*		Southern Michigan Bank & Trust Supplemental Executive Retirement Plan. Previously filed with the Commission on December 19, 2007 in Southern Michigan Bancorp Inc.’s Current Report on Form 8-K, dated December 17, 2007, Exhibit 10.1. Here incorporated by reference.

10.10		Indenture, dated March 25, 2004, between Southern Michigan Bancorp, Inc. and Wilmington Trust Company. Previously filed with the Commission on March 28, 2008 in Southern Michigan Bancorp Inc.’s Annual Report on Form 10-K for the fiscal year ended December 31, 2007, Exhibit 10.13. Here incorporated by reference.

10.11		Amended and Restated Declaration of Trust of Southern Michigan Bancorp Capital Trust I, dated March 25, 2004. Previously filed with the Commission on March 28, 2008 in Southern Michigan Bancorp Inc.’s Annual Report on Form 10-K for the fiscal year ended December 31, 2007, Exhibit 10.14. Here incorporated by reference.

10.12		Guarantee Agreement of Southern Michigan Bancorp, Inc., dated March 25, 2004. Previously filed with the Commission on March 28, 2008 in Southern Michigan Bancorp Inc.’s Annual Report on Form 10-K for the fiscal year ended December 31, 2007, Exhibit 10.15. Here incorporated by reference.

10.13*		Form of Southern Michigan Bank & Trust 2011 Defined Contribution Supplemental Executive Retirement Plan. Previously filed with the Commission on December 28, 2011 in Southern Michigan Bancorp Inc.’s Current Report on Form 8-K, dated December 27, 2011, Exhibit 10.1. Here incorporated by reference.

100


Exhibit Number		Document

21		Subsidiaries of Southern Michigan Bancorp, Inc.

24		Powers of Attorney.

31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32		Certification pursuant to 18 U.S.C. § 1350. This exhibit is furnished to, and not filed with, the Commission.

99.1		Annual Report to Shareholders for fiscal year ended December 31, 2012. This exhibit is furnished to, and not filed with, the Commission.

99.2		Proxy Statement for annual meeting to be held May 9, 2013. This exhibit is furnished to, and not filed with, the Commission.

99.3		Form of Proxy for annual meeting to be held May 9, 2013. This exhibit is furnished to, and not filed with, the Commission.

101.INS		XBRL Instance Document (1)

101.SCH		XBRL Taxonomy Extension Schema Document (1)

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document (1)

101.LAB		XBRL Taxonomy Extension Label Linkbase Document (1)

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document (1)

101.DEF		XBRL Taxonomy Extension Definitions Linkbase Document (1)

(1)	As provided in Rule 406T of Regulation S-T, these exhibits are furnished to, and not filed with, the Commission.

*	These documents are management contracts or compensation plans or arrangements required to be filed as exhibits to this Form 10-K.

101

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

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


/s/ John H. Castle	Chairman and Chief Executive Officer (Principal Executive Officer)	March 28, 2013
John H. Castle

/s/ Kurt G. Miller	President and Director	March 28, 2013
Kurt G. Miller

/s/ Danice L. Chartrand	Senior Vice President, Chief Financial Officer, Secretary and Treasurer (Principal Financial and Accounting Officer)	March 28, 2013
Danice L. Chartrand

/s/ Dean Calhoun	Director	March 28, 2013
Dean Calhoun*

/s/ John S. Carton	Director	March 28, 2013
John S. Carton*

/s/ H. Kenneth Cole	Director	March 28, 2013
H. Kenneth Cole*

/s/ Gary H. Haberl	Director	March 28, 2013
Gary H. Haberl*

/s/ Nolan E. Hooker	Director	March 28, 2013
Nolan E. Hooker*

102



/s/ Gregory J. Hull	Director	March 28, 2013
Gregory J. Hull*

/s/ Thomas E. Kolassa	Director	March 28, 2013
Thomas E. Kolassa*

/s/ Donald J. Labrecque	Director	March 28, 2013
Donald J. Labrecque*

/s/ Brian P. McConnell	Director	March 28, 2013
Brian P. McConnell*

/s/ Freeman E. Riddle	Director	March 28, 2013
Freeman E. Riddle*


*By		/s/ John H. Castle
		John H. Castle, Attorney-in-Fact

103

Grafico Azioni Southern Michigan Bancorp (PK) (USOTC:SOMC)
Storico
Da Mag 2024 a Giu 2024

Clicca qui per i Grafici di Southern Michigan Bancorp (PK)

Grafico Azioni Southern Michigan Bancorp (PK) (USOTC:SOMC)
Storico
Da Giu 2023 a Giu 2024

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if smaller reporting company)

Smaller reporting company