10-K

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, 2007
(   )	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 (State or Other Jurisdiction of Incorporation or Organization)	38-2407501 (I.R.S. Employer Identification No.)
51 West Pearl Street Coldwater, Michigan (Address of Principal Executive Offices)	49036 (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 on 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained in this form, 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):

Large accelerated filer           Accelerated filer           Non-accelerated filer           Smaller Reporting Company   X  

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

As of December 1, 2007, the date of completion of the Registrant's initial public offering, the aggregate market value of common stock held by non-affiliates of the Registrant was $46,011,255. This amount is computed by reference to a price of $21.75 per share for the Registrant's common stock, which was the price at which the Registrant's common stock was last sold as of December 1, 2007.

The number of shares outstanding of the Registrant's Common Stock, $2.50 par value, as of March 14, 2008, was 2,307,924 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," or "strategy"; that an event or trend "may," "should," "will," or "is likely" to occur or "continue" or "is scheduled" or "on track" or that Southern Michigan Bancorp, Inc. or its management "anticipates," "believes," "estimates," "plans," "forecasts," "intends," "predicts," "projects," or "expects" a particular result, or is "confident" or "optimistic" that an event will occur, and variations of such words and similar expressions. All of the information concerning interest rate sensitivity is forward-looking. Management's determination of the provision and allowance for loan losses involves judgments that are inherently forward-looking. These statements ar e 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; the timing and level of asset growth; changes in banking laws and regulations; changes in tax laws; changes in prices, levies and assessments; the impact of technological advances and issues; governmental and regulatory policy changes; opportunities for acquisitions and the effective completion of acquisitions and integration of acquired entities; the possibility that anticipated cost savings and revenue enhancements from acquisitions, restructurings, reorganizations and bank consolidations may not be realized at amounts projected, at all or within expected time frames; the local and global effects of the ongoing war on terrorism and other military actions, including actions in Iraq; and current uncertainties and fluctuations in the financial markets and stocks of financial services providers due to concerns about credit availability and concerns about the Michigan economy in particular. 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.

          This section is intended to provide meaningful cautionary statements. This should not be construed as a complete list of all economic, competitive, governmental, technological, and other factors that could adversely affect our expected consolidated financial position, results of operations or liquidity. 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

General

          Southern Michigan Bancorp, Inc. ("Southern," the "Company," "We," or "Us") is a bank holding company registered under the Bank Holding Company Act of 1956, as amended. Southern was incorporated on March 1, 1982, as a Michigan corporation. Southern was formed to create a bank holding company for the purpose of acquiring all of the capital stock of Southern Michigan Bank & Trust, a Michigan state-chartered bank ("Southern Michigan Bank") (formerly Southern Michigan National Bank), which it did in November 1982. Southern is also the parent company of FNB Financial, a Michigan state-chartered bank (formerly The First National Bank of Three Rivers), which it acquired on December 1, 2007, and Southern Michigan Bancorp Capital Trust I, a Delaware statutory trust. At December 31, 2007, Southern, on a consolidated basis, had shareholders' equity of $44.2 million.

          Southern Michigan Bank is the parent company of SMB Mortgage Company, a Michigan corporation, and SMB&T Financial Services, Inc., a Michigan corporation. FNB Financial is the parent company of FNB Financial Services, Inc., a Michigan corporation.

          Through our bank subsidiaries, we operate 18 banking offices located in Athens, Battle Creek, Camden, Cassopolis, Centreville, Coldwater, Constantine, Hillsdale, Marshall, Mendon, North Adams, Tekonsha, Three Rivers, and Union City, Michigan. At December 31, 2007, on a consolidated basis, we had assets of $480.2 million, deposits of $399.2 million, a net loan portfolio of $330.8 million, and had trust assets totaling $203.4 million.

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          Our business, which we conduct primarily through our bank subsidiaries, is 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, industry, 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 as sistance, and cash management custody. No material part of our business is dependent upon a single customer or very few customers, the loss of which would have a material adverse effect on us.

Competition

          Our business is highly competitive. 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. 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, 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. 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 change, 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.

          Southern

          Southern is subject to supervision and regulation by the Federal Reserve System. Our activities are generally limited to owning or controlling banks 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.

          Southern is a legal entity separate and distinct from our bank subsidiaries. There are legal limitations on the extent to which our bank subsidiaries may lend or otherwise supply funds to us. Payment of dividends to us by our bank subsidiaries, our principal source of funds, is subject to various state and federal regulatory limitations. Under the Michigan Banking Code of 1999, a subsidiary 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.

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

          Under Federal Reserve System policy, we are expected to act as a source of financial strength to our bank subsidiaries and to commit resources to support both banks. In addition, if the Michigan Office of Financial and Insurance Services ("OFIS") deems a bank subsidiary's capital to be impaired, OFIS 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.

          The Federal Reserve System 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. As of the date of this report, Southern and its bank subsidiaries are "well-capitalized" under the capital adequacy guidelines.

          The Banks

          Southern Michigan Bank and FNB Financial are chartered under Michigan law and are subject to regulation by OFIS. 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 banks' deposits are insured by the Federal Deposit Insurance Corporation ("FDIC") to the extent provided by law. From time to time, the banks are required to pay deposit insurance premiums to the Deposit Insurance Fund ("DIF"). The amount of the premiums varies and are generally determined by the FDIC based on the balance of insured deposits and the amount of risk each institution poses to the DIF. Both banks are members of the Federal Home Loan Bank system. This provides certain advantages to them, including favorable borrowing rates for certain funds.

          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 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 Bank Secrecy Act, Office of Foreign Assets Control regulations, 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 oper ating 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 the OFIS, (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 o f branches located in Michigan.

Environmental Regulations

          In our business, 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

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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, 2007, Southern Michigan Bank employed 150 total employees and 142 full-time equivalent employees and FNB Financial employed 66 total employees and 60 full-time equivalent employees. Southern's only employees as of the same date were its five executive officers (four of whom are also employed by Southern Michigan Bank and one of whom is also employed by FNB Financial).

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.

          Southern acquired FNB Financial Corporation on December 1, 2007. Statistical information presented for 2007 includes information for FNB Financial Corporation from the date of acquisition. Any comparison of information from 2007 to information in previous years must consider that information for FNB Financial Corporation is not included in information presented for periods before December 1, 2007.

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          Securities Portfolio

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

(Dollars in thousands)

	2007		2006		2005
U.S. Government and federal agency	$	26,430	$	13,997	$	13,989
States and political subdivisions		33,352		17,741		20,525
Mortgage-backed securities		17,733		864		1,161
Corporate		-		3,000		-
Total	$	77,515	$	35,602	$	35,675

          At the end of 2007 and 2006, the market value of securities issued by the State of Michigan and all its political subdivisions held by us totaled $20,900,000 and $11,383,000, respectively. No other securities of any single issuer held by us were greater than 10% of shareholders' equity.

          Presented below is the fair value of securities as of December 31, 2007 and 2006, a schedule of maturities of securities as of December 31, 2007, and the weighted average yields of securities as of December 31, 2007.

(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, 2007		Fair Value at Dec. 31, 2006
U.S. Government and
federal agency	$	8,064	$	14,304	$	4,062	$	-	$	26,430	$	13,997
States and political      subdivisions		3,224		16,985		9,724		3,419		33,352		17,741
Mortgage-backed securities		180		2,414		1,593		13,546		17,733		864
Corporate		-		-		-		-		-		3,000
Total securities	$	11,468	$	33,703	$	15,379	$	16,965	$	77,515	$	35,602

	Weighted average yields(1)
U.S. Government and
federal agency	4.55	%	4.88	%	4.28	%	-	%
States and political      subdivisions	3.58		4.36		4.04		3.07
Corporate	-		-		-		-
Mortgage-backed securities	5.65		4.88		4.74		5.21

______________

(1) Yields are not presented on a tax-equivalent basis.

          The weighted average interest rates 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)

	2007		2006		2005		2004		2003
Commercial and agricultural	$	84,937	$	63,709	$	61,019	$	56,038	$	54,848
Real estate - commercial		129,065		97,144		81,876		85,984		81,072
Real estate - construction		11,686		10,025		9,504		7,224		7,272
Real estate - residential		94,560		66,202		71,999		73,344		75,063
Consumer		15,730		15,745		18,316		18,794		14,815
Total loans, gross	$	335,978	$	252,825	$	242,714	$	241,384	$	233,070

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          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, 2007. 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, 2007.

(Dollars in thousands)

Loan Type	Less than 1 Year		1 Year - 5 Years		More than 5 Years		Total
Commercial, agricultural, and    real estate - commercial	$	61,988	$	141,830	$	10,184	$	214,002
Real estate - construction		7,712		2,836		1,138		11,686
Totals	$	69,700	$	144,666	$	11,322	$	225,688
Loan Sensitivity to Changes in Interest Rates			1 Year - 5 Years		More than 5 Years		Total
Loans with fixed interest rates			$	116,809	$	5,342	$	122,151
Loans with floating or adjustable interest rates				27,857		5,980		33,837
Totals			$	144,666	$	11,322	$	155,988

          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 three years. Such strategy 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 g rades.

          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 to promptly identify potential problem loans within the portfolio, to maintain an adequate allowance for losses, 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, and require repayment in 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

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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 - 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 - commercial loans. We make non-residential real estate loans secured by first mortgages and/or junior mortgages on non-residential real estate, including 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.

          Real estate - construction loans. 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, vacation expenses, and other consumer purposes. Consumer loans may be secured, other than by real estate, or unsecured, and generally require repayment on an installment repayment schedule.

          The following loans were classified as nonperforming as of December 31:

(Dollars in thousands)

	2007		2006		2005		2004		2003
Loans accounted for on a non-accrual basis	$	4,405	$	3,518	$	2,590	$	2,002	$	3,586
Accruing loans which are contractually past due 90      days or more as to principal or interest payments		429		6		996		1,499		2
Loans defined as "troubled debt restructurings"		-		-		-		-		-
Totals	$	4,834	$	3,524	$	3,586	$	3,501	$	3,588

          A loan is placed on nonaccrual status at the point in time at which the collectibility of principal or interest is considered doubtful. The table below illustrates interest forgone and interest recorded on nonperforming loans for the years presented.

(Dollars in thousands)

	2007		2006		2005		2004		2003
Interest on non-performing loans which would have      been earned had the loans been in an accrual or      performing status	$	278	$	326	$	202	$	103	$	291
Interest on non-performing loans that was actually      recorded when received	$	21	$	- -	$	26	$	102	$	39

          Potential Problem Loans

          At December 31, 2007, there were $17.3 million of loans not disclosed above where some concern existed as to the borrowers' abilities to comply with original loan terms. We allocated $1,013,137 in the aggregate for loan losses for nonperforming and potential problem loans as of December 31, 2007. However, our allowance for loan losses is also available for potential problem loans.

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          Loan Concentrations

          As of December 31, 2007, there was no concentration of loans exceeding 10% of total loans that is not otherwise disclosed as a category of loans in the loan portfolio listed in Note E to the consolidated financial statements.

          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)

	2007			2006			2005			2004			2003
Balance at January 1	$	3,302		$	3,167		$	3,459		$	3,252		$	3,512
Charge-offs:
Commercial and agricultural		81			367			1,016			73			978
Real estate - commercial		78			38			15			47			257
Real estate - construction		32			-			-			-			-
Real estate - residential		106			110			42			65			87
Consumer		228			70			98			77			138
Total charge-offs		525			485			1,171			262			1,460
Recoveries:
Commercial and agricultural		61			14			44			364			148
Real estate - commercial		10			16			8			11			-
Real estate - construction		-			-			-			-			-
Real estate - residential		-			18			3			1			7
Consumer		105			72			74			93			145
Total recoveries		176			120			129			469			300
Net charge-offs/(recoveries)		349			365			1,042			(207	)		1,160
Addition resulting from FNB acquisition		1,458			-			-			-			-
Additions charged to operations(1)		745			500			750			-			900
Balance at December 31	$	5,156		$	3,302		$	3,167		$	3,459		$	3,252
Ratio of net charge-offs (recoveries) during the period to average loans outstanding during the period		0.13	%		0.15	%		0.42	%		(0.09	)%		0.49	%

_________________________________ 

(1) The allowance for loan losses is maintained at a level which, in management's opinion, is 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 2007 management added $745,000 to the allowance. The provision reflects net charge off experience, the growth of the commercial portfolio, and the continued decline in the Michigan economy and the local real estate market. During 2006, management added $500,000 to the allowance. Approximately half was provided to support the commercial loan growth in the portfolio, with additional provision recorded to provide for charge-offs that did not have specific reserves allocated and to increase the provision due to economic conditions in Michigan. During 2005 management added $750,000 to the allowance as specific reserves

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increased and charge-offs exceeded historical trends. Southern experienced net recoveries for the year ended 2004, reduced loans with specific reserves and decreased loan delinquencies. The decrease in the 2003 allowance and provision for loan losses occurred as allocations for specific loans decreased.

           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)

	2007		2006		2005		2004		2003
Commercial (including agricultural,   real estate and construction)	$	4,605	$	3,051	$	2,840	$	3,135	$	3,001
Real estate - residential		396		126		180		136		111
Consumer		155		125		147		188		140
Unallocated		-		-		-		-		-
Total allowance	$	5,156	$	3,302	$	3,167	$	3,459	$	3,252

          The Securities and Exchange Commission's guide on statistical disclosure by bank holding companies 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.

	2007		2006		2005		2004		2003
Commercial and agricultural	25.3	%	25.2	%	25.2	%	23.2	%	23.5	%
Real estate - commercial	38.4		38.4		33.7		35.6		34.8
Real estate - construction	3.5		4.0		3.9		3.0		3.1
Real estate - mortgage	28.1		26.2		29.7		30.4		32.2
Consumer	4.7		6.2		7.5		7.8		6.4
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 by category for the respective years.

(Dollars in thousands)

	2007				2006				2005
Noninterest-bearing demand	$	42,618	-		$	42,146	-		$	43,218	-
Interest-bearing demand		119,118	2.61	%		104,108	2.16	%		97,013	1.29	%
Savings		31,874	0.59	%		29,295	0.39	%		32,296	0.37	%
Certificates of deposit		103,819	4.30	%		96,751	3.85	%		88,629	3.01	%
Total	$	297,429	3.04	%	$	272,300	2.64	%	$	261,156	1.86	%

          The following table illustrates the maturities of certificates of deposits issued in denominations of $100,000 or more as of December 31, 2007.

(Dollars in thousands)

Maturing in less than 3 months	$	8,742
Maturing in 3 to 6 months		8,993
Maturing in 6 to 12 months		6,584
Maturing in more than 12 months		18,195
Total	$	42,514

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          Return on Equity and Assets

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

	2007		2006		2005
Return on assets (net income divided by average total assets)	1.18	%	1.25	%	1.19	%
Return on equity (net income divided by average equity)(1)	12.72	%	14.54	%	14.81	%
Dividend payout ratio (dividends declared per share divided      by net income per share)	36.90	%	34.44	%	31.69	%
Equity to assets ratio (average equity divided by average total assets)(1)	9.27	%	8.56	%	8.06	%

_________________

(1) Average equity used in the above table excludes common stock subject to repurchase obligation but includes average accumulated other comprehensive income.

Item 1A. Risk Factors

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 OTC Bulletin Board 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.

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

          Southern's ability to pay dividends is limited by regulatory restrictions and the need to maintain sufficient consolidated capital. The ability of Southern's subsidiary banks to pay dividends to Southern is limited by their obligations to maintain sufficient capital and by other general restrictions on dividends that are applicable to banks. If Southern or its subsidiary banks do not satisfy these regulatory requirements, Southern would be unable to continue to pay dividends on its common stock.

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 stock appreciation rights, options or warrants to purchase Southern common stock in the future and those 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

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of its debt securities 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 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.

Risks Related to Southern's Business

The integration of FNB Financial Corporation into Southern may be more difficult, costly, or time-consuming than we expect.

          Before completion of the merger of FNB Financial Corporation into Southern, each company operated independently. It is possible that the integration process post-merger could result in the loss of key employees or disruption of either or both of the banks' ongoing business or inconsistencies in standards, procedures and policies that would adversely affect the banks' ability to maintain relationships with clients and employees or to achieve the anticipated benefits of the merger. If Southern has difficulties with the integration process, Southern might not achieve the economic benefits expected to result from the merger. As with any merger of banking institutions, the merger may also result in business disruptions that cause either or both of the banks to lose customers or cause customers to remove their deposits or loans from the banks and move their business to competing financial institutions.

          Southern believes it has reasonably estimated the likely costs of integrating the operations of FNB into Southern and the incremental costs of operating as a combined organization. However, it is possible that unexpected transaction costs, such as taxes, or unexpected future operating expenses, such as increased personnel costs or increased taxes, and other types of unanticipated adverse developments, could have an adverse effect on the results of operations and financial condition of Southern. If unexpected costs are incurred, the merger could have a significant dilutive effect on Southern's earnings per share. In other words, if Southern incurs such unexpected costs and expenses as a result of the merger, Southern believes that the earnings per share of Southern common stock could be less than they would have been if the merger had not been completed.

          Efforts by management to integrate FNB Financial Corporation into Southern could distract management from the other business and operations of Southern. Any such distraction on the part of management, if significant, could affect its ability to manage existing business and develop new business and adversely affect the business and earnings of Southern.

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 and financial condition. 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

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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. As Southern expands into new markets, its determination of the size of the allowance could be understated due to Southern's lack of familiarity with market-specific factors.

          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.

          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 negative effect on Southern's operating results.

Losses on loans acquired as a result of the merger could result in a decrease in Southern's earnings.

          As a result of the merger of FNB Financial Corporation into Southern, Southern acquired FNB Financial and its entire loan portfolio. FNB Financial's loans were not underwritten and administered under the supervision of Southern's management or under Southern's loan policies, and future loan loss development on the acquired loan portfolio may be different, and may be less favorable, than Southern's historical loan loss experience. FNB Financial's recent historical loan loss experience has been less favorable than Southern's. Thus, it is possible that the merger will result in Southern being forced to increase its consolidated provisions for loan losses in the future resulting in a decrease in Southern's earnings.

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 repa y 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.

Changes in interest rates may negatively affect Southern's earnings and the value of its assets.

          Changes in interest rates may affect Southern's level of interest income, the primary component of its gross revenue, and the level of its interest expense, Southern's largest recurring expenditure. Changes in prevailing interest rates are not within our control and could adversely affect our financial condition and results of operations.

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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. The services of John H. Castle, Southern's Chairman and Chief Executive Officer; Kurt G. Miller, Southern's President; Richard E. Dyer, Southern's Executive Vice President; and Danice L. Chartrand, Southern's Chief Financial Officer; would be particularly difficult to replace.

Southern's continued growth may require it to raise additional capital in the future, but that capital might not be available on acceptable terms when it is needed.

          Southern is required by federal and state regulatory authorities to maintain adequate levels of capital to support its operations. Southern expects that it may need to raise additional capital to support its continued 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. If Southern cannot raise additional capital when needed, its ability to further expand its operations through organic growth and acquisitions could be materially impaired.

Southern's business is subject to the success of the local economies where it operates.

          Southern's success significantly depends upon the economy, population, income levels, deposits and housing starts in the southwest Michigan market. If this market does not grow or if prevailing economic conditions locally or nationally are unfavorable, Southern's business may be adversely affected. Adverse economic conditions in southwest Michigan, including the loss of certain significant employers, could reduce Southern's growth rate, affect the ability of its customers to repay their loans to Southern, and generally adversely affect Southern's financial condition and results of operations. Southern is less able than a larger institution to spread the risks of unfavorable local economic conditions across a large number of diversified economies.

          Any adverse market or economic conditions in Michigan may disproportionately increase the risk that Southern's borrowers are unable to make their loan payments. In addition, the market value of the real estate securing loans as collateral could be adversely affected by unfavorable changes in market and economic conditions. A sustained period of increased payment delinquencies, foreclosures or losses caused by adverse market or economic conditions in the State of Michigan could adversely affect the value of Southern's assets, revenues, results of operations and financial condition.

          Commercial banks and other financial institutions are affected by economic and political conditions, both domestic and international, and by governmental monetary policies. Conditions such as inflation, recession, unemployment, high interest rates, short money supply, scarce natural resources, international disorders, terrorism and other factors beyond Southern's control may adversely affect profitability.

Southern's recent operating results may not be indicative of its future operating results.

          Southern may not be able to sustain its historical rate of growth or may not even be able to grow its business at all. In the future, Southern may not have the benefit of a favorable interest rate environment, a strong residential mortgage market, or the ability to find suitable candidates for acquisition. Various factors, such as economic conditions, regulatory and legislative considerations and competition, may also impede or prohibit Southern's ability to expand its market presence. If Southern experiences a significant decrease in its historical rate of growth, Southern's results of operations and financial condition may be adversely affected due to a high percentage of its operating costs being fixed expenses.

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, national and international financial institutions that operate offices in Southern's primary market areas and elsewhere. In addition, some of the

13

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 res ponsiveness in working with local customers, Southern can give no assurance that this strategy will be successful.

Compliance with the Securities Exchange Act of 1934 may adversely effect Southern's earnings.

          As a result of the merger, Southern is subject to the Securities Exchange Act of 1934, the Sarbanes-Oxley Act of 2002, and other laws, rules and regulations applicable to registered companies that were not applicable to Southern before the merger. Southern will incur substantial additional expenses to comply with these laws and regulations that may adversely effect its earnings when compared to prior periods. Complying with these laws and regulations will require substantial time and attention of Southern's board of directors and management, reducing the time and attention they will have available for integrating FNB Financial Corporation's business and operations and managing the combined organization. Companies that are subject to these laws and regulations are also believed to be subject to a greater risk of litigation and liability than companies that are not.

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. 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.

Future claims could be made against Southern or Southern Michigan Bank related to their relationship with Alanar, Inc. and its affiliates.

          Southern Michigan Bank previously served as indenture trustee and also is the depository bank in connection with certain bond offerings underwritten by Alanar, Inc. Southern Michigan Bank also is party to an agreement with Guardian Services, LLC, an affiliate of Alanar, Inc., to provide fiduciary oversight services related to the custodianship of certain individual retirement accounts that invested in bonds underwritten by Alanar, Inc. On July 26, 2005, the SEC obtained a court order freezing all assets under the control of Alanar, Inc., Guardian Services, LLC, and their affiliates, including all accounts at Southern Michigan Bank. Alanar, Inc., Guardian Services, LLC, and their affiliates have been under court-appointed monitorship since July 26, 2005 and in receivership since December 20, 2005. The SEC and the receiver have alleged that Alanar, Inc., Guardian Services, LLC, and their affiliates engaged in fraud and other improper conduct to hide bond defaults in connec tion with over 340 bond offerings. Southern Michigan Bank has not served as indenture trustee since November 16, 2006, when the court approved the removal of Southern Michigan Bank as trustee so that the receiver could assume this role to promote efficiency in the administration of the receivership. On August 28, 2007, the court approved a plan of receivership pursuant to which another bank is eventually expected to serve as the depository bank for the bond issuances and Southern Michigan Bank's agreement with Guardian Services, LLC related to the individual retirement accounts will eventually be terminated. Upon the occurrence of these events, it is expected that Southern Michigan Bank will not have any further relationship with Alanar or its affiliates. No claims with respect to this matter have been filed against Southern or Southern Michigan Bank by any person or entity. There can be no assurance,

14

however, that Southern or Southern Michigan Bank will not be subject to future claims arising out of their relationship with Alanar, Inc. and Guardian Services, LLC. Protracted litigation or an adverse decision or settlement of any such action or proceeding could have a material adverse effect on the financial position, business, prospects, and results of operation of Southern or Southern Michigan Bank. For more information, see "Legal Proceedings-Alanar, Inc." on page 76.

If Southern is required to write down goodwill, 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 on Southern's consolidated balance sheets. The amount of the purchase price that is allocated to goodwill is determined by the excess of the purchase price over the fair value of 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 clients/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.

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.

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 will 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 likely 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.

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Item 1B. Unresolved Staff Comments

          None.

Item 2. Properties

Our offices are as follows:

Southern's, Southern Michigan Bank's, and the SMB Mortgage Company'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:
   102 East Main Street, North Adams, Michigan
   Office is owned by Southern Michigan Bank and comprises 1,292 square feet.

Southern Michigan Bank's branch office:
   100 West Burr Oak, Athens, Michigan
   Office is owned by Southern Michigan Bank and comprises 2,120 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.

FNB Financial's and FNB Financial Services' main office:
   88 North Main Street, Three Rivers, Michigan
   Office is owned by FNB Financial and comprises approximately 14,256 square feet.

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FNB Financial's branch office:
   1200 North Main Street, Three Rivers, Michigan
   Office is owned by FNB Financial and comprises approximately 3,321 square feet.

FNB Financial's branch office:
   225 U.S. 131, Three Rivers, Michigan
   Office is owned by FNB Financial and comprises approximately 900 square feet.

FNB Financial's branch office:
   901 East State Street, Cassopolis, Michigan
   Office is leased by FNB Financial and comprises approximately 220 square feet.

FNB Financial's branch office:
   235 East Main Street, Centreville, Michigan
   Office is owned by FNB Financial and comprises approximately 1,945 square feet.

FNB Financial's branch office:
   345 North Washington Street, Constantine, Michigan
   Office is owned by FNB Financial and comprises approximately 2,400 square feet.

FNB Financial's branch office:
   136 North Nottawa Road, Mendon, Michigan
   Office is owned by FNB Financial and comprises approximately 2,700 square feet.

FNB Financial's loan production office:
   212 South Front Street, Dowagiac, Michigan
   Office is leased by FNB Financial and comprises approximately 2,900 square feet.

Item 3. Legal Proceedings

          As of March 14, 2008, there are no significant pending legal proceedings to which we are a party or to which any of our properties are subject, except for legal proceedings arising in the ordinary course of business. In the opinion of management, resolution of pending legal proceedings will not have a material effect on the consolidated financial condition of Southern.

Alanar, Inc.

          From approximately December 2001 through November 16, 2006, Southern Michigan Bank served as the indenture trustee on 49 bond offerings that were underwritten by Alanar, Inc. ("Alanar"), an Indiana broker-dealer firm specializing in bond offerings by churches. Southern Michigan Bank also serves as the depository bank in connection with these 49 offerings, as well as an additional 35 bond offerings underwritten by Alanar for which Southern Michigan Bank was not the indenture trustee. Southern Michigan Bank also is party to an agreement dated December 27, 2000 with Guardian Services, LLC ("Guardian"), an affiliate of Alanar, pursuant to which Southern Michigan Bank agreed to provide fiduciary oversight services to Guardian and Guardian agreed to provide accounting, reporting and custodial services for individual retirement accounts.

          On July 26, 2005, the SEC obtained a court order freezing all assets under the control of Alanar, Guardian and their affiliates, including all accounts at Southern Michigan Bank. On October 5, 2005, the SEC issued an order finding that the defendants made misrepresentations to investors and misused investment proceeds from church bond issuances and the sale of bond investment fund units. The SEC revoked Alanar's registration as a broker and dealer and barred certain control persons from associating with any broker or dealer.

          Alanar, Guardian and their affiliates have been under court-appointed monitorship since July 26, 2005 and in receivership since December 20, 2005. The receiver has asserted that Alanar, Guardian and their affiliates operated a Ponzi scheme by improperly using the various accounts to make payments to investors in other bond offerings, to pay other defaulted bonds and to trade in securities in a commingled investment account. The receiver

17

has alleged that Alanar failed to perform an independent credit analysis of the churches before issuance of the bonds, but was able to hide a high rate of bond defaults by using improper transfers between the various accounts so that new investor money was allegedly used to pay returns to old investors. The receiver has further asserted that Alanar sold the bonds for the churches by focusing on the elderly and other unsophisticated investors who had a desire to help in the financing of churches. Sales were accomplished through prospectuses and placement memoranda prepared by Alanar that allegedly violated the securities laws by failing to disclose the roles and relationships of the paying agents, indenture trustees, registrars and other parties; the conflicts of interest and compensation of Alanar and its affiliates; and the multiple improper uses of funds in the alleged Ponzi scheme.

          According to the receiver's reports, as of April 30, 2007, there was a total of approximately $139,500,000 in outstanding principal and $59,300,000 in past due interest on all the bonds related to the Alanar receivership matter. Of this total indebtedness for all Alanar-related bonds, approximately $28,700,000 in principal and $6,000,000 in interest (18% of the total indebtedness) related to bonds for which Southern Michigan Bank previously served as the indenture trustee and for which the issuers had not made payments into their bond repayment accounts sufficient to pay their bond indebtedness completely. Of this $28,700,000 in principal indebtedness, the receiver's reports show that 11 issuers representing approximately $11,000,000 (38%) in combined bond principal were in default before the SEC action in July 2005. As discussed above, the receiver has asserted that Alanar was able to hide past bond defaults by using improper transfers between the various accounts so th at new investor money was allegedly used to pay returns to old investors. Following the SEC action and the resulting appointment of the receiver with control over all accounts for the potential benefit of the receivership estate, some bond issuers ceased making their scheduled payments into their bond repayment accounts, while other bond issuers have continued to make these payments. However, all bond issuances are currently in default because all bondholders have not been paid since the accounts were frozen by court order on July 26, 2005.

          Under the stated terms of the trust indentures in each of these offerings, Southern Michigan Bank had no contractual duties to perform as indenture trustee until it received written notice of an event of default on the bonds. Following the SEC action in 2005 freezing all bond offering accounts, Southern Michigan Bank demanded information from Alanar and its affiliates serving as the registrars, paying agents and servicing agents for the bonds. Southern Michigan Bank also began corresponding with bond issuers to provide notice of important events and to obtain information from them, including information about their plans for repayment of their bondholders. In March 2006, the court amended its receivership order to provide the receiver with exclusive authority to correspond with bond issuers and bondholders and to prohibit others from doing so. In June 2006, the receiver filed a motion to have Southern Michigan Bank removed as indenture trustee for the purpose of avoiding inefficiencies and duplication of effort by both the receiver and Southern Michigan Bank. On November 17, 2006, pursuant to the receiver's unopposed motion, the court approved the removal of Southern Michigan Bank as indenture trustee for all bond offerings based upon the court's finding that "in light of the terms of the Receivership Order, as amended, [Southern Michigan Bank] is incapable of acting as trustee." At present, Southern Michigan Bank continues as the depository bank for the bond offering accounts, all of which are under the exclusive control of the receiver.

          According to the receiver's reports, there are 840 individual retirement accounts serviced by Guardian. The receiver's report of February 2006 indicates that these IRA accounts, combined with fifty 401(k) accounts also serviced by Guardian, together held approximately $1,400,000 in cash and approximately $12,000,000 in Alanar-related bond investment funds. Although the current total portfolio value of the IRAs is unknown, the last report received from Guardian prior to the receivership reported a total portfolio value of $35,800,000 in 790 individual retirement accounts as of December 31, 2004. On June 15, 2006, the receiver petitioned the court for authorization to permit distributions and roll-overs of all cash amounts and all investments such as mutual funds and real estate investment trusts that were unrelated to Alanar. The receiver stated that the forensic accounting reports "reveal that there is no evidence of any inappropriate commingling, misapplication or raidi ng of the cash deposits or non-Alanar related investments in these IRAs." On June 19, 2006, the court authorized these distributions. Subsequent reports of the receiver indicate that approximately $1,300,000 in cash has been distributed from the IRA and 401(k) accounts. The accounts continue to hold church bonds, bond investment fund units and any undistributed cash.

          On August 28, 2007, the court approved a plan for distribution of the receivership assets. The court also issued certain findings of fact and conclusions of law, including finding that the offering documents prepared by Alanar to sell the bonds contained misrepresentations and omissions of material facts necessary for investors to make informed investment decisions. The court also found that there was inappropriate manipulation and commingling of funds, and that the failure to disclose this manipulation and commingling had all the essential elements of a Ponzi scheme. Under the receivership plan approved by the court, all investors in the bond investment funds will be subject

18

to common pooling, but there will be a period of seven and one-half months (or perhaps longer, if extended by the court) for each of the individual bond issuances to be categorized based upon demonstrated ability to repay their bondholders. The timing for future distributions to bondholders and the scope of potential pooling of assets will depend upon the particular category assigned to a bond issuance by the receiver. Some bond issuances could be released from the receivership, some could be granted up to two years to achieve successful rehabilitation and others could be subject to immediate collection activity by the receiver. As to certain bond categories, a bank has been selected to serve as successor trustee and another bank to serve as successor bond registrar, transfer agent, paying agent and depository bank.

          As discussed above, Southern Michigan Bank has not served as indenture trustee since November 16, 2006, when the court approved the removal of Southern Michigan Bank so that the receiver could assume this role as the successor trustee to promote efficiency in the administration of the receivership. Under the receivership plan approved on August 28, 2007, the receiver will eventually name a new successor indenture trustee, as well as another bank to serve as the successor depository bank for the bond issuances. The plan also requires Southern Michigan Bank's agreement with Guardian related to the IRAs to be terminated within seven and one-half months (unless extended by the court). Upon the occurrence of these events, it is expected that Southern Michigan Bank will not have any further relationship with Alanar or its affiliates.

          No claims have been filed against Southern or Southern Michigan Bank by any bondholder, bond issuer, individual retirement account holder, the receiver, any governmental agency or any other person related to Southern Michigan Bank's former role as indenture trustee or Southern Michigan Bank's role as depository bank or in any other capacity related to these matters. There can be no assurance, however, that Southern or Southern Michigan Bank will not be subject to future claims, actions, suits or proceedings, including potential claims that our conduct was in breach of contractual, fiduciary or other duties or applicable statutes or regulations, or that, if made, Southern or Southern Michigan Bank would be successful in defending such claims. Protracted litigation or an adverse decision or settlement of any such action or proceeding could have a material adverse effect on the financial position, business, prospects and results of operations of Southern or Southern Michiga n Bank.

Item 4. Submission of Matters to a Vote of Security Holders

          We did not submit any matters to a vote of the security holders of Southern during the fiscal quarter ended December 31, 2007.

PART II

Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market for and Dividends on Southern Common Stock

          Southern common stock is quoted on the OTC Bulletin Board under the symbol "SOMC.OB." Trading activity in our common stock is relatively infrequent. Our trading volume and recent share price information can be viewed under the symbol "SOMC.OB" on certain financial websites.

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          The range of high and low bid prices for shares of Southern common stock (adjusted to account for a 5% stock dividend declared in February 2006) for each quarterly period during the past two years is as follows:

Date	High		Low
2007
1st Quarter	$	24.75	$	24.06
2nd Quarter		24.20		23.00
3rd Quarter		24.50		22.50
4th Quarter		24.45		20.75
2006
1st Quarter		24.70		22.00
2nd Quarter		23.70		22.90
3rd Quarter		23.90		22.95
4th Quarter		24.30		23.80

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

          As of March 14, 2008, there were 2,307,924 shares of Southern common stock issued and outstanding. As of March 14, 2008, there were 453 record holders of shares of Southern common stock.

          The following table summarizes cash dividends declared per share of Southern common stock during 2007 and 2006:

Quarter	2007		2006
1st Quarter	$	0.20	$	0.18
2nd Quarter		0.20		0.20
3rd Quarter		0.20		0.20
4th Quarter		0.20		0.20

          Southern's principal source of funds to pay cash dividends is the earnings and dividends paid by our subsidiary banks. The banks are restricted in their ability to pay cash dividends under current laws and regulations. (See Management's Discussion and Analysis of Financial Condition and Results of Operations and Note Q to the Southern consolidated financial statements). Based on information presently available, management expects Southern to declare and pay regular quarterly cash dividends in 2008.

          Information regarding the equity compensation plans both approved and not approved by shareholders at December 31, 2007 is included in Item 12 of this report and is here incorporated by reference.

Item 6. Selected Financial Data

          The following table shows summarized historical consolidated financial data for Southern. The table is unaudited. The information in the table is derived from Southern's audited financial statements for 2003 through 2007. 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.

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	Year Ended December 31,
	2007(1)		2006		2005		2004		2003
	(unaudited) (in thousands, except share amounts)
Income Statement Data:
Net interest income	$	14,906	$	14,495	$	13,437	$	12,264	$	11,865
Provision for loan losses		745		500		750		-		900
Net income		4,133		4,009		3,802		3,604		3,263
Balance Sheet Data (period end):
Assets		480,178		329,891		317,952		313,458		321,587
Deposits		399,169		282,509		268,078		251,868		254,701
Other borrowings		14,753		6,973		12,164		21,903		27,621
Subordinated debentures		5,155		5,155		5,155		5,155		-
Shareholders' equity		44,219		28,482		26,110		27,465		26,358
Common Share Summary(1):
Diluted earnings per share		2.28		2.26		2.12		1.86		1.68
Dividends per share		0.80		0.78		0.67		0.63		0.61
Book value per share		19.96		16.95		15.45		15.02		14.25
Weighted average diluted shares
outstanding		1,813,306		1,770,835		1,791,721		1,929,487		1,933,594

_______________________

(1) Southern acquired FNB Financial Corporation on December 1, 2007. Selected financial data presented for 2007 includes information for FNB Financial Corporation from the date of acquisition. Any comparison of selected financial data from 2007 to selected financial data in previous years must consider that information for FNB Financial Corporation is not included in selected financial data presented for periods before December 1, 2007.

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

          The following discussion is designed to provide a review of the consolidated financial condition and results of operations of Southern and its wholly-owned subsidiaries, Southern Michigan Bank and FNB Financial. This discussion should be read in conjunction with the consolidated financial statements and related footnotes.

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. Man y of the factors listed are inherently subjective, and requires the use of significant management estimates.

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          Mortgage Servicing Rights

          Mortgage servicing rights represent the estimated 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.

Merger with FNB Financial Corporation

          On December 1, 2007, Southern merged with FNB Financial Corporation. The 2007 results of operations include one month of combined financial results after the close of the merger and the 2007 year end balance sheet includes all of the assets acquired and liabilities assumed from FNB Financial Corporation. Therefore, a comparison of 2007 and 2006 financial condition and results of operations is materially affected as a result of the merger. For more detailed information concerning the merger, see Note C to the consolidated financial statements.

Results of Operations

          Southern's net income for 2007 was $4,133,000, a 3.1% improvement from 2006. Provision for loan losses in the amount of $745,000 was expensed in 2007; up from $500,000 in 2006. Non-interest income of Southern, including gain on loan sales, increased 4.0% to $4,268,000 in 2007. Non-interest expense of $12,860,000 in 2007 was 2.1% higher than the 2006 costs.

	Percent Change from Prior Year			Percent Change from Prior Year
	2007	2006		2007	2006
Net interest income	2.84%	7.87%	Assets	45.56%	3.75%
Provision for loan losses	49.00%	-33.33%	Gross loans	32.89%	4.17%
Non-interest income	3.97%	-2.86%	Allowance for loan losses	56.15%	4.26%
Non-interest expense	2.06%	6.77%	Deposits	41.29%	5.38%
Net income	3.09%	5.44%	Other borrowings	111.57%	-41.16%
			Shareholders' equity	55.25%	9.08%

          Results of operations can be measured by various ratio analyses. Two widely recognized performance indicators are return on equity and the return on assets. Southern's return on average equity was 12.72% in 2007, 14.54% in 2006 and 14.81% in 2005. The return on average assets was 1.18% in 2007, 1.25% in 2006 and 1.19% in 2005.

          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

22

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.

          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 2007, Southern's net interest margin (FTE) was 4.83% compared to 5.05% for 2006 and 4.73% in 2005. Beginning in 2004 and continuing in 2005 and the first six months of 2006, the Federal Reserve increased rates 25 basis points 17 different times. From mid 2006 through August 2007 the prime rate remained steady. Beginning with a 50 basis point drop in September 2007, the Federal Reserve began a campaign of decreasing overnight borrowing rates to stimulate the economy. In both October and December rates were dropped an additional 25 basis points, for a 100 basis point total drop in 2007. Even as overnight borrowing rates began to decline, many larger banks continued to pay relatively high rates for deposits as they looked for sources of funding their loan commitments.

          Despite the lower net interest margin in 2007, net interest income increased during the year by $508,000. The increase was a result of a $2,187,000 improvement in interest income partially offset by an increase in interest expense of $1,679,000. The increase in interest income was primarily a result of $24.9 million of additional earning assets. Approximately $10.5 million of the increase in average earning assets was a result of the merger with FNB Financial Corporation. The average rate realized on earning assets in 2007 was 7.55%, an increase of 13 basis points from the 2006 results of 7.42%, and 97 basis points higher than the 6.58% realized in 2005. This increase in average rates also contributed to the increase in interest income.

          Increases in interest expense partially offset the interest income. Deposit rate increases that went into effect during the last half of 2006 impacted the full year of interest expense of 2007.          

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          The following table presents a summary of net interest income (FTE) for 2007, 2006 and 2005.

Table 1. Average Balances and Tax Equivalent Interest Rates

(Dollars in thousands)

	2007							2006							2005
	Average Balance			Interest		Yield/ Rate		Average Balance			Interest		Yield/ Rate		Average Balance			Interest		Yield/ Rate
ASSETS
Interest earning assets:
Loans(1)(2)(3)	$	259,811		$	20,824	8.02	%	$	248,088		$	19,494	7.86	%	$	245,637		$	17,225	7.01	%
Taxable investment securities(4)		31,586			1,648	5.22			22,909			1,018	4.44			26,215			875	3.34
Tax-exempt investment securities(1)		16,189			982	6.07			14,533			841	5.79			13,478			786	5.83
Federal funds sold		9,419			492	5.22			7,746			406	5.24			4,904			206	4.20
Total interest earning assets		317,005			23,946	7.55			293,276			21,759	7.42			290,234			19,092	6.58
Non-interest earning assets:
Cash and due from banks		8,940							9,056							10,240
Other assets		28,156							22,737							21,759
Less allowance for loan losses		(3,474	)						(3,175	)						(3,584	)
Total assets	$	350,627						$	321,894						$	318,649
LIABILITIES AND   SHAREHOLDERS' EQUITY
Interest bearing liabilities:
Demand deposits	$	119,118		$	3,106	2.61	%	$	104,108		$	2,249	2.16	%	$	97,013		$	1,249	1.29	%
Savings deposits		31,874			188	.59			29,295			113	0.39			32,296			121	0.37
Time deposits		103,819			4,464	4.30			96,751			3,721	3.85			88,629			2,672	3.01
Securities sold under agreements    to repurchase and overnight    borrowings		3,235			114	3.52			39			2	5.13			229			6	2.62
Other borrowings		5,340			362	6.78			10,519			475	4.52			19,732			1,015	5.14
Subordinated debentures		5,155			404	7.84			5,155			399	7.74			5,155			308	5.97
Total interest bearing liabilities		268,541			8,638	3.22			245,867			6,959	2.83			243,054			5,371	2.21
Non-interest bearing liabilities:
Demand deposits		42,618							42,146							43,218
Other		4,887							4,285							4,552
Common stock subject to    repurchase obligation		2,089							2,030							2,155
Shareholders' equity		32,492							27,566							25,670
Total liabilities and shareholders'    equity	$	350,627						$	321,894						$	318,649
Net interest income				$	15,308						$	14,800						$	13,721
Interest rate spread						4.33	%						4.59	%						4.37	%
Net yield on interest earning assets						4.83	%						5.05	%						4.73	%

______________________

(1)	Includes tax equivalent adjustment of interest (assuming a 34% tax rate) for securities and loans of $334,000 and $68,000, respectively for 2007; $286,000 and $19,000, respectively for 2006; and $267,000 and $17,000, respectively for 2005.
(2)	Average balance includes average nonaccrual loan balances of $3,373,000 in 2007; $2,951,000 in 2006; and $2,926,000 in 2005.
(3)	Interest income includes loan fees of $353,000 in 2007; $400,000 in 2006; and $412,000 in 2005.
(4)	Average balance includes average unrealized gain (loss) of $14,000 in 2007; ($199,000) in 2006; and ($53,000) in 2005 on available for sale securities. The yield was calculated without regard to this average unrealized gain (loss).

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          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)

	2007 Compared to 2006 Increase (Decrease) Due To									2006 Compared to 2005 Increase (Decrease) Due To
Interest income on:	Rate			Volume			Net			Rate			Volume			Net
Loans	$	396		$	934		$	1,330		$	2,096		$	173		$	2,269
Taxable investment securities		198			432			630			263			(120	)		143
Tax-exempt investment securities		42			99			141			(6	)		61			55
Federal funds sold		(1	)		87			86			60			140			200
Total interest earning assets	$	635		$	1,552		$	2,187		$	2,413		$	254		$	2,667
Interest expense on:
Demand deposits	$	505		$	352		$	857		$	903			97		$	1,000
Savings deposits		64			11			75			3			(11	)		(8	)
Time deposits		459			284			743			787			262			1,049
Federal funds purchased		(1	)		113			112			3			(7	)		(4	)
Other borrowings		179			(292	)		(113	)		(112	)		(428	)		(540	)
Subordinated debentures		5			-			5			91			-			91
Total interest bearing liabilities	$	1,211		$	468		$	1,679		$	1,675		$	(87	)	$	1,588
Net interest income	$	(576	)	$	1,084		$	508		$	738		$	341		$	1,079

          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 deemed appropriate by management. The allowance for loan losses is maintained at 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, if necessary, 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" on page 28.

          The provision for loan losses was $745,000 in 2007, $500,000 in 2006 and $750,000 in 2005. In both 2007 and 2006, the provision for loan losses reflects net charge off experience, the growth of the commercial portfolio as well as the continued decline in the Michigan economy and the local real estate market. Net charge offs were $349,000 and $365,000 for 2007 and 2006, respectively. Commercial loans increased $52 million in 2007 with approximately $43 million coming from the FNB Financial Corporation merger. The commercial loan portfolio increased in excess of $18 million in 2006. In 2005, Southern charged off a commercial loan, which necessitated provision expense.

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          Non-Interest Income

          Non-interest income increased $163,000 or 4.0% in 2007 and decreased 2.9% in 2006, and 1.0% in 2005. The 2007 increase is due to the merger with FNB Financial Corporation, which provided $174,000 of income in 2007.

          In order to reduce the risk associated with changing interest rates, Southern regularly sells fixed rate real estate mortgage loans on the secondary market. Southern recognizes a profit at the time of the sale. Southern originated real estate mortgage loans of $17,015,000 in 2007 compared to $26,343,000 in 2006 and $35,572,000 during 2005. Net gains on loan sales decreased $237,000 in 2007, $169,000 in 2006 and $58,000 in 2005 as residential mortgage refinancing activity declined as rates moved up from 2004 historic lows.

          In 2007, offsetting the decrease in net gains on loan sales was an 11.5% or $82,000 increase in trust fees and an 8.3% or $152,000 increase in deposit account service charges. The average balance of loans serviced for others increased over $16 million in 2007, increasing the associated fees by $39,000. Southern also recorded a $128,000 gain on the sale of other real estate owned (OREO) during 2007.

          Net security gains of $13,000, $1,000 and $4,000 were recognized in 2007, 2006 and 2005, respectively.

          Non-Interest Expense

          Non-interest expenses increased $260,000 or 2.1% in 2007, 6.8% in 2006 and 1.2% in 2005. During 2007, salaries and employee benefits increased 8.7% or $611,000. The FNB Financial Corporation merger added 60 full time equivalent employees in December 2007, which added $247,000 of salary and benefits expense. Reductions in pension expense due to the partial freeze of the plan in 2006 were offset by increases to the 401(k) plan as Southern enhanced the employer match and added a safe harbor 3% contribution provision. Health insurance costs increased 12.4% or $71,000 in 2007 compared to 2006.

          In 2006, Southern recorded over $900,000 in unusual expenses. These included a loss on a repossessed asset associated with a prior year failed commercial loan, payments for marketing consultants and legal expenses.

          As a result of lower volumes of mortgage loans being generated, commissions paid to mortgage loan originators were down in 2007 and 2006 compared to 2005. Offsetting the decrease in 2005 was an increase in employee benefit plan costs, with the largest increase in pension costs.

          Income Tax Expense

          Income tax expense was $1,436,000 in 2007, $1,491,000 in 2006, and $1,310,000 in 2005. 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 approximately $234,000 in 2007, $180,000 in 2006, and $170,000 in 2005.

Financial Condition

          Securities Available for Sale

          The securities available for sale portfolio increased by 117.7% or $41,913,000 from December 31, 2006 to December 31, 2007. Securities totaling $40 million were acquired in December 2007 from the merger with FNB Financial Corporation.

          Securities available for sale were approximately the same in 2006 as in 2005. Approximately $31 million of securities matured or were called in 2007 as compared to $21 million in 2006, substantially all of which were replaced with new securities. The portfolio is monitored and securities or federal funds are purchased as deemed prudent by the asset liability management committee.

          The securities available for sale portfolio had net unrealized gains of $271,000 at December 31, 2007 and net unrealized losses of $64,000 December 31, 2006.

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          Loans

          Substantially all loans are granted to customers located in Southern's service area, which is primarily Southern Michigan. Gross loans increased by $83.2 million or 32.9% in 2007, and 4.2% in 2006. The 2007 increase reflects $78.3 million of loans acquired from the merger with FNB Financial Corporation. Excluding the loans acquired in the merger with FNB Financial Corporation, total loans increased $4.9 million entirely in the commercial and commercial real estate categories with declines in the real estate mortgage, consumer and construction categories.

          In 2006, commercial loans increased $18,479,000 or 12.1%, while consumer loans and real estate mortgage loans were down $2,571,000 and $5,797,000, respectively. Likewise, in 2005, commercial loans increased $3,153,000 or 2.1%, while consumer loans and real estate mortgage loans were down $478,000 and $1,345,000, respectively. Commercial loans increased as lenders saw positive relationships with current customers lead to new customer opportunities. Real estate mortgage loans decreased as payments on existing loans exceeded new loan volume. A decrease in home values and general economic conditions in Michigan has led to a large number of homes on the market, making it difficult for people to refinance or move. Consumer loans have decreased due to fewer originations of automobile, recreational vehicles and personal loans.

          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 $64,041,000 and $57,141,000 at December 31, 2007 and 2006, 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, 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 collectibility 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.

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

(Dollars in thousands)

	December 31,
	2007			2006			2005
Nonaccrual loans:
Commercial, financial and agricultural	$	3,032		$	3,062		$	2,472
Real estate mortgage		1,342			449			118
Installment		31			7			-
		4,405			3,518			2,590
Loans contractually past due 90 days or
more and still on accrual:
Commercial, financial and agricultural		411			-			934
Real estate mortgage		-			-			-
Installment		18			6			62
		429			6			996
Total nonperforming loans		4,834			3,524			3,586
Other real estate owned		866			693			706
Total nonperforming assets	$	5,700		$	4,217		$	4,292
Nonperforming loans to year-end loans		1.44	%		1.39	%		1.48	%
Nonperforming assets to total assets		1.19	%		1.28	%		1.35	%

27

          Nonperforming loans are subject to continuous monitoring by management and estimated losses are specifically allocated for in the allowance for loan losses where appropriate. At December 31, 2007, 2006 and 2005, Southern had loans of $9,144,000, $7,281,000 and $6,421,000, respectively, which were considered impaired.

          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 regular, quarterly assessments of the probable estimated incurred losses inherent in the loan portfolio. The allowance is based on two principles of accounting: Statement of Financial Accountings Standards (SFAS) No. 5, "Accounting for Contingencies" and SFAS No. 114, "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 the three and five year historical loss experience for each loan category. The component may be adjusted for significant factors that, in management's opinion, will affect the collectibility of the portfolio. The resulting loss estimate could 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. These allowances are calculated in accordance with SFAS No. 114.

          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 is maintained at a level, which in management's opinion, is adequate to absorb probable incurred loan losses in the loan portfolio. While management uses the best 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 for loan losses was $5,156,000 or 1.53% of loans at December 31, 2007, compared to $3,302,000 or 1.31% of loans at December 31, 2006. The FNB Financial Corporation transaction added $1,462,000 to the December 31, 2007 allowance. The December 31, 2007 allowance consists of $2,354,000 in the historical loss experience component and specifically allocated reserves, leaving $2,802,000 from the other factors. This compares to $1,880,000 from the historical loss experience component and specifically allocated reserves and $1,422,000 from other factors at December 31, 2006.

          Deposits

          Deposits have traditionally represented Southern's principal source of funds. Total deposits increased 41.3% or $116,660,000 in 2007 and 5.4% or $14,431,000 in 2006. Approximately $118 million of deposits were acquired in the merger with FNB Financial Corporation in December 2007. Of the deposits acquired, checking and savings accounts totaled $71 million and time deposits totaled $47 million. In 2006, time deposits and higher rate money market accounts increased while non-interest bearing and savings accounts decreased. Attracting and keeping traditional deposit relationships will continue to be a focus of Southern.

28

          Securities Sold Under Agreements to Repurchase

          Securities sold under agreements to repurchase increased $9.6 million during 2007 as one large deposit customer converted to this product.

          Other Borrowings

          Southern borrowed $8.0 million in December 2007, which was used to partially fund the FNB Financial Corporation merger. The borrowings consisted of a $7.0 million variable rate term loan and $1.0 million under the $3.0 million variable rate revolving line of credit, both with a correspondent bank. At December 31, 2007, $7.0 million was outstanding on the term loan and $1.0 million was outstanding on the line of credit.

          As another alternate funding source, Southern obtains bullet advances from the Federal Home Loan Bank (FHLB). The advances are secured by a blanket collateral agreement with the FHLB giving the FHLB an unperfected security interest in Southern's one-to-four family mortgage and SBA loans. FHLB advances may be a less expensive way to obtain longer term funds than paying a premium for long term deposits. Southern acquired $3.0 million in FHLB advances in the FNB Financial Corporation merger. At December 31, 2007 Southern had $5,536,000 in FHLB advances with interest rates between 3.29% - 4.57%, averaging 3.98%.

          Other borrowings decreased in 2006, as Southern paid off a $5.0 million advance. At December 31, 2006, Southern had $5,651,000 in FHLB advances with interest rates between 3.49% - 4.57%.

          Subordinated Debentures

          In March 2004, Southern Michigan Bancorp Capital Trust I, a Delaware statutory 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 security of the trust and the proceeds of the preferred securities sold by the trust. Southern may redeem the subordinated debentures, in whole or in part, in a principal amount with integral multiples of $1,000, on or after April 7, 2009 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 or 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 no t to exceed five consecutive years.

          The $5.0 million 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 sum of the three month London Interbank Offered Rate (LIBOR) and 2.75%. The rate at December 31, 2007 was 7.99%. Southern's investment in the common stock of the trust was $155,000 and is included in other assets.

Capital Resources

          Southern maintains a strong capital base to take advantage of business opportunities and absorb the risks inherent in the business.

          Shareholder equity increased 55.3% or $15,737,000 from $28,482,000 at December 31, 2006 to $44,219,000 at December 31, 2007. A total of $12.7 million of common stock was issued to FNB Financial Corporation shareholders in December 2007 as part of the merger with FNB Financial Corporation. Other growth in equity resulted primarily from current year's earnings offset by cash dividends declared.

          The Federal Reserve Board (FRB) has imposed risk-based capital guidelines applicable to Southern. These guidelines require that banks and bank holding companies maintain capital commensurate with both on and off balance sheet credit risks of their operations. Under the guidelines, a bank must have a minimum ratio of total capital to risk-weighted assets of 8.0%. In addition, a bank and a bank holding company must maintain a minimum ratio of Tier 1 capital equal to 4.0% of risk-weighted assets. Tier 1 capital includes common shareholders' equity, qualifying perpetual preferred stock and minority interests in equity accounts of consolidated subsidiaries less goodwill, core deposit intangibles and 10.0% of mortgage servicing rights assets.

29

          As a supplement to the risk-based capital requirements, the FRB has also adopted leverage capital ratio requirements. The leverage ratio requirements are intended to ensure that adequate capital is maintained against risk other than credit risk. The leverage ratio requirements establish a minimum ratio of Tier 1 capital to total assets of 3.0% for the most highly rated bank holding companies and banks that do not anticipate and are not experiencing significant growth. All other bank holding companies are required to maintain a ratio of Tier 1 capital to assets of 4.0% to 5.0%, depending on the particular circumstances and risk profile of the institution.

          Regulatory agencies have determined that the capital component created by the adoption of FASB Statement 115 should not be included in Tier 1 capital. As such, the net unrealized gain or loss on available for sale securities is not included in the ratios listed in Note U to the consolidated financial statements. The ratios include the common stock subject to repurchase obligation in Southern's employee stock ownership plan (ESOP). As discussed in Note U, Southern and its subsidiary banks all exceed the well capitalized requirements at December 31, 2007.

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.

          Southern maintains correspondent accounts with a number of other banks for various purposes. In addition, cash sufficient to meet the operating needs of its branches is maintained at its lowest practical levels. At times, Southern is a participant in the federal funds market. Federal funds are generally borrowed or sold for one-day periods. During 2007 and 2006, federal funds were sold with an average balance of $9,419,000 and $7,746,000, respectively. As disclosed in Note J to Southern's consolidated financial statements, Southern has available credit arrangements enabling it to purchase up to $32.0 million in federal funds should the need arise.

          Southern's principal source of funds to pay cash dividends is the earnings and dividends paid by Southern Michigan Bank and FNB Financial, which are restricted under current banking regulations as described in Note U to the consolidated financial statements. As discussed under Other Borrowings, Southern also has a $3.0 million bank line of credit agreement to meet cash demands.

Impact of Inflation and Changing Prices

          The majority of assets and liabilities of a financial institution are monetary in nature and therefore 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, 2007, Southern had commitm ents of $64,041,000 for lines of credit, $1,340,000 in standby letters of credit and $21,000 in commitments under commercial letters of credit outstanding.

30

          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.

Regulatory Matters

          Representatives of the FDIC completed an examination of Southern's subsidiary bank using financial information as of September 30, 2006. The purpose of the examination was to determine the safety and soundness of Southern.

          Examination procedures require individual judgments about a borrower's ability to repay loans, sufficiency of collateral values and the effects of changing economic circumstances. These procedures are similar to those employed by Southern in determining the adequacy of the allowance for loan losses and in classifying loans. Judgments made by regulatory examiners may differ from those made by management. Southern's level and classification of identified potential problem loans was not revised significantly as a result of this regulatory examination process.

          Management and the board of directors evaluate existing practices and procedures on an ongoing basis. In addition, regulators often make recommendations during the course of their examination that relate to the operations of Southern. As a matter of practice, management and the board of directors consider such recommendations promptly.

31

MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL INFORMATION

Management of Southern Michigan Bancorp, Inc. has prepared and is responsible for the accompanying 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 Company maintains a system of internal accounting controls designed to provide reasonable assurance that assets are safeguarded and that transactions are executed in accordance with the Company's authorizations and policies. Further, such a system provides reasonable assurances as to the integrity and reliability of the financial statements which fairly present financial position and results of operations in conformity with accounting principles generally accepted in the United States of America. Internal accounting controls are augmented by written policies covering standards of personal and business conduct and an organizational structure providing for division of responsibility and authority.

Management monitors the effectiveness of and compliance with established control systems through a continuous program of internal audit and credit examinations and recommends possible improvements thereto. Management believes that, as of December 31, 2007, the Company's system of internal controls has prevented or detected on a timely basis any occurrences that could be material to the financial statements and that timely corrective actions have been initiated when appropriate.

The Board of Directors exercises its responsibility for the financial statements and related information through the Audit Committee, which is composed entirely of outside directors. The Audit Committee meets regularly with management, internal auditors and Clifton Gunderson LLP. Clifton Gunderson LLP has direct and confidential access to the Audit Committee to discuss the results of their audit.

The 2007 financial statements have been audited by the independent accounting firm of Clifton Gunderson 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. The Company believes that all representations made to the independent auditors during their audit were valid and appropriate. Clifton Gunderson LLP's audit report is presented on the following page.

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

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

          Not required.

32

Item 8. Financial Statements and Supplementary Data

SOUTHERN MICHIGAN BANCORP, INC.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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, 2007 and 2006, and the related consolidated statements income, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 2007. 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, 2007 and 2006, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2007 in conformity with accounting principles generally accepted in the United States of America.

Toledo, Ohio
March 11, 2008

33

SOUTHERN MICHIGAN BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)

	December 31,
	2007			2006
ASSETS
Cash	$	4,027		$	3,211
Due from banks		10,443			6,158
Cash and cash equivalents		14,470			9,369
Federal funds sold		6,449			10,429
Securities available for sale		77,515			35,602
Loans held for sale, net of valuation of $0 in 2007		624			-
Loans, net of allowance for loan losses of $5,156 - 2007 ($3,302 - 2006)		330,822			249,523
Premises and equipment, net		13,335			8,665
Accrued interest receivable		3,387			2,506
Net cash surrender value of life insurance		10,015			7,502
Goodwill		13,422			620
Other intangible assets		3,091			-
Other assets		7,048			5,675
Total Assets	$	480,178		$	329,891
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Non-interest bearing	$	57,027		$	42,281
Interest bearing		342,142			240,228
Total deposits		399,169			282,509
Securities sold under agreements to repurchase and overnight         borrowings		9,776			184
Accrued expenses and other liabilities		5,077			4,440
Other borrowings		14,753			6,973
Subordinated debentures		5,155			5,155
Total Liabilities		433,930			299,261
Common stock subject to repurchase obligation in   Employee Stock Ownership Plan, 92,203 shares outstanding in 2007   (89,122 shares in 2006)		2,029			2,148
Shareholders' equity
Preferred stock, 100,000 shares authorized; none issued or outstanding		-			-
Common stock, $2.50 par value:
Authorized - 4,000,000 shares
Issued - 2,307,924 shares in 2007 (1,769,248, shares in 2006)
Outstanding (other than ESOP shares) - 2,215,721 shares
in 2007 (1,680,126 shares in 2006)		5,539			4,200
Additional paid-in capital		17,087			5,446
Retained earnings		21,629			19,021
Accumulated other comprehensive income (loss), net		122			(42	)
Unearned Employee Stock Ownership Plan shares		(103	)		(143	)
Unearned restricted stock compensation		(55	)		-
Total Shareholders' Equity		44,219			28,482
Total Liabilities and Shareholders' Equity	$	480,178		$	329,891

See accompanying notes to consolidated financial statements.

34

SOUTHERN MICHIGAN BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)

	Year ended December 31,
	2007		2006		2005
Interest income:
Loans, including fees	$	20,756	$	19,475	$	17,208
Securities:
Taxable		1,648		1,018		875
Tax-exempt		648		555		519
Other		492		406		206
Total interest income		23,544		21,454		18,808
Interest expense:
Deposits		7,758		6,083		4,042
Other		880		876		1,329
Total interest expense		8,638		6,959		5,371
Net Interest Income		14,906		14,495		13,437
Provision for loan losses		745		500		750
Net Interest Income after Provision for Loan Losses		14,161		13,995		12,687
Non-interest income:
Service charges on deposit accounts		1,990		1,838		1,953
Trust fees		791		709		652
Net securities gains		13		1		4
Net gains on loan sales		390		627		796
Earnings on life insurance assets		286		272		293
Gain on life insurance proceeds		-		124		-
Other		798		534		528
Total non-interest income		4,268		4,105		4,226
Non-interest expense:
Salaries and employee benefits		7,652		7,041		6,998
Occupancy, net		954		766		759
Equipment		839		756		837
Printing, postage and supplies		378		373		351
Advertising and marketing		237		284		236
Professional and outside services		747		951		588
Amortization of other intangibles		31		22		39
Other		2,022		2,407		1,993
Total non-interest expense		12,860		12,600		11,801
Income before income taxes		5,569		5,500		5,112
Federal income taxes		1,436		1,491		1,310
Net Income	$	4,133	$	4,009	$	3,802
Basic Earnings Per Common Share	$	2.29	$	2.27	$	2.13
Diluted Earnings Per Common Share	$	2.28	$	2.26	$	2.12

See accompanying notes to consolidated financial statements.

35

SOUTHERN MICHIGAN BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands, except number of shares and per share data)
Years ended December 31, 2007, 2006 and 2005

	Common Stock			Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss), Net			Unearned ESOP Shares			Unearned Compen- sation			Total
Balance at January 1, 2005	$	4,354		$	7,218		$	15,822		$	111		$	(40	)	$	-		$	27,465
Comprehensive income:
Net income for 2005								3,802												3,802
Net change for the year in other
comprehensive income items											(235	)								(235	)
Total comprehensive income																				3,567
Cash dividends declared - $.67 per share								(1,205	)											(1,205	)
Common stock repurchased and
retired (142,765 shares)		(357	)		(3,733	)														(4,090	)
Change in common stock subject
to repurchase		23			465															488
Purchase of shares by ESOP (7,568
shares)														(204	)					(204	)
Reduction of ESOP obligation														60						60
Stock options exercised (1,811 shares)		5			24															29
Balance at December 31, 2005		4,025			3,974			18,419			(124	)		(184	)		-			26,110
Comprehensive income:
Net income for 2006								4,009												4,009
Net change for the year in other
comprehensive income items											82									82
Total comprehensive income																				4,091
Cash dividends declared - $.78 per share								(1,381	)											(1,381	)
Common stock repurchased and
retired (10,050 shares)		(25	)		(215	)														(240	)
Issuance of shares for 5% stock   dividend, net of fractional shares
(84,355 shares)		211			1,813			(2,026	)											(2	)
Change in common stock subject
to repurchase		(25	)		(212	)														(237	)
Reduction of ESOP obligation														41						41
Stock options exercised (5,581 shares)		14			86															100
Balance at December 31, 2006		4,200			5,446			19,021			(42	)		(143	)		-			28,482
Comprehensive income:
Net income for 2007								4,133												4,133
Net change for the year in other
comprehensive income items											223									223
Total comprehensive income																				4,356
Cash dividends declared - $.80 per share								(1,525	)											(1,525	)
Issuance of restricted stock (2,740   shares of common stock at   $24.58 per share)		7			60												(67	)		- -
Vesting of restricted stock																	12			12
Issuance of 535,936 shares in merger   with FNB		1,340			11,371															12,711
Change in common stock subject
to repurchase		(8	)		127															119
Reduction of ESOP obligation														40						40
Stock option expense					83															83
Adjustment to initially apply SFAS 158,   net of tax											(59	)								(59	)
Balance at December 31, 2007	$	5,539		$	17,087		$	21,629		$	122		$	(103	)	$	(55	)	$	44,219

See accompanying notes to consolidated financial statements.

36

SOUTHERN MICHIGAN BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

	Year ended December 31,
	2007			2006			2005
Operating Activities
Net income	$	4,133		$	4,009		$	3,802
Adjustments to reconcile net income to net cash
from operating activities:
Provision for loan losses		745			500			750
Depreciation		835			696			643
Net amortization (accretion) of investment securities		(33	)		(69	)		140
Stock option and restricted stock grant compensation expense		95			-			-
Net securities gains		(13	)		(1	)		(4	)
Loans originated for sale		(17,015	)		(26,343	)		(35,572	)
Proceeds on loans sold		17,140			27,195			35,931
Net gains on loan sales		(390	)		(627	)		(796	)
Net realized loss on disposal of fixed assets		1			2			-
Gain on life insurance proceeds		-			(124	)		-
Amortization of other intangible assets		31			22			39
Net change in obligation under ESOP		40			41			(144	)
Net change in:
Accrued interest receivable		(52	)		(395	)		(170	)
Cash surrender value		(286	)		38			(293	)
Other assets		1,041			1,693			(232	)
Accrued expenses and other liabilities		(821	)		(144	)		187
Net cash from operating activities		5,451			6,493			4,281
Investing Activities
Bank acquisition, net of $4,199 cash assumed		(9,565	)		-			-
Activity in available for sale securities:
Proceeds from sales		-			-			105
Proceeds from maturities and calls		30,733			20,628			18,289
Purchases		(32,007	)		(20,066	)		(10,561	)
Net change in federal funds sold		9,495			(2,993	)		(7,436	)
Proceeds from life insurance		67			-			-
Loan originations and payments, net		(7,438	)		(10,974	)		(3,375	)
Proceeds from sale of equipment		2			-			-
Additions to premises and equipment		(2,564	)		(2,168	)		(1,247	)
Net cash from investing activities		(11,277	)		(15,573	)		(4,225	)
Financing Activities
Net change in deposits		(1,938	)		14,431			16,210
Net change in securities sold under agreements to repurchase and           overnight borrowings		9,592			-			(625	)
Proceeds from other borrowings		9,084			1,127			400
Repayments of other borrowings		(4,286	)		(6,134	)		(10,139	)
Cash dividends paid		(1,525	)		(1,331	)		(901	)
Cash paid in lieu of fractional shares for 5% stock dividend		-			(2	)		-
Stock options exercised		-			100			29
Repurchase of common stock		-			(240	)		(4,090	)
Net cash from financing activities		10,927			7,951			884
Net change in cash and cash equivalents		5,101			(1,129	)		940
Beginning cash and cash equivalents		9,369			10,498			9,558
Ending cash and cash equivalents	$	14,470		$	9,369		$	10,498

See accompanying notes to consolidated financial statements.

37

SOUTHERN MICHIGAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note A - Nature of Operations and Significant Accounting Policies

Nature of Operations and Industry Segments: Southern Michigan Bancorp, Inc. (the Company) is a two bank holding company. The Company's business is concentrated in the banking industry segment. The subsidiary banks offer individuals, businesses, institutions and government agencies a full range of commercial banking services primarily in the southern Michigan communities in which the banks are located and in areas immediately surrounding these communities. The banks grant 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 Southern Michigan Bancorp, Inc. and its wholly-owned subsidiaries, Southern Michigan Bank & Trust (SMB&T) and FNB Financial (FNB) after elimination of significant inter-company balances and transactions. SMB&T owns SMB Mortgage Company, which transacts all residential real estate loans. It is consolidated into SMB&T financial statements. FNB owns FNB Financial Services, which conducts a brokerage business and is consolidated into FNB financial statements. 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, loss contingencies, 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 Company's ability and intent to hold the security for a period sufficient to allow for any anticipated recovery in fair value.

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.

38

SOUTHERN MICHIGAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Note A - Nature of Operations and Significant Accounting Policies (continued)

Loans (Continued): 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.

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 less recoveries. Estimating the risk of loss and the amount of loss on any loan is necessarily subjective. Accordingly, 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.

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 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 existing 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 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.

Premises and Equipment: Premises and equipment are stated at cost, less accumulated depreciation. Depreciation is computed principally using accelerated methods over their estimated useful lives. The estimated useful lives are 10 to 40 years for buildings and improvements and 3 to 10 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.

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.

39

SOUTHERN MICHIGAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Note A - Nature of Operations and Significant Accounting Policies (continued)

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 will be recognized in the period identified.

Other intangible assets consist of core deposit intangible assets arising from whole bank or branch acquisitions. They are initially measured at fair value and then are amortized on an accelerated method over their estimated useful life, which is 10 years.

Other Real Estate: Other real estate was $866,000 and $693,000 at December 31, 2007 and 2006 and is included in other assets. Other real estate 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 cost to sell at the date of foreclosure, establishing a new cost basis. After foreclosure, valuations are periodically performed by management and real estate is carried at the lower of carrying amount or fair value less estimated cost of disposal. Expenses, gains and losses on disposition, and reductions in carrying value are reported in other expense.

Stock Compensation: Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 123R, Share-based Payment, using the modified prospective transition method. Under this method, the Company began recognizing compensation cost for equity-based compensation for all new or modified grants after the date of adoption. Awards issued prior to 2006 that have not been modified are not affected by SFAS 123R. For 2006 no stock based employee cost was recorded as no options were granted in 2006 and all prior options were fully vested prior to January 1, 2006.

Prior to January 1, 2006 employee compensation expense under stock option plans was reported using the intrinsic value method. No stock-based compensation cost is reflected in net income for the year ending December 31, 2005 as all options granted had an exercise price equal to or greater than the market price of the underlying common stock at date of grant. The following table illustrates the effect on net income and earnings per share if expense was measured using the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock Based Compensation.

(In thousands, except per share data)	2005
Net income as reported	$	3,802
Deduct: stock based compensation expense
determined under fair value based method		(144	)
Pro forma net income	$	3,658
Basic earnings per share as reported	$	2.13
Pro forma basic earnings per share		2.05
Diluted earnings per share as reported	$	2.12
Pro forma diluted earnings per share		2.04

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

Advertising Costs: Advertising costs are expensed as incurred.

40

SOUTHERN MICHIGAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Note A - Nature of Operations and Significant Accounting Policies (continued)

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.

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.

Income Taxes: Income tax expense 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.

Stock Dividends: The Company issued 84,355 common shares in connection with a 5% stock dividend effected in February 2006. All prior year information relating to earnings and dividends per share has been restated to reflect these dividends.

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. Earnings and dividends per share are restated for all stock splits and stock dividends through the date of issue 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 pension accounting required by SFAS 158, 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 a separate note. 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 southern Michigan. Commercial loans include loans collateralized by commercial real estate, business assets and agricultural loans collateralized by crops and farm equipment. Commercial, financial and agricultural loans make up approximately 67% of the loan portfolio at December 31, 2007 and the loans are expected to be repaid from cash flow from operations of businesses. Residential mortgage loans make up approximately 28% of the loan portfolio at December 31, 2007 and are collateralized by mortgages on residential real estate. Consumer loans make up approximately 5% of the loan portfolio at December 31, 2007 and are primarily collateralized by consumer assets.

41

SOUTHERN MICHIGAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Note A - Nature of Operations and Significant Accounting Policies (continued)

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.

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, 2007 and 2006.

Adoption of New Accounting Standards: In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48), which was issued to require that all tax positions be evaluated using consistent criteria and measurement and further supplemented by enhanced disclosure. FIN 48, an interpretation of FASB Statement No. 109, Accounting for Income Taxes, prescribes the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. This interpretation provides clear criteria for subsequently recognizing, derecognizing, and measuring such tax positions for financial statement purposes as well as provides guidance on accrual of interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 was effective January 1, 2007 for the Company and the adoption of FIN 48 did not have a material impact on the financial statements.

In February 2006, the FASB issued Statement of Financial Accounting Standards No. 155, Accounting for Certain Hybrid Financial Instruments (SFAS No. 155), which permits fair value remeasurement for hybrid financial instruments that contain an embedded derivative that otherwise would require bifurcation. Additionally, SFAS No. 155 clarifies the accounting guidance for beneficial interests in securitizations. Under SFAS No. 155, all beneficial interests in a securitization will require an assessment in accordance with SFAS No. 133 to determine if an embedded derivative exists within the instrument. In January 2007, the FASB issued Derivatives Implementation Group Issue B40, Application of Paragraph 13(b) to Securitized Interests in Prepayable Financial Assets (DIG Issue B40). DIG Issue B40 provides an exemption from the embedded derivative test of paragraph 13(b) of SFAS No. 133 for instruments that would otherwise require bifurcation if the test is met solely because of a prepayment feature i ncluded within the securitized interest and prepayment is not controlled by the security holder. SFAS No. 155 and DIG Issue B40 are effective for fiscal years beginning after September 15, 2006. The adoption of SFAS No. 155 and DIG Issue B40 did not have a material impact on the Company's consolidated financial position or results of operations.

In September 2006, the FASB issued SFAS No. 158, Employers' Accounting for Defined Benefit Pension and Other Post-retirement Plans (SFAS 158), that requires companies to recognize the funded status of its defined benefit pension and post-retirement plans as an asset or liability on the balance sheet rather than being disclosed in the notes to the financial statements. The over-funded or under-funded status (asset or liability) is measured as the difference between the fair value of the plan assets and the projected benefit obligation for pensions and the accumulated post-retirement benefit obligation for other post-retirement benefits. The requirement to recognize the funded status in the balance sheet was effective for fiscal years ending after December 15, 2006 for public entities and years ending after June 15, 2007 for non-public entities. Since the Company did not become a public entity until 2007, the Company adopted the balance sheet recognition requirement for its year ending December 31, 2007. The adoption of SFAS 158 reduced accumulated other comprehensive income by $59,000, net of $31,000 in taxes.

42

SOUTHERN MICHIGAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Note A - Nature of Operations and Significant Accounting Policies (continued)

Effect of Newly Issued But Not Yet Effective Accounting Standards: In September 2006, the FASB issued Statement No. 157, Fair Value Measurements. This Statement defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. This Statement establishes a fair value hierarchy about the assumptions used to measure fair value and clarifies assumptions about risk and the effect of a restriction on the sale or use of an asset. The standard is effective for fiscal years beginning after November 15, 2007. The impact of adopting this Statement is not expected to have a material impact on the Company's consolidated financial statements.

In February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. The standard provides companies with an option to report selected financial assets and liabilities at fair value and establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. The new standard is effective for fiscal years beginning after November 15, 2007, with early adoption permitted. The Company did not elect the fair value option for any financial assets or financial liabilities in 2007 and is in process of evaluating what, if any, impact the adoption of the Statement will have on the Company's consolidated financial statements.

In December 2007, the FASB issued Statement No. 141 (Revised 2007), Business Combinations (SFAS 141R) which establishes principles and requirements for how an acquirer in a business combination recognizes and measures in its financial statements identifiable assets acquired, liabilities assumed, and any noncontrolling interests of the acquiree. SFAS 141R also recognizes and measures any goodwill acquired, as well as gain resulting from a bargain purchase option. SFAS 141R applies to all transactions or other events in which an entity obtains control of one or more entities and also requires that costs incurred in connection with a business acquisition be expensed as incurred. SFAS 141R applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008, and early adoption is not permitted.

The FASB Emerging Issues Task Force finalized Issues No. 06-4 and 06-10, dealing with the accounting for deferred compensation and post-retirement benefit aspects of endorsement and collateral assignment split-dollar life insurance arrangements. These Issues require that a liability be recorded during the service period when a split-dollar life insurance agreement continues after participants' employment or retirement. The required accrued liability will be based on either the post-employment benefit cost for the continuing life insurance or based on the future death benefit depending on the contractual terms of the underlying agreement. The Issues are effective for fiscal years beginning after December 15, 2007. Management does not believe the adoption of the Issues will have a material impact on the Company's consolidated financial statements.

On November 5, 2007, the SEC issued Staff Accounting Bulletin No. 109, Written Loan Commitments Recorded at Fair Value through Earnings (SAB 109). Previously, SAB 105, Application of Accounting Principles to Loan Commitments, stated that in measuring the fair value of a derivative loan commitment, a company should not incorporate the expected net future cash flows related to the associated servicing of the loan. SAB 109 supersedes SAB 105 and indicates that the expected net future cash flows related to the associated servicing of the loan should be included in measuring fair value for all written loan commitments that are accounted for at fair value through earnings. SAB 105 also indicated that internally-developed intangible assets should not be recorded as part of the fair value of a derivative loan commitment, and SAB 109 retains that view. SAB 109 is effective for derivative loan commitments issued or modified in fiscal quarters beginning after December 15, 2007. The Company does not expect the impact of this standard to be material to the consolidated financial statements.

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 that will have a material effect on the consolidated financial statements as of December 31, 2007.

43

SOUTHERN MICHIGAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Note A - Nature of Operations and Significant Accounting Policies (continued)

Reclassifications: Certain items in the 2006 and 2005 consolidated financial statements have been reclassified to conform with the current year presentation.

Note B - Basic and Diluted Earnings Per Common Share

A reconciliation of the numerators and denominators of basic and diluted earnings per common share for the years ended December 31, 2007, 2006 and 2005 is presented below:

	2007			2006			2005
Basic Earnings Per Common Share
Net income (in thousands)	$	4,133		$	4,009		$	3,802
Weighted average common shares outstanding		1,813,003			1,771,211			1,787,346
Less: Unallocated ESOP shares		(5,090	)		(6,679	)		(2,810	)
Weighted average common shares outstanding for basic
earnings per common share		1,807,913			1,764,532			1,784,536
Basic earnings per common share	$	2.29		$	2.27		$	2.13
Diluted Earnings Per Common Share
Net income (in thousands)	$	4,133		$	4,009		$	3,802
Weighted average common shares outstanding for basic
earnings per common share		1,807,913			1,764,532			1,784,536
Add: Dilutive effects of assumed exercises of stock options		5,393			6,303			7,185
Average shares and dilutive potential
of common shares outstanding		1,813,306			1,770,835			1,791,721
Diluted earnings per common share	$	2.28		$	2.26		$	2.12

Stock options for 131,145; 28,560 and 28,770 shares of common stock were not considered in computing diluted earnings per share for 2007, 2006 and 2005, respectively, because they were anti-dilutive.

Note C - Purchase of FNB Financial

On December 1, 2007, the Company completed a merger with FNB Financial Corporation, parent company of First National Bank of Three Rivers. Upon completion of the merger, the name of First National Bank of Three Rivers was changed to FNB Financial (FNB). The merger was accounted for using the purchase method of accounting and, accordingly, the purchase price was allocated to the assets acquired and the liabilities assumed based upon the estimated fair values as of the date of merger. For federal income tax purposes, the tax basis of the assets and liabilities of FNB at November 30, 2007 carryover. The purchase provided the Company the strategic opportunity to expand into adjacent markets since the opportunity to grow organically within the Company's existing market was limited by competition and economic conditions.

44

SOUTHERN MICHIGAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Note C - Purchase of FNB Financial (continued)

The aggregate purchase price was $26,475,000, representing $13,764,000 of cash and acquisition costs and issuance of 535,936 shares of the Company's common stock valued at $12,711,000, net of $125,000 of offering costs. The cash portion of the acquisition was financed with a $5,000,000 special dividend from SMB&T, the proceeds from a $7,000,000 five-year term loan with a correspondent bank and $1,000,000 from a line of credit with the same correspondent bank, as described in Note I.

The following table summarizes the estimated fair values of the assets acquired and the liabilities assumed at the date of the merger with FNB (in thousands):

		Fair Value
Cash and cash equivalents	$	4,199
Federal funds sold		5,515
Securities		40,218
Loans, net of $1,458 allowance		76,828
Premises & equipment		2,944
Cash surrender value of bank owned life insurance		2,294
Core deposit intangible asset		3,122
Goodwill		12,802
Other assets		2,484
Total assets acquired		150,406
Deposits		118,598
Advances from Federal Home Loan Bank		2,982
Other liabilities		2,351
Total liabilities assumed		123,931
Net assets acquired	$	26,475

The purchase accounting fair value adjustments are being amortized under various methods and over the estimated lives of the corresponding assets and liabilities. Goodwill recorded from the merger amounted to $12,802,000 bringing total goodwill for the Company to $13,422,000 at December 31, 2007. Goodwill is not being amortized but is subject to an annual impairment test. A core deposit intangible asset of $3,122,000 was recorded as part of the deposits assumed and is being amortized using an accelerated basis over a period of 10 years. Amortization of the core deposit intangible asset for the period ended December 31, 2007 was $31,000, resulting in an unamortized balance of $3,091,000 at December 31, 2007. The estimated amortization expense for each of the next five years ending December 31 is as follows: 2008, $374,000; 2009, $362,000; 2010, $350,000; 2011, $339,000; and 2012 $325,000.

The following summarizes pro forma information for the years ended December 31, 2007, 2006 and 2005, assuming the merger occurred at the beginning of each year (in thousands, except share data):

	2007		2006		2005
Net interest income after provision for loan losses	$	18,253	$	17,552	$	16,969
Net income		4,155		3,987		3,620
Basic earnings per common share		1.77		1.73		1.56
Diluted earnings per common share		1.77		1.73		1.56

The pro forma information includes purchase accounting adjustments relating to interest income on loans acquired, amortization of intangible asset arising from the transaction, depreciation expense on property acquired, interest expense on deposits acquired and debt borrowings and related tax effects. The pro forma results do not necessarily represent results which would have occurred if the merger had taken place on the basis assumed above, nor are they indicative of the results of future combined operations.

45

SOUTHERN MICHIGAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Note D - Securities

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

Available for sale, 2007	Fair Value		Gross Unrealized Gains		Gross Unrealized Losses
U.S. Treasury and Government agencies	$	26,430	$	92	$	(18	)
States and political subdivisions		33,352		152		(32	)
Mortgage-backed securities		17,733		86		(9	)
Total	$	77,515	$	330	$	(59	)

Available for sale, 2006	Fair Value		Gross Unrealized Gains		Gross Unrealized Losses
U.S. Treasury and Government agencies	$	13,997	$	10	$	(70	)
States and political subdivisions		17,741		52		(57	)
Corporate securities		3,000		-		-
Mortgage-backed securities		864		1		-
Total	$	35,602	$	63	$	(127	)

Included above for 2007 and 2006 are $6,468,000 and $4,200,000, respectively, of floating rate securities that are putable on a weekly basis.

Securities with unrealized losses at year end 2007 and 2006 that have not been recognized in income are as follows (in thousands):

2007	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
U.S. Treasury and Government
agencies	$	7,279	$	(10	)	$	2,485	$	(8	)	$	9,764	$	(18	)
States and political subdivisions		2,335		(21	)		1,171		(11	)		3,506		(32	)
Mortgage-backed securities		2,731		(9	)		-		-			2,731		(9	)
Total temporarily impaired	$	12,345	$	(40	)	$	3,656	$	(19	)	$	16,001	$	(59	)

2006	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
U.S. Treasury and Government
agencies	$	6,160	$	(9	)	$	5,417	$	(61	)	$	11,577	$	(70	)
States and political subdivisions		1,696		(9	)		6,452		(48	)		8,148		(57	)
Total temporarily impaired	$	7,856	$	(18	)	$	11,869	$	(109	)	$	19,725	$	(127	)

Unrealized losses have not been recognized into income as the issuers are of high credit quality, management has the intent and ability to hold for the time necessary to recover the unrealized loss, 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.

46

SOUTHERN MICHIGAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Note D - Securities (continued)

Sales of available for sale securities were (in thousands):

	2007		2006		2005
Proceeds	$	-	$	-	$	105
Gross gains		-		-		4

Gains on calls of securities were $13,000 and $1,000 for 2007 and 2006, respectively. There were no such gains or losses for 2005. Contractual maturities of debt securities at year-end 2007 were as follows (in thousands):

	Fair Value
Due in one year or less	$	11,288
Due from one to five years		31,289
Due from five to ten years		13,786
Due after ten years		3,419
Mortgage-backed securities		17,733
	$	77,515

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 $26,263,000 and $7,234,000 were pledged as collateral for public deposits and for other purposes at year-end 2007 and 2006.

At year-end 2007 and 2006, the market value of securities issued by the State of Michigan and all its political subdivisions totaled $20,900,000 and $11,383,000, respectively. No other securities of any state (including all its political subdivisions) were greater than 10% of shareholders' equity.

Investments in the Federal Home Loan Bank totaled $2,057,000 and $1,173,000 at December 31, 2007 and 2006, respectively, and are included in other assets since such investments are considered restricted.

Note E - Loans

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

	2007			2006
Commercial	$	84,937		$	63,709
Real estate - commercial		129,065			97,144
Real estate - construction		11,686			10,025
Consumer		15,730			15,745
Real estate mortgage		94,560			66,202
		335,978			252,825
Less allowance for loan losses		(5,156	)		(3,302	)
Loans, net	$	330,822		$	249,523

At December 31, 2007 and 2006, certain directors and executive officers of the Company, including their associates and companies in which they are principal owners, were indebted to the banks.

The following is a summary of loans (in thousands) exceeding $60,000 in the aggregate to these individuals and their associates. Other changes include adjustments for loans applicable to one reporting period that are excludable from the other reporting period.

	2007			2006
Balance at January 1	$	11,922		$	7,555
New loans, including renewals		5,459			10,454
Repayments		(6,659	)		(7,928	)
Other changes, net		108			1,841
Balance at December 31	$	10,830		$	11,922

The unpaid principal balance of mortgage loans serviced for others, which are not included on the consolidated balance sheet, was $121,365,000 and $56,399,000 at December 31, 2007 and 2006, respectively.

47

SOUTHERN MICHIGAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Note E - Loans (continued)

Activity for capitalized mortgage servicing rights was as follows (in thousands):

	2007			2006			2005
Balance at January 1	$	399		$	274		$	102
Additions		157			210			235
Acquisition of servicing rights from FNB		308			-			-
Amortized to expense		(115	)		(85	)		(63	)
Balance at December 31	$	749		$	399		$	274

No valuation allowance for capitalized mortgage servicing rights was necessary at December 31, 2007, 2006 or 2005 since the fair value of such rights approximated or exceeded the carrying value.

Note F - Allowance For Loan Losses

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

	2007			2006			2005
Balance at January 1	$	3,302		$	3,167		$	3,459
Provision for loan losses		745			500			750
Addition resulting from FNB acquisition		1,458			-			-
Loans charged off		(525	)		(485	)		(1,171	)
Recoveries		176			120			129
Net charge-offs		(349	)		(365	)		(1,042	)
Balance at December 31	$	5,156		$	3,302		$	3,167

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

	2007		2006
Year end loans with allowance for loan losses allocated	$	6,099	$	5,758
Year end loans with no allowance for loan losses allocated		3,045		1,523
Total impaired loans	$	9,144	$	7,281
Amount of allowance allocated to these loans	$	1,013	$	906

	2007		2006		2005
Average balance of impaired loans during the year	$	9,362	$	7,826	$	8,042
Cash basis interest income recognized during the year	$	364	$	425	$	309
Interest income recognized during the year	$	366	$	418	$	317

Nonperforming loans at December 31 were as follows (in thousands):

	2007		2006
Loans past due over 90 days still on accrual	$	429	$	6
Nonaccrual loans		4,405		3,518

Nonperforming loans and impaired loans are defined differently. Some loans may be included in both categories, whereas other loans may only be included in one category.

48

SOUTHERN MICHIGAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Note G - Premises and Equipment, Net

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

	2007			2006
Land	$	2,150		$	1,322
Buildings and improvements		14,285			10,903
Furniture and equipment		6,935			5,677
		23,370			17,902
Less accumulated depreciation		(10,035	)		(9,237	)
Totals	$	13,335		$	8,665

Depreciation and amortization expense charged to operations was approximately $835,000, $696,000 and $643,000 in 2007, 2006 and 2005, respectively.

Lease commitments under noncancelable operating equipment leases at December 31, 2007 were as follows (in thousands):

2008	$	68
2009		46
2010		19
2011		2
Total	$	135

Note H - Deposits

The carrying amount of domestic deposits at December 31 follows (in thousands):

	2007		2006
Non-interest bearing checking	$	57,027	$	42,281
Interest bearing checking		86,971		50,177
Savings		56,877		28,693
Money market accounts		63,665		60,835
Time deposits		134,629		100,523
Totals	$	399,169	$	282,509

The carrying amount of time deposits over $100,000 was $42,514,000 and $42,153,000 at December 31, 2007 and 2006, respectively. Interest expense on time deposits over $100,000 was $1,835,000, $1,691,000 and $1,125,000 for the years ended December 31, 2007, 2006 and 2005, respectively.

At December 31, 2007, scheduled maturities of time deposits were as follows for the years ending December 31 (in thousands):

2007	$	86,368
2008		26,555
2009		11,034
2010		4,143
2011		4,398
Thereafter		2,131
Totals	$	134,629

Related party deposits were $11,552,000 and $17,197,000 at December 31, 2007 and 2006, respectively.

49

SOUTHERN MICHIGAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Note I - Other Borrowings

Other borrowings at December 31, 2007 include $5,536,000 in advances from the Federal Home Loan Bank (FHLB) of Indianapolis. The advances have maturities from December 2009 through December 2013 with fixed interest rates ranging from 3.29% to 4.57%, averaging 3.98%. Principal is due at maturity for $4,983,000 of the advances. The remaining $553,000 FHLB advance is at a fixed rate of 4.57% with principal payments beginning in December 2003 and continuing through December 2013.

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, commercial real estate and SBA loans. Eligible FHLB loan collateral at December 31, 2007 and 2006 was approximately $66,069,000 and $40,049,000, respectively.

At December 31, 2006, FHLB fixed rate advances with principal due at maturity of $5,000,000 were outstanding. They had a weighted average interest rate of 3.81%. In addition, $651,000 in fixed rate FHLB advances at a fixed rate of 4.57% with principal payments beginning in December of 2003 and continuing through December of 2013 were outstanding.

On November 20, 2007, the Company entered into a Business Loan Agreement with LaSalle Bank N.A., consisting of two credit facilities. The first consisted of a $3,000,000 secured revolving line of credit, maturing in three years with a LIBOR plus 150 basis point interest rate (6.62375% at December 31, 2007). Repayment terms are interest only on a quarterly basis with the principal due at maturity. The second was a $7,000,000 secured term loan, with a maturity of five years subject to a twelve year amortization with an interest rate of LIBOR plus 145 basis points (6.57375% at December 31, 2007). Repayment terms are interest and principal on a quarterly basis (based on a 12 year amortization), with the remaining principal amount due at maturity. Both credit facilities are secured by a pledge of 100% of the stock of the Company's wholly-owned subsidiary, SMB&T. At December 31, 2007, $1,000,000 was outstanding on the line of credit and $7,000,000 on the term note.

Other borrowings also include a loan to the Company with a balance at December 31, 2007 and 2006 of $133,000 and $176,000, respectively. The loan matures on September 15, 2010 and is unsecured.

Also included in other borrowings at December 31, 2007 are $1,084,000 ($1,146,000 in 2006) of amounts due for overdrawn correspondent bank balances. This amount was repaid on January 2, 2008.

At year-end 2007, scheduled principal reductions on other borrowings were as follows for the years ending December 31 (in thousands):

	FHLB		LaSalle Bank		Other		Total
2008	$	102	$	397	$	1,130	$	1,629
2009		3,090		424		48		3,562
2010		112		3,453		39		3,604
2011		1,117		483		-		1,600
2012		115		3,243		-		3,358
Thereafter		1,000		-		-		1,000
Total FHLB advances	$	5,536	$	8,000	$	1,217	$	14,753

50

SOUTHERN MICHIGAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Note J - Securities Sold Under Agreements to Repurchase and Overnight 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):

		2007			2006
At December 31:
Outstanding balance	$	8,976		$	184
Average interest rate		4.06	%		2.38	%
Daily average for the year:
Outstanding balance	$	2,818		$	342
Average interest rate		3.44	%		1.84	%
Maximum outstanding at any month end	$	9,958		$	612

At December 31, 2007, the subsidiary banks had lines of credit arrangements available to purchase federal funds totaling $32,000,000, subject to quarterly and annual reviews. The balance on these lines at December 31, 2007 and 2006 was $800,000 and $0, respectively.

Note K - Subordinated Debentures And Trust Preferred Securities

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 security of the trust and the proceeds of the preferred securities sold by the trust. The Company may redeem the subordinated debentures, in whole or in part, in a principal amount with integral multiples of $1,000, on or after April 7, 2009 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 or in part from time to time, upon the occurrence of specific events defined within the trust indenture. The Company has the option to defer interest payments on the subordinated debentures from time to time for a period not to exceed five consecutive years.

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 sum of the three month London Interbank Offered Rate (LIBOR) and 2.75%. The rate at December 31, 2007 was 7.99%. The Company's investment in the common stock of the trust was $155,000 and is included in other assets.

Note L - Income Taxes

Income tax expense consists of (in thousands):

	2007			2006		2005
Current	$	1,460		$	1,453	$	1,320
Deferred		(24	)		38		(10	)
Totals	$	1,436		$	1,491	$	1,310

51

SOUTHERN MICHIGAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Note L - Income Taxes (continued)

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

	2007			2006			2005
Income tax at statutory rate	$	1,893		$	1,870		$	1,738
Tax-exempt interest income, net		(234	)		(180	)		(170	)
Increase in net cash surrender value of life insurance policies		(97	)		(135	)		(100	)
Low income housing partnership tax credit		(127	)		(127	)		(127	)
Other items, net		1			63			(31	)
Totals	$	1,436		$	1,491		$	1,310

Year-end deferred tax assets and liabilities consist of the following (in thousands):

	2007			2006
Deferred tax assets:
Allowance for loan losses	$	1,305		$	800
Deferred compensation and supplemental retirement liability		739			701
Net operating loss carryforward		434			-
Intangible asset amortization		50			62
Pension liability		19			115
Pension liability - SFAS 158		31			-
Write off of investment		60			68
Write down of other real estate		-			22
Nonaccrual loan interest		226			170
Net unrealized loss on available for sale securities		-			21
Other		116			63
		2,980			2,022
Valuation allowance		(54	)		(54	)
Total deferred tax assets, net of valuation allowance		2,926			1,968
Deferred tax liabilities:
Mortgage servicing rights		(255	)		(136	)
Goodwill		(128	)		(106	)
Purchase accounting adjustments		(951	)		-
Net unrealized gain on available for sale securities		(90	)		-
Other		(237	)		(81	)
Total deferred tax liabilities		(1,661	)		(323	)
Net deferred tax assets, included in other assets	$	1,265		$	1,645

At the date of acquisition, FNB had a net operating loss carryforward (NOL) of approximately $1,277,000 for federal income tax purposes. The NOL resulted from FNB's 2007 operating results through November 30, 2007 and is available to reduce FNB's future taxable income through 2027.

A valuation allowance against deferred tax assets of $54,000 was considered necessary at December 31, 2007 and 2006 as the likelihood of receiving a tax benefit on a portion of the capital loss on the write off of an investment is considered doubtful. Remaining deferred tax assets are deemed more likely than not to be realized.

The Company and its subsidiaries file income tax returns in the U.S. federal and certain state jurisdictions. Such returns are no longer subject to tax examinations by tax authorities for years before 2004.

52

SOUTHERN MICHIGAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Note M - Benefit Plans

Defined Benefit Pension Plan: The Company adopted SFAS 158 effective December 31, 2007. The impact of the adoption of SFAS 158 on the 2007 consolidated balance sheet was to increase pension liability by $90,000 with a corresponding increase of $31,000 to deferred tax assets and a charge to accumulated other comprehensive income of $59,000.

Effective December 31, 2006 the Southern Michigan Bank & Trust Pension Plan was frozen on a partial basis. Current plan-eligible employees who meet specific age and years of service requirements have been grand-fathered in and will continue to accrue benefits under the plan. All other employees will continue to vest in their December 31, 2006 benefit balances, however, no further benefits will accrue. This curtailment resulted in a $687,000 reduction in the projected benefit obligation during 2006. The curtailment gain was entirely used to offset the unrecognized net actuarial loss; and therefore, there was no impact of this gain on net income. The Company uses a December 31 measurement date for the plan.

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

	2007			2006
Change in benefit obligation:
Beginning benefit obligation	$	(2,136	)	$	(2,354	)
Service cost		(37	)		(275	)
Interest cost		(130	)		(155	)
Curtailment gain		-			687
Actuarial loss from change in actuarial assumptions		(39	)		(233	)
Benefits paid		142			194
Ending benefit obligation		(2,200	)		(2,136	)
Change in plan assets, at fair value:
Beginning plan assets		1,763			1,325
Actual return		108			147
Employer contribution		432			485
Benefits paid		(142	)		(194	)
Ending plan assets		2,161			1,763
Net amount recognized:
Funded status		(39	)		(373	)
Unrecognized net actuarial loss		-			34
Accrued benefit cost	$	(39	)	$	(339	)

The accumulated benefit obligation for the defined benefit pension plan was $2,075,000 and $1,935,000 at December 31, 2007 and 2006, respectively.

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

	2007			2006			2005
Components of net periodic benefit cost:
Service cost	$	37		$	275		$	211
Interest cost		130			155			176
Expected return on plan assets		(129	)		(98	)		(134	)
Recognized net actuarial loss		-			35			22
Settlement charge		-			-			194
Net periodic benefit cost	$	38		$	367		$	469

At December 31, 2007, a net actuarial loss of $94,000 has 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 2008 has not yet been determined.

53

SOUTHERN MICHIGAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Note M - Benefit Plans (continued)

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

	2007		2006		2005
Discount rate on benefit obligation		6.0%		6.0%		6.5%
Long-term expected rate of return on plan assets		7.0%		7.0%		7.0%
Rate of compensation increase		4.0%		4.0%		4.0%

	Target Allocation 2008	Percentage of Plan Assets at Year-end		Weighted Average Expected Long-Term Rate of Return - 2007
Asset Category		2007	2006
Equity securities	0%	0%	56%	0%
Debt securities	22%	22%	31%	6.0%
Cash	78%	78%	13%	3.8%
	100%	100%	100%	4.3%

The expected return on plan assets has been based upon actual historical long-term returns of the overall stock and bond markets and actual portfolio returns.

The pension plan assets are managed by the Trust Department. A written investment policy which meets the standards of the prudent investor rule is followed. In addition, the Northern Trust Company and Main Street Advisors, both of Chicago, have provided investment advisory services, guidance and expertise.

The investment policy is established to provide direction for the purchase of equity and debt securities of good quality, determined by careful analysis and investigation. Factors to be considered include relative price, yield, earnings, dividends, assets, ratings and ability to repay debts.

The equity philosophy has been driven by the long term objective of growth. Diversification is achieved by diversifying by industry in order to reduce the portfolio's sensitivity to any one sector of the economy.

Debt securities (bonds), as a general rule, must have an "A" rating or better to meet the criteria as an investment of the plan. Bond maturities are laddered over several years in order to provide predictable income flow and reduce interest rate risk.

Only trust quality investments will be allowed in the plan. Those include blue chip stocks, bonds with an A rating or better, mutual funds that meet established investment criteria and money market funds. Investments not allowed in the plan include derivatives, puts, calls, options and futures. No single issue may have a concentration greater than 10% of the total fair value.

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, 2007 is primarily fixed income investments with a target of 90% bonds and 10% cash. The allocation percentages may be reduced or increased depending upon market conditions and interest rates. Due to the partial freeze of the plan, the investment allocations have been reevaluated with shorter term objectives.

54

SOUTHERN MICHIGAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Note M - Benefit Plans (continued)

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.

During 2005, the Company distributed a lump sum distribution to a highly compensated employee which triggered a plan settlement in the amount of $194,000 in addition to the Company's expense of $275,000, bringing the total expense to $469,000 for the year.

The Company expects to contribute $100,000 to its pension plan in 2008.

At year-end 2007, estimated future benefit payments from the plan were as follows for the years ending December 31 (in thousands):

2008	$	24
2009		26
2010		26
2011		31
2012		37
2013 - 2017		463

Employee Stock Ownership Plan: The Company has an employee stock ownership plan (ESOP) for substantially all full-time employees. The Board of Directors determines the Company's contribution level annually. Effective January 1, 2007, the Company increased its discretionary and matching contribution levels. Assets of the plan are held in trust by SMB&T and administrative costs of the plan are borne by the plan participants. Expense charged to operations for contributions to the plan totaled $426,000, $122,000 and $117,000 in 2007, 2006 and 2005, respectively. Company matching is provided in Company stock.

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

	2007		2006
Allocated shares		92,203		89,122
Unallocated shares		3,990		5,579
Total ESOP shares		96,193		94,701

The fair value of the allocated shares held by the ESOP is approximately $2,029,000 and $2,148,000 at December 31, 2007 and 2006, 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 2005, the ESOP obtained a loan for $204,000 to purchase 7,568 shares. The balance of the loan at December 31, 2007 and 2006 was $103,000 and $143,000, respectively.

55

SOUTHERN MICHIGAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Note M - Benefit Plans (continued)

Deferred Compensation Plan: As an incentive to retain key members of management and directors, the Bank has a deferred compensation plan whereby participants defer a portion of current compensation. Benefits are based on salary and length of service and are vested as service is provided from the date of participation through age 65. A liability is recorded on a present value basis and discounted at current interest rates. This liability may change depending upon changes in long-term interest rates. Current rates paid on deferred compensation balances range from 5.81% - 12.98%. Deferred compensation expense was $225,000, $225,000 and $227,000 in 2007, 2006 and 2005, respectively. The liability for vested benefits was $1,787,000 and $1,780,000 at December 31, 2007 and 2006, respectively, and is included in accrued expenses and other liabilities.

Supplemental Retirement Plan: The Bank also maintains a supplemental retirement plan to provide annual payments to particular executives subsequent to their retirement. The plan covers two individuals, both of whom are retired. Liabilities associated with this plan totaled $212,000 and $235,000 at December 31, 2007 and 2006. Expense associated with this plan totaled $11,000, $13,000 and $20,000 in 2007, 2006 and 2005, respectively.

Note N - Stock Options

The Company has stock based compensation plans as described below. Total compensation cost that has been charged against income for those plans was $95,000 in 2007 (none in 2006 and 2005).

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 157,500 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, 2007, 20,502 shares are available 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 total 115,500. Options are to be 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 are granted and a vesting period as determined by the Board of Directors. The plan will terminate on the earliest of: (i) March 20, 2010; (ii) when all shares have been issued through exercise of options granted under this Plan; or (iii) at any earlier time that the Board of Directors may determine. At December 31, 2007, 44,841 shares are available under the plan.

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.

	2007	2006	2005
Risk-free interest rate	4.75%	NA	3.00%
Expected option life	8 years	NA	8 years
Expected stock price volatility	14.05%	NA	13.49%
Dividend yield	3.59%	NA	2.72%
Weighted-average fair value of options granted during year	$3.58	NA	$3.13

56

SOUTHERN MICHIGAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Note N - Stock Options (continued)

A summary of the activity in the plans (as restated for the 5% stock dividends in February 2006) is as follows for the years ended December 31, 2007, 2006 and 2005:

	2007				2006				2005
	Shares		Weighted Average Price		Shares		Weighted Average Price		Shares		Weighted Average Price
Outstanding at beginning of year	95,663		$	22.17	102,084		$	22.00	43,555		$	18.46
Granted	103,110			24.09	-			-	61,691			24.32
Exercised	-			-	(5,581	)		17.92	(1,902	)		15.17
Forfeited	(1,665	)		23.90	(840	)		24.23	(1,260	)		22.05
Outstanding at end of year	197,108			23.16	95,663			22.17	102,084			22.00
Options exercisable at year-end	94,298			22.15	95,663			22.17	102,084			22.00

At December 31, 2007 the weighted average remaining contractual life for all options outstanding was 6.8 years.

At December 31, 2007, the aggregate intrinsic value of options outstanding and exercisable totaled $119,000. This value represents the difference between the Company's closing stock price on the last day of trading for the year and the exercise price multiplied by the number of in-the-money options assuming all option holders had exercised their stock options on December 31, 2007. The aggregate intrinsic value of stock options exercised during 2007, 2006 and 2005 was $0, $34,000 and $14,000, respectively. Exercise of the options resulted in cash payments of $0, $100,000 and $29,000 for 2007, 2006 and 2005, respectively.

As of December 31, 2007, there was $286,000 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 3.4 years.

Restricted Stock - Restricted shares may be issued under the plans 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. During 2007, the Company issued 2,740 shares of restricted stock at a fair value of $24.58 and recorded $12,000 of compensation cost. All shares are unvested as of December 31, 2007. As of December 31, 2007, there is $55,000 of total unrecognized compensation cost related to nonvested shares granted under the Plan. The cost is expected to be recognized over a weighted average period of 4.3 years.

57

SOUTHERN MICHIGAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Note O - Commitments

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, 2007 and 2006, the Company had $21,000 and $0, respectively, of 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, 2007 and 2006, commitments under outstanding standby letters of credit were $1,340,000 and $2,240,000, respectively.

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

	2007		2006
Fixed rate	$	7,670	$	5,782
Variable rate		56,371		51,359
Totals	$	64,041	$	57,141

The fixed rate commitments have stated interest rates ranging from 4.75% to 14.00%. The terms of the above commitments range from 1 to 62 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 three years worth of the officers' salaries upon a change of control.

Note P - Accumulated Other Comprehensive Income (loss)

Accumulated other comprehensive income (loss) amounted to $122,000 at December 31, 2007 and ($42,000) at December 31, 2006 and is summarized as follows (in thousands):

	2007			2006
Unrealized gain (loss) on available-for-sale securities, net of
income taxes of $90 in 2007 and $21 in 2006	$	181		$	(42	)
Pension liability, net of income taxes of $31		(59	)		-
Total	$	122		$	(42	)

The changes in the components of accumulated comprehensive income (loss), excluding the impact in 2007 of initially applying SFAS 158 pension accounting, and related tax effects for the years ended December 31, 2007, 2006 and 2005 are as follows (in thousands):

	2007			2006			2005
Unrealized gain (loss) on available for sale securities	$	347		$	124		$	(352	)
Reclassification adjustments for net realized gains
included in net income		(13	)		(1	)		(4	)
Net unrealized gain (loss) arising during the year		334			123			(356	)
Tax effect		(111	)		(41	)		121
Other comprehensive income (loss) for the year	$	223		$	82		$	(235	)

58

SOUTHERN MICHIGAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Note Q - Restrictions On Transfers From Subsidiaries

Capital guidelines adopted by Federal and State regulatory agencies and restrictions imposed by law limit the amount of cash dividends the banks can pay to the Company. At December 31, 2007, using the most restrictive of these conditions for each bank, the aggregate cash dividends that the banks can pay the Company without prior approval was approximately $4,993,000.

Note R - Southern Michigan Bancorp, Inc. (Parent Company Only) Financial Information

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

Balance Sheets	December 31,
	2007		2006
Assets
Cash and cash equivalents	$	377	$	304
Investment in subsidiary banks		57,834		34,357
Investment in non banking subsidiary		193		195
Premises and equipment, net		972		1,007
Other		770		629
Total Assets	$	60,146	$	36,492
Liabilities and Shareholders' Equity
Dividends payable	$	462	$	354
Other liabilities		148		177
Other borrowings		8,133		176
Subordinated debentures		5,155		5,155
Common stock subject to repurchase obligation in ESOP		2,029		2,148
Shareholders' equity		44,219		28,482
Total Liabilities and Shareholders' Equity	$	60,146	$	36,492

Statements of Income	Year ended December 31,
	2007			2006			2005
Dividends from subsidiary banks	$	7,459		$	1,791		$	1,515
Interest income		18			11			12
Interest expense		(458	)		(412	)		(312	)
Other income		209			246			260
Other expenses		(175	)		(72	)		(175	)
		7,053			1,564			1,300
Federal income tax benefit		(139	)		(78	)		(73	)
		7,192			1,642			1,373
Equity in net income, less dividends received, of:
Subsidiary banks		(3,057	)		2,368			2,431
Non-banking subsidiary		(2	)		(1	)		(2	)
Net Income	$	4,133		$	4,009		$	3,802

59

SOUTHERN MICHIGAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Note R - Southern Michigan Bancorp, Inc. (Parent Company Only) Financial Information (continued)

Statements of Cash Flows	Year ended December 31,
	2007			2006			2005
Operating Activities
Net income	$	4,133		$	4,009		$	3,802
Adjustments to reconcile net income to net cash
from operating activities:
Equity in net income, less dividends received, of:
Subsidiary banks		3,057			(2,368	)		(2,431	)
Non-banking subsidiary		2			1			2
Stock option and restricted stock grant compensation expense		95			-			-
Depreciation		35			31			31
Net change of obligation under ESOP		40			41			(144	)
Other		43			(138	)		(244	)
Net cash from operating activities		7,405			1,576			1,016
Investing Activities
Subsidiary bank acquisition		(13,764	)		-			-
Proceeds from maturities and calls of available for sale securities		-			-			495
Net cash from investing activities		(13,764	)		-			495
Financing Activities
Proceeds from other borrowings		8,000			-			236
Repayments of other borrowings		(43	)		(40	)		(60	)
Cash dividends paid		(1,525	)		(1,331	)		(901	)
Cash paid in lieu of fractional shares for 5% stock dividend		-			(2	)		-
Stock options exercised		-			100			29
Repurchase of common stock		-			(240	)		(4,090	)
Net cash from financing activities		6,432			(1,513	)		(4,786	)
Net change in cash and cash equivalents		73			63			(3,275	)
Beginning cash and cash equivalents		304			241			3,516
Ending cash and cash equivalents	$	377		$	304		$	241

Note S - Supplemental Cash Flow Disclosures

The following supplemental cash flow disclosures are provided for the years ended December 31, 2007, 2006 and 2005 (in thousands):

	2007			2006			2005
Cash paid during the year for:
Interest	$	8,595		$	6,906		$	5,313
Income taxes		1,305			1,465			1,445
Non-cash operating activities:
Change in deferred income taxes on net unrealized gain (loss)       on available for sale securities		(111	)		(41	)		121
Non-cash investing activities:
Change in unrealized gain (loss) on available for sale securities		334			123			(356	)
Transfers from loans to foreclosed assets		1,863			498			1,003
Non-cash financing activities:
Issuance of common stock, net of issuance cost		12,711			-			-

60

SOUTHERN MICHIGAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Note T - Fair Value Information

The following methods and assumptions were used by the Company in estimating fair values for financial instruments:

Cash and cash equivalents: The carrying amount reported in the balance sheet approximates fair value.

Securities available for sale: Fair values for securities available for sale are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. The fair value of restricted equity securities approximates amortized cost.

Loans and loans held for sale, net: For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. 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. The allowance for loan losses is considered to be a reasonable estimate of discount for credit quality concerns.

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). 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.

Securities sold under agreements to repurchase, federal funds sold and purchased: The carrying amount reported in the balance sheet approximates fair value.

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.

Subordinated debentures: The carrying amount reported in the balance sheet approximates fair value of the variable-rate subordinated debentures.

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

While these estimates of fair value are based on management's judgment of the most appropriate factors, there is no assurance that if the Company had disposed of such items at December 31, 2007 and 2006, 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, 2007 and 2006 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.

61

SOUTHERN MICHIGAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Note T - Fair Value Information (Continued)

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

	2007						2006
	Carrying Amount			Fair Value			Carrying Amount			Fair Value
Financial assets:
Cash and cash equivalents	$	14,470		$	14,470		$	9,369		$	9,369
Federal funds sold		6,449			6,449			10,429			10,429
Securities available for sale		77,515			77,515			35,602			35,602
Loans held for sale		624			624			-			-
Loans, net of allowance for loan losses		330,822			334,523			249,523			248,544
Accrued interest receivable		3,387			3,387			2,506			2,506
Financial liabilities:
Deposits	$	(399,169	)	$	(399,817	)	$	(282,509	)	$	(282,115	)
Securities sold under agreements to repurchase      and overnight borrowings		(9,776	)		(9,776	)		(184	)		(184	)
Other borrowings		(14,753	)		(14,840	)		(6,973	)		(6,811	)
Subordinated debentures		(5,155	)		(5,155	)		(5,155	)		(5,155	)
Accrued interest payable		(611	)		(611	)		(225	)		(225	)

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

Note U - Regulatory Matters

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 effect on the consolidated financial statements. Prompt corrective action provisions are not applicable to bank holding companies.

The prompt corrective action regulations provide five classifications, including well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized, although these terms are not used to represent overall financial condition. If only adequately capitalized, regulatory approval is required to 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 2007 and 2006, the most recent regulatory notifications categorized the Company as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the classification.

62

SOUTHERN MICHIGAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Note U - Regulatory Matters (continued)

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
2007
Total capital (to risk weighted assets)
Consolidated	$39,724	10.9	%	$29,198	8.0	%	N/A	N/A
SMB&T	34,052	12.5		21,816	8.0		$27,269	10.0	%
FNB	11,679	12.6		7,428	8.0		9,285	10.0
Tier 1 capital (to risk weighted assets)
Consolidated	34,568	9.5		14,599	4.0		N/A	N/A
SMB&T	30,640	11.2		10,908	4.0		16,362	6.0
FNB	10,515	11.3		3,714	4.0		5,571	6.0
Tier 1 capital (to average assets)
Consolidated	34,568	10.3		13,362	4.0		N/A	N/A
SMB&T	30,640	9.1		13,410	4.0		16,763	5.0
FNB	10,515	8.3		5,041	4.0		6,301	5.0

	Actual			Minimum Required For Capital Adequacy Purposes			Minimum Required To Be Well Capitalized Under Prompt Corrective Action Regulations
	Amount	Ratio		Amount	Ratio		Amount	Ratio
2006
Total capital (to risk weighted assets)
Consolidated	$38,313	14.1	%	$21,673	8.0	%	N/A	N/A
SMB&T	37,041	13.7		21,575	8.0		$26,969	10.0	%
Tier 1 capital (to risk weighted assets)
Consolidated	35,011	12.9		10,836	4.0		N/A	N/A
SMB&T	33,739	12.5		10,788	4.0		16,182	6.0
Tier 1 capital (to average assets)
Consolidated	35,011	10.8		13,019	4.0		N/A	N/A
SMB&T	33,739	10.4		12,979	4.0		16,224	5.0

Note V - Quarterly Financial Data (in thousands, except per share data) (Unaudited)

	Interest Income		Net Interest Income		Net Income		Earnings Per Share
							Basic		Fully Diluted
2007
First Quarter	$	5,570	$	3,570	$	978	$	0.55	$	0.55
Second Quarter		5,722		3,649		1,069		0.61		0.60
Third Quarter		5,895		3,683		1,082		0.61		0.61
Fourth Quarter		6,357		4,004		1,004		0.52		0.52
2006
First Quarter	$	5,078	$	3,560	$	926	$	0.52	$	0.52
Second Quarter		5,245		3,613		1,017		0.58		0.57
Third Quarter		5,563		3,696		1,029		0.58		0.58
Fourth Quarter		5,568		3,626		1,037		0.59		0.59

63

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

          None.

Item 9A(T). Controls and Procedures

          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, 2007. 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 as of the end of the period covered by this report.

          This annual report does not include a report of management's assessment regarding internal control over financial reporting or an attestation report of Southern's registered public accounting firm due to a transition period established by rules of the Securities and Exchange Commission for newly public companies.

          There was no change in Southern's internal control over financial reporting that occurred during the year ended December 31, 2007 that has materially affected, or that is reasonably likely to materially affect, Southern's internal control over financial reporting.

Item 9B. Other Information

          On March 26, 2008, Southern entered into amended employment agreements with the following individuals:

• John H. Castle, Director, Chairman of the Board, and Chief Executive Officer of Southern and Southern Michigan Bank.

• Kurt G. Miller, Director and President of Southern and Southern Michigan Bank and President of SMB Mortgage Co. and SMB&T Financial Services, Inc.

• Richard E. Dyer, Director and Executive Vice President of Southern and Director, President, and Chief Executive Officer of FNB Financial

          A summary of the material amendments to the employment agreements is as follows:

• The previous form of agreements limited severance payments in connection with a change in control to the maximum amount that would not result in excise taxes under Internal Revenue Code Section 280G. The amended agreements replace the "280G cap" with a "280G gross-up" for Messrs. Castle and Mr. Miller (but not Mr. Dyer). The gross-up will make Messrs. Castle and Miller whole for any additional taxes incurred as a result of Internal Revenue Code Section 280G in the event of severance payments in connection with a change in control of Southern.

• Technical changes have been made so that the employment agreements comply with Internal Revenue Service regulations under Internal Revenue Code Section 409A, which are effective at the end of 2008.

          The amended employment agreements are filed with this report as Exhibits 10.1, 10.2, and 10.3 and are here incorporated by reference. For further information on the terms of the amended employment agreements, see Items 11 and 13 of this report.

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.

64

          Biographical information concerning the persons who are directors and executive officers of Southern is presented below as of March 14, 2008. Except as otherwise indicated, all of the named individuals have had the same principal employment for over five years. Executive officers will be appointed annually and serve at the pleasure of the board of directors of Southern.

          Directors with Terms Expiring in 2008

          Marcia S. Albright (age 44) has been a director of Southern since 2002 and a director of Southern Michigan Bank since 2002. Ms. Albright is Vice President and General Manager of Cequent Electrical Products, a manufacturer of automotive electronic parts, and was previously Engineering Manager for Tekonsha Engineering from 1995 to 2002.

          Dean Calhoun (age 49) 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 and lumber manufacturing company, Chief Executive Officer of Altenburg Hardware 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 and Chief Executive Officer of Tri-State Hardwood Co. Inc.

          John H. Castle (age 50) 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. He is Chairman of the Board of SMB Mortgage Co. and SMB&T Financial Services, Inc.

          Robert L. Hance (age 52) has been a director of Southern since December 17, 2007. Mr. Hance 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. Hance is a former director of FNB Financial Corporation, which Southern acquired effective December 1, 2007. Mr. Hance has been a director of FNB Financial (f/k/a The First National Bank of Three Rivers) since 2004. Mr. Hance is the President of Midwest Energy Cooperative, an electric utility.

          Nolan E. Hooker (age 56) 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.

          Directors with Terms Expiring in 2009

          Richard E. Dyer (age 50) has been a director of Southern since December 17, 2007. Mr. Dyer 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. Dyer is a former director and Chief Executive Officer and President of FNB Financial Corporation, which Southern acquired effective December 1, 2007. Mr. Dyer has been a director of FNB Financial (f/k/a The First National Bank of Three Rivers) since 2001. Mr. Dyer is Executive Vice President of Southern and Chief Executive Officer and President of FNB Financial.

          Gregory J. Hull (age 60) 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.

          Thomas E. Kolassa (age 60) has been a director of Southern since 1995 and a director of Southern Michigan Bank since 1995. Mr. Kolassa is an executive vice-president of Hub International, Inc., a North American insurance brokerage.

          Donald J. Labrecque (age 50) 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 three bowling centers, and is President of Kegler Inc and Double Inc.

          Freeman E. Riddle (age 75) 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.

65

          Directors with Terms Expiring in 2010

          John S. Carton (age 67) 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 has been a director of FNB Financial (f/k/a The First National Bank of Three Rivers) since 2003. 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.

          H. Kenneth Cole (age 59) has been a director of Southern since 1998 and a director of Southern Michigan Bank since 1998. Mr. Cole is Chief Administrative Officer and Treasurer of Hillsdale College, a private, liberal arts college, located in Hillsdale, Michigan.

          Gary Hart Haberl (age 55) has been a director of Southern since 2004 and a director of Southern Michigan Bank since 2004. Mr. Haberl is Chief Executive Officer and President of Infinisource, Inc., a benefits administrator.

          Brian P. McConnell (age 45) 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.

          Kurt G. Miller (age 52) has been a director of Southern since 2002 and a director of Southern Michigan Bank since 2002. Mr. Miller is President of Southern, Southern Michigan Bank, SMB Mortgage Co., and SMB&T Financial Services, Inc.

          Executive Officers Who Are Not Directors

          Danice L. Chartrand (age 41) is the Senior Vice President, Chief Financial Officer, Secretary and Treasurer of Southern and Southern Michigan Bank. She is the Treasurer and Secretary of SMB&T Financial Services, Inc. and the Treasurer of SMB Mortgage Co.

          Loren V. Happel (age 52) is the Senior Vice President of Southern, Southern Michigan Bank and SMB Mortgage Company.

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 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 de adline 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.

66

Item 11. Executive Compensation

SUMMARY COMPENSATION TABLE

          The following table summarizes the compensation of Southern's named executive officers, which includes Southern's principal executive officer and its two other most highly compensated executive officers.

Name and Principal Position	Year	Salary(1)		Bonus		Stock Awards (2)		Option Awards (2)		Nonequity Incentive Plan Compen- sation		Non- qualified Deferred Compen- sation Earnings		All Other Compen- sation (3)		Total
John H. Castle	2007	$	212,360	$	58,800	$	4,916	$	27,180	$	-	$	-	$	19,965	$	322,921
Chairman and	2006		200,340		56,000		-		-		-		-		14,343		270,683
CEO of Southern
and Southern
Michigan Bank
Kurt G. Miller	2007	$	169,888	$	48,300	$	3,933	$	22,806	$	-	$	-	$	18,976	$	263,903
President of	2006		160,272		46,000		-		-		-		-		10,935		217,207
Southern and
Southern
Michigan Bank
Danice L. Chartrand	2007	$	112,035	$	27,500	$	1,229	$	9,981	$	-	$	-	$	10,015	$	160,760
Senior Vice	2006		101,850		25,000				-		-		-		3,911		130,761
President and CFO
of Southern and
Southern
Michigan Bank

_____________________________

(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)	The amount listed reflects the portion of the fair value of option grants and stock awards that represent earned compensation for the year listed on the same basis as included in the Company's financial statements. Value of stock options granted is based on "Grant Date Present Value" as calculated using a Black-Scholes option pricing model. Information regarding all forfeitures of option awards during 2007 and assumptions made in the valuation of option awards is presented in Note N, Stock Options, to the Consolidated Financial Statements for the Fiscal Year Ended December 31, 2007 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 retirement plan, the taxable benefit of company owned vehicles, company paid life insurance premiums (a benefit that is generally available to Southern's salaried employees) and country club memberships. None of Southern's named executive officers received perquisites or personal benefits having an aggregate value of $10,000 or greater. The following table provides details regarding all other compensation paid to named executive officers:

67

	Year		Qualified Savings Plan Match		Automobile Allowance		Life and Disability Insurance Premiums		Country Club Membership		Total
Mr. Castle	2007	$	11,357	$	1,430	$	3,178	$	4,000	$	19,965
	2006		5,500		1,830		2,943		4,070		14,343
Mr. Miller	2007	$	11,128	$	1,404	$	2,419	$	4,025		18,976
	2006		4,680		1,402		2,308		2,545		10,935
Ms. Chartrand	2007	$	9,022	$	-	$	993	$	-		10,015
	2006		3,009		-		902		-		3,911

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, which was amended and restated in 2008, 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 $221,000 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 up to $5,000 if Mr. Castle is terminated without cause;

• pay Mr. Castle his health care continuation coverage premium for the length of his continuation coverage under COBRA and 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;

• pay Mr. Castle a "gross up" payment for any excise tax, interest, penalties and additional income tax incurred as a result of Section 280G of the Internal Revenue Code due to payments to Mr. Castle under the agreement;

• 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.

68

         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, which was amended and restated in 2008, on the same terms as those for Mr. Castle described above, except that Mr. Miller's base salary was initially at least $177,000 per year, or as may be adjusted, less taxes and withholdings.

69

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 the fiscal year ended December 31, 2007.

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 ($)	Option Expiration Date	Number of Shares or Units of Stock that Have Not Vested (#) (3)	Market Value of Shares of Units of Stock that Have Not Vested ($)
John H. Castle	1,575 8,925 8,925 10,500	- - - - - - -	15.72 20.05 25.89 22.80	3/17/2013 1/2/2014 1/2/2015 12/19/2015
	-	9,000	24.58	1/29/2017
	-	20,000	23.90	4/24/2017
					1,000	22,000
Kurt G. Miller	1,575 6,825 6,825 8,400	- - - - - - -	15.72 20.05 25.89 22.80	3/17/2013 1/2/2014 1/2/2015 12/19/2015
		7,200	24.58	1/29/2017
		18,000	23.90	4/24/2017
					800	17,600
Danice L. Chartrand	327 945 2,625 2,625 2,625	- - - - - - - - -	14.55 15.72 20.05 25.89 22.80	4/17/2011 3/17/02013 1/2/2014 1/2/2015 12/19/2015
	-	2,250	24.58	1/29/2017
	-	11,000	23.90	4/24/2017
					250	5,500

__________________________

(1)	All exercisable options are fully vested.
(2)	Options granted in January 2007 vest annually over a two-year period. Options granted in April 2007 vest annually over a five-year period.
(3)	Shares of restricted stock were awarded in January 2007 and vest over a five-year period (20% each year).

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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 contribute discretionary matching and employee stock ownership plan payments to the 401(k) plan. If Southern Michigan Bank contributes matching or employee stock ownership plan payments 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.

          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 plan provisions provide that the 401(k) plan, in part, is designed to invest primarily in Southern common stock.

          Southern Michigan Bank & Trust Pension Plan

          Employees are 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.

          Effective December 31, 2006, the Southern Michigan Bank & Trust Pension Plan was partially frozen. Current participants who meet specific age and years of service requirements have been grandfathered in the plan and will continue to accrue benefits under the plan. All other employees will continue to vest in their December 31, 2006, benefit balances but will not accrue any additional benefits. The named executives do not meet the age and years of service requirement to be grandfathered in the plan, so they will not accrue any additional benefits under the plan.

          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.

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          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 within 90 days of termination of employment of the participant's entire account balance at the time of termination.

          Under terms of the agreement, 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 2007 on any named executive's bank owned life insurance policies.

          Stock Incentive Plan of 2005

          Under the Stock Incentive Plan of 2005, the Compensation Committee of the board of directors may grant stock options and stock appreciation rights and award restricted stock to directors, officers, or any employee, in the Compensation Committee's discretion. Upon retirement, stock options and stock appreciation rights are exercisable for the remainder of their terms, and restricted stock fully vests (i.e., the restrictions lapse).

          Agreements with Payments Upon Resignation, Retirement, Termination, or Change in Control

          Information about the material terms of the employment agreements for John H. Castle and Kurt G. Miller that provide payments to Messrs. Castle or Miller upon their resignation, retirement, or termination or a change in control of Southern are described above under "Executive Compensation - Narrative Disclosure to Summary Compensation Table," pages 68 to 69, and is here incorporated by reference.

          Stock options, stock appreciation rights, and restricted stock granted or awarded under the Stock Incentive Plan of 2005 are fully exercisable and fully vest upon a change of control of Southern.

Compensation of Directors

          Directors who are not employed by Southern or any subsidiary of Southern ("non-employee directors") received an annual retainer of $10,200 in 2007. Each non-employee director also received $190 for each trust, compensation and executive committee meeting attended and $340 for each audit committee meeting attended. The Chairman of the audit committee received an additional $1,500 retainer. Non-employee directors also received a $2,000 discretionary bonus for 2007. Directors who are employed by Southern or either of the Banks do not receive director compensation.

          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 2007 on any directors' bank-owned life insurance policies.

          The following table summarizes the compensation of Southern's directors who are not named executive officers.

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DIRECTOR COMPENSATION

Name	Fees Earned Or Paid in Cash ($)	Stock Awards ($)(3)	Option Awards ($)(3)	All Other Compensation ($)		Total ($)
Marcia S. Albright	13,510	246	736	-		14,492
Dean Calhoun	4,438	246	736	-		5,420
John S. Carton(4)	-	-	-	-		-
H. Kenneth Cole	14,830	246	736	-		15,812
Richard E. Dyer(4)	-	-	-	-		-
Gary H. Haberl	12,830	246	736	677	(2)	14,489
Robert L. Hance(4)	-	-	-	-		-
Nolan E. Hooker	12,610	246	736	-		13,592
Gregory J. Hull	13,150	246	736	-		14,132
Thomas E. Kolassa	13,190	246	736	-		14,172
Donald J. Labrecque	12,610	246	736	1,230	(2)	14,822
Brian P. McConnell	12,640	-	-	-		12,640
Freeman E. Riddle	13,550	246	736	14,051	(1)	28,583

(1)	Payments made under deferred fee plan.
(2)	Premiums paid for term insurance to cover supplemental death benefit.
(3)	The amount listed reflects the portion of the fair value of option grants and stock awards that represent earned compensation for the year listed on the same basis as included in the Company's financial statements. Value of stock options granted is based on "Grant Date Present Value" as calculated using a Black-Scholes option pricing model. The information regarding all forfeitures of option awards during 2007 and assumptions made in the valuation of option awards is presented in Note N, Stock Options, to the Consolidated Financial Statements for the Fiscal Year Ended December 31, 2007 and is here incorporated by reference.
(4)	Messrs. Carton, Dyer and Hance were appointed to the board of directors of Southern on December 17, 2007.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

          The following table sets forth information, as of December 31, 2007, 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:

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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	-	191,881(4)	191,881	8.3%
Gwyn Hartman   47315 Westlake Drive   Shelby Township, Michigan 48315-4555	12,374(5)	153,493(6)	165,867	7.2%
Greenleaf Trust   100 W. Michigan Avenue, Suite 100   Kalamazoo, Michigan 49007	-	153,493(6)	153,493	6.7%

          The following table shows certain information concerning the number of shares of Southern common stock held as of December 31, 2007, by each of Southern's directors, each of the named executive officers, and all of Southern's directors and executive officers as a group:

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Stock Ownership By Management
Amount and Nature of Beneficial Ownership of
Southern Common Stock(1)

Name of Beneficial Owner	Sole Voting and Dispositive Power	Shared Voting or Dispositive Power(2)	Stock Options(7)	Total Beneficial Ownership	Percent of Class(3)
Marcia S. Albright	1,540	-	1,733	3,273	*
John S. Carton	1,474	-	-	1,474	*
Dean Calhoun	10	40,032	-	40,042	1.74	%
John H. Castle	8,955	170	29,925	39,050	1.67	%
Danice L. Chartrand	1,639	-	9,147	10,786	*
H. Kenneth Cole	447	-	2,048	2,495	*
Richard E. Dyer	-	7,269	-	7,269	*
Gary H. Haberl	10	5,000	893	5,903	*
Loren V. Happel	1,614	-	1,155	2,769	*
Robert L. Hance	-	200	-	200	*
Nolan E. Hooker	2,570	3,705	2,048	8,323	*
Gregory J. Hull	10	2,613	2,048	4,671	*
Thomas E. Kolassa	6,639	-	2,048	8,687	*
Donald J. Labrecque	1,455	-	893	2,348	*
Brian P. McConnell	1,500	-	-	1,500	*
Kurt G. Miller	5,660	12	23,625	29,297	1.26	%
Freeman E. Riddle	1,000	9,000	1,418	11,418	*
All directors and   executive officers   as a group	34,523	68,001	76,981	179,505	7.53	%

_______________________________
*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.
(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 2,307,924 issued and outstanding shares as of December 31, 2007, plus shares of common stock subject to options held by the applicable listed person or persons that are currently exercisable or that will be exercisable within 60 days.
(4)	Southern Michigan Bank holds 191,881 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% or more of such shares. Included in the 191,881 shares that Southern Michigan Bank holds in various fiduciary capacities, are 96,193 shares held by Southern Michigan Bank in its capacity as trustee of an ESOP/401(k) Plan for its employees. Of that number, 92,203 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 discl aims beneficial ownership of such shares.
(5)	Represents 12,374 shares held by Ms. Hartman as trustee.
(6)	Ms. Hartman and Greenleaf Trust are co-trustees and the shares reported as held by each of them are the same shares.
(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.

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          The following table presents information regarding the equity compensation plans both approved and not approved by shareholders at December 31, 2007:

	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 security holders	199,848	$  23.16	65,343
Equity compensation plans not      approved by security holders	- -	- -	- -
Total	199,848	$  23.16	65,343

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, our bank subsidiaries in the ordinary course of business during 2007. 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 are in default as of the date of this proxy statement.

          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 appropriate subsidiary 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.

          Richard E. Dyer, a director and Executive Vice President of Southern, received consideration valued at approximately $159,000 (7,269 shares of Southern common stock and $70.75 cash) from Southern in exchange for his shares of common stock of FNB Financial Corporation as a result of the acquisition by Southern of FNB Financial Corporation on December 1, 2007.

          On April 17, 2007, Mr. Dyer entered into a Transition Agreement and an Employment Agreement with Southern, which automatically became effective at the effective time of the acquisition of FNB Financial Corporation.

          Under the Transition Agreement, Southern has a fixed and absolute obligation to pay Mr. Dyer a lump sum cash payment on the later of the first day after the six month period following the effective time of the acquisition of FNB Financial Corporation or January 1, 2008, in the amount of $140,000, in lieu of any and all payments and benefits to which he would have otherwise have been entitled under certain employment agreements with FNB Financial Corporation, except for Mr. Dyer's vested rights in the FNB Financial Corporation 401(k) Profit Sharing Plan, pending claims under FNB Financial Corporation's health insurance program, any right of indemnity under the Articles or Bylaws of FNB Financial Corporation or FNB Financial, or his rights under the Supplemental Life Insurance Agreement dated October 25, 2004 between the Mr. Dyer and FNB Financial Corporation.

          Under the Employment Agreement, if Mr. Dyer's employment is terminated (i) because of death, (ii) because of Permanent Disability (as defined in the Employment Agreement), (iii) by Southern for Cause (as defined in the Employment Agreement), (iv) at will by Mr. Dyer with at least 30 days advance notice, or (v) by either Southern or Mr. Dyer after the termination of the Employment Agreement, then Mr. Dyer will be entitled to (A) his unpaid salary installments through the end of the week in which his employment terminates, (B) any vested benefits

76

accrued as of the date of termination of his employment under the terms of any written employment, compensation or benefit program; and (C) any rights of Mr. Dyer to indemnification under the provisions of the Articles or Bylaws of Southern or FNB Financial (collectively, "Vested Rights").

          Under the Employment Agreement, if Mr. Dyer's employment is terminated (i) at will by Southern without the notice required under the Employment Agreement, or (ii) by Mr. Dyer for Good Reason (as defined under the Employment Agreement) after a Change of Control (as defined under the Employment Agreement), then Mr. Dyer will be entitled to all of his Vested Rights and either (A) Severance Pay or (B) Cash Payment, as applicable.

          Mr. Dyer is entitled to Severance Pay if he is terminated at will without the notice required under the Employment Agreement (and is not otherwise entitled to a Cash Payment). If Mr. Dyer subsequently becomes eligible for a Cash Payment, the amount of the Cash Payment shall be reduced by the amount of Severance Pay already received by Mr. Dyer. The Severance Pay includes (A) the continuation of Mr. Dyer's salary for fifty-two (52) weeks following the week in which the employment terminates (the "Severance Pay Period"), subject to required payroll withholding; (B) payment by Southern of the COBRA continuation coverage premium necessary to continue Mr. Dyer's then current employee and dependent health, dental, and prescription drug coverage during the Severance Pay Period; and (C) up to $5,000 of outplacement assistance from an outplacement assistance firm. Mr. Dyer's Severance Pay will be reduced by (i) any disability benefits to which Mr. Dyer is entitled, (ii) any severance pay payable to Mr. Dyer under any other agreement or policy of Southern, (iii) any payment due Mr. Dyer under the Federal Worker Adjustment and Retraining Notification Act or any comparable state statue or local ordinance, and (iv) the amount necessary to result in no portion of the payment to Mr. Dyer to be subject to the excise tax to be imposed under Section 4999 of Internal Revenue Code.

          Mr. Dyer is entitled to a Cash Payment if his employment is terminated (A) by Mr. Dyer for Good Reason after a Change of Control, or (B) by Southern without the required notice and such termination occurs either (i) after the date of a Change in Control or (ii) within six months before the date of a Change in Control. Mr. Dyer will then receive (A) payment by Southern of the COBRA continuation coverage premium necessary to continue Mr. Dyer's then current employee and dependent health, dental, and prescription drug coverage during the period of time Mr. Dyer would be entitled to continuation coverage, and (B) a Cash Payment equal to 2.99 times Mr. Dyer's Average Compensation (as defined below), payable in one lump sum on the tenth business day after termination of the his employment. "Average Compensation" means (A) the sum of Mr. Dyer's salary and cash bonuses for each of the most recent three complete calendar years of Mr. Dyer's empl oyment (or such lesser number of complete calendar years as Mr. Dyer has been employed by Southern) divided by (B) three (or the lesser number of complete calendar years for which Mr. Dyer has been employed by Southern). Average Compensation shall not include any amount, other than salary and cash bonuses, included in Mr. Dyer's taxable compensation for federal income tax purposes, such as the reporting of previously deferred compensation or gain realized upon exercise of any non qualified stock options. For purposes of computing Average Compensation only, Mr. Dyer shall be deemed to have been employed during all of 2007, and the sum of Mr. Dyer's salary and cash bonuses for 2007 shall be deemed to be the greater of (A) Mr. Dyer's actual salary and cash bonuses under this Agreement, or (B) $160,444. The Cash Payment will not be reduced by any amounts other than the required payroll deductions and the amount necessary to result in no portion of the payment to Mr. Dyer to be subject to the excise tax to b e imposed under Section 4999 of Internal Revenue Code.

Item 14. Principal Accountant Fees and Services

          The aggregate fees billed by Clifton Gunderson LLP to Southern and its subsidiaries for fiscal years 2007 and 2006 are as follows:

	Fiscal 2007		Fiscal 2006
Audit Fees(1)	$	127,832	$	70,210
Audit-Related Fees(2)		-		30,473
Tax Fees(3)		15,000		-
All Other Fees		-		-
	$	142,832	$	100,683

____________________

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(1)	Audit fees consist of fees related to the audit of the Company's annual consolidated financial statements, reviews of quarterly reports on Form 10-Q (beginning with the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2007), preparation of annual "management letter", meetings with the audit committee and related consultations. 2006 numbers include fees for the re-audits of the 2006 and 2005 consolidated financial statements, which was necessary in connection with the Company becoming a reporting company.
(2)	Audit-related fees consist of fees for services related to the filing of the Company's Registration Statement on Form S-4 in connection with the acquisition of FNB Financial Corporation.
(3)	Tax fees consist of fees for tax compliance and preparation services for fiscal year 2007 and services related to tax advice. The Company did not pay Clifton Gunderson LLP any fees related to tax services before 2007.

          Clifton Gunderson LLP did not provide any services to Southern or its subsidiaries related to financial information systems design and implementation during the past two fiscal years.

          The Audit Committee Charter provides the policy and procedures for the approval by the Audit Committee of all services provided by Clifton Gunderson LLP. 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 Au dit Committee. None of the audit-related fees or 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 Clifton Gunderson LLP dated March 11, 2008
		Consolidated Balance Sheets as of December 31, 2007 and 2006
		Consolidated Statements of Income for the years ended December 31, 2007, 2006 and 2005
		Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 2007, 2006 and 2005
		Consolidated Statements of Cash Flows for the years ended December 31, 2007, 2006 and 2005
		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.

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3. Exhibits.

Exhibit Number	Document
2	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.
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	Selected provisions of Articles of Incorporation of Southern Michigan Bancorp, Inc., as amended. See Exhibit 3.1.
4.2	Selected provisions of Amended and Restated Bylaws of Southern Michigan Bancorp, Inc., as amended. See Exhibit 3.2.
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.
10.2*	Form of Employment Agreement with Kurt G. Miller.
10.3*	Form of Employment Agreement with Richard E. Dyer.
10.4*	Form of Transition Agreement with Richard E. Dyer. 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 10.4. Here incorporated by reference.
10.5*	Southern Michigan Bancorp, Inc. Stock Incentive Plan of 2005, as amended and restated.
10.6*	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.
10.7*	Form of Second Amendment to Southern Michigan Bank & Trust Deferred Compensation Agreement.
10.8*	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.
10.9*	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.

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Exhibit Number	Document
10.10*	Form of Second Amendment to Southern Michigan Bank & Trust Director Deferred Fee Agreement.
10.11*	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.
10.12	Business Loan Agreement with LaSalle Bank N.A. Previously filed with the Commission on November 27, 2007 in Southern Michigan Bancorp Inc.'s Current Report on Form 8-K, dated December 20, 2007, Exhibit 10.1. Here incorporated by reference.
10.13	Indenture, dated March 25, 2004, between Southern Michigan Bancorp, Inc. and Wilmington Trust Company.
10.14	Amended and Restated Declaration of Trust of Southern Michigan Bancorp Capital Trust I, dated March 25, 2004.
10.15	Guarantee Agreement of Southern Michigan Bancorp, Inc., dated March 25, 2004.
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, 2007. This exhibit is furnished to, and not filed with, the Commission.
99.2	Proxy Statement for annual meeting to be held May 15, 2008. This exhibit is furnished to, and not filed with, the Commission.
99.3	Form of Proxy for annual meeting to be held May 15, 2008. This exhibit is 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.

80

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.

	Southern Michigan Bancorp, Inc.
By	/s/ John H. Castle	March 28, 2008
	John H. Castle Chairman and Chief Executive Officer

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

/s/ John H. Castle John H. Castle	Chairman and Chief Executive Officer (Principal Executive Officer)	March 28, 2008
/s/ Kurt G. Miller Kurt G. Miller	President and Director	March 28, 2008
/s/ Danice L. Chartrand Danice L. Chartrand	Senior Vice President, Chief Financial Officer, Secretary, and Treasurer (Principal Financial and Accounting Officer)	March 28, 2008
/s/ Richard E. Dyer Richard E. Dyer	Executive Vice President and Director	March 28, 2008
/s/ Marcia S. Albright Marcia S. Albright*	Director	March 28, 2008
/s/ Dean Calhoun Dean Calhoun*	Director	March 28, 2008
/s/ John S. Carton John S. Carton*	Director	March 28, 2008
/s/ H. Kenneth Cole H. Kenneth Cole*	Director	March 28, 2008

81

/s/ Gary H. Haberl Gary H. Haberl*	Director	March 28, 2008
/s/ Robert L. Hance Robert L. Hance*	Director	March 28, 2008
/s/ Nolan E. Hooker Nolan E. Hooker*	Director	March 28, 2008
/s/ Gregory J. Hull Gregory J. Hull*	Director	March 28, 2008
/s/ Thomas E. Kolassa Thomas E. Kolassa*	Director	March 28, 2008
/s/ Donald J. Labrecque Donald J. Labrecque*	Director	March 28, 2008
/s/ Brian P. McConnell Brian P. McConnell*	Director	March 28, 2008
/s/ Freeman E. Riddle Freeman E. Riddle*	Director	March 28, 2008

*By /s/ John H. Castle    John H. Castle, Attorney-in-Fact

82

EXHIBIT INDEX

Exhibit Number	Document
2	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.
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	Selected provisions of Articles of Incorporation of Southern Michigan Bancorp, Inc., as amended. See Exhibit 3.1.
4.2	Selected provisions of Amended and Restated Bylaws of Southern Michigan Bancorp, Inc., as amended. See Exhibit 3.2.
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.
10.2*	Form of Employment Agreement with Kurt G. Miller.
10.3*	Form of Employment Agreement with Richard E. Dyer.
10.4*	Form of Transition Agreement with Richard E. Dyer. 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 10.4. Here incorporated by reference.
10.5*	Southern Michigan Bancorp, Inc. Stock Incentive Plan of 2005, as amended and restated.
10.6*	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.
10.7*	Form of Second Amendment to Southern Michigan Bank & Trust Deferred Compensation Agreement.
10.8*	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.
10.9*	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.
10.10*	Form of Second Amendment to Southern Michigan Bank & Trust Director Deferred Fee Agreement.

Exhibit Number	Document
10.11*	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.
10.12	Business Loan Agreement with LaSalle Bank N.A. Previously filed with the Commission on November 27, 2007 in Southern Michigan Bancorp Inc.'s Current Report on Form 8-K, dated December 20, 2007, Exhibit 10.1. Here incorporated by reference.
10.13	Indenture, dated March 25, 2004, between Southern Michigan Bancorp, Inc. and Wilmington Trust Company.
10.14	Amended and Restated Declaration of Trust of Southern Michigan Bancorp Capital Trust I, dated March 25, 2004.
10.15	Guarantee Agreement of Southern Michigan Bancorp, Inc., dated March 25, 2004.
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, 2007. This exhibit is furnished to, and not filed with, the Commission.
99.2	Proxy Statement for annual meeting to be held May 15, 2008. This exhibit is furnished to, and not filed with, the Commission.
99.3	Form of Proxy for annual meeting to be held May 15, 2008. This exhibit is 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.

EX-10.1

EXHIBIT 10.1

AMENDED AND RESTATED EMPLOYMENT AGREEMENT

                    THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT (the "Agreement") is made by SOUTHERN MICHIGAN BANCORP, INC., a Michigan corporation (the "Corporation"), and John H. Castle ("Executive") and amends and restates in its entirety the Employment Agreement between the Corporation and Executive effective January 1, 2004 (the "Prior Agreement"). The parties agree as follows.

                    WHEREAS, the Board of Directors of the Corporation believes that the future services of the Executive as provided in this Agreement will be of great value to the Corporation; and

                    WHEREAS, the Corporation operates wholly owned commercial banking subsidiaries known as Southern Michigan Bank & Trust ("SMB Bank") and FNB Financial ("FNB Bank"), each of which is engaged in the general business of banking (the "Banks"); and

                    WHEREAS, the Board of Directors of the Corporation has determined that it is in the best interests of the Corporation and its shareholders to secure Executive's continued services and to ensure Executive's continued dedication and objectivity in the event of any threat or occurrence of, or negotiation or other action that could lead to, or create the possibility of, a Change in Control (as hereafter defined) of the Corporation, without concern as to whether Executive might be hindered or distracted by personal uncertainties and risks created by any such possible Change in Control, and to encourage Executive's full attention and dedication to the Corporation and the Bank, the Board of Directors has authorized the Corporation to enter into this Agreement; and

                    WHEREAS the Executive is willing to serve in the employ of the Corporation and the Bank on a full-time basis as provided in this Agreement;

                    NOW, THEREFORE, the parties agree as follows.

          1.          Effective Date and Term. This Agreement will take effect as of ________, 2008 ("Effective Date"). This Agreement shall remain in effect until the end of the calendar year following that in which either party gives the other Notice (as defined in Section 14) of intention to terminate this Agreement; provided, however, that:

          (a)          except for termination as provided above pursuant to Notice from the Executive to the Corporation, this Agreement will not terminate during an "Active Change in Control Proposal Period" (as defined in Section 10), even if the Corporation has given the Executive Notice of intention to terminate this Agreement;

          (b)          except for termination as provided above pursuant to Notice from the Executive to the Corporation, upon the occurrence of a "Change in Control" (as defined in Section 9) the term of this Agreement shall automatically be extended until the second anniversary of the effective date of the Change in Control, even if the Corporation has given Notice of intention to terminate this Agreement; and

          (c)          termination of this Agreement shall not affect the obligations of either party accrued before termination of this Agreement, the obligations of the Corporation under Section 7(B)(ii) with regard to a termination of the Employment before this Agreement terminates, the Executive's obligations under Section 11, 12 or 13, or the obligations of the parties under Section 18 or 20.

          2.          Employment. Executive will serve as: (A) Chairman and Chief Executive Officer of the Corporation and Chairman and Chief Executive Officer of SMB Bank; (the "principal positions"); and (B) in such positions with Affiliates (defined for purposes of this Agreement as any organizations controlling, controlled by or under common control with the Corporation) as reasonably requested by the Corporation, provided that the duties of such positions are consistent with Executive's responsibilities in his principal position; (together, the "Employment"). As used in this Agreement, the term "Corporation" includes the Banks, unless the context clearly required otherwise.

Executive will serve the Corporation and the Banks well and faithfully during the Employment and will devote his best reasonable full time business efforts to the Employment, except that Executive may engage in civic and professional activities, investment oversight, and service on boards of directors as long as such activities do not constitute a conflict of interest or impair the Executive's performance of the duties of the Employment. The Employment may be terminated during the term of this Agreement as provided in Sections 4 and 5.

          3.          Compensation. Executive will be compensated during the Employment as follows:.

          (a)          Salary. Executive's salary ("Salary") will be $221,000 for 2008, subject to required payroll deductions and payable in weekly, bi-weekly or semi-monthly installments pursuant to the Corporation's normal payroll practices. Such Salary shall be subject to review annually commencing in 2009 and shall be maintained or increased during the term hereof as determined by the Corporation's Board of Directors.

          (b)          Bonus. Executive will participate in any bonus programs for senior executives of the Corporation or the Banks. The Corporation shall negotiate in good faith with the Executive an incentive bonus plan providing the Executive with an annual bonus opportunity, upon attainment of goals established pursuant to the plan, equal to comparable amounts paid to other senior officers of the Corporation.

          (c)          Equity Plans. Executive will participate in any stock option or other equity based compensation programs ("Equity Plans") offered by the Corporation, at a level commensurate with Executive's principal position.

          (d)          Fringe Benefits. Executive will participate in health and dental, life insurance, short and long term disability insurance, retirement and other employee fringe benefit programs covering the Corporation's salaried employees as a group, and in any programs applicable to senior executives of the Corporation or the Banks. The terms of applicable insurance policies and benefit plans in effect from time to time will govern with regard to specific issues of coverage and benefit eligibility. All benefit programs are

- -2- subject to change from time to time in the Corporation's discretion, except that Executive will at all times receive the following specific benefits:

          i.          Four weeks paid vacation per year, to be taken in the year earned, and which may not be accumulated or carried forward except with the written approval of the Chairman of the Executive Committee;

          ii.          The use of an executive automobile at the expense of the Corporation and payment by the Corporation of all insurance, maintenance and business fuel expenses relating to the automobile;

          iii.          Corporation-paid membership for the Executive in the Coldwater Country Club, and such other clubs as agreed to by the parties from time to time, including all dues, fees and assessments.

          (e)          Business Expenses. The Corporation will reimburse Executive for reasonable ordinary and necessary business expenses incurred in the course of the Employment, for fees and expenses of Executive's attendance in the course of the Employment at banking related conventions and similar events, for reasonable professional association and seminar expenses, and for any additional expenses authorized by the Corporation, subject to the Executive's submission of proper documentation for tax and accounting purposes. Reimbursement under this section will be paid within thirty (30) days after the Executive submits documentation as provided by this Section, provided that payments may not be made after March 15 of the calendar year following the calendar year in which the expenses were incurred.

          4.          Termination of the Employment Without Severance Pay. Executive shall not be entitled to any further compensation from the Corporation or any Affiliate after termination of the Employment as permitted by this Section 4, except (A) unpaid Salary installments through the end of the week in which the Employment terminates, (B) any vested benefits accrued as of the date of termination of the Employment under the terms of any written Corporation or Bank employment, compensation or benefit program; and (C) any rights of Executive to indemnification under the provisions of the Articles or Bylaws of the Corporation or the Banks (together, the "Vested Rights").

          (a)          Death. The Employment will terminate automatically upon Executive's death.

          (b)          Disability. The Corporation may terminate the Employment due to Executive's "Permanent Disability", as defined and provided for in this Section 4(b). If Executive has been unable by reason of physical or mental disability to properly perform his duties hereunder for a period of one hundred eighty (180) days, the Corporation may give the Executive Notice of its intention to terminate the Employment due to Permanent Disability. If Executive wishes to contest the existence of termination due to Permanent Disability, he must give the Corporation Notice of his disagreement within ten (10) days after receipt of the Notice from the Corporation, and he must promptly submit to examination by three physicians in the Coldwater Michigan area who are reasonably

- -3- acceptable to both Executive and the Corporation (with consultation from other physicians as determined by those three). If (A) within sixty (60) days after receipt by the Executive of the Notice from the Corporation, two of such physicians shall issue their written statement to the effect that in their opinion, based on their diagnosis, the Executive is capable of resuming his employment and devoting his full time and energy to discharging his duties within sixty (60) days after the date of such statement, and (B) Executive does in fact within such sixty (60) day period resume the Employment and properly perform his duties hereunder, then the Employment shall not be terminated due to Permanent Disability. It is understood that the Corporation has the right to terminate the Employment due to Executive's disability without meeting the standards in this Section 4(b), but in that event the termination shall be deemed to be a termination of the Employment pursuant to Section 5(a).

          (c)          Termination by Corporation for Cause. The Corporation may terminate the Employment for "Cause", defined as removal by order of a regulatory agency having jurisdiction over the Corporation or the Banks, or the Executive's willful and repeated failure to perform his duties under this Employment Agreement, which failure has not been cured within thirty (30) days after the Corporation gives Notice thereof to the Executive; it being expressly understood that negligence or bad judgment shall not constitute "Cause" so long as such act or omission shall be without intent of personal profit and is reasonably believed by the Executive to be in or not adverse to the best interests of the Corporation.

          (d)          Discretionary Termination by Executive. Executive may terminate the Employment at will, with at least thirty (30) days advance Notice.          If Executive gives such notice of termination, the Corporation may (but need not) relieve Executive of some or all of Executive's offices and responsibilities for part or all of such notice period, provided that Executive's Salary and benefits are continued for the lesser of thirty (30) days or the remaining period of the Employment.

          (e)          Termination of Employment after Termination of This Agreement. If Executive continues to be employed by the Corporation or the Banks after termination of this Agreement as provided in Section 1, Executive's employment shall be terminable by either party at will.

          5.          Termination With Severance Pay. Executive shall not be entitled to any further compensation from the Corporation or any Affiliate after termination of the Employment as permitted by this Section 5, except (A) Vested Rights; and (B) Severance Pay under Section 6 or the Cash Payment under Section 7, whichever is applicable.

          (a)          Discretionary Termination by Corporation. The Corporation may terminate the Employment during the term of this Agreement at will, by Notice to Executive. Any termination of Executive's Employment by the Corporation under Section 4 that is found not to meet the standards of such Section will be considered to have been a termination under this Section 5(a).

- -4-

          (b)          Termination by Executive for Good Reason After a Change in Control. Executive may terminate the Employment during the term of this Agreement for "Good Reason" after the occurrence of a Change in Control if there is a material negative change to the employment relationship between Executive and the Corporation because: (A) Executive is removed from any of his principal positions; or (B) the status, authority or responsibility of Executive's principal positions is materially diminished; or (C) Executive's Salary as then in effect is materially reduced, or (D) Executive's bonus opportunity is materially reduced; or (E) the overall value to Executive of the fringe benefit programs in which he participates (other than Equity Plans) is materially reduced from the overall value of the fringe benefit programs applicable to Executive immediately before the Change in Control; or (F) any requirement of the Corporation that Executive be b ased anywhere other than in Branch or contiguous counties or any substantial increase in the business travel required of Executive; or (G) any material breach by the Corporation or the Banks or any successor of its obligations to Executive under this Agreement.

          Executive may not terminate the employment for "Good Reason" unless:

          i.          Executive notifies the Board in writing, within 90 days after Executive becomes aware of the act or omission constituting Good Reason that the act or omission in question constitutes Good Reason and explaining why the Executive considers it to constitute Good Reason;

          ii.          the Corporation fails, within 30 days after notice from Executive under i. above, to revoke the action or correct the omission and make the Executive whole; and

          iii.          Executive gives notice of termination within 90 days after expiration of the 30-day period under ii. above.

          6.          Severance Pay. The Corporation will pay and provide Executive with the payments and benefit continuation provided in this Section 6 ("Severance Pay") if Executive's Employment is terminated during the term of this Agreement as provided in Section 5(a) above in a manner that constitutes a "separation from service" as that term is defined by Section 409A of the Internal Revenue Code of 1986 (the "Code") and Executive is not entitled to the Cash Payment (as defined in Section 7). If Executive becomes entitled to Severance Pay under this Section, and subsequently becomes entitled to the Cash Payment under Section 7(B)(ii), the amount of the Cash Payment under Section 7 shall be reduced by the amount of Severance Pay already received by Executive under this Section 6, and no further Severance Pay will be payable under this Section 6.

          (a)  Amount and Duration of Severance Pay. Subject to the other provisions of this Section, Severance Pay will consist of:

          i.          Salary Continuation. Continuation of Executive's Salary for fifty-two (52) weeks following the week in which the Employment terminates (the "Severance Pay Period"), subject to required payroll withholding; and

- -5-

          ii.          Health Coverage Continuation. Reimbursement by the Corporation of expenses incurred by Executive to continue Executive's then current employee and dependent health, dental, and prescription drug coverage under COBRA during the Severance Pay Period, provided (A) that Executive elects and remains eligible for COBRA continuation coverage, (B) that Executive continues to pay the normal employee contribution for such coverage, (C) that the Corporation's obligation to provide coverage will end if Executive becomes eligible for comparable coverage from a new employer; and (D) that reimbursements under this Section will be made within thirty (30) days after the Executive submits documentation of the reimbursable expense, but may not be made after the last day of the second calendar year following the calendar year in which the Executive's employment terminates; and

          iii.          Outplacement Assistance. Reimbursement of up to $5,000.00 of outplacement assistance from an outplacement assistance firm selected by Executive and approved by the Corporation (whose approval shall not be unreasonably withheld). Expenses must be incurred under this Section by the last day of the second calendar year following the calendar year in which Executive's Employment terminates. Such expenses will be reimbursed within thirty (30) days after the Executive submits documentation of the expenses, provided that payments may not be made after the last day of the third calendar year following the calendar year in which Executive's Employment terminates.

Executive will receive the Salary continuation provided in Section 6(a)(i) notwithstanding any other earnings that Executive may have, and subject to offset only as provided in Section 6(c). If Executive dies during the Severance Pay Period, Salary continuation under Section 6(a)(i) will continue for the remainder of the Severance Pay Period for the benefit of Executive's designated beneficiary (or Executive's estate if Executive fails to designate a beneficiary), and health coverage continuation under Section 6(a)(ii) will continue for Executive's eligible dependants for the remainder of the Severance Pay Period subject to the conditions in Sections 6(a)(ii) (A) and (B).

          (b)          Conditions to Severance Pay. To be eligible for Severance Pay, Executive must meet the following conditions: (i) Executive must comply with Executive's obligations under this Agreement that continue after termination of the Employment; and (ii) Executive must resign upon written request by Corporation from all positions with or representing the Corporation or any Affiliate, including but not limited, to membership on boards of directors; and (iii) Executive must provide the Corporation for a period of thirty (30) days after the Employment termination date with consulting services regarding matters within the scope of Executive's former duties upon request by the Corporation's Chief Executive Officer; provided, however, that Executive will only be required to provide those services by telephone at Executive's reasonable convenience and without substantial interference with Executive's other activities or commitments.

          (c)          Reductions to Severance Pay. The Severance Pay due to Executive under Section 6(a)(i) for any week will be reduced (but not below 0) by: (i) any disability benefits to which Executive is entitled for that week under any disability insurance policy

- -6- or program of the Corporation or any Affiliate (including but not limited to worker's disability compensation); and (ii) any severance pay payable to Executive under any other agreement or Corporation policy; (iii) any payment due to Executive under the Federal Worker Adjustment and Retraining Notification Act or any comparable state statute or local ordinance.

          7.          Cash Payment. The Corporation will make the payments provided for in this Section 7 if Executive's Employment is terminated during the term of this Agreement in a manner that constitutes a "separation from service" as that term is defined by Section 409A of the Code: (A) by Executive as permitted by Section 5(b) or (B) by the Corporation as provided in Section 5(a), and such termination of Employment occurs either (i) after the date of a Change in Control or (ii) within six months before the date of a Change in Control.

          (a)          Amount and Payment of Cash Payment. The Corporation will make a cash payment (the "Cash Payment") to Executive in an amount equal to 2.99 times the Executive's Average Compensation (as defined below). The Cash Payment shall be paid to Executive in a single lump sum on the tenth business day after termination of the Employment. If Executive dies after becoming entitled to the Cash Payment but before it has been paid, the Cash Payment will be made to Executive's designated beneficiary (or Executive's estate if Executive fails to designate a beneficiary).

          (b)          Average Compensation. As used in this Section 7 "Average Compensation" means (A) the sum of the Executive's Salary and cash bonuses for each of the most recent three complete calendar years of Executive's employment by the Corporation (or such lesser number of complete calendar years as the Executive has been employed by the Corporation) divided by (B) three (or the lesser number of complete calendar years for which the Executive has been employed by the Corporation). Average Compensation shall not include any amount, other than Salary and cash bonuses, included in Executive's taxable compensation for federal income tax purposes, such as the reporting of previously deferred compensation or gain realized upon exercise of any non qualified stock options.

          (c)          Health Coverage Continuation. In addition to the foregoing, the Corporation will reimburse Executive for expenses incurred by Executive to continue Executive's then current employee and dependent health, dental, and prescription drug coverage during the period of time in which the Executive would be entitled to continuation coverage under COBRA, provided (A) that Executive elects and remains eligible for COBRA continuation coverage, (B) that Executive continues to pay the normal employee contribution for such coverage, and (C) that the Corporation's obligation to provide coverage will end if Executive becomes eligible for comparable coverage from a new employer; and (D) that reimbursements under this Section will be made within thirty (30) days after the Executive submits documentation of the reimbursable expense, but may not be made after the last day of the calendar year following the second calendar year in which the Execut ive's employment terminates.

- -7-

          (d)          Reductions to Cash Payment. The Executive will receive the Cash Payment notwithstanding any other earnings that Executive may have and without offset of any kind except required payroll deductions.

          8.          Gross-Up Payment. Within thirty (30) days following a payment to the Executive pursuant to Section 7 of this Agreement, the Corporation shall obtain a determination of whether any amount paid under this Agreement, either separately or in conjunction with any other payments, benefits and entitlements received by the Executive hereunder or under any other plan or agreement under which Executive participates or to which he is a party, would constitute an "Excess Parachute Payment" within the meaning of Section 280G of the Code, and would thereby be subject to the excise tax, interest and penalties imposed by Section 4999 of the Code (the "Excise Tax"). In such event, the Corporation shall pay to Executive, within thirty (30) days of such determination, but no later than March 15 of the calendar year following the year in which Executive's separation from service (as defined by Code Section 409A) occurs, an additional cash payment (a "Gross-Up Payment"), in an amount equal to the amount of such Excise Tax, plus all federal and state income or other taxes, interest or penalties with respect to the payment of the amount of such Excise Tax, including all such taxes with respect to any such grossing-up amount. If, at a later date, the Internal Revenue Service assesses a deficiency against Executive for the Excise Tax which is greater than that which was determined at the time such amounts were paid, the Corporation shall pay to Executive, within thirty (30) days of such assessment, but no later than March 15 of the calendar year following the year in which the deficiency is assessed, the amount of such unreimbursed Excise Tax, plus any interest, penalties and reasonable professional fees or expenses incurred by the Executive as a result of such assessment, including all such taxes with respect to any such additional amount, provided that in no event shall such payment be made until six (6) months following Executive's separation from serv ice, if at the time of such separation from service the Executive is a specified employee as defined by Section 409A of the Code. The Corporation shall withhold from any amounts paid under this Agreement the amount of any Excise Tax or other federal, state or local taxes then required to be withheld. Computations of the amount of any Gross-Up Payment paid under this Section shall be conclusively made by the Corporation's independent accountants, or other independent accountants retained by the Corporation, in consultation, if necessary, with the Corporation's independent legal counsel. If, after the Executive receives any gross-up payments or other amount pursuant to this Section, the Executive receives any refund with respect to the Excise Tax, the Executive shall promptly pay the Corporation the amount of such refund within thirty (30) days of receipt by the Executive, on a grossed-up basis. If the Corporation deems it necessary or advisable to contest or appeal any assessment, or determination made by the Internal Revenue Service relating to the imposition of an Excise Tax as described herein (an "Excise Tax Contest/Appeal"), Executive covenants and agrees to reasonably cooperate with the Corporation in connection with the Excise Tax Contest/Appeal; provided, however, that the Corporation shall be responsible for all professional costs and expenses incurred by the Executive in connection with such Excise Tax Contest/Appeal.

          9.          Definition of Change in Control. As used in this Agreement, the term "Change in Control" means any of the occurrences listed in (a) below, subject to (b) and (c) below.

          (a)          A Change in Control shall be deemed to have occurred if:

- -8-

          i.          Any person or group (as such terms are used in connection with Sections 13(d) and 14(d) of the Exchange Act) becomes the "beneficial owner" (as defined in Rule 13(d)(3) and 13(d)(5) under the Exchange Act), directly or indirectly, of securities of the Corporation representing 50% or more of the combined voting power of the Corporation's then outstanding securities;

          ii.          A merger, consolidation, sale of assets, reorganization, or proxy contest is consummated and, as a consequence of which, members of the Corporation's Board of Directors in office immediately prior to such transaction or event constitute less than a majority of the Board of Directors thereafter;

          iii.          During any period of 24 consecutive months, individuals who at the beginning of such period constitute the Board of Directors of the Corporation (including for this purpose any new director whose election or nomination for election by the Corporation's stockholders was approved by a vote of at least one-half of the directors then still in office who were directors at the beginning of such period) cease for any reason to constitute at least a majority of the Board of Directors; or

          iv.          A merger, consolidation or reorganization is consummated with any other corporation pursuant to which the shareholders of the Corporation immediately prior to the merger, consolidation or reorganization do not immediately thereafter directly or indirectly own more than fifty percent (50%) of the combined voting power of the voting securities entitled to vote in the election of directors of the merged, consolidated or reorganized entity.

          (b)          Notwithstanding the foregoing, no trust department or designated fiduciary or other trustee of such trust department of the Corporation or a subsidiary of the Corporation, or other similar fiduciary capacity of the Corporation with direct voting control of the stock shall be treated as a person or group within the meaning of subsection (a)(i) hereof. Further, no profit-sharing, employee stock ownership, employee stock purchase and savings, employee pension, or other employee benefit plan of the Corporation or any of its subsidiaries, and no trustee of any such plan in its capacity as such trustee, shall be treated as a person or group within the meaning of subsection (a)(i) hereof.

          (c)          Notwithstanding anything contained in this Agreement to the contrary, if Executive's employment is terminated prior to a Change in Control and Executive reasonably demonstrates that such termination was at the request of or in response to a third party who has indicated an intention or taken steps reasonably calculated to effect a Change in Control (a "Third Party"), and who subsequently effectuates a Change in Control, then for all purposes of this Agreement, the date of a Change in Control shall mean the date immediately prior to the date of such termination of Executive's employment.

          10.          Definition of "Active Change in Control Proposal Period". As used in this Agreement the term "Active Change in Control Proposal Period" shall mean any period:

- -9-

          (a)          during which the Board of Directors of the Corporation has authorized solicitation by the Corporation of offers for a transaction which, if consummated, would constitute a Change in Control; or

          (b)          during which the Corporation has received a proposal for a transaction which, if consummated, would constitute a Change in Control, and the Board of Directors has not determined to reject such proposal without any counter-offer or further discussions; or

          (c)          during which any proxy solicitation or tender offer with regard to the securities of the Corporation is ongoing, if the intent of such proxy solicitation or tender offer is to cause the Corporation to solicit offers for or enter into a transaction that would constitute a Change in Control.

          11.          Confidentiality, Return of Property. Executive has obtained and may obtain confidential information concerning the business, operations, financial affairs, organizational and personnel matters, policies, procedures and other non-public matters of Corporation and its Affiliates, and those of third-parties that is not generally disclosed to persons not employed by Corporation or its subsidiaries. Such information (referred to herein as the "Confidential Information") may have been or may be provided in written form or orally. Executive shall not disclose to any other person the Confidential Information at any time during or after termination of the Employment, except that during the Employment Executive may use and disclose Confidential Information as reasonably required by the Employment. Upon termination of the Employment, Executive will deliver to the Corporation any and all property owned or leased by the Corporation or any Affiliate and any and all Confidential Information (in whatever form) including without limitation all customer lists and information, financial information, business notes, business plans, documents, keys, credit cards and other Corporation-provided equipment. Executive's commitments in this Section will continue in effect after termination of the Employment and after termination of this Agreement. The parties agree that any breach of Executive's covenants in this Section would cause the Corporation irreparable harm, and that injunctive relief would be appropriate.

          12.          Inventions, Discoveries and Improvements. Executive hereby agrees to assign and transfer to the Corporation, its successors and assigns, his entire right, title and interest in and to any and all inventions, discoveries, trade secrets and improvements thereto which he may discover to develop, either solely or jointly with others, during his employment hereunder and for a period of one year after termination of such employment, which would relate in any way to the business of the Corporation or any Affiliate of the Corporation, together with all rights to letters patent, copyrights or trademarks which may be granted with respect thereto. Immediately upon making or developing any invention, discovery, trade secret or improvement thereto, Executive shall notify the Corporation thereof and shall execute and deliver to the Corporation, without further compensation, such documents as may be necessary to assign and transfer to the Co rporation his entire right, title and interest in and to such invention, discovery, trade secret or improvement thereto, and to prepare or prosecute applications for letters patent with respect to the same in the name of the Corporation. Executive's obligations under this Section 12 shall continue in effect, as to inventions, discoveries and improvements covered by this Section 12, notwithstanding any termination of the employment or this Agreement.

- -10-

          13.          Noncompetition and Nonsolicitation.

          (a)          In view of Executive's importance to the success of the Corporation, Executive and Corporation agree that the Corporation would likely suffer significant harm from Executive's competing with Corporation during the Employment and for some period of time thereafter. Accordingly, Executive agrees that Executive shall not engage in competitive activities (except in Marginal Business Areas, as defined in Section 13(e)) either: (A) while employed by Corporation; or (B) if Executive's Employment is terminated during the term of this Agreement, during the Restricted Period (as defined below). Executive shall be deemed to engage in competitive activities if he shall, without the prior written consent of the Corporation, (i) in Branch County, Michigan, or in any county contiguous thereto (including the municipalities therein), render services directly or indirectly, as an employee, officer, director, consultant, advisor, partner or otherwise, for any organization or enterprise which competes directly or indirectly with the business of Corporation or any of its Affiliates in providing financial products or services (including, without limitation, banking, insurance, or securities products or services) to consumers and businesses, or (ii) directly or indirectly acquires any financial or beneficial interest in (except as provided in the next sentence) any organization which conducts or is otherwise engaged in a business or enterprise in Branch County, Michigan, or any of the counties contiguous thereto (including all municipalities) which competes directly or indirectly with the business of Corporation or any of its Affiliates in providing financial products or services (including, without limitation, banking, insurance or securities products or services) to consumers and businesses. Notwithstanding the preceding sentence, Executive shall not be prohibited from owning less than 1 percent of any class of publicly traded securities. For purposes of th is Section 13 the term "Restricted Period" shall equal one (1) year, commencing as of the date of termination of Executive's Employment during the term of this Agreement.

          (b)          While employed by Corporation and for a period of one (1) year following any termination of Executive's Employment during the term of this Agreement, Executive agrees that Executive shall not, in any manner directly (i) solicit by mail, by telephone, by personal meeting, or by any other means, any customer or prospective customer of Corporation to whom Executive provided services, or for whom Executive transacted business, or whose identity become known to Executive in connection with Executive's services to Corporation (including employment with or services to any predecessor or successor entities), to transact business with a person or an entity other than the Corporation or its Affiliates or reduce or refrain from doing any business with the Corporation or its Affiliates or (ii) interfere with or damage (or attempt to interfere with or damage) any relationship between Corporation or any of its Affiliates and any such customer or p rospective customer, or any shareholder of the Corporation. The term "solicit" as used in this Section 13 means any communication of any kind whatsoever, inviting, encouraging or requesting any person to take or refrain from taking any action with respect to the business of Corporation or any of its Affiliates.

          (c)          While employed by Corporation and for a period of one (1) year following any termination of Executive's Employment during the term of this Agreement, Executive agrees that Executive shall not, in any manner directly solicit any person who

- -11- is an employee of Corporation or any of its Affiliates to apply for or accept employment or a business opportunity with any other person or entity.

          (d)          The parties agree that nothing herein shall be construed to limit or negate that common law of torts or trade secrets where it provides broader protection than that provided herein.

          (e)          Activities by Executive that would otherwise violate Section 13(a) will not be considered a violation of this Agreement if such activities are conducted only with regard to a Marginal Business Area, defined as a line of business (other than banking) engaged in by the Corporation or any of its Affiliates but which represents less than 5% of the consolidated non-interest income of the Corporation and its Affiliates.

          (f)          Notwithstanding the foregoing, this Section 13 shall not apply after termination of the Employment if Executive is entitled to the Cash Payment under Section 7.

          (g)          If Executive's Employment is terminated during the term of this Agreement, the Executive's obligations under this Section shall survive termination of this Agreement.

          14.          Successors; Binding Agreement.

          (a)          This Agreement shall not be terminated by any merger or consolidation of the Corporation whereby the Corporation is or is not the surviving or resulting corporation or as a result of any transfer of all or substantially all of the assets of the Corporation. In the event of any such merger, consolidation, or transfer of assets, the provisions of this Agreement shall be binding upon the surviving or resulting corporation or the person or entity to which such assets are transferred.

          (b)          The Corporation agrees that concurrently with any merger, consolidation or transfer of assets constituting a Change in Control, it will cause any successor or transferee unconditionally to assume, by written instrument delivered to Executive (or his beneficiary or estate), all of the obligations of the Corporation hereunder. Failure of the Corporation to obtain such assumption prior to the effective date of any Change in Control shall be a material breach of the Corporation's obligations to Executive under this Agreement.

          (c)          This Agreement shall inure to the benefit of and be enforceable by Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If Executive shall die while any amounts would be payable to Executive hereunder had Executive continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to such person or persons appointed in writing by Executive to receive such amounts or, if no person is so appointed, to Executive's estate.

          15.          Notice. For purposes of this Agreement, all notices and other communications required or permitted hereunder shall be in writing and shall be deemed to have been duly given

- -12-

when delivered or received by facsimile transmission or five (5) days after deposit in the United States mail, certified and return receipt requested, postage prepaid, addressed as follows:

If to the Corporation:	51 West Pearl Street Coldwater, MI 49036
If to the Executive:	78 Douglas Avenue Coldwater, MI 49036

Either party may change its address for Notices by Notice to the other party.

          16.          Amendment and Waiver. No provisions of this Agreement may be amended, modified, waived or discharged unless the waiver, modification, or discharge is authorized by the Corporation's board of directors, or a committee of the board of directors, and is agreed to in a writing signed by Executive and by the Chief Executive Officer of the Corporation. No waiver by either party at any time of any breach or non-performance of this Agreement by the other party shall be deemed a waiver of any prior or subsequent breach or non-performance.

          17.          Severability. The invalidity or unenforceability of any provision of this Agreement will not affect the validity or enforceability of any other provision of this Agreement, which will remain in full force and effect. If a court of competent jurisdiction ever determines that any provision of this Agreement (including, but not limited to, all or any part of the non-competition covenant in this Agreement) is unenforceable as written, the parties intend that the provision shall be deemed narrowed or revised in that jurisdiction (as to geographic scope, duration, or any other matter) to the extent necessary to allow enforcement of the provision. The revision shall thereafter govern in that jurisdiction, subject only to any allowable appeals of that court decision.

          18.          Dispute Resolution.

          (a)          Arbitration. The Corporation and Executive agree that except as provided in Section 18(b) the sole and exclusive method for resolving any dispute between them arising out of or relating to this Agreement shall be arbitration under the procedures set forth in this Section; provided, however, that nothing in this Section prohibits a party from seeking preliminary or permanent judicial injunctive relief, or from seeking judicial enforcement of the arbitration award. The arbitrator shall be selected pursuant to the Rules for Commercial Arbitration of the American Arbitration Association. The arbitrator shall hold a hearing at which both parties may appear, with or without counsel, and present evidence and argument. Pre-hearing discovery shall be allowed in the discretion of and to the extent deemed appropriate by the arbitrator, and the arbitrator shall have subpoena power. The procedural rules for an arbitration hearing under thi s Section shall be the rules of the American Arbitration Association for Commercial Arbitration hearings and any rules as the arbitrator may determine. The hearing shall be completed within ninety (90) days after the arbitrator has been selected and the arbitrator shall issue a written decision within sixty (60) days after the close of the hearing. The hearing shall be held in Coldwater, Michigan. The award of the arbitrator shall be final and binding and may be enforced by and certified as a judgment

- -13- of the Circuit Court for Branch County, Michigan or any other court of competent jurisdiction. One-half of the fees and expenses of the arbitrator shall be paid by the Corporation and one-half by Executive, except that the fees and expenses of the Arbitrator incurred by Executive shall be reimbursed in full by the Corporation with respect to any arbitration initiated after the date of a Change in Control. The attorney fees and expenses incurred by the parties shall be paid by each party, except that the Corporation shall reimburse the Executive's reasonable attorney fees incurred with regard to any arbitration proceeding initiated after a Change in Control unless the arbitrator finds that the Executive's claims or defenses in such proceeding lack merit and were asserted in bad faith. Any such reimbursement will be made within thirty (30) days after the Executive submits documentation of such expenses, provided that no payment will be made after the last day of the calendar year following the calendar year in which the expense was incurred. To the extent that (i) the reimbursement of attorney fees, together with any other payments under this Agreement that constitute separation pay under Code Section 409A and the regulations thereunder; (ii) a portion of such separation pay exceeds the amount that would be exempt from consideration as a deferral of compensation under Treas. Reg. § 1.409A-1(b)(9)(iii) (the "Excess Separation Payment"); and (iii) the Excess Separation Payment is not otherwise exempt from treatment as a deferral of compensation under Treas. Reg. § 1.409A-1(b), then such amounts shall be reduced to the extent necessary so that the Executive does not receive an Excess Separation Payment.

          (b)          Section 18(a) shall be inapplicable to a dispute arising out of or relating to Sections 12 of this Agreement.

          19.          Entire Agreement. No agreements or representations, oral or otherwise, express or implied, with respect to Executive's Employment with the Corporation or any of the subjects covered by this Agreement have been made by either party that are not set forth expressly in this Agreement, and this Agreement supersedes any pre-existing employment agreements, including the Prior Agreement, and any other agreements on the subjects covered by this Agreement; provided, however, except as expressly modified hereby, this Agreement shall not affect Executive's rights under the Deferred Compensation Agreement between Executive and SMB Bank, as amended, Executive's rights under the SMB Bank Supplemental Retirement Plan or under other retirement and health and welfare plans in which Executive participates which are maintained by the Corporation or its Affiliates.

          20.          Governing Law. The validity, interpretation, and construction of this Agreement are to be governed by Michigan laws, without regard to choice of law rules. The parties agree that any judicial action involving a dispute arising under this Agreement will be filed, heard and decided in the Branch County Circuit Court. The parties agree that they will subject themselves to the personal jurisdiction and venue of either court, regardless of where Executive or the Corporation may be located at the time any action may be commenced. The parties agree that the locations specified above are mutually convenient forums and that each of the parties conducts business in Branch County.

- -14-

          21.          Counterparts. This Agreement may be signed in original or by fax in counterparts, each of which shall be deemed an original, and together the counterparts shall constitute one complete document.

The parties made this Agreement effective as of the Effective Date in Section 1.

SOUTHERN MICHIGAN BANCORP, INC.
By:
	Nolan E. Hooker	John H. Castle
Its:	Chairman of the Compensation Committee	Chairman and Chief Executive Officer
	"Corporation"	"Executive"

- -15-

EX-10.2

EXHIBIT 10.2

AMENDED AND RESTATED EMPLOYMENT AGREEMENT

                    THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT (the "Agreement") is made by SOUTHERN MICHIGAN BANCORP, INC., a Michigan corporation (the "Corporation"), and Kurt G. Miller ("Executive") and amends and restates in its entirety the Employment Agreement between the Corporation and Executive effective January 1, 2004 (the "Prior Agreement"). The parties agree as follows.

                    WHEREAS, the Board of Directors of the Corporation believes that the future services of the Executive as provided in this Agreement will be of great value to the Corporation; and

                    WHEREAS, the Corporation operates wholly owned commercial banking subsidiaries known as Southern Michigan Bank & Trust ("SMB Bank") and FNB Financial ("FNB Bank"), each of which is engaged in the general business of banking (the "Banks"); and

                    WHEREAS, the Board of Directors of the Corporation has determined that it is in the best interests of the Corporation and its shareholders to secure Executive's continued services and to ensure Executive's continued dedication and objectivity in the event of any threat or occurrence of, or negotiation or other action that could lead to, or create the possibility of, a Change in Control (as hereafter defined) of the Corporation, without concern as to whether Executive might be hindered or distracted by personal uncertainties and risks created by any such possible Change in Control, and to encourage Executive's full attention and dedication to the Corporation and the Bank, the Board of Directors has authorized the Corporation to enter into this Agreement; and

                    WHEREAS the Executive is willing to serve in the employ of the Corporation and the Bank on a full-time basis as provided in this Agreement;

                    NOW, THEREFORE, the parties agree as follows.

          1.          Effective Date and Term. This Agreement will take effect as of ________, 2008 ("Effective Date"). This Agreement shall remain in effect until the end of the calendar year following that in which either party gives the other Notice (as defined in Section 14) of intention to terminate this Agreement; provided, however, that:

          (a)          except for termination as provided above pursuant to Notice from the Executive to the Corporation, this Agreement will not terminate during an "Active Change in Control Proposal Period" (as defined in Section 10), even if the Corporation has given the Executive Notice of intention to terminate this Agreement;

          (b)          except for termination as provided above pursuant to Notice from the Executive to the Corporation, upon the occurrence of a "Change in Control" (as defined in Section 9) the term of this Agreement shall automatically be extended until the second anniversary of the effective date of the Change in Control, even if the Corporation has given Notice of intention to terminate this Agreement; and

          (c)          termination of this Agreement shall not affect the obligations of either party accrued before termination of this Agreement, the obligations of the Corporation under Section 7(B)(ii) with regard to a termination of the Employment before this Agreement terminates, the Executive's obligations under Section 11, 12 or 13, or the obligations of the parties under Section 18 or 20.

          2.          Employment. Executive will serve as: (A) President of the Corporation and Chairman and President of SMB Bank; (the "principal positions"); and (B) in such positions with Affiliates (defined for purposes of this Agreement as any organizations controlling, controlled by or under common control with the Corporation) as reasonably requested by the Corporation, provided that the duties of such positions are consistent with Executive's responsibilities in his principal position; (together, the "Employment"). As used in this Agreement, the term "Corporation" includes the Banks, unless the context clearly required otherwise.

Executive will serve the Corporation and the Banks well and faithfully during the Employment and will devote his best reasonable full time business efforts to the Employment, except that Executive may engage in civic and professional activities, investment oversight, and service on boards of directors as long as such activities do not constitute a conflict of interest or impair the Executive's performance of the duties of the Employment. The Employment may be terminated during the term of this Agreement as provided in Sections 4 and 5.

          3.          Compensation. Executive will be compensated during the Employment as follows:.

          (a)          Salary. Executive's salary ("Salary") will be $177,000 for 2008, subject to required payroll deductions and payable in weekly, bi-weekly or semi-monthly installments pursuant to the Corporation's normal payroll practices. Such Salary shall be subject to review annually commencing in 2009 and shall be maintained or increased during the term hereof as determined by the Corporation's Board of Directors.

          (b)          Bonus. Executive will participate in any bonus programs for senior executives of the Corporation or the Banks. The Corporation shall negotiate in good faith with the Executive an incentive bonus plan providing the Executive with an annual bonus opportunity, upon attainment of goals established pursuant to the plan, equal to comparable amounts paid to other senior officers of the Corporation.

          (c)          Equity Plans. Executive will participate in any stock option or other equity based compensation programs ("Equity Plans") offered by the Corporation, at a level commensurate with Executive's principal position.

          (d)          Fringe Benefits. Executive will participate in health and dental, life insurance, short and long term disability insurance, retirement and other employee fringe benefit programs covering the Corporation's salaried employees as a group, and in any programs applicable to senior executives of the Corporation or the Banks. The terms of applicable insurance policies and benefit plans in effect from time to time will govern with regard to specific issues of coverage and benefit eligibility. All benefit programs are

- -2- subject to change from time to time in the Corporation's discretion, except that Executive will at all times receive the following specific benefits:

          i.          Four weeks paid vacation per year, to be taken in the year earned, and which may not be accumulated or carried forward except with the written approval of the Chairman of the Executive Committee;

          ii.          The use of an executive automobile at the expense of the Corporation and payment by the Corporation of all insurance, maintenance and business fuel expenses relating to the automobile;

          iii.          Corporation-paid membership for the Executive in the Coldwater Country Club, and such other clubs as agreed to by the parties from time to time, including all dues, fees and assessments.

          (e)          Business Expenses. The Corporation will reimburse Executive for reasonable ordinary and necessary business expenses incurred in the course of the Employment, for fees and expenses of Executive's attendance in the course of the Employment at banking related conventions and similar events, for reasonable professional association and seminar expenses, and for any additional expenses authorized by the Corporation, subject to the Executive's submission of proper documentation for tax and accounting purposes. Reimbursement under this section will be paid within thirty (30) days after the Executive submits documentation as provided by this Section, provided that payments may not be made after March 15 of the calendar year following the calendar year in which the expenses were incurred.

          4.          Termination of the Employment Without Severance Pay. Executive shall not be entitled to any further compensation from the Corporation or any Affiliate after termination of the Employment as permitted by this Section 4, except (A) unpaid Salary installments through the end of the week in which the Employment terminates, (B) any vested benefits accrued as of the date of termination of the Employment under the terms of any written Corporation or Bank employment, compensation or benefit program; and (C) any rights of Executive to indemnification under the provisions of the Articles or Bylaws of the Corporation or the Banks (together, the "Vested Rights").

          (a)          Death. The Employment will terminate automatically upon Executive's death.

          (b)          Disability. The Corporation may terminate the Employment due to Executive's "Permanent Disability", as defined and provided for in this Section 4(b). If Executive has been unable by reason of physical or mental disability to properly perform his duties hereunder for a period of one hundred eighty (180) days, the Corporation may give the Executive Notice of its intention to terminate the Employment due to Permanent Disability. If Executive wishes to contest the existence of termination due to Permanent Disability, he must give the Corporation Notice of his disagreement within ten (10) days after receipt of the Notice from the Corporation, and he must promptly submit to

- -3- examination by three physicians in the Coldwater Michigan area who are reasonably acceptable to both Executive and the Corporation (with consultation from other physicians as determined by those three). If (A) within sixty (60) days after receipt by the Executive of the Notice from the Corporation, two of such physicians shall issue their written statement to the effect that in their opinion, based on their diagnosis, the Executive is capable of resuming his employment and devoting his full time and energy to discharging his duties within sixty (60) days after the date of such statement, and (B) Executive does in fact within such sixty (60) day period resume the Employment and properly perform his duties hereunder, then the Employment shall not be terminated due to Permanent Disability. It is understood that the Corporation has the right to terminate the Employment due to Executive's disability without meeting the standards in this Section 4(b), but in that event the termination shall be deemed to be a termi nation of the Employment pursuant to Section 5(a).

          (c)          Termination by Corporation for Cause. The Corporation may terminate the Employment for "Cause", defined as removal by order of a regulatory agency having jurisdiction over the Corporation or the Banks, or the Executive's willful and repeated failure to perform his duties under this Employment Agreement, which failure has not been cured within thirty (30) days after the Corporation gives Notice thereof to the Executive; it being expressly understood that negligence or bad judgment shall not constitute "Cause" so long as such act or omission shall be without intent of personal profit and is reasonably believed by the Executive to be in or not adverse to the best interests of the Corporation.

          (d)          Discretionary Termination by Executive. Executive may terminate the Employment at will, with at least thirty (30) days advance Notice.          If Executive gives such notice of termination, the Corporation may (but need not) relieve Executive of some or all of Executive's offices and responsibilities for part or all of such notice period, provided that Executive's Salary and benefits are continued for the lesser of thirty (30) days or the remaining period of the Employment.

          (e)          Termination of Employment after Termination of This Agreement. If Executive continues to be employed by the Corporation or the Banks after termination of this Agreement as provided in Section 1, Executive's employment shall be terminable by either party at will.

          5.          Termination With Severance Pay. Executive shall not be entitled to any further compensation from the Corporation or any Affiliate after termination of the Employment as permitted by this Section 5, except (A) Vested Rights; and (B) Severance Pay under Section 6 or the Cash Payment under Section 7, whichever is applicable.

          (a)          Discretionary Termination by Corporation. The Corporation may terminate the Employment during the term of this Agreement at will, by Notice to Executive. Any termination of Executive's Employment by the Corporation under Section 4 that is found not to meet the standards of such Section will be considered to have been a termination under this Section 5(a).

- -4-

          (b)          Termination by Executive for Good Reason After a Change in Control. Executive may terminate the Employment during the term of this Agreement for "Good Reason" after the occurrence of a Change in Control if there is a material negative change to the employment relationship between Executive and the Corporation because: (A) Executive is removed from any of his principal positions; or (B) the status, authority or responsibility of Executive's principal positions is materially diminished; or (C) Executive's Salary as then in effect is materially reduced, or (D) Executive's bonus opportunity is materially reduced; or (E) the overall value to Executive of the fringe benefit programs in which he participates (other than Equity Plans) is materially reduced from the overall value of the fringe benefit programs applicable to Executive immediately before the Change in Control; or (F) any requirement of the Corporation that Executive be b ased anywhere other than in Branch or contiguous counties or any substantial increase in the business travel required of Executive; or (G) any material breach by the Corporation or the Banks or any successor of its obligations to Executive under this Agreement.

          Executive may not terminate the employment for "Good Reason" unless:

          i.          Executive notifies the Board in writing, within 90 days after Executive becomes aware of the act or omission constituting Good Reason that the act or omission in question constitutes Good Reason and explaining why the Executive considers it to constitute Good Reason;

          ii.          the Corporation fails, within 30 days after notice from Executive under i. above, to revoke the action or correct the omission and make the Executive whole; and

          iii.          Executive gives notice of termination within 90 days after expiration of the 30-day period under ii. above.

          6.          Severance Pay. The Corporation will pay and provide Executive with the payments and benefit continuation provided in this Section 6 ("Severance Pay") if Executive's Employment is terminated during the term of this Agreement as provided in Section 5(a) above in a manner that constitutes a "separation from service" as that term is defined by Section 409A of the Internal Revenue Code of 1986 (the "Code") and Executive is not entitled to the Cash Payment (as defined in Section 7). If Executive becomes entitled to Severance Pay under this Section, and subsequently becomes entitled to the Cash Payment under Section 7(B)(ii), the amount of the Cash Payment under Section 7 shall be reduced by the amount of Severance Pay already received by Executive under this Section 6, and no further Severance Pay will be payable under this Section 6.

          (a)  Amount and Duration of Severance Pay. Subject to the other provisions of this Section, Severance Pay will consist of:

- -5-

          i.          Salary Continuation. Continuation of Executive's Salary for fifty-two (52) weeks following the week in which the Employment terminates (the "Severance Pay Period"), subject to required payroll withholding; and

          ii.          Health Coverage Continuation. Reimbursement by the Corporation of expenses incurred by Executive to continue Executive's then current employee and dependent health, dental, and prescription drug coverage under COBRA during the Severance Pay Period, provided (A) that Executive elects and remains eligible for COBRA continuation coverage, (B) that Executive continues to pay the normal employee contribution for such coverage, (C) that the Corporation's obligation to provide coverage will end if Executive becomes eligible for comparable coverage from a new employer; and (D) that reimbursements under this Section will be made within thirty (30) days after the Executive submits documentation of the reimbursable expense, but may not be made after the last day of the second calendar year following the calendar year in which the Executive's employment terminates; and

          iii.          Outplacement Assistance. Reimbursement of up to $5,000.00 of outplacement assistance from an outplacement assistance firm selected by Executive and approved by the Corporation (whose approval shall not be unreasonably withheld). Expenses must be incurred under this Section by the last day of the second calendar year following the calendar year in which Executive's Employment terminates. Such expenses will be reimbursed within thirty (30) days after the Executive submits documentation of the expenses, provided that payments may not be made after the last day of the third calendar year following the calendar year in which Executive's Employment terminates.

Executive will receive the Salary continuation provided in Section 6(a)(i) notwithstanding any other earnings that Executive may have, and subject to offset only as provided in Section 6(c). If Executive dies during the Severance Pay Period, Salary continuation under Section 6(a)(i) will continue for the remainder of the Severance Pay Period for the benefit of Executive's designated beneficiary (or Executive's estate if Executive fails to designate a beneficiary), and health coverage continuation under Section 6(a)(ii) will continue for Executive's eligible dependants for the remainder of the Severance Pay Period subject to the conditions in Sections 6(a)(ii) (A) and (B).

          (b)          Conditions to Severance Pay. To be eligible for Severance Pay, Executive must meet the following conditions: (i) Executive must comply with Executive's obligations under this Agreement that continue after termination of the Employment; and (ii) Executive must resign upon written request by Corporation from all positions with or representing the Corporation or any Affiliate, including but not limited, to membership on boards of directors; and (iii) Executive must provide the Corporation for a period of thirty (30) days after the Employment termination date with consulting services regarding matters within the scope of Executive's former duties upon request by the Corporation's Chief Executive Officer; provided, however, that Executive will only

- -6- be required to provide those services by telephone at Executive's reasonable convenience and without substantial interference with Executive's other activities or commitments.

          (c)          Reductions to Severance Pay. The Severance Pay due to Executive under Section 6(a)(i) for any week will be reduced (but not below 0) by: (i) any disability benefits to which Executive is entitled for that week under any disability insurance policy or program of the Corporation or any Affiliate (including but not limited to worker's disability compensation); and (ii) any severance pay payable to Executive under any other agreement or Corporation policy; (iii) any payment due to Executive under the Federal Worker Adjustment and Retraining Notification Act or any comparable state statute or local ordinance.

          7.          Cash Payment. The Corporation will make the payments provided for in this Section 7 if Executive's Employment is terminated during the term of this Agreement in a manner that constitutes a "separation from service" as that term is defined by Section 409A of the Code: (A) by Executive as permitted by Section 5(b) or (B) by the Corporation as provided in Section 5(a), and such termination of Employment occurs either (i) after the date of a Change in Control or (ii) within six months before the date of a Change in Control.

          (a)          Amount and Payment of Cash Payment. The Corporation will make a cash payment (the "Cash Payment") to Executive in an amount equal to 2.99 times the Executive's Average Compensation (as defined below). The Cash Payment shall be paid to Executive in a single lump sum on the tenth business day after termination of the Employment. If Executive dies after becoming entitled to the Cash Payment but before it has been paid, the Cash Payment will be made to Executive's designated beneficiary (or Executive's estate if Executive fails to designate a beneficiary).

          (b)          Average Compensation. As used in this Section 7 "Average Compensation" means (A) the sum of the Executive's Salary and cash bonuses for each of the most recent three complete calendar years of Executive's employment by the Corporation (or such lesser number of complete calendar years as the Executive has been employed by the Corporation) divided by (B) three (or the lesser number of complete calendar years for which the Executive has been employed by the Corporation). Average Compensation shall not include any amount, other than Salary and cash bonuses, included in Executive's taxable compensation for federal income tax purposes, such as the reporting of previously deferred compensation or gain realized upon exercise of any non qualified stock options.

          (c)          Health Coverage Continuation. In addition to the foregoing, the Corporation will reimburse Executive for expenses incurred by Executive to continue Executive's then current employee and dependent health, dental, and prescription drug coverage during the period of time in which the Executive would be entitled to continuation coverage under COBRA, provided (A) that Executive elects and remains eligible for COBRA continuation coverage, (B) that Executive continues to pay the normal employee contribution for such coverage, and (C) that the Corporation's obligation to provide coverage will end if Executive becomes eligible for comparable

- -7- coverage from a new employer; and (D) that reimbursements under this Section will be made within thirty (30) days after the Executive submits documentation of the reimbursable expense, but may not be made after the last day of the calendar year following the second calendar year in which the Executive's employment terminates.

          (d)          Reductions to Cash Payment. The Executive will receive the Cash Payment notwithstanding any other earnings that Executive may have and without offset of any kind except required payroll deductions.

          8.          Gross-Up Payment. Within thirty (30) days following a payment to the Executive pursuant to Section 7 of this Agreement, the Corporation shall obtain a determination of whether any amount paid under this Agreement, either separately or in conjunction with any other payments, benefits and entitlements received by the Executive hereunder or under any other plan or agreement under which Executive participates or to which he is a party, would constitute an "Excess Parachute Payment" within the meaning of Section 280G of the Code, and would thereby be subject to the excise tax, interest and penalties imposed by Section 4999 of the Code (the "Excise Tax"). In such event, the Corporation shall pay to Executive, within thirty (30) days of such determination, but no later than March 15 of the calendar year following the year in which Executive's separation from service (as defined by Code Section 409A) occurs, an additional cash payment (a "Gross-Up Payment"), in an amount equal to the amount of such Excise Tax, plus all federal and state income or other taxes, interest or penalties with respect to the payment of the amount of such Excise Tax, including all such taxes with respect to any such grossing-up amount. If, at a later date, the Internal Revenue Service assesses a deficiency against Executive for the Excise Tax which is greater than that which was determined at the time such amounts were paid, the Corporation shall pay to Executive, within thirty (30) days of such assessment, but no later than March 15 of the calendar year following the year in which the deficiency is assessed, the amount of such unreimbursed Excise Tax, plus any interest, penalties and reasonable professional fees or expenses incurred by the Executive as a result of such assessment, including all such taxes with respect to any such additional amount, provided that in no event shall such payment be made until six (6) months following Executive's separation from serv ice, if at the time of such separation from service the Executive is a specified employee as defined by Section 409A of the Code. The Corporation shall withhold from any amounts paid under this Agreement the amount of any Excise Tax or other federal, state or local taxes then required to be withheld. Computations of the amount of any Gross-Up Payment paid under this Section shall be conclusively made by the Corporation's independent accountants, or other independent accountants retained by the Corporation, in consultation, if necessary, with the Corporation's independent legal counsel. If, after the Executive receives any gross-up payments or other amount pursuant to this Section, the Executive receives any refund with respect to the Excise Tax, the Executive shall promptly pay the Corporation the amount of such refund within thirty (30) days of receipt by the Executive, on a grossed-up basis. If the Corporation deems it necessary or advisable to contest or appeal any assessment, or determination made by the Internal Revenue Service relating to the imposition of an Excise Tax as described herein (an "Excise Tax Contest/Appeal"), Executive covenants and agrees to reasonably cooperate with the Corporation in connection with the Excise Tax Contest/Appeal; provided, however, that the Corporation shall be responsible for all professional costs and expenses incurred by the Executive in connection with such Excise Tax Contest/Appeal.

- -8-

          9.          Definition of Change in Control. As used in this Agreement, the term "Change in Control" means any of the occurrences listed in (a) below, subject to (b) and (c) below.

          (a)          A Change in Control shall be deemed to have occurred if:

          i.          Any person or group (as such terms are used in connection with Sections 13(d) and 14(d) of the Exchange Act) becomes the "beneficial owner" (as defined in Rule 13(d)(3) and 13(d)(5) under the Exchange Act), directly or indirectly, of securities of the Corporation representing 50% or more of the combined voting power of the Corporation's then outstanding securities;

          ii.          A merger, consolidation, sale of assets, reorganization, or proxy contest is consummated and, as a consequence of which, members of the Corporation's Board of Directors in office immediately prior to such transaction or event constitute less than a majority of the Board of Directors thereafter;

          iii.          During any period of 24 consecutive months, individuals who at the beginning of such period constitute the Board of Directors of the Corporation (including for this purpose any new director whose election or nomination for election by the Corporation's stockholders was approved by a vote of at least one-half of the directors then still in office who were directors at the beginning of such period) cease for any reason to constitute at least a majority of the Board of Directors; or

          iv.          A merger, consolidation or reorganization is consummated with any other corporation pursuant to which the shareholders of the Corporation immediately prior to the merger, consolidation or reorganization do not immediately thereafter directly or indirectly own more than fifty percent (50%) of the combined voting power of the voting securities entitled to vote in the election of directors of the merged, consolidated or reorganized entity.

          (b)          Notwithstanding the foregoing, no trust department or designated fiduciary or other trustee of such trust department of the Corporation or a subsidiary of the Corporation, or other similar fiduciary capacity of the Corporation with direct voting control of the stock shall be treated as a person or group within the meaning of subsection (a)(i) hereof. Further, no profit-sharing, employee stock ownership, employee stock purchase and savings, employee pension, or other employee benefit plan of the Corporation or any of its subsidiaries, and no trustee of any such plan in its capacity as such trustee, shall be treated as a person or group within the meaning of subsection (a)(i) hereof.

          (c)          Notwithstanding anything contained in this Agreement to the contrary, if Executive's employment is terminated prior to a Change in Control and Executive reasonably demonstrates that such termination was at the request of or in response to a third party who has indicated an intention or taken steps reasonably calculated to effect a Change in Control (a "Third Party"), and who subsequently effectuates a Change in

- -9- Control, then for all purposes of this Agreement, the date of a Change in Control shall mean the date immediately prior to the date of such termination of Executive's employment.

          10.          Definition of "Active Change in Control Proposal Period". As used in this Agreement the term "Active Change in Control Proposal Period" shall mean any period:

          (a)          during which the Board of Directors of the Corporation has authorized solicitation by the Corporation of offers for a transaction which, if consummated, would constitute a Change in Control; or

          (b)          during which the Corporation has received a proposal for a transaction which, if consummated, would constitute a Change in Control, and the Board of Directors has not determined to reject such proposal without any counter-offer or further discussions; or

          (c)          during which any proxy solicitation or tender offer with regard to the securities of the Corporation is ongoing, if the intent of such proxy solicitation or tender offer is to cause the Corporation to solicit offers for or enter into a transaction that would constitute a Change in Control.

          11.          Confidentiality, Return of Property. Executive has obtained and may obtain confidential information concerning the business, operations, financial affairs, organizational and personnel matters, policies, procedures and other non-public matters of Corporation and its Affiliates, and those of third-parties that is not generally disclosed to persons not employed by Corporation or its subsidiaries. Such information (referred to herein as the "Confidential Information") may have been or may be provided in written form or orally. Executive shall not disclose to any other person the Confidential Information at any time during or after termination of the Employment, except that during the Employment Executive may use and disclose Confidential Information as reasonably required by the Employment. Upon termination of the Employment, Executive will deliver to the Corporation any and all property owned or leased by the Corporation or any Affiliate and any and all Confidential Information (in whatever form) including without limitation all customer lists and information, financial information, business notes, business plans, documents, keys, credit cards and other Corporation-provided equipment. Executive's commitments in this Section will continue in effect after termination of the Employment and after termination of this Agreement. The parties agree that any breach of Executive's covenants in this Section would cause the Corporation irreparable harm, and that injunctive relief would be appropriate.

          12.          Inventions, Discoveries and Improvements. Executive hereby agrees to assign and transfer to the Corporation, its successors and assigns, his entire right, title and interest in and to any and all inventions, discoveries, trade secrets and improvements thereto which he may discover to develop, either solely or jointly with others, during his employment hereunder and for a period of one year after termination of such employment, which would relate in any way to the business of the Corporation or any Affiliate of the Corporation, together with all rights to letters patent, copyrights or trademarks which may be granted with respect thereto. Immediately

- -10-

upon making or developing any invention, discovery, trade secret or improvement thereto, Executive shall notify the Corporation thereof and shall execute and deliver to the Corporation, without further compensation, such documents as may be necessary to assign and transfer to the Corporation his entire right, title and interest in and to such invention, discovery, trade secret or improvement thereto, and to prepare or prosecute applications for letters patent with respect to the same in the name of the Corporation. Executive's obligations under this Section 12 shall continue in effect, as to inventions, discoveries and improvements covered by this Section 12, notwithstanding any termination of the employment or this Agreement.

          13.          Noncompetition and Nonsolicitation.

          (a)          In view of Executive's importance to the success of the Corporation, Executive and Corporation agree that the Corporation would likely suffer significant harm from Executive's competing with Corporation during the Employment and for some period of time thereafter. Accordingly, Executive agrees that Executive shall not engage in competitive activities (except in Marginal Business Areas, as defined in Section 13(e)) either: (A) while employed by Corporation; or (B) if Executive's Employment is terminated during the term of this Agreement, during the Restricted Period (as defined below). Executive shall be deemed to engage in competitive activities if he shall, without the prior written consent of the Corporation, (i) in Branch County, Michigan, or in any county contiguous thereto (including the municipalities therein), render services directly or indirectly, as an employee, officer, director, consultant, advisor, partner or otherwise, for any organization or enterprise which competes directly or indirectly with the business of Corporation or any of its Affiliates in providing financial products or services (including, without limitation, banking, insurance, or securities products or services) to consumers and businesses, or (ii) directly or indirectly acquires any financial or beneficial interest in (except as provided in the next sentence) any organization which conducts or is otherwise engaged in a business or enterprise in Branch County, Michigan, or any of the counties contiguous thereto (including all municipalities) which competes directly or indirectly with the business of Corporation or any of its Affiliates in providing financial products or services (including, without limitation, banking, insurance or securities products or services) to consumers and businesses. Notwithstanding the preceding sentence, Executive shall not be prohibited from owning less than 1 percent of any class of publicly traded securities. For purposes of th is Section 13 the term "Restricted Period" shall equal one (1) year, commencing as of the date of termination of Executive's Employment during the term of this Agreement.

          (b)          While employed by Corporation and for a period of one (1) year following any termination of Executive's Employment during the term of this Agreement, Executive agrees that Executive shall not, in any manner directly (i) solicit by mail, by telephone, by personal meeting, or by any other means, any customer or prospective customer of Corporation to whom Executive provided services, or for whom Executive transacted business, or whose identity become known to Executive in connection with Executive's services to Corporation (including employment with or services to any predecessor or successor entities), to transact business with a person or an entity other than the Corporation or its Affiliates or reduce or refrain from doing any business with

- -11- the Corporation or its Affiliates or (ii) interfere with or damage (or attempt to interfere with or damage) any relationship between Corporation or any of its Affiliates and any such customer or prospective customer, or any shareholder of the Corporation. The term "solicit" as used in this Section 13 means any communication of any kind whatsoever, inviting, encouraging or requesting any person to take or refrain from taking any action with respect to the business of Corporation or any of its Affiliates.

          (c)          While employed by Corporation and for a period of one (1) year following any termination of Executive's Employment during the term of this Agreement, Executive agrees that Executive shall not, in any manner directly solicit any person who is an employee of Corporation or any of its Affiliates to apply for or accept employment or a business opportunity with any other person or entity.

          (d)          The parties agree that nothing herein shall be construed to limit or negate that common law of torts or trade secrets where it provides broader protection than that provided herein.

          (e)          Activities by Executive that would otherwise violate Section 13(a) will not be considered a violation of this Agreement if such activities are conducted only with regard to a Marginal Business Area, defined as a line of business (other than banking) engaged in by the Corporation or any of its Affiliates but which represents less than 5% of the consolidated non-interest income of the Corporation and its Affiliates.

          (f)          Notwithstanding the foregoing, this Section 13 shall not apply after termination of the Employment if Executive is entitled to the Cash Payment under Section 7.

          (g)          If Executive's Employment is terminated during the term of this Agreement, the Executive's obligations under this Section shall survive termination of this Agreement.

          14.          Successors; Binding Agreement.

          (a)          This Agreement shall not be terminated by any merger or consolidation of the Corporation whereby the Corporation is or is not the surviving or resulting corporation or as a result of any transfer of all or substantially all of the assets of the Corporation. In the event of any such merger, consolidation, or transfer of assets, the provisions of this Agreement shall be binding upon the surviving or resulting corporation or the person or entity to which such assets are transferred.

          (b)          The Corporation agrees that concurrently with any merger, consolidation or transfer of assets constituting a Change in Control, it will cause any successor or transferee unconditionally to assume, by written instrument delivered to Executive (or his beneficiary or estate), all of the obligations of the Corporation hereunder. Failure of the Corporation to obtain such assumption prior to the effective date of any Change in Control shall be a material breach of the Corporation's obligations to Executive under this Agreement.

- -12-

          (c)          This Agreement shall inure to the benefit of and be enforceable by Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If Executive shall die while any amounts would be payable to Executive hereunder had Executive continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to such person or persons appointed in writing by Executive to receive such amounts or, if no person is so appointed, to Executive's estate.

          15.          Notice. For purposes of this Agreement, all notices and other communications required or permitted hereunder shall be in writing and shall be deemed to have been duly given when delivered or received by facsimile transmission or five (5) days after deposit in the United States mail, certified and return receipt requested, postage prepaid, addressed as follows:

If to the Corporation:	51 West Pearl Street Coldwater, MI 49036
If to the Executive:	85 Arrowhead Drive Coldwater, MI 49036

Either party may change its address for Notices by Notice to the other party.

          16.          Amendment and Waiver. No provisions of this Agreement may be amended, modified, waived or discharged unless the waiver, modification, or discharge is authorized by the Corporation's board of directors, or a committee of the board of directors, and is agreed to in a writing signed by Executive and by the Chief Executive Officer of the Corporation. No waiver by either party at any time of any breach or non-performance of this Agreement by the other party shall be deemed a waiver of any prior or subsequent breach or non-performance.

          17.          Severability. The invalidity or unenforceability of any provision of this Agreement will not affect the validity or enforceability of any other provision of this Agreement, which will remain in full force and effect. If a court of competent jurisdiction ever determines that any provision of this Agreement (including, but not limited to, all or any part of the non-competition covenant in this Agreement) is unenforceable as written, the parties intend that the provision shall be deemed narrowed or revised in that jurisdiction (as to geographic scope, duration, or any other matter) to the extent necessary to allow enforcement of the provision. The revision shall thereafter govern in that jurisdiction, subject only to any allowable appeals of that court decision.

          18.          Dispute Resolution.

          (a)          Arbitration. The Corporation and Executive agree that except as provided in Section 18(b) the sole and exclusive method for resolving any dispute between them arising out of or relating to this Agreement shall be arbitration under the procedures set forth in this Section; provided, however, that nothing in this Section prohibits a party from seeking preliminary or permanent judicial injunctive relief, or from seeking judicial enforcement of the arbitration award. The arbitrator shall be selected pursuant to the Rules for Commercial Arbitration of the American Arbitration

- -13- Association. The arbitrator shall hold a hearing at which both parties may appear, with or without counsel, and present evidence and argument. Pre-hearing discovery shall be allowed in the discretion of and to the extent deemed appropriate by the arbitrator, and the arbitrator shall have subpoena power. The procedural rules for an arbitration hearing under this Section shall be the rules of the American Arbitration Association for Commercial Arbitration hearings and any rules as the arbitrator may determine. The hearing shall be completed within ninety (90) days after the arbitrator has been selected and the arbitrator shall issue a written decision within sixty (60) days after the close of the hearing. The hearing shall be held in Coldwater, Michigan. The award of the arbitrator shall be final and binding and may be enforced by and certified as a judgment of the Circuit Court for Branch County, Michigan or any other court of competent jurisdiction. One-half of the fees and expenses of the arbitrator shall b e paid by the Corporation and one-half by Executive, except that the fees and expenses of the Arbitrator incurred by Executive shall be reimbursed in full by the Corporation with respect to any arbitration initiated after the date of a Change in Control. The attorney fees and expenses incurred by the parties shall be paid by each party, except that the Corporation shall reimburse the Executive's reasonable attorney fees incurred with regard to any arbitration proceeding initiated after a Change in Control unless the arbitrator finds that the Executive's claims or defenses in such proceeding lack merit and were asserted in bad faith. Any such reimbursement will be made within thirty (30) days after the Executive submits documentation of such expenses, provided that no payment will be made after the last day of the calendar year following the calendar year in which the expense was incurred. To the extent that (i) the reimbursement of attorney fees, together with any other payments under this Agreement that con stitute separation pay under Code Section 409A and the regulations thereunder; (ii) a portion of such separation pay exceeds the amount that would be exempt from consideration as a deferral of compensation under Treas. Reg. § 1.409A-1(b)(9)(iii) (the "Excess Separation Payment"); and (iii) the Excess Separation Payment is not otherwise exempt from treatment as a deferral of compensation under Treas. Reg. § 1.409A-1(b), then such amounts shall be reduced to the extent necessary so that the Executive does not receive an Excess Separation Payment.

          (b)          Section 18(a) shall be inapplicable to a dispute arising out of or relating to Sections 12 of this Agreement.

          19.          Entire Agreement. No agreements or representations, oral or otherwise, express or implied, with respect to Executive's Employment with the Corporation or any of the subjects covered by this Agreement have been made by either party that are not set forth expressly in this Agreement, and this Agreement supersedes any pre-existing employment agreements, including the Prior Agreement, and any other agreements on the subjects covered by this Agreement; provided, however, except as expressly modified hereby, this Agreement shall not affect Executive's rights under the Deferred Compensation Agreement between Executive and SMB Bank, as amended, Executive's rights under the SMB Bank Supplemental Retirement Plan or under other retirement and health and welfare plans in which Executive participates which are maintained by the Corporation or its Affiliates.

- -14-

          20.          Governing Law. The validity, interpretation, and construction of this Agreement are to be governed by Michigan laws, without regard to choice of law rules. The parties agree that any judicial action involving a dispute arising under this Agreement will be filed, heard and decided in the Branch County Circuit Court. The parties agree that they will subject themselves to the personal jurisdiction and venue of either court, regardless of where Executive or the Corporation may be located at the time any action may be commenced. The parties agree that the locations specified above are mutually convenient forums and that each of the parties conducts business in Branch County.

          21.          Counterparts. This Agreement may be signed in original or by fax in counterparts, each of which shall be deemed an original, and together the counterparts shall constitute one complete document.

The parties made this Agreement effective as of the Effective Date in Section 1.

SOUTHERN MICHIGAN BANCORP, INC.
By:
	John H. Castle	Kurt G. Miller
Its:	Chairman and Chief Executive Officer	President
	"Corporation"	"Executive"

- -15-

EX-10.3

EXHIBIT 10.3

AMENDED AND RESTATED EMPLOYMENT AGREEMENT

                    THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT (the "Agreement"), is made by and among SOUTHERN MICHIGAN BANCORP, INC., a Michigan corporation (the "Corporation") and RICHARD E. DYER ("Executive") and amends and restates in its entirety the Employment Agreement between the Corporation and the Executive effective December 1, 2007 (the "Prior Agreement"). The parties agree as follows.

                    WHEREAS, the Board of Directors of the Corporation believes that the future services of the Executive as provided in this Agreement will be of great value to the Corporation; and

                    WHEREAS, the Corporation operates wholly owned commercial banking subsidiaries known as Southern Michigan Bank & Trust ("SMB Bank") and FNB Financial ("FNB Bank"), each of which is engaged in the general business of banking (the "Banks"); and

                    WHEREAS, the Board of Directors of the Corporation has determined that it is in the best interests of the Corporation and its shareholders to secure Executive's continued services and to ensure Executive's continued dedication and objectivity in the event of any threat or occurrence of, or negotiation or other action that could lead to, or create the possibility of, a Change in Control (as hereafter defined) of the Corporation, without concern as to whether Executive might be hindered or distracted by personal uncertainties and risks created by any such possible Change in Control, and to encourage Executive's full attention and dedication to the Corporation and the Bank, the Board of Directors has authorized the Corporation to enter into this Agreement; and

                    WHEREAS the Executive is willing to serve in the employ of the Corporation on a full-time basis as provided in this Agreement;

                    NOW, THEREFORE, the parties agree as follows.

          1.  Effective Date and Term. This Agreement will take effect as of ________, 2008 ("Effective Date"). This Agreement shall remain in effect until the end of the calendar year following that in which either party gives the other Notice (as defined in Section 15) of intention to terminate this Agreement; provided, however, that:

          (a)  except for termination as provided above pursuant to Notice from the Executive to the Corporation, this Agreement will not terminate during an "Active Change in Control Proposal Period" (as defined in Section 10), even if the Corporation has given the Executive Notice of intention to terminate this Agreement;

          (b)  except for termination as provided above pursuant to Notice from the Executive to the Corporation, upon the occurrence of a "Change in Control" (as defined in Section 10) the term of this Agreement shall automatically be extended until the

second anniversary of the effective date of the Change in Control, even if the Corporation has given Notice of intention to terminate this Agreement; and

          (c)  termination of this Agreement shall not affect the obligations of either party accrued before termination of this Agreement, the obligations of the Corporation under Section 7(B)(ii) with regard to a termination of the Employment before this Agreement terminates, the Executive's obligations under Section 11, 12 or 13, or the obligations of the parties under Section 18 or 20.

          2.  Employment. Executive will serve as: (A) Executive Vice-President of the Corporation (the "principal position"); and (B) in such positions with Affiliates (defined for purposes of this Agreement as any organizations controlling, controlled by or under common control with the Corporation) as reasonably requested by the Corporation, provided that the duties of such positions are consistent with Executive's responsibilities in his principal position; (together, the "Employment").

Executive will perform his duties under this Agreement well and faithfully during the Employment and will devote his best reasonable full time business efforts to the Employment, except that Executive may engage in civic and professional activities, investment oversight, and service on boards of directors as long as such activities do not constitute a conflict of interest or impair the Executive's performance of the duties of the Employment. The Employment may be terminated during the term of this Agreement as provided in Sections 4 and 5.

          3.  Compensation. Executive will be compensated during the Employment as follows:

          (a)  Salary. Executive's Salary ("Salary") will be One Hundred Sixty Thousand Four Hundred Forty-four Dollars ($160,444) for 2008, subject to required payroll deductions and payable in weekly, bi-weekly or semi-monthly installments pursuant to the Corporation's normal payroll practices. Such Salary shall be subject to review annually commencing in 2009 and shall be maintained or increased during the term hereof as determined by the Corporation's Board of Directors.

          (b)  Bonus. Executive will participate in any bonus programs for senior executives of the Corporation or the Banks.

          (c)  Equity Plans. Executive will participate in any stock option or other equity based compensation programs ("Equity Plans") offered by the Corporation, at a level commensurate with Executive's principal position.

          (d)  Fringe Benefits. Executive will participate in health and dental, life insurance, short and long term disability insurance, retirement and other employee fringe benefit programs covering the Corporation's salaried employees as a group, and in any programs applicable to senior executives of the Corporation or the Banks. The terms of applicable insurance policies and benefit plans in effect from time to time will govern

- -2- with regard to specific issues of coverage and benefit eligibility. All benefit programs are subject to change from time to time in the Corporation's discretion, except that Executive will at all times receive the following specific benefits:

          i.          Four weeks paid vacation per year (prorated for 2007 based on the number of days Executive is employed by the Corporation in 2007) to be taken in the year earned, and which may not be accumulated or carried forward except with the written approval of the Chief Executive Officer of the Corporation;

          ii.          The use of an executive automobile at the expense of the Corporation and payment by the Corporation of all insurance, maintenance and business fuel expenses relating to the automobile;

          iii.          Corporation-paid membership for the Executive in a local golf club with dues not to exceed $2,400 per year, and such other clubs as agreed to by the parties from time to time, including all dues, fees and assessments.

          (e)  Business Expenses. The Corporation will reimburse Executive for reasonable ordinary and necessary business expenses incurred in the course of the Employment, for fees and expenses of Executive's attendance in the course of the Employment at banking related conventions and similar events, for reasonable professional association and seminar expenses, and for any additional expenses authorized by the Corporation, subject to the Executive's submission of proper documentation for tax and accounting purposes. Reimbursement under this section will be paid within thirty (30) days after the Executive submits documentation as provided by this Section, provided that payments may not be made after March 15 of the calendar year following the calendar year in which the expenses were incurred.

          4.  Termination of the Employment Without Severance Pay. Executive shall not be entitled to any further compensation from the Corporation or any Affiliate after termination of the Employment as permitted by this Section 4, except (A) unpaid Salary installments through the end of the week in which the Employment terminates, (B) any vested benefits accrued as of the date of termination of the Employment under the terms of any written Corporation or Bank employment, compensation or benefit program; and (C) any rights of Executive to indemnification under the provisions of the Articles or Bylaws of the Corporation or the Banks (together, the "Vested Rights").

          (a)  Death. The Employment will terminate automatically upon Executive's death.

          (b)  Disability. The Corporation may terminate the Employment due to Executive's "Permanent Disability", as defined and provided for in this Section 4(b). If Executive has been unable by reason of physical or mental disability to properly perform his duties hereunder for a period of one hundred eighty (180) days, the Corporation may give the Executive Notice of its intention to terminate the Employment due to Permanent Disability. If Executive wishes to contest the existence of termination due to Permanent

- -3- Disability, he must give the Corporation Notice of his disagreement within ten (10) days after receipt of the Notice from the Corporation, and he must promptly submit to examination by three physicians in the southern Michigan area who are reasonably acceptable to both Executive and the Corporation (with consultation from other physicians as determined by those three). If (A) within sixty (60) days after receipt by the Executive of the Notice from the Corporation, two of such physicians shall issue their written statement to the effect that in their opinion, based on their diagnosis, the Executive is capable of resuming his employment and devoting his full time and energy to discharging his duties within sixty (60) days after the date of such statement, and (B) Executive does in fact within such sixty (60) day period resume the Employment and properly perform his duties hereunder, then the Employment shall not be terminated due to Permanent Disability. It is understood that the Corporation has the right to t erminate the Employment due to Executive's disability without meeting the standards in this Section 4(b), but in that event the termination shall be deemed to be a termination of the Employment pursuant to Section 5(a).

          (c)  Termination by Corporation for Cause. The Corporation may terminate the Employment for "Cause", defined as removal by order of a regulatory agency having jurisdiction over the Corporation or the Banks, or the Executive's willful and repeated failure to perform his duties under this Employment Agreement, which failure has not been cured within thirty (30) days after the Corporation gives Notice thereof to the Executive; it being expressly understood that negligence or bad judgment shall not constitute "Cause" so long as such act or omission shall be without intent of personal profit and is reasonably believed by the Executive to be in or not adverse to the best interests of the Corporation.

          (d)  Discretionary Termination by Executive. Executive may terminate the Employment at will, with at least thirty (30) days advance Notice. If Executive gives such notice of termination, the Corporation may (but need not) relieve Executive of some or all of Executive's offices and responsibilities for part or all of such notice period, provided that Executive's Salary and benefits are continued for the lesser of thirty (30) days or the remaining period of the Employment.

          (e)  Termination of Employment after Termination of This Agreement. If Executive continues to be employed by the Corporation or the Banks after termination of this Agreement as provided in Section 1, Executive's employment shall be terminable by either party at will.

          5.  Termination With Severance Pay. Executive shall not be entitled to any further compensation from the Corporation or any Affiliate after termination of the Employment as permitted by this Section 5, except (A) Vested Rights; and (B) Severance Pay under Section 6 or the Cash Payment under Section 7, whichever is applicable.

          (a)  Discretionary Termination by Corporation. The Corporation may terminate the Employment during the term of this Agreement at will, by Notice to Executive. Any termination of Executive's Employment by the Corporation under

- -4- Section 4 that is found not to meet the standards of such Section will be considered to have been a termination under this Section 5(a).

          (b)  Termination by Executive for Good Reason After a Change in Control. Executive may terminate the Employment during the term of this Agreement for "Good Reason" after the occurrence of a Change in Control if there is a material negative change to the employment relationship between Executive and the Corporation because: (A) Executive is removed from any of his principal position; or (B) the status, authority or responsibility of Executive's principal position is materially diminished; or (C) Executive's Salary as then in effect is materially reduced, or (D) Executive's bonus opportunity is materially reduced; or (E) the overall value to Executive of the fringe benefit programs in which he participates (other than Equity Plans) is materially reduced from the overall value of the fringe benefit programs applicable to Executive immediately before the Change in Control; or (F) any requirement of the Corporation that Executive be based anywhere other than in St. Joseph or contiguous counties or any substantial increase in the business travel required of Executive; or (G) any material breach by the Corporation or the Bank or any successor of its obligations to Executive under this Agreement.

          Executive may not terminate the employment for "Good Reason" unless:

          i.          Executive notifies the Board in writing, within 90 days after Executive becomes aware of the act or omission constituting Good Reason that the act or omission in question constitutes Good Reason and explaining why the Executive considers it to constitute Good Reason;

          ii.          the Corporation fails, within 30 days after notice from Executive under i. above, to revoke the action or correct the omission and make the Executive whole; and

          iii.          Executive gives notice of termination within 90 days after expiration of the 30-day period under ii. above.

          6.  Severance Pay. The Corporation will pay and provide Executive with the payments and benefit continuation provided in this Section 6 ("Severance Pay") if Executive's Employment is terminated during the term of this Agreement as provided in Section 5(a) above in a manner that constitutes a "separation from service" as that term is defined by Section 409A of the Internal Revenue Code of 1986 and Executive is not entitled to the Cash Payment (as defined in Section 7). If Executive becomes entitled to Severance Pay under this Section, and subsequently becomes entitled to the Cash Payment under Section 7(B)(ii), the amount of the Cash Payment under Section 7 shall be reduced by the amount of Severance Pay already received by Executive under this Section 6, and no further Severance Pay will be payable under this Section 6.

          (a)  Amount and Duration of Severance Pay. Subject to the other provisions of this Section, Severance Pay will consist of:

- -5-

          i.          Salary Continuation. Continuation of Executive's Salary for fifty-two (52) weeks following the week in which the Employment terminates (the "Severance Pay Period"), subject to required payroll withholding; and

          ii.          Health Coverage Continuation. Reimbursement by the Corporation of expenses incurred by Executive to continue Executive's then current employee and dependent health, dental, and prescription drug coverage under COBRA during the Severance Pay Period, provided (A) that Executive elects and remains eligible for COBRA continuation coverage, (B) that Executive continues to pay the normal employee contribution for such coverage, (C) that the Corporation's obligation to provide coverage will end if Executive becomes eligible for comparable coverage from a new employer and (D) that reimbursements under this Section will be made within thirty (30) days after the Executive submits documentation of the reimbursable expense, but may not be made after the last day of the second calendar year following the calendar year in which the Executive's employment terminates; and

          iii.          Outplacement Assistance. Reimbursement of up to $5,000.00 of outplacement assistance from an outplacement assistance firm selected by Executive and approved by the Corporation (whose approval shall not be unreasonably withheld). Expenses must be incurred under this Section by the last day of the second calendar year following the calendar year in which Executive's Employment terminates and must be reimbursed by the last day of the third calendar year following the calendar year in which Executive's Employment terminates.

Executive will receive the Salary continuation provided in Section 6(a)(i) notwithstanding any other earnings that Executive may have, and subject to offset only as provided in Section 6(c). If Executive dies during the Severance Pay Period, Salary continuation under Section 6(a)(i) will continue for the remainder of the Severance Pay Period for the benefit of Executive's designated beneficiary (or Executive's estate if Executive fails to designate a beneficiary), and health coverage continuation under Section 6(a)(ii) will continue for Executive's eligible dependants for the remainder of the Severance Pay Period subject to the conditions in Sections 6(a)(ii) (A) and (B).

          (b)  Conditions to Severance Pay. To be eligible for Severance Pay, Executive must meet the following conditions: (i) Executive must comply with Executive's obligations under this Agreement that continue after termination of the Employment; and (ii) Executive must resign upon written request by Corporation from all positions with or representing the Corporation or any Affiliate, including but not limited, to membership on boards of directors; and (iii) Executive must provide the Corporation for a period of thirty (30) days after the Employment termination date with consulting services regarding matters within the scope of Executive's former duties upon request by the Corporation's Chief Executive Officer; provided, however, that Executive will only be required to provide those services by telephone at Executive's reasonable convenience and without substantial interference with Executive's other activities or commitments.

- -6-

          (c)  Reductions to Severance Pay. The Severance Pay due to Executive under Section 6(a)(i) for any week will be reduced (but not below 0) by: (i) any disability benefits to which Executive is entitled for that week under any disability insurance policy or program of the Corporation or any Affiliate (including but not limited to worker's disability compensation); and (ii) any severance pay payable to Executive under any other agreement or Corporation policy; (iii) any payment due to Executive under the Federal Worker Adjustment and Retraining Notification Act or any comparable state statute or local ordinance. The Severance Pay will also be subject to any reduction required by Section 9.

          7.  Cash Payment. The Corporation will make the payment provided for in this Section 7 if Executive's Employment is terminated during the term of this Agreement in a manner that constitutes a "separation from service" as that term is defined by Section 409A of the Code: (A) by Executive as permitted by Section 5(b); or (B) by the Corporation as provided in Section 5(a) and such termination of Employment occurs either (i) after the date of a Change in Control or (ii) within six months before the date of a Change in Control.

          (a)  Amount and Payment of Cash Payment. The Corporation will make a cash payment (the "Cash Payment") to Executive in an amount equal to 2.99 times the Executive's Average Compensation (as defined below). The Cash Payment shall be paid to Executive in a single lump sum on the tenth business day after termination of the Employment. If Executive dies after becoming entitled to the Cash Payment but before it has been paid, the Cash Payment will be made to Executive's designated beneficiary (or Executive's estate if Executive fails to designate a beneficiary).

          (b)  Average Compensation. As used in this Section 7 "Average Compensation" means (A) the sum of the Executive's Salary and cash bonuses for each of the most recent three complete calendar years of Executive's employment under this Agreement (or such lesser number of complete calendar years as the Executive has been employed by the Corporation) divided by (B) three (or the lesser number of complete calendar years for which the Executive has been employed by the Corporation). Average Compensation shall not include any amount, other than Salary and cash bonuses, included in Executive's taxable compensation for federal income tax purposes, such as the reporting of previously deferred compensation or gain realized upon exercise of any non qualified stock options. Provided, however, that for purposes of computing Average Compensation only, Executive shall be deemed to have been employed during all of 2007, and the sum of Executive's Salary and cash bonuses fo r 2007 shall be deemed to be the greater of (A) Executive's actual Salary and cash bonuses under this Agreement, or (B) $160,444.

          (c)  Health Coverage Continuation. In addition to the foregoing, the Corporation will reimburse Executive for expenses incurred by Executive to continue Executive's then current employee and dependent health, dental, and prescription drug coverage during the period of time in which the Executive would be entitled to continuation coverage under COBRA, provided (A) that Executive elects and remains eligible for COBRA continuation coverage, (B) that Executive continues to pay the

- -7- normal employee contribution for such coverage, (C) that the Corporation's obligation to provide coverage will end if Executive becomes eligible for comparable coverage from a new employer and (D) that reimbursements under this Section will be made within thirty (30) days after the Executive submits documentation of the reimbursable expense, but may not be made after the last day of the second calendar year following the calendar year in which the Executive's employment terminates.

          (d)  Reductions to Cash Payment. The Executive will receive the Cash Payment notwithstanding any other earnings that Executive may have and without offset of any kind except required payroll deductions and any reduction required by Section 8.

          8.  IRC Section 280(G) Limitation. In the event that payments required under this Agreement, when combined with any other amounts payable by the Corporation or its Affiliates to or for the benefit of Executive, result in an "Excess Parachute Payment," as that term is defined in Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), then the amount of the payments provided for in this Agreement shall be reduced to that amount which causes no excise tax to be imposed under Section 4999 (or any successor thereto) of the Code.

          9.  Definition of Change in Control. As used in this Agreement, the term "Change in Control" means any of the occurrences listed in (a) below, subject to (b) and (c) below.

          (a)  A Change in Control shall be deemed to have occurred if:

          i.          Any person or group (as such terms are used in connection with Sections 13(d) and 14(d) of the Exchange Act) becomes the "beneficial owner" (as defined in Rule 13(d)(3) and 13(d)(5) under the Exchange Act), directly or indirectly, of securities of the Corporation representing 50% or more of the combined voting power of the Corporation's then outstanding securities;

          ii.          A merger, consolidation, sale of assets, reorganization, or proxy contest is consummated and, as a consequence of which, members of the Corporation's Board of Directors in office immediately prior to such transaction or event constitute less than a majority of the Board of Directors thereafter;

          iii.          During any period of 24 consecutive months, individuals who at the beginning of such period constitute the Board of Directors of the Corporation (including for this purpose any new director whose election or nomination for election by the Corporation's stockholders was approved by a vote of at least one-half of the directors then still in office who were directors at the beginning of such period) cease for any reason to constitute at least a majority of the Board of Directors; or

          iv.          A merger, consolidation or reorganization is consummated with any other corporation pursuant to which the shareholders of the Corporation immediately prior to the merger, consolidation or reorganization do not

- -8- immediately thereafter directly or indirectly own more than fifty percent (50%) of the combined voting power of the voting securities entitled to vote in the election of directors of the merged, consolidated or reorganized entity.

          (b)  Notwithstanding the foregoing, no trust department or designated fiduciary or other trustee of such trust department of the Corporation or a subsidiary of the Corporation, or other similar fiduciary capacity of the Corporation with direct voting control of the stock shall be treated as a person or group within the meaning of subsection (a)(i) hereof. Further, no profit-sharing, employee stock ownership, employee stock purchase and savings, employee pension, or other employee benefit plan of the Corporation or any of its subsidiaries, and no trustee of any such plan in its capacity as such trustee, shall be treated as a person or group within the meaning of subsection (a)(i) hereof.

          (c)  Notwithstanding anything contained in this Agreement to the contrary, if Executive's employment is terminated prior to a Change in Control and Executive reasonably demonstrates that such termination was at the request of or in response to a third party who has indicated an intention or taken steps reasonably calculated to effect a Change in Control (a "Third Party"), and who subsequently effectuates a Change in Control, then for all purposes of this Agreement, the date of a Change in Control shall mean the date immediately prior to the date of such termination of Executive's employment.

          10.  Definition of "Active Change in Control Proposal Period". As used in this Agreement the term "Active Change in Control Proposal Period" shall mean any period:

          (a)  during which the Board of Directors of the Corporation has authorized solicitation by the Corporation of offers for a transaction which, if consummated, would constitute a Change in Control; or

          (b)  during which the Corporation has received a proposal for a transaction which, if consummated, would constitute a Change in Control, and the Board of Directors has not determined to reject such proposal without any counter-offer or further discussions; or

          (c)  during which any proxy solicitation or tender offer with regard to the securities of the Corporation is ongoing, if the intent of such proxy solicitation or tender offer is to cause the Corporation to solicit offers for or enter into a transaction that would constitute a Change in Control.

          11.  Confidentiality, Return of Property. Executive has obtained and may obtain confidential information concerning the business, operations, financial affairs, organizational and personnel matters, policies, procedures and other non-public matters of Corporation and its Affiliates, and those of third-parties that is not generally disclosed to persons not employed by Corporation or its subsidiaries. Such information (referred to herein as the "Confidential Information") may have been or may be provided in written form or orally. Executive shall not disclose to any other person the Confidential Information at any time

- -9-

during or after termination of the Employment, except that during the Employment Executive may use and disclose Confidential Information as reasonably required by the Employment. Upon termination of the Employment, Executive will deliver to the Corporation any and all property owned or leased by the Corporation or any Affiliate and any and all Confidential Information (in whatever form) including without limitation all customer lists and information, financial information, business notes, business plans, documents, keys, credit cards and other Corporation-provided equipment. Executive's commitments in this Section will continue in effect after termination of the Employment and after termination of this Agreement. The parties agree that any breach of Executive's covenants in this Section would cause the Corporation irreparable harm, and that injunctive relief would be appropriate.

          12.  Inventions, Discoveries and Improvements. Executive hereby agrees to assign and transfer to the Corporation, its successors and assigns, his entire right, title and interest in and to any and all inventions, discoveries, trade secrets and improvements thereto which he may discover to develop, either solely or jointly with others, during his employment hereunder and for a period of one year after termination of such employment, which would relate in any way to the business of the Corporation or any Affiliate of the Corporation, together with all rights to letters patent, copyrights or trademarks which may be granted with respect thereto. Immediately upon making or developing any invention, discovery, trade secret or improvement thereto, Executive shall notify the Corporation thereof and shall execute and deliver to the Corporation, without further compensation, such documents as may be necessary to assign and transfer to the Corporation his entire ri ght, title and interest in and to such invention, discovery, trade secret or improvement thereto, and to prepare or prosecute applications for letters patent with respect to the same in the name of the Corporation. Executive's obligations under this Section 12 shall continue in effect, as to inventions, discoveries and improvements covered by this Section 12, notwithstanding any termination of the employment or this Agreement.

- -10-

          13.  Noncompetition and Nonsolicitation.

          (a)  In view of Executive's importance to the success of the Corporation, Executive and Corporation agree that the Corporation would likely suffer significant harm from Executive's competing with Corporation during the Employment and for some period of time thereafter. Accordingly, Executive agrees that Executive shall not engage in competitive activities (except in Marginal Business Areas, as defined in Section 13(e)) either: (A) while employed under this Agreement; or (B) if Executive's Employment is terminated during the term of this Agreement, during the Restricted Period (as defined below). Executive shall be deemed to engage in competitive activities if he shall, without the prior written consent of the Corporation, (i) in St. Joseph County, Michigan, or in any county contiguous thereto (including the municipalities therein), render services directly or indirectly, as an employee, officer, director, consultant, advisor, partner or otherwise, for any organization or enterprise which competes directly or indirectly with the business of Corporation or any of its Affiliates in providing financial products or services (including, without limitation, banking, insurance, or securities products or services) to consumers and businesses, or (ii) directly or indirectly acquires any financial or beneficial interest in (except as provided in the next sentence) any organization which conducts or is otherwise engaged in a business or enterprise in St. Joseph County, Michigan, or in any county contiguous thereto (including all municipalities) which competes directly or indirectly with the business of Corporation or any of its Affiliates in providing financial products or services (including, without limitation, banking, insurance or securities products or services) to consumers and businesses. Notwithstanding the preceding sentence, Executive shall not be prohibited from owning less than 1 percent of any class of publicly traded securities. For purposes of this Se ction 13 the term "Restricted Period" shall equal one (1) year, commencing as of the date of termination of Executive's Employment during the term of this Agreement.

          (b)  While employed under this Agreement and during the Restricted Period (as defined in Section 13(a)), Executive agrees that Executive shall not, in any manner directly (i) solicit by mail, by telephone, by personal meeting, or by any other means, any customer or prospective customer of Corporation to whom Executive provided services, or for whom Executive transacted business, or whose identity become known to Executive in connection with Executive's services to Corporation or the Bank (including employment with or services to any predecessor or successor entities), to transact business with a person or an entity other than the Corporation or its Affiliates or reduce or refrain from doing any business with the Corporation or its Affiliates or (ii) interfere with or damage (or attempt to interfere with or damage) any relationship between Corporation or any of its Affiliates and any such customer or prospective customer, or any shareholder of the Corp oration. The term "solicit" as used in this Section 13 means any communication of any kind whatsoever, inviting, encouraging or requesting any person to take or refrain from taking any action with respect to the business of Corporation or any of its Affiliates.

          (c)  While employed under this Agreement and during the Restricted Period (as defined in Section 13(a)), Executive agrees that Executive shall not, in any manner

- -11- directly solicit any person who is an employee of Corporation or any of its Affiliates to apply for or accept employment or a business opportunity with any other person or entity.

          (d)  The parties agree that nothing herein shall be construed to limit or negate that common law of torts or trade secrets where it provides broader protection than that provided herein.

          (e)  Activities by Executive that would otherwise violate Section 13(a) will not be considered a violation of this Agreement if such activities are conducted only with regard to a Marginal Business Area, defined as a line of business (other than banking) engaged in by the Corporation or any of its Affiliates but which represents less than 5% of the consolidated non-interest income of the Corporation and its Affiliates.

          (f)  Notwithstanding the foregoing, this Section 13 shall not apply after termination of the Employment if Executive is entitled to the Cash Payment under Section 7.

          (g)  If Executive's Employment is terminated during the term of this Agreement, the Executive's obligations under this Section shall survive termination of this Agreement.

          14.  Successors; Binding Agreement.

          (a)  This Agreement shall not be terminated by any merger or consolidation of the Corporation whereby the Corporation is or is not the surviving or resulting corporation or as a result of any transfer of all or substantially all of the assets of the Corporation. In the event of any such merger, consolidation, or transfer of assets, the provisions of this Agreement shall be binding upon the surviving or resulting corporation or the person or entity to which such assets are transferred.

          (b)  The Corporation agrees that concurrently with any merger, consolidation or transfer of assets constituting a Change in Control, it will cause any successor or transferee unconditionally to assume, by written instrument delivered to Executive (or his beneficiary or estate), all of the obligations of the Corporation hereunder. Failure of the Corporation to obtain such assumption prior to the effective date of any Change in Control shall be a material breach of the Corporation's obligations to Executive under this Agreement.

          (c)  This Agreement shall inure to the benefit of and be enforceable by Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If Executive shall die while any amounts would be payable to Executive hereunder had Executive continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to such person or persons appointed in writing by Executive to receive such amounts or, if no person is so appointed, to Executive's estate.

- -12-

          15.  Notice. For purposes of this Agreement, all notices and other communications required or permitted hereunder shall be in writing and shall be deemed to have been duly given when delivered or received by facsimile transmission or five (5) days after deposit in the United States mail, certified and return receipt requested, postage prepaid, addressed as follows:

If to the Corporation:	51 West Pearl Street Coldwater, MI 49036
If to the Executive:	17150 Reagan Drive Three Rivers, MI 49093

Either party may change its address for Notices by Notice to the other party.

          16.  Amendment and Waiver. No provisions of this Agreement may be amended, modified, waived or discharged unless the waiver, modification, or discharge is authorized by the Corporation's board of directors, or a committee of the board of directors, and is agreed to in a writing signed by Executive and by the Chief Executive Officer of the Corporation. No waiver by either party at any time of any breach or non-performance of this Agreement by the other party shall be deemed a waiver of any prior or subsequent breach or non-performance.

          17.  Severability. The invalidity or unenforceability of any provision of this Agreement will not affect the validity or enforceability of any other provision of this Agreement, which will remain in full force and effect. If a court of competent jurisdiction ever determines that any provision of this Agreement (including, but not limited to, all or any part of the non-competition covenant in this Agreement) is unenforceable as written, the parties intend that the provision shall be deemed narrowed or revised in that jurisdiction (as to geographic scope, duration, or any other matter) to the extent necessary to allow enforcement of the provision. The revision shall thereafter govern in that jurisdiction, subject only to any allowable appeals of that court decision.

          18.  Dispute Resolution.

          (a)  Arbitration. The Corporation and Executive agree that except as provided in Section 18(b) the sole and exclusive method for resolving any dispute between them arising out of or relating to this Agreement shall be arbitration under the procedures set forth in this Section; provided, however, that nothing in this Section prohibits a party from seeking preliminary or permanent judicial injunctive relief, or from seeking judicial enforcement of the arbitration award. The arbitrator shall be selected pursuant to the Rules for Commercial Arbitration of the American Arbitration Association. The arbitrator shall hold a hearing at which both parties may appear, with or without counsel, and present evidence and argument. Pre-hearing discovery shall be allowed in the discretion of and to the extent deemed appropriate by the arbitrator, and the arbitrator shall have subpoena power. The procedural rules for an arbitration hearing under this Section shall be the rules of the American Arbitration Association for Commercial Arbitration hearings and any rules as the arbitrator may determine. The hearing shall be

- -13- completed within ninety (90) days after the arbitrator has been selected and the arbitrator shall issue a written decision within sixty (60) days after the close of the hearing. The hearing shall be held in Coldwater, Michigan. The award of the arbitrator shall be final and binding and may be enforced by and certified as a judgment of the Circuit Court for Branch County, Michigan or any other court of competent jurisdiction. One-half of the fees and expenses of the arbitrator shall be paid by the Corporation and one-half by Executive, except that the fees and expenses of the Arbitrator incurred by Executive shall be reimbursed in full by the Corporation with respect to any arbitration initiated after the date of a Change in Control. The attorney fees and expenses incurred by the parties shall be paid by each party, except that the Corporation shall reimburse the Executive's reasonable attorney fees incurred with regard to any arbitration proceeding initiated after a Change in Control unless the arbitrator fi nds that the Executive's claims or defenses in such proceeding lack merit and were asserted in bad faith. Any such reimbursement will be made within thirty (30) days after the Executive submits documentation of such expenses, provided that no payment will be made after the last day of the calendar year following the calendar year in which the expense was incurred. To the extent that (i) the reimbursement of attorney fees, together with any other payments under this Agreement that constitute separation pay under Code Section 409A and the regulations thereunder; (ii) a portion of such separation pay exceeds the amount that would be exempt from consideration as a deferral of compensation under Treas. Reg. § 1.409A-1(b)(9)(iii) (the "Excess Separation Payment"); and (iii) the Excess Separation Payment is not otherwise exempt from treatment as a deferral of compensation under Treas. Reg. § 1.409A-1(b), then such amounts shall be reduced to the extent necessary so that the Executive does not receive an E xcess Separation Payment.

          (b)  Section 18(a) shall be inapplicable to a dispute arising out of or relating to Sections 12of this Agreement.

          19.  Entire Agreement. No agreements or representations, oral or otherwise, express or implied, with respect to Executive's Employment with the Corporation or any of the subjects covered by this Agreement have been made by either party that are not set forth expressly in this Agreement, and this Agreement supersedes any pre-existing employment agreements , including the Prior Agreement, and any other agreements on the subjects covered by this Agreement; provided, however, except as expressly modified hereby, this Agreement shall not affect Executive's rights under retirement and health and welfare plans in which Executive participates which are maintained by the Corporation or its Affiliates.

          20.  Governing Law. The validity, interpretation, and construction of this Agreement are to be governed by Michigan laws, without regard to choice of law rules. The parties agree that any judicial action involving a dispute arising under this Agreement will be filed, heard and decided in the Branch County Circuit Court. The parties agree that they will subject themselves to the personal jurisdiction and venue of either court, regardless of where Executive or the Corporation may be located at the time any action may be commenced. The parties agree that the locations specified above are mutually convenient forums and that each of the parties conducts business in Branch County.

- -14-

          21.  Counterparts. This Agreement may be signed in original or by fax in counterparts, each of which shall be deemed an original, and together the counterparts shall constitute one complete document.

          The parties made this Agreement effective as of the Effective Date in Section 1.

SOUTHERN MICHIGAN BANCORP, INC.

By:
	John H. Castle	Richard E. Dyer
Its:	Chairman and Chief Executive Officer	Executive Vice-President
	"Corporation"	"Executive"

- -15-

EX-10.5

EXHIBIT 10.5

As Amended
And Restated
March 18, 2008

SOUTHERN MICHIGAN BANCORP, INC.
STOCK INCENTIVE PLAN OF 2005

SECTION 1

ESTABLISHMENT OF PLAN; PURPOSE OF PLAN

          1.1          Establishment of Plan. The Corporation hereby establishes the STOCK INCENTIVE PLAN OF 2005 (the "Plan") for its directors, corporate and Subsidiary officers and other key employees. The Plan permits the grant and award of Stock Options, Stock Appreciation Rights, Restricted Stock and Stock Awards.

          1.2          Purpose of Plan. The purpose of the Plan is to provide directors, officers and key employees of the Corporation and its Subsidiaries with an increased incentive to make significant contributions to the long-term performance and growth of the Corporation and its Subsidiaries, to join the interests of directors, officers and key employees with the interests of the Corporation's shareholders through the opportunity for increased stock ownership and to attract and retain officers and key employees of exceptional abilities. The Plan is further intended to provide flexibility to the Corporation in structuring long-term incentive compensation to best promote the foregoing objectives.

SECTION 2

DEFINITIONS

                    The following words have the following meanings unless a different meaning is plainly required by the context:

          2.1          "Act" means the Securities Exchange Act of 1934, as amended.

          2.2          "Board" means the Board of Directors of the Corporation.

          2.3          "Cause," when used in connection with termination of employment or officer status, will have the meaning given to such term in any employment or other similar agreement between the Corporation and the applicable Participant. In the absence of any agreement between the Corporation and a Participant that provides any definition of "cause," the term "Cause" for the purposes of the Plan will mean a Participant's neglect, continued failure or inability to perform, or poor performance of duties, consistent failure to attain assigned objectives, misappropriation of Corporation property, intentional damage to Corporation property, activities in aid of a competitor, insubordination, dishonesty, conviction of a crime involving moral turpitude or performance of any act (including any dishonest or fraudulent act) detrimental to the interests of the Corporation. A determination by the Committee that a Participant has been terminated for "cause" w ill be conclusive and binding on the Participant.

          2.4          "Change in Control" means: (a) the failure of the Continuing Directors at any time to constitute at least a majority of the members of the Board; (b) the acquisition by any Person other than an

- -1-

Excluded Holder of beneficial ownership (within the meaning of Rule 13d-3 issued under the Act) of 20% or more of the outstanding Common Stock or the combined voting power of the Corporation's outstanding securities entitled to vote generally in the election of directors; (c) the approval by the shareholders of the Corporation of a reorganization, merger or consolidation, unless with or into a Permitted Successor; or (d) the approval by the shareholders of the Corporation of a complete liquidation or dissolution of the Corporation or the sale or disposition of all or substantially all of the assets of the Corporation other than to a Permitted Successor.

          2.5          "Code" means the Internal Revenue Code of 1986, as amended.

          2.6          "Committee" means the Compensation Committee of the Board or such other committee as the Board will designate to administer the Plan.

          2.7          "Common Stock" means the common stock, $2.50 par value, of the Corporation.

          2.8          "Corporation" means Southern Michigan Bancorp, Inc. and its successors and assigns.

          2.9          "Continuing Directors" means the individuals constituting the Board as of the date this Plan was adopted and any subsequent directors whose election or nomination for election by the Corporation's shareholders was approved by a vote of majority of the individuals who are then Continuing Directors, but specifically excluding any individual whose initial assumption of office occurs as a result of either an actual or threatened election contest (as the term is used in Rule 14a-11 of Regulation 14A issued under the Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board.

          2.10          "Disability" means: (a) a Participant is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months; or (b) a Participant is, by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, receiving income replacement benefits for a period of not less than 3 months under an accident and health plan covering employees of Corporation.

          2.11          "Employee Benefit Plan" means any plan or program established by the Corporation or a Subsidiary for the compensation or benefit of employees of the Corporation or any of its Subsidiaries.

          2.12          "Excluded Holder" means the Corporation, a Subsidiary, any Employee Benefit Plan or any trust holding Common Stock or other securities pursuant to the terms of an Employee Benefit Plan, or any Person determined to be an Excluded Holder by a vote of a majority of Continuing Directors.

          2.13          "Incentive Award" means the award or grant of a Stock Option, Restricted Stock, Stock Award or Stock Appreciation Right to a Participant pursuant to the Plan.

          2.14          "Market Value" of Common Stock means the most recent closing price if the shares are traded on a national securities exchange or quoted on a national inter-dealer quotation system. If the shares are not so traded or quoted, "Market Value" means an amount determined by the Committee, in its discretion, taking into account such factors as it considers advisable in a manner consistent with the valuation principles of Section 409A of the Code, except when the Committee expressly determines not to use Section 409A valuation principles. Factors that the Committee may, but need not, consider include, without limitation, the prices at which recent sales of Common Stock have been made, the lack of a

- -2-

market for Common Stock, any recent valuation of Common Stock obtained by the Corporation, any Subsidiary or any Employee Benefit Plan, and the book value of Common Stock. (Amended 3/18/08)

          2.15          "Participant" means a director, an officer or any employee of the Corporation or its Subsidiaries who the Committee determines is eligible to participate in the Plan and who is designated to be granted an Incentive Award under the Plan.

          2.16          "Permitted Successor" means a corporation which, immediately following the consummation of a transaction specified in clauses (c) and (d) of the definition of "Change in Control" above, satisfies each of the following criteria: (a) 60% or more of the outstanding common stock of the corporation and the combined voting power of the outstanding securities of the corporation entitled to vote generally in the election of directors (in each case determined immediately following the consummation of the applicable transaction) is beneficially owned, directly or indirectly, by all or substantially all of the Persons who were the beneficial owners of the Corporation's outstanding Common Stock and outstanding securities entitled to vote generally in the election of directors (respectively) immediately prior to the applicable transaction; (b) no Person other than an Excluded Holder beneficially owns, directly or indirectly, 20% or more of the o utstanding common stock of the corporation or the combined voting power of the outstanding securities of the corporation entitled to vote generally in the election of directors; and (c) at least a majority of the board of directors is comprised of Continuing Directors.

          2.17          "Person" has the same meaning as set forth in Sections 13(d) and 14(d)(2) of the Act.

          2.18          "Restricted Period" means the period of time during which Restricted Stock awarded under the Plan is subject to restrictions. The Restricted Period may differ among Participants and may have different expiration dates with respect to shares of Common Stock covered by the same Incentive Award.

          2.19          "Restricted Stock" means Common Stock awarded to a Participant pursuant to Section 6 of the Plan.

          2.20          "Retirement" means the voluntary termination of all employment by a Participant, or the voluntary termination of a Participant as a director of the Corporation (as applicable), after the Participant has attained 62 years of age, or such other age as will be determined by the Committee in its sole discretion or as otherwise may be set forth in the Incentive Award agreement or other grant document with respect to a Participant and a particular Incentive Award.

          2.21          "Stock Appreciation Right" means the right to receive cash or shares of Common Stock, pursuant to the terms of Section 8 of the Plan.

          2.22          "Stock Award" means an award of Common Stock awarded to a Participant pursuant to Section 7 of the Plan.

          2.23          "Stock Option" means the right to purchase Common Stock at a stated price for a specified period of time. For purposes of the Plan, a Stock Option may be either an incentive stock option within the meaning of Section 422(b) of the Code or a nonqualified stock option.

          2.24          "Subsidiary" means any corporation or other entity of which 50% or more of the outstanding voting stock or voting ownership interest is directly or indirectly owned or controlled by the Corporation or by one or more Subsidiaries of the Corporation.

- -3-

SECTION 3

ADMINISTRATION

          3.1          Power and Authority. The Committee will administer the Plan, will have full power and authority to interpret the provisions of the Plan and Incentive Awards granted under the Plan and will have full power and authority to supervise the administration of the Plan and Incentive Awards granted under the Plan. All determinations, interpretations and selections made by the Committee regarding the Plan will be final and conclusive. The Committee will hold its meetings at such times and places as it deems advisable. Action may be taken by a written instrument signed by a majority of the members of the Committee and any action so taken will be fully as effective as if it had been taken at a meeting duly called and held. The Committee will make such rules and regulations for the conduct of its business as it considers advisable.

          3.2          Grants or Awards to Participants. In accordance with and subject to the provisions of the Plan, the Committee will have the authority to determine all provisions of Incentive Awards as the Committee may consider necessary or desirable and as are consistent with the terms of the Plan, including, without limitation, the following: (a) the persons who will be selected as Participants; (b) the nature and terms of the Incentive Awards to be made to each Participant (including the number of shares of Common Stock to be subject to each Incentive Award, any exercise price, the manner in which an Incentive Award will vest or become exercisable and the form of payment for the Incentive Award); (c) the time or times when Incentive Awards will be granted; (d) the duration of each Incentive Award; and (e) the restrictions and other conditions to which payment or vesting of Incentive Awards may be subject.

          3.3          Amendments or Modifications of Awards. The Committee will have authority to amend or modify the terms of any outstanding Incentive Award in any manner, provided that the amended or modified terms are not prohibited by the Plan as then in effect and provided that such actions do not cause an Incentive Award not otherwise subject to Section 409A of the Code to become subject to Section 409A of the Code, including, without limitation, authority to: (a) modify the number of shares or other terms and conditions of an Incentive Award; provided that any increase in the number of shares of an Incentive Award other than pursuant to Section 4.2 will be considered to be a new grant with respect to such additional shares for purposes of Section 409A of the Code and such new grant shall be made at Market Value on the date of the new grant; (b) extend the term of an Incentive Award to a date that is no later than the earlier of the latest d ate upon which the Incentive Award could have expired by its terms under any circumstances or the 10^th anniversary of the date of grant (for purposes of clarity, as permitted under Section 409A of the Code, if the term of a Stock Option is extended at a time when the Stock Option price equals or exceeds the Market Value, it will not be an extension of the term of the Stock Option, but instead will be treated as a modification of the Stock Option and a new Stock Option will be treated as having been granted); (c) accelerate the exercisability or vesting or otherwise terminate any restrictions relating to an Incentive Award; (d) accept the surrender of any outstanding Incentive Award; and (e) to the extent not previously exercised or vested, authorize the grant of new Incentive Awards in substitution for surrendered Incentive Awards; provided, however, that such grant of new Incentive Awards will be considered to be a new grant for purposes of Section 409A of the Code and such new grant shall be mad e at Market Value on the date of the new grant. (Amended 3/18/08)

          3.4          Indemnification of Committee Members. Each person who is or will have been a member of the Committee will be indemnified and held harmless by the Corporation from and against any cost, liability or expense imposed or incurred in connection with such person's or the Committee's taking

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or failing to take any action under the Plan. Each such person will be justified in relying on information furnished in connection with the Plan's administration by any appropriate person or persons.

SECTION 4

SHARES SUBJECT TO THE PLAN

          4.1          Number of Shares. A maximum of 300,000 shares of Common Stock will be available for Incentive Awards under the Plan, subject to adjustment as provided in Section 4.2 of the Plan. Such shares shall be authorized and may be unissued shares, shares issued and repurchased by the Company (including shares purchased on the open market), shares issued and otherwise reacquired by the Company and shares otherwise held by the Company. (Amended 3/18/08)

          4.2          Adjustments. If the number of shares of Common Stock outstanding changes by reason of a stock dividend, stock split, recapitalization, merger, consolidation, combination, exchange of shares or any other change in the corporate structure or shares of the Corporation, the number and kind of securities subject to and reserved under the Plan, together with applicable exercise prices, will be appropriately adjusted. No fractional shares will be issued pursuant to the Plan and any fractional shares resulting from adjustments will be eliminated from the respective Incentive Awards, with an appropriate cash adjustment for the value of any Incentive Awards eliminated. If an Incentive Award is canceled, surrendered, modified, exchanged for a substitute Incentive Award or expires or terminates during the term of the Plan but prior to the exercise or vesting of the Incentive Award in full, the shares subject to but not delivered under suc h Incentive Award will be available for other Incentive Awards. If shares of Common Stock are surrendered to the Corporation in connection with the exercise or vesting of an Incentive Award, the surrendered shares will be available for other Incentive Awards under the Plan.

SECTION 5

STOCK OPTIONS

          5.1          Grant. A Participant may be granted one or more Stock Options under the Plan. The Committee, in its discretion, may provide in the initial grant of a Stock Option for the subsequent automatic grant of additional Stock Options for the number of shares, if any, that are subject to the initial Stock Option and surrendered to the Corporation in connection with the exercise of the initial or any subsequently granted Stock Option. Stock Options will be subject to such terms and conditions, consistent with the other provisions of the Plan, as may be determined by the Committee in its sole discretion. In addition, the Committee may vary, among Participants and among Stock Options granted to the same Participant, any and all of the terms and conditions of the Stock Options granted under the Plan. The Committee will have complete discretion in determining the number of Stock Options granted to each Participant. The Committee may designa te whether or not a Stock Option is to be considered an incentive stock option as defined in Section 422(b) of the Code, except no incentive stock options will be granted to nonemployee directors.

          5.2          Grants to Non-employee Directors. Each non-employee director may be granted a Stock Option on an annual basis at a time determined by the Board. The exercise price of the Stock Option will be equal to the Market Value of the Common Stock on the grant date. The Stock Option will grant the right to purchase that number of shares of Common Stock having an aggregate Market Value at the grant date no greater than the amount of one times the annual director fee then in effect. These Stock Options will be issued for a term of 10 years using a form of agreement approved by the Committee in its discretion. Subject to Section 6.2 below (Grants of Restricted Stock to Non-Employee Directors), these

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grants of Stock Options may be suspended, modified or terminated by the Board, in its sole discretion. Non-employee directors may pay the exercise price in any manner permitted for exercises by other Participants. Stock Options granted to non-employee directors of the Company will not qualify as incentive stock options. (Amended 3/18/08)

          5.3          Stock Option Agreements. Stock Options will be evidenced by stock option agreements containing such terms and conditions, consistent with the provisions of the Plan, as the Committee will from time to time determine. To the extent not covered by the stock option agreement, the terms and conditions of this Section 5 will govern.

          5.4          Stock Option Price. The per share Stock Option exercise price will be determined by the Committee, but shall be a price that is equal to or greater than the Market Value on the date of grant. (Amended 3/18/08)

          5.5          Medium and Time of Payment. The exercise price for each share purchased pursuant to a Stock Option granted under the Plan will be payable in cash or, if the Committee consents or if a Participant's stock option agreement so provides, in shares of Common Stock (including Common Stock to be received upon a simultaneous exercise) or other consideration substantially equivalent to cash. The time and terms of payment may be amended with the consent of a Participant before or after exercise of a Stock Option. The Committee may from time to time authorize payment of all or a portion of the Stock Option price in the form of a promissory note or other deferred payment installments according to such terms as the Committee may approve. The Board may restrict or suspend the power of the Committee to permit such loans and may require that security be provided.

          5.6          Stock Options Granted to 10% Shareholders. No Stock Option granted to any Participant who at the time of such grant owns, together with stock attributed to such Participant under Section 424(d) of the Code, more than 10% of the total combined voting power of all classes of stock of the Corporation or any of its Subsidiaries may be designated as an incentive stock option, unless such Stock Option provides an exercise price equal to at least 110% of the Market Value of the Common Stock and the exercise of the Stock Option after the expiration of 5 years from the date of grant of the Stock Option is prohibited by its terms.

          5.7          Limits on Exercisability. Stock Options will be exercisable for such periods, not to exceed 10 years from the date of grant, as may be fixed by the Committee. At the time of exercise of a Stock Option, the holder of the Stock Option, if requested by the Committee, must represent to the Corporation that the shares are being acquired for investment and not with a view to their distribution. The Committee may in its discretion require a Participant to continue the Participant's service with the Corporation and its Subsidiaries for a certain length of time as a condition to a Stock Option becoming exercisable and may eliminate such delayed vesting provisions.

          5.8          Restrictions on Transferability.

          (a)          General. Unless the Committee otherwise consents (before or after the option grant) or unless the stock option agreement or grant provides otherwise: (i) no incentive stock option granted under the Plan may be sold, exchanged, transferred, pledged, assigned or otherwise alienated or hypothecated except by will or the laws of descent and distribution; and (ii) all Stock Options that are not incentive stock options may be transferred; provided, that as a condition to any such transfer the transferee must execute a written agreement permitting the Corporation to withhold from the shares subject to the Incentive Award a number of shares

- -6- having a Market Value at least equal to the amount of any federal, state or local withholding or other taxes associated with or resulting from the exercise of a Stock Option.

          (b)          Other Restrictions. The Committee may impose other restrictions on any shares of Common Stock acquired pursuant to the exercise of a Stock Option under the Plan as the Committee considers advisable, including, without limitation, restrictions under applicable federal or state securities laws.

          5.9          Termination of Employment or Director or Officer Status.

          (a)          General. If a Participant ceases to be employed by or an officer of the Corporation or one of its Subsidiaries for any reason or if a director ceases to serve as a director of the Corporation for any reason, other than the Participant's or director's death, Disability, Retirement or termination for Cause, the Participant or director may exercise his or her Stock Options only for a period of 3 months after such termination of employment or director or officer status, but only to the extent the Participant or director was entitled to exercise the Stock Options on the date of termination, unless the Committee otherwise consents or the terms of the stock option agreement or grant provide otherwise. For purposes of the Plan, the following will not be considered a termination of employment or director or officer status: (i) a transfer of an employee among the Corporation and its Subsidiaries; (ii) a leave of absence, duly aut horized in writing by the Corporation, for military service or for any other purpose approved by the Corporation if the period of such leave does not exceed 90 days; (iii) a leave of absence in excess of 90 days, duly authorized in writing by the Corporation, provided that the employee's right to reemployment is guaranteed either by statute or contract; or (iv) a termination of employment with continued service as a director or officer.

          (b)          Death. If a Participant dies either while an employee or officer of the Corporation or one of its Subsidiaries or after the termination of employment other than for Cause but during the time when the Participant could have exercised a Stock Option under the Plan, or if a director dies while serving as a director of the Corporation or after ceasing to be a director but during the time the director or former director could have exercised a Stock Option under the Plan, the Stock Option issued to such Participant, director or former director will be exercisable by the personal representative of such Participant, director or former director or other successor to the interest of the Participant, director or former director for 1 year after the Participant's death, but only to the extent that the Participant was entitled to exercise the Stock Option on the date of death or termination of employment or status as a director or o fficer, whichever first occurred, unless the Committee otherwise consents or the terms of the stock option agreement or grant provide otherwise.

          (c)          Disability. If a Participant ceases to be an employee, director or officer of the Corporation or one of its Subsidiaries due to the Participant's Disability, the Participant may exercise a Stock Option for a period of 1 year following such termination of employment or director or officer status, but only to the extent that the Participant was entitled to exercise the Stock Option on the date of such event, unless the Committee otherwise consents or the terms of the stock option agreement or grant provide otherwise.

          (d)          Participant Retirement. If a Participant Retires as an employee or officer of the Corporation or one of its Subsidiaries or if a director retires, any Stock Option granted under the Plan may be exercised during the remaining term of the Stock Option, unless the terms of the stock option agreement or grant provide otherwise.

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          (e)          Termination for Cause. If a Participant is terminated for Cause, the Participant will have no further right to exercise any Stock Option previously granted, unless the Committee determines otherwise.

SECTION 6

RESTRICTED STOCK

          6.1          Grant. A Participant may be granted Restricted Stock under the Plan. Restricted Stock will be subject to such terms and conditions, consistent with the other provisions of the Plan, as will be determined by the Committee in its sole discretion. The Committee may impose such restrictions or conditions, consistent with the provisions of the Plan, to the vesting of Restricted Stock as it considers appropriate.

          6.2          Grants to Non-employee Directors. If the Board suspends or terminates the grant of Stock Options to non-employee directors, as provided in Section 5.2 above, then the Board may, in its sole discretion, grant each non-employee director, on an annual basis at a time determined by the Board, a number of shares of Restricted Stock having an aggregate Market Value at the grant date no greater than one-half (1/2) times the annual director fee then in effect. The shares of Restricted Stock will be evidenced using a form of agreement approved by the Committee in its discretion. (Amended 3/18/08)

          6.3          Termination of Employment or Officer Status.

          (a)          General. In the event of termination of employment or officer status during the Restricted Period for any reason other than death, Disability, Retirement, termination by the Corporation other than for Cause or termination for Cause, then any shares of Restricted Stock still subject to restrictions at the date of such termination will automatically be forfeited and returned to the Corporation, unless the Committee determines otherwise, waives the automatic forfeiture or waives or modifies the restrictions. For purposes of the Plan, the following will not be considered a termination of employment or officer status: (i) a transfer of an employee among the Corporation and its Subsidiaries; (ii) a leave of absence, duly authorized in writing by the Corporation, for military service or for any other purpose approved by the Corporation if the period of such leave does not exceed 90 days; (iii) a leave of absence in excess of 9 0 days duly authorized in writing by the Corporation, provided that the employee's right to reemployment is guaranteed either by statute or contract; and (iv) a termination of employment with continued service as an officer.

          (b)          Death, Retirement or Disability. Unless the terms of the restricted stock agreement or grant provide otherwise, in the event a Participant terminates his employment with the Corporation because of death, Disability or Retirement during the Restricted Period, the restrictions applicable to the shares of Restricted Stock will terminate automatically with respect to all shares of Restricted Stock.

          (c)          Termination by Corporation other than for Cause. In the event of a voluntary or involuntary termination of the employment or officer status of a Participant by the Corporation other than for Cause, the restrictions applicable to the shares of Restricted Stock will terminate automatically with respect to that number of shares (rounded to the nearest whole number) equal to the total number of shares of Restricted Stock granted to such Participant multiplied by the number of full months that have elapsed since the date of grant divided by the maximum number

- -8- of full months of the Restricted Period. All remaining shares will be forfeited and returned to the Corporation; provided, that the Committee may, in its sole discretion, waive the automatic forfeiture of any or all such shares of Restricted Stock and/or may modify the restrictions to such shares of Restricted Stock as it considers appropriate with the consent of the Participant.

          (d)          Termination for Cause. If a Participant's employment is terminated for Cause, the Participant will have no further right to retain any Restricted Stock and all Restricted Stock still subject to restrictions at the date of such termination will automatically be forfeited and returned to the Corporation, unless the Committee determines otherwise.

          6.4          Restrictions on Transferability.

          (a)          General. Unless the Committee otherwise consents or unless the terms of the restricted stock agreement or grant provide otherwise: (i) shares of Restricted Stock will not be sold, exchanged, transferred, pledged, assigned or otherwise alienated or hypothecated during the Restricted Period except by will or the laws of descent and distribution; and (ii) all rights with respect to Restricted Stock granted to a Participant under the Plan will be exercisable during the Participant's lifetime only by such Participant, his guardian or legal representative.

          (b)          Other Restrictions. The Committee may impose other restrictions on any shares of Common Stock acquired pursuant to an award of Restricted Stock under the Plan as the Committee considers advisable, including, without limitation, restrictions under applicable federal or state securities laws.

          6.5          Legending of Restricted Stock. In addition to any other legend that may be set forth on a Participant's share certificate, any certificates evidencing shares of Restricted Stock awarded pursuant to the Plan will bear the following legend:

The shares represented by this certificate were issued subject to certain restrictions under the Southern Michigan Bancorp, Inc. Stock Incentive Plan of 2005 (the "Plan"). A copy of the Plan is on file in the office of the Secretary of the Corporation. This certificate is held subject to the terms and conditions contained in a restricted stock agreement that includes a prohibition against the sale or transfer of the stock represented by this certificate except in compliance with that agreement and that provides for forfeiture upon certain events.

          6.6          Rights as a Shareholder. A Participant will have all voting, dividend, liquidation and other rights with respect to Restricted Stock held of record by such Participant as if the Participant held unrestricted Common Stock; provided, that the unvested portion of any award of Restricted Stock will be subject to any restrictions on transferability or risks of forfeiture imposed pursuant to Sections 6.3 and 6.4 of the Plan. Unless the Committee otherwise determines or unless the terms of the restricted stock agreement or grant provide otherwise, any noncash dividends or distributions paid with respect to shares of unvested Restricted Stock will be subject to the same restrictions as the shares to which such dividends or distributions relate. Any dividend payment with respect to Restricted Stock shall be made no later than the end of the calendar year in which the dividends are paid to shareholders, or, if later, the 15th day of the third month following the date the dividends are paid to shareholders. (Amended 3/18/08)

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SECTION 7

STOCK AWARDS

          7.1          Grant. A Participant may be granted one or more Stock Awards under the Plan. Stock Awards will be subject to such terms and conditions, consistent with the other provisions of the Plan, as may be determined by the Committee in its sole discretion. Notwithstanding the previous sentence, Stock Awards shall be settled no later than the 15th day of the third month after the awards vest. (Amended 3/18/08)

          7.2          Rights as a Shareholder. A Participant will have all voting, dividend, liquidation and other rights with respect to shares of Common Stock issued to the Participant as a Stock Award under this Section 7 upon the Participant becoming the holder of record of the Common Stock granted pursuant to such Stock Award; provided, that the Committee may impose such restrictions on the assignment or transfer of Common Stock awarded pursuant to a Stock Award as it considers appropriate. Any dividend payment with respect to a Stock Award shall be made no later than the end of the calendar year in which the dividends are paid to shareholders, or, if later, the 15th day of the third month following the date the dividends are paid to shareholders. (Amended 3/18/08)

SECTION 8

STOCK APPRECIATION RIGHTS

          8.1          Grant. A Participant may be granted one or more Stock Appreciation Rights under the Plan and such Stock Appreciation Rights will be subject to such terms and conditions, consistent with the other provisions of the Plan, as will be determined by the Committee in its sole discretion. A Stock Appreciation Right may relate to a particular Stock Option and may be granted simultaneously with or subsequent to the Stock Option to which it relates. Except to the extent otherwise modified in the grant, Stock Appreciation Rights will be subject to the same restrictions and conditions as Stock Options under of the Plan and may be subject to additional restrictions and conditions. The exercise price of Stock Appreciation Rights shall be determined by the Committee, but shall be a price that is equal to or greater than the Market Value on the date of grant. The appreciation in value will be equal to the excess of the Market Value of such sh ares at the time of the exercise of the Stock Appreciation Right over the exercise price of such shares. (Amended 3/18/08)

          8.2          Exercise; Payment. To the extent granted in tandem with a Stock Option, Stock Appreciation Rights may be exercised only when a related Stock Option could be exercised and only when the Market Value of the stock subject to the Stock Option exceeds the exercise price of the Stock Option. Unless the Committee decides otherwise (in its sole discretion), Stock Appreciation Rights will only be paid in cash.

SECTION 9

CHANGE IN CONTROL

          9.1          Acceleration of Vesting. If a Change in Control of the Corporation will occur, then, unless the Committee or the Board otherwise determines with respect to one or more Incentive Awards, without action by the Committee or the Board: (a) all outstanding Stock Options and Stock Appreciation Rights will become immediately vested and exercisable in full and will remain exercisable during the remaining term thereof, regardless of whether the Participants to whom such Stock Options have been

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granted remain in the employ or service of the Corporation or any Subsidiary; and (b) all other outstanding Incentive Awards will become immediately fully vested and nonforfeitable.

          9.2          Cash Payment for Stock Options. If a Change in Control of the Corporation occurs, then the Committee, in its sole discretion, and without the consent of any Participant affected thereby, may determine that some or all Participants holding outstanding Stock Options will receive, with respect to some or all of the shares of Common Stock subject to such Stock Options, as of the effective date of any such Change in Control of the Corporation, cash in an amount equal to the greater of the excess of (a) the highest sales price of the shares immediately prior to the effective date of such Change in Control of the Corporation or (b) the highest price per share actually paid in connection with any Change in Control of the Corporation, over the exercise price per share of such Stock Options.

SECTION 10

GENERAL PROVISIONS

          10.1          No Rights to Awards. No Participant or other person will have any claim to be granted any Incentive Award under the Plan and there is no obligation of uniformity of treatment of Participants or holders or beneficiaries of Incentive Awards under the Plan. The terms and conditions of Incentive Awards of the same type and the determination of the Committee to grant a waiver or modification of any Incentive Award and the terms and conditions thereof need not be the same with respect to each Participant or even the same Participant.

          10.2          Withholding. The Corporation or a Subsidiary will be entitled to: (a) withhold and deduct from future wages of a Participant (or from other amounts that may be due and owing to a Participant from the Corporation or a Subsidiary), or make other arrangements for the collection of, all amounts required to satisfy any and all federal, state and local withholding and employment-related tax requirements attributable to an Incentive Award, including, without limitation, the grant, exercise or vesting of, or payment of dividends with respect to, an Incentive Award or a disqualifying disposition of Common Stock received upon exercise of an incentive stock option; or (b) require a Participant promptly to remit the amount of such withholding to the Corporation before taking any action with respect to an Incentive Award. Unless the Committee determines otherwise, withholding may be satisfied by withholding Common Stock to be received upo n exercise or by delivery to the Corporation of previously owned Common Stock. The Corporation may establish such rules and procedures concerning timing of any withholding election as it deems appropriate.

          10.3          Compliance with Laws; Listing and Registration of Shares. All Incentive Awards granted under the Plan (and all issuances of Common Stock or other securities under the Plan) will be subject to all applicable laws, rules and regulations, and to the requirement that if at any time the Committee determines, in its discretion, that the listing, registration or qualification of the shares covered thereby upon any securities exchange or under any state or federal law, or the consent or approval of any governmental regulatory body, is necessary or desirable as a condition of, or in connection with, the grant of such Incentive Award or the issue or purchase of shares thereunder, such Incentive Award may not be exercised in whole or in part, or the restrictions on such Incentive Award will not lapse, unless and until such listing, registration, qualification, consent or approval will have been effected or obtained free of any condition s not acceptable to the Committee. (Former §§ 10.4 and 10.5 deleted 3/18/08)

          10.4          No Limit on Other Compensation Arrangements. Nothing contained in the Plan will prevent the Corporation or any Subsidiary from adopting, continuing in effect, or discontinuing other or

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additional compensation arrangements, including the grant of stock options and other stock-based awards, and such arrangements may be either generally applicable or applicable only in specific cases.

          10.5          No Right to Employment. The grant of an Incentive Award will not be construed as giving a Participant the right to be retained in the employ of the Corporation or any Subsidiary. The Corporation or any Subsidiary may at any time dismiss a Participant from employment, free from any liability or any claim under the Plan, unless otherwise expressly provided in the Plan or in any written agreement with a Participant.

          10.6          Suspension of Rights under Incentive Awards. The Corporation, by written notice to a Participant, may suspend a Participant's and any transferee's rights under any Incentive Award for a period not to exceed 30 days while the termination for Cause of that Participant's employment with the Corporation and its Subsidiaries is under consideration.

          10.7          Governing Law. The validity, construction and effect of the Plan and any rules and regulations relating to the Plan will be determined in accordance with the laws of the State of Michigan and applicable federal law.

          10.8          Severability. In the event any provision of the Plan will be held illegal or invalid for any reason, the illegality or invalidity will not affect the remaining provisions of the Plan and the Plan will be construed and enforced as if the illegal or invalid provision had not been included.

SECTION 11

TERMINATION AND AMENDMENT

                    The Board may terminate the Plan at any time, or may from time to time amend the Plan. No termination, amendment or modification of the Plan will become effective with respect to any Incentive Award previously granted under the Plan without the prior written consent of the Participant holding such Incentive Award unless such amendment or modification operates solely to the benefit of the Participant.

SECTION 12

EFFECTIVE DATE AND DURATION OF THE PLAN

                    This Plan will take effect on June 6, 2005. Unless earlier terminated by the Board of Directors, the Plan will terminate on the date 10 years after that date. No Incentive Award will be granted under the Plan after such termination date.

- -12-

EX-10.7

EXHIBIT 10.7

SECOND AMENDMENT TO
SOUTHERN MICHIGAN BANK & TRUST
DEFERRED COMPENSATION AGREEMENT
For

          THIS AMENDMENT executed on March 28, 2008, by SOUTHERN MICHIGAN BANK & TRUST, a state commercial bank located in Coldwater, Michigan (the "Company") and _____________ (the "Executive").

          The Company and the Executive executed the Southern Michigan Bank & Trust Deferred Compensation Agreement dated ________________ (the "Agreement"). Pursuant to the power of amendment reserved by Article 9 of the Agreement, the undersigned hereby amend, in part, said Agreement for the purpose of complying with the final deferred compensation regulations under Section 409A of the Internal Revenue Code. Therefore:

          Article 1, Section 1.6 is amended to read as follows:

          1.6          "Disability" means the Executive is, by reason of any medically determinable physical or mental impairment that can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, either (i) unable to engage in any substantial gainful activity, or (ii) receiving income replacement benefits for a period of not less than three months under the Company's accident and health plan.

          Article 1, Section 1.13 is amended to read as follows:

          1.13          "Termination of Employment" means that the Executive ceases to be employed by the Company for any reason whatsoever in a manner that constitutes a "separation from service" as that term in defined by Section 409A of the Code, other than by reason of a leave of absence, which is approved by the Company. For purposes of this Agreement, if there is a dispute over the employment status of the Executive or the date of the Executive's Termination of Employment, the Company shall have the sole and absolute right to decide the dispute.

          Article 2, Section 2.2.2 is amended to read as follows:

          2.2.2          Hardship. If an unforeseeable financial emergency occurs, the Executive, by written instructions to the Company, may reduce future deferrals under this Agreement. For purposes of this Agreement, an unforeseeable financial hardship shall mean an emergency need for funds resulting from extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Executive.

          Article 4, Section 4.3 is amended to read as follows:

          4.3          Disability Benefit. If the Executive suffers a Disability, the Company shall pay to the Executive the benefit described in this Section 4.3 in lieu of any other benefit under this Agreement.

1

          Article 4, Section 4.5 is amended to read as follows:

          4.5          Hardship Distribution. Upon the Board of Director's determination (following petition by the Executive) that the Executive has suffered an unforeseeable financial emergency as described in Section 2.2.2, the Company shall distribute to the Executive all or a portion of the Deferral Account balance as determined by the Company, but in no event shall the distribution be greater than is necessary to relieve the financial hardship (including amounts necessary to pay taxes or penalties resulting from the distribution) and distribution shall not be made to the extent the unforeseeable financial hardship may be relieved through alternative means, such as insurance, liquidation of the Executive's assets to the extent it would not cause a severe financial hardship, or by ceasing deferrals under this Agreement.

          A new Article 4, Section 4.6 is added to read as follows:

          4.6          Benefit Elections. The form of payment of Executive's Normal Retirement Benefit, Disability Benefit and Change of Control Benefit in effect on December 31, 2007, on the Form of Benefit Election attached as Exhibit II to the Agreement is irrevocable as of December 31, 2007, and may not be subsequently changed except in accordance with the following restrictions:

          4.6.1          Effective Date. An election of a new form of payment will not take effect until 12 months after the date on which the election is made.

          4.6.2          Mandatory Deferral. Except for changes in the form of payment of Executive's Disability Benefit, any new election of the form of payment will result in the payment being deferred for five years from the date the payment otherwise would have been made. The five year deferral will be calculated from the date the lump sum or first installment was otherwise scheduled to be paid.

          A new Article 4, Section 4.7 is added to read as follows:

          4.7          Delay in Payment. Notwithstanding any other timing provision in this Article 4, if, at the time Executive would begin receiving payment of the Normal Retirement Benefit, Early Termination Benefit, or Change in Control Benefit, Executive is a "specified employee" as defined by Section 409A of the Internal Revenue Code, then no payments will be made before the date that is six months after Executive's Termination of Employment. Payments to which Executive would otherwise have been entitled during that six months will be accumulated and paid on the first day after six months following the date of Executive's Termination of Employment. All payments that would otherwise be made more than six months following the date of Executive's Termination of Employment will be made in accordance with the general timing provisions described above.

2

          Article 7, Section 7.3 is amended to read as follows:

          7.3          Excess Parachute Payment Gross-up. If any benefit payable under this Agreement would create an excise tax under the excess parachute rules of Section 280G of the Code, the Company shall pay to the Executive an additional amount (the "Gross-up") equal to the Executive's excise penalty tax amount divided by the sum of (one minus the sum of the penalty tax rate plus the Executive's marginal income tax rate). The Gross-up shall be paid to Executive in a lump sum by the end of the calendar year following the calendar year in which Executive remits the related taxes.

          Article 7, Section 7.4 is amended to read as follows:

          7.4          Deferral Unwind Provision. If, for any reason, all or any portion of the Executive's benefits becomes taxable under Section 409A of the Code prior to receipt, the Executive may petition the Company for a distribution of that portion of the Executive's benefit that has become taxable. Upon the grant of such a petition, the Company shall distribute to the Executive immediately available funds in an amount equal to the portion of the benefit taxable under Section 409A of the Code. If the petition is granted, the tax liability distribution shall be made within 90 days of the date when the Executive's petition is granted.

          IN WITNESS OF THE ABOVE, the Executive and the Company have agreed to this Amendment.

Executive:	Company:
	Southern Michigan Bank & Trust
	By
	Title

3

EX-10.10

EXHIBIT 10.10

SECOND AMENDMENT TO
SOUTHERN MICHIGAN BANK & TRUST
DIRECTOR DEFERRED FEE AGREEMENT
For

          THIS AMENDMENT executed on March 28, 2008, by SOUTHERN MICHIGAN BANK & TRUST, a state commercial bank located in Coldwater, Michigan (the "Company") and _____________________ (the "Director").

          The Company and the Director executed the Southern Michigan Bank & Trust Director Deferred Fee Agreement dated _____________ (the "Agreement"). Pursuant to the power of amendment reserved by Article 9 of the Agreement, the undersigned hereby amend, in part, said Agreement for the purpose of complying with the final deferred compensation regulations under Section 409A of the Internal Revenue Code. Therefore:

          Article 1, Section 1.6 is amended to read as follows:

          1.6          "Disability" means the Director is, by reason of any medically determinable physical or mental impairment that can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, unable to engage in any substantial gainful activity.

          Article 1, Section 1.13 is amended to read as follows:

          1.13          "Termination of Service" means that the Director ceases to be a member of the Company's Board of Directors for any reason whatsoever in a manner that constitutes a "separation from service" as that term in defined by Section 409A of the Code, other than by reason of a leave of absence, which is approved by the Company. For purposes of this Agreement, if there is a dispute over the Director's status or the date of the Director's Termination of Service, the Company shall have the sole and absolute right to decide the dispute.

          Article 2, Section 2.2.2 is amended to read as follows:

          2.2.2    Hardship. If an unforeseeable financial emergency occurs, the Director, by written instructions to the Company, may reduce future deferrals under this Agreement. For purposes of this Agreement, an unforeseeable financial hardship shall mean an emergency need for funds resulting from extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Director.

          Article 4, Section 4.3 is amended to read as follows:

          4.3          Disability Benefit. If the Director suffers a Disability, the Company shall pay to the Director the benefit described in this Section 4.3 in lieu of any other benefit under this Agreement.

1

          Article 4, Section 4.5 is amended to read as follows:

          4.5          Hardship Distribution. Upon the Board of Director's determination (following petition by the Director) that the Director has suffered an unforeseeable financial emergency as described in Section 2.2.2, the Company shall distribute to the Director all or a portion of the Deferral Account balance as determined by the Company, but in no event shall the distribution be greater than is necessary to relieve the financial hardship (including amounts necessary to pay taxes or penalties resulting from the distribution) and distribution shall not be made to the extent the unforeseeable financial hardship may be relieved through alternative means, such as insurance, liquidation of the Director's assets to the extent it would not cause a severe financial hardship, or by ceasing deferrals under this Agreement.

          A new Article 4, Section 4.6 is added to read as follows:

          4.6          Benefit Elections. The form of payment of Director's Normal Retirement Benefit, Disability Benefit and Change of Control Benefit in effect on December 31, 2007, on the Form of Benefit Election attached as Exhibit II to the Agreement is irrevocable as of December 31, 2007, and may not be subsequently changed except in accordance with the following restrictions:

          4.6.1    Effective Date. An election of a new form of payment will not take effect until 12 months after the date on which the election is made.

          4.6.2    Mandatory Deferral. Except for changes in the form of payment of Director's Disability Benefit, any new election of the form of payment will result in the payment being deferred for five years from the date the payment otherwise would have been made. The five year deferral will be calculated from the date the lump sum or first installment was otherwise scheduled to be paid.

          A new Article 4, Section 4.7 is added to read as follows:

          4.7          Delay in Payment. Notwithstanding any other timing provision in this Article 4, if, at the time Director would begin receiving payment of the Normal Retirement Benefit, Early Termination Benefit, or Change in Control Benefit, Director is a "specified employee" as defined by Section 409A of the Internal Revenue Code, then no payments will be made before the date that is six months after Director's Termination of Service. Payments to which Director would otherwise have been entitled during that six months will be accumulated and paid on the first day after six months following the date of Director's Termination of Service. All payments that would otherwise be made more than six months following the date of Director's Termination of Service will be made in accordance with the general timing provisions described above.

          Article 7, Section 7.3 is amended to read as follows:

          7.3          Excess Parachute Payment Gross-up. If any benefit payable under this Agreement would create an excise tax under the excess parachute rules of Section 280G of the Code, the Company shall pay to the Director an additional amount (the "Gross-up") equal to the Director's excise penalty tax amount divided by the sum of (one minus the sum of the penalty

2

tax rate plus the Director's marginal income tax rate). The Gross-up shall be paid to Director in a lump sum by the end of the calendar year following the calendar year in which Director remits the related taxes.

          Article 7, Section 7.4 is amended to read as follows:

          7.4          Deferral Unwind Provision. If, for any reason, all or any portion of the Director's benefits becomes taxable under Section 409A of the Code prior to receipt, the Director may petition the Company for a distribution of that portion of the Director's benefit that has become taxable. Upon the grant of such a petition, the Company shall distribute to the Director immediately available funds in an amount equal to the portion of the benefit taxable under Section 409A of the Code. If the petition is granted, the tax liability distribution shall be made within 90 days of the date when the Director's petition is granted.

          IN WITNESS OF THE ABOVE, the Director and the Company have agreed to this Amendment.

Director:	Company:
	Southern Michigan Bank & Trust
	By
	Title

3

EX-10.13

EXHIBIT 10.13

Southern Michigan Bancorp, Inc.

as Issuer

INDENTURE

Dated as of March 25, 2004

WILMINGTON TRUST COMPANY

as Trustee

FLOATING RATE JUNIOR SUBORDINATED DEBT SECURITIES DUE 2034

TABLE OF CONTENTS

ARTICLE I DEFINITIONS 1

Section 1.01 Definitions 1

ARTICLE II DEBT SECURITIES 8

Section 2.01	Authentication and Dating	8
Section 2.02	Form of Trustee's Certificate of Authentication	9
Section 2.03	Form and Denomination of Debt Securities	9
Section 2.04	Execution of Debt Securities	9
Section 2.05	Exchange and Registration of Transfer of Debt Securities	10
Section 2.06	Mutilated, Destroyed, Lost or Stolen Debt Securities	13
Section 2.07	Temporary Debt Securities	14
Section 2.08	Payment of Interest	14
Section 2.09	Cancellation of Debt Securities Paid, etc.	15
Section 2.10	Computation of Interest	16
Section 2.11	Extension of Interest Payment Period	17
Section 2.12	CUSIP Numbers	18

ARTICLE III PARTICULAR COVENANTS OF THE COMPANY 18

Section 3.01	Payment of Principal, Premium and Interest; Agreed Treatment of the Debt Securities	18
Section 3.02	Offices for Notices and Payments, etc.	19
Section 3.03	Appointments to Fill Vacancies in Trustee's Office	20
Section 3.04	Provision as to Paying Agent	20
Section 3.05	Certificate to Trustee	21
Section 3.06	Additional Amounts	21
Section 3.07	Compliance with Consolidation Provisions	21
Section 3.08	Limitation on Dividends	22
Section 3.09	Covenants as to the Trust	22

ARTICLE IV LISTS 23

Section 4.01	Securityholders' Lists	23
Section 4.02	Preservation and Disclosure of Lists	23
Section 4.03	Financial and Other Information	24

ARTICLE V REMEDIES OF THE TRUSTEE AND SECURITYHOLDERS 25

Section 5.01	Events of Default	25
Section 5.02	Payment of Debt Securities on Default; Suit Therefor	26
Section 5.03	Application of Moneys Collected by Trustee	28
Section 5.04	Proceedings by Securityholders	28

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Section 5.05	Proceedings by Trustee	29
Section 5.06	Remedies Cumulative and Continuing	29
Section 5.07	Direction of Proceedings and Waiver of Defaults by Majority of Securityholders	29
Section 5.08	Notice of Defaults	30
Section 5.09	Undertaking to Pay Costs	30

ARTICLE VI CONCERNING THE TRUSTEE 31

Section 6.01	Duties and Responsibilities of Trustee	31
Section 6.02	Reliance on Documents, Opinions, etc.	32
Section 6.03	No Responsibility for Recitals, etc.	33
Section 6.04	Trustee, Authenticating Agent, Paying Agents, Transfer Agents or Registrar May Own Debt Securities	33
Section 6.05	Moneys to be Held in Trust	33
Section 6.06	Compensation and Expenses of Trustee	34
Section 6.07	Officers' Certificate as Evidence	35
Section 6.08	Eligibility of Trustee	35
Section 6.09	Resignation or Removal of Trustee	35
Section 6.10	Acceptance by Successor Trustee	37
Section 6.11	Succession by Merger, etc.	37
Section 6.12	Authenticating Agents	38

ARTICLE VII CONCERNING THE SECURITYHOLDERS 39

Section 7.01	Action by Securityholders	39
Section 7.02	Proof of Execution by Securityholders	40
Section 7.03	Who Are Deemed Absolute Owners	40
Section 7.04	Debt Securities Owned by Company Deemed Not Outstanding	40
Section 7.05	Revocation of Consents; Future Holders Bound	41

ARTICLE VIII SECURITYHOLDERS' MEETINGS 41

Section 8.01	Purposes of Meetings	41
Section 8.02	Call of Meetings by Trustee	41
Section 8.03	Call of Meetings by Company or Securityholders	42
Section 8.04	Qualifications for Voting	42
Section 8.05	Regulations	42
Section 8.06	Voting	43
Section 8.07	Quorum; Actions	43

ARTICLE IX SUPPLEMENTAL INDENTURES 44

Section 9.01	Supplemental Indentures without Consent of Securityholders	44
Section 9.02	Supplemental Indentures with Consent of Securityholders	45
Section 9.03	Effect of Supplemental Indentures	46

ii

Section 9.04	Notation on Debt Securities	47
Section 9.05	Evidence of Compliance of Supplemental Indenture to be Furnished to Trustee	47

ARTICLE X REDEMPTION OF SECURITIES 47

Section 10.01	Optional Redemption	47
Section 10.02	Special Event Redemption	47
Section 10.03	Notice of Redemption; Selection of Debt Securities	48
Section 10.04	Payment of Debt Securities Called for Redemption	48

ARTICLE XI CONSOLIDATION, MERGER, SALE, CONVEYANCE AND LEASE 49

Section 11.01	Company May Consolidate, etc., on Certain Terms	49
Section 11.02	Successor Entity to be Substituted	50
Section 11.03	Opinion of Counsel to be Given to Trustee	50

ARTICLE XII SATISFACTION AND DISCHARGE OF INDENTURE 51

Section 12.01	Discharge of Indenture	51
Section 12.02	Deposited Moneys to be Held in Trust by Trustee	51
Section 12.03	Paying Agent to Repay Moneys Held	52
Section 12.04	Return of Unclaimed Moneys	52

ARTICLE XIII IMMUNITY OF INCORPORATORS, STOCKHOLDERS, OFFICERS AND DIRECTORS 52

Section 13.01 Indenture and Debt Securities Solely Corporate Obligations 52

ARTICLE XIV MISCELLANEOUS PROVISIONS 52

Section 14.01	Successors	52
Section 14.02	Official Acts by Successor Entity	52
Section 14.03	Surrender of Company Powers	53
Section 14.04	Addresses for Notices, etc.	53
Section 14.05	Governing Law	53
Section 14.06	Evidence of Compliance with Conditions Precedent	53
Section 14.07	Business Day Convention	54
Section 14.08	Table of Contents, Headings, etc.	54
Section 14.09	Execution in Counterparts	54
Section 14.10	Separability	54
Section 14.11	Assignment	54
Section 14.12	Acknowledgment of Rights	55

ARTICLE XV SUBORDINATION OF DEBT SECURITIES 55

Section 15.01 Agreement to Subordinate 55

iii

Section 15.02	Default on Senior Indebtedness	55
Section 15.03	Liquidation; Dissolution; Bankruptcy	56
Section 15.04	Subrogation	57
Section 15.05	Trustee to Effectuate Subordination	58
Section 15.06	Notice by the Company	58
Section 15.07	Rights of the Trustee; Holders of Senior Indebtedness	59
Section 15.08	Subordination May Not Be Impaired	59

EXHIBITS

         EXHIBIT A   Form of Debt Security

iv

                   THIS INDENTURE, dated as of March 25, 2004, between Southern Michigan Bancorp, Inc., a bank holding company incorporated in Michigan (hereinafter sometimes called the "Company"), and Wilmington Trust Company, a Delaware banking corporation, as trustee (hereinafter sometimes called the "Trustee").

W I T N E S S E T H :

                   WHEREAS, for its lawful corporate purposes, the Company has duly authorized the issuance of its Floating Rate Junior Subordinated Debt Securities due 2034 (the "Debt Securities") under this Indenture and to provide, among other things, for the execution and authentication, delivery and administration thereof, the Company has duly authorized the execution of this Indenture.

                   NOW, THEREFORE, in consideration of the premises, and the purchase of the Debt Securities by the holders thereof, the Company covenants and agrees with the Trustee for the equal and proportionate benefit of the respective holders from time to time of the Debt Securities as follows:

ARTICLE I
DEFINITIONS

                   Section 1.01         Definitions.

                   The terms defined in this Section 1.01 (except as herein otherwise expressly provided or unless the context otherwise requires) for all purposes of this Indenture and of any indenture supplemental hereto shall have the respective meanings specified in this Section 1.01. All accounting terms used herein and not expressly defined shall have the meanings assigned to such terms in accordance with generally accepted accounting principles and the term "generally accepted accounting principles" means such accounting principles as are generally accepted in the United States at the time of any computation. The words "herein," "hereof" and "hereunder" and other words of similar import refer to this Indenture as a whole and not to any particular Article, Section or other subdivision.

                   "Additional Amounts" has the meaning set forth in Section 3.06.

                   "Additional Provisions" has the meaning set forth in Section 15.01.

                   "Administrative Action" has the meaning specified within the definition of "Tax Event" in this Section 1.01.

                   "Authenticating Agent" means any agent or agents of the Trustee which at the time shall be appointed and acting pursuant to Section 6.12.

                   "Bankruptcy Law" means Title 11, U.S. Code, or any similar federal or state law for the relief of debtors.

                   "Board of Directors" means the board of directors or the executive committee or any other duly authorized designated officers of the Company.

                   "Board Resolution" means a copy of a resolution certified by the Secretary or an Assistant Secretary of the Company to have been duly adopted by the Board of Directors and to be in full force and effect on the date of such certification and delivered to the Trustee.

                   "Business Day" means any day other than a Saturday, Sunday or any other day on which banking institutions in Wilmington, Delaware, The City of New York or Lansing, Michigan are permitted or required by law or executive order to close.

                   "Calculation Agent" means the Person identified as "Trustee" in the first paragraph hereof with respect to the Debt Securities and the Institutional Trustee with respect to the Trust Securities.

                   "Capital Securities" means undivided beneficial interests in the assets of the Trust which are designated as "MMCapS^SM" and rank pari passu with Common Securities issued by the Trust; provided, however, that if an Event of Default (as defined in the Declaration) has occurred and is continuing, the rights of holders of such Common Securities to payment in respect of distributions and payments upon liquidation, redemption and otherwise are subordinated to the rights of holders of such Capital Securities.

                   "Capital Securities Guarantee" means the guarantee agreement that the Company will enter into with Wilmington Trust Company or other Persons that operates directly or indirectly for the benefit of holders of Capital Securities of the Trust.

                   "Capital Treatment Event" means, if the Company is organized and existing under the laws of the United States or any state thereof or the District of Columbia, the receipt by the Company and the Trust of an Opinion of Counsel experienced in such matters to the effect that, as a result of any amendment to, or change in, the laws, rules or regulations of the United States or any political subdivision thereof or therein, or as the result of any official or administrative pronouncement or action or decision interpreting or applying such laws, rules or regulations, which amendment or change is effective or which pronouncement, action or decision is announced on or after the date of original issuance of the Debt Securities, there is more than an insubstantial risk that the Company will not, within 90 days of the date of such opinion, be entitled to treat an amount equal to the aggregate Liquidation Amount of the Capital Securities as "Tier 1 Capital" (or the then equivalent thereof) for purposes of the capital adequacy guidelines of the Federal Reserve (or any successor regulatory authority with jurisdiction over bank holding companies), as then in effect and applicable to the Company; provided, however, that the distribution of the Debt Securities in connection with the liquidation of the Trust by the Company shall not in and of itself constitute a Capital Treatment Event unless such liquidation shall have occurred in connection with a Tax Event or an Investment Company Event.

                   "Certificate" means a certificate signed by any one of the principal executive officer, the principal financial officer or the principal accounting officer of the Company.

                   "Code" means the Internal Revenue Code of 1986, as amended.

                   "Common Securities" means undivided beneficial interests in the assets of the Trust which are designated as "Common Securities" and rank pari passu with Capital Securities issued by the Trust; provided, however, that if an Event of Default (as defined in the Declaration)

2

has occurred and is continuing, the rights of holders of such Common Securities to payment in respect of distributions and payments upon liquidation, redemption and otherwise are subordinated to the rights of holders of such Capital Securities.

                   "Company" means Southern Michigan Bancorp, Inc., a bank holding company incorporated in Michigan, and, subject to the provisions of Article XI, shall include its successors and assigns.

                   "Debt Security" or "Debt Securities" has the meaning stated in the first recital of this Indenture.

                   "Debt Security Register" has the meaning specified in Section 2.05.

                   "Declaration" means the Amended and Restated Declaration of Trust of the Trust, dated as of March 25, 2004, as amended or supplemented from time to time.

                   "Default" means any event, act or condition that with notice or lapse of time, or both, would constitute an Event of Default.

                   "Defaulted Interest" has the meaning set forth in Section 2.08.

                   "Deferred Interest" has the meaning set forth in Section 2.11.

                   "Event of Default" means any event specified in Section 5.01, which has continued for the period of time, if any, and after the giving of the notice, if any, therein designated.

                   "Exchange Act" means the Securities Exchange Act of 1934, as amended.

                   "Extension Period" has the meaning set forth in Section 2.11.

                   "Federal Reserve" means the Board of Governors of the Federal Reserve System.

                   "Indenture" means this Indenture as originally executed or, if amended or supplemented as herein provided, as so amended or supplemented, or both.

                   "Institutional Trustee" has the meaning set forth in the Declaration.

                   "Interest Payment Date" means January 7, April 7, July 7 and October 7 of each year, commencing on July 7, 2004, subject to Section 14.07.

                   "Interest Period" has the meaning set forth in Section 2.08.

                   "Interest Rate" means, with respect to any Interest Period, a per annum rate of interest equal to LIBOR, as determined on the LIBOR Determination Date for such Interest Period (or, in the case of the first Interest Period, will be 1.11%), plus 2.75%; provided, however, that the Interest Rate for any Interest Period may not exceed the highest rate permitted by New York law, as the same may be modified by United States law of general application.

3

                   "Investment Company Event" means the receipt by the Company and the Trust of an Opinion of Counsel experienced in such matters to the effect that, as a result of a change in law or regulation or written change in interpretation or application of law or regulation by any legislative body, court, governmental agency or regulatory authority, there is more than an insubstantial risk that the Trust is or, within 90 days of the date of such opinion will be, considered an "investment company" that is required to be registered under the Investment Company Act of 1940, as amended, which change becomes effective or would become effective, as the case may be, on or after the date of the original issuance of the Debt Securities.

                   "LIBOR" means the London Interbank Offered Rate for three-month U.S. Dollar deposits in Europe as determined by the Calculation Agent according to Section 2.10(b).

                   "LIBOR Banking Day" has the meaning set forth in Section 2.10(b)(i).

                   "LIBOR Business Day" has the meaning set forth in Section 2.10(b)(i).

                   "LIBOR Determination Date" has the meaning set forth in Section 2.10(b)(i).

                   "Liquidation Amount" means the liquidation amount of $1,000 per Trust Security.

                   "Maturity Date" means April 6, 2034, subject to Section 14.07.

                   "Officers' Certificate" means a certificate signed by the Chairman of the Board, the Vice Chairman, the President or any Vice President, and by the Chief Financial Officer, the Treasurer, an Assistant Treasurer, the Comptroller, an Assistant Comptroller, the Secretary or an Assistant Secretary of the Company, and delivered to the Trustee. Each such certificate shall include the statements provided for in Section 14.06 if and to the extent required by the provisions of such Section.

                   "Opinion of Counsel" means an opinion in writing signed by legal counsel, who may be an employee of or counsel to the Company or may be other counsel reasonably satisfactory to the Trustee. Each such opinion shall include the statements provided for in Section 14.06 if and to the extent required by the provisions of such Section.

                   The term "outstanding," when used with reference to Debt Securities, subject to the provisions of Section 7.04, means, as of any particular time, all Debt Securities authenticated and delivered by the Trustee or the Authenticating Agent under this Indenture, except

                   (a)         Debt Securities theretofore canceled by the Trustee or the Authenticating Agent or delivered to the Trustee for cancellation;

                   (b)         Debt Securities, or portions thereof, for the payment or redemption of which moneys in the necessary amount shall have been deposited in trust with the Trustee or with any Paying Agent (other than the Company) or shall have been set aside and segregated in trust by the Company (if the Company shall act as its own Paying Agent); provided, that, if such Debt Securities, or portions thereof, are to be redeemed prior to maturity thereof, notice of such redemption shall have been given as provided in Articles X and XIV or provision satisfactory to the Trustee shall have been made for giving such notice; and

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                   (c)         Debt Securities paid pursuant to Section 2.06 or in lieu of or in substitution for which other Debt Securities shall have been authenticated and delivered pursuant to the terms of Section 2.06 unless proof satisfactory to the Company and the Trustee is presented that any such Debt Securities are held by bona fide holders in due course.

                   "Optional Redemption Date" has the meaning set forth in Section 10.01.

                   "Optional Redemption Price" means an amount in cash equal to 100% of the principal amount of the Debt Securities being redeemed plus unpaid interest accrued on such Debt Securities to the related Optional Redemption Date.

                   "Paying Agent" has the meaning set forth in Section 3.04(e).

                   "Person" means a legal person, including any individual, corporation, estate, partnership, joint venture, association, joint-stock company, limited liability company, trust, unincorporated association, or government or any agency or political subdivision thereof, or any other entity of whatever nature.

                   "Predecessor Security" of any particular Debt Security means every previous Debt Security evidencing all or a portion of the same debt as that evidenced by such particular Debt Security; and, for the purposes of this definition, any Debt Security authenticated and delivered under Section 2.06 in lieu of a lost, destroyed or stolen Debt Security shall be deemed to evidence the same debt as the lost, destroyed or stolen Debt Security.

                   "Principal Office of the Trustee" means the office of the Trustee at which at any particular time its corporate trust business shall be principally administered, which at all times shall be located within the United States and at the time of the execution of this Indenture shall be Rodney Square North, 1100 North Market Street, Wilmington, DE 19890-0001.

                   "Reference Banks" has the meaning set forth in Section 2.10(b)(ii).

                   "Resale Restriction Termination Date" means, with respect to any Debt Security, the date which is the later of (i) two years (or such shorter period of time as permitted by Rule 144(k) under the Securities Act) after the later of (y) the date of original issuance of such Debt Security and (z) the last date on which the Company or any Affiliate (as defined in Rule 405 under the Securities Act) of the Company was the holder of such Debt Security (or any predecessor thereto) and (ii) such later date, if any, as may be required by any subsequent change in applicable law.

                   "Responsible Officer" means, with respect to the Trustee, any officer within the Principal Office of the Trustee with direct responsibility for the administration of the Indenture, including any vice-president, any assistant vice-president, any secretary, any assistant secretary, the treasurer, any assistant treasurer, any trust officer or other officer of the Principal Office of the Trustee customarily performing functions similar to those performed by any of the above designated officers and also means, with respect to a particular corporate trust matter, any other officer to whom such matter is referred because of that officer's knowledge of and familiarity with the particular subject.

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                   "Securities Act" means the Securities Act of 1933, as amended.

                   "Securityholder," "holder of Debt Securities" or other similar terms, means any Person in whose name at the time a particular Debt Security is registered on the Debt Security Register.

                   "Senior Indebtedness" means, with respect to the Company, (i) the principal, premium, if any, and interest in respect of (A) indebtedness of the Company for money borrowed and (B) indebtedness evidenced by securities, debentures, notes, bonds or other similar instruments issued by the Company, (ii) all capital lease obligations of the Company, (iii) all obligations of the Company issued or assumed as the deferred purchase price of property, all conditional sale obligations of the Company and all obligations of the Company under any title retention agreement (but excluding trade accounts payable arising in the ordinary course of business), (iv) all obligations of the Company for the reimbursement of any letter of credit, any banker's acceptance, any security purchase facility, any repurchase agreement or similar arrangement, any interest rate swap, any other hedging arrangement, any obligation under options or any similar credit or other transaction, (v) all obligations of the type referred to in clauses (i) through (iv) above of other Persons for the payment of which the Company is responsible or liable as obligor, guarantor or otherwise and (vi) all obligations of the type referred to in clauses (i) through (v) above of other Persons secured by any lien on any property or asset of the Company (whether or not such obligation is assumed by the Company), whether incurred on or prior to the date of this Indenture or thereafter incurred, unless, with the prior approval of the Federal Reserve if not otherwise generally approved, it is provided in the instrument creating or evidencing the same or pursuant to which the same is outstanding that such obligations are not superior or are pari passu in right of payment to the Debt Securities; provided, however, that Senior Indebtedness shall not include (A) any debt securities issued to any trust other than the Trust (or a trustee of such trust) that is a financing vehicl e of the Company (a "financing entity"), in connection with the issuance by such financing entity of equity or other securities in transactions substantially similar in structure to the transactions contemplated hereunder and in the Declaration or (B) any guarantees of the Company in respect of the equity or other securities of any financing entity referred to in clause (A) above.

                   "Special Event" means any of a Tax Event, an Investment Company Event or a Capital Treatment Event.

                   "Special Redemption Date" has the meaning set forth in Section 10.02.

                   "Special Redemption Price" means, with respect to the redemption of any Debt Security following a Special Event, an amount in cash equal to 103.525% of the principal amount of Debt Securities to be redeemed prior to April 7, 2005 and thereafter equal to the percentage of the principal amount of the Debt Securities that is specified below for the Special Redemption Date plus, in each case, unpaid interest accrued thereon to the Special Redemption Date:

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Special Redemption During the 12-Month Period Beginning April 7,	Percentage of Principal Amount
2005	103.140%
2006	102.355%
2007	101.570%
2008	100.785%
2009 and thereafter	100.000%

                   "Subsidiary" means, with respect to any Person, (i) any corporation, at least a majority of the outstanding voting stock of which is owned, directly or indirectly, by such Person or one or more of its Subsidiaries or by such Person and one or more of its Subsidiaries, (ii) any general partnership, joint venture or similar entity, at least a majority of the outstanding partnership or similar interests of which shall at the time be owned by such Person or one or more of its Subsidiaries or by such Person and one or more of its Subsidiaries, and (iii) any limited partnership of which such Person or any of its Subsidiaries is a general partner. For the purposes of this definition, "voting stock" means shares, interests, participations or other equivalents in the equity interest (however designated) in such Person having ordinary voting power for the election of a majority of the directors (or the equivalent) of such Pers on, other than shares, interests, participations or other equivalents having such power only by reason of the occurrence of a contingency.

                   "Tax Event" means the receipt by the Company and the Trust of an Opinion of Counsel experienced in such matters to the effect that, as a result of any amendment to or change (including any announced prospective change) in the laws or any regulations thereunder of the United States or any political subdivision or taxing authority thereof or therein, or as a result of any official administrative pronouncement (including any private letter ruling, technical advice memorandum, regulatory procedure, notice or announcement (an "Administrative Action")) or judicial decision interpreting or applying such laws or regulations, regardless of whether such Administrative Action or judicial decision is issued to or in connection with a proceeding involving the Company or the Trust and whether or not subject to review or appeal, which amendment, clarification, change, Administrative Action or decision is enacted, promulgated or anno unced, in each case on or after the date of original issuance of the Debt Securities, there is more than an insubstantial risk that: (i) the Trust is, or will be within 90 days of the date of such opinion, subject to United States federal income tax with respect to income received or accrued on the Debt Securities; (ii) if the Company is organized and existing under the laws of the United States or any state thereof or the District of Columbia, interest payable by the Company on the Debt Securities is not, or within 90 days of the date of such opinion, will not be, deductible by the Company, in whole or in part, for United States federal income tax purposes; or (iii) the Trust is, or will be within 90 days of the date of such opinion, subject to or otherwise required to pay, or required to withhold from distributions to holders of Trust Securities, more than a de minimis amount of other taxes (including withholding taxes), duties, assessments or other governmental charges.

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                   "Trust" means Southern Michigan Bancorp Capital Trust I, the Delaware statutory trust, or any other similar trust created for the purpose of issuing Capital Securities in connection with the issuance of Debt Securities under this Indenture, of which the Company is the sponsor.

                   "Trust Indenture Act" means the Trust Indenture Act of 1939, as amended from time to time, or any successor legislation.

                   "Trust Securities" means Common Securities and Capital Securities of the Trust.

                   "Trustee" means the Person identified as "Trustee" in the first paragraph hereof, and, subject to the provisions of Article VI hereof, shall also include its successors and assigns as Trustee hereunder.

                   "United States" means the United States of America and the District of Columbia.

                   "U.S. Person" has the meaning given to United States Person as set forth in Section 7701(a)(30) of the Code.

ARTICLE II
DEBT SECURITIES

                   Section 2.01         Authentication and Dating.

                   Upon the execution and delivery of this Indenture, or from time to time thereafter, Debt Securities in an aggregate principal amount not in excess of $5,155,000 may be executed and delivered by the Company to the Trustee for authentication, and the Trustee shall thereupon authenticate and make available for delivery said Debt Securities to or upon the written order of the Company, signed by its Chairman of the Board of Directors, Vice Chairman, President or Chief Financial Officer or one of its Vice Presidents, without any further action by the Company hereunder. In authenticating such Debt Securities, and accepting the additional responsibilities under this Indenture in relation to such Debt Securities, the Trustee shall be entitled to receive, and (subject to Section 6.01) shall be fully protected in relying upon a copy of any Board Resolution or Board Resolutions relating thereto and, if applicable, an appropriate record of any actio n taken pursuant to such resolution, in each case certified by the Secretary or an Assistant Secretary or other officers with appropriate delegated authority of the Company as the case may be.

                   The Trustee shall have the right to decline to authenticate and deliver any Debt Securities under this Section if the Trustee, being advised by counsel, determines that such action may not lawfully be taken or if a Responsible Officer of the Trustee in good faith shall determine that such action would expose the Trustee to personal liability to existing Securityholders.

                   The definitive Debt Securities shall be typed, printed, lithographed or engraved on steel engraved borders or may be produced in any other manner, all as determined by the officers executing such Debt Securities, as evidenced by their execution of such Debt Securities.

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                   Section 2.02         Form of Trustee's Certificate of Authentication.

                   The Trustee's certificate of authentication on all Debt Securities shall be in substantially the following form:

                   This is one of the Debt Securities referred to in the within-mentioned Indenture.

Wilmington Trust Company,
	not in its individual capacity but solely as trustee
By:
	Authorized Officer

                   Section 2.03         Form and Denomination of Debt Securities.

                   The Debt Securities shall be substantially in the form of Exhibit A hereto. The Debt Securities shall be in registered, certificated form without coupons and in minimum denominations of $100,000 and any multiple of $1,000 in excess thereof. The Debt Securities shall be numbered, lettered, or otherwise distinguished in such manner or in accordance with such plans as the officers executing the same may determine with the approval of the Trustee as evidenced by the execution and authentication thereof.

                   Section 2.04         Execution of Debt Securities.

                   The Debt Securities shall be signed in the name and on behalf of the Company by the manual or facsimile signature of its Chairman of the Board of Directors, Vice Chairman, President or Chief Financial Officer or one of its Executive Vice Presidents, Senior Vice Presidents or Vice Presidents, under its corporate seal (if legally required) which may be affixed thereto or printed, engraved or otherwise reproduced thereon, by facsimile or otherwise, and which need not be attested. Only such Debt Securities as shall bear thereon a certificate of authentication substantially in the form herein before recited, executed by the Trustee or the Authenticating Agent by the manual signature of an authorized officer, shall be entitled to the benefits of this Indenture or be valid or obligatory for any purpose. Such certificate by the Trustee or the Authenticating Agent upon any Debt Security executed by the Company shall be conclusive evidence that the Debt Security so authenticated has been duly authenticated and delivered hereunder and that the holder is entitled to the benefits of this Indenture.

                   In case any officer of the Company who shall have signed any of the Debt Securities shall cease to be such officer before the Debt Securities so signed shall have been authenticated and delivered by the Trustee or the Authenticating Agent, or disposed of by the Company, such Debt Securities nevertheless may be authenticated and delivered or disposed of as though the Person who signed such Debt Securities had not ceased to be such officer of the Company; and any Debt Security may be signed on behalf of the Company by such Persons as, at the actual date of the execution of such Debt Security, shall be the proper officers of the Company, although at the date of the execution of this Indenture any such person was not such an officer.

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                   Every Debt Security shall be dated the date of its authentication.

                   Section 2.05         Exchange and Registration of Transfer of Debt Securities.

                   The Company shall cause to be kept, at the office or agency maintained for the purpose of registration of transfer and for exchange as provided in Section 3.02, a register (the "Debt Security Register") for the Debt Securities issued hereunder in which, subject to such reasonable regulations as it may prescribe, the Company shall provide for the registration and transfer of all Debt Securities as provided in this Article II. Such register shall be in written form or in any other form capable of being converted into written form within a reasonable time.

                   Debt Securities to be exchanged may be surrendered at the Principal Office of the Trustee or at any office or agency to be maintained by the Company for such purpose as provided in Section 3.02, and the Company shall execute, the Company or the Trustee shall register and the Trustee or the Authenticating Agent shall authenticate and make available for delivery in exchange therefor, the Debt Security or Debt Securities which the Securityholder making the exchange shall be entitled to receive. Upon due presentment for registration of transfer of any Debt Security at the Principal Office of the Trustee or at any office or agency of the Company maintained for such purpose as provided in Section 3.02, the Company shall execute, the Company or the Trustee shall register and the Trustee or the Authenticating Agent shall authenticate and make available for delivery in the name of the transferee or transferees, a new Debt Security for a like agg regate principal amount. Registration or registration of transfer of any Debt Security by the Trustee or by any agent of the Company appointed pursuant to Section 3.02, and delivery of such Debt Security, shall be deemed to complete the registration or registration of transfer of such Debt Security.

                   All Debt Securities presented for registration of transfer or for exchange or payment shall (if so required by the Company or the Trustee or the Authenticating Agent) be duly endorsed by, or be accompanied by, a written instrument or instruments of transfer in form satisfactory to the Company and either the Trustee or the Authenticating Agent duly executed by, the holder or such holder's attorney duly authorized in writing.

                   No service charge shall be made for any exchange or registration of transfer of Debt Securities, but the Company or the Trustee may require payment of a sum sufficient to cover any tax, fee or other governmental charge that may be imposed in connection therewith other than exchanges pursuant to Section 2.07, Section 9.04 or Section 10.04 not involving any transfer.

                   The Company or the Trustee shall not be required to exchange or register a transfer of any Debt Security for a period of 15 days immediately preceding the date of selection of Debt Securities for redemption.

                   Notwithstanding the foregoing, Debt Securities may not be transferred prior to the Resale Restriction Termination Date except in compliance with the legend set forth below, unless otherwise determined by the Company in accordance with applicable law, which legend shall be placed on each Debt Security:

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                   THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS OR ANY OTHER APPLICABLE SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. THE HOLDER OF THIS SECURITY OR ANY INTEREST OR PARTICIPATION HEREIN, BY ITS ACCEPTANCE HEREOF OR THEREOF, AS THE CASE MAY BE, AGREES TO OFFER, SELL OR OTHERWISE TRANSFER SUCH SECURITY OR ANY INTEREST OR PARTICIPATION HEREIN PRIOR TO THE DATE WHICH IS THE LATER OF (i) TWO YEARS (OR SUCH SHORTER PERIOD OF TIME AS PERMITTED BY RULE 144(k) UNDER THE SECURITIES ACT) AFTER THE LATER OF (Y) THE DATE OF ORIGINAL ISSUANCE HEREOF AND (Z) THE LAST DATE ON WHIC H THE COMPANY OR ANY AFFILIATE (AS DEFINED IN RULE 405 UNDER THE SECURITIES ACT) OF THE COMPANY WAS THE HOLDER OF THIS SECURITY OR SUCH INTEREST OR PARTICIPATION (OR ANY PREDECESSOR THERETO) AND (ii) SUCH LATER DATE, IF ANY, AS MAY BE REQUIRED BY ANY SUBSEQUENT CHANGE IN APPLICABLE LAW, ONLY (A) TO THE COMPANY, (B) PURSUANT TO RULE 144A UNDER THE SECURITIES ACT ("RULE 144A"), TO A PERSON THE HOLDER REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER", AS DEFINED IN RULE 144A, THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (C) PURSUANT TO AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT TO AN "ACCREDITED INVESTOR" WITHIN THE MEANING OF SUBPARAGRAPH (a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                   THE HOLDER OF THIS SECURITY OR ANY INTEREST OR PARTICIPATION HEREIN, BY ITS ACCEPTANCE HEREOF OR THEREOF, AS THE CASE MAY BE, ALSO AGREES, REPRESENTS AND WARRANTS THAT IT IS NOT AN EMPLOYEE BENEFIT, INDIVIDUAL RETIREMENT ACCOUNT OR OTHER PLAN OR ARRANGEMENT SUBJECT TO TITLE I OF THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED ("ERISA"), OR SECTION 4975 OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE "CODE") (EACH A "PLAN"), OR AN ENTITY WHOSE UNDERLYING ASSETS INCLUDE "PLAN ASSETS" BY REASON OF ANY PLAN'S INVESTMENT IN THE ENTITY AND NO PERSON INVESTING "PLAN ASSETS" OF ANY PLAN MAY ACQUIRE OR HOLD THIS SECURITY OR ANY INTEREST OR PARTICIPATION HEREIN, UNLESS SUCH PURCHASER OR HOLDER IS ELIGIBLE FOR THE EXEMPTIVE RELIEF AVAILABLE UNDER U.S. DEPARTMENT OF LABOR PROHIBITED TRANSACTION CLASS EXEMPTION 96-23, 95-60, 91-38, 90-1 OR 84-14 OR ANOTHER APPLICABLE EXEMPTION OR ITS PURCHASE AND HOLDING OF THIS SECURITY OR SUCH INTEREST OR PARTICIPATION IS NOT PROHIBITED BY SECTION 406 OF ERISA OR SECTION 4975 OF THE CODE WITH RESPECT TO SUCH PURCHASE OR HOLDING. ANY PURCHASER OR HOLDER OF THIS SECURITY OR ANY INTEREST OR PARTICIPATION HEREIN WILL BE DEEMED TO HAVE REPRESENTED BY ITS PURCHASE AND HOLDING HEREOF OR THEREOF, AS THE CASE MAY BE, THAT EITHER (i) IT IS NOT AN EMPLOYEE BENEFIT PLAN WITHIN THE MEANING OF SECTION 3(3) OF ERISA, OR A PLAN TO WHICH SECTION 4975 OF THE CODE IS APPLICABLE, A TRUSTEE OR OTHER PERSON ACTING ON BEHALF OF AN EMPLOYEE BENEFIT PLAN OR PLAN, OR ANY OTHER PERSON OR ENTITY USING THE ASSETS OF ANY EMPLOYEE BENEFIT PLAN OR PLAN TO FINANCE SUCH PURCHASE, OR (ii) SUCH PURCHASE AND HOLDING WILL NOT RESULT IN A PROHIBITED TRANSACTION UNDER SECTION 406 OF ERISA OR SECTION 4975 OF THE CODE FOR WHICH THERE IS NO APPLICABLE STATUTORY OR ADMINISTRATIVE EXEMPTION.

                   IN CONNECTION WITH ANY TRANSFER, THE HOLDER OF THIS SECURITY WILL DELIVER TO THE REGISTRAR AND TRANSFER AGENT SUCH CERTIFICATES AND OTHER INFORMATION AS MAY BE REQUIRED BY THE INDENTURE TO CONFIRM THAT THE TRANSFER COMPLIES WITH THE FOREGOING RESTRICTIONS.

                   THIS SECURITY WILL BE ISSUED AND MAY BE TRANSFERRED ONLY IN MINIMUM DENOMINATIONS OF $100,000 AND MULTIPLES OF $1,000 IN EXCESS THEREOF. ANY ATTEMPTED TRANSFER OF THIS SECURITY IN DENOMINATIONS OF LESS THAN $100,000 SHALL BE DEEMED TO BE VOID AND OF NO LEGAL EFFECT WHATSOEVER. ANY SUCH PURPORTED TRANSFEREE SHALL BE DEEMED NOT TO BE THE HOLDER OF THIS SECURITY OR ANY INTEREST OR PARTICIPATION HEREIN FOR ANY PURPOSE, INCLUDING, BUT NOT LIMITED TO, THE RECEIPT OF DISTRIBUTIONS ON THIS SECURITY OR SUCH INTEREST OR PARTICIPATION, AND SUCH PURPORTED TRANSFEREE

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SHALL BE DEEMED TO HAVE NO INTEREST WHATSOEVER IN THIS SECURITY OR ANY INTEREST OR PARTICIPATION HEREIN.

                   THIS OBLIGATION IS NOT A DEPOSIT AND IS NOT INSURED BY THE UNITED STATES OR ANY AGENCY OR FUND OF THE UNITED STATES, INCLUDING THE FEDERAL DEPOSIT INSURANCE CORPORATION (THE "FDIC"). THIS OBLIGATION IS SUBORDINATED TO THE CLAIMS OF THE DEPOSITORS AND THE CLAIMS OF GENERAL AND SECURED CREDITORS OF THE COMPANY, IS INELIGIBLE AS COLLATERAL FOR A LOAN BY THE COMPANY OR ANY OF ITS SUBSIDIARIES AND IS NOT SECURED.

                   Section 2.06         Mutilated, Destroyed, Lost or Stolen Debt Securities.

                   In case any Debt Security shall become mutilated or be destroyed, lost or stolen, the Company shall execute, and upon its written request the Trustee shall authenticate and deliver, a new Debt Security bearing a number not contemporaneously outstanding, in exchange and substitution for the mutilated Debt Security, or in lieu of and in substitution for the Debt Security so destroyed, lost or stolen. In every case the applicant for a substituted Debt Security shall furnish to the Company and the Trustee such security or indemnity as may be required by them to save each of them harmless, and, in every case of destruction, loss or theft, the applicant shall also furnish to the Company and the Trustee evidence to their satisfaction of the destruction, loss or theft of such Debt Security and of the ownership thereof.

                   The Trustee may authenticate any such substituted Debt Security and deliver the same upon the written request or authorization of any officer of the Company. Upon the issuance of any substituted Debt Security, the Company or the Trustee may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses connected therewith. In case any Debt Security which has matured or is about to mature or has been called for redemption in full shall become mutilated or be destroyed, lost or stolen, the Company may, instead of issuing a substitute Debt Security, pay or authorize the payment of the same (without surrender thereof except in the case of a mutilated Debt Security) if the applicant for such payment shall furnish to the Company and the Trustee such security or indemnity as may be required by them to save each of them harmless and, in case of destruction, l oss or theft, evidence satisfactory to the Company and to the Trustee of the destruction, loss or theft of such Security and of the ownership thereof.

                   Every substituted Debt Security issued pursuant to the provisions of this Section 2.06 by virtue of the fact that any such Debt Security is destroyed, lost or stolen shall constitute an additional contractual obligation of the Company, whether or not the destroyed, lost or stolen Debt Security shall be found at any time, and shall be entitled to all the benefits of this Indenture equally and proportionately with any and all other Debt Securities duly issued hereunder. All Debt Securities shall be held and owned upon the express condition that, to the extent permitted by applicable law, the foregoing provisions are exclusive with respect to the replacement or payment of mutilated, destroyed, lost or stolen Debt Securities and shall preclude any and all other rights or remedies notwithstanding any law or statute existing or hereafter enacted to the contrary with respect to the replacement or payment of negotiable instruments or other secu rities without their surrender.

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                   Section 2.07         Temporary Debt Securities.

                   Pending the preparation of definitive Debt Securities, the Company may execute and the Trustee shall authenticate and make available for delivery temporary Debt Securities that are typed, printed or lithographed. Temporary Debt Securities shall be issuable in any authorized denomination, and substantially in the form of the definitive Debt Securities but with such omissions, insertions and variations as may be appropriate for temporary Debt Securities, all as may be determined by the Company. Every such temporary Debt Security shall be executed by the Company and be authenticated by the Trustee upon the same conditions and in substantially the same manner, and with the same effect, as the definitive Debt Securities. Without unreasonable delay, the Company will execute and deliver to the Trustee or the Authenticating Agent definitive Debt Securities and thereupon any or all temporary Debt Securities may be surrendered in exchange theref or, at the Principal Office of the Trustee or at any office or agency maintained by the Company for such purpose as provided in Section 3.02, and the Trustee or the Authenticating Agent shall authenticate and make available for delivery in exchange for such temporary Debt Securities a like aggregate principal amount of such definitive Debt Securities. Such exchange shall be made by the Company at its own expense and without any charge therefor except that in case of any such exchange involving a registration of transfer the Company may require payment of a sum sufficient to cover any tax, fee or other governmental charge that may be imposed in relation thereto. Until so exchanged, the temporary Debt Securities shall in all respects be entitled to the same benefits under this Indenture as definitive Debt Securities authenticated and delivered hereunder.

                   Section 2.08         Payment of Interest.

                   Each Debt Security will bear interest at the then applicable Interest Rate (i) in the case of the initial Interest Period, for the period from, and including, the date of original issuance of such Debt Security to, but excluding, the initial Interest Payment Date and (ii) thereafter, for the period from, and including, the first day following the end of the preceding Interest Period to, but excluding, the applicable Interest Payment Date or, in the case of the last Interest Period, the related Optional Redemption Date, Special Redemption Date or Maturity Date, as applicable (each such period, an "Interest Period"), on the principal thereof, on any overdue principal and (to the extent that payment of such interest is enforceable under applicable law) on Deferred Interest and on any overdue installment of interest (including Defaulted Interest), payable (subject to the provisions of Article XII) on each Interest Payment Date and on the Maturity Date, any Optional Redemption Date or the Special Redemption Date, as the case may be. Interest and any Deferred Interest on any Debt Security that is payable, and is punctually paid or duly provided for by the Company, on any Interest Payment Date shall be paid to the Person in whose name such Debt Security (or one or more Predecessor Securities) is registered at the close of business on the regular record date for such interest installment, except that interest and any Deferred Interest payable on the Maturity Date, any Optional Redemption Date or the Special Redemption Date, as the case may be, shall be paid to the Person to whom principal is paid. In case (i) the Maturity Date of any Debt Security or (ii) any Debt Security or portion thereof is called for redemption and the related Optional Redemption Date or the Special Redemption Date, as the case may be, is subsequent to the regular record date with respect to any Interest Payment Date and prior to such Interest Payment Dat e, interest on such Debt Security will be paid upon presentation and surrender of such Debt Security.

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                   Any interest on any Debt Security, other than Deferred Interest, that is payable, but is not punctually paid or duly provided for by the Company, on any Interest Payment Date (herein called "Defaulted Interest") shall forthwith cease to be payable to the holder on the relevant regular record date by virtue of having been such holder, and such Defaulted Interest shall be paid by the Company to the Persons in whose names such Debt Securities (or their respective Predecessor Securities) are registered at the close of business on a special record date for the payment of such Defaulted Interest, which shall be fixed in the following manner: the Company shall notify the Trustee in writing of the amount of Defaulted Interest proposed to be paid on each such Debt Security and the date of the proposed payment, and at the same time the Company shall deposit with the Trustee an amount of money equal to the aggregate amount proposed to be paid in respect of such Defaulted Interest or shall make arrangements reasonably satisfactory to the Trustee for such deposit prior to the date of the proposed payment, such money when deposited to be held in trust for the benefit of the Persons entitled to such Defaulted Interest as provided in this paragraph. Thereupon the Trustee shall fix a special record date for the payment of such Defaulted Interest, which shall not be more than fifteen nor less than ten days prior to the date of the proposed payment and not less than ten days after the receipt by the Trustee of the notice of the proposed payment. The Trustee shall promptly notify the Company of such special record date and, in the name and at the expense of the Company, shall cause notice of the proposed payment of such Defaulted Interest and the special record date therefor to be mailed, first class postage prepaid, to each Securityholder at his or her address as it appears in the Debt Security Register, not less than ten days prior to such speci al record date. Notice of the proposed payment of such Defaulted Interest and the special record date therefor having been mailed as aforesaid, such Defaulted Interest shall be paid to the Persons in whose names such Debt Securities (or their respective Predecessor Securities) are registered on such special record date and thereafter the Company shall have no further payment obligation in respect of the Defaulted Interest.

                   Any interest scheduled to become payable on an Interest Payment Date occurring during an Extension Period shall not be Defaulted Interest and shall be payable on such other date as may be specified in the terms of such Debt Securities.

                   The term "regular record date", as used in this Section, shall mean the fifteenth day prior to the applicable Interest Payment Date, whether or not such day is a Business Day.

                   Subject to the foregoing provisions of this Section, each Debt Security delivered under this Indenture upon registration of transfer of or in exchange for or in lieu of any other Debt Security shall carry the rights to interest accrued and unpaid, and to accrue, that were carried by such other Debt Security.

                   Section 2.09         Cancellation of Debt Securities Paid, etc.

                   All Debt Securities surrendered for the purpose of payment, redemption, exchange or registration of transfer, shall, if surrendered to the Company or any Paying Agent, be surrendered to the Trustee and promptly canceled by it, or, if surrendered to the Trustee or any Authenticating Agent, shall be promptly canceled by it, and no Debt Securities shall be issued in lieu thereof except as expressly permitted by any of the provisions of this Indenture. All Debt Securities canceled by any Authenticating Agent shall be delivered to the Trustee. The

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Trustee shall destroy all canceled Debt Securities unless the Company otherwise directs the Trustee in writing, in which case the Trustee shall dispose of such Debt Securities as directed by the Company. If the Company shall acquire any of the Debt Securities, however, such acquisition shall not operate as a redemption or satisfaction of the indebtedness represented by such Debt Securities unless and until the same are surrendered to the Trustee for cancellation.

                   Section 2.10         Computation of Interest.

                    (a)          The amount of interest payable for any Interest Period will be computed on the basis of a 360-day year and the actual number of days elapsed in such Interest Period.

                    (b)          LIBOR shall be determined by the Calculation Agent for each Interest Period (other than the first Interest Period, in which case LIBOR will be 1.11% per annum) in accordance with the following provisions:

                    (i)          On the second LIBOR Business Day (provided, that on such day commercial banks are open for business (including dealings in foreign currency deposits) in London (a "LIBOR Banking Day"), and otherwise the next preceding LIBOR Business Day that is also a LIBOR Banking Day) prior to the January 15, April 15, July 15, or October 15, as the case may be, immediately succeeding the commencement of such Interest Period (each such day, a "LIBOR Determination Date"), LIBOR shall equal the rate, as obtained by the Calculation Agent, for three-month U.S. Dollar deposits in Europe, which appears on Telerate (as defined in the International Swaps and Derivatives Association, Inc. 2000 Interest Rate and Currency Exchange Definitions) page 3750 or such other page as may replace such page 3750, as of 11:00 a.m. (London time) on such LIBOR Determination Date, as reported by Bloomberg Financial Mark ets Commodities News or any successor service ("Telerate Page 3750"). "LIBOR Business Day" means any day that is not a Saturday, Sunday or other day on which commercial banking institutions in The City of New York or Wilmington, Delaware are authorized or obligated by law or executive order to be closed. If such rate is superseded on Telerate Page 3750 by a corrected rate before 12:00 noon (London time) on such LIBOR Determination Date, the corrected rate as so substituted will be LIBOR for such LIBOR Determination Date.

                    (ii)          If, on such LIBOR Determination Date, such rate does not appear on Telerate Page 3750, the Calculation Agent shall determine the arithmetic mean of the offered quotations of the Reference Banks to leading banks in the London interbank market for three-month U.S. Dollar deposits in Europe (in an amount determined by the Calculation Agent) by reference to requests for quotations as of approximately 11:00 a.m. (London time) on such LIBOR Determination Date made by the Calculation Agent to the Reference Banks. If, on such LIBOR Determination Date, at least two of the Reference Banks provide such quotations, LIBOR shall equal the arithmetic mean of such quotations. If, on such LIBOR Determination Date, only one or none of the Reference Banks provide such a quotation, LIBOR shall be deemed to be the arithmetic mean of the offered quotations that at least two leading banks in The City of New York (as se lected by the Calculation Agent) are quoting on such LIBOR Determination Date for three-month U.S. Dollar deposits in Europe at approximately 11:00 a.m. (London time) (in an

16 amount determined by the Calculation Agent). As used herein, "Reference Banks" means four major banks in the London interbank market selected by the Calculation Agent.

                    (iii)          If the Calculation Agent is required but is unable to determine a rate in accordance with at least one of the procedures provided above, LIBOR for such Interest Period shall be LIBOR in effect for the immediately preceding Interest Period.

                    (c)          All percentages resulting from any calculations on the Debt Securities will be rounded, if necessary, to the nearest one hundred-thousandth of a percentage point, with five one-millionths of a percentage point rounded upward (e.g., 9.876545% (or .09876545) being rounded to 9.87655% (or .0987655)), and all dollar amounts used in or resulting from such calculation will be rounded to the nearest cent (with one-half cent being rounded upward).

                    (d)          On each LIBOR Determination Date, the Calculation Agent shall notify, in writing, the Company and the Paying Agent of the applicable Interest Rate that applies to the related Interest Period. The Calculation Agent shall, upon the request of a holder of any Debt Securities, inform such holder of the Interest Rate that applies to the related Interest Period. All calculations made by the Calculation Agent in the absence of manifest error shall be conclusive for all purposes and binding on the Company and the holders of the Debt Securities. The Paying Agent shall be entitled to rely on information received from the Calculation Agent or the Company as to the applicable Interest Rate. The Company shall, from time to time, provide any necessary information to the Paying Agent relating to any original issue discount and interest on the Debt Securities that is included in any payment and reportable for t axable income calculation purposes.

                   Section 2.11         Extension of Interest Payment Period.

                  So long as no Event of Default has occurred and is continuing, the Company shall have the right, from time to time and without causing an Event of Default, to defer payments of interest on the Debt Securities by extending the interest payment period on the Debt Securities at any time and from time to time during the term of the Debt Securities, for up to 20 consecutive quarterly periods (each such extended interest payment period, together with all previous and further consecutive extensions thereof, is referred to herein as an "Extension Period"). No Extension Period may end on a date other than an Interest Payment Date or extend beyond the Maturity Date, any Optional Redemption Date or the Special Redemption Date, as the case may be. During any Extension Period, interest will continue to accrue on the Debt Securities, and interest on such accrued interest (such accrued interest and interest thereon referred to herein as &quo t;Deferred Interest") will accrue at an annual rate equal to the Interest Rate applicable during such Extension Period, compounded quarterly from the date such Deferred Interest would have been payable were it not for the Extension Period, to the extent permitted by applicable law. No interest or Deferred Interest (except any Additional Amounts that may be due and payable) shall be due and payable during an Extension Period, except at the end thereof. At the end of any Extension Period, the Company shall pay all Deferred Interest then accrued and unpaid on the Debt Securities; provided, however, that during any Extension Period, the Company shall be subject to the restrictions set forth in Section 3.08. Prior to the termination of any Extension Period, the Company may further extend such Extension Period, provided, that no Extension Period (including all previous and further consecutive extensions that are part of such Extension

17

Period) shall exceed 20 consecutive quarterly periods. Upon the termination of any Extension Period and upon the payment of all Deferred Interest, the Company may commence a new Extension Period, subject to the foregoing requirements. The Company must give the Trustee notice of its election to begin or extend an Extension Period at least one Business Day prior to the regular record date applicable to the next succeeding Interest Payment Date. The Trustee shall give notice of the Company's election to begin or extend an Extension Period to the Securityholders.

                   Section 2.12         CUSIP Numbers.

                   The Company in issuing the Debt Securities may use a "CUSIP" number (if then generally in use), and, if so, the Trustee shall use a "CUSIP" number in notices of redemption as a convenience to Securityholders; provided, that any such notice may state that no representation is made as to the correctness of such number either as printed on the Debt Securities or as contained in any notice of a redemption and that reliance may be placed only on the other identification numbers printed on the Debt Securities, and any such redemption shall not be affected by any defect in or omission of such numbers. The Company will promptly notify the Trustee in writing of any change in the CUSIP number.

ARTICLE III
PARTICULAR COVENANTS OF THE COMPANY

                   Section 3.01         Payment of Principal, Premium and Interest; Agreed Treatment of the Debt Securities.

          (a)          The Company covenants and agrees that it will duly and punctually pay or cause to be paid all payments due in respect of the Debt Securities at the place, at the respective times and in the manner provided in this Indenture and the Debt Securities. Payment of the principal of and premium, if any, and interest on the Debt Securities due on the Maturity Date, any Optional Redemption Date or the Special Redemption Date, as the case may be, will be made by the Company in immediately available funds against presentation and surrender of such Debt Securities. At the option of the Company, each installment of interest on the Debt Securities due on an Interest Payment Date other than the Maturity Date, any Optional Redemption Date or the Special Redemption Date, as the case may be, may be paid (i) by mailing checks for such interest payable to the order of the holders of Debt Securities entitled thereto as they appear on the Debt Security Register or (ii) by wire transfer of immediately available funds to any account with a banking institution located in the United States designated by such holders to the Paying Agent no later than the related record date. Notwithstanding anything to the contrary contained in this Indenture or any Debt Security, if the Trust or the trustee of the Trust is the holder of any Debt Security, then all payments in respect of such Debt Security shall be made by the Company in immediately available funds when due.

          (b)          The Company will treat the Debt Securities as indebtedness, and the interest payable in respect of such Debt Securities as interest, for all U.S. federal income tax purposes. All payments in respect of such Debt Securities will be made free and clear of U.S. withholding tax to any beneficial owner thereof that has provided an Internal Revenue Service

18

Form W-8 BEN (or any substitute or successor form) establishing its non-U.S. status for U.S. federal income tax purposes.

          (c)          As of the date of this Indenture, the Company represents that it has no intention to exercise its right under Section 2.11 to defer payments of interest on the Debt Securities by commencing an Extension Period.

          (d)          As of the date of this Indenture, the Company represents that the likelihood that it would exercise its right under Section 2.11 to defer payments of interest on the Debt Securities by commencing an Extension Period at any time during which the Debt Securities are outstanding is remote because of the restrictions that would be imposed on the Company's ability to declare or pay dividends or distributions on, or to redeem, purchase or make a liquidation payment with respect to, any of its outstanding equity and on the Company's ability to make any payments of principal of or premium, if any, or interest on, or repurchase or redeem, any of its debt securities that rank pari passu in all respects with or junior in interest to the Debt Securities.

                   Section 3.02         Offices for Notices and Payments, etc.

                   So long as any of the Debt Securities remain outstanding, the Company will maintain in Wilmington, Delaware or in Lansing, Michigan an office or agency where the Debt Securities may be presented for payment, an office or agency where the Debt Securities may be presented for registration of transfer and for exchange as provided in this Indenture and an office or agency where notices and demands to or upon the Company in respect of the Debt Securities or of this Indenture may be served. The Company will give to the Trustee written notice of the location of any such office or agency and of any change of location thereof. Until otherwise designated from time to time by the Company in a notice to the Trustee, or specified as contemplated by Section 2.05, such office or agency for all of the above purposes shall be the Principal Office of the Trustee. In case the Company shall fail to maintain any such office or agency in Wilmington, Delawa re or in Lansing, Michigan, or shall fail to give such notice of the location or of any change in the location thereof, presentations and demands may be made and notices may be served at the Principal Office of the Trustee.

                   In addition to any such office or agency, the Company may from time to time designate one or more offices or agencies outside Wilmington, Delaware or Lansing, Michigan where the Debt Securities may be presented for registration of transfer and for exchange in the manner provided in this Indenture, and the Company may from time to time rescind such designation, as the Company may deem desirable or expedient; provided, however, that no such designation or rescission shall in any manner relieve the Company of its obligation to maintain any such office or agency in Wilmington, Delaware or in Lansing, Michigan for the purposes above mentioned. The Company will give to the Trustee prompt written notice of any such designation or rescission thereof.

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                   Section 3.03         Appointments to Fill Vacancies in Trustee's Office.

                   The Company, whenever necessary to avoid or fill a vacancy in the office of Trustee, will appoint, in the manner provided in Section 6.09, a Trustee, so that there shall at all times be a Trustee hereunder.

                   Section 3.04         Provision as to Paying Agent.

                   (a)         If the Company shall appoint a Paying Agent other than the Trustee, it will cause such Paying Agent to execute and deliver to the Trustee an instrument in which such agent shall agree with the Trustee, subject to the provision of this Section 3.04,

                   (i)         that it will hold all sums held by it as such agent for the payment of all payments due on the Debt Securities (whether such sums have been paid to it by the Company or by any other obligor on the Debt Securities) in trust for the benefit of the holders of the Debt Securities;

                   (ii)         that it will give the Trustee prompt written notice of any failure by the Company (or by any other obligor on the Debt Securities) to make any payment on the Debt Securities when the same shall be due and payable; and

                   (iii)         that it will, at any time during the continuance of any Event of Default, upon the written request of the Trustee, forthwith pay to the Trustee all sums so held in trust by such Paying Agent.

                   (b)         If the Company shall act as its own Paying Agent, it will, on or before each due date of the payments due on the Debt Securities, set aside, segregate and hold in trust for the benefit of the holders of the Debt Securities a sum sufficient to make such payments so becoming due and will notify the Trustee in writing of any failure to take such action and of any failure by the Company (or by any other obligor under the Debt Securities) to make any payment on the Debt Securities when the same shall become due and payable.

                   Whenever the Company shall have one or more Paying Agents for the Debt Securities, it will, on or prior to each due date of the payments on the Debt Securities, deposit with a Paying Agent a sum sufficient to pay all payments so becoming due, such sum to be held in trust for the benefit of the Persons entitled thereto and (unless such Paying Agent is the Trustee) the Company shall promptly notify the Trustee in writing of its action or failure to act.

                   (c)         Anything in this Section 3.04 to the contrary notwithstanding, the Company may, at any time, for the purpose of obtaining a satisfaction and discharge with respect to the Debt Securities, or for any other reason, pay, or direct any Paying Agent to pay, to the Trustee all sums held in trust by the Company or any such Paying Agent, such sums to be held by the Trustee upon the same terms and conditions herein contained.

20

                   (d)         Anything in this Section 3.04 to the contrary notwithstanding, the agreement to hold sums in trust as provided in this Section 3.04 is subject to Sections 12.03 and 12.04.

                   (e)         The Company hereby initially appoints the Trustee to act as paying agent for the Debt Securities (the "Paying Agent").

                   Section 3.05         Certificate to Trustee.

                   The Company will deliver to the Trustee on or before 120 days after the end of each fiscal year, so long as Debt Securities are outstanding hereunder, a Certificate stating that in the course of the performance by the signers of their duties as officers of the Company they would normally have knowledge of any default by the Company in the performance of any covenants of the Company contained herein, stating whether or not they have knowledge of any such default and, if so, specifying each such default of which the signers have knowledge and the nature thereof.

                   Section 3.06         Additional Amounts.

                   If and for so long as the Trust is the holder of all Debt Securities and is subject to or otherwise required to pay (or is required to withhold from distributions to holders of Trust Securities) any additional taxes (including withholding taxes), duties, assessments or other governmental charges as a result of a Tax Event, the Company will pay such additional amounts (the "Additional Amounts") on the Debt Securities or the Trust Securities, as the case may be, as shall be required so that the net amounts received and retained by the holders of Debt Securities or Trust Securities, as the case may be, after payment of all taxes (including withholding taxes), duties, assessments or other governmental charges, will be equal to the amounts that such holders would have received and retained had no such taxes (including withholding taxes), duties, assessments or other governmental charges been imposed.

                   Whenever in this Indenture or the Debt Securities there is a reference in any context to the payment of principal of or premium, if any, or interest on the Debt Securities, such mention shall be deemed to include mention of payments of the Additional Amounts provided for in this Section to the extent that, in such context, Additional Amounts are, were or would be payable in respect thereof pursuant to the provisions of this Section and express mention of the payment of Additional Amounts (if applicable) in any provisions hereof shall not be construed as excluding Additional Amounts in those provisions hereof where such express mention is not made, provided, however, that, notwithstanding anything to the contrary contained in this Indenture or any Debt Security, the deferral of the payment of interest during an Extension Period pursuant to Section 2.11 shall not defer the payment of any Additional Amounts that may be due and payable.

                   Section 3.07         Compliance with Consolidation Provisions.

                   The Company will not, while any of the Debt Securities remain outstanding, consolidate with, or merge into, any other Person, or merge into itself, or sell, convey, transfer or otherwise dispose of all or substantially all of its property or capital stock to any other Person unless the provisions of Article XI hereof are complied with.

21

                   Section 3.08         Limitation on Dividends.

                   If (i) there shall have occurred and be continuing a Default or an Event of Default, (ii) the Company shall be in default with respect to its payment of any obligations under the Capital Securities Guarantee or (iii) the Company shall have given notice of its election to defer payments of interest on the Debt Securities by extending the interest payment period as provided herein and such period, or any extension thereof, shall have commenced and be continuing, then the Company may not (A) declare or pay any dividends or distributions on, or redeem, purchase, acquire, or make a liquidation payment with respect to, any of the Company's capital stock, (B) make any payment of principal of or premium, if any, or interest on or repay, repurchase or redeem any debt securities of the Company that rank pari passu in all respects with or junior in interest to the Debt Securities or (C) make any payment under any guarantees of the Company th at rank pari passu in all respects with or junior in interest to the Capital Securities Guarantee (other than (a) repurchases, redemptions or other acquisitions of shares of capital stock of the Company (I) in connection with any employment contract, benefit plan or other similar arrangement with or for the benefit of one or more employees, officers, directors or consultants, (II) in connection with a dividend reinvestment or stockholder stock purchase plan or (III) in connection with the issuance of capital stock of the Company (or securities convertible into or exercisable for such capital stock) as consideration in an acquisition transaction entered into prior to the occurrence of (i), (ii) or (iii) above, (b) as a result of any exchange or conversion of any class or series of the Company's capital stock (or any capital stock of a subsidiary of the Company) for any class or series of the Company's capital stock or of any class or series of the Company's indebtedness for any class or series of the C ompany's capital stock, (c) the purchase of fractional interests in shares of the Company's capital stock pursuant to the conversion or exchange provisions of such capital stock or the security being converted or exchanged, (d) any declaration of a dividend in connection with any stockholder's rights plan, or the issuance of rights, stock or other property under any stockholder's rights plan, or the redemption or repurchase of rights pursuant thereto or (e) any dividend in the form of stock, warrants, options or other rights where the dividend stock or the stock issuable upon exercise of such warrants, options or other rights is the same stock as that on which the dividend is being paid or ranks pari passu with or junior in interest to such stock).

                   Section 3.09         Covenants as to the Trust.

                   For so long as such Trust Securities remain outstanding, the Company shall maintain 100% ownership of the Common Securities; provided, however, that any permitted successor of the Company under this Indenture may succeed to the Company's ownership of such Common Securities. The Company, as owner of the Common Securities, shall use commercially reasonable efforts to cause the Trust (a) to remain a statutory trust, except in connection with a distribution of Debt Securities to the holders of Trust Securities in liquidation of the Trust, the redemption of all of the Trust Securities or mergers, consolidations or amalgamations, each as permitted by the Declaration, (b) to otherwise continue to be classified as a grantor trust for United States federal income tax purposes and (c) to cause each holder of Trust Securities to be treated as owning an undivided beneficial interest in the Debt Securities.

22

ARTICLE IV
LISTS

                   Section 4.01         Securityholders' Lists.

                   The Company covenants and agrees that it will furnish or cause to be furnished to the Trustee:

                   (a)         on each regular record date for an Interest Payment Date, a list, in such form as the Trustee may reasonably require, of the names and addresses of the Securityholders of the Debt Securities as of such record date; and

                   (b)         at such other times as the Trustee may request in writing, within 30 days after the receipt by the Company of any such request, a list of similar form and content as of a date not more than 15 days prior to the time such list is furnished; except that no such lists need be furnished under this Section 4.01 so long as the Trustee is in possession thereof by reason of its acting as Debt Security registrar.

                   Section 4.02         Preservation and Disclosure of Lists.

                   (a)         The Trustee shall preserve, in as current a form as is reasonably practicable, all information as to the names and addresses of the holders of Debt Securities (1) contained in the most recent list furnished to it as provided in Section 4.01 or (2) received by it in the capacity of Debt Securities registrar (if so acting) hereunder. The Trustee may destroy any list furnished to it as provided in Section 4.01 upon receipt of a new list so furnished.

                   (b)         In case three or more holders of Debt Securities (hereinafter referred to as "applicants") apply in writing to the Trustee and furnish to the Trustee reasonable proof that each such applicant has owned a Debt Security for a period of at least six months preceding the date of such application, and such application states that the applicants desire to communicate with other holders of Debt Securities with respect to their rights under this Indenture or under such Debt Securities and is accompanied by a copy of the form of proxy or other communication which such applicants propose to transmit, then the Trustee shall within five Business Days after the receipt of such application, at its election, either:

                   (i)         afford such applicants access to the information preserved at the time by the Trustee in accordance with the provisions of subsection (a) of this Section 4.02, or

                   (ii)         inform such applicants as to the approximate number of holders of Debt Securities whose names and addresses appear in the information preserved at the time by the Trustee in accordance with the provisions of subsection (a) of this Section 4.02, and as to the approximate cost of mailing to such Securityholders the form of proxy or other communication, if any, specified in such application.

                   If the Trustee shall elect not to afford such applicants access to such information, the Trustee shall, upon the written request of such applicants, mail to each Securityholder of Debt Securities whose name and address appear in the information preserved at the time by the

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Trustee in accordance with the provisions of subsection (a) of this Section 4.02 a copy of the form of proxy or other communication which is specified in such request with reasonable promptness after a tender to the Trustee of the material to be mailed and of payment, or provision for the payment, of the reasonable expenses of mailing, unless within five days after such tender, the Trustee shall mail to such applicants and file with the Securities and Exchange Commission, if permitted or required by applicable law, together with a copy of the material to be mailed, a written statement to the effect that, in the opinion of the Trustee, such mailing would be contrary to the best interests of the holders of all Debt Securities, as the case may be, or would be in violation of applicable law. Such written statement shall specify the basis of such opinion. If said Commission, as permitted or required by applicable law, after opportunity for a hearing upon the objections specified in the written statement so file d, shall enter an order refusing to sustain any of such objections or if, after the entry of an order sustaining one or more of such objections, said Commission shall find, after notice and opportunity for hearing, that all the objections so sustained have been met and shall enter an order so declaring, the Trustee shall mail copies of such material to all such Securityholders with reasonable promptness after the entry of such order and the renewal of such tender; otherwise the Trustee shall be relieved of any obligation or duty to such applicants respecting their application.

                   (c)         Each and every holder of Debt Securities, by receiving and holding the same, agrees with the Company and the Trustee that none of the Company, the Trustee or any Paying Agent shall be held accountable by reason of the disclosure of any such information as to the names and addresses of the holders of Debt Securities in accordance with the provisions of subsection (b) of this Section 4.02, regardless of the source from which such information was derived, and that the Trustee shall not be held accountable by reason of mailing any material pursuant to a request made under said subsection (b).

                   Section 4.03         Financial and Other Information.

                   (a)         The Company shall deliver to each Securityholder (1) each Report on Form 10-K and Form 10-Q prepared by the Company and filed with the Securities and Exchange Commission in accordance with the Exchange Act within 10 Business Days after the filing thereof, (2) if the Company is not then (y) subject to Section 13 or 15(d) of the Exchange Act or (z) exempt from reporting pursuant to Rule 12g3-2(b) thereunder, the information required to be provided by Rule 144A(d)(4) under the Securities Act and (3) within 30 days after the end of the fiscal year of the Company, Form 1099 or such other annual U.S. federal income tax information statement required by the Code containing such information with regard to the Debt Securities held by such holder as is required by the Code and the income tax regulations of the U.S. Treasury thereunder.

                   (b)         If and so long as a Holder of the Debt Securities is ALESCO Preferred Funding III, Ltd. or an entity that holds a pool of trust preferred securities and/or debt securities or a trustee thereof, the Company will cause copies of its reports on Form FRY-9C to be delivered to such Holder promptly following their filing with the Federal Reserve.

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ARTICLE V
REMEDIES OF THE TRUSTEE AND SECURITYHOLDERS

                   Section 5.01         Events of Default.

                   The following events shall be "Events of Default" with respect to Debt Securities:

                   (a)         the Company defaults in the payment of any interest upon any Debt Security when it becomes due and payable, and continuance of such default for a period of 30 days; for the avoidance of doubt, an extension of any interest payment period by the Company in accordance with Section 2.11 of this Indenture shall not constitute a default under this clause 5.01(a); or

                   (b)         the Company defaults in the payment of all or any part of the principal of (or premium, if any, on) any Debt Securities as and when the same shall become due and payable, whether at maturity, upon redemption, by acceleration of maturity pursuant to Section 5.01 of this Indenture or otherwise; or

                   (c)         the Company defaults in the performance of, or breaches, any of its covenants or agreements in Sections 3.06, 3.07, 3.08 or 3.09 of this Indenture (other than a covenant or agreement a default in whose performance or whose breach is elsewhere in this Section specifically dealt with), and continuance of such default or breach for a period of 90 days after there has been given, by registered or certified mail, to the Company by the Trustee or to the Company and the Trustee by the holders of not less than 25% in aggregate principal amount of the outstanding Debt Securities, a written notice specifying such default or breach and requiring it to be remedied and stating that such notice is a "Notice of Default" hereunder; or

                   (d)         a court having jurisdiction in the premises shall enter a decree or order for relief in respect of the Company in an involuntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or appoints a receiver, liquidator, assignee, custodian, trustee, sequestrator or other similar official of the Company or for any substantial part of its property, or orders the winding-up or liquidation of its affairs and such decree, appointment or order shall remain unstayed and in effect for a period of 90 consecutive days; or

                   (e)         the Company shall commence a voluntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, shall consent to the entry of an order for relief in an involuntary case under any such law, or shall consent to the appointment of or taking possession by a receiver, liquidator, assignee, trustee, custodian, sequestrator or other similar official of the Company or of any substantial part of its property, or shall make any general assignment for the benefit of creditors, or shall fail generally to pay its debts as they become due; or

                   (f)         the Trust shall have voluntarily or involuntarily liquidated, dissolved, wound-up its business or otherwise terminated its existence except in connection with (1) the distribution of the Debt Securities to holders of the Trust Securities in liquidation of their interests in the Trust, (2) the redemption of all of the outstanding Trust Securities or (3) mergers, consolidations or amalgamations, each as permitted by the Declaration.

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                   If an Event of Default specified under clause (a), (b) or (c) of this Section 5.01 occurs and is continuing with respect to the Debt Securities, then, in each and every such case, either the Trustee or the holders of not less than 25% in aggregate principal amount of the Debt Securities then outstanding hereunder, by notice in writing to the Company (and to the Trustee if given by Securityholders), may declare the entire principal of the Debt Securities and any premium and interest accrued, but unpaid, thereon to be due and payable immediately, and upon any such declaration the same shall become immediately due and payable. If an Event of Default specified under clause (d), (e) or (f) of this Section 5.01 occurs, then, in each and every such case, the entire principal amount of the Debt Securities and any premium and interest accrued, but unpaid, thereon shall ipso facto become immediately due and payable without further a ction.

                   The foregoing provisions, however, are subject to the condition that if, at any time after the principal of the Debt Securities shall have become due by acceleration, and before any judgment or decree for the payment of the moneys due shall have been obtained or entered as hereinafter provided, (i) the Company shall pay or shall deposit with the Trustee a sum sufficient to pay all matured installments of interest upon all the Debt Securities and all payments on the Debt Securities which shall have become due otherwise than by acceleration (with interest upon all such payments and Deferred Interest, to the extent permitted by law) and such amount as shall be sufficient to cover reasonable compensation to the Trustee and each predecessor Trustee, their respective agents, attorneys and counsel, and all other amounts due to the Trustee pursuant to Section 6.06, if any, and (ii) all Events of Default under this Indenture, other than the non-p ayment of the payments in respect of Debt Securities which shall have become due by acceleration, shall have been cured, waived or otherwise remedied as provided herein, then, in each and every such case, the holders of a majority in aggregate principal amount of the Debt Securities then outstanding, by written notice to the Company and to the Trustee, may waive all defaults and rescind and annul such acceleration and its consequences, but no such waiver or rescission and annulment shall extend to or shall affect any subsequent default or shall impair any right consequent thereon; provided, however, that if the Debt Securities are held by the Trust or a trustee of the Trust, such waiver or rescission and annulment shall not be effective until the holders of a majority in aggregate liquidation amount of the outstanding Capital Securities of the Trust shall have consented to such waiver or rescission and annulment.

                   In case the Trustee shall have proceeded to enforce any right under this Indenture and such proceedings shall have been discontinued or abandoned because of such rescission or annulment or for any other reason or shall have been determined adversely to the Trustee, then and in every such case the Company, the Trustee and the holders of the Debt Securities shall be restored respectively to their several positions and rights hereunder, and all rights, remedies and powers of the Company, the Trustee and the holders of the Debt Securities shall continue as though no such proceeding had been taken.

                   Section 5.02         Payment of Debt Securities on Default; Suit Therefor.

                   The Company covenants that upon the occurrence of an Event of Default pursuant to clause (a) or (b) of Section 5.01 and upon demand of the Trustee, the Company will pay to the Trustee, for the benefit of the holders of the Debt Securities, the whole amount that then shall have become due and payable on all Debt Securities, including Deferred Interest accrued on the

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Debt Securities; and, in addition thereto, such further amount as shall be sufficient to cover the costs and expenses of collection, including a reasonable compensation to the Trustee, its agents, attorneys and counsel, and any other amounts due to the Trustee under Section 6.06. In case the Company shall fail forthwith to pay such amounts upon such demand, the Trustee, in its own name and as trustee of an express trust, shall be entitled and empowered to institute any actions or proceedings at law or in equity for the collection of the sums so due and unpaid, and may prosecute any such action or proceeding to judgment or final decree, and may enforce any such judgment or final decree against the Company or any other obligor on such Debt Securities and collect in the manner provided by law out of the property of the Company or any other obligor on such Debt Securities wherever situated the moneys adjudged or decreed to be payable.

                   In case there shall be pending proceedings for the bankruptcy or for the reorganization of the Company or any other obligor on the Debt Securities under Bankruptcy Law, or in case a receiver or trustee shall have been appointed for the property of the Company or such other obligor, or in the case of any other similar judicial proceedings relative to the Company or other obligor upon the Debt Securities, or to the creditors or property of the Company or such other obligor, the Trustee, irrespective of whether the principal of the Debt Securities shall then be due and payable as therein expressed or by acceleration or otherwise and irrespective of whether the Trustee shall have made any demand pursuant to the provisions of this Section 5.02, shall be entitled and empowered, by intervention in such proceedings or otherwise, to file and prove a claim or claims for the whole amount of principal and interest owing and unpaid in respect of the Debt Securities and, in case of any judicial proceedings, to file such proofs of claim and other papers or documents as may be necessary or advisable in order to have the claims of the Trustee (including any claim for reasonable compensation to the Trustee and each predecessor Trustee, and their respective agents, attorneys and counsel, and for reimbursement of all other amounts due to the Trustee under Section 6.06) and of the Securityholders allowed in such judicial proceedings relative to the Company or any other obligor on the Debt Securities, or to the creditors or property of the Company or such other obligor, unless prohibited by applicable law and regulations, to vote on behalf of the holders of the Debt Securities in any election of a trustee or a standby trustee in arrangement, reorganization, liquidation or other bankruptcy or insolvency proceedings or Person performing similar functions in comparable proceedings, and to collect and receive any moneys or other property payable or deliverable on an y such claims, and to distribute the same after the deduction of its charges and expenses; and any receiver, assignee or trustee in bankruptcy or reorganization is hereby authorized by each of the Securityholders to make such payments to the Trustee, and, in the event that the Trustee shall consent to the making of such payments directly to the Securityholders, to pay to the Trustee such amounts as shall be sufficient to cover reasonable compensation to the Trustee, each predecessor Trustee and their respective agents, attorneys and counsel, and all other amounts due to the Trustee under Section 6.06.

                   Nothing herein contained shall be construed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Securityholder any plan of reorganization, arrangement, adjustment or composition affecting the Debt Securities or the rights of any holder thereof or to authorize the Trustee to vote in respect of the claim of any Securityholder in any such proceeding.

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                   All rights of action and of asserting claims under this Indenture, or under any of the Debt Securities, may be enforced by the Trustee without the possession of any of the Debt Securities, or the production thereof at any trial or other proceeding relative thereto, and any such suit or proceeding instituted by the Trustee shall be brought in its own name as trustee of an express trust, and any recovery of judgment shall be for the ratable benefit of the holders of the Debt Securities.

                   In any proceedings brought by the Trustee (and also any proceedings involving the interpretation of any provision of this Indenture to which the Trustee shall be a party), the Trustee shall be held to represent all the holders of the Debt Securities, and it shall not be necessary to make any holders of the Debt Securities parties to any such proceedings.

                   Section 5.03         Application of Moneys Collected by Trustee.

                   Any moneys collected by the Trustee shall be applied in the following order, at the date or dates fixed by the Trustee for the distribution of such moneys, upon presentation of the several Debt Securities in respect of which moneys have been collected, and stamping thereon the payment, if only partially paid, and upon surrender thereof if fully paid:

                   First: To the payment of costs and expenses incurred by, and reasonable fees of, the Trustee, its agents, attorneys and counsel, and of all other amounts due to the Trustee under Section 6.06;

                   Second: To the payment of all Senior Indebtedness of the Company if and to the extent required by Article XV;

                   Third: To the payment of the amounts then due and unpaid upon Debt Securities, in respect of which or for the benefit of which money has been collected, ratably, without preference or priority of any kind, according to the amounts due upon such Debt Securities; and

                   Fourth: The balance, if any, to the Company.

                   Section 5.04         Proceedings by Securityholders.

                   No holder of any Debt Security shall have any right to institute any suit, action or proceeding for any remedy hereunder, unless such holder previously shall have given to the Trustee written notice of an Event of Default with respect to the Debt Securities and unless the holders of not less than 25% in aggregate principal amount of the Debt Securities then outstanding shall have given the Trustee a written request to institute such action, suit or proceeding and shall have offered to the Trustee such reasonable indemnity as it may require against the costs, expenses and liabilities to be incurred thereby, and the Trustee for 60 days after its receipt of such notice, request and offer of indemnity shall have failed to institute any such action, suit or proceeding; provided, that no holder of Debt Securities shall have any right to prejudice the rights of any other holder of Debt Securities, obtain priority or preference over any o ther such holder or enforce any right under this Indenture except in the manner herein provided and for the equal, ratable and common benefit of all holders of Debt Securities.

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                   Notwithstanding any other provisions in this Indenture, the right of any holder of any Debt Security to receive payment of the principal of and premium, if any, and interest on such Debt Security when due, or to institute suit for the enforcement of any such payment, shall not be impaired or affected without the consent of such holder. For the protection and enforcement of the provisions of this Section, each and every Securityholder and the Trustee shall be entitled to such relief as can be given either at law or in equity.

                   Section 5.05         Proceedings by Trustee.

                   In case of an Event of Default, the Trustee may in its discretion proceed to protect and enforce the rights vested in it by this Indenture by such appropriate judicial proceedings as the Trustee shall deem most effectual to protect and enforce any of such rights, either by suit in equity or by action at law or by proceeding in bankruptcy or otherwise, whether for the specific enforcement of any covenant or agreement contained in this Indenture or in aid of the exercise of any power granted in this Indenture, or to enforce any other legal or equitable right vested in the Trustee by this Indenture or by law.

                   Section 5.06         Remedies Cumulative and Continuing.

                   Except as otherwise provided in Section 2.06, all powers and remedies given by this Article V to the Trustee or to the Securityholders shall, to the extent permitted by law, be deemed cumulative and not exclusive of any other powers and remedies available to the Trustee or the holders of the Debt Securities, by judicial proceedings or otherwise, to enforce the performance or observance of the covenants and agreements contained in this Indenture or otherwise established with respect to the Debt Securities, and no delay or omission of the Trustee or of any holder of any of the Debt Securities to exercise any right or power accruing upon any Event of Default occurring and continuing as aforesaid shall impair any such right or power, or shall be construed to be a waiver of any such default or an acquiescence therein; and, subject to the provisions of Section 5.04, every power and remedy given by this Article V or by law to the Trustee or to the Securityholders may be exercised from time to time, and as often as shall be deemed expedient, by the Trustee or by the Securityholders.

                   Section 5.07         Direction of Proceedings and Waiver of Defaults by Majority of Securityholders.

                   The holders of a majority in aggregate principal amount of the Debt Securities affected at the time outstanding and, if the Debt Securities are held by the Trust or a trustee of the Trust, the holders of a majority in aggregate liquidation amount of the outstanding Capital Securities of the Trust shall have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred on the Trustee with respect to such Debt Securities; provided, however, that if the Debt Securities are held by the Trust or a trustee of the Trust, such time, method and place or such exercise, as the case may be, may not be so directed until the holders of a majority in aggregate liquidation amount of the outstanding Capital Securities of the Trust shall have directed such time, method and place or such exercise, as the case may be; provided, further, that (subject to the provisions of Section 6.01) the Trustee shall have the right to decline to follow any such direction if the Trustee shall determine that the action so directed would be unjustly prejudicial to the holders

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not taking part in such direction or if the Trustee being advised by counsel determines that the action or proceeding so directed may not lawfully be taken or if a Responsible Officer of the Trustee shall determine that the action or proceedings so directed would involve the Trustee in personal liability. Prior to any declaration of acceleration, or ipso facto acceleration, of the maturity of the Debt Securities, the holders of a majority in aggregate principal amount of the Debt Securities at the time outstanding may on behalf of the holders of all of the Debt Securities waive (or modify any previously granted waiver of) any past Default or Event of Default and its consequences, except a default (a) in the payment of principal of or premium, if any, or interest on any of the Debt Securities, (b) in respect of covenants or provisions hereof which cannot be modified or amended without the consent of the holder of each Debt Security affected, or (c) in respect of the covenants contained in Sect ion 3.09; provided, however, that if the Debt Securities are held by the Trust or a trustee of the Trust, such waiver or modification to such waiver shall not be effective until the holders of a majority in aggregate liquidation amount of the outstanding Capital Securities of the Trust shall have consented to such waiver or modification to such waiver; provided, further, that if the consent of the holder of each outstanding Debt Security is required, such waiver or modification to such waiver shall not be effective until each holder of the outstanding Capital Securities of the Trust shall have consented to such waiver or modification to such waiver. Upon any such waiver or modification to such waiver, the Default or Event of Default covered thereby shall be deemed to be cured for all purposes of this Indenture and the Company, the Trustee and the holders of the Debt Securities shall be restored to their former positions and rights hereunder, respectively; but no such waiver or mo dification to such waiver shall extend to any subsequent or other Default or Event of Default or impair any right consequent thereon. Whenever any Default or Event of Default hereunder shall have been waived as permitted by this Section, said Default or Event of Default shall for all purposes of the Debt Securities and this Indenture be deemed to have been cured and to be not continuing.

                   Section 5.08         Notice of Defaults.

                   The Trustee shall, within 90 days after a Responsible Officer of the Trustee shall have actual knowledge or received written notice of the occurrence of a default with respect to the Debt Securities, mail to all Securityholders, as the names and addresses of such holders appear upon the Debt Security Register, notice of all defaults with respect to the Debt Securities known to the Trustee, unless such defaults shall have been cured before the giving of such notice (the term "default" for the purpose of this Section is hereby defined to be any event specified in Section 5.01, not including periods of grace, if any, provided for therein); provided, that, except in the case of default in the payment of the principal of or premium, if any, or interest on any of the Debt Securities, the Trustee shall be protected in withholding such notice if and so long as a Responsible Officer of the Trustee in good faith determines that the withholding of such notice is in the interests of the Securityholders.

                   Section 5.09                   Undertaking to Pay Costs.

                   All parties to this Indenture agree, and each holder of any Debt Security by such holder's acceptance thereof shall be deemed to have agreed, that any court may in its discretion require, in any suit for the enforcement of any right or remedy under this Indenture, or in any suit against the Trustee for any action taken or omitted by it as Trustee, the filing by any party litigant in such suit of an undertaking to pay the costs of such suit, and that such court may in its

30

discretion assess reasonable costs, including reasonable attorneys' fees and expenses, against any party litigant in such suit, having due regard to the merits and good faith of the claims or defenses made by such party litigant; but the provisions of this Section shall not apply to any suit instituted by the Trustee, to any suit instituted by any Securityholder, or group of Securityholders, holding in the aggregate more than 10% in principal amount of the outstanding Debt Securities (or, if such Debt Securities are held by the Trust or a trustee of the Trust, more than 10% in liquidation amount of the outstanding Capital Securities),to any suit instituted by any Securityholder for the enforcement of the payment of the principal of or premium, if any, or interest on any Debt Security against the Company on or after the same shall have become due and payable or to any suit instituted in accordance with Section 14.12.

ARTICLE VI
CONCERNING THE TRUSTEE

                   Section 6.01         Duties and Responsibilities of Trustee.

                   With respect to the holders of Debt Securities issued hereunder, the Trustee, prior to the occurrence of an Event of Default with respect to the Debt Securities and after the curing or waiving of all Events of Default which may have occurred, with respect to the Debt Securities, undertakes to perform such duties and only such duties as are specifically set forth in this Indenture. In case an Event of Default with respect to the Debt Securities has occurred (which has not been cured or waived), the Trustee shall exercise such of the rights and powers vested in it by this Indenture, and use the same degree of care and skill in their exercise, as a prudent person would exercise or use under the circumstances in the conduct of such person's own affairs.

                   No provision of this Indenture shall be construed to relieve the Trustee from liability for its own negligent action, its own negligent failure to act or its own willful misconduct or bad faith, except that:

                   (a)         prior to the occurrence of an Event of Default and after the curing or waiving of all Events of Default which may have occurred:

                   (i)         the duties and obligations of the Trustee with respect to the Debt Securities shall be determined solely by the express provisions of this Indenture, and the Trustee shall not be liable except for the performance of such duties and obligations with respect to the Debt Securities as are specifically set forth in this Indenture, and no implied covenants or obligations shall be read into this Indenture against the Trustee; and

                   (ii)         in the absence of bad faith on the part of the Trustee, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon any certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture; but, in the case of any such certificates or opinions which by any provision hereof are specifically required to be furnished to the Trustee, the Trustee shall be under a duty to examine the same to determine whether or not they conform on their face to the requirements of this Indenture;

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                   (b)         the Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer or Officers of the Trustee, unless it shall be proved that the Trustee was negligent in ascertaining the pertinent facts;

                   (c)         the Trustee shall not be liable with respect to any action taken or omitted to be taken by it in good faith, in accordance with the direction of the Securityholders pursuant to Section 5.07, relating to the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred upon the Trustee, under this Indenture; and

                   (d)         the Trustee shall not be charged with knowledge of any Default or Event of Default with respect to the Debt Securities unless either (1) a Responsible Officer shall have actual knowledge of such Default or Event of Default or (2) written notice of such Default or Event of Default shall have been given to the Trustee by the Company or any other obligor on the Debt Securities or by any holder of the Debt Securities, except that the Trustee shall be deemed to have knowledge of any Event of Default pursuant to Sections 5.01(a) or 5.01(b) hereof (other than an Event of Default resulting from the default in the payment of Additional Amounts if the Trustee does not have actual knowledge or written notice that such payment is due and payable) .

                   None of the provisions contained in this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur personal financial liability in the performance of any of its duties or in the exercise of any of its rights or powers.

                   Section 6.02         Reliance on Documents, Opinions, etc.

                   Except as otherwise provided in Section 6.01:

                   (a)         the Trustee may conclusively rely and shall be fully protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, bond, note, debenture or other paper or document believed by it in good faith to be genuine and to have been signed or presented by the proper party or parties;

                   (b)         any request, direction, order or demand of the Company mentioned herein shall be sufficiently evidenced by an Officers' Certificate (unless other evidence in respect thereof be herein specifically prescribed); and any Board Resolution may be evidenced to the Trustee by a copy thereof certified by the Secretary or an Assistant Secretary of the Company;

                   (c)         the Trustee may consult with counsel of its selection and any advice or Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in accordance with such advice or Opinion of Counsel;

                   (d)         the Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request, order or direction of any of the Securityholders, pursuant to the provisions of this Indenture, unless such Securityholders shall have offered to the Trustee reasonable security or indemnity against the costs, expenses and liabilities which may be incurred therein or thereby;

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                   (e)         the Trustee shall not be liable for any action taken or omitted by it in good faith and reasonably believed by it to be authorized or within the discretion or rights or powers conferred upon it by this Indenture; nothing contained herein shall, however, relieve the Trustee of the obligation, upon the occurrence of an Event of Default with respect to the Debt Securities (which has not been cured or waived) to exercise with respect to the Debt Securities such of the rights and powers vested in it by this Indenture, and to use the same degree of care and skill in their exercise, as a prudent person would exercise or use under the circumstances in the conduct of such person's own affairs;

                   (f)         the Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, approval, bond, debenture, coupon or other paper or document, unless requested in writing to do so by the holders of a majority in aggregate principal amount of the outstanding Debt Securities affected thereby; provided, however, that if the payment within a reasonable time to the Trustee of the costs, expenses or liabilities likely to be incurred by it in the making of such investigation is, in the opinion of the Trustee, not reasonably assured to the Trustee by the security afforded to it by the terms of this Indenture, the Trustee may require reasonable indemnity against such expense or liability as a condition to so proceeding; and

                   (g)         the Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents (including any Authenticating Agent) or attorneys, and the Trustee shall not be responsible for any misconduct or negligence on the part of any such agent or attorney appointed by it with due care.

                   Section 6.03         No Responsibility for Recitals, etc.

                   The recitals contained herein and in the Debt Securities (except in the certificate of authentication of the Trustee or the Authenticating Agent) shall be taken as the statements of the Company, and the Trustee and the Authenticating Agent assume no responsibility for the correctness of the same. The Trustee and the Authenticating Agent make no representations as to the validity or sufficiency of this Indenture or of the Debt Securities. The Trustee and the Authenticating Agent shall not be accountable for the use or application by the Company of any Debt Securities or the proceeds of any Debt Securities authenticated and delivered by the Trustee or the Authenticating Agent in conformity with the provisions of this Indenture.

                   Section 6.04         Trustee, Authenticating Agent, Paying Agents, Transfer Agents or Registrar May Own Debt Securities.

                   The Trustee, any Authenticating Agent, any Paying Agent, any transfer agent or any Debt Security registrar, in its individual or any other capacity, may become the owner or pledgee of Debt Securities with the same rights it would have if it were not Trustee, Authenticating Agent, Paying Agent, transfer agent or Debt Security registrar.

                   Section 6.05         Moneys to be Held in Trust.

                   Subject to the provisions of Section 12.04, all moneys received by the Trustee or any Paying Agent shall, until used or applied as herein provided, be held in trust for the purpose for which they were received, but need not be segregated from other funds except to the extent

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required by law. The Trustee and any Paying Agent shall be under no liability for interest on any money received by it hereunder except as otherwise agreed in writing with the Company. So long as no Event of Default shall have occurred and be continuing, all interest allowed on any such moneys, if any, shall be paid from time to time to the Company upon the written order of the Company, signed by the Chairman of the Board of Directors, the President, the Chief Operating Officer, a Vice President, the Treasurer or an Assistant Treasurer of the Company.

                   Section 6.06         Compensation and Expenses of Trustee.

                   The Company covenants and agrees to pay to the Trustee from time to time, and the Trustee shall be entitled to, such compensation specifically set forth in the Fee Agreement between the Company and the Trustee dated March 25, 2004 (which shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust), and the Company will pay or reimburse the Trustee upon its written request for all documented reasonable expenses, disbursements and advances incurred or made by the Trustee in accordance with any of the provisions of this Indenture (including the reasonable compensation and the reasonable expenses and disbursements of its counsel and of all Persons not regularly in its employ) except any such expense, disbursement or advance that arises from its negligence, willful misconduct or bad faith. The Company also covenants to indemnify each of the Trustee (including in its individual capacity) and an y predecessor Trustee (and its officers, agents, directors and employees) for, and to hold it harmless against, any and all loss, damage, claim, liability or expense including taxes (other than taxes based on the income of the Trustee), except to the extent such loss, damage, claim, liability or expense results from the negligence, willful misconduct or bad faith of such indemnitee, arising out of or in connection with the acceptance or administration of this trust, including the costs and expenses of defending itself against any claim or liability in the premises. The obligations of the Company under this Section to compensate and indemnify the Trustee and to pay or reimburse the Trustee for documented expenses, disbursements and advances shall constitute additional indebtedness hereunder. Such additional indebtedness shall be secured by a lien prior to that of the Debt Securities upon all property and funds held or collected by the Trustee as such, except funds held in trust for the benefit of the holder s of particular Debt Securities.

                   Without prejudice to any other rights available to the Trustee under applicable law, when the Trustee incurs expenses or renders services in connection with an Event of Default specified in clause (d), (e) or (f) of Section 5.01, the expenses (including the reasonable charges and expenses of its counsel) and the compensation for the services are intended to constitute expenses of administration under any applicable federal or state bankruptcy, insolvency or other similar law.

                   The provisions of this Section shall survive the resignation or removal of the Trustee and the defeasance or other termination of this Indenture.

                   Notwithstanding anything in this Indenture or any Debt Security to the contrary, the Trustee shall have no obligation whatsoever to advance funds to pay any principal of or interest on or other amounts with respect to the Debt Securities or otherwise advance funds to or on behalf of the Company.

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                   Section 6.07         Officers' Certificate as Evidence.

                   Except as otherwise provided in Sections 6.01 and 6.02, whenever in the administration of the provisions of this Indenture the Trustee shall deem it necessary or desirable that a matter be proved or established prior to taking or omitting any action hereunder, such matter (unless other evidence in respect thereof be herein specifically prescribed) may, in the absence of negligence, willful misconduct or bad faith on the part of the Trustee, be deemed to be conclusively proved and established by an Officers' Certificate delivered to the Trustee, and such certificate, in the absence of negligence, willful misconduct or bad faith on the part of the Trustee, shall be full warrant to the Trustee for any action taken or omitted by it under the provisions of this Indenture upon the faith thereof.

                   Section 6.08         Eligibility of Trustee.

                   The Trustee hereunder shall at all times be a U.S. Person that is a banking corporation or national association organized and doing business under the laws of the United States of America or any state thereof or of the District of Columbia and authorized under such laws to exercise corporate trust powers, having a combined capital and surplus of at least fifty million U.S. dollars ($50,000,000) and subject to supervision or examination by federal, state, or District of Columbia authority. If such corporation or national association publishes reports of condition at least annually, pursuant to law or to the requirements of the aforesaid supervising or examining authority, then for the purposes of this Section the combined capital and surplus of such corporation or national association shall be deemed to be its combined capital and surplus as set forth in its most recent records of condition so published.

                   The Company may not, nor may any Person directly or indirectly controlling, controlled by, or under common control with the Company, serve as Trustee, notwithstanding that such corporation or national association shall be otherwise eligible and qualified under this Article.

                   In case at any time the Trustee shall cease to be eligible in accordance with the provisions of this Section, the Trustee shall resign immediately in the manner and with the effect specified in Section 6.09.

                   If the Trustee has or shall acquire any "conflicting interest" within the meaning of §310(b) of the Trust Indenture Act, the Trustee shall either eliminate such interest or resign, to the extent and in the manner provided by, and subject to, this Indenture.

                   Section 6.09         Resignation or Removal of Trustee.

                   (a)         The Trustee, or any trustee or trustees hereafter appointed, may at any time resign by giving written notice of such resignation to the Company and by mailing notice thereof, at the Company's expense, to the holders of the Debt Securities at their addresses as they shall appear on the Debt Security Register. Upon receiving such notice of resignation, the Company shall promptly appoint a successor trustee or trustees by written instrument, in duplicate, executed by order of its Board of Directors, one copy of which instrument shall be delivered to the resigning Trustee and one copy to the successor Trustee. If no successor Trustee shall have been so appointed and have accepted appointment within 30 days after the mailing of

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such notice of resignation to the affected Securityholders, the resigning Trustee may petition any court of competent jurisdiction for the appointment of a successor Trustee, or any Securityholder who has been a bona fide holder of a Debt Security or Debt Securities for at least six months may, subject to the provisions of Section 5.09, on behalf of himself or herself and all others similarly situated, petition any such court for the appointment of a successor Trustee. Such court may thereupon, after such notice, if any, as it may deem proper and prescribe, appoint a successor Trustee.

                   (b)         In case at any time any of the following shall occur:

                   (i)         the Trustee shall fail to comply with the provisions of the last paragraph of Section 6.08 after written request therefor by the Company or by any Securityholder who has been a bona fide holder of a Debt Security or Debt Securities for at least six months;

                   (ii)         the Trustee shall cease to be eligible in accordance with the provisions of Section 6.08 and shall fail to resign after written request therefor by the Company or by any such Securityholder; or

                   (iii)         the Trustee shall become incapable of acting, or shall be adjudged bankrupt or insolvent, or a receiver of the Trustee or of its property shall be appointed, or any public officer shall take charge or control of the Trustee or of its property or affairs for the purpose of rehabilitation, conservation or liquidation,

then, in any such case, the Company may remove the Trustee and appoint a successor Trustee by written instrument, in duplicate, executed by order of the Board of Directors, one copy of which instrument shall be delivered to the Trustee so removed and one copy to the successor Trustee, or, subject to the provisions of Section 5.09, if no successor Trustee shall have been so appointed and have accepted appointment within 30 days of the occurrence of any of (i), (ii) or (iii) above, any Securityholder who has been a bona fide holder of a Debt Security or Debt Securities for at least six months may, on behalf of himself or herself and all others similarly situated, petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee. Such court may thereupon, after such notice, if any, as it may deem proper and prescribe, remove the Trustee and appoint a successor Trustee.

                   (c)         Upon prior written notice to the Company and the Trustee, the holders of a majority in aggregate principal amount of the Debt Securities at the time outstanding may at any time remove the Trustee and nominate a successor Trustee, which shall be deemed appointed as successor Trustee unless within ten Business Days after such nomination the Company objects thereto, in which case or in the case of a failure by such holders to nominate a successor Trustee, the Trustee so removed or any Securityholder, upon the terms and conditions and otherwise as in subsection (a) of this Section, may petition any court of competent jurisdiction for an appointment of a successor.

                   (d)         Any resignation or removal of the Trustee and appointment of a successor Trustee pursuant to any of the provisions of this Section shall become effective upon acceptance of appointment by the successor Trustee as provided in Section 6.10.

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                   Section 6.10         Acceptance by Successor Trustee.

                   Any successor Trustee appointed as provided in Section 6.09 shall execute, acknowledge and deliver to the Company and to its predecessor Trustee an indenture supplemental hereto which shall contain such provisions as shall be deemed necessary or desirable to confirm that all of the rights, powers, trusts and duties of the retiring Trustee shall be vested in the successor Trustee, and thereupon the resignation or removal of the retiring Trustee shall become effective and such successor Trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, duties and obligations with respect to the Debt Securities of its predecessor hereunder, with like effect as if originally named as Trustee herein; but, nevertheless, on the written request of the Company or of the successor Trustee, the Trustee ceasing to act shall, upon payment of the amounts then due it pursuant to the provisions of Section 6.06, execut e and deliver an instrument transferring to such successor Trustee all the rights and powers of the Trustee so ceasing to act and shall duly assign, transfer and deliver to such successor Trustee all property and money held by such retiring Trustee hereunder. Upon request of any such successor Trustee, the Company shall execute any and all instruments in writing for more fully and certainly vesting in and confirming to such successor Trustee all such rights and powers. Any Trustee ceasing to act shall, nevertheless, retain a lien upon all property or funds held or collected by such Trustee to secure any amounts then due it pursuant to the provisions of Section 6.06.

                   No successor Trustee shall accept appointment as provided in this Section unless at the time of such acceptance such successor Trustee shall be eligible and qualified under the provisions of Section 6.08.

                   In no event shall a retiring Trustee be liable for the acts or omissions of any successor Trustee hereunder.

                   Upon acceptance of appointment by a successor Trustee as provided in this Section, the Company shall mail notice of the succession of such Trustee hereunder to the holders of Debt Securities at their addresses as they shall appear on the Debt Security Register. If the Company fails to mail such notice within ten Business Days after the acceptance of appointment by the successor Trustee, the successor Trustee shall cause such notice to be mailed at the expense of the Company.

                   Section 6.11         Succession by Merger, etc.

                   Any corporation into which the Trustee may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which the Trustee shall be a party, or any corporation succeeding to all or substantially all of the corporate trust business of the Trustee, shall be the successor of the Trustee hereunder without the execution or filing of any paper or any further act on the part of any of the parties hereto, provided, that such corporation shall be otherwise eligible and qualified under this Article.

                   In case at the time such successor to the Trustee shall succeed to the trusts created by this Indenture any of the Debt Securities shall have been authenticated but not delivered, any

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such successor to the Trustee may adopt the certificate of authentication of any predecessor Trustee, and deliver such Debt Securities so authenticated; and in case at that time any of the Debt Securities shall not have been authenticated, any successor to the Trustee may authenticate such Debt Securities either in the name of any predecessor hereunder or in the name of the successor Trustee; and in all such cases such certificates shall have the full force which it is anywhere in the Debt Securities or in this Indenture provided that the certificate of the Trustee shall have; provided, however, that the right to adopt the certificate of authentication of any predecessor Trustee or authenticate Debt Securities in the name of any predecessor Trustee shall apply only to its successor or successors by merger, conversion or consolidation.

                   Section 6.12         Authenticating Agents.

                   There may be one or more Authenticating Agents appointed by the Trustee upon the request of the Company with power to act on its behalf and subject to its direction in the authentication and delivery of Debt Securities issued upon exchange or registration of transfer thereof as fully to all intents and purposes as though any such Authenticating Agent had been expressly authorized to authenticate and deliver Debt Securities; provided, however, that the Trustee shall have no liability to the Company for any acts or omissions of the Authenticating Agent with respect to the authentication and delivery of Debt Securities. Any such Authenticating Agent shall at all times be a corporation organized and doing business under the laws of the United States or of any state thereof or of the District of Columbia authorized under such laws to act as Authenticating Agent, having a combined capital and surplus of at least $50,000,000 and being subject to supervision or examination by federal, state or District of Columbia authority. If such corporation publishes reports of condition at least annually pursuant to law or the requirements of such authority, then for the purposes of this Section the combined capital and surplus of such corporation shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. If at any time an Authenticating Agent shall cease to be eligible in accordance with the provisions of this Section, it shall resign immediately in the manner and with the effect herein specified in this Section.

                   Any corporation into which any Authenticating Agent may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, consolidation or conversion to which any Authenticating Agent shall be a party, or any corporation succeeding to all or substantially all of the corporate trust business of any Authenticating Agent, shall be the successor of such Authenticating Agent hereunder, if such successor corporation is otherwise eligible under this Section without the execution or filing of any paper or any further act on the part of the parties hereto or such Authenticating Agent.

                   Any Authenticating Agent may at any time resign by giving written notice of resignation to the Trustee and to the Company. The Trustee may at any time terminate the agency of any Authenticating Agent with respect to the Debt Securities by giving written notice of termination to such Authenticating Agent and to the Company. Upon receiving such a notice of resignation or upon such a termination, or in case at any time any Authenticating Agent shall cease to be eligible under this Section, the Trustee may, and upon the request of the Company shall, promptly appoint a successor Authenticating Agent eligible under this Section, shall give written notice of such appointment to the Company and shall mail notice of such appointment to all holders of Debt Securities as the names and addresses of such holders appear on the Debt

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Security Register. Any successor Authenticating Agent, upon acceptance of its appointment hereunder, shall become vested with all rights, powers, duties and responsibilities of its predecessor hereunder, with like effect as if originally named as Authenticating Agent herein.

                   The Company agrees to pay to any Authenticating Agent from time to time reasonable compensation for its services. Any Authenticating Agent shall have no responsibility or liability for any action taken by it as such in accordance with the directions of the Trustee.

ARTICLE VII
CONCERNING THE SECURITYHOLDERS

                   Section 7.01         Action by Securityholders.

                   Whenever in this Indenture it is provided that the holders of a specified percentage in aggregate principal amount of the Debt Securities or aggregate liquidation amount of the Capital Securities may take any action (including the making of any demand or request, the giving of any notice, consent or waiver or the taking of any other action), the fact that at the time of taking any such action the holders of such specified percentage have joined therein may be evidenced (a) by any instrument or any number of instruments of similar tenor executed by such Securityholders or holders of Capital Securities, as the case may be, in person or by agent or proxy appointed in writing, or (b) by the record of such holders of Debt Securities voting in favor thereof at any meeting of such Securityholders duly called and held in accordance with the provisions of Article VIII or of such holders of Capital Securities duly called and held in accordance wit h the provisions of the Declaration, or (c) by a combination of such instrument or instruments and any such record of such a meeting of such Securityholders or holders of Capital Securities, as the case may be, or (d) by any other method the Trustee deems satisfactory.

                   If the Company shall solicit from the Securityholders any request, demand, authorization, direction, notice, consent, waiver or other action or revocation of the same, the Company may, at its option, as evidenced by an Officers' Certificate, fix in advance a record date for such Debt Securities for the determination of Securityholders entitled to give such request, demand, authorization, direction, notice, consent, waiver or other action or revocation of the same, but the Company shall have no obligation to do so. If such a record date is fixed, such request, demand, authorization, direction, notice, consent, waiver or other action or revocation of the same may be given before or after the record date, but only the Securityholders of record at the close of business on the record date shall be deemed to be Securityholders for the purposes of determining whether Securityholders of the requisite proportion of outstanding Debt Securities ha ve authorized or agreed or consented to such request, demand, authorization, direction, notice, consent, waiver or other action or revocation of the same, and for that purpose the outstanding Debt Securities shall be computed as of the record date; provided, however, that no such authorization, agreement or consent by such Securityholders on the record date shall be deemed effective unless it shall become effective pursuant to the provisions of this Indenture not later than six months after the record date.

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                   Section 7.02         Proof of Execution by Securityholders.

                   Subject to the provisions of Sections 6.01, 6.02 and 8.05, proof of the execution of any instrument by a Securityholder or such Securityholder's agent or proxy shall be sufficient if made in accordance with such reasonable rules and regulations as may be prescribed by the Trustee or in such manner as shall be satisfactory to the Trustee. The ownership of Debt Securities shall be proved by the Debt Security Register or by a certificate of the Debt Security registrar. The Trustee may require such additional proof of any matter referred to in this Section as it shall deem necessary.

                   The record of any Securityholders' meeting shall be proved in the manner provided in Section 8.06.

                   Section 7.03         Who Are Deemed Absolute Owners.

                   Prior to due presentment for registration of transfer of any Debt Security, the Company, the Trustee, any Authenticating Agent, any Paying Agent, any transfer agent and any Debt Security registrar may deem the Person in whose name such Debt Security shall be registered upon the Debt Security Register to be, and may treat such Person as, the absolute owner of such Debt Security (whether or not such Debt Security shall be overdue) for the purpose of receiving payment of or on account of the principal of and premium, if any, and interest on such Debt Security and for all other purposes; and none of the Company, the Trustee, any Authenticating Agent, any Paying Agent, any transfer agent or any Debt Security registrar shall be affected by any notice to the contrary. All such payments so made to any holder for the time being or upon such holder's order shall be valid, and, to the extent of the sum or sums so paid, effectual to satisfy and dis charge the liability for moneys payable upon any such Debt Security.

                   Section 7.04         Debt Securities Owned by Company Deemed Not Outstanding.

                   In determining whether the holders of the requisite aggregate principal amount of Debt Securities have concurred in any direction, consent or waiver under this Indenture, Debt Securities which are owned by the Company or any other obligor on the Debt Securities or by any Person directly or indirectly controlling or controlled by or under direct or indirect common control with the Company (other than the Trust) or any other obligor on the Debt Securities shall be disregarded and deemed not to be outstanding for the purpose of any such determination, provided, that for the purposes of determining whether the Trustee shall be protected in relying on any such direction, consent or waiver, only Debt Securities which a Responsible Officer of the Trustee actually knows are so owned shall be so disregarded. Debt Securities so owned which have been pledged in good faith may be regarded as outstanding for the purposes of this Section if th e pledgee shall establish to the satisfaction of the Trustee the pledgee's right to vote such Debt Securities and that the pledgee is not the Company or any such other obligor or Person directly or indirectly controlling or controlled by or under direct or indirect common control with the Company or any such other obligor. In the case of a dispute as to such right, any decision by the Trustee taken upon the advice of counsel shall be full protection to the Trustee.

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                   Section 7.05         Revocation of Consents; Future Holders Bound.

                   At any time prior to (but not after) the evidencing to the Trustee, as provided in Section 7.01, of the taking of any action by the holders of the percentage in aggregate principal amount of the Debt Securities specified in this Indenture in connection with such action, any holder (in cases where no record date has been set pursuant to Section 7.01) or any holder as of an applicable record date (in cases where a record date has been set pursuant to Section 7.01) of a Debt Security (or any Debt Security issued in whole or in part in exchange or substitution therefor) the serial number of which is shown by the evidence to be included in the Debt Securities the holders of which have consented to such action may, by filing written notice with the Trustee at the Principal Office of the Trustee and upon proof of holding as provided in Section 7.02, revoke such action so far as concerns such Debt Security (or so far as concerns the principal am ount represented by any exchanged or substituted Debt Security). Except as aforesaid any such action taken by the holder of any Debt Security shall be conclusive and binding upon such holder and upon all future holders and owners of such Debt Security, and of any Debt Security issued in exchange or substitution therefor or on registration of transfer thereof, irrespective of whether or not any notation in regard thereto is made upon such Debt Security or any Debt Security issued in exchange or substitution therefor.

ARTICLE VIII
SECURITYHOLDERS' MEETINGS

                   Section 8.01         Purposes of Meetings.

                   A meeting of Securityholders may be called at any time and from time to time pursuant to the provisions of this Article VIII for any of the following purposes:

                   (a)         to give any notice to the Company or to the Trustee, or to give any directions to the Trustee, or to consent to the waiving of any default hereunder and its consequences, or to take any other action authorized to be taken by Securityholders pursuant to any of the provisions of Article V;

                   (b)         to remove the Trustee and nominate a successor trustee pursuant to the provisions of Article VI;

                   (c)         to consent to the execution of an indenture or indentures supplemental hereto pursuant to the provisions of Section 9.02; or

                   (d)         to take any other action authorized to be taken by or on behalf of the holders of any specified aggregate principal amount of such Debt Securities under any other provision of this Indenture or under applicable law.

                   Section 8.02         Call of Meetings by Trustee.

                   The Trustee may at any time call a meeting of Securityholders to take any action specified in Section 8.01, to be held at such time and at such place in The City of New York, the Borough of Manhattan, or Wilmington, Delaware, as the Trustee shall determine. Notice of every meeting of the Securityholders, setting forth the time and the place of such meeting and in

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general terms the action proposed to be taken at such meeting, shall be mailed to holders of Debt Securities affected at their addresses as they shall appear on the Debt Securities Register. Such notice shall be mailed not less than 20 nor more than 180 days prior to the date fixed for the meeting.

                   Section 8.03         Call of Meetings by Company or Securityholders.

                   In case at any time the Company pursuant to a Board Resolution, or the holders of at least 10% in aggregate principal amount of the Debt Securities, as the case may be, then outstanding, shall have requested the Trustee to call a meeting of Securityholders, by written request setting forth in reasonable detail the action proposed to be taken at the meeting, and the Trustee shall not have mailed the notice of such meeting within 20 days after receipt of such request, then the Company or such Securityholders may determine the time and the place in Lansing, Michigan for such meeting and may call such meeting to take any action authorized in Section 8.01, by mailing notice thereof as provided in Section 8.02.

                   Section 8.04         Qualifications for Voting.

                   To be entitled to vote at any meeting of Securityholders, a Person shall be (a) a holder of one or more Debt Securities or (b) a Person appointed by an instrument in writing as proxy by a holder of one or more Debt Securities. The only Persons who shall be entitled to be present or to speak at any meeting of Securityholders shall be the Persons entitled to vote at such meeting and their counsel and any representatives of the Trustee and its counsel and any representatives of the Company and its counsel.

                   Section 8.05         Regulations.

                   Notwithstanding any other provisions of this Indenture, the Trustee may make such reasonable regulations as it may deem advisable for any meeting of Securityholders, in regard to proof of the holding of Debt Securities and of the appointment of proxies, and in regard to the appointment and duties of inspectors of votes, the submission and examination of proxies, certificates and other evidence of the right to vote, and such other matters concerning the conduct of the meeting as it shall deem appropriate.

                   The Trustee shall, by an instrument in writing, appoint a temporary chairman of the meeting, unless the meeting shall have been called by the Company or by Securityholders as provided in Section 8.03, in which case the Company or the Securityholders calling the meeting, as the case may be, shall in like manner appoint a temporary chairman. A permanent chairman and a permanent secretary of the meeting shall be elected by majority vote at the meeting.

                   Subject to the provisions of Section 7.04, at any meeting each holder of Debt Securities with respect to which such meeting is being held or proxy therefor shall be entitled to one vote for each $1,000 principal amount of Debt Securities held or represented by such holder; provided, however, that no vote shall be cast or counted at any meeting in respect of any Debt Security challenged as not outstanding and ruled by the chairman of the meeting to be not outstanding. The chairman of the meeting shall have no right to vote other than by virtue of Debt Securities held by such chairman or instruments in writing as aforesaid duly designating such chairman as the Person to vote on behalf of other Securityholders. Any meeting of

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Securityholders duly called pursuant to the provisions of Section 8.02 or 8.03 may be adjourned from time to time by a majority of those present, whether or not constituting a quorum, and the meeting may be held as so adjourned without further notice.

                   Section 8.06         Voting.

                   The vote upon any resolution submitted to any meeting of holders of Debt Securities with respect to which such meeting is being held shall be by written ballots on which shall be subscribed the signatures of such holders or of their representatives by proxy and the serial number or numbers of the Debt Securities held or represented by them. The permanent chairman of the meeting shall appoint two inspectors of votes who shall count all votes cast at the meeting for or against any resolution and who shall make and file with the secretary of the meeting their verified written reports in triplicate of all votes cast at the meeting. A record in duplicate of the proceedings of each meeting of Securityholders shall be prepared by the secretary of the meeting and there shall be attached to said record the original reports of the inspectors of votes on any vote by ballot taken thereat and affidavits by one or more Persons having knowledge of the facts setting forth a copy of the notice of the meeting and showing that said notice was mailed as provided in Section 8.02. The record shall show the serial numbers of the Debt Securities voting in favor of or against any resolution. The record shall be signed and verified by the affidavits of the permanent chairman and secretary of the meeting and one of the duplicates shall be delivered to the Company and the other to the Trustee to be preserved by the Trustee, the latter to have attached thereto the ballots voted at the meeting.

                   Any record so signed and verified shall be conclusive evidence of the matters therein stated.

                   Section 8.07         Quorum; Actions.

                   The Persons entitled to vote a majority in aggregate principal amount of the Debt Securities then outstanding shall constitute a quorum for a meeting of Securityholders; provided, however, that if any action is to be taken at such meeting with respect to a consent, waiver, request, demand, notice, authorization, direction or other action which may be given by the holders of not less than a specified percentage in aggregate principal amount of the Debt Securities then outstanding, the Persons holding or representing such specified percentage in aggregate principal amount of the Debt Securities then outstanding will constitute a quorum. In the absence of a quorum within 30 minutes of the time appointed for any such meeting, the meeting shall, if convened at the request of Securityholders, be dissolved. In any other case, the meeting may be adjourned for a period of not less than 10 days as determined by the permanent chairm an of the meeting prior to the adjournment of such meeting. In the absence of a quorum at any such adjourned meeting, such adjourned meeting may be further adjourned for a period of not less than 10 days as determined by the permanent chairman of the meeting prior to the adjournment of such adjourned meeting. Notice of the reconvening of any adjourned meeting shall be given as provided in Section 8.02, except that such notice need be given only once not less than five days prior to the date on which the meeting is scheduled to be reconvened. Notice of the reconvening of an adjourned meeting shall state expressly the percentage, as provided above, of the aggregate principal amount of the Debt Securities then outstanding which shall constitute a quorum.

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                   Except as limited by the proviso in the first paragraph of Section 9.02, any resolution presented to a meeting or adjourned meeting duly reconvened at which a quorum is present as aforesaid may be adopted by the affirmative vote of the holders of a majority in aggregate principal amount of the Debt Securities then outstanding; provided, however, that, except as limited by the proviso in the first paragraph of Section 9.02, any resolution with respect to any consent, waiver, request, demand, notice, authorization, direction or other action that this Indenture expressly provides may be given by the holders of not less than a specified percentage in outstanding principal amount of the Debt Securities may be adopted at a meeting or an adjourned meeting duly reconvened and at which a quorum is present as aforesaid only by the affirmative vote of the holders of not less than such specified percentage in aggregate principal amount of the Debt Securities then outstanding.

                   Any resolution passed or decision taken at any meeting of holders of Debt Securities duly held in accordance with this Section shall be binding on all the Securityholders, whether or not present or represented at the meeting.

ARTICLE IX
SUPPLEMENTAL INDENTURES

                   Section 9.01         Supplemental Indentures without Consent of Securityholders.

                   The Company, when authorized by a Board Resolution, and the Trustee may from time to time and at any time enter into an indenture or indentures supplemental hereto, without the consent of the Securityholders, for one or more of the following purposes:

                   (a)         to evidence the succession of another corporation to the Company, or successive successions, and the assumption by the successor corporation of the covenants, agreements and obligations of the Company, pursuant to Article XI hereof;

                   (b)         to add to the covenants of the Company such further covenants, restrictions or conditions for the protection of the holders of Debt Securities as the Board of Directors shall consider to be for the protection of the holders of such Debt Securities, and to make the occurrence, or the occurrence and continuance, of a Default in any of such additional covenants, restrictions or conditions a Default or an Event of Default permitting the enforcement of all or any of the several remedies provided in this Indenture as herein set forth; provided, however, that in respect of any such additional covenant, restriction or condition such supplemental indenture may provide for a particular period of grace after Default (which period may be shorter or longer than that allowed in the case of other Defaults) or may provide for an immediate enforcement upon such Default or may limit the remedies available to the Trustee upon such default;

                   (c)         to cure any ambiguity or to correct or supplement any provision contained herein or in any supplemental indenture which may be defective or inconsistent with any other provision contained herein or in any supplemental indenture, or to make such other provisions in regard to matters or questions arising under this Indenture, provided, that any such action shall not adversely affect the interests of the holders of the Debt Securities then outstanding;

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                   (d)         to add to, delete from, or revise the terms of Debt Securities, including, without limitation, any terms relating to the issuance, exchange, registration or transfer of Debt Securities, including to provide for transfer procedures and restrictions substantially similar to those applicable to the Capital Securities, as required by Section 2.05 (for purposes of assuring that no registration of Debt Securities is required under the Securities Act), provided, that any such action shall not adversely affect the interests of the holders of the Debt Securities then outstanding (it being understood, for purposes of this proviso, that transfer restrictions on Debt Securities substantially similar to those applicable to Capital Securities shall not be deemed to adversely affect the holders of the Debt Securities);

                   (e)         to evidence and provide for the acceptance of appointment hereunder by a successor Trustee with respect to the Debt Securities and to add to or change any of the provisions of this Indenture as shall be necessary to provide for or facilitate the administration of the trusts hereunder by more than one Trustee, pursuant to the requirements of Section 6.10;

                   (f)         to make any change (other than as elsewhere provided in this Section) that does not adversely affect the rights of any Securityholder in any material respect; or

                   (g)         to provide for the issuance of and establish the form and terms and conditions of the Debt Securities, to establish the form of any certifications required to be furnished pursuant to the terms of this Indenture or the Debt Securities, or to add to the rights of the holders of Debt Securities.

                   The Trustee is hereby authorized to join with the Company in the execution of any such supplemental indenture, to make any further appropriate agreements and stipulations which may be therein contained and to accept the conveyance, transfer and assignment of any property thereunder, but the Trustee shall not be obligated to, but may in its discretion, enter into any such supplemental indenture which affects the Trustee's own rights, duties or immunities under this Indenture or otherwise.

                   Any supplemental indenture authorized by the provisions of this Section may be executed by the Company and the Trustee without the consent of the holders of any of the Debt Securities at the time outstanding, notwithstanding any of the provisions of Section 9.02.

                   Section 9.02         Supplemental Indentures with Consent of Securityholders.

                   With the consent (evidenced as provided in Section 7.01) of the holders of a majority in aggregate principal amount of the Debt Securities at the time outstanding affected by such supplemental indenture, the Company, when authorized by a Board Resolution, and the Trustee may from time to time and at any time enter into an indenture or indentures supplemental hereto (which shall conform to the provisions of the Trust Indenture Act, then in effect, applicable to indentures qualified thereunder) for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Indenture or of any supplemental indenture or of modifying in any manner the rights of the holders of the Debt Securities; provided, however, that no such supplemental indenture shall, without the consent of the holders of each Debt Security then outstanding and affected thereby, (i) change the Maturity Date of any Debt Se curity, or reduce the principal amount thereof or any premium thereon, or

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reduce the rate (or manner of calculation of the rate) or extend the time of payment of interest thereon, or reduce (other than as a result of the maturity or earlier redemption of any such Debt Security in accordance with the terms of this Indenture and such Debt Security) or increase the aggregate principal amount of Debt Securities then outstanding, or change any of the redemption provisions, or make the principal thereof or any interest or premium thereon payable in any coin or currency other than United States Dollars, or impair or affect the right of any Securityholder to institute suit for payment thereof, or (ii) reduce the aforesaid percentage of Debt Securities the holders of which are required to consent to any such supplemental indenture; and provided, further, that if the Debt Securities are held by the Trust or the trustee of the Trust, such supplemental indenture shall not be effective until the holders of a majority in aggregate liquidation amount of the outstanding Capital Secu rities shall have consented to such supplemental indenture; provided, further, that if the consent of the Securityholder of each outstanding Debt Security is required, such supplemental indenture shall not be effective until each holder of the outstanding Capital Securities shall have consented to such supplemental indenture.

                   Upon the request of the Company accompanied by a Board Resolution authorizing the execution of any such supplemental indenture, and upon the filing with the Trustee of evidence of the consent of Securityholders (and holders of Capital Securities, if required) as aforesaid, the Trustee shall join with the Company in the execution of such supplemental indenture unless such supplemental indenture affects the Trustee's own rights, duties or immunities under this Indenture or otherwise, in which case the Trustee may in its discretion, but shall not be obligated to, enter into such supplemental indenture.

                   Promptly after the execution by the Company and the Trustee of any supplemental indenture pursuant to the provisions of this Section, the Trustee shall transmit by mail, first class postage prepaid, a notice, prepared by the Company, setting forth in general terms the substance of such supplemental indenture, to the Securityholders as their names and addresses appear upon the Debt Security Register. Any failure of the Trustee to mail such notice, or any defect therein, shall not, however, in any way impair or affect the validity of any such supplemental indenture.

                   It shall not be necessary for the consent of the Securityholders under this Section to approve the particular form of any proposed supplemental indenture, but it shall be sufficient if such consent shall approve the substance thereof.

                   Section 9.03         Effect of Supplemental Indentures.

                   Upon the execution of any supplemental indenture pursuant to the provisions of this Article IX, this Indenture shall be and be deemed to be modified and amended in accordance therewith and the respective rights, limitations of rights, obligations, duties and immunities under this Indenture of the Trustee, the Company and the holders of Debt Securities shall thereafter be determined, exercised and enforced hereunder subject in all respects to such modifications and amendments and all the terms and conditions of any such supplemental indenture shall be and be deemed to be part of the terms and conditions of this Indenture for any and all purposes.

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                   Section 9.04         Notation on Debt Securities.

                   Debt Securities authenticated and delivered after the execution of any supplemental indenture pursuant to the provisions of this Article IX may bear a notation as to any matter provided for in such supplemental indenture. If the Company or the Trustee shall so determine, new Debt Securities so modified as to conform, in the opinion of the Board of Directors of the Company, to any modification of this Indenture contained in any such supplemental indenture may be prepared and executed by the Company, authenticated by the Trustee or the Authenticating Agent and delivered in exchange for the Debt Securities then outstanding.

                   Section 9.05         Evidence of Compliance of Supplemental Indenture to be Furnished to Trustee.

                   The Trustee, subject to the provisions of Sections 6.01 and 6.02, shall, in addition to the documents required by Section 14.06, receive an Officers' Certificate as conclusive evidence that any supplemental indenture executed pursuant hereto complies with the requirements of this Article IX. The Trustee shall also receive an Opinion of Counsel as conclusive evidence that any supplemental indenture executed pursuant to this Article IX is authorized or permitted by, and conforms to, the terms of this Article IX and that it is proper for the Trustee under the provisions of this Article IX to join in the execution thereof.

ARTICLE X
REDEMPTION OF SECURITIES

                   Section 10.01         Optional Redemption.

                   The Company shall have the right, subject to the receipt by the Company of the prior approval from the Federal Reserve, if then required under applicable capital guidelines or policies of the Federal Reserve, to redeem the Debt Securities, in whole or (provided that all accrued and unpaid interest has been paid on all Debt Securities for all Interest Periods terminating on or prior to such date) from time to time in part, on any Interest Payment Date on or after April 7, 2009 (each, an "Optional Redemption Date"), at the Optional Redemption Price.

                   Section 10.02         Special Event Redemption.

                   If a Special Event shall occur and be continuing, the Company shall have the right, subject to the receipt by the Company of prior approval from the Federal Reserve, if then required under applicable capital guidelines or policies of the Federal Reserve, to redeem the Debt Securities, in whole but not in part, at any time within 90 days following the occurrence of such Special Event (the "Special Redemption Date"), at the Special Redemption Price. In the event that the Special Redemption Date falls on a day prior to the LIBOR Determination Date for any Interest Period, then the Company shall be required to pay to Securityholders, on the Business Day following such LIBOR Determination Date, any additional amount of interest that would have been payable on the Special Redemption Date had the amount of interest determined on such LIBOR Determination Date been known on the first day of such Interest Period.

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                   Section 10.03         Notice of Redemption; Selection of Debt Securities.

                   In case the Company shall desire to exercise the right to redeem all, or, as the case may be, any part of the Debt Securities, it shall fix a date for redemption and shall mail, or cause the Trustee to mail (at the expense of the Company), a notice of such redemption at least 30 and not more than 60 days prior to the date fixed for redemption to the holders of Debt Securities so to be redeemed as a whole or in part at their last addresses as the same appear on the Debt Security Register. Such mailing shall be by first class mail. The notice if mailed in the manner herein provided shall be conclusively presumed to have been duly given, whether or not the holder receives such notice. In any case, failure to give such notice by mail or any defect in the notice to the holder of any Debt Security designated for redemption as a whole or in part shall not affect the validity of the proceedings for the redemption of any other Debt Security.

                   Each such notice of redemption shall specify the CUSIP number, if any, of the Debt Securities to be redeemed, the date fixed for redemption, the price (or manner of calculation of the price) at which Debt Securities are to be redeemed, the place or places of payment, that payment will be made upon presentation and surrender of such Debt Securities, that interest accrued to the date fixed for redemption will be paid as specified in said notice, and that on and after said date interest thereon or on the portions thereof to be redeemed will cease to accrue. If less than all the Debt Securities are to be redeemed, the notice of redemption shall specify the numbers of the Debt Securities to be redeemed. In case the Debt Securities are to be redeemed in part only, the notice of redemption shall state the portion of the principal amount thereof to be redeemed and shall state that on and after the date fixed for redemption, upon surrender of su ch Debt Security, a new Debt Security or Debt Securities in principal amount equal to the unredeemed portion thereof will be issued.

                   Prior to 10:00 a.m., New York City time, on the Optional Redemption Date or the Special Redemption Date specified in the notice of redemption given as provided in this Section, the Company will deposit with the Trustee or with one or more Paying Agents an amount of money sufficient to redeem on such date all the Debt Securities so called for redemption at the applicable price therefor, together with unpaid interest accrued to such date.

                   The Company will give the Trustee notice not less than 45 nor more than 75 days prior to the date fixed for redemption as to the price at which the Debt Securities are to be redeemed and the aggregate principal amount of Debt Securities to be redeemed and the Trustee shall select, in such manner as in its sole discretion it shall deem appropriate and fair, the Debt Securities or portions thereof (in integral multiples of $1,000) to be redeemed.

                   Section 10.04         Payment of Debt Securities Called for Redemption.

                   If notice of redemption has been given as provided in Section 10.03, the Debt Securities or portions of Debt Securities with respect to which such notice has been given shall become due and payable on the related Optional Redemption Date or Special Redemption Date (as the case may be) and at the place or places stated in such notice at the applicable price therefor, together with unpaid interest accrued thereon to said Optional Redemption Date or the Special Redemption Date (as the case may be), and on and after said Optional Redemption Date or the Special Redemption Date (as the case may be) (unless the Company shall default in the

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payment of such Debt Securities at the redemption price, together with unpaid interest accrued thereon to said date) interest on the Debt Securities or portions of Debt Securities so called for redemption shall cease to accrue. On presentation and surrender of such Debt Securities at a place of payment specified in said notice, such Debt Securities or the specified portions thereof shall be paid and redeemed by the Company at the applicable price therefor, together with unpaid interest, if any, accrued thereon to said Optional Redemption Date or the Special Redemption Date (as the case may be); provided, however, that interest payable on any Interest Payment Date on or prior to said Optional Redemption Date or the Special Redemption Date will be paid to the holders on the relevant regular record date.

                   Upon presentation of any Debt Security redeemed in part only, the Company shall execute and the Trustee shall authenticate and make available for delivery to the holder thereof, at the expense of the Company, a new Debt Security or Debt Securities of authorized denominations in principal amount equal to the unredeemed portion of the Debt Security so presented.

ARTICLE XI
CONSOLIDATION, MERGER, SALE, CONVEYANCE AND LEASE

                   Section 11.01         Company May Consolidate, etc., on Certain Terms.

                   Nothing contained in this Indenture or in the Debt Securities shall prevent any consolidation or merger of the Company with or into any other corporation or corporations (whether or not affiliated with the Company) or successive consolidations or mergers in which the Company or its successor or successors shall be a party or parties, or shall prevent any sale, conveyance, transfer or other disposition of all or substantially all of the property or capital stock of the Company or its successor or successors to any other corporation (whether or not affiliated with the Company or its successor or successors) authorized to acquire and operate the same; provided, however, that the Company hereby covenants and agrees that (i) upon any such consolidation, merger (where the Company is not the surviving corporation), sale, conveyance, transfer or other disposition, the successor entity shall be a corporation organized and exist ing under the laws of the United States or any state thereof or the District of Columbia (unless such corporation has (1) agreed to make all payments due in respect of the Debt Securities or, if outstanding, the Trust Securities and the Capital Securities Guarantee without withholding or deduction for, or on account of, any taxes, duties, assessments or other governmental charges under the laws or regulations of the jurisdiction of organization or residence (for tax purposes) of such corporation or any political subdivision or taxing authority thereof or therein unless required by applicable law, in which case such corporation shall have agreed to pay such additional amounts as shall be required so that the net amounts received and retained by the holders of such Debt Securities or Trust Securities, as the case may be, after payment of all taxes (including withholding taxes), duties, assessments or other governmental charges, will be equal to the amounts that such holders would have received and retained had no such taxes (including withholding taxes), duties, assessments or other governmental charges been imposed, (2) irrevocably and unconditionally consented and submitted to the jurisdiction of any United States federal court or New York state court, in each case located in the Borough of Manhattan, The City of New York, in respect of any action, suit or proceeding against it arising out of or in connection with this Indenture, the Debt Securities, the Capital Securities Guarantee or the

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Declaration and irrevocably and unconditionally waived, to the fullest extent permitted by law, any objection to the laying of venue in any such court or that any such action, suit or proceeding has been brought in an inconvenient forum and (3) irrevocably appointed an agent in The City of New York for service of process in any action, suit or proceeding referred to in clause (2) above) and such corporation expressly assumes all of the obligations of the Company under the Debt Securities, this Indenture, the Capital Securities Guarantee and the Declaration and (ii) after giving effect to any such consolidation, merger, sale, conveyance, transfer or other disposition, no Default or Event of Default shall have occurred and be continuing.

                   Section 11.02         Successor Entity to be Substituted.

                   In case of any such consolidation, merger, sale, conveyance, transfer or other disposition contemplated in Section 11.01 and upon the assumption by the successor corporation, by supplemental indenture, executed and delivered to the Trustee and reasonably satisfactory in form to the Trustee, of the due and punctual payment of the principal of and premium, if any, and interest on all of the Debt Securities and the due and punctual performance and observance of all of the covenants and conditions of this Indenture to be performed or observed by the Company, such successor corporation shall succeed to and be substituted for the Company, with the same effect as if it had been named herein as the Company, and thereupon the predecessor entity shall be relieved of any further liability or obligation hereunder or upon the Debt Securities. Such successor corporation thereupon may cause to be signed, and may issue either in its own name or in the name of the Company, any or all of the Debt Securities issuable hereunder which theretofore shall not have been signed by the Company and delivered to the Trustee or the Authenticating Agent; and, upon the order of such successor corporation instead of the Company and subject to all the terms, conditions and limitations in this Indenture prescribed, the Trustee or the Authenticating Agent shall authenticate and deliver any Debt Securities which previously shall have been signed and delivered by the officers of the Company to the Trustee or the Authenticating Agent for authentication, and any Debt Securities which such successor corporation thereafter shall cause to be signed and delivered to the Trustee or the Authenticating Agent for that purpose. All the Debt Securities so issued shall in all respects have the same legal rank and benefit under this Indenture as the Debt Securities theretofore or thereafter issued in accordance with the terms of this Indenture as though all of such Debt Securities had been issued at the date of the execution hereof.

                   Section 11.03         Opinion of Counsel to be Given to Trustee.

                   The Trustee, subject to the provisions of Sections 6.01 and 6.02, shall receive, in addition to the Opinion of Counsel required by Section 9.05, an Opinion of Counsel as conclusive evidence that any consolidation, merger, sale, conveyance, transfer or other disposition, and any assumption, permitted or required by the terms of this Article XI complies with the provisions of this Article XI.

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ARTICLE XII
SATISFACTION AND DISCHARGE OF INDENTURE

                   Section 12.01         Discharge of Indenture.

                   When (a) the Company shall deliver to the Trustee for cancellation all Debt Securities theretofore authenticated (other than any Debt Securities which shall have been destroyed, lost or stolen and which shall have been replaced or paid as provided in Section 2.06) and not theretofore canceled, or (b) all the Debt Securities not theretofore canceled or delivered to the Trustee for cancellation shall have become due and payable, or are by their terms to become due and payable within one year or are to be called for redemption within one year under arrangements satisfactory to the Trustee for the giving of notice of redemption, and the Company shall deposit with the Trustee, in trust, funds, which shall be immediately due and payable, sufficient to pay at maturity or upon redemption all of the Debt Securities (other than any Debt Securities which shall have been destroyed, lost or stolen and which shall have been replaced or paid as provide d in Section 2.06) not theretofore canceled or delivered to the Trustee for cancellation, including principal and premium, if any, and interest due or to become due to the Maturity Date, any Optional Redemption Date or the Special Redemption Date, as the case may be, but excluding, however, the amount of any moneys for the payment of principal of and premium, if any, or interest on the Debt Securities (1) theretofore repaid to the Company in accordance with the provisions of Section 12.04, or (2) paid to any state or to the District of Columbia pursuant to its unclaimed property or similar laws, and if in the case of either clause (a) or (b) above the Company shall also pay or cause to be paid all other sums payable hereunder by the Company, then this Indenture shall cease to be of further effect except for the provisions of Sections 2.05, 2.06, 3.01, 3.02, 3.04, 6.06, 6.09 and 12.04 hereof, which shall survive until such Debt Securities shall mature or are redeemed, as the case may be, and are paid in full. Thereafter, Sections 6.06, 6.09 and 12.04 shall survive, and the Trustee, on demand of the Company accompanied by an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent herein provided for relating to the satisfaction and discharge of this Indenture have been complied with, and at the cost and expense of the Company, shall execute proper instruments acknowledging satisfaction of and discharging this Indenture, the Company, however, hereby agreeing to reimburse the Trustee for any costs or expenses thereafter reasonably and properly incurred by the Trustee in connection with this Indenture or the Debt Securities.

                   Section 12.02         Deposited Moneys to be Held in Trust by Trustee.

                   Subject to the provisions of Section 12.04, all moneys deposited with the Trustee pursuant to Section 12.01 shall be held in trust and applied by it to the payment, either directly or through any Paying Agent (including the Company if acting as its own Paying Agent), to the holders of the particular Debt Securities for the payment of which such moneys have been deposited with the Trustee, of all sums due and to become due thereon for principal, premium, if any, and interest.

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                   Section 12.03         Paying Agent to Repay Moneys Held.

                   Upon the satisfaction and discharge of this Indenture, all moneys then held by any Paying Agent of the Debt Securities (other than the Trustee) shall, upon demand of the Company, be repaid to the Company or paid to the Trustee, and thereupon such Paying Agent shall be released from all further liability with respect to such moneys.

                   Section 12.04         Return of Unclaimed Moneys.

                   Any moneys deposited with or paid to the Trustee or any Paying Agent for payment of the principal of and premium, if any, or interest on Debt Securities and not applied but remaining unclaimed by the holders of Debt Securities for two years after the date upon which the principal of and premium, if any, or interest on such Debt Securities, as the case may be, shall have become due and payable, shall be repaid to the Company by the Trustee or such Paying Agent on written demand; and the holder of any of the Debt Securities shall thereafter look only to the Company for any payment which such holder may be entitled to collect and all liability of the Trustee or such Paying Agent with respect to such moneys shall thereupon cease.

ARTICLE XIII
IMMUNITY OF INCORPORATORS, STOCKHOLDERS,
OFFICERS AND DIRECTORS

                   Section 13.01         Indenture and Debt Securities Solely Corporate Obligations.

                   No recourse for the payment of the principal of or premium, if any, or interest on any Debt Security, or for any claim based thereon or otherwise in respect thereof, and no recourse under or upon any obligation, covenant or agreement of the Company in this Indenture or in any supplemental indenture, or in any such Debt Security, or because of the creation of any indebtedness represented thereby, shall be had against any incorporator, stockholder, officer, director, employee or agent, as such, past, present or future, of the Company or of any predecessor or successor corporation of the Company, either directly or through the Company or any successor corporation of the Company, whether by virtue of any constitution, statute or rule of law, or by the enforcement of any assessment or penalty or otherwise; it being expressly understood that all such liability is hereby expressly waived and released as a condition of, and as a consideration fo r, the execution of this Indenture and the issue of the Debt Securities.

ARTICLE XIV
MISCELLANEOUS PROVISIONS

                   Section 14.01         Successors.

                   All the covenants, stipulations, promises and agreements of the Company contained in this Indenture shall bind its successors and assigns, whether so expressed or not.

                   Section 14.02         Official Acts by Successor Entity.

                   Any act or proceeding by any provision of this Indenture authorized or required to be done or performed by any board, committee or officer of the Company shall and may be done

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and performed with like force and effect by the like board, committee, officer or other authorized Person of any entity that shall at the time be the lawful successor of the Company.

                   Section 14.03         Surrender of Company Powers.

                   The Company, by instrument in writing executed by authority of 2/3 (two thirds) of its Board of Directors and delivered to the Trustee, may surrender any of the powers reserved to the Company and thereupon such power so surrendered shall terminate both as to the Company and as to any permitted successor.

                   Section 14.04         Addresses for Notices, etc.

                   Any notice or demand which by any provision of this Indenture is required or permitted to be given or served by the Trustee or by the Securityholders on the Company may be given or served in writing by being deposited postage prepaid by registered or certified mail in a post office letter box addressed (until another address is filed by the Company with the Trustee for such purpose) to the Company at 51 West Pearl Street, Coldwater, Michigan 49036, Attention: Danice L. Chartrand. Any notice, direction, request or demand by any Securityholder or the Company to or upon the Trustee shall be deemed to have been sufficiently given or made, for all purposes, if given or made in writing at the office of Wilmington Trust Company at Rodney Square North, 1100 North Market Street, Wilmington, DE 19890-0001, Attention: Corporate Trust Administration.

                   Section 14.05         Governing Law.

                   This Indenture and the Debt Securities shall each be governed by, and construed in accordance with, the laws of the State of New York, without regard to conflict of laws principles of said State other than Section 5-1401 of the New York General Obligations Law.

                   Section 14.06         Evidence of Compliance with Conditions Precedent.

                   Upon any application or demand by the Company to the Trustee to take any action under any of the provisions of this Indenture, the Company shall furnish to the Trustee an Officers' Certificate stating that in the opinion of the signers all conditions precedent, if any, provided for in this Indenture relating to the proposed action have been complied with and an Opinion of Counsel stating that, in the opinion of such counsel, all such conditions precedent have been complied with (except that no such Opinion of Counsel is required to be furnished to the Trustee in connection with the authentication and issuance of Debt Securities).

                   Each certificate or opinion provided for in this Indenture and delivered to the Trustee with respect to compliance with a condition or covenant provided for in this Indenture (except certificates delivered pursuant to Section 3.05) shall include (a) a statement that the person making such certificate or opinion has read such covenant or condition and the definitions relating thereto; (b) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (c) a statement that, in the opinion of such person, he or she has made such examination or investigation as is necessary to enable him or her to express an informed opinion as to whether

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or not such covenant or condition has been complied with; and (d) a statement as to whether or not, in the opinion of such person, such condition or covenant has been complied with.

                   Section 14.07         Business Day Convention.

                   Notwithstanding anything to the contrary contained herein, if any Interest Payment Date, other than the Maturity Date, any Optional Redemption Date or the Special Redemption Date, falls on a day that is not a Business Day, then any interest payable will be paid on, and such Interest Payment Date will be moved to, the next succeeding Business Day, and additional interest will accrue for each day that such payment is delayed as a result thereof. If the Maturity Date, any Optional Redemption Date or the Special Redemption Date falls on a day that is not a Business Day, then the principal, premium, if any, and/or interest payable on such date will be paid on the next succeeding Business Day, and no additional interest will accrue in respect of such payment made on such next succeeding Business Day.

                   Section 14.08         Table of Contents, Headings, etc.

                   The table of contents and the titles and headings of the Articles and Sections of this Indenture have been inserted for convenience of reference only, are not to be considered a part hereof, and shall in no way modify or restrict any of the terms or provisions hereof.

                   Section 14.09         Execution in Counterparts.

                   This Indenture may be executed in any number of counterparts, each of which shall be an original, but such counterparts shall together constitute but one and the same instrument.

                   Section 14.10         Separability.

                   In case any one or more of the provisions contained in this Indenture or in the Debt Securities shall for any reason be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provisions of this Indenture or of such Debt Securities, but this Indenture and such Debt Securities shall be construed as if such invalid, illegal or unenforceable provision had never been contained herein or therein.

                   Section 14.11         Assignment.

                   Subject to Article XI, the Company will have the right at all times to assign any of its rights or obligations under this Indenture and the Debt Securities to a direct or indirect wholly owned Subsidiary of the Company; provided, however, that, in the event of any such assignment, the Company will remain liable for all such obligations. Subject to the foregoing, this Indenture is binding upon and inures to the benefit of the parties hereto and their respective successors and assigns. This Indenture may not otherwise be assigned by the parties thereto.

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                   Section 14.12         Acknowledgment of Rights.

                   The Company acknowledges that, with respect to any Debt Securities held by the Trust or a trustee of the Trust, if such trustee of the Trust fails to enforce its rights under this Indenture as the holder of Debt Securities held as the assets of the Trust after the holders of a majority in aggregate liquidation amount of the outstanding Capital Securities of the Trust have so directed in writing such trustee, a holder of record of such Capital Securities may, to the fullest extent permitted by law, institute legal proceedings directly against the Company to enforce such trustee's rights under this Indenture without first instituting any legal proceedings against such trustee or any other Person. Notwithstanding the foregoing, if an Event of Default has occurred and is continuing and such event is attributable to the failure of the Company to pay interest or premium, if any, on or principal of the Debt Securities on the date such interest , premium, if any, or principal is otherwise due and payable (or, in the case of redemption, on the related Optional Redemption Date or the Special Redemption Date (as the case may be)), the Company acknowledges that a holder of outstanding Capital Securities of the Trust may directly institute a proceeding against the Company for enforcement of payment to such holder directly of the principal of or premium, if any, or interest on the Debt Securities having an aggregate principal amount equal to the aggregate liquidation amount of the Capital Securities of such holder on or after the respective due date (or Optional Redemption Date or Special Redemption Date (as the case may be)) specified in the Debt Securities.

ARTICLE XV
SUBORDINATION OF DEBT SECURITIES

                   Section 15.01         Agreement to Subordinate.

                   The Company covenants and agrees, and each holder of Debt Securities issued hereunder and under any supplemental indenture (the "Additional Provisions") by such holder's acceptance thereof likewise covenants and agrees, that all Debt Securities shall be issued subject to the provisions of this Article XV; and each holder of a Debt Security, whether upon original issue or upon transfer or assignment thereof, accepts and agrees to be bound by such provisions.

                   The payment by the Company of the payments due on all Debt Securities issued hereunder and under any Additional Provisions shall, to the extent and in the manner hereinafter set forth, be subordinated and junior in right of payment to the prior payment in full of all Senior Indebtedness of the Company, whether outstanding at the date of this Indenture or thereafter incurred.

                   No provision of this Article XV shall prevent the occurrence of any default or Event of Default hereunder.

                   Section 15.02         Default on Senior Indebtedness.

                   In the event and during the continuation of any default by the Company in the payment of principal, premium, interest or any other payment due on any Senior Indebtedness of the Company following any applicable grace period, or in the event that the maturity of any Senior Indebtedness of the Company has been accelerated because of a default, and such acceleration has not been rescinded or canceled and such Senior Indebtedness has not been paid

55

in full, then, in either case, no payment shall be made by the Company with respect to the payments due on the Debt Securities.

                   In the event that, notwithstanding the foregoing, any payment shall be received by the Trustee or any Securityholder when such payment is prohibited by the preceding paragraph of this Section, such payment shall, subject to Section 15.06, be held in trust for the benefit of, and shall be paid over or delivered to, the holders of Senior Indebtedness or their respective representatives, or to the trustee or trustees under any indenture pursuant to which any of such Senior Indebtedness may have been issued, as their respective interests may appear, but only to the extent that the holders of the Senior Indebtedness (or their representative or representatives or trustee) notify the Trustee in writing within 90 days of such payment of the amounts then due and owing on the Senior Indebtedness and only the amounts specified in such notice to the Trustee shall be paid to the holders of Senior Indebtedness.

                   Section 15.03         Liquidation; Dissolution; Bankruptcy.

                   Upon any payment by the Company or distribution of assets of the Company of any kind or character, whether in cash, property or securities, to creditors upon any dissolution, winding-up, liquidation or reorganization of the Company, whether voluntary or involuntary or in bankruptcy, insolvency, receivership or other proceedings, all amounts due upon all Senior Indebtedness of the Company shall first be paid in full, or payment thereof provided for in money in accordance with its terms, before any payment is made by the Company on the Debt Securities; and upon any such dissolution, winding-up, liquidation or reorganization, any payment by the Company, or distribution of assets of the Company of any kind or character, whether in cash, property or securities, to which the Securityholders or the Trustee would be entitled to receive from the Company, except for the provisions of this Article XV, shall be paid by the Company, or by any receive r, trustee in bankruptcy, liquidating trustee, agent or other Person making such payment or distribution, or by the Securityholders or by the Trustee under this Indenture if received by them or it, directly to the holders of Senior Indebtedness of the Company (pro rata to such holders on the basis of the respective amounts of Senior Indebtedness held by such holders, as calculated by the Company) or their representative or representatives, or to the trustee or trustees under any indenture pursuant to which any instruments evidencing such Senior Indebtedness may have been issued, as their respective interests may appear, to the extent necessary to pay such Senior Indebtedness in full, in money or money's worth, after giving effect to any concurrent payment or distribution to or for the holders of such Senior Indebtedness, before any payment or distribution is made to the Securityholders or to the Trustee.

                   In the event that, notwithstanding the foregoing, any payment or distribution of assets of the Company of any kind or character, whether in cash, property or securities, prohibited by the foregoing shall be received by the Trustee or any Securityholder before all Senior Indebtedness of the Company is paid in full, or provision is made for such payment in money in accordance with its terms, such payment or distribution shall be held in trust for the benefit of, and shall be paid over or delivered to, the holders of such Senior Indebtedness or their representative or representatives, or to the trustee or trustees under any indenture pursuant to which any instruments evidencing such Senior Indebtedness may have been issued, as their respective interests may appear, as calculated by the Company, for application to the payment of all Senior Indebtedness of the Company remaining unpaid to the extent necessary to pay such

56

Senior Indebtedness in full in money in accordance with its terms, after giving effect to any concurrent payment or distribution to or for the benefit of the holders of such Senior Indebtedness.

                   For purposes of this Article XV, the words "cash, property or securities" shall not be deemed to include shares of stock of the Company as reorganized or readjusted, or securities of the Company or any other corporation provided for by a plan of reorganization or readjustment, the payment of which is subordinated at least to the extent provided in this Article XV with respect to the Debt Securities to the payment of all Senior Indebtedness of the Company, that may at the time be outstanding, provided, that (a) such Senior Indebtedness is assumed by the new corporation, if any, resulting from any such reorganization or readjustment, and (b) the rights of the holders of such Senior Indebtedness are not, without the consent of such holders, altered by such reorganization or readjustment. The consolidation of the Company with, or the merger of the Company into, another corporation or the liquidation or dissolution of the Co mpany following the conveyance, transfer or other disposition of its property as an entirety, or substantially as an entirety, to another corporation upon the terms and conditions provided for in Article XI of this Indenture shall not be deemed a dissolution, winding-up, liquidation or reorganization for the purposes of this Section if such other corporation shall, as a part of such consolidation, merger, conveyance or transfer, comply with the conditions stated in Article XI of this Indenture. Nothing in Section 15.02 or in this Section shall apply to claims of, or payments to, the Trustee under or pursuant to Section 6.06 of this Indenture.

                   Section 15.04         Subrogation.

                   Subject to the payment in full of all Senior Indebtedness of the Company, the Securityholders shall be subrogated to the rights of the holders of such Senior Indebtedness to receive payments or distributions of cash, property or securities of the Company applicable to such Senior Indebtedness until all payments due on the Debt Securities shall be paid in full; and, for the purposes of such subrogation, no payments or distributions to the holders of such Senior Indebtedness of any cash, property or securities to which the Securityholders or the Trustee would be entitled except for the provisions of this Article XV, and no payment over pursuant to the provisions of this Article XV to or for the benefit of the holders of such Senior Indebtedness by Securityholders or the Trustee, shall, as between the Company, its creditors other than holders of Senior Indebtedness of the Company, and the holders of the Debt Securities be deemed to be a pay ment or distribution by the Company to or on account of such Senior Indebtedness. It is understood that the provisions of this Article XV are, and are intended, solely for the purposes of defining the relative rights of the holders of the Debt Securities, on the one hand, and the holders of such Senior Indebtedness, on the other hand.

                   Nothing contained in this Article XV or elsewhere in this Indenture, any Additional Provisions or in the Debt Securities is intended to or shall impair, as between the Company, its creditors other than the holders of Senior Indebtedness of the Company, and the holders of the Debt Securities, the obligation of the Company, which is absolute and unconditional, to pay to the holders of the Debt Securities all payments on the Debt Securities as and when the same shall become due and payable in accordance with their terms, or is intended to or shall affect the relative rights of the holders of the Debt Securities and creditors of the Company other than the holders of Senior Indebtedness of the Company, nor shall anything

57

herein or therein prevent the Trustee or the holder of any Debt Security from exercising all remedies otherwise permitted by applicable law upon default under this Indenture, subject to the rights, if any, under this Article XV of the holders of such Senior Indebtedness in respect of cash, property or securities of the Company received upon the exercise of any such remedy.

                   Upon any payment or distribution of assets of the Company referred to in this Article XV, the Trustee, subject to the provisions of Article VI of this Indenture, and the Securityholders shall be entitled to conclusively rely upon any order or decree made by any court of competent jurisdiction in which such dissolution, winding-up, liquidation or reorganization proceedings are pending, or a certificate of the receiver, trustee in bankruptcy, liquidation trustee, agent or other Person making such payment or distribution, delivered to the Trustee or to the Securityholders, for the purposes of ascertaining the Persons entitled to participate in such distribution, the holders of Senior Indebtedness and other indebtedness of the Company, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Article XV.

                   Section 15.05         Trustee to Effectuate Subordination.

                   Each Securityholder, by such Securityholder's acceptance thereof, authorizes and directs the Trustee on such Securityholder's behalf to take such action as may be necessary or appropriate to effectuate the subordination provided in this Article XV and appoints the Trustee such Securityholder's attorney-in-fact for any and all such purposes.

                   Section 15.06         Notice by the Company.

                   The Company shall give prompt written notice to a Responsible Officer of the Trustee at the Principal Office of the Trustee of any fact known to the Company that would prohibit the making of any payment of moneys to or by the Trustee in respect of the Debt Securities pursuant to the provisions of this Article XV. Notwithstanding the provisions of this Article XV or any other provision of this Indenture or any Additional Provisions, the Trustee shall not be charged with knowledge of the existence of any facts that would prohibit the making of any payment of moneys to or by the Trustee in respect of the Debt Securities pursuant to the provisions of this Article XV unless and until a Responsible Officer of the Trustee at the Principal Office of the Trustee shall have received written notice thereof from the Company or a holder or holders of Senior Indebtedness or from any trustee therefor; and before the receipt of any such written notice, the Trustee, subject to the provisions of Article VI of this Indenture, shall be entitled in all respects to assume that no such facts exist; provided, however, that if the Trustee shall not have received the notice provided for in this Section at least two Business Days prior to the date upon which by the terms hereof any money may become payable for any purpose (including, without limitation, the payment of the principal of or premium, if any, or interest on any Debt Security), then, anything herein contained to the contrary notwithstanding, the Trustee shall have full power and authority to receive such money and to apply the same to the purposes for which they were received, and shall not be affected by any notice to the contrary that may be received by it within two Business Days prior to such date.

                   The Trustee, subject to the provisions of Article VI of this Indenture, shall be entitled to conclusively rely on the delivery to it of a written notice by a Person representing

58

himself or herself to be a holder of Senior Indebtedness of the Company (or a trustee or representative on behalf of such holder) to establish that such notice has been given by a holder of such Senior Indebtedness or a trustee or representative on behalf of any such holder or holders. In the event that the Trustee determines in good faith that further evidence is required with respect to the right of any Person as a holder of such Senior Indebtedness to participate in any payment or distribution pursuant to this Article XV, the Trustee may request such Person to furnish evidence to the reasonable satisfaction of the Trustee as to the amount of such Senior Indebtedness held by such Person, the extent to which such Person is entitled to participate in such payment or distribution and any other facts pertinent to the rights of such Person under this Article XV, and, if such evidence is not furnished, the Trustee may defer any payment to such Person pending judicial determination as to the right of such Person to receive such payment.

                   Section 15.07         Rights of the Trustee; Holders of Senior Indebtedness.

                   The Trustee, in its individual capacity, shall be entitled to all the rights set forth in this Article XV in respect of any Senior Indebtedness at any time held by it, to the same extent as any other holder of Senior Indebtedness, and nothing in this Indenture or any Additional Provisions shall deprive the Trustee of any of its rights as such holder.

                   With respect to the holders of Senior Indebtedness of the Company, the Trustee undertakes to perform or to observe only such of its covenants and obligations as are specifically set forth in this Article XV, and no implied covenants or obligations with respect to the holders of such Senior Indebtedness shall be read into this Indenture or any Additional Provisions against the Trustee. The Trustee shall not owe or be deemed to owe any fiduciary duty to the holders of such Senior Indebtedness and, subject to the provisions of Article VI of this Indenture, the Trustee shall not be liable to any holder of such Senior Indebtedness if it shall pay over or deliver to Securityholders, the Company or any other Person money or assets to which any holder of such Senior Indebtedness shall be entitled by virtue of this Article XV or otherwise.

                   Nothing in this Article XV shall apply to claims of, or payments to, the Trustee under or pursuant to Section 6.06.

                   Section 15.08         Subordination May Not Be Impaired.

                   No right of any present or future holder of any Senior Indebtedness of the Company to enforce subordination as herein provided shall at any time in any way be prejudiced or impaired by any act or failure to act on the part of the Company, or by any act or failure to act, in good faith, by any such holder, or by any noncompliance by the Company, with the terms, provisions and covenants of this Indenture, regardless of any knowledge thereof that any such holder may have or otherwise be charged with.

                   Without in any way limiting the generality of the foregoing paragraph, the holders of Senior Indebtedness of the Company may, at any time and from time to time, without the consent of or notice to the Trustee or the Securityholders, without incurring responsibility to the Securityholders and without impairing or releasing the subordination provided in this Article XV or the obligations hereunder of the holders of the Debt Securities to the holders of such Senior Indebtedness, do any one or more of the following: (a) change the manner, place or terms of

59

payment or extend the time of payment of, or renew or alter, such Senior Indebtedness, or otherwise amend or supplement in any manner such Senior Indebtedness or any instrument evidencing the same or any agreement under which such Senior Indebtedness is outstanding; (b) sell, exchange, release or otherwise deal with any property pledged, mortgaged or otherwise securing such Senior Indebtedness; (c) release any Person liable in any manner for the collection of such Senior Indebtedness; and (d) exercise or refrain from exercising any rights against the Company or any other Person.

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                   Wilmington Trust Company, in its capacity as Trustee, hereby accepts the trusts in this Indenture declared and provided, upon the terms and conditions herein above set forth.

                   IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed by their respective officers thereunto duly authorized, as of the day and year first above written.

SOUTHERN MICHIGAN BANCORP, INC.
By:	/s/ John H. Castle
	John H. Castle Chief Executive Officer

WILMINGTON TRUST COMPANY,        as Trustee
By:	/s/ Denise M. Geran
	Denise M. Geran Vice President

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EXHIBIT A

FORM OF DEBT SECURITY

[FORM OF FACE OF SECURITY]

                   THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS OR ANY OTHER APPLICABLE SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. THE HOLDER OF THIS SECURITY OR ANY INTEREST OR PARTICIPATION HEREIN, BY ITS ACCEPTANCE HEREOF OR THEREOF, AS THE CASE MAY BE, AGREES TO OFFER, SELL OR OTHERWISE TRANSFER SUCH SECURITY OR ANY INTEREST OR PARTICIPATION HEREIN PRIOR TO THE DATE WHICH IS THE LATER OF (i) TWO YEARS (OR SUCH SHORTER PERIOD OF TIME AS PERMITTED BY RULE 144(k) UNDER THE SECURITIES ACT) AFTER THE LATER OF (Y) THE DATE OF ORIGINAL ISSUANCE HEREOF AND (Z) THE LAST DATE ON WHIC H THE COMPANY OR ANY AFFILIATE (AS DEFINED IN RULE 405 UNDER THE SECURITIES ACT) OF THE COMPANY WAS THE HOLDER OF THIS SECURITY OR SUCH INTEREST OR PARTICIPATION (OR ANY PREDECESSOR THERETO) AND (ii) SUCH LATER DATE, IF ANY, AS MAY BE REQUIRED BY ANY SUBSEQUENT CHANGE IN APPLICABLE LAW, ONLY (A) TO THE COMPANY, (B) PURSUANT TO RULE 144A UNDER THE SECURITIES ACT ("RULE 144A"), TO A PERSON THE HOLDER REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER", AS DEFINED IN RULE 144A, THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (C) PURSUANT TO AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT TO AN "ACCREDITED INVESTOR" WITHIN THE MEANING OF SUBPARAGRAPH (a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INDENTURE, A COPY OF WHICH MAY BE OBTAINED FROM THE COMPANY. THE HOLDER OF THIS SECURITY OR ANY INTEREST OR PARTICIPATION HEREIN, BY ITS ACCEPTANCE HEREOF OR THEREOF, AS THE CASE MAY BE, AGREES THAT IT WILL COMPLY WITH THE FOREGOING RESTRICTIONS.

                   THE HOLDER OF THIS SECURITY OR ANY INTEREST OR PARTICIPATION HEREIN, BY ITS ACCEPTANCE HEREOF OR THEREOF, AS THE CASE MAY BE, ALSO AGREES, REPRESENTS AND WARRANTS THAT IT IS NOT AN EMPLOYEE BENEFIT, INDIVIDUAL RETIREMENT ACCOUNT OR OTHER PLAN OR ARRANGEMENT SUBJECT TO TITLE I OF THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED ("ERISA"), OR SECTION 4975 OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE "CODE") (EACH A "PLAN"), OR AN ENTITY WHOSE UNDERLYING ASSETS INCLUDE "PLAN ASSETS" BY REASON OF ANY PLAN'S INVESTMENT IN THE ENTITY AND NO PERSON INVESTING "PLAN ASSETS" OF ANY PLAN MAY ACQUIRE OR HOLD THIS SECURITY OR ANY INTEREST OR PARTICIPATION HEREIN, UNLESS SUCH PURCHASER OR HOLDER IS ELIGIBLE FOR THE EXEMPTIVE RELIEF AVAILABLE UNDER U.S. DEPARTMENT OF LABOR PROHIBITED TRANSACTION CLASS EXEMPTION 96-23, 95-60, 91-38, 90-1 OR 84-14 OR ANOTHER APPLICABLE EXEMPTION OR ITS PURCHASE AND HOLDING OF THIS SECURITY OR SUCH INTEREST OR PARTICIPATION IS NOT PROHIBITED BY SECTION 406 OF ERISA OR SECTION 4975 OF THE CODE WITH RESPECT TO SUCH PURCHASE OR HOLDING. ANY PURCHASER OR HOLDER OF THIS SECURITY OR ANY INTEREST OR PARTICIPATION HEREIN WILL BE DEEMED TO HAVE REPRESENTED BY ITS PURCHASE AND HOLDING HEREOF OR THEREOF, AS THE CASE MAY BE, THAT EITHER (i) IT IS NOT AN EMPLOYEE BENEFIT PLAN WITHIN THE MEANING OF SECTION 3(3) OF ERISA, OR A PLAN TO WHICH SECTION 4975 OF THE CODE IS APPLICABLE, A TRUSTEE OR OTHER PERSON ACTING ON BEHALF OF AN EMPLOYEE BENEFIT PLAN OR PLAN, OR ANY OTHER PERSON OR ENTITY USING THE ASSETS OF ANY EMPLOYEE BENEFIT PLAN OR PLAN TO FINANCE SUCH PURCHASE, OR (ii) SUCH PURCHASE AND HOLDING WILL NOT RESULT IN A PROHIBITED TRANSACTION UNDER SECTION 406 OF ERISA OR SECTION 4975 OF THE CODE FOR WHICH THERE IS NO APPLICABLE STATUTORY OR ADMINISTRATIVE EXEMPTION.

                   IN CONNECTION WITH ANY TRANSFER, THE HOLDER OF THIS SECURITY WILL DELIVER TO THE REGISTRAR AND TRANSFER AGENT SUCH CERTIFICATES AND OTHER INFORMATION AS MAY BE REQUIRED BY THE INDENTURE TO CONFIRM THAT THE TRANSFER COMPLIES WITH THE FOREGOING RESTRICTIONS.

                   THIS SECURITY WILL BE ISSUED AND MAY BE TRANSFERRED ONLY IN MINIMUM DENOMINATIONS OF $100,000 AND MULTIPLES OF $1,000 IN EXCESS THEREOF. ANY ATTEMPTED TRANSFER OF THIS SECURITY IN DENOMINATIONS OF LESS THAN $100,000 SHALL BE DEEMED TO BE VOID AND OF NO LEGAL EFFECT WHATSOEVER. ANY SUCH PURPORTED TRANSFEREE

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SHALL BE DEEMED NOT TO BE THE HOLDER OF THIS SECURITY OR ANY INTEREST OR PARTICIPATION HEREIN FOR ANY PURPOSE, INCLUDING, BUT NOT LIMITED TO, THE RECEIPT OF DISTRIBUTIONS ON THIS SECURITY OR SUCH INTEREST OR PARTICIPATION, AND SUCH PURPORTED TRANSFEREE SHALL BE DEEMED TO HAVE NO INTEREST WHATSOEVER IN THIS SECURITY OR ANY INTEREST OR PARTICIPATION HEREIN.

                   THIS OBLIGATION IS NOT A DEPOSIT AND IS NOT INSURED BY THE UNITED STATES OR ANY AGENCY OR FUND OF THE UNITED STATES, INCLUDING THE FEDERAL DEPOSIT INSURANCE CORPORATION (THE "FDIC"). THIS OBLIGATION IS SUBORDINATED TO THE CLAIMS OF THE DEPOSITORS AND THE CLAIMS OF GENERAL AND SECURED CREDITORS OF THE COMPANY, IS INELIGIBLE AS COLLATERAL FOR A LOAN BY THE COMPANY OR ANY OF ITS SUBSIDIARIES AND IS NOT SECURED.

Floating Rate Junior Subordinated Debt Security due 2034
of
SOUTHERN MICHIGAN BANCORP, INC.

                   Southern Michigan Bancorp, Inc., a bank holding company incorporated in Michigan (the "Company", which term includes any successor permitted under the Indenture (as defined herein)), for value received, promises to pay to Wilmington Trust Company, not in its individual capacity but solely as Institutional Trustee for Southern Michigan Bancorp Capital Trust I, a Delaware statutory trust, or registered assigns, the principal amount of ______________ Dollars ($______________) on April 6, 2034 (the "Maturity Date") (or any Optional Redemption Date or the Special Redemption Date, each as defined herein, or any earlier date of acceleration of the maturity of this Debt Security), and to pay interest on the outstanding principal amount of this Debt Security from March 25, 2004, or from the most recent Interest Payment Date (as defined below) to which interest has been paid or duly provided for, quarterly (subject to deferral as set forth herein) in arrears on January 7, April 7, July 7 and October 7 of each year, commencing on July 7, 2004 (each, an "Interest Payment Date"), at a floating rate per annum, which, with respect to any Interest Period (as defined in the Indenture), will be equal to LIBOR (as defined in the Indenture), as determined on the LIBOR Determination Date (as defined in the Indenture) for such Interest Period (or, in the case of the first Interest Period, will be 1.11%), plus 2.75% (the "Interest Rate") (provided that the Interest Rate for any Interest Period may not exceed the highest rate permitted by New York law, as the same may be modified by United States law of general application) until the principal hereof shall have been paid or duly provided for, and on any overdue principal and (without duplication and to the extent that payment of such interest is enforceable under applicable law) on any overdue installment of interest at an annual rate equal to the then applicable Inte rest Rate, compounded quarterly. The amount of interest payable for any Interest Period shall be computed on the basis of a 360-day year and the actual number of days elapsed in such Interest Period.

                   The interest installment so payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in the Indenture, be paid to the Person in whose name this Debt Security (or one or more Predecessor Securities, as defined in the Indenture) is

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registered at the close of business on the "regular record date" for such interest installment, which shall be the fifteenth day prior to such Interest Payment Date, whether or not such day is a Business Day (as defined herein). Any such interest installment (other than Deferred Interest (as defined herein)) not punctually paid or duly provided for shall forthwith cease to be payable to the holders on such regular record date and may be paid to the Person in whose name this Debt Security (or one or more Predecessor Securities) is registered at the close of business on a special record date to be fixed by the Trustee for the payment of such defaulted interest, notice whereof shall be given to the holders of the Debt Securities not less than 10 days prior to such special record date, all as more fully provided in the Indenture.

                   Payment of the principal of and premium, if any, and interest on this Debt Security due on the Maturity Date, any Optional Redemption Date or the Special Redemption Date, as the case may be, shall be made in immediately available funds against presentation and surrender of this Debt Security at the office or agency of the Trustee maintained for that purpose in Wilmington, Delaware, or at the office or agency of any other Paying Agent appointed by the Company maintained for that purpose in Wilmington, Delaware or Lansing, Michigan. Payment of interest on this Debt Security due on any Interest Payment Date other than the Maturity Date, any Optional Redemption Date or the Special Redemption Date, as the case may be, shall be made at the option of the Company by check mailed to the holder thereof at such address as shall appear in the Debt Security Register or by wire transfer of immediately available funds to an account appropriately desig nated by the holder hereof. Notwithstanding the foregoing, so long as the holder of this Debt Security is the Institutional Trustee, payment of the principal of and premium, if any, and interest on this Debt Security shall be made in immediately available funds when due at such place and to such account as may be designated by the Institutional Trustee. All payments in respect of this Debt Security shall be payable in any coin or currency of the United States of America that at the time of payment is legal tender for payment of public and private debts.

                   Notwithstanding anything to the contrary contained herein, if any Interest Payment Date, other than the Maturity Date, any Optional Redemption Date or the Special Redemption Date, falls on a day that is not a Business Day, then any interest payable will be paid on, and such Interest Payment Date will be moved to, the next succeeding Business Day, and additional interest will accrue for each day that such payment is delayed as a result thereof. If the Maturity Date, any Optional Redemption Date or the Special Redemption Date falls on a day that is not a Business Day, then the principal, premium, if any, and/or interest payable on such date will be paid on the next succeeding Business Day, and no additional interest will accrue in respect of such payment made on such next succeeding Business Day.

                   So long as no Event of Default has occurred and is continuing, the Company shall have the right, from time to time and without causing an Event of Default, to defer payments of interest on the Debt Securities by extending the interest payment period on the Debt Securities at any time and from time to time during the term of the Debt Securities, for up to 20 consecutive quarterly periods (each such extended interest payment period, together with all previous and further consecutive extensions thereof, is referred to herein as an "Extension Period"). No Extension Period may end on a date other than an Interest Payment Date or extend beyond the Maturity Date, any Optional Redemption Date or the Special Redemption Date, as the case may be. During any Extension Period, interest will continue to accrue on the Debt Securities, and

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interest on such accrued interest (such accrued interest and interest thereon referred to herein as "Deferred Interest") will accrue at an annual rate equal to the Interest Rate applicable during such Extension Period, compounded quarterly from the date such Deferred Interest would have been payable were it not for the Extension Period, to the extent permitted by applicable law. No interest or Deferred Interest (except any Additional Amounts (as defined in the Indenture) that may be due and payable) shall be due and payable during an Extension Period, except at the end thereof. At the end of any Extension Period, the Company shall pay all Deferred Interest then accrued and unpaid on the Debt Securities; provided, however, that during any Extension Period, the Company may not (i) declare or pay any dividends or distributions on, or redeem, purchase, acquire, or make a liquidation payment with respect to, any of the Company's capital stock, (ii) make any payment of principal of or pre mium, if any, or interest on or repay, repurchase or redeem any debt securities of the Company that rank pari passu in all respects with or junior in interest to the Debt Securities or (iii) make any payment under any guarantees of the Company that rank in all respects pari passu with or junior in respect to the Capital Securities Guarantee (other than (a) repurchases, redemptions or other acquisitions of shares of capital stock of the Company (A) in connection with any employment contract, benefit plan or other similar arrangement with or for the benefit of one or more employees, officers, directors or consultants, (B) in connection with a dividend reinvestment or stockholder stock purchase plan or (C) in connection with the issuance of capital stock of the Company (or securities convertible into or exercisable for such capital stock), as consideration in an acquisition transaction entered into prior to such Extension Period, (b) as a result of any exchange or conversion of any class or serie s of the Company's capital stock (or any capital stock of a subsidiary of the Company) for any class or series of the Company's capital stock or of any class or series of the Company's indebtedness for any class or series of the Company's capital stock, (c) the purchase of fractional interests in shares of the Company's capital stock pursuant to the conversion or exchange provisions of such capital stock or the security being converted or exchanged, (d) any declaration of a dividend in connection with any stockholder's rights plan, or the issuance of rights, stock or other property under any stockholder's rights plan, or the redemption or repurchase of rights pursuant thereto or (e) any dividend in the form of stock, warrants, options or other rights where the dividend stock or the stock issuable upon exercise of such warrants, options or other rights is the same stock as that on which the dividend is being paid or ranks pari passu with or junior to such stock). Prior to the termination of any Extens ion Period, the Company may further extend such Extension Period, provided, that no Extension Period (including all previous and further consecutive extensions that are part of such Extension Period) shall exceed 20 consecutive quarterly periods. Upon the termination of any Extension Period and upon the payment of all Deferred Interest, the Company may commence a new Extension Period, subject to the foregoing requirements. The Company must give the Trustee notice of its election to begin or extend an Extension Period at least one Business Day prior to the regular record date applicable to the next succeeding Interest Payment Date.

                   The indebtedness evidenced by this Debt Security is, to the extent provided in the Indenture, subordinate and junior in right of payment to the prior payment in full of all Senior Indebtedness (as defined in the Indenture), and this Debt Security is issued subject to the provisions of the Indenture with respect thereto. Each holder of this Debt Security, by accepting the same, (a) agrees to and shall be bound by such provisions, (b) authorizes and directs the Trustee on such holder's behalf to take such action as may be necessary or appropriate to acknowledge or effectuate the subordination so provided and (c) appoints the Trustee such

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holder's attorney-in-fact for any and all such purposes. Each holder hereof, by such holder's acceptance hereof, hereby waives all notice of the acceptance of the subordination provisions contained herein and in the Indenture by each holder of Senior Indebtedness, whether now outstanding or hereafter incurred, and waives reliance by each such holder upon said provisions.

                   The Company waives diligence, presentment, demand for payment, notice of nonpayment, notice of protest, and all other demands and notices.

                   This Debt Security shall not be entitled to any benefit under the Indenture hereinafter referred to and shall not be valid or become obligatory for any purpose until the certificate of authentication hereon shall have been signed by or on behalf of the Trustee.

                   The provisions of this Debt Security are continued on the reverse side hereof and such continued provisions shall for all purposes have the same effect as though fully set forth at this place.

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                   IN WITNESS WHEREOF, the Company has duly executed this certificate.

SOUTHERN MICHIGAN BANCORP, INC.
By:
	Name: Title:

Dated: ______________________, ____

CERTIFICATE OF AUTHENTICATION

                   This is one of the Debt Securities referred to in the within-mentioned Indenture.

WILMINGTON TRUST COMPANY,     not in its individual capacity but solely as     the Trustee
By:
	Authorized Officer

Dated: ______________________, ____

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[FORM OF REVERSE OF SECURITY]

                   This Debt Security is one of a duly authorized series of debt securities of the Company (collectively, the "Debt Securities"), all issued or to be issued pursuant to an Indenture (the "Indenture"), dated as of March 25, 2004, duly executed and delivered between the Company and Wilmington Trust Company, as Trustee (the "Trustee"), to which Indenture and all indentures supplemental thereto reference is hereby made for a description of the rights, limitations of rights, obligations, duties and immunities thereunder of the Trustee, the Company and the holders of the Debt Securities of which this Debt Security is a part.

                   Upon the occurrence and continuation of a Tax Event, an Investment Company Event or a Capital Treatment Event (each, a "Special Event"), the Company shall have the right to redeem this Debt Security, at its option, in whole with all other Debt Securities but not in part, at any time, within 90 days following the occurrence of such Special Event (the "Special Redemption Date"), at the Special Redemption Price (as defined herein). In the event that the Special Redemption Date falls on a day prior to the LIBOR Determination Date for any Interest Period, then the Company shall be required to pay to Securityholders, on the Business Day following such LIBOR Determination Date, any additional amount of interest that would have been payable on the Special Redemption Date had the amount of interest determined on such LIBOR Determination Date been known on the first day of such Interest Period.

                   The Company shall also have the right to redeem this Debt Security at its option, in whole or (provided that all accrued and unpaid interest has been paid on all Debt Securities for all Interest Periods terminating on or prior to such date) from time to time in part, on any Interest Payment Date on or after April 7, 2009 (each, an "Optional Redemption Date"), at the Optional Redemption Price (as defined herein).

                   Any redemption pursuant to the preceding two paragraphs will be made, subject to receipt by the Company of prior approval from the Board of Governors of the Federal Reserve System (the "Federal Reserve") if then required under applicable capital guidelines or policies of the Federal Reserve, upon not less than 30 days' nor more than 60 days' prior written notice. If the Debt Securities are only partially redeemed by the Company, the Debt Securities will be redeemed pro rata or by any other method utilized by the Trustee. In the event of redemption of this Debt Security in part only, a new Debt Security or Debt Securities for the unredeemed portion hereof will be issued in the name of the holder hereof upon the cancellation hereof.

                   "Optional Redemption Price" means an amount in cash equal to 100% of the principal amount of this Debt Security being redeemed plus unpaid interest accrued thereon to the related Optional Redemption Date.

                   "Special Redemption Price" means, with respect to the redemption of this Debt Security following a Special Event, an amount in cash equal to 103.525% of the principal amount of this Debt Security to be redeemed prior to April 7, 2005 and thereafter equal to the percentage of the principal amount of this Debt Security that is specified below for the Special Redemption Date plus, in each case, unpaid interest accrued thereon to the Special Redemption Date:

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Special Redemption During the 12-Month Period Beginning April 7,	Percentage of Principal Amount
2005	103.140%
2006	102.355%
2007	101.570%
2008	100.785%
2009 and thereafter	100.000%

                   In case an Event of Default, as defined in the Indenture, shall have occurred and be continuing, the principal of all of the Debt Securities may be declared, and, in certain cases, shall ipso facto become, due and payable, and upon any such declaration of acceleration shall become due and payable, in each case, in the manner, with the effect and subject to the conditions provided in the Indenture.

                   The Indenture contains provisions permitting the Company and the Trustee, with the consent of the holders of a majority in aggregate principal amount of the Debt Securities at the time outstanding affected thereby, as specified in the Indenture, to execute supplemental indentures for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of the Indenture or of any supplemental indenture or of modifying in any manner the rights of the holders of the Debt Securities; provided, however, that no such supplemental indenture shall, among other things, without the consent of the holders of each Debt Security then outstanding and affected thereby (i) change the Maturity Date of any Debt Security, or reduce the principal amount thereof or any premium thereon, or reduce the rate (or manner of calculation of the rate) or extend the time of payment of interest thereon, or reduce (oth er than as a result of the maturity or earlier redemption of any such Debt Security in accordance with the terms of the Indenture and such Debt Security) or increase the aggregate principal amount of Debt Securities then outstanding, or change any of the redemption provisions, or make the principal thereof or any interest or premium thereon payable in any coin or currency other than United States Dollars, or impair or affect the right of any holder to institute suit for payment thereof, or (ii) reduce the aforesaid percentage of Debt Securities the holders of which are required to consent to any such supplemental indenture. The Indenture also contains provisions permitting the holders of a majority in aggregate principal amount of the Debt Securities at the time outstanding, on behalf of the holders of all the Debt Securities, to waive any past default in the performance of any of the covenants contained in the Indenture, or established pursuant to the Indenture, and its consequences, except (a) a default in payments due in respect of any of the Debt Securities, (b) in respect of covenants or provisions of the Indenture which cannot be modified or amended without the consent of the holder of each Debt Security affected, or (c) in respect of the covenants of the Company relating to its ownership of Common Securities of the Trust. Any such consent or waiver by the holder of this Debt Security (unless revoked as provided in the Indenture) shall be conclusive and binding upon such holder and upon all future holders and owners of this Debt Security and of any Debt Security issued in exchange

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herefor or in place hereof (whether by registration of transfer or otherwise), irrespective of whether or not any notation of such consent or waiver is made upon this Debt Security.

                   No reference herein to the Indenture and no provision of this Debt Security or of the Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to make all payments due on this Debt Security at the time and place and at the rate and in the money herein prescribed.

                   As provided in the Indenture and subject to certain limitations herein and therein set forth, this Debt Security is transferable by the holder hereof on the Debt Security Register (as defined in the Indenture) of the Company, upon surrender of this Debt Security for registration of transfer at the office or agency of the Trustee in Wilmington, Delaware, or at any other office or agency of the Company in Wilmington, Delaware or Lansing, Michigan, accompanied by a written instrument or instruments of transfer in form satisfactory to the Company or the Trustee duly executed by the holder hereof or such holder's attorney duly authorized in writing, and thereupon one or more new Debt Securities of authorized denominations and for the same aggregate principal amount will be issued to the designated transferee or transferees. No service charge will be made for any such registration of transfer, but the Company or the Trustee may require paymen t of a sum sufficient to cover any tax, fee or other governmental charge payable in relation thereto as specified in the Indenture.

                   Prior to due presentment for registration of transfer of this Debt Security, the Company, the Trustee, any Authenticating Agent, any Paying Agent, any transfer agent and the Debt Security registrar may deem and treat the holder hereof as the absolute owner hereof (whether or not this Debt Security shall be overdue and notwithstanding any notice of ownership or writing hereon) for the purpose of receiving payment of the principal of and premium, if any, and interest on this Debt Security and for all other purposes, and none of the Company, the Trustee, any Authenticating Agent, any Paying Agent, any transfer agent or any Debt Security registrar shall be affected by any notice to the contrary.

                   As provided in the Indenture and subject to certain limitations herein and therein set forth, Debt Securities are exchangeable for a like aggregate principal amount of Debt Securities of different authorized denominations, as requested by the holder surrendering the same.

                   The Debt Securities are issuable only in registered certificated form without coupons.

                   No recourse shall be had for the payment of the principal of or premium, if any, or interest on this Debt Security, or for any claim based hereon, or otherwise in respect hereof, or based on or in respect of the Indenture, against any incorporator, stockholder, officer, director, employee or agent, past, present or future, as such, of the Company or of any predecessor or successor corporation of the Company, whether by virtue of any constitution, statute or rule of law, or by the enforcement of any assessment or penalty or otherwise, all such liability being, by the acceptance hereof and as part of the consideration for the issuance hereof, expressly waived and released.

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                   All terms used but not defined in this Debt Security shall have the meanings assigned to them in the Indenture.

                   THIS DEBT SECURITY SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO CONFLICT OF LAWS PRINCIPLES OF SAID STATE OTHER THAN SECTION 5-1401 OF THE NEW YORK GENERAL OBLIGATIONS LAW.

A-11

EX-10.14

EXHIBIT 10.14

AMENDED AND RESTATED DECLARATION OF TRUST

OF

SOUTHERN MICHIGAN BANCORP CAPITAL TRUST I

Dated as of March 25, 2004

TABLE OF CONTENTS

Page

ARTICLE I
INTERPRETATION AND DEFINITIONS

Section 1.1 Definitions 1

ARTICLE II
ORGANIZATION

Section 2.1	Name	9
Section 2.2	Office	9
Section 2.3	Purpose	9
Section 2.4	Authority	10
Section 2.5	Title to Property of the Trust	10
Section 2.6	Powers and Duties of the Trustees and the Administrators	10
Section 2.7	Prohibition of Actions by the Trust and the Trustees	15
Section 2.8	Powers and Duties of the Institutional Trustee	15
Section 2.9	Certain Duties and Responsibilities of the Trustees and the Administrators	17
Section 2.10	Certain Rights of Institutional Trustee	19
Section 2.11	Delaware Trustee	21
Section 2.12	Execution of Documents	21
Section 2.13	Execution of Documents	21
Section 2.14	Duration of Trust	22
Section 2.15	Mergers	22

ARTICLE III
SPONSOR

Section 3.1	Sponsor's Purchase of Common Securities	24
Section 3.2	Responsibilities of the Sponsor	24

ARTICLE IV
TRUSTEES AND ADMINISTRATORS

Section 4.1	Number of Trustees	24
Section 4.2	Delaware Trustee	24
Section 4.3	Institutional Trustee; Eligibility	25
Section 4.4	Administrators	25
Section 4.5	Appointment, Removal and Resignation of the Trustees and the Administrators	26
Section 4.6	Vacancies Among Trustees	27
Section 4.7	Effect of Vacancies	28
Section 4.8	Meetings of the Trustees and the Administrators	28
Section 4.9	Delegation of Power	28

Section 4.10 Merger, Conversion, Consolidation or Succession to Business 29

ARTICLE V
DISTRIBUTIONS

Section 5.1 Distributions 29

ARTICLE VI
ISSUANCE OF SECURITIES

Section 6.1	General Provisions Regarding Securities	29
Section 6.2	Paying Agent, Transfer Agent, Calculation Agent and Registrar	30
Section 6.3	Form and Dating	31
Section 6.4	Mutilated, Destroyed, Lost or Stolen Certificates	31
Section 6.5	Temporary Certificates	32
Section 6.6	Cancellation	32
Section 6.7	Rights of Holders; Waivers of Past Defaults	32

ARTICLE VII
DISSOLUTION AND TERMINATION OF TURST

Section 7.1 Dissolution and Termination of Trust 34

ARTICLE VIII
TRANSFER OF INTERESTS

Section 8.1	General	35
Section 8.2	Transfer Procedures and Restrictions	36
Section 8.3	Deemed Security Holders	39
Section 8.4	Transfer of Initial Securities	39

ARTICLE IX
LIMITATION OF LIABILITY OF HOLDERS OF SECURITIES, TRUSTEES OR
OTHERS

Section 9.1	Liability	40
Section 9.2	Exculpation	41
Section 9.3	Fiduciary Duty	41
Section 9.4	Indemnification	42
Section 9.5	Outside Businesses	45
Section 9.6	Compensation; Fee	45

ARTICLE X
ACCOUNTING

Section 10.1	Fiscal Year	46
Section 10.2	Certain Accounting Matters	46
Section 10.3	Banking	47
Section 10.4	Withholding	47

ii

ARTICLE XI
AMENDMENTS AND MEETINGS

Section 11.1	Amendments	47
Section 11.2	Meetings of the Holders of the Securities; Action by Written Consent	49

ARTICLE XII
REPRESENTATIONS OF INSTITUTIONAL TRUSTEE AND DELAWARE
TRUSTEE

Section 12.1	Representations and Warranties of Institutional Trustee	51
Section 12.2	Representations and Warranties of Delaware Trustee	51

ARTICLE XIII
MISCELLANEOUS

Section 13.1	Notices	52
Section 13.2	Governing Law	53
Section 13.3	Submission to Jurisdiction	53
Section 13.4	Intention of the Parties	54
Section 13.5	Headings	54
Section 13.6	Successors and Assigns	54
Section 13.7	Partial Enforceability	54
Section 13.8	Counterparts	54

\

ANNEXES AND EXHIBITS

ANNEX I	Terms of Capital Securities and Common Securities
EXHIBIT A-1	Form of Capital Security Certificate
EXHIBIT A-2	Form of Common Security Certificate
EXHIBIT B	Form of Transferee Certificate to be Executed by Accredited Investors
EXHIBIT C	Form of Transferor Certificate to be Executed for QIBs
EXHIBIT D	Form of Transferee Certificate to be Executed by Non-U.S. Persons

iii

AMENDED AND RESTATED DECLARATION OF TRUST

OF

SOUTHERN MICHIGAN BANCORP CAPITAL TRUST I

March 25, 2004

                   AMENDED AND RESTATED DECLARATION OF TRUST (as amended or supplemented from time to time in accordance with the terms hereof, this "Declaration"), dated and effective as of March 25, 2004, by the Trustees (as defined herein), the Administrators (as defined herein), the Sponsor (as defined herein) and the holders from time to time of undivided beneficial interests in the assets of the Trust (as defined herein) to be issued pursuant to this Declaration.

                   WHEREAS, certain of the Trustees and the Sponsor established Southern Michigan Bancorp Capital Trust I (the "Trust"), a statutory trust under the Statutory Trust Act (as defined herein), pursuant to a Declaration of Trust, dated as of March 18, 2004 (the "Original Declaration"), and a Certificate of Trust filed with the Secretary of State of the State of Delaware on March 18, 2004, for the sole purpose of issuing and selling the Securities (as defined herein) representing undivided beneficial interests in the assets of the Trust, investing the proceeds thereof in the Debentures (as defined herein) of the Debenture Issuer (as defined herein) and engaging in those activities necessary, advisable or incidental thereto;

                   WHEREAS, as of the date hereof, no interests in the assets of the Trust have been issued; and

                   WHEREAS, all of the Trustees, the Administrators and the Sponsor, by this Declaration, amend and restate each and every term and provision of the Original Declaration.

                   NOW, THEREFORE, it being the intention of the parties hereto to continue the Trust as a statutory trust under the Statutory Trust Act and that this Declaration constitutes the governing instrument of such statutory trust, and that all assets contributed to the Trust will be held in trust for the benefit of the holders, from time to time, of the Securities, subject to the provisions of this Declaration, and, in consideration of the mutual covenants contained herein and other good and valuable consideration, the receipt of which is hereby acknowledged, the parties, intending to be legally bound hereby, amend and restate in its entirety the Original Declaration and agree as follows:

ARTICLE I

INTERPRETATION AND DEFINITIONS

                   Section 1.1  Definitions. Unless the context otherwise requires:

                   (a)         capitalized terms used in this Declaration but not defined in the preamble above or elsewhere herein have the respective meanings assigned to them in this Section 1.1 or, if not defined in this Section 1.1 or elsewhere herein, in the Indenture;

                   (b)         a term defined anywhere in this Declaration has the same meaning throughout;

                   (c)         all references to "the Declaration" or "this Declaration" are to this Declaration and each Annex and Exhibit hereto, as modified, supplemented or amended from time to time;

                   (d)         all references in this Declaration to Articles and Sections and Annexes and Exhibits are to Articles and Sections of and Annexes and Exhibits to this Declaration unless otherwise specified;

                   (e)         a term defined in the Trust Indenture Act (as defined herein) has the same meaning when used in this Declaration unless otherwise defined in this Declaration or unless the context otherwise requires; and

                   (f)         a reference to the singular includes the plural and vice versa.

                   "Additional Amounts" has the meaning set forth in Section 3.06 of the Indenture.

                   "Administrative Action" has the meaning set forth in paragraph 4(a) of Annex I.

                   "Administrators" means each of John H. Castle, Kurt G. Miller and Danice L. Chartrand, solely in such Person's capacity as Administrator of the Trust continued hereunder and not in such Person's individual capacity, or such Administrator's successor in interest in such capacity, or any successor appointed as herein provided.

                   "Affiliate" has the same meaning as given to that term in Rule 405 under the Securities Act or any successor rule thereunder.

                   "Authorized Officer" of a Person means any Person that is authorized to bind such Person.

                   "Bankruptcy Event" means, with respect to any Person:

                   (a)         a court having jurisdiction in the premises enters a decree or order for relief in respect of such Person in an involuntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or appoints a receiver, liquidator, assignee, custodian, trustee, sequestrator or similar official of such Person or for any substantial part of its property, or orders the winding-up or liquidation of its affairs, and such decree, appointment or order remains unstayed and in effect for a period of 90 consecutive days; or

                   (b)         such Person commences a voluntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, consents to the entry of an order for relief in an involuntary case under any such law, or consents to the appointment of or taking possession by a receiver, liquidator, assignee, trustee, custodian, sequestrator or other similar official of such Person or of any substantial part of its property, or makes any general assignment for the benefit of creditors, or fails generally to pay its debts as they become due.

2

                   "Business Day" means any day other than Saturday, Sunday or any other day on which banking institutions in Wilmington, Delaware, The City of New York or Lansing, Michigan are permitted or required by law or executive order to close.

                   "Calculation Agent" has the meaning set forth in Section 1.01 of the Indenture.

                   "Capital Securities" has the meaning set forth in Section 6.1(a).

                   "Capital Security Certificate" means a definitive Certificate registered in the name of the Holder representing a Capital Security substantially in the form of Exhibit A-1.

                   "Capital Treatment Event" has the meaning set forth in paragraph 4(a) of Annex I.

                   "Certificate" means any certificate evidencing Securities.

                   "Certificate of Trust" means the certificate of trust filed with the Secretary of State of the State of Delaware with respect to the Trust, as amended and restated from time to time.

                   "Closing Date" has the meaning set forth in the Placement Agreement.

                   "Code" means the Internal Revenue Code of 1986, as amended from time to time, or any successor legislation.

                   "Commission" means the United States Securities and Exchange Commission.

                   "Common Securities" has the meaning set forth in Section 6.1(a).

                   "Common Security Certificate" means a definitive Certificate registered in the name of the Holder representing a Common Security substantially in the form of Exhibit A-2.

                   "Company Indemnified Person" means (a) any Administrator, (b) any Affiliate of any Administrator, (c) any officers, directors, shareholders, members, partners, employees, representatives or agents of any Administrator or (d) any officer, employee or agent of the Trust or its Affiliates.

                   "Corporate Trust Office" means the office of the Institutional Trustee at which at any particular time its corporate trust business shall be principally administered, which at all times shall be located within the United States and at the time of execution of this Declaration shall be Rodney Square North, 1100 North Market Street, Wilmington, DE 19890-0001, Attention: Corporate Trust Administration.

                   "Coupon Rate" has the meaning set forth in paragraph 2(a) of Annex I.

                   "Covered Person" means (a) any Administrator, officer, director, shareholder, partner, member, representative, employee or agent of the Trust or the Trust's Affiliates or (b) any Holder of Securities.

3

                   "Debenture Issuer" means Southern Michigan Bancorp, Inc., a bank holding company incorporated in Michigan, in its capacity as issuer of the Debentures under the Indenture, and any permitted successor under the Indenture.

                   "Debenture Trustee" means Wilmington Trust Company, a Delaware banking corporation, not in its individual capacity but solely as trustee under the Indenture until a successor is appointed thereunder, and thereafter means such successor trustee.

                   "Debentures" means the Floating Rate Junior Subordinated Debt Securities due 2034 to be issued by the Debenture Issuer under the Indenture.

                   "Default" means any event, act or condition that with notice or lapse of time, or both, would constitute an Event of Default.

                   "Deferred Interest" means any interest on the Debentures that would have been overdue and unpaid for more than one Distribution Payment Date but for the imposition of an Extension Period, and the interest that shall accrue (to the extent that the payment of such interest is legally enforceable) on such interest at the Coupon Rate applicable during such Extension Period, compounded quarterly from the date on which such Deferred Interest would otherwise have been due and payable until paid or made available for payment.

                   "Definitive Capital Securities" means any Capital Securities in definitive form issued by the Trust.

                   "Delaware Trustee" has the meaning set forth in Section 4.2.

                   "Direct Action" has the meaning set forth in Section 2.8(e).

                   "Distribution" means a distribution payable to Holders of Securities in accordance with Section 5.1.

                   "Distribution Payment Date" has the meaning set forth in paragraph 2(e) of Annex I.

                   "Distribution Period" has the meaning set forth in paragraph 2(a) of Annex I.

                   "Event of Default" means the occurrence of an Indenture Event of Default.

                   "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time, or any successor legislation.

                   "Extension Period" has the meaning set forth in paragraph 2(e) of Annex I.

                   "Federal Reserve" has the meaning set forth in paragraph 3 of Annex I.

                   "Fiduciary Indemnified Person" shall mean each of the Institutional Trustee (including in its individual capacity), the Delaware Trustee (including in its individual capacity), any Affiliate of the Institutional Trustee or the Delaware Trustee, and any officers, directors,

4

shareholders, members, partners, employees, representatives, custodians, nominees or agents of the Institutional Trustee or the Delaware Trustee.

                   "Fiscal Year" has the meaning set forth in Section 10.1

                   "Guarantee" means the Guarantee Agreement, dated as of the Closing Date, of the Sponsor (the "Guarantor") in respect of the Capital Securities.

                   "Holder" means a Person in whose name a Certificate representing a Security is registered on the Securities Register maintained by or on behalf of the Registrar, such Person being a beneficial owner within the meaning of the Statutory Trust Act.

                   "Indemnified Person" means a Company Indemnified Person or a Fiduciary Indemnified Person.

                   "Indenture" means the Indenture, dated as of the Closing Date, between the Debenture Issuer and the Debenture Trustee, and any indenture supplemental thereto pursuant to which the Debentures are to be issued.

                   "Indenture Event of Default" means an "Event of Default" as defined in the Indenture.

                   "Institutional Trustee" means the Trustee meeting the eligibility requirements set forth in Section 4.3.

                   "Investment Company" means an investment company as defined in the Investment Company Act.

                   "Investment Company Act" means the Investment Company Act of 1940, as amended from time to time, or any successor legislation.

                   "Investment Company Event" has the meaning set forth in paragraph 4(a) of Annex I.

                   "Legal Action" has the meaning set forth in Section 2.8(e).

                   "LIBOR" means the London Interbank Offered Rate for three-month U.S. Dollar deposits in Europe as determined by the Calculation Agent according to paragraph 2(b) of Annex I.

                   "LIBOR Banking Day" has the meaning set forth in paragraph 2(b)(1) of Annex I.

                   "LIBOR Business Day" has the meaning set forth in paragraph 2(b)(1) of Annex I.

                   "LIBOR Determination Date" has the meaning set forth in paragraph 2(b)(1) of Annex I.

                   "Liquidation" has the meaning set forth in paragraph 3 of Annex I.

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                   "Liquidation Distribution" has the meaning set forth in paragraph 3 of Annex I.

                   "Majority in liquidation amount of the Securities" means Holders of outstanding Securities voting together as a single class or, as the context may require, Holders of outstanding Capital Securities or Holders of outstanding Common Securities voting separately as a class, who are the record owners of more than 50% of the aggregate liquidation amount (including the amount that would be paid upon the redemption, liquidation or otherwise on the date upon which the voting percentages are determined, plus unpaid Distributions accrued thereon to such date) of all outstanding Securities of the relevant class.

                   "Maturity Date" has the meaning set forth in paragraph 4(a) of Annex I.

                   "Maturity Redemption Price" has the meaning set forth in paragraph 4(a) of Annex I.

                   "Officers' Certificate" means, with respect to any Person, a certificate signed by two Authorized Officers of such Person or, in the case of a natural Person, such Person. Any Officers' Certificate delivered with respect to compliance with a condition or covenant provided for in this Declaration shall include:

                   (a)         a statement that each Authorized Officer or Person, as the case may be, signing the Officers' Certificate has read the covenant or condition and the definitions relating thereto;

                   (b)         a brief statement of the nature and scope of the examination or investigation undertaken by each Authorized Officer or Person, as the case may be, in rendering the Officers' Certificate;

                   (c)         a statement that each Authorized Officer or Person, as the case may be, has made such examination or investigation as, in his or her opinion, is necessary to enable such Authorized Officer or Person, as the case may be, to express an informed opinion as to whether or not such covenant or condition has been complied with; and

                   (d)         a statement as to whether, in the opinion of each Authorized Officer or Person, as the case may be, such condition or covenant has been complied with.

                   "Optional Redemption Date" has the meaning set forth in paragraph 4(a) of Annex I.

                   "Optional Redemption Price" has the meaning set forth in paragraph 4(a) of Annex I.

                   "Paying Agent" has the meaning set forth in Section 6.2(a).

                   "Payment Amount" has the meaning set forth in Section 5.1.

                   "Person" means a legal person, including any individual, corporation, estate, partnership, joint venture, association, joint stock company, limited liability company, trust,

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unincorporated association, or government or any agency or political subdivision thereof, or any other entity of whatever nature.

                   "Placement Agreement" means the Placement Agreement relating to the offer and sale of Capital Securities.

                   "PORTAL" has the meaning set forth in Section 2.6(a)(i).

                   "Property Account" has the meaning set forth in Section 2.8(c).

                   "Pro Rata" has the meaning set forth in paragraph 8 of Annex I.

                   "Purchaser" means ALESCO Preferred Funding III, Ltd.

                   "QIB" means a "qualified institutional buyer" as defined under Rule 144A.

                   "Quorum" means a majority of the Administrators or, if there are only two Administrators, both of them.

                   "Redemption/Distribution Notice" has the meaning set forth in paragraph 4(e) of Annex I.

                   "Reference Banks" has the meaning set forth in paragraph 2(b)(2) of Annex I.

                   "Registrar" has the meaning set forth in Section 6.2(a).

                   "Relevant Trustee" has the meaning set forth in Section 4.5(a).

                   "Resale Restriction Termination Date" means, with respect to any Capital Security, the date which is the later of (i) two years (or such shorter period of time as permitted by Rule 144(k) under the Securities Act) after the later of (y) the date of original issuance of such Capital Security and (z) the last date on which the Trust or any Affiliate of the Trust was the Holder of such Capital Security (or any predecessor thereto) and (ii) such later date, if any, as may be required by any subsequent change in applicable law.

                   "Responsible Officer" means, with respect to the Institutional Trustee, any officer within the Corporate Trust Office of the Institutional Trustee with direct responsibility for the administration of this Declaration, including any vice-president, any assistant vice-president, any secretary, any assistant secretary, the treasurer, any assistant treasurer, any trust officer or other officer of the Corporate Trust Office of the Institutional Trustee customarily performing functions similar to those performed by any of the above designated officers and also means, with respect to a particular corporate trust matter, any other officer to whom such matter is referred because of that officer's knowledge of and familiarity with the particular subject.

                   "Restricted Securities Legend" has the meaning set forth in Section 8.2(c).

                   "Rule 144A" means Rule 144A under the Securities Act.

                   "Rule 3a-5" means Rule 3a-5 under the Investment Company Act.

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                   "Rule 3a-7" means Rule 3a-7 under the Investment Company Act.

                   "Securities" means the Common Securities and the Capital Securities.

                   "Securities Act" means the Securities Act of 1933, as amended from time to time, or any successor legislation.

                   "Securities Register" has the meaning set forth in Section 6.2(a).

                   "Special Event" has the meaning set forth in paragraph 4(a) of Annex I.

                   "Special Redemption Date" has the meaning set forth in paragraph 4(a) of Annex I.

                   "Special Redemption Price" has the meaning set forth in paragraph 4(a) of Annex I.

                   "Sponsor" means Southern Michigan Bancorp, Inc., a bank holding company that is incorporated in Michigan, or any permitted successor of the Debenture Issuer under the Indenture, in its capacity as sponsor of the Trust.

                   "Statutory Trust Act" means Chapter 38 of Title 12 of the Delaware Code, 12 Del. Code § 3801 et seq., as it may be amended from time to time, or any successor legislation.

                   "Successor Delaware Trustee" has the meaning set forth in Section 4.5(e).

                   "Successor Entity" has the meaning set forth in Section 2.15(b).

                   "Successor Institutional Trustee" has the meaning set forth in Section 4.5(b).

                   "Successor Securities" has the meaning set forth in Section 2.15(b).

                   "Super Majority" has the meaning set forth in paragraph 5(b) of Annex I.

                   "Tax Event" has the meaning set forth in paragraph 4(a) of Annex I.

                   "Telerate Page 3750" has the meaning set forth in paragraph 2(b)(1) of Annex I.

                   "10% in liquidation amount of the Securities" means Holders of outstanding Securities voting together as a single class or, as the context may require, Holders of outstanding Capital Securities or Holders of outstanding Common Securities voting separately as a class, who are the record owners of 10% or more of the aggregate liquidation amount (including the stated amount that would be paid upon the redemption, liquidation or otherwise on the date upon which the voting percentages are determined, plus unpaid Distributions accrued thereon to such date) of all outstanding Securities of the relevant class.

                   "Transfer Agent" has the meaning set forth in Section 6.2(a).

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                   "Treasury Regulations" means the income tax regulations, including temporary and proposed regulations, promulgated under the Code by the United States Treasury, as such regulations may be amended from time to time (including corresponding provisions of succeeding regulations).

                   "Trust Indenture Act" means the Trust Indenture Act of 1939, as amended from time-to-time, or any successor legislation.

                   "Trustee" or "Trustees" means each Person who has signed this Declaration as a trustee, so long as such Person shall continue in office in accordance with the terms hereof, and all other Persons who may from time to time be duly appointed, qualified and serving as Trustees in accordance with the provisions hereof, and references herein to a Trustee or the Trustees shall refer to such Person or Persons solely in their capacity as trustees hereunder.

                   "Trust Property" means (a) the Debentures, (b) any cash on deposit in, or owing to, the Property Account and (c) all proceeds and rights in respect of the foregoing and any other property and assets for the time being held or deemed to be held by the Institutional Trustee pursuant to the trusts of this Declaration.

                   "U.S. Person" means a United States Person as defined in Section 7701(a)(30) of the Code.

ARTICLE II

ORGANIZATION

                   Section 2.1.  Name. The Trust is named "Southern Michigan Bancorp Capital Trust I," as such name may be modified from time to time by the Administrators following written notice to the Institutional Trustee and the Holders of the Securities. The Trust's activities may be conducted under the name of the Trust or any other name deemed advisable by the Administrators.

                   Section 2.2.  Office. The address of the principal office of the Trust, which shall be in a state of the United States or the District of Columbia, is 51 West Pearl Street, Coldwater, Michigan 49036. On ten Business Days' written notice to the Institutional Trustee and the Holders of the Securities, the Administrators may designate another principal office, which shall be in a state of the United States or the District of Columbia.

                   Section 2.3.  Purpose. The exclusive purposes and functions of the Trust are (a) to issue and sell the Securities representing undivided beneficial interests in the assets of the Trust, (b) to invest the gross proceeds from such sale in the Debentures and (c) except as otherwise limited herein, to engage in only those other activities deemed necessary, advisable or incidental thereto by the Institutional Trustee, including, without limitation, those activities specified in this Declaration. The Trust shall not borrow money, issue debt or reinvest proceeds derived from investments, pledge any of its assets, or otherwise undertake (or permit to be undertaken) any activity that would cause the Trust not to be classified for United States federal income tax purposes as a grantor trust.

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                   Section 2.4.  Authority. Except as specifically provided in this Declaration, the Institutional Trustee shall have exclusive and complete authority to carry out the purposes of the Trust. An action taken by a Trustee on behalf of the Trust and in accordance with such Trustee's powers shall constitute the act of and serve to bind the Trust. In dealing with the Trustees acting on behalf of the Trust, no Person shall be required to inquire into the authority of the Trustees to bind the Trust. Persons dealing with the Trust are entitled to rely conclusively on the power and authority of the Trustees as set forth in this Declaration. The Administrators shall have only those ministerial duties set forth herein with respect to accomplishing the purposes of the Trust and are not intended to be trustees or fiduciaries with respect to the Trust or the Holders. The Institutional Trustee shall have the right, but shall not be obligated except as provided in Section 2.6, to perform those duties assigned to the Administrators.

                   Section 2.5.  Title to Property of the Trust. Except as provided in Section 2.8 with respect to the Debentures and the Property Account or as otherwise provided in this Declaration, legal title to all assets of the Trust shall be vested in the Trust. The Holders shall not have legal title to any part of the assets of the Trust, but shall have an undivided beneficial interest in the assets of the Trust.

                   Section 2.6.  Powers and Duties of the Trustees and the Administrators.

                   (a)         The Trustees and the Administrators shall conduct the affairs of the Trust in accordance with the terms of this Declaration. Subject to the limitations set forth in paragraph (b) of this Section, and in accordance with the following provisions (i) and (ii), the Administrators and, at the direction of the Administrators, the Trustees, shall have the authority to enter into all transactions and agreements determined by the Administrators to be appropriate in exercising the authority, express or implied, otherwise granted to the Trustees or the Administrators, as the case may be, under this Declaration, and to perform all acts in furtherance thereof, including without limitation, the following:

         (i)         Each Administrator shall have the power, duty and authority, and is hereby authorized, to act on behalf of the Trust with respect to the following matters:

         (A)         the issuance and sale of the Securities;

         (B)         to cause the Trust to enter into, and to execute, deliver and perform on behalf of the Trust, such agreements as may be necessary or desirable in connection with the purposes and function of the Trust, including agreements with the Paying Agent, a subscription agreement for Debentures between the Trust and the Sponsor, a subscription agreement for Capital Securities between the Trust and the Purchaser of the Capital Securities and a subscription agreement for Common Securities between the Trust and the Sponsor;

         (C)         ensuring compliance with the Securities Act and applicable securities or blue sky laws of states and other jurisdictions;

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         (D)         if and at such time determined solely by the Sponsor at the request of the Holders, assisting in the designation of the Capital Securities for trading in the Private Offering, Resales and Trading through the Automatic Linkages ("PORTAL") system if available;

         (E)         the sending of notices (other than notices of default) and other information regarding the Securities and the Debentures to the Holders in accordance with this Declaration, including notice of any notice received from the Debenture Issuer of its election to defer payments of interest on the Debentures by extending the interest payment period under the Indenture;

         (F)         the appointment of a Paying Agent, Transfer Agent and Registrar in accordance with this Declaration;

         (G)         execution and delivery of the Securities in accordance with this Declaration;

         (H)         execution and delivery of closing certificates pursuant to the Placement Agreement and the application for a taxpayer identification number;

         (I)         unless otherwise determined by the Holders of a Majority in liquidation amount of the Securities or as otherwise required by the Statutory Trust Act, to execute on behalf of the Trust (either acting alone or together with any or all of the Administrators) any documents that the Administrators have the power to execute pursuant to this Declaration;

         (J)         the taking of any action as the Sponsor or an Administrator may from time to time determine is necessary, advisable or incidental to the foregoing to give effect to the terms of this Declaration for the benefit of the Holders (without consideration of the effect of any such action on any particular Holder);

         (K)         to establish a record date with respect to all actions to be taken hereunder that require a record date be established, including Distributions, voting rights, redemptions and exchanges, and to issue relevant notices to the Holders of Capital Securities and Holders of Common Securities as to such actions and applicable record dates;

         (L)         to duly prepare and file on behalf of the Trust all applicable tax returns and tax information reports that are required to be filed with respect to the Trust;

         (M)         to negotiate the terms of, and the execution and delivery of, the Placement Agreement providing for the sale of the Capital Securities;

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         (N)         to employ or otherwise engage employees, agents (who may be designated as officers with titles), managers, contractors, advisors, attorneys and consultants and pay reasonable compensation for such services;

         (O)         to incur expenses that are necessary, advisable or incidental to carry out any of the purposes of the Trust;

         (P)         to give the certificate required by § 314(a)(4) of the Trust Indenture Act to the Institutional Trustee, which certificate may be executed by an Administrator; and

         (Q)         to take all action that may be necessary or appropriate for the preservation and the continuation of the Trust's valid existence, rights, franchises and privileges as a statutory trust under the laws of each jurisdiction (other than the State of Delaware) in which such existence is necessary to protect the limited liability of the Holders of the Capital Securities or to enable the Trust to effect the purposes for which the Trust was created.

         (ii)         As among the Trustees and the Administrators, the Institutional Trustee shall have the power, duty and authority, and is hereby authorized, to act on behalf of the Trust with respect to the following matters:

         (A)         the establishment of the Property Account;

         (B)         the receipt of the Debentures;

         (C)         the collection of interest, principal and any other payments made in respect of the Debentures in the Property Account;

         (D)         the distribution through the Paying Agent of amounts owed to the Holders in respect of the Securities;

         (E)         the exercise of all of the rights, powers and privileges of a holder of the Debentures;

         (F)         the sending of notices of default and other information regarding the Securities and the Debentures to the Holders in accordance with this Declaration;

         (G)         the distribution of the Trust Property in accordance with the terms of this Declaration;

         (H)         to the extent provided in this Declaration, the winding up of the affairs of and liquidation of the Trust and the preparation, execution and filing of the certificate of cancellation with the Secretary of State of the State of Delaware;

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         (I)         after any Event of Default (of which the Institutional Trustee has knowledge (as provided in Section 2.10(m) hereof)) (provided, that such Event of Default is not by or with respect to the Institutional Trustee), the taking of any action that the Institutional Trustee may from time to time determine is necessary, advisable or incidental for the foregoing to give effect to the terms of this Declaration and protect and conserve the Trust Property for the benefit of the Holders (without consideration of the effect of any such action on any particular Holder);

         (J)         to take all action that may be necessary or appropriate for the preservation and the continuation of the Trust's valid existence, rights, franchises and privileges as a statutory trust under the laws of the State of Delaware to protect the limited liability of the Holders of the Capital Securities or to enable the Trust to effect the purposes for which the Trust was created; and

         (K)         to undertake any actions set forth in § 317(a) of the Trust Indenture Act.

         (iii)         The Institutional Trustee shall have the power and authority, and is hereby authorized, to act on behalf of the Trust with respect to any of the duties, liabilities, powers or the authority of the Administrators set forth in Section 2.6(a)(i)(E) and (F) herein but shall not have a duty to do any such act unless specifically requested to do so in writing by the Sponsor, and shall then be fully protected in acting pursuant to such written request; and in the event of a conflict between the action of the Administrators and the action of the Institutional Trustee, the action of the Institutional Trustee shall prevail.

                   (b)         So long as this Declaration remains in effect, the Trust (or the Trustees or Administrators acting on behalf of the Trust) shall not undertake any business, activities or transaction except as expressly provided herein or contemplated hereby. In particular, neither the Trustees nor the Administrators may cause the Trust to (i) acquire any investments or engage in any activities not authorized by this Declaration, (ii) sell, assign, transfer, exchange, mortgage, pledge, set-off or otherwise dispose of any of the Trust Property or interests therein, including to Holders, except as expressly provided herein, (iii) take any action that would cause (or in the case of the Institutional Trustee, to the actual knowledge of a Responsible Officer would cause) the Trust to fail or cease to qualify as a grantor trust for United States federal income tax purposes, (iv) incur any indebtedness f or borrowed money or issue any other debt or (v) take or consent to any action that would result in the placement of a lien on any of the Trust Property. The Institutional Trustee shall, at the sole cost and expense of the Trust subject to reimbursement under Section 9.6(a), defend all claims and demands of all Persons at any time claiming any lien on any of the Trust Property adverse to the interest of the Trust or the Holders in their capacity as Holders.

                   (c)         In connection with the issuance and sale of the Capital Securities, the Sponsor shall have the right and responsibility to assist the Trust with respect to, or effect on

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behalf of the Trust, the following (and any actions taken by the Sponsor in furtherance of the following prior to the date of this Declaration are hereby ratified and confirmed in all respects):

         (i)         the taking of any action necessary to obtain an exemption from the Securities Act;

         (ii)         the determination of the jurisdictions in which to take appropriate action to qualify or register for sale all or part of the Capital Securities and the determination of any and all such acts, other than actions which must be taken by or on behalf of the Trust, and the advisement of and direction to the Trustees of actions they must take on behalf of the Trust, and the preparation for execution and filing of any documents to be executed and filed by the Trust or on behalf of the Trust, as the Sponsor deems necessary or advisable in order to comply with the applicable laws of any such jurisdictions in connection with the sale of the Capital Securities; and

         (iii)         the taking of any other actions necessary or desirable to carry out any of the foregoing activities.

                   (d)         Notwithstanding anything herein to the contrary, the Administrators, the Institutional Trustee and the Holders of a Majority in liquidation amount of the Common Securities are authorized and directed to conduct the affairs of the Trust and to operate the Trust so that (i) the Trust will not be deemed to be an Investment Company required to be registered under the Investment Company Act (in the case of the Institutional Trustee, to the actual knowledge of a Responsible Officer), and (ii) the Trust will not fail to be classified as a grantor trust for United States federal income tax purposes (in the case of the Institutional Trustee, to the actual knowledge of a Responsible Officer) and (iii) the Trust will not take any action inconsistent with the treatment of the Debentures as indebtedness of the Debenture Issuer for United States federal income tax purposes (in the case of the Institu tional Trustee, to the actual knowledge of a Responsible Officer). In this connection, the Institutional Trustee, the Administrators and the Holders of a Majority in liquidation amount of the Common Securities are authorized to take any action, not inconsistent with applicable laws or this Declaration, as amended from time to time, that each of the Institutional Trustee, the Administrators and such Holders determine in their discretion to be necessary or desirable for such purposes, even if such action adversely affects the interests of the Holders of the Capital Securities.

                   (e)         All expenses incurred by the Administrators or the Trustees pursuant to this Section 2.6 shall be reimbursed by the Sponsor, and the Trustees shall have no obligations with respect to such expenses.

                   (f)         The assets of the Trust shall consist of the Trust Property.

                   (g)         Legal title to all Trust Property shall be vested at all times in the Institutional Trustee (in its capacity as such) and shall be held and administered by the Institutional Trustee for the benefit of the Trust in accordance with this Declaration.

                   (h)         If the Institutional Trustee or any Holder has instituted any proceeding to enforce any right or remedy under this Declaration and such proceeding has been discontinued

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or abandoned for any reason, or has been determined adversely to the Institutional Trustee or to such Holder, then and in every such case the Sponsor, the Institutional Trustee and the Holders shall, subject to any determination in such proceeding, be restored severally and respectively to their former positions hereunder, and thereafter all rights and remedies of the Institutional Trustee and the Holders shall continue as though no such proceeding had been instituted.

                   Section 2.7.  Prohibition of Actions by the Trust and the Trustees.

                   The Trust shall not, and the Institutional Trustee and the Administrators shall not, and the Administrators shall cause the Trust not to, engage in any activity other than as required or authorized by this Declaration. In particular, the Trust shall not, and the Institutional Trustee and the Administrators shall not cause the Trust to:

                   (a)         invest any proceeds received by the Trust from holding the Debentures, but shall distribute all such proceeds to Holders of the Securities pursuant to the terms of this Declaration and of the Securities;

                   (b)         acquire any assets other than as expressly provided herein;

                   (c)         possess Trust Property for other than a Trust purpose;

                   (d)         make any loans or incur any indebtedness other than loans represented by the Debentures;

                   (e)         possess any power or otherwise act in such a way as to vary the Trust Property or the terms of the Securities;

                   (f)         issue any securities or other evidences of beneficial ownership of, or beneficial interest in, the Trust other than the Securities; or

                   (g)         other than as provided in this Declaration (including Annex I), (i) direct the time, method and place of exercising any trust or power conferred upon the Debenture Trustee with respect to the Debentures, (ii) waive any past default that is waivable under the Indenture, (iii) exercise any right to rescind or annul any declaration that the principal of all the Debentures shall be due and payable, or (iv) consent to any amendment, modification or termination of the Indenture or the Debentures where such consent shall be required unless the Trust shall have received a written opinion of counsel experienced in such matters to the effect that such amendment, modification or termination will not cause the Trust to cease to be classified as a grantor trust for United States federal income tax purposes.

                   Section 2.8.  Powers and Duties of the Institutional Trustee.

                   (a)         The legal title to the Debentures shall be owned by and held of record in the name of the Institutional Trustee in trust for the benefit of the Trust. The right, title and interest of the Institutional Trustee to the Debentures shall vest automatically in each Person who may hereafter be appointed as Institutional Trustee in accordance with Section 4.5. Such vesting and cessation of title shall be effective whether or not conveyancing documents with regard to the Debentures have been executed and delivered.

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                   (b)         The Institutional Trustee shall not transfer its right, title and interest in the Debentures to the Administrators or to the Delaware Trustee.

                   (c)         The Institutional Trustee shall:

         (i)         establish and maintain a segregated non-interest bearing trust account (the "Property Account") in the United States (as defined in Treasury Regulations § 301.7701-7), in the name of and under the exclusive control of the Institutional Trustee, and maintained in the Institutional Trustee's trust department, on behalf of the Holders of the Securities and, upon the receipt of payments of funds made in respect of the Debentures held by the Institutional Trustee, deposit such funds into the Property Account and make payments to the Holders of the Capital Securities and Holders of the Common Securities from the Property Account in accordance with Section 5.1. Funds in the Property Account shall be held uninvested until disbursed in accordance with this Declaration;

         (ii)         engage in such ministerial activities as shall be necessary or appropriate to effect the redemption of the Capital Securities and the Common Securities to the extent the Debentures are redeemed or mature; and

         (iii)         upon written notice of distribution issued by the Administrators in accordance with the terms of the Securities, engage in such ministerial activities as shall be necessary or appropriate to effect the distribution of the Debentures to Holders of Securities upon the occurrence of the circumstances specified therefor under the terms of the Securities.

                   (d)         The Institutional Trustee shall take all actions and perform such duties as may be specifically required of the Institutional Trustee pursuant to the terms of the Securities.

                   (e)         The Institutional Trustee may bring or defend, pay, collect, compromise, arbitrate, resort to legal action with respect to, or otherwise adjust claims or demands of or against, the Trust (a "Legal Action") which arise out of or in connection with an Event of Default of which a Responsible Officer of the Institutional Trustee has actual knowledge or the Institutional Trustee's duties and obligations under this Declaration or the Trust Indenture Act; provided, however, that if an Event of Default has occurred and is continuing and such event is attributable to the failure of the Debenture Issuer to pay interest or premium, if any, on or principal of the Debentures on the date such interest, premium, if any, or principal is otherwise payable (or in the case of redemption, on the date of redemption), then a Holder of the Capital Securities may directly institute a proceeding for en forcement of payment to such Holder of the principal of or premium, if any, or interest on the Debentures having a principal amount equal to the aggregate liquidation amount of the Capital Securities of such Holder (a "Direct Action") on or after the respective due date specified in the Debentures. In connection with such Direct Action, the rights of the Holders of the Common Securities will be subrogated to the rights of such Holder of the Capital Securities to the extent of any payment made by the Debenture Issuer to such Holder of the Capital Securities in such Direct Action; provided, however, that a Holder of the Common Securities may exercise such right of subrogation only if no Event of Default with respect to the Capital Securities has occurred and is continuing.

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                   (f)         The Institutional Trustee shall continue to serve as a Trustee until either:

         (i)         the Trust has been completely liquidated and the proceeds of the liquidation distributed to the Holders of the Securities pursuant to the terms of the Securities and this Declaration (including Annex I); or

         (ii)         a Successor Institutional Trustee has been appointed and has accepted that appointment in accordance with Section 4.5.

                   (g)         The Institutional Trustee shall have the legal power to exercise all of the rights, powers and privileges of a holder of the Debentures under the Indenture and, if an Event of Default occurs and is continuing, the Institutional Trustee may, for the benefit of Holders of the Securities, enforce its rights as holder of the Debentures subject to the rights of the Holders pursuant to this Declaration (including Annex I) and the terms of the Securities.

                   (h)         The Institutional Trustee must exercise the powers set forth in this Section 2.8 in a manner that is consistent with the purposes and functions of the Trust set out in Section 2.3, and the Institutional Trustee shall not take any action that is inconsistent with the purposes and functions of the Trust set out in Section 2.3.

                   Section 2.9.  Certain Duties and Responsibilities of the Trustees and the Administrators.

                   (a)         The Institutional Trustee, before the occurrence of any Event of Default (of which the Institutional Trustee has knowledge (as provided in Section 2.10(m) hereof)) and after the curing of all Events of Default that may have occurred, shall undertake to perform only such duties as are specifically set forth in this Declaration and no implied covenants shall be read into this Declaration against the Institutional Trustee. In case an Event of Default (of which the Institutional Trustee has knowledge (as provided in Section 2.10(m) hereof)), has occurred (that has not been cured or waived pursuant to Section 6.7), the Institutional Trustee shall exercise such of the rights and powers vested in it by this Declaration, and use the same degree of care and skill in their exercise, as a prudent person would exercise or use under the circumstances in the conduct of his or her own affairs.

                   (b)         The duties and responsibilities of the Trustees and the Administrators shall be as provided by this Declaration and, in the case of the Institutional Trustee, by the Trust Indenture Act. Notwithstanding the foregoing, no provision of this Declaration shall require any Trustee or Administrator to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder, or in the exercise of any of its rights or powers, if it shall have reasonable grounds for believing that repayment of such funds or adequate indemnity satisfactory to it against such risk or liability is not reasonably assured to it. Whether or not therein expressly so provided, every provision of this Declaration relating to the conduct or affecting the liability of or affording protection to the Trustees or the Administrators shall be subject to the provisions of this Article. Nothin g in this Declaration shall be construed to release a Trustee from liability for its own negligent action, its own negligent failure to act, or its own willful misconduct or bad faith. Nothing in this Declaration shall be construed to release an Administrator from liability for its own gross negligent action, its own gross

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negligent failure to act, or its own willful misconduct or bad faith. To the extent that, at law or in equity, a Trustee or an Administrator has duties and liabilities relating to the Trust or to the Holders, such Trustee or Administrator shall not be liable to the Trust or to any Holder for such Trustee's or Administrator's good faith reliance on the provisions of this Declaration. The provisions of this Declaration, to the extent that they restrict the duties and liabilities of the Administrators or the Trustees otherwise existing at law or in equity, are agreed by the Sponsor and the Holders to replace such other duties and liabilities of the Administrators or the Trustees.

                   (c)         All payments made by the Institutional Trustee or a Paying Agent in respect of the Securities shall be made only from the revenue and proceeds from the Trust Property and only to the extent that there shall be sufficient revenue or proceeds from the Trust Property to enable the Institutional Trustee or a Paying Agent to make payments in accordance with the terms hereof. Each Holder, by its acceptance of a Security, agrees that it will look solely to the revenue and proceeds from the Trust Property to the extent legally available for distribution to it as herein provided and that the Trustees and the Administrators are not personally liable to it for any amount distributable in respect of any Security or for any other liability in respect of any Security. This Section 2.9(c) does not limit the liability of the Trustees expressly set forth elsewhere in this Declaration or, in the case of the Instituti onal Trustee, in the Trust Indenture Act.

                   (d)         No provision of this Declaration shall be construed to relieve the Institutional Trustee from liability for its own negligent action, its own negligent failure to act, or its own willful misconduct or bad faith with respect to matters that are within the authority of the Institutional Trustee under this Declaration, except that:

         (i)         the Institutional Trustee shall not be liable for any error or judgment made in good faith by an Authorized Officer of the Institutional Trustee, unless it shall be proved that the Institutional Trustee was negligent in ascertaining the pertinent facts;

         (ii)         the Institutional Trustee shall not be liable with respect to any action taken or omitted to be taken by it in good faith in accordance with the direction of the Holders of a Majority in liquidation amount of the Capital Securities or the Common Securities, as applicable, relating to the time, method and place of conducting any proceeding for any remedy available to the Institutional Trustee, or exercising any trust or power conferred upon the Institutional Trustee under this Declaration;

         (iii)         the Institutional Trustee's sole duty with respect to the custody, safe keeping and physical preservation of the Debentures and the Property Account shall be to deal with such property in a similar manner as the Institutional Trustee deals with similar property for its own account, subject to the protections and limitations on liability afforded to the Institutional Trustee under this Declaration and the Trust Indenture Act;

         (iv)         the Institutional Trustee shall not be liable for any interest on any money received by it except as it may otherwise agree in writing with the

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Sponsor; and money held by the Institutional Trustee need not be segregated from other funds held by it except in relation to the Property Account maintained by the Institutional Trustee pursuant to Section 2.8(c)(i) and except to the extent otherwise required by law; and

         (v)         the Institutional Trustee shall not be responsible for monitoring the compliance by the Administrators or the Sponsor with their respective duties under this Declaration, nor shall the Institutional Trustee be liable for any default or misconduct of the Administrators or the Sponsor.

                   Section 2.10.  Certain Rights of Institutional Trustee. Subject to the provisions of Section 2.9:

                   (a)         the Institutional Trustee may conclusively rely and shall fully be protected in acting or refraining from acting in good faith upon any resolution, written opinion of counsel, certificate, written representation of a Holder or transferee, certificate of auditors or any other certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, appraisal, bond, debenture, note, other evidence of indebtedness or other paper or document believed by it to be genuine and to have been signed, sent or presented by the proper party or parties;

                   (b)         if (i) in performing its duties under this Declaration, the Institutional Trustee is required to decide between alternative courses of action, (ii) in construing any of the provisions of this Declaration, the Institutional Trustee finds the same ambiguous or inconsistent with any other provisions contained herein, or (iii) the Institutional Trustee is unsure of the application of any provision of this Declaration, then, except as to any matter as to which the Holders of Capital Securities are entitled to vote under the terms of this Declaration, the Institutional Trustee may deliver a notice to the Sponsor requesting the Sponsor's opinion as to the course of action to be taken and the Institutional Trustee shall take such action, or refrain from taking such action, as the Institutional Trustee in its sole discretion shall deem advisable and in the best interests of the Holders, in which event the Institutional Trustee shall have no liability except for its own negligence, willful misconduct or bad faith;

                   (c)         any direction or act of the Sponsor or the Administrators contemplated by this Declaration shall be sufficiently evidenced by an Officers' Certificate;

                   (d)         whenever in the administration of this Declaration, the Institutional Trustee shall deem it desirable that a matter be proved or established before undertaking, suffering or omitting any action hereunder, the Institutional Trustee (unless other evidence is herein specifically prescribed) may, in the absence of bad faith on its part, request and conclusively rely upon an Officers' Certificate which, upon receipt of such request, shall be promptly delivered by the Sponsor or the Administrators;

                   (e)         the Institutional Trustee shall have no duty to see to any recording, filing or registration of any instrument (including any financing or continuation statement or any filing under tax or securities laws) or any rerecording, refiling or reregistration thereof;

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                   (f)         the Institutional Trustee may consult with counsel of its selection (which counsel may be counsel to the Sponsor or any of its Affiliates) and the advice of such counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in reliance thereon and in accordance with such advice; the Institutional Trustee shall have the right at any time to seek instructions concerning the administration of this Declaration from any court of competent jurisdiction;

                   (g)         the Institutional Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Declaration at the request or direction of any of the Holders pursuant to this Declaration, unless such Holders shall have offered to the Institutional Trustee security or indemnity reasonably satisfactory to it against the costs, expenses and liabilities which might be incurred by it in compliance with such request or direction; provided, that nothing contained in this Section 2.10(g) shall be taken to relieve the Institutional Trustee, upon the occurrence of an Event of Default (of which the Institutional Trustee has knowledge (as provided in Section 2.10(m) hereof)) that has not been cured or waived, of its obligation to exercise the rights and powers vested in it by this Declaration;

                   (h)         the Institutional Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, approval, bond, debenture, note or other evidence of indebtedness or other paper or document, unless requested in writing to do so by one or more Holders, but the Institutional Trustee may make such further inquiry or investigation into such facts or matters as it may see fit;

                   (i)         the Institutional Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through its agents or attorneys and the Institutional Trustee shall not be responsible for any misconduct or negligence on the part of, or for the supervision of, any such agent or attorney appointed with due care by it hereunder;

                   (j)         whenever in the administration of this Declaration the Institutional Trustee shall deem it desirable to receive instructions with respect to enforcing any remedy or right or taking any other action hereunder, the Institutional Trustee (i) may request instructions from the Holders of the Common Securities and the Capital Securities, which instructions may be given only by the Holders of the same proportion in liquidation amount of the Common Securities and the Capital Securities as would be entitled to direct the Institutional Trustee under the terms of the Common Securities and the Capital Securities in respect of such remedy, right or action, (ii) may refrain from enforcing such remedy or right or taking such other action until such instructions are received, and (iii) shall be fully protected in acting in accordance with such instructions;

                   (k)         except as otherwise expressly provided in this Declaration, the Institutional Trustee shall not be under any obligation to take any action that is discretionary under the provisions of this Declaration;

                   (l)         when the Institutional Trustee incurs expenses or renders services in connection with a Bankruptcy Event, such expenses (including the fees and expenses of its


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counsel) and the compensation for such services are intended to constitute expenses of administration under any bankruptcy law or law relating to creditors rights generally;

                   (m)         the Institutional Trustee shall not be charged with knowledge of an Event of Default unless a Responsible Officer of the Institutional Trustee has actual knowledge of such event or the Institutional Trustee receives written notice of such event from any Holder, except that the Institutional Trustee shall be deemed to have knowledge of any Event of Default pursuant to Sections 5.01(a) or 5.01(b) of the Indenture (other than an Event of Default resulting from the default in the payment of Additional Amounts if the Institutional Trustee does not have actual knowledge or written notice that such payment is due and payable);

                   (n)         any action taken by the Institutional Trustee or its agents hereunder shall bind the Trust and the Holders of the Securities, and the signature of the Institutional Trustee or its agents alone shall be sufficient and effective to perform any such action and no third party shall be required to inquire as to the authority of the Institutional Trustee to so act or as to its compliance with any of the terms and provisions of this Declaration, both of which shall be conclusively evidenced by the Institutional Trustee's or its agent's taking such action; and

                   (o)         no provision of this Declaration shall be deemed to impose any duty or obligation on the Institutional Trustee to perform any act or acts or exercise any right, power, duty or obligation conferred or imposed on it, in any jurisdiction in which it shall be illegal, or in which the Institutional Trustee shall be unqualified or incompetent in accordance with applicable law, to perform any such act or acts, or to exercise any such right, power, duty or obligation, and no permissive power or authority available to the Institutional Trustee shall be construed to be a duty.

                   Section 2.11.  Delaware Trustee. Notwithstanding any other provision of this Declaration other than Section 4.2, the Delaware Trustee shall not be entitled to exercise any powers, and the Delaware Trustee shall not have any of the duties and responsibilities of any of the Trustees or the Administrators specified in this Declaration (except as may be required under the Statutory Trust Act). Except as set forth in Section 4.2, the Delaware Trustee shall be a Trustee for the sole and limited purpose of fulfilling the requirements of § 3807 of the Statutory Trust Act.

                   Section 2.12.  Execution of Documents. Unless otherwise determined in writing by the Institutional Trustee, and except as otherwise required by the Statutory Trust Act, the Institutional Trustee, or any one or more of the Administrators, as the case may be, is authorized to execute and deliver on behalf of the Trust any documents, agreements, instruments or certificates that the Trustees or the Administrators, as the case may be, have the power and authority to execute pursuant to Section 2.6.

                   Section 2.13.  Not Responsible for Recitals or Issuance of Securities. The recitals contained in this Declaration and the Securities shall be taken as the statements of the Sponsor, and the Trustees do not assume any responsibility for their correctness. The Trustees make no representations as to the value or condition of the Trust Property or any part thereof. The Trustees make no representations as to the validity or sufficiency of this Declaration, the Debentures or the Securities.

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                   Section 2.14.  Duration of Trust. The Trust, unless dissolved pursuant to the provisions of Article VII hereof, shall have existence for five (5) years after the Maturity Date.

                   Section 2.15.  Mergers.  (a)  The Trust may not consolidate, amalgamate, merge with or into, or be replaced by, or convey, transfer or lease its properties and assets substantially as an entirety to any corporation or other Person, except as described in this Section 2.15 and except with respect to the distribution of Debentures to Holders of Securities pursuant to Section 7.1(a)(iv) of this Declaration or Section 4 of Annex I.

                   (b)         The Trust may, with the consent of the Administrators (which consent will not be unreasonably withheld) and without the consent of the Institutional Trustee, the Delaware Trustee or the Holders of the Capital Securities, consolidate, amalgamate, merge with or into, or be replaced by, or convey, transfer or lease its properties and assets as an entirety or substantially as an entirety to a trust organized as such under the laws of any state; provided, that:

         (i)         if the Trust is not the survivor, such successor entity (the "Successor Entity") either:

         (A)         expressly assumes all of the obligations of the Trust under the Securities; or

         (B)         substitutes for the Securities other securities having substantially the same terms as the Securities (the "Successor Securities") so that the Successor Securities rank the same as the Securities rank with respect to Distributions and payments upon Liquidation, redemption and otherwise;

         (ii)         the Sponsor expressly appoints, as the holder of the Debentures, a trustee of the Successor Entity that possesses the same powers and duties as the Institutional Trustee;

         (iii)         the Capital Securities or any Successor Securities are listed or quoted, or any Successor Securities will be listed or quoted upon notification of issuance, on any national securities exchange or with another organization on which the Capital Securities are then listed or quoted, if any;

         (iv)         such merger, consolidation, amalgamation, replacement, conveyance, transfer or lease does not cause the rating on the Capital Securities or any Successor Securities to be downgraded or withdrawn by any nationally recognized statistical rating organization, if the Capital Securities are then rated;

         (v)         such merger, consolidation, amalgamation, replacement, conveyance, transfer or lease does not adversely affect the rights, preferences and privileges of the Holders of the Securities or any Successor Securities in any material respect (other than with respect to any dilution of such Holders' interests in the Successor Entity);

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         (vi)         such Successor Entity, if any, has a purpose substantially identical to that of the Trust;

         (vii)         prior to such merger, consolidation, amalgamation, replacement, conveyance, transfer or lease, the Trust has received a written opinion of a nationally recognized independent counsel to the Trust experienced in such matters to the effect that:

         (A)         such merger, consolidation, amalgamation, replacement, conveyance, transfer or lease does not adversely affect the rights, preferences and privileges of the Holders of the Securities or any Successor Securities in any material respect (other than with respect to any dilution of such Holders' interests in the Successor Entity);

         (B)         following such merger, consolidation, amalgamation, replacement, conveyance, transfer or lease, neither the Trust nor the Successor Entity will be required to register as an Investment Company under the Investment Company Act; and

         (C)         following such merger, consolidation, amalgamation, replacement, conveyance, transfer or lease, the Trust or the Successor Entity will continue to be classified as a grantor trust for United States federal income tax purposes;

         (viii)         the Sponsor guarantees the obligations of the Successor Entity under the Successor Securities to the same extent provided by the Indenture, the Guarantee, the Debentures and this Declaration; and

         (ix)         prior to such merger, consolidation, amalgamation, replacement, conveyance, transfer or lease, the Institutional Trustee shall have received an Officers' Certificate of the Administrators and an opinion of counsel, each to the effect that all conditions precedent of this paragraph (b) to such transaction have been satisfied.

                   (c)         Notwithstanding Section 2.15(b), the Trust shall not, except with the consent of Holders of 100% in liquidation amount of the Securities, consolidate, amalgamate, merge with or into, or be replaced by, or convey, transfer or lease its properties and assets as an entirety or substantially as an entirety to, any other Person or permit any other Person to consolidate, amalgamate, merge with or into, or replace it if such consolidation, amalgamation, merger, replacement, conveyance, transfer or lease would cause the Trust or Successor Entity to be classified as other than a grantor trust for United States federal income tax purposes.

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ARTICLE III

SPONSOR

                   Section 3.1.  Sponsor's Purchase of Common Securities. On the Closing Date, the Sponsor will purchase all of the Common Securities issued by the Trust, in an amount at least equal to 3% of the capital of the Trust, at the same time as the Capital Securities are sold.

                   Section 3.2.  Responsibilities of the Sponsor. In connection with the issue and sale of the Capital Securities, the Sponsor shall have the exclusive right and responsibility and sole decision to engage in, or direct the Administrators to engage in, the following activities:

                   (a)          to determine the jurisdictions in which to take appropriate action to qualify or register for sale all or part of the Capital Securities and to do any and all such acts, other than actions which must be taken by the Trust, and advise the Trust of actions it must take, and prepare for execution and filing any documents to be executed and filed by the Trust, as the Sponsor deems necessary, advisable or incidental thereto in order to comply with the applicable laws of any such jurisdictions;

                   (b)         to prepare for filing and request the Administrators to cause the filing by the Trust, as may be appropriate, of an application to the PORTAL system, for listing or quotation upon notice of issuance of any Capital Securities, as requested by the Holders of not less than a Majority in liquidation amount of the Capital Securities; and

                   (c)         to negotiate the terms of and/or execute and deliver on behalf of the Trust, the Placement Agreement and other related agreements providing for the sale of the Capital Securities.

ARTICLE IV

TRUSTEES AND ADMINISTRATORS

                   Section 4.1.  Number of Trustees. The number of Trustees initially shall be two, and:

                   (a)         at any time before the issuance of any Securities, the Sponsor may, by written instrument, increase or decrease the number of Trustees; and

                   (b)         after the issuance of any Securities, the number of Trustees may be increased or decreased by vote of the Holder of a Majority in liquidation amount of the Common Securities voting as a class at a meeting of the Holder of the Common Securities; provided, however, that there shall be a Delaware Trustee if required by Section 4.2; and there shall always be one Trustee who shall be the Institutional Trustee, and such Trustee may also serve as Delaware Trustee if it meets the applicable requirements, in which case Section 2.11 shall have no application to such entity in its capacity as Institutional Trustee.

                   Section 4.2.  Delaware Trustee. If required by the Statutory Trust Act, one Trustee (the "Delaware Trustee") shall be:

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                   (a)         a natural person who is a resident of the State of Delaware and a U.S. Person at least 21 years of age; or

                   (b)         if not a natural person, an entity which is organized under the laws of the United States or any state thereof or the District of Columbia, has its principal place of business in the State of Delaware, and otherwise meets the requirements of applicable law, including §3807 of the Statutory Trust Act.

                   (c)         The initial Delaware Trustee shall be Wilmington Trust Company.

                   Section 4.3.  Institutional Trustee; Eligibility.

                   (a)         There shall at all times be one Trustee that shall act as Institutional Trustee which shall:

         (i)         not be an Affiliate of the Sponsor;

         (ii)         not offer or provide credit or credit enhancement to the Trust; and

         (iii)         be a banking corporation or national association organized and doing business under the laws of the United States of America or any state thereof or of the District of Columbia and authorized under such laws to exercise corporate trust powers, having a combined capital and surplus of at least fifty million U.S. dollars ($50,000,000), and subject to supervision or examination by federal, state or District of Columbia authority. If such corporation or national association publishes reports of condition at least annually, pursuant to law or to the requirements of the supervising or examining authority referred to above, then for the purposes of this Section 4.3(a)(iii), the combined capital and surplus of such corporation or national association shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published.

                   (b)         If at any time the Institutional Trustee shall cease to be eligible to so act under Section 4.3(a), the Institutional Trustee shall immediately resign in the manner and with the effect set forth in Section 4.5.

                   (c)         If the Institutional Trustee has or shall acquire any "conflicting interest" within the meaning of § 310(b) of the Trust Indenture Act, the Institutional Trustee shall either eliminate such interest or resign, to the extent and in the manner provided by, and subject to this Declaration.

                   (d)         The initial Institutional Trustee shall be Wilmington Trust Company.

                   Section 4.4.  Administrators. Each Administrator shall be a U.S. Person. There shall at all times be at least one Administrator. Except where a requirement for action by a specific number of Administrators is expressly set forth in this Declaration and except with respect to any action the taking of which is the subject of a meeting of the Administrators, any action required or permitted to be taken by the Administrators may be taken by, and any power

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of the Administrators may be exercised by, or with the consent of, any one such Administrator acting alone.

                   Section 4.5.  Appointment, Removal and Resignation of the Trustees and the Administrators.

                   (a)         No resignation or removal of any Trustee (the "Relevant Trustee") and no appointment of a successor Trustee pursuant to this Article shall become effective until the acceptance of appointment by the successor Trustee in accordance with the applicable requirements of this Section.

                   (b)         Subject to Section 4.5(a), a Relevant Trustee may resign at any time by giving written notice thereof to the Holders of the Securities and by appointing a successor Relevant Trustee. Upon the resignation of the Institutional Trustee, the Institutional Trustee shall appoint a successor by requesting from at least three Persons meeting the eligibility requirements their expenses and charges to serve as the successor Institutional Trustee on a form provided by the Administrators, and selecting the Person who agrees to the lowest expense and charges (the "Successor Institutional Trustee"). If the instrument of acceptance by the successor Relevant Trustee required by this Section shall not have been delivered to the Relevant Trustee within 60 days after the giving of such notice of resignation or delivery of the instrument of removal, the Relevant Trustee may petition, at the expense of the Tru st, any federal, state or District of Columbia court of competent jurisdiction for the appointment of a successor Relevant Trustee. Such court may thereupon, after prescribing such notice, if any, as it may deem proper, appoint a Relevant Trustee. The Institutional Trustee shall have no liability for the selection of such successor pursuant to this Section.

                   (c)         Unless an Event of Default shall have occurred and be continuing, any Trustee may be removed at any time by an act of the Holders of a Majority in liquidation amount of the Common Securities. If any Trustee shall be so removed, the Holders of the Common Securities, by act of the Holders of a Majority in liquidation amount of the Common Securities delivered to the Relevant Trustee, shall promptly appoint a successor Relevant Trustee, and such successor Relevant Trustee shall comply with the applicable requirements of this Section. If an Event of Default shall have occurred and be continuing, the Institutional Trustee or the Delaware Trustee, or both of them, may be removed by the act of the Holders of a Majority in liquidation amount of the Capital Securities, delivered to the Relevant Trustee (in its individual capacity and on behalf of the Trust). If any Trustee shall be so removed, the Holders of Capital Securities, by act of the Holders of a Majority in liquidation amount of the Capital Securities then outstanding delivered to the Relevant Trustee, shall promptly appoint a successor Relevant Trustee or Trustees, and such successor Relevant Trustee shall comply with the applicable requirements of this Section. If no successor Relevant Trustee shall have been so appointed by the Holders of a Majority in liquidation amount of the Capital Securities and accepted appointment in the manner required by this Section within 30 days after delivery of an instrument of removal, the Relevant Trustee or any Holder who has been a Holder of the Securities for at least six months may, on behalf of himself and all others similarly situated, petition any federal, state or District of Columbia court of competent jurisdiction for the appointment of a successor Relevant Trustee. Such court may thereupon, after prescribing such notice, if any, as it may deem proper, appoint a successor Relevant Trustee or Trustees.

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                   (d)         The Institutional Trustee shall give notice of each resignation and each removal of a Trustee and each appointment of a successor Trustee to all Holders and to the Sponsor. Each notice shall include the name of the successor Relevant Trustee and the address of its Corporate Trust Office if it is the Institutional Trustee.

                   (e)         Notwithstanding the foregoing or any other provision of this Declaration, in the event a Delaware Trustee who is a natural person dies or is adjudged by a court to have become incompetent or incapacitated, the vacancy created by such death, incompetence or incapacity may be filled by the Institutional Trustee following the procedures in this Section (with the successor being a Person who satisfies the eligibility requirement for a Delaware Trustee set forth in this Declaration) (the "Successor Delaware Trustee").

                   (f)         In case of the appointment hereunder of a successor Relevant Trustee, the retiring Relevant Trustee and each successor Relevant Trustee with respect to the Securities shall execute and deliver an amendment hereto wherein each successor Relevant Trustee shall accept such appointment and which (a) shall contain such provisions as shall be necessary or desirable to transfer and confirm to, and to vest in, each successor Relevant Trustee all the rights, powers, trusts and duties of the retiring Relevant Trustee with respect to the Securities and the Trust and (b) shall add to or change any of the provisions of this Declaration as shall be necessary to provide for or facilitate the administration of the Trust by more than one Relevant Trustee, it being understood that nothing herein or in such amendment shall constitute such Relevant Trustees co-trustees and upon the execution and delivery of such amendmen t the resignation or removal of the retiring Relevant Trustee shall become effective to the extent provided therein and each such successor Relevant Trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, trusts and duties of the retiring Relevant Trustee; but, on request of the Trust or any successor Relevant Trustee, such retiring Relevant Trustee shall duly assign, transfer and deliver to such successor Relevant Trustee all Trust Property, all proceeds thereof and money held by such retiring Relevant Trustee hereunder with respect to the Securities and the Trust subject to the payment of all unpaid fees, expenses and indemnities of such retiring Relevant Trustee.

                   (g)         No Institutional Trustee or Delaware Trustee shall be liable for the acts or omissions to act of any Successor Institutional Trustee or Successor Delaware Trustee, as the case may be.

                   (h)         The Holders of the Capital Securities will have no right to vote to appoint, remove or replace the Administrators, which voting rights are vested exclusively in the Holders of the Common Securities.

                   (i)         Any Successor Delaware Trustee shall file an amendment to the Certificate of Trust with the Secretary of State of the State of Delaware identifying the name and principal place of business of such Delaware Trustee in the State of Delaware.

                   Section 4.6.  Vacancies Among Trustees. If a Trustee ceases to hold office for any reason and the number of Trustees is not reduced pursuant to Section 4.1, or if the number of Trustees is increased pursuant to Section 4.1, a vacancy shall occur. A resolution certifying the existence of such vacancy by the Trustees or, if there are more than two, a majority of the

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Trustees shall be conclusive evidence of the existence of such vacancy. The vacancy shall be filled with a Trustee appointed in accordance with Section 4.5.

                   Section 4.7.  Effect of Vacancies. The death, resignation, retirement, removal, bankruptcy, dissolution, liquidation, incompetence or incapacity to perform the duties of a Trustee shall not operate to dissolve, terminate or annul the Trust or terminate this Declaration. Whenever a vacancy in the number of Trustees shall occur, until such vacancy is filled by the appointment of a Trustee in accordance with Section 4.5, the Institutional Trustee shall have all the powers granted to the Trustees and shall discharge all the duties imposed upon the Trustees by this Declaration.

                   Section 4.8.  Meetings of the Trustees and the Administrators. Meetings of the Trustees or the Administrators shall be held from time to time upon the call of any Trustee or Administrator, as applicable. Regular meetings of the Trustees and the Administrators, respectively, may be in person in the United States or by telephone, at a place (if applicable) and time fixed by resolution of the Trustees or the Administrators, as applicable. Notice of any in-person meetings of the Trustees or the Administrators shall be hand delivered or otherwise delivered in writing (including by facsimile, with a hard copy by overnight courier) not less than 48 hours before such meeting. Notice of any telephonic meetings of the Trustees or the Administrators or any committee thereof shall be hand delivered or otherwise delivered in writing (including by facsimile, with a hard copy by overnight courier) not less than 24 hours before a me eting. Notices shall contain a brief statement of the time, place and anticipated purposes of the meeting. The presence (whether in person or by telephone) of a Trustee or an Administrator, as the case may be, at a meeting shall constitute a waiver of notice of such meeting except where a Trustee or an Administrator, as the case may be, attends a meeting for the express purpose of objecting to the transaction of any activity on the ground that the meeting has not been lawfully called or convened. Unless provided otherwise in this Declaration, any action of the Trustees or the Administrators, as the case may be, may be taken at a meeting by vote of a majority of the Trustees or the Administrators present (whether in person or by telephone) and eligible to vote with respect to such matter; provided, that, in the case of the Administrators, a Quorum is present, or without a meeting by the unanimous written consent of the Trustees or the Administrators, as the case may be. Meetings of the Trustees and the Administrators together shall be held from time to time upon the call of any Trustee or Administrator.

                   Section 4.9.  Delegation of Power. (a)  Any Trustee or any Administrator, as the case may be, may, by power of attorney consistent with applicable law, delegate to any other natural person over the age of 21 that is a U.S. Person his or her power for the purpose of executing any documents, instruments or other writings contemplated in Section 2.6.

                   (b)         The Trustees shall have power to delegate from time to time to such of their number or to any officer of the Trust that is a U.S. Person, the doing of such things and the execution of such instruments or other writings either in the name of the Trust or the names of the Trustees or otherwise as the Trustees may deem expedient, to the extent such delegation is not prohibited by applicable law or contrary to the provisions of the Trust, as set forth herein.

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                   Section 4.10.  Merger, Conversion, Consolidation or Succession to Business. Any Person into which the Institutional Trustee or the Delaware Trustee, as the case may be, may be merged or converted or with which either may be consolidated, or any Person resulting from any merger, conversion or consolidation to which the Institutional Trustee or the Delaware Trustee, as the case may be, shall be a party, or any Person succeeding to all or substantially all the corporate trust business of the Institutional Trustee or the Delaware Trustee, as the case may be, shall be the successor of the Institutional Trustee or the Delaware Trustee, as the case may be, hereunder, without the execution or filing of any paper or any further act on the part of any of the parties hereto, provided such Person shall be otherwise qualified and eligible under this Article and, provided, further, that such Person shall file an amendme nt to the Certificate of Trust with the Secretary of State of the State of Delaware as contemplated in Section 4.5(i).

ARTICLE V

DISTRIBUTIONS

                   Section 5.1.  Distributions. Holders shall receive Distributions in accordance with the applicable terms of the relevant Holder's Securities. Distributions shall be made on the Capital Securities and the Common Securities in accordance with the preferences set forth in their respective terms. If and to the extent that the Debenture Issuer makes a payment of interest (including any Additional Amounts or Deferred Interest) or premium, if any, on and/or principal of the Debentures held by the Institutional Trustee (the amount of any such payment being a "Payment Amount"), the Institutional Trustee shall and is directed, to the extent funds are available in the Property Account for that purpose, to make a distribution (a "Distribution") of the Payment Amount to Holders. For the avoidance of doubt, funds in the Property Account shall not be distributed to Holders to the extent of any taxes payable by t he Trust, in the case of withholding taxes, as determined by the Institutional Trustee or any Paying Agent and, in the case of taxes other than withholding taxes, as determined by the Administrators in a written notice to the Institutional Trustee.

ARTICLE VI

ISSUANCE OF SECURITIES

                   Section 6.1.  General Provisions Regarding Securities.

                   (a)         The Administrators shall on behalf of the Trust issue one series of capital securities, evidenced by a certificate substantially in the form of Exhibit A-1, representing undivided beneficial interests in the assets of the Trust and having such terms as are set forth in Annex I (the "Capital Securities"), and one series of common securities, evidenced by a certificate substantially in the form of Exhibit A-2, representing undivided beneficial interests in the assets of the Trust and having such terms as are set forth in Annex I (the "Common Securities"). The Trust shall issue no securities or other interests in the assets of the Trust other than the Capital Securities and the Common Securities. The Capital Securities rank pari passu with, and payment thereon shall be made Pro Rata with, the Common Securities except that, where an Event of Default has occurred and is continu ing, the rights of Holders of the Common

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Securities to payment in respect of Distributions and payments upon liquidation, redemption and otherwise are subordinated to the rights to payment of the Holders of the Capital Securities.

                   (b)         The Certificates shall be signed on behalf of the Trust by one or more Administrators. Such signature shall be the facsimile or manual signature of any Administrator. In case any Administrator of the Trust who shall have signed any of the Securities shall cease to be such Administrator before the Certificates so signed shall be delivered by the Trust, such Certificates nevertheless may be delivered as though the person who signed such Certificates had not ceased to be such Administrator. Any Certificate may be signed on behalf of the Trust by such person who, at the actual date of execution of such Certificate, shall be an Administrator of the Trust, although at the date of the execution and delivery of the Declaration any such person was not such an Administrator. A Capital Security shall not be valid until the Certificate evidencing it is authenticated by the manual or facsimile signature of an Authorized Officer of the Institutional Trustee. Such signature shall be conclusive evidence that the Certificate evidencing such Capital Security has been authenticated under this Declaration. Upon written order of the Trust signed by one Administrator, the Institutional Trustee shall authenticate one or more Certificates evidencing the Capital Securities for original issue. The Institutional Trustee may appoint an authenticating agent that is a U.S. Person acceptable to the Sponsor to authenticate Certificates evidencing Capital Securities. A Common Security need not be so authenticated and shall be valid upon execution by one or more Administrators.

                   (c)         The consideration received by the Trust for the issuance of the Securities shall constitute a contribution to the capital of the Trust and shall not constitute a loan to the Trust.

                   (d)         Upon issuance of the Securities as provided in this Declaration, the Securities so issued shall be deemed to be validly issued, fully paid and non-assessable, and each Holder thereof shall be entitled to the benefits provided by this Declaration.

                   (e)         Every Person, by virtue of having become a Holder in accordance with the terms of this Declaration, shall be deemed to have expressly assented and agreed to the terms of, and shall be bound by, this Declaration and the Guarantee.

                   Section 6.2.  Paying Agent, Transfer Agent, Calculation Agent and Registrar.

                   (a)         The Trust shall maintain in Wilmington, Delaware (i) an office or agency where the Securities may be presented for payment (the "Paying Agent") and (ii) an office or agency where Securities may be presented for registration of transfer or exchange (the "Transfer Agent"). The Trust shall keep or cause to be kept at such office or agency a register (the "Securities Register") for the purpose of registering Securities and transfers and exchanges of Securities, such Securities Register to be held by a registrar (the "Registrar"). The Administrators may appoint the Paying Agent, the Registrar and the Transfer Agent, and may appoint one or more additional Paying Agents, one or more co-Registrars, or one or more co-Transfer Agents in such other locations as it shall determine. The term "Paying Agent" includes any additional Paying Agent, the term "Reg istrar" includes any additional Registrar or co-Registrar and the term "Transfer Agent" includes any additional Transfer Agent or co-Transfer Agent. The Administrators may change any Paying Agent, Transfer Agent or Registrar at any

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time without prior notice to any Holder. The Administrators shall notify the Institutional Trustee of the name and address of any Paying Agent, Transfer Agent and Registrar not a party to this Declaration. The Administrators hereby initially appoint the Institutional Trustee to act as Paying Agent, Transfer Agent and Registrar for the Capital Securities and the Common Securities at its Corporate Trust Office. The Institutional Trustee or any of its Affiliates in the United States may act as Paying Agent, Transfer Agent or Registrar.

                   (b)         The Trust shall also appoint a Calculation Agent, which shall determine the Coupon Rate in accordance with the terms of the Securities. The Trust initially appoints the Institutional Trustee as Calculation Agent.

                   Section 6.3.  Form and Dating.

                   (a)         The Capital Securities shall be evidenced by one or more Certificates, and the Institutional Trustee's certificate of authentication thereon shall be, substantially in the form of Exhibit A-1, and the Common Securities shall be evidenced by one or more Certificates substantially in the form of Exhibit A-2, each of which is hereby incorporated in and expressly made a part of this Declaration. Certificates may be typed, printed, lithographed or engraved or may be produced in any other manner as is reasonably acceptable to the Administrators, as conclusively evidenced by their execution thereof. Certificates evidencing Securities may have letters, numbers, notations or other marks of identification or designation and such legends or endorsements required by law, stock exchange rule, agreements to which the Trust is subject, if any, or usage (provided, that any such notation, legend or endorsement is in a form acceptable to the Sponsor). The Trust, at the direction of the Sponsor, shall furnish any such legend not contained in Exhibit A-1 to the Institutional Trustee in writing. Each Capital Security Certificate shall be dated the date of its authentication. The terms and provisions of the Securities set forth in Annex I and the forms of Certificates set forth in Exhibits A-1 and A-2 are part of the terms of this Declaration and to the extent applicable, the Institutional Trustee, the Delaware Trustee, the Administrators and the Sponsor, by their execution and delivery of this Declaration, expressly agree to such terms and provisions and to be bound thereby. Capital Securities will be issued only in blocks having an aggregate liquidation amount of not less than $100,000.

                   (b)         The Capital Securities are being offered and sold by the Trust initially pursuant to the Placement Agreement in definitive form, registered in the name of the Holder thereof, without coupons and with the Restricted Securities Legend.

                   Section 6.4.  Mutilated, Destroyed, Lost or Stolen Certificates. If (a) any mutilated Certificate should be surrendered to the Registrar, or if the Registrar shall receive evidence to its satisfaction of the destruction, loss or theft of any Certificate and (b) the related Holder shall deliver to the Registrar, the Administrators and the Institutional Trustee such security or indemnity as may be reasonably required by them to keep each of them harmless, then, in the absence of notice that such Certificate shall have been acquired by a bona fide purchaser, an Administrator on behalf of the Trust shall execute (and in the case of a Capital Security Certificate, the Institutional Trustee shall authenticate) and deliver to such Holder, in exchange for or in lieu of any such mutilated, destroyed, lost or stolen Certificate, a new Certificate of like denomination. In connection with the issuance of any new Certificate under< BR>

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this Section, the Registrar or the Administrators may require such Holder to pay a sum sufficient to cover any tax or other governmental charge that may be imposed in connection therewith. Any Certificate executed and delivered pursuant to this Section shall constitute conclusive evidence of an ownership interest in the relevant Securities, as if originally issued, whether or not the lost, stolen or destroyed Certificate shall be found at any time.

                   Section 6.5.  Temporary Certificates. Until definitive Certificates are ready for delivery, the Administrators may prepare and execute on behalf of the Trust (and in the case of Capital Security Certificates, the Institutional Trustee shall authenticate) temporary Certificates. Temporary Certificates shall be substantially in the form of definitive Certificates but may have variations that the Administrators consider appropriate for temporary Certificates. Without unreasonable delay, the Administrators shall prepare and execute on behalf of the Trust and, in the case of the Capital Security Certificates, the Institutional Trustee shall authenticate definitive Certificates in exchange for temporary Certificates.

                   Section 6.6.  Cancellation. The Administrators at any time may deliver Certificates evidencing Securities to the Institutional Trustee for cancellation. The Registrar shall forward to the Institutional Trustee any Certificates evidencing Securities surrendered to it for registration of transfer, redemption or payment. The Institutional Trustee shall promptly cancel all Certificates surrendered for registration of transfer, payment, replacement or cancellation and shall dispose of such canceled Certificates as the Administrators direct. The Administrators may not issue new Certificates to replace Certificates evidencing Securities that have been paid or, except for Certificates surrendered for purposes of the transfer or exchange of the Securities evidenced thereby, that have been delivered to the Institutional Trustee for cancellation.

                   Section 6.7.  Rights of Holders; Waivers of Past Defaults.

                   (a)         The legal title to the Trust Property is vested exclusively in the Institutional Trustee (in its capacity as such) in accordance with Section 2.5, and the Holders shall not have any right or title therein other than the undivided beneficial interest in the assets of the Trust conferred by their Securities and they shall have no right to call for any partition or division of property, profits or rights of the Trust except as described below. The Securities shall be personal property giving only the rights specifically set forth therein and in this Declaration. The Securities shall have no, and the issuance of the Securities shall not be subject to, preemptive or other similar rights and when issued and delivered to Holders against payment of the purchase price therefor, the Securities will be fully paid and nonassessable by the Trust.

                   (b)         For so long as any Capital Securities remain outstanding, if, upon an Indenture Event of Default, the Debenture Trustee fails or the holders of not less than 25% in principal amount of the outstanding Debentures fail to declare the principal of all of the Debentures to be immediately due and payable, the Holders of not less than a Majority in liquidation amount of the Capital Securities then outstanding shall have the right to make such declaration by a notice in writing to the Institutional Trustee, the Sponsor and the Debenture Trustee.

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                   (c)         At any time after the acceleration of maturity of the Debentures has been made and before a judgment or decree for payment of the money due has been obtained by the Debenture Trustee as provided in the Indenture, if the Institutional Trustee, subject to the provisions hereof, fails to annul any such acceleration and waive such default, the Holders of a Majority in liquidation amount of the Capital Securities, by written notice to the Institutional Trustee, the Sponsor and the Debenture Trustee, may rescind and annul such acceleration and its consequences if:

         (i)         the Sponsor has paid or deposited with the Debenture Trustee a sum sufficient to pay

         (A)         all overdue installments of interest on all of the Debentures;

         (B)         any accrued Deferred Interest on all of the Debentures;

         (C)         all payments on any Debentures that have become due otherwise than by such acceleration and interest and Deferred Interest thereon at the rate borne by the Debentures; and

         (D)         all sums paid or advanced by the Debenture Trustee under the Indenture and the reasonable compensation, documented expenses, disbursements and advances of the Debenture Trustee and the Institutional Trustee, their agents and counsel; and

         (ii)         all Events of Default with respect to the Debentures, other than the non-payment of the principal of or premium, if any, on the Debentures that has become due solely by such acceleration, have been cured or waived as provided in Section 5.07 of the Indenture.

                   (d)         The Holders of a Majority in liquidation amount of the Capital Securities may, on behalf of the Holders of all the Capital Securities, waive any past Default or Event of Default, except a Default or Event of Default arising from the non-payment of principal of or premium, if any, or interest on the Debentures (unless such Default or Event of Default has been cured and a sum sufficient to pay all matured installments of interest, premium and principal due otherwise than by acceleration has been deposited with the Debenture Trustee) or a Default or Event of Default in respect of a covenant or provision that under the Indenture cannot be modified or amended without the consent of the holder of each outstanding Debenture. No such rescission shall affect any subsequent default or impair any right consequent thereon.

                   (e)         Upon receipt by the Institutional Trustee of written notice declaring such an acceleration, or rescission and annulment thereof, by Holders of any part of the Capital Securities, a record date shall be established for determining Holders of outstanding Capital Securities entitled to join in such notice, which record date shall be at the close of business on the day the Institutional Trustee receives such notice. The Holders on such record date, or their duly designated proxies, and only such Persons, shall be entitled to join in such notice, whether or not such Holders remain Holders after such record date; provided, that, unless such declaration of acceleration, or rescission and annulment, as the case may be, shall have become effective by virtue of the requisite percentage having joined in such notice prior to the day that

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is 90 days after such record date, such notice of declaration of acceleration, or rescission and annulment, as the case may be, shall automatically and without further action by any Holder be canceled and of no further effect. Nothing in this paragraph shall prevent a Holder, or a proxy of a Holder, from giving, after expiration of such 90-day period, a new written notice of declaration of acceleration, or rescission and annulment thereof, as the case may be, that is identical to a written notice that has been canceled pursuant to the proviso to the preceding sentence, in which event a new record date shall be established pursuant to the provisions of this Section.

                   (f)         Except as otherwise provided in this Section, the Holders of a Majority in liquidation amount of the Capital Securities may, on behalf of the Holders of all the Capital Securities, waive any past Default or Event of Default and its consequences. Upon such waiver, any such Default or Event of Default shall cease to exist, and any Default or Event of Default arising therefrom shall be deemed to have been cured, for every purpose of this Declaration, but no such waiver shall extend to any subsequent or other Default or Event of Default or impair any right consequent thereon.

ARTICLE VII

DISSOLUTION AND TERMINATION OF TRUST

                   Section 7.1.  Dissolution and Termination of Trust.  (a)  The Trust shall dissolve on the first to occur of :

         (i)         unless earlier dissolved, on April 6, 2039, the expiration of the term of the Trust;

         (ii)         a Bankruptcy Event with respect to the Sponsor, the Trust or the Debenture Issuer;

         (iii)         other than in connection with a merger, consolidation or similar transaction not prohibited by the Indenture, this Declaration or the Guarantee, as the case may be, the filing of a certificate of dissolution or its equivalent with respect to the Sponsor or upon the revocation of the charter of the Sponsor and the expiration of 90 days after the date of revocation without a reinstatement thereof;

         (iv)         the distribution of all of the Debentures to the Holders of the Securities, upon exercise of the right of the Holders of all of the outstanding Common Securities to dissolve the Trust as provided in Annex I hereto;

         (v)         the entry of a decree of judicial dissolution of any Holder of the Common Securities, the Sponsor, the Trust or the Debenture Issuer;

         (vi)         when all of the Securities are then subject to redemption and the amounts necessary for redemption thereof shall have been paid to the Holders in accordance with the terms of the Securities; or

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         (vii)         before the issuance of any Securities, with the consent of all of the Trustees and the Sponsor.

                   (b)         As soon as is practicable after the occurrence of an event referred to in Section 7.1(a), and after satisfaction of liabilities to creditors of the Trust as required by applicable law, including §3808 of the Statutory Trust Act, and subject to the terms set forth in Annex I, the Institutional Trustee shall terminate the Trust by filing a certificate of cancellation with the Secretary of State of the State of Delaware.

                   (c)         The provisions of Section 2.9 and Article IX shall survive the termination of the Trust.

ARTICLE VIII

TRANSFER OF INTERESTS

                   Section 8.1  General.  (a)  Where a Holder of Capital Securities delivers to the Registrar in accordance with this Declaration a request to register a transfer of such Holder's Capital Securities or to exchange them for an equal aggregate liquidation amount of Capital Securities represented by different Certificates, the Registrar shall register the transfer or make the exchange when the requirements specified in this Article VIII for such transfer or exchange are met. To facilitate registrations of transfers and exchanges, the Trust shall execute and the Institutional Trustee shall authenticate Capital Security Certificates at the Registrar's request.

                   (b)         Upon issuance of the Common Securities, the Sponsor shall acquire and retain beneficial and record ownership of the Common Securities and, for so long as the Securities remain outstanding, the Sponsor shall maintain 100% ownership of the Common Securities; provided, however, that any permitted successor of the Debenture Issuer under the Indenture may succeed to the Sponsor's ownership of the Common Securities.

                   (c)         Capital Securities may only be transferred, in whole or in part, in accordance with the terms and conditions set forth in this Declaration and in the terms of the Capital Securities. To the fullest extent permitted by applicable law, any transfer or purported transfer of any Security not made in accordance with this Declaration shall be null and void and will be deemed to be of no legal effect whatsoever and any such purported transferee shall be deemed not to be the Holder of such Capital Securities for any purpose, including, but not limited to, the receipt of Distributions on such Capital Securities, and such transferee shall be deemed to have no interest whatsoever in such Capital Securities.

                   (d)         The Registrar shall provide in the Securities Register for the registration of Securities and of transfers of Securities, which will be effected without charge but only upon payment (with such indemnity as the Registrar may reasonably require) in respect of any tax or other governmental charges that may be imposed in relation to it. Upon its receipt of the documents required under this Section 8.1(d) for registration of transfer of any Securities, the Registrar shall register in the Securities Register, in the name of the designated transferee or transferees, the Securities being transferred and thereupon, for all purposes of this Declaration, such transfer shall be effective and such transferee or transferees shall be, and such transferor

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shall no longer be, the Holder of the transferred Securities. Upon the registration of a transfer of a Security pursuant to the terms of this Declaration in the name of the new Holder thereof, such Security shall constitute the same Security as the Security so transferred and shall be entitled to the same benefits under this Declaration as the Security so transferred. The Registrar shall, and is authorized to, record and register in the Securities Register the transfer of a Security upon the Registrar's receipt of originals or copies (which may be by facsimile or other form of electronic transmission) of (i) a written instrument of transfer in form reasonably satisfactory to the Registrar duly executed by the Holder or such Holder's attorney duly authorized in writing, and (ii) if such Security is being transferred prior to the Resale Restriction Termination Date other than in accordance with Section 8.4, a certificate substantially in the form set forth as Exhibit B, C or D, as applicable, hereto, exec uted by the transferor or transferee, as applicable; thereupon, the Registrar is authorized to confirm in writing to the transferee and, if requested, to the transferor of such Security that such transfer has been registered in the Securities Register and that such transferee is the Holder of such Security. The Certificate evidencing the Security so transferred, duly endorsed by the transferor, shall be surrendered to the Registrar at the time the transfer conditions specified in the immediately preceding sentence are satisfied or within five (5) Business Days after the Registrar has registered the transfer of such Security on the Securities Register, and promptly after such surrender, an Administrator on behalf of the Trust shall execute and, in the case of a Capital Security Certificate, the Institutional Trustee shall, and is authorized to, authenticate a Certificate in the name of the transferee as the new Holder of the Security evidenced thereby. Until the Certificate evidencing the Security so transf erred is surrendered to the Registrar, such Security may not be transferred by such new Holder. Each Certificate surrendered in connection with a registration of transfer shall be canceled by the Institutional Trustee pursuant to Section 6.6. A transferee of a Security shall be entitled to the rights and subject to the obligations of a Holder hereunder upon the registration of such transfer in the Securities Register. Each such transferee shall be deemed to have agreed to be bound by this Declaration.

                   (e)          Neither the Trust nor the Registrar shall be required (i) to issue Certificates representing Securities or register the transfer of or exchange any Securities during a period beginning at the opening of business 15 days before the day of any selection of Securities for redemption and ending at the close of business on the earliest date on which the relevant notice of redemption is deemed to have been given to all Holders of the Securities to be redeemed, or (ii) to register the transfer or exchange of any Security so selected for redemption in whole or in part, except the unredeemed portion of any Security being redeemed in part.

                   Section 8.2.  Transfer Procedures and Restrictions.

                   (a)         Prior to the Resale Restriction Termination Date, Certificates evidencing Capital Securities shall bear the Restricted Securities Legend. The Restricted Securities Legend on any Certificate evidencing outstanding Capital Securities shall not be removed unless there is delivered to the Trust such satisfactory evidence, which may include an opinion of counsel, as may be reasonably required by the Trust, that neither the Restricted Securities Legend nor the restrictions on transfer set forth therein are required to ensure that transfers thereof comply with the provisions of the Securities Act or that such Securities are not "restricted" within the meaning of Rule 144 under the Securities Act. Upon provision of such satisfactory evidence, the Institutional Trustee, at the written direction of the Trust, shall authenticate and deliver

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Capital Securities Certificates that do not bear the Restricted Securities Legend in exchange for the Capital Securities Certificates bearing the Restricted Securities Legend.

                   (b)         Prior to the Resale Restriction Termination Date, without the written consent of the Sponsor, Capital Securities may only be transferred: (i) to a QIB if the instrument of transfer is accompanied by a certificate of the transferor substantially in the form set forth as Exhibit C hereto; (ii) to an "accredited investor" within the meaning of Rule 501(a) (1), (2), (3), (7) or (8) under the Securities Act if the instrument of transfer is accompanied by a certificate of the transferee substantially in the form set forth as Exhibit B hereto; or (iii) to a non-"U.S. Person" in an "offshore transaction" under, and within the meaning of, Regulation S under the Securities Act if the instrument of transfer is accompanied by a certificate of the transferee substantially in the form set forth as Exhibit D hereto. Each certificate furnished pursuant to this Section 8.2(b) may be an original or a copy (which may be furnished by facsimile or other form of electronic transmission).

                   (c)         The Capital Securities may not be transferred prior to the Resale Restriction Termination Date except in compliance with restrictions on transfer set forth in the legend set forth below (the "Restricted Securities Legend"), and except as otherwise contemplated in Section 8.2(a), prior to the Resale Restriction Termination Date, each Certificate evidencing outstanding Capital Securities shall bear the Restricted Securities Legend:

                   THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS OR ANY OTHER APPLICABLE SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. THE HOLDER OF THIS SECURITY OR ANY INTEREST OR PARTICIPATION HEREIN, BY ITS ACCEPTANCE HEREOF OR THEREOF, AS THE CASE MAY BE, AGREES TO OFFER, SELL OR OTHERWISE TRANSFER SUCH SECURITY OR ANY INTEREST OR PARTICIPATION HEREIN PRIOR TO THE DATE WHICH IS THE LATER OF (i) TWO YEARS (OR SUCH SHORTER PERIOD OF TIME AS PERMITTED BY RULE 144(k) UNDER THE SECURITIES ACT) AFTER THE LATER OF (Y) THE DATE OF ORIGINAL ISSUANCE HEREOF AND (Z) THE LAST DATE ON WHICH T HE TRUST OR ANY AFFILIATE (AS DEFINED IN RULE 405 UNDER THE SECURITIES ACT) OF THE TRUST WAS THE HOLDER OF THIS SECURITY OR SUCH INTEREST OR PARTICIPATION (OR ANY PREDECESSOR THERETO) AND (ii) SUCH LATER DATE, IF ANY, AS MAY BE REQUIRED BY ANY SUBSEQUENT CHANGE IN APPLICABLE LAW, ONLY (A) TO THE DEBENTURE ISSUER OR THE TRUST, (B) PURSUANT TO RULE 144A UNDER THE SECURITIES ACT ("RULE 144A"), TO A PERSON THE HOLDER REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER," AS DEFINED IN RULE 144A, THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (C) PURSUANT TO AN EXEMPTION FROM THE REGISTRATION

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REQUIREMENTS OF THE SECURITIES ACT TO AN "ACCREDITED INVESTOR" WITHIN THE MEANING OF SUBPARAGRAPH (a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

                   THE HOLDER OF THIS SECURITY OR ANY INTEREST OR PARTICIPATION HEREIN, BY ITS ACCEPTANCE HEREOF OR THEREOF, AS THE CASE MAY BE, ALSO AGREES, REPRESENTS AND WARRANTS THAT IT IS NOT AN EMPLOYEE BENEFIT, INDIVIDUAL RETIREMENT ACCOUNT OR OTHER PLAN OR ARRANGEMENT SUBJECT TO TITLE I OF THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED ("ERISA"), OR SECTION 4975 OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE "CODE") (EACH A "PLAN"), OR AN ENTITY WHOSE UNDERLYING ASSETS INCLUDE "PLAN ASSETS" BY REASON OF ANY PLAN'S INVESTMENT IN THE ENTITY AND NO PERSON INVESTING "PLAN ASSETS" OF ANY PLAN MAY ACQUIRE OR HOLD THIS SECURITY OR ANY INTEREST OR PARTICIPATION HEREIN, UNLESS SUCH PURCHASER OR HOLDER IS ELIGIBLE FOR THE EXEMPTIVE RELIEF AVAILABLE UNDER U.S. DEPARTMENT OF LABOR PROHIBITED TRANSACTION CLASS EXEMPTION 96-23, 95-60, 91-38, 90-1 OR 84-14 OR ANOTHER APPLICABLE EXEMPTION OR ITS PURCHASE AND HOLDING OF THIS SECURITY OR SUCH INTEREST OR PARTICIPATION IS NOT PROHIBITED BY SECTION 406 OF ERISA OR SECTION 4975 OF THE CODE WITH RESPECT TO SUCH PURCHASE OR HOLDING. ANY PURCHASER OR HOLDER OF THIS SECURITY OR ANY INTEREST OR PARTICIPATION HEREIN WILL BE DEEMED TO HAVE REPRESENTED BY ITS PURCHASE AND HOLDING HEREOF OR THEREOF, AS THE CASE MAY BE, THAT EITHER (i) IT IS NOT AN EMPLOYEE BENEFIT PLAN WITHIN THE MEANING OF SECTION 3(3) OF ERISA, OR A PLAN TO WHICH SECTION 4975 OF THE CODE IS APPLICABLE, A TRUSTEE OR OTHER PERSON ACTING ON BEHALF OF AN EMPLOYEE BENEFIT PLAN OR PLAN, OR ANY OTHER PERSON OR ENTITY USING THE ASSETS OF ANY EMPLOYEE BENEFIT PLAN OR PLAN TO FINANCE SUCH PURCHASE, OR (ii) SUCH PURCHASE AND HOLDING WILL NOT RESULT IN A

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PROHIBITED TRANSACTION UNDER SECTION 406 OF ERISA OR SECTION 4975 OF THE CODE FOR WHICH THERE IS NO APPLICABLE STATUTORY OR ADMINISTRATIVE EXEMPTION.

                   IN CONNECTION WITH ANY TRANSFER, THE HOLDER OF THIS SECURITY WILL DELIVER TO THE REGISTRAR AND TRANSFER AGENT SUCH CERTIFICATES AND OTHER INFORMATION AS MAY BE REQUIRED BY THE AMENDED AND RESTATED DECLARATION OF TRUST TO CONFIRM THAT THE TRANSFER COMPLIES WITH THE FOREGOING RESTRICTIONS.

                   THIS SECURITY WILL BE ISSUED AND MAY BE TRANSFERRED ONLY IN BLOCKS HAVING A LIQUIDATION AMOUNT OF NOT LESS THAN $100,000 AND MULTIPLES OF $1,000 IN EXCESS THEREOF. ANY ATTEMPTED TRANSFER OF THIS SECURITY IN A BLOCK HAVING A LIQUIDATION AMOUNT OF LESS THAN $100,000 SHALL BE DEEMED TO BE VOID AND OF NO LEGAL EFFECT WHATSOEVER. ANY SUCH PURPORTED TRANSFEREE SHALL BE DEEMED NOT TO BE THE HOLDER OF THIS SECURITY OR ANY INTEREST OR PARTICIPATION HEREIN FOR ANY PURPOSE, INCLUDING, BUT NOT LIMITED TO, THE RECEIPT OF DISTRIBUTIONS ON THIS SECURITY OR SUCH INTEREST OR PARTICIPATION, AND SUCH PURPORTED TRANSFEREE SHALL BE DEEMED TO HAVE NO INTEREST WHATSOEVER IN THIS SECURITY OR ANY INTEREST OR PARTICIPATION HEREIN.

                   THIS SECURITY DOES NOT EVIDENCE A DEPOSIT AND IS NOT INSURED BY THE UNITED STATES OR ANY AGENCY OR FUND OF THE UNITED STATES, INCLUDING THE FEDERAL DEPOSIT INSURANCE CORPORATION (THE "FDIC").

                   (d)         Capital Securities may only be transferred in minimum blocks of $100,000 aggregate liquidation amount (100 Capital Securities) and multiples of $1,000 in excess thereof. Any attempted transfer of Capital Securities in a block having an aggregate liquidation amount of less than $100,000 shall be deemed to be void and of no legal effect whatsoever. Any such purported transferee shall be deemed not to be a Holder of such Capital Securities for any purpose, including, but not limited to, the receipt of Distributions on such Capital Securities, and such purported transferee shall be deemed to have no interest whatsoever in such Capital Securities.

                   Section 8.3.  Deemed Security Holders. The Trust, the Administrators, the Trustees, the Paying Agent, the Transfer Agent or the Registrar may treat the Person in whose name any Security shall be registered on the Securities Register of the Trust as the sole Holder and owner of such Security for purposes of receiving Distributions and for all other purposes whatsoever and, accordingly, shall not be bound to recognize any equitable or other claim to or interest in such Security on the part of any other Person, whether or not the Trust, the Administrators, the Trustees, the Paying Agent, the Transfer Agent or the Registrar shall have actual or other notice thereof.

                   Section 8.4.  Transfer of Initial Securities. Notwithstanding the foregoing provisions of this Article VIII or any other provision of this Declaration (including all Annexes

39

and Exhibits hereto) to the contrary, any or all of the Capital Securities initially issued to the Purchaser (the "Initial Securities") may be transferred by the Purchaser to any transferee selected by it that meets the parameters specified below and, upon delivery to the Registrar, of originals or copies (which may be by facsimile or other form of electronic transmission) of a written instrument of transfer in form reasonably satisfactory to the Registrar duly executed by the Purchaser or the Purchaser's attorney duly authorized in writing (it being understood that no signature guarantee shall be required), then the Registrar shall, and is authorized to, record and register on the Securities Register the transfer of such Initial Securities to such transferee; thereupon, the Registrar is authorized to confirm in writing to the transferee and, if requested, to the transferor of such Initial Securities that such transfer has been registered in the Securities Register and that such transferee is t he Holder of such Initial Securities; provided, however, that the Purchaser of the Initial Securities, by its acceptance thereof, agrees that it may not transfer any Initial Securities prior to the Resale Restriction Termination Date to any transferee that is not a QIB, an "accredited investor" within the meaning of Rule 501(a)(1), (2), (3), (7) or (8) under the Securities Act or a non-"U.S. Person" in an "offshore transaction" under, and within the meaning of, Regulation S under the Securities Act. The Certificate evidencing the Initial Securities to be transferred, duly endorsed by the Purchaser, shall be surrendered to the Registrar at the time the transfer conditions specified in the immediately preceding sentence are satisfied or within five (5) Business Days after the Registrar has registered the transfer of such Initial Securities in the Securities Register, and promptly after such surrender, an Administrator on behalf of the Trust shall execute and, in the case of a Capital Security Certificate, the Institutional Trustee shall, and is authorized to, authenticate a Certificate in the name of the transferee as the new Holder of the Initial Securities evidenced thereby. Until the Certificate evidencing the Initial Securities so transferred is surrendered to the Registrar, such Initial Securities may not be transferred by such new Holder. No other conditions, restrictions or other provisions of this Declaration or any other document shall apply to a transfer of Initial Securities by the Purchaser.

ARTICLE IX

LIMITATION OF LIABILITY OF
HOLDERS OF SECURITIES, TRUSTEES OR OTHERS

                   Section 9.1.   Liability.  (a)  Except as expressly set forth in this Declaration, the Guarantee and the terms of the Securities, the Sponsor shall not be:

         (i)         personally liable for the return of any portion of the capital contributions (or any return thereon) of the Holders of the Securities which shall be made solely from assets of the Trust; and

         (ii)         required to pay to the Trust or to any Holder of the Securities any deficit upon dissolution of the Trust or otherwise.

                   (b)         The Holder of the Common Securities shall be liable for all of the debts and obligations of the Trust (other than with respect to the Securities) to the extent not satisfied out of the Trust's assets.

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                   (c)         Pursuant to § 3803(a) of the Statutory Trust Act, the Holders of the Securities shall be entitled to the same limitation of personal liability extended to stockholders of private corporations for profit organized under the General Corporation Law of the State of Delaware, except as otherwise specifically set forth herein.

                   Section 9.2.  Exculpation.   (a)  No Indemnified Person shall be liable, responsible or accountable in damages or otherwise to the Trust or any Covered Person for any loss, damage or claim incurred by reason of any act or omission performed or omitted by such Indemnified Person in good faith on behalf of the Trust and in a manner such Indemnified Person reasonably believed to be within the scope of the authority conferred on such Indemnified Person by this Declaration or by law, except that an Indemnified Person (other than an Administrator) shall be liable for any such loss, damage or claim incurred by reason of such Indemnified Person's negligence, willful misconduct or bad faith with respect to such acts or omissions and except that an Administrator shall be liable for any such loss, damage or claim incurred by reason of such Administrator's gross negligence, willful misconduct or bad faith with r espect to such acts or omissions.

                   (b)          An Indemnified Person shall be fully protected in relying in good faith upon the records of the Trust and upon such information, opinions, reports or statements presented to the Trust by any Person as to matters the Indemnified Person reasonably believes are within such other Person's professional or expert competence and, if selected by such Indemnified Person, has been selected by such Indemnified Person with reasonable care by or on behalf of the Trust, including information, opinions, reports or statements as to the value and amount of the assets, liabilities, profits, losses or any other facts pertinent to the existence and amount of assets from which Distributions to Holders of Securities might properly be paid.

                   Section 9.3.  Fiduciary Duty. (a)  To the extent that, at law or in equity, an Indemnified Person has duties (including fiduciary duties) and liabilities relating thereto to the Trust or to any other Covered Person, an Indemnified Person acting under this Declaration shall not be liable to the Trust or to any other Covered Person for its good faith reliance on the provisions of this Declaration. The provisions of this Declaration, to the extent that they restrict the duties and liabilities of an Indemnified Person otherwise existing at law or in equity (other than the duties imposed on the Institutional Trustee under the Trust Indenture Act), are agreed by the parties hereto to replace such other duties and liabilities of the Indemnified Person.

                   (b)         Whenever in this Declaration an Indemnified Person is permitted or required to make a decision:

         (i)         in its "discretion" or under a grant of similar authority, the Indemnified Person shall be entitled to consider such interests and factors as it desires, including its own interests, and shall have no duty or obligation to give any consideration to any interest of or factors affecting the Trust or any other Person; or

         (ii)         in its "good faith" or under another express standard, the Indemnified Person shall act under such express standard and shall not be subject

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to any other or different standard imposed by this Declaration or by applicable law.

                   Section 9.4.  Indemnification. (a)

         (i)         The Sponsor shall indemnify, to the fullest extent permitted by law, any Indemnified Person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Trust) by reason of the fact that such Person is or was an Indemnified Person against expenses (including attorneys' fees and expenses), judgments, fines and amounts paid in settlement actually and reasonably incurred by such Person in connection with such action, suit or proceeding if such Person acted in good faith and in a manner such Person reasonably believed to be in or not opposed to the best interests of the Trust, and, with respect to any criminal action or proceeding, had no reasonable cause to believe such conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement , conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the Indemnified Person did not act in good faith and in a manner which such Person reasonably believed to be in or not opposed to the best interests of the Trust, and, with respect to any criminal action or proceeding, had reasonable cause to believe that such conduct was unlawful.

         (ii)         The Sponsor shall indemnify, to the fullest extent permitted by law, any Indemnified Person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Trust to procure a judgment in its favor by reason of the fact that such Person is or was an Indemnified Person against expenses (including attorneys' fees and expenses) actually and reasonably incurred by such Person in connection with the defense or settlement of such action or suit if such Person acted in good faith and in a manner such Person reasonably believed to be in or not opposed to the best interests of the Trust and except that no such indemnification shall be made in respect of any claim, issue or matter as to which such Indemnified Person shall have been adjudged to be liable to the Trust unless and only to the extent that the Court of Chancery of Delaware or the court in which such action or s uit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such Person is fairly and reasonably entitled to indemnity for such expenses which such Court of Chancery or such other court shall deem proper.

         (iii)         To the extent that an Indemnified Person shall be successful on the merits or otherwise (including dismissal of an action without prejudice or the settlement of an action without admission of liability) in defense of any action, suit or proceeding referred to in paragraphs (i) and (ii) of this Section 9.4(a), or in defense of any claim, issue or matter therein, such Person shall be indemnified, to the fullest extent permitted by law, against expenses (including attorneys' fees

42 and expenses) actually and reasonably incurred by such Person in connection therewith.

         (iv)         Any indemnification of an Administrator under paragraphs (i) and (ii) of this Section 9.4(a) (unless ordered by a court) shall be made by the Sponsor only as authorized in the specific case upon a determination that indemnification of the Indemnified Person is proper in the circumstances because such Person has met the applicable standard of conduct set forth in paragraphs (i) and (ii). Such determination shall be made (A) by the Administrators by a majority vote of a Quorum consisting of such Administrators who were not parties to such action, suit or proceeding, (B) if such a Quorum is not obtainable, or, even if obtainable, if a Quorum of disinterested Administrators so directs, by independent legal counsel in a written opinion, or (C) by the Common Security Holder of the Trust.

         (v)         To the fullest extent permitted by law, expenses (including attorneys' fees and expenses) incurred by an Indemnified Person in defending a civil, criminal, administrative or investigative action, suit or proceeding referred to in paragraphs (i) and (ii) of this Section 9.4(a) shall be paid by the Sponsor in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such Indemnified Person to repay such amount if it shall ultimately be determined that such Person is not entitled to be indemnified by the Sponsor as authorized in this Section 9.4(a). Notwithstanding the foregoing, no advance shall be made by the Sponsor if a determination is reasonably and promptly made (1) in the case of a Company Indemnified Person (A) by the Administrators by a majority vote of a Quorum of disinterested Administrators, (B) if such a Quorum is not obtainable, or, even if obtainable, if a Quorum of disinterested Administrators so directs, by independent legal counsel in a written opinion or (C) by the Common Security Holder of the Trust, that, based upon the facts known to the Administrators, counsel or the Common Security Holder at the time such determination is made, such Indemnified Person acted in bad faith or in a manner that such Person either believed to be opposed to or did not believe to be in the best interests of the Trust, or, with respect to any criminal proceeding, that such Indemnified Person believed or had reasonable cause to believe such conduct was unlawful, or (2) in the case of a Fiduciary Indemnified Person, by independent legal counsel in a written opinion that, based upon the facts known to the counsel at the time such determination is made, such Indemnified Person acted in bad faith or in a manner that such Indemnified Person either believed to be opposed to or did not believe to be in the best interests of the Trust, or, with respect to any criminal proceeding, that such I ndemnified Person believed or had reasonable cause to believe such conduct was unlawful. In no event shall any advance be made (i) to a Company Indemnified Person in instances where the Administrators, independent legal counsel or the Common Security Holder reasonably determine that such Person deliberately breached such Person's duty to the Trust or its Common or Capital Security Holders or (ii) to a Fiduciary Indemnified Person in instances where independent legal counsel promptly and reasonably determines in a written opinion that such

43

Person deliberately breached such Person's duty to the Trust or its Common or Capital Security Holders.

                   (b)         The Sponsor shall indemnify, to the fullest extent permitted by applicable law, each Indemnified Person from and against any and all loss, damage, liability, tax (other than taxes based on the income of such Indemnified Person), penalty, expense or claim of any kind or nature whatsoever incurred by such Indemnified Person arising out of or in connection with or by reason of the creation, administration or termination of the Trust, or any act or omission of such Indemnified Person in good faith on behalf of the Trust and in a manner such Indemnified Person reasonably believed to be within the scope of authority conferred on such Indemnified Person by this Declaration, except that no Indemnified Person shall be entitled to be indemnified in respect of any loss, damage, liability, tax, penalty, expense or claim incurred by such Indemnified Person by reason of negligence, willful misconduct or bad faith w ith respect to such acts or omissions.

                   (c)         The indemnification and advancement of expenses provided by, or granted pursuant to, the other paragraphs of this Section shall not be deemed exclusive of any other rights to which those seeking indemnification and advancement of expenses may be entitled under any agreement, vote of stockholders or disinterested directors of the Sponsor or Capital Security Holders of the Trust or otherwise, both as to action in such Person's official capacity and as to action in another capacity while holding such office. All rights to indemnification under this Section shall be deemed to be provided by a contract between the Sponsor and each Indemnified Person who serves in such capacity at any time while this Section is in effect. Any repeal or modification of this Section shall not affect any rights or obligations then existing.

                   (d)         The Sponsor or the Trust may purchase and maintain insurance on behalf of any Person who is or was an Indemnified Person against any liability asserted against such Person and incurred by such Person in any such capacity, or arising out of such Person's status as such, whether or not the Sponsor would have the power to indemnify such Person against such liability under the provisions of this Section.

                   (e)         For purposes of this Section, references to "the Trust" shall include, in addition to the resulting or surviving entity, any constituent entity (including any constituent of a constituent) absorbed in a consolidation or merger, so that any Person who is or was a director, trustee, officer or employee of such constituent entity, or is or was serving at the request of such constituent entity as a director, trustee, officer, employee or agent of another entity, shall stand in the same position under the provisions of this Section with respect to the resulting or surviving entity as such Person would have with respect to such constituent entity if its separate existence had continued.

                   (f)         The indemnification and advancement of expenses provided by, or granted pursuant to, this Section shall, unless otherwise provided when authorized or ratified, continue as to a Person who has ceased to be an Indemnified Person and shall inure to the benefit of the heirs, executors and administrators of such a Person.

                   (g)         The provisions of this Section shall survive the termination of this Declaration or the earlier resignation or removal of the Institutional Trustee. The obligations of

44

the Sponsor under this Section to compensate and indemnify the Trustees and to pay or reimburse the Trustees for expenses, disbursements and advances shall constitute additional indebtedness hereunder. Such additional indebtedness shall be secured by a lien prior to that of the Securities upon all property and funds held or collected by the Trustees as such, except funds held in trust for the benefit of the Holders of particular Capital Securities, provided, that the Sponsor is the Holder of the Common Securities.

                   Section 9.5.  Outside Businesses. Any Covered Person, the Sponsor, the Delaware Trustee and the Institutional Trustee (subject to Section 4.3(c)) may engage in or possess an interest in other business ventures of any nature or description, independently or with others, similar or dissimilar to the business of the Trust, and the Trust and the Holders of Securities shall have no rights by virtue of this Declaration in and to such independent ventures or the income or profits derived therefrom, and the pursuit of any such venture, even if competitive with the business of the Trust, shall not be deemed wrongful or improper. None of any Covered Person, the Sponsor, the Delaware Trustee or the Institutional Trustee shall be obligated to present any particular investment or other opportunity to the Trust even if such opportunity is of a character that, if presented to the Trust, could be taken by the Trust, and any Covered Pe rson, the Sponsor, the Delaware Trustee and the Institutional Trustee shall have the right to take for its own account (individually or as a partner or fiduciary) or to recommend to others any such particular investment or other opportunity. Any Covered Person, the Delaware Trustee and the Institutional Trustee may engage or be interested in any financial or other transaction with the Sponsor or any Affiliate of the Sponsor, or may act as depositary for, trustee or agent for, or act on any committee or body of holders of, securities or other obligations of the Sponsor or its Affiliates.

                   Section 9.6.  Compensation; Fee. (a)  The Sponsor agrees:

         (i)         to pay to the Trustees from time to time such compensation for all services rendered by them hereunder as the parties shall agree in writing from time to time to the extent agreed upon in the Fee Agreement, dated as of March 25, 2004, between Sponsor and Wilmington Trust Company (which compensation shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust); and

         (ii)         except as otherwise expressly provided herein, to reimburse each of the Trustees upon request for all reasonable, documented expenses, disbursements and advances incurred or made by such Person in accordance with any provision of this Declaration (including the reasonable compensation and the expenses and disbursements of such Person's agents and counsel), except any such expense, disbursement or advance attributable to such Person's negligence, willful misconduct or bad faith.

                   (b)         The provisions of this Section shall survive the dissolution of the Trust and the termination of this Declaration and the removal or resignation of any Trustee.

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ARTICLE X

ACCOUNTING

                   Section 10.1.  Fiscal Year. The fiscal year (the "Fiscal Year") of the Trust shall be the calendar year, or such other year as is required by the Code.

                   Section 10.2  Certain Accounting Matters.

                   (a)         At all times during the existence of the Trust, the Administrators shall keep, or cause to be kept, at the principal office of the Trust in the United States, as defined for purposes of Treasury Regulations § 301.7701-7, full books of account, records and supporting documents, which shall reflect in reasonable detail each transaction of the Trust. The books of account shall be maintained on the accrual method of accounting, in accordance with generally accepted accounting principles, consistently applied.

                   (b)         The Sponsor shall cause the Administrators to deliver to each Holder of Securities: (1) each Form 10-K and Form 10-Q prepared by the Sponsor and filed with the Commission in accordance with the Exchange Act, within 10 Business Days after the filing thereof; (2) if the Sponsor is not then (y) subject to Section 13 or 15(d) of the Exchange Act or (z) exempt from reporting pursuant to Rule 12g3-2(b) thereunder, the information required to be provided by Rule 144A(d)(4) under the Securities Act; and (3) within 90 days after the end of each Fiscal Year of the Trust, annual financial statements of the Trust, including a balance sheet of the Trust as of the end of such Fiscal Year and the statements of income or loss for the Fiscal Year then ended, that are prepared at the principal office of the Trust in the United States, as defined for purposes of Treasury Regulations § 301.7701-7.

                   (c)         The Administrators shall cause to be duly prepared and delivered to each of the Holders of Securities Form 1099 or such other annual United States federal income tax information statement required by the Code, containing such information with regard to the Securities held by each Holder as is required by the Code and the Treasury Regulations. Notwithstanding any right under the Code to deliver any such statement at a later date, the Administrators shall endeavor to deliver all such statements within 30 days after the end of each Fiscal Year of the Trust.

                   (d)         The Administrators shall cause to be duly prepared in the United States, as defined for purposes of Treasury Regulations § 301.7701-7, and filed an annual United States federal income tax return on a Form 1041 or such other form required by United States federal income tax law, and any other annual income tax returns required to be filed by the Administrators on behalf of the Trust with any state or local taxing authority.

                   (e)         So long as a Holder of the Capital Securities is ALESCO Preferred Funding III, Ltd. or an entity that holds a pool of trust preferred securities and/or debt securities or a trustee thereof, the Sponsor shall cause the Administrators to deliver the Sponsor's reports on Form FR Y-9C to be delivered to such Holder promptly following their filing with the Federal Reserve.

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                   Section 10.3.  Banking. The Trust shall maintain one or more bank accounts in the United States, as defined for purposes of Treasury Regulations § 301.7701-7, in the name and for the sole benefit of the Trust; provided, however, that all payments of funds in respect of the Debentures held by the Institutional Trustee shall be made directly to the Property Account and no other funds of the Trust shall be deposited in the Property Account. The sole signatories for such accounts (including the Property Account) shall be designated by the Institutional Trustee.

                   Section 10.4.  Withholding. The Institutional Trustee or any Paying Agent and the Administrators shall comply with all withholding requirements under United States federal, state and local law. The Institutional Trustee or any Paying Agent shall request, and each Holder shall provide to the Institutional Trustee or any Paying Agent, such forms or certificates as are necessary to establish an exemption from withholding with respect to the Holder, and any representations and forms as shall reasonably be requested by the Institutional Trustee or any Paying Agent to assist it in determining the extent of, and in fulfilling, its withholding obligations. The Administrators shall file required forms with applicable jurisdictions and, unless an exemption from withholding is properly established by a Holder, shall remit amounts withheld with respect to the Holder to applicable jurisdictions. To the extent that the Institution al Trustee or any Paying Agent is required to withhold and pay over any amounts to any authority with respect to distributions or allocations to any Holder, the amount withheld shall be deemed to be a Distribution to the Holder in the amount of the withholding. In the event of any claimed overwithholding, Holders shall be limited to an action against the applicable jurisdiction. If the amount required to be withheld was not withheld from actual Distributions made, the Institutional Trustee or any Paying Agent may reduce subsequent Distributions by the amount of such withholding.

ARTICLE XI

AMENDMENTS AND MEETINGS

                   Section 11.1.  Amendments. (a)  Except as otherwise provided in this Declaration or by any applicable terms of the Securities, this Declaration may only be amended by a written instrument approved and executed by

         (i)         the Institutional Trustee,

         (ii)         if the amendment affects the rights, powers, duties, obligations or immunities of the Delaware Trustee, the Delaware Trustee,

         (iii)         if the amendment affects the rights, powers, duties, obligations or immunities of the Administrators, the Administrators, and

         (iv)         the Holders of a Majority in liquidation amount of the Common Securities.

                   (b)         Notwithstanding any other provision of this Article XI, no amendment shall be made, and any such purported amendment shall be void and ineffective:

47

         (i)         unless the Institutional Trustee shall have first received

         (A)         an Officers' Certificate from each of the Trust and the Sponsor that such amendment is permitted by, and conforms to, the terms of this Declaration (including the terms of the Securities); and

         (B)         an opinion of counsel (who may be counsel to the Sponsor or the Trust) that such amendment is permitted by, and conforms to, the terms of this Declaration (including the terms of the Securities) and that all conditions precedent to the execution and delivery of such amendment have been satisfied; or

         (ii)         if the result of such amendment would be to

         (A)         cause the Trust to cease to be classified for purposes of United States federal income taxation as a grantor trust;

         (B)         reduce or otherwise adversely affect the powers of the Institutional Trustee in contravention of the Trust Indenture Act;

         (C)         cause the Trust to be deemed to be an Investment Company required to be registered under the Investment Company Act; or

         (D)         cause the Debenture Issuer to be unable to treat an amount equal to the liquidation amount of the Capital Securities as "Tier 1 Capital" (or its equivalent) for purposes of the capital adequacy guidelines of the Federal Reserve (or any successor regulatory authority with jurisdiction over bank holding companies).

                   (c)         Except as provided in Section 11.1(d), (e) or (g), no amendment shall be made, and any such purported amendment shall be void and ineffective, unless the Holders of a Majority in liquidation amount of the Capital Securities shall have consented to such amendment.

                   (d)         In addition to and notwithstanding any other provision in this Declaration, without the consent of each affected Holder, this Declaration may not be amended to (i) change the amount or timing of any Distribution on the Securities or any redemption or liquidation provisions applicable to the Securities or otherwise adversely affect the amount of any Distribution required to be made in respect of the Securities as of a specified date or (ii) restrict the right of a Holder to institute suit for the enforcement of any Distributions or other amounts on or after their due date.

                   (e)         Sections 9.1(b) and 9.1(c) and this Section shall not be amended without the consent of all of the Holders of the Securities.

                   (f)         The rights of the Holders of the Capital Securities and Common Securities, as applicable, under Article IV to increase or decrease the number of, and appoint

48

and remove, Trustees shall not be amended without the consent of the Holders of a Majority in liquidation amount of the Capital Securities or Common Securities, as applicable.

                   (g)         This Declaration may be amended by the Institutional Trustee and the Holder of the Common Securities without the consent of the Holders of the Capital Securities to:

         (i)         cure any ambiguity;

         (ii)         correct or supplement any provision in this Declaration that may be defective or inconsistent with any other provision of this Declaration;

         (iii)         add to the covenants, restrictions or obligations of the Sponsor; or

         (iv)         modify, eliminate or add to any provision of this Declaration to such extent as may be necessary or desirable, including, without limitation, to ensure that the Trust will be classified for United States federal income tax purposes at all times as a grantor trust and will not be required to register as an Investment Company under the Investment Company Act (including without limitation to conform to any change in Rule 3a-5, Rule 3a-7 or any other applicable rule under the Investment Company Act or written change in interpretation or application thereof by any legislative body, court, government agency or regulatory authority);

provided, however, that no such amendment contemplated in clause (i), (ii), (iii) or (iv) shall adversely affect the powers, preferences, rights or interests of Holders of Capital Securities.

                   Section 11.2.  Meetings of the Holders of the Securities; Action by Written Consent.

                   (a)         Meetings of the Holders of the Capital Securities or the Common Securities may be called at any time by the Administrators (or as provided in the terms of such Securities) to consider and act on any matter on which Holders of such Securities are entitled to act under the terms of this Declaration, the terms of such Securities or the rules of any stock exchange on which the Capital Securities are listed or admitted for trading, if any. The Administrators shall call a meeting of the Holders of such Securities if directed to do so by the Holders of not less than 10% in liquidation amount of such Securities. Such direction shall be given by delivering to the Administrators one or more notices in a writing stating that the signing Holders of such Securities wish to call a meeting and indicating the general or specific purpose for which the meeting is to be called. Any Holders of Securities calling a mee ting shall specify in writing the Certificates held by the Holders of the Securities exercising the right to call a meeting and only those Securities represented by such Certificates shall be counted for purposes of determining whether the required percentage set forth in the second sentence of this paragraph has been met.

                   (b)         Except to the extent otherwise provided in the terms of the Securities, the following provisions shall apply to meetings of Holders of the Securities:

49

         (i)         Notice of any such meeting shall be given to all the Holders of the Securities having a right to vote thereat at least 7 days and not more than 60 days before the date of such meeting. Whenever a vote, consent or approval of the Holders of the Securities is permitted or required under this Declaration or the rules of any stock exchange on which the Capital Securities are listed or admitted for trading, if any, such vote, consent or approval may be given at a meeting of the Holders of the Securities. Any action that may be taken at a meeting of the Holders of the Securities may be taken without a meeting if a consent in writing setting forth the action so taken is signed by the Holders of the Securities owning not less than the minimum liquidation amount of Securities that would be necessary to authorize or take such action at a meeting at which all Holders of the Securities having a right to vote thereon were present and voting. Pro mpt notice of the taking of action without a meeting shall be given to the Holders of the Securities entitled to vote who have not consented in writing. The Administrators may specify that any written ballot submitted to the Holders of the Securities for the purpose of taking any action without a meeting shall be returned to the Trust within the time specified by the Administrators.

         (ii)         Each Holder of a Security may authorize any Person to act for it by proxy on all matters in which a Holder of Securities is entitled to participate, including waiving notice of any meeting, or voting or participating at a meeting. No proxy shall be valid after the expiration of 11 months from the date thereof unless otherwise provided in the proxy. Every proxy shall be revocable at the pleasure of the Holder of the Securities executing it. Except as otherwise provided herein, all matters relating to the giving, voting or validity of proxies shall be governed by the General Corporation Law of the State of Delaware relating to proxies, and judicial interpretations thereunder, as if the Trust were a Delaware corporation and the Holders of the Securities were stockholders of a Delaware corporation. Each meeting of the Holders of the Securities shall be conducted by the Administrators or by such other Person that the Administrators may designate.

         (iii)         Unless the Statutory Trust Act, this Declaration, the terms of the Securities, the Trust Indenture Act or the listing rules of any stock exchange on which the Capital Securities are then listed or admitted for trading, if any, otherwise provides, the Administrators, in their sole discretion, shall establish all other provisions relating to meetings of Holders of Securities, including notice of the time, place or purpose of any meeting at which any matter is to be voted on by any Holders of the Securities, waiver of any such notice, action by consent without a meeting, the establishment of a record date, quorum requirements, voting in person or by proxy or any other matter with respect to the exercise of any such right to vote; provided, however, that each meeting shall be conducted in the United States (as that term is defined in Treasury Regulations § 301.7701-7).

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ARTICLE XII

REPRESENTATIONS OF INSTITUTIONAL TRUSTEE
AND DELAWARE TRUSTEE

                   Section 12.1.  Representations and Warranties of Institutional Trustee. The Trustee that acts as initial Institutional Trustee represents and warrants to the Trust and to the Sponsor at the date of this Declaration, and each Successor Institutional Trustee represents and warrants to the Trust and the Sponsor at the time of the Successor Institutional Trustee's acceptance of its appointment as Institutional Trustee, that:

                   (a)         the Institutional Trustee is a banking corporation or national association with trust powers, duly organized, validly existing and in good standing under the laws of the State of Delaware or the United States of America, respectively, with trust power and authority to execute and deliver, and to carry out and perform its obligations under the terms of, this Declaration;

                   (b)         the Institutional Trustee has a combined capital and surplus of at least fifty million U.S. dollars ($50,000,000);

                   (c)         the Institutional Trustee is not an Affiliate of the Sponsor, nor does the Institutional Trustee offer or provide credit or credit enhancement to the Trust;

                   (d)         the execution, delivery and performance by the Institutional Trustee of this Declaration has been duly authorized by all necessary action on the part of the Institutional Trustee, and this Declaration has been duly executed and delivered by the Institutional Trustee, and under Delaware law (excluding any securities laws) constitutes a legal, valid and binding obligation of the Institutional Trustee, enforceable against it in accordance with its terms, subject to applicable bankruptcy, reorganization, moratorium, insolvency and other similar laws affecting creditors' rights generally and to general principles of equity and the discretion of the court (regardless of whether considered in a proceeding in equity or at law);

                   (e)         the execution, delivery and performance of this Declaration by the Institutional Trustee does not conflict with or constitute a breach of the charter or by-laws of the Institutional Trustee; and

                   (f)         no consent, approval or authorization of, or registration with or notice to, any state or federal banking authority governing the trust powers of the Institutional Trustee is required for the execution, delivery or performance by the Institutional Trustee of this Declaration.

                   Section 12.2.  Representations and Warranties of Delaware Trustee. The Trustee that acts as initial Delaware Trustee represents and warrants to the Trust and to the Sponsor at the date of this Declaration, and each Successor Delaware Trustee represents and warrants to the Trust and the Sponsor at the time of the Successor Delaware Trustee's acceptance of its appointment as Delaware Trustee that:

                   (a)         if it is not a natural person, the Delaware Trustee is duly organized, validly existing and in good standing under the laws of the State of Delaware;

51

                   (b)         if it is not a natural person, the execution, delivery and performance by the Delaware Trustee of this Declaration has been duly authorized by all necessary corporate action on the part of the Delaware Trustee, and this Declaration has been duly executed and delivered by the Delaware Trustee, and under Delaware law (excluding any securities laws) constitutes a legal, valid and binding obligation of the Delaware Trustee, enforceable against it in accordance with its terms, subject to applicable bankruptcy, reorganization, moratorium, insolvency and other similar laws affecting creditors' rights generally and to general principles of equity and the discretion of the court (regardless of whether considered in a proceeding in equity or at law);

                   (c)         if it is not a natural person, the execution, delivery and performance of this Declaration by the Delaware Trustee does not conflict with or constitute a breach of the charter or by-laws of the Delaware Trustee;

                   (d)         it has trust power and authority to execute and deliver, and to carry out and perform its obligations under the terms of, this Declaration;

                   (e)         no consent, approval or authorization of, or registration with or notice to, any state or federal banking authority governing the trust powers of the Delaware Trustee is required for the execution, delivery or performance by the Delaware Trustee of this Declaration; and

                   (f)         the Delaware Trustee is a natural person who is a resident of the State of Delaware or, if not a natural person, it is an entity which has its principal place of business in the State of Delaware and, in either case, a Person that satisfies for the Trust the requirements of §3807 of the Statutory Trust Act.

ARTICLE XIII

MISCELLANEOUS

                   Section 13.1.  Notices. All notices provided for in this Declaration shall be in writing, duly signed by the party giving such notice, and shall be delivered, telecopied (which telecopy shall be followed by notice delivered or mailed by first class mail) or mailed by first class mail, as follows:

                   (a)         if given to the Trust, in care of the Administrators at the Trust's mailing address set forth below (or such other address as the Trust may give notice of to the Holders of the Securities): Southern Michigan Bancorp Capital Trust I, c/o Southern Michigan Bancorp, Inc., 51 West Pearl Street, Coldwater, Michigan 49036, Attention: Danice L. Chartrand, Telecopy: (517) 278-8469, Telephone: (517) 279-5500;

                   (b)         if given to the Delaware Trustee, at the mailing address set forth below (or such other address as the Delaware Trustee may give notice of to the Holders of the Securities): Wilmington Trust Company, Rodney Square North, 1100 North Market Street, Wilmington, DE 19890-0001, Attention: Corporate Trust Administration, Telecopy: 302-651-8882, Telephone: 302-651-1000;

                   (c)         if given to the Institutional Trustee, at the Institutional Trustee's mailing address set forth below (or such other address as the Institutional Trustee may give notice of to

52

the Holders of the Securities): Wilmington Trust Company, Rodney Square North, 1100 North Market Street, Wilmington, DE 19890-0001, Attention: Corporate Trust Administration, Telecopy: 302-651-8882, Telephone: 302-651-1000;

                   (d)         if given to the Holder of the Common Securities, at the mailing address of the Sponsor set forth below (or such other address as the Holder of the Common Securities may give notice of to the Trust): Southern Michigan Bancorp, Inc., 51 West Pearl Street, Coldwater, Michigan 49036, Attention: Danice L. Chartrand, Telecopy: (517) 278-8469, Telephone: (517) 279-5500; or

                   (e)         if given to any other Holder, at the address set forth on the books and records of the Trust.

All such notices shall be deemed to have been given when received in person, telecopied with receipt confirmed, or mailed by first class mail, postage prepaid, except that if a notice or other document is refused delivery or cannot be delivered because of a changed address of which no notice was given, such notice or other document shall be deemed to have been delivered on the date of such refusal or inability to deliver.

                   Section 13.2.  Governing Law. This Declaration and the rights and obligations of the parties hereunder shall be governed by and interpreted in accordance with the law of the State of Delaware and all rights, obligations and remedies shall be governed by such laws without regard to the principles of conflict of laws of the State of Delaware or any other jurisdiction that would call for the application of the law of any jurisdiction other than the State of Delaware.

                   Section 13.3.  Submission to Jurisdiction.

                   (a)         Each of the parties hereto agrees that any suit, action or proceeding arising out of or based upon this Declaration, or the transactions contemplated hereby, may be instituted in any of the courts of the State of New York and the United States District Courts, in each case located in the Borough of Manhattan, City and State of New York, and further agrees to submit to the jurisdiction of any competent court in the place of its corporate domicile in respect of actions brought against it as a defendant. In addition, each such party irrevocably waives, to the fullest extent permitted by law, any objection which it may now or hereafter have to the laying of the venue of such suit, action or proceeding brought in any such court and irrevocably waives any claim that any such suit, action or proceeding brought in any such court has been brought in an inconvenient forum and irrevocably waives any right to wh ich it may be entitled on account of its place of corporate domicile. Each such party hereby irrevocably waives any and all right to trial by jury in any legal proceeding arising out of or relating to this Declaration or the transactions contemplated hereby. Each such party agrees that final judgment in any proceedings brought in such a court shall be conclusive and binding upon it and may be enforced in any court to the jurisdiction of which it is subject by a suit upon such judgment.

                   (b)         Each of the Sponsor, the Trustees, the Administrators and the Holder of the Common Securities irrevocably consents to the service of process on it in any such suit,

53

action or proceeding by the mailing thereof by registered or certified mail, postage prepaid, to it at its address given in or pursuant to Section 13.1 hereof.

                   (c)         To the extent permitted by law, nothing herein contained shall preclude any party from effecting service of process in any lawful manner or from bringing any suit, action or proceeding in respect of this Declaration in any other state, country or place.

                   Section 13.4.  Intention of the Parties. It is the intention of the parties hereto that the Trust be classified for United States federal income tax purposes as a grantor trust. The provisions of this Declaration shall be interpreted to further this intention of the parties.

                   Section 13.5.  Headings. Headings contained in this Declaration are inserted for convenience of reference only and do not affect the interpretation of this Declaration or any provision hereof.

                   Section 13.6.  Successors and Assigns. Whenever in this Declaration any of the parties hereto is named or referred to, the successors and assigns of such party shall be deemed to be included, and all covenants and agreements in this Declaration by the Sponsor and the Trustees shall bind and inure to the benefit of their respective successors and assigns, whether or not so expressed.

                   Section 13.7.  Partial Enforceability. If any provision of this Declaration, or the application of such provision to any Person or circumstance, shall be held invalid, the remainder of this Declaration, or the application of such provision to persons or circumstances other than those to which it is held invalid, shall not be affected thereby.

                   Section 13.8.  Counterparts. This Declaration may contain more than one counterpart of the signature page and this Declaration may be executed by the affixing of the signature of each of the Trustees and Administrators to any of such counterpart signature pages. All of such counterpart signature pages shall be read as though one, and they shall have the same force and effect as though all of the signers had signed a single signature page.

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                   IN WITNESS WHEREOF, the undersigned have caused this Declaration to be duly executed as of the day and year first above written.

WILMINGTON TRUST COMPANY,     as Delaware Trustee
By:	/s/ Denise M. Geran
	Denise M. Geran Vice President

WILMINGTON TRUST COMPANY,
    as Institutional Trustee

By:	/s/ Denise M. Geran
	Denise M. Geran Vice President

SOUTHERN MICHIGAN BANCORP, INC.
    as Sponsor

By:	/s/ John H. Castle
	John H. Castle Chief Executive Officer

/s/ John H. Castle

John H. Castle
     as Administrator

/s/ Kurt G. Miller

Kurt G. Miller
     as Administrator

/s/ Danice L. Chartrand

Danice L. Chartrand
     as Administrator

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ANNEX I

TERMS OF
CAPITAL SECURITIES AND COMMON SECURITIES

                   Pursuant to Section 6.1 of the Amended and Restated Declaration of Trust, dated as of March 25, 2004 (as amended from time to time, the "Declaration"), the designation, rights, privileges, restrictions, preferences and other terms and provisions of the Capital Securities and the Common Securities (collectively, the "Securities") are set out below (each capitalized term used but not defined herein has the meaning set forth in the Declaration):

                   1.         Designation and Number.

                   (a)         Capital Securities. 5,000 Capital Securities of Southern Michigan Bancorp Capital Trust I (the "Trust"), with an aggregate liquidation amount with respect to the assets of the Trust of FIVE MILLION Dollars ($5,000,000) and a liquidation amount with respect to the assets of the Trust of $1,000 per Capital Security, are hereby designated for the purposes of identification only as the "MMCapS^SM" (the "Capital Securities"). The Capital Security Certificates evidencing the Capital Securities shall be substantially in the form of Exhibit A-1 to the Declaration, with such changes and additions thereto or deletions therefrom as may be required by ordinary usage, custom or practice or to conform to the rules of any stock exchange on which the Capital Securities are listed, if any.

                   (b)         Common Securities. 155 Common Securities of the Trust (the "Common Securities") will be evidenced by Common Security Certificates substantially in the form of Exhibit A-2 to the Declaration, with such changes and additions thereto or deletions therefrom as may be required by ordinary usage, custom or practice. In the absence of an Event of Default, the Common Securities will have an aggregate liquidation amount with respect to the assets of the Trust of ONE HUNDRED AND FIFTY-FIVE THOUSAND Dollars ($155,000) and a liquidation amount with respect to the assets of the Trust of $1,000 per Common Security.

                   2.         Distributions. (a)  Distributions payable on each Security will be payable at a floating rate of interest per annum, which, with respect to any Distribution Period (as defined herein), will be equal to LIBOR, as determined on the LIBOR Determination Date for such Distribution Period (or, in the case of the first Distribution Period, will be 1.11%), plus 2.75% (the "Coupon Rate"); provided, however, that the Coupon Rate for any Distribution Period may not exceed the Interest Rate (as defined in the Indenture) for the related Interest Period (as defined in the Indenture). Distributions in arrears for more than one Distribution Period will bear interest thereon, compounded quarterly, at the applicable Coupon Rate for each Distribution Period thereafter (to the extent permitted by applicable law). The term "Distributions", as used herein, includes cash Distributions, any such compounded Distributions and any Additional Amounts payable on the Debentures unless otherwise stated. A Distribution is payable only to the extent that payments are made in respect of the Debentures held by the Institutional Trustee and to the extent the Institutional Trustee has funds legally available in the Property Account therefor. The amount of Distributions payable for any Distribution Period will be computed on the basis of a 360-day year and the actual number of days elapsed in such Distribution Period.

A-I-1

                   The term "Distribution Period", as used herein, means (i) in the case of the first Distribution Period, the period from, and including, the date of original issuance of the Securities to, but excluding, the initial Distribution Payment Date and (ii) thereafter, from, and including, the first day following the end of the preceding Distribution Period to, but excluding, the applicable Distribution Payment Date or, in the case of the last Distribution Period, the related date of redemption.

                   (b)         LIBOR shall be determined by the Calculation Agent for each Distribution Period (other than the first Distribution Period, in which case LIBOR will be 1.11% per annum) in accordance with the following provisions:

         (1)         On the second LIBOR Business Day (provided, that on such day commercial banks are open for business (including dealings in foreign currency deposits) in London (a "LIBOR Banking Day"), and otherwise the next preceding LIBOR Business Day that is also a LIBOR Banking Day) prior to the January 15, April 15, July 15 or October 15, as the case may be, immediately succeeding the commencement of such Distribution Period (each such day, a "LIBOR Determination Date"), LIBOR shall equal the rate, as obtained by the Calculation Agent, for three-month U.S. Dollar deposits in Europe, which appears on Telerate (as defined in the International Swaps and Derivatives Association, Inc. 2000 Interest Rate and Currency Exchange Definitions) page 3750 or such other page as may replace such page 3750, as of 11:00 a.m. (London time) on such LIBOR Determination Date, as reported by Bloomberg Financial Markets Commodities N ews or any successor service ("Telerate Page 3750"). "LIBOR Business Day" means any day that is not a Saturday, Sunday or other day on which commercial banking institutions in The City of New York or Wilmington, Delaware are authorized or obligated by law or executive order to be closed. If such rate is superseded on Telerate Page 3750 by a corrected rate before 12:00 noon (London time) on such LIBOR Determination Date, the corrected rate as so substituted will be LIBOR for such LIBOR Determination Date.

         (2)         If, on such LIBOR Determination Date, such rate does not appear on Telerate Page 3750, the Calculation Agent shall determine the arithmetic mean of the offered quotations of the Reference Banks (as defined below) to leading banks in the London interbank market for three-month U.S. Dollar deposits in Europe (in an amount determined by the Calculation Agent) by reference to requests for quotations as of approximately 11:00 a.m. (London time) on such LIBOR Determination Date made by the Calculation Agent to the Reference Banks. If, on such LIBOR Determination Date, at least two of the Reference Banks provide such quotations, LIBOR shall equal the arithmetic mean of such quotations. If, on such LIBOR Determination Date, only one or none of the Reference Banks provide such a quotation, LIBOR shall be deemed to be the arithmetic mean of the offered quotations that at least two leading banks in The City of New York (as selected by the Calcu lation Agent) are quoting on such LIBOR Determination Date for three-month U.S. Dollar deposits in Europe at approximately 11:00 a.m. (London time) (in an amount determined by the

A-I-2

Calculation Agent). As used herein, "Reference Banks" means four major banks in the London interbank market selected by the Calculation Agent.

         (3)         If the Calculation Agent is required but is unable to determine a rate in accordance with at least one of the procedures provided above, LIBOR for such Distribution Period shall be LIBOR in effect for the immediately preceding Distribution Period.

                   (c)         All percentages resulting from any calculations on the Securities will be rounded, if necessary, to the nearest one hundred-thousandth of a percentage point, with five one-millionths of a percentage point rounded upward (e.g., 9.876545% (or .09876545) being rounded to 9.87655% (or .0987655)), and all dollar amounts used in or resulting from such calculation will be rounded to the nearest cent (with one-half cent being rounded upward).

                   (d)         On each LIBOR Determination Date, the Calculation Agent shall notify, in writing, the Sponsor and the Paying Agent of the applicable Coupon Rate that applies to the related Distribution Period. The Calculation Agent shall, upon the request of a Holder of any Securities, inform such Holder of the Coupon Rate that applies to the related Distribution Period. All calculations made by the Calculation Agent in the absence of manifest error shall be conclusive for all purposes and binding on the Sponsor and the Holders of the Securities. The Paying Agent shall be entitled to rely on information received from the Calculation Agent or the Sponsor as to the applicable Coupon Rate. The Sponsor shall, from time to time, provide any necessary information to the Paying Agent relating to any original issue discount and interest on the Securities that is included in any payment and reportable for taxable income c alculation purposes.

                   (e)         Distributions on the Securities will be cumulative, will accrue from the date of original issuance, and will be payable, subject to extension of Distribution Periods as described herein, quarterly in arrears on January 7, April 7, July 7 and October 7 of each year, commencing on July 7, 2004 (each, a "Distribution Payment Date"), and on any earlier date of redemption, as applicable. The Debenture Issuer has the right under the Indenture to defer payments of interest on the Debentures by extending the interest payment period for up to 20 consecutive quarterly periods (each such extended interest payment period, together with all previous and future consecutive extensions thereof, is referred to herein as an "Extension Period") at any time and from time to time on the Debentures, subject to the conditions described below and in the Indenture. No Extension P eriod may end on a date other than a Distribution Payment Date or extend beyond the Maturity Date, any Optional Redemption Date or the Special Redemption Date, as the case may be (each such term as defined herein). During any Extension Period, interest will continue to accrue on the Debentures, and interest on such accrued interest (such accrued interest and interest thereon referred to herein as "Deferred Interest") will accrue, at an annual rate equal to the Coupon Rate applicable during such Extension Period, compounded quarterly from the date such Deferred Interest would have been payable were it not for the Extension Period, to the extent permitted by applicable law. At the end of any Extension Period, the Debenture Issuer shall pay all Deferred Interest then accrued and unpaid on the Debentures; provided, however, that during any Extension Period, the Debenture Issuer may not (i) declare or pay any dividends or distributions on, or redeem, purchase, acquire, or make a liquidat ion payment with respect to, any of the Debenture Issuer's capital stock, (ii) make any

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payment of principal or premium or interest on or repay, repurchase or redeem any debt securities of the Debenture Issuer that rank in all respects pari passu with or junior in interest to the Debentures or (iii) make any payment under any guarantees of the Debenture Issuer that rank in all respects pari passu with or junior in interest to the Guarantee (other than (a) repurchases, redemptions or other acquisitions of shares of capital stock of the Debenture Issuer (A) in connection with any employment contract, benefit plan or other similar arrangement with or for the benefit of one or more employees, officers, directors or consultants, (B) in connection with a dividend reinvestment or stockholder stock purchase plan or (C) in connection with the issuance of capital stock of the Debenture Issuer (or securities convertible into or exercisable for such capital stock), as consideration in an acquisition transaction entered into prior to the applicable Extension Period, (b) as a result of any e xchange or conversion of any class or series of the Debenture Issuer's capital stock (or any capital stock of a subsidiary of the Debenture Issuer) for any class or series of the Debenture Issuer's capital stock or of any class or series of the Debenture Issuer's indebtedness for any class or series of the Debenture Issuer's capital stock, (c) the purchase of fractional interests in shares of the Debenture Issuer's capital stock pursuant to the conversion or exchange provisions of such capital stock or the security being converted or exchanged, (d) any declaration of a dividend in connection with any stockholder's rights plan, or the issuance of rights, stock or other property under any stockholder's rights plan, or the redemption or repurchase of rights pursuant thereto, or (e) any dividend in the form of stock, warrants, options or other rights where the dividend stock or the stock issuable upon exercise of such warrants, options or other rights is the same stock as that on which the dividend is being paid or ranks pari passu with or junior in interest to such stock). Prior to the termination of any Extension Period, the Debenture Issuer may further extend such Extension Period, provided, that no Extension Period (including all previous and further consecutive extensions that are part of such Extension Period) shall exceed 20 consecutive quarterly periods. Upon the termination of any Extension Period and upon the payment of all Deferred Interest, the Debenture Issuer may commence a new Extension Period, subject to the requirements herein and in the Indenture. No interest or Deferred Interest (except any Additional Amounts that may be due and payable) shall be due and payable during an Extension Period, except at the end thereof, but Deferred Interest shall accrue upon each installment of interest that would otherwise have been due and payable during such Extension Period until such installment is paid.

                   As a consequence of any Extension Period, Distributions will be deferred. Notwithstanding any such deferral, Distributions will continue to accrue on the Securities, and Distributions on such accrued Distributions will accrue, at the Coupon Rate applicable during such Extension Period, compounded quarterly, to the extent permitted by applicable law. If Distributions are deferred, the Distributions due shall be paid on the date that such Extension Period terminates to Holders of the Securities as they appear on the books and records of the Trust on the regular record date immediately preceding the Distribution Payment Date on which such Extension Period terminates to the extent that the Trust has funds legally available for the payment of such Distributions in the Property Account of the Trust.

                   The Trust's funds available for Distributions to the Holders of the Securities will be limited to payments received from the Debenture Issuer. The payment of Distributions out of moneys held by the Trust is guaranteed by the Guarantor pursuant to the Guarantee.

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                   (f)         Distributions on the Securities on any Distribution Payment Date will be payable to the Holders thereof as they appear on the books and records of the Registrar on the relevant regular record dates. The relevant "regular record dates" shall be 15 days before the relevant Distribution Payment Dates. Distributions payable on any Securities that are not punctually paid on any Distribution Payment Date, as a result of the Debenture Issuer having failed to make a payment under the Debentures, as the case may be, when due (taking into account any Extension Period), will cease to be payable to the Person in whose name such Securities are registered on the original relevant regular record date, and such defaulted Distributions will instead be payable to the Person in whose name such Securities are registered on the regular record date preceding the Distribution Payment Date on which the related Ex tension Period terminates or, in the absence of an Extension Period, a special record date therefor selected by the Administrators.

                   (g)         In the event that there is any money or other property held by or for the Trust that is not accounted for hereunder, such property shall be distributed Pro Rata (as defined herein) among the Holders of the Securities.

                   (h)         If any Distribution Payment Date other than any date of redemption falls on a day that is not a Business Day, then Distributions payable will be paid on, and such Distribution Payment Date will be moved to, the next succeeding Business Day, and additional Distributions will accrue for each day that such payment is delayed as a result thereof.

                   (3)         Liquidation Distribution Upon Dissolution. In the event of the voluntary or involuntary liquidation, dissolution, winding-up or termination of the Trust (each, a "Liquidation"), the Holders of the Securities will be entitled to receive out of the assets of the Trust legally available for distribution to Holders of the Securities, after satisfaction of liabilities to creditors of the Trust (to the extent not satisfied by the Debenture Issuer), an amount in cash equal to the aggregate of the liquidation amount of $1,000 per Security plus unpaid Distributions accrued thereon to the date of payment (collectively, the "Liquidation Distribution"), unless: (i) the Debentures have been redeemed in full in accordance with the terms thereof and of the Indenture; or (ii) the Debentures in an aggregate principal amount equal to the aggregate liquidation amount of such Securities and be aring accrued and unpaid interest in an amount equal to the accrued and unpaid Distributions on such Securities, after paying or making reasonable provision to pay all claims and obligations of the Trust in accordance with Section 3808(e) of the Statutory Trust Act, shall be distributed on a Pro Rata basis to the Holders of the Securities in exchange for such Securities.

                   The Sponsor, as the Holder of all of the Common Securities, has the right at any time, upon receipt by the Debenture Issuer and the Institutional Trustee for the benefit of the Trust of (i) an opinion of nationally recognized tax counsel that Holders will not recognize any gain or loss for United States Federal income tax purposes as a result of the distribution of Debentures, to dissolve the Trust (including, without limitation, upon the occurrence of a Tax Event, an Investment Company Event or a Capital Treatment Event, each as defined herein) and (ii) prior approval from the Board of Governors of the Federal Reserve System (the "Federal Reserve") (if then required under applicable capital guidelines or policies of the Federal Reserve) and, after satisfaction of liabilities to creditors of the Trust, cause the Debentures to be

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distributed to the Holders of the Securities on a Pro Rata basis in accordance with the aggregate liquidation amount thereof.

                   The Trust shall dissolve on the first to occur of (i) April 6, 2039, the expiration of the term of the Trust, (ii) a Bankruptcy Event with respect to the Sponsor, the Trust or the Debenture Issuer, (iii) (other than in connection with a merger, consolidation or similar transaction not prohibited by the Indenture, this Declaration or the Guarantee, as the case may be) the filing of a certificate of dissolution or its equivalent with respect to the Sponsor or upon the revocation of the charter of the Sponsor and the expiration of 90 days after the date of revocation without a reinstatement thereof, (iv) the distribution of all of the Debentures to the Holders of the Securities, upon exercise of the right of the Holders of all of the outstanding Common Securities to dissolve the Trust as described above, (v) the entry of a decree of a judicial dissolution of any Holder of the Common Securities, the Sponsor, the Trust or the Debenture I ssuer, (vi) when all of the Securities are then subject to redemption and the amounts necessary for redemption thereof shall have been paid to the Holders in accordance with the terms of the Securities or (vii) before the issuance of any Securities, with the consent of all of the Trustees and the Sponsor. As soon as practicable after the dissolution of the Trust and upon completion of the winding up of the Trust, the Trust shall terminate upon the filing of a certificate of cancellation with the Secretary of State of the State of Delaware.

                   Notwithstanding the foregoing, if a Liquidation of the Trust occurs as described in clause (i), (ii), (iii) or (v) in the immediately preceding paragraph, the Trust shall be liquidated by the Institutional Trustee of the Trust as expeditiously as such Trustee determines to be practical by distributing, after satisfaction of liabilities to creditors of the Trust (to the extent not satisfied by the Debenture Issuer) as provided by applicable law, to the Holders of the Securities, the Debentures on a Pro Rata basis, unless such distribution is determined by the Institutional Trustee not to be practical, in which event such Holders will be entitled to receive on a Pro Rata basis, out of the assets of the Trust legally available for distribution to the Holders of the Securities, after satisfaction of liabilities to creditors of the Trust (to the extent not satisfied by the Debenture Issuer), an amount in cash equal to the Liquidation Distribu tion. A Liquidation of the Trust pursuant to clause (iv) of the immediately preceding paragraph shall occur if the Institutional Trustee determines that such Liquidation is practical by distributing, after satisfaction of liabilities to creditors of the Trust (to the extent not satisfied by the Debenture Issuer), to the Holders of the Securities on a Pro Rata basis, the Debentures, and such distribution occurs.

                   If, upon any Liquidation of the Trust, the Liquidation Distribution can be paid only in part because the Trust has insufficient assets available to pay in full the aggregate Liquidation Distribution, then the amounts payable directly by the Trust on the Securities shall be paid to the Holders of the Securities on a Pro Rata basis, except that if an Event of Default has occurred and is continuing, then the Capital Securities shall have a preference over the Common Securities with regard to such amounts.

                   Upon any Liquidation of the Trust involving a distribution of the Debentures, if at the time of such Liquidation, the Capital Securities were rated by at least one nationally-recognized statistical rating organization, the Debenture Issuer will use its reasonable best efforts to obtain from at least one such or other rating organization a rating for the Debentures.

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                   After the date for any distribution of the Debentures upon any Liquidation of the Trust, (i) the Securities of the Trust will be deemed to be no longer outstanding, (ii) any certificates representing the Capital Securities will be deemed to represent undivided beneficial interests in such of the Debentures as have an aggregate principal amount equal to the aggregate liquidation amount of such Capital Securities and bearing accrued and unpaid interest equal to accrued and unpaid Distributions on such Capital Securities until such certificates are presented to the Debenture Issuer or its agent for transfer or reissuance (and until such certificates are so surrendered, no payments shall be made to Holders of Securities in respect of any payments due and payable under the Debentures) and (iii) all rights of Holders of Securities shall cease, except the right of such Holders to receive Debentures upon surrender of certificates representing su ch Securities.

                   4.         Redemption and Distribution.

                   (a)         The Debentures will mature on April 6, 2034 (the "Maturity Date") at an amount in cash equal to 100% of the principal amount thereof plus unpaid interest accrued thereon to such date (the "Maturity Redemption Price"). The Debentures may be redeemed by the Debenture Issuer, at its option, in whole or in part, on any Distribution Payment Date on or after April 7, 2009 (each, an "Optional Redemption Date"), at the Optional Redemption Price, upon not less than 30 nor more than 60 days' prior written notice to holders of such Debentures. In addition, upon the occurrence and continuation of a Tax Event, an Investment Company Event or a Capital Treatment Event, the Debentures may be redeemed by the Debenture Issuer, at its option, in whole but not in part, at any time within 90 days following the occurrence of such Tax Event, Investment Company Event or Capital Treat ment Event, as the case may be (the "Special Redemption Date"), at the Special Redemption Price, upon not less than 30 nor more than 60 days' prior written notice to holders of the Debentures so long as such Tax Event, Investment Company Event or Capital Treatment Event, as the case may be, is continuing. In each case, the right of the Debenture Issuer to redeem the Debentures prior to maturity is subject to the Debenture Issuer and the Trust having received prior approval from the Federal Reserve, if then required under applicable capital guidelines or policies of the Federal Reserve. Additional interest may also be payable by the Debenture Issuer in connection with such Tax Event, Investment Company Event or Capital Treatment Event as specified in Section 10.02 of the Indenture. Any such interest received by the Trust will be distributed promptly to Holders of the Securities on a Pro Rata basis.

                   "Tax Event" means the receipt by the Debenture Issuer and the Trust of an opinion of counsel experienced in such matters to the effect that, as a result of any amendment to or change (including any announced prospective change) in the laws or any regulations thereunder of the United States or any political subdivision or taxing authority thereof or therein, or as a result of any official administrative pronouncement (including any private letter ruling, technical advice memorandum, regulatory procedure, notice or announcement) (an "Administrative Action") or judicial decision interpreting or applying such laws or regulations, regardless of whether such Administrative Action or judicial decision is issued to or in connection with a proceeding involving the Debenture Issuer or the Trust and whether or not subject to review or appeal, which amendment, clarification, change, Administrative Action or decision is enacted, p romulgated or announced, in each case on or after the date of original issuance of the Debentures, there is more than an insubstantial risk that: (i) the Trust is, or will be

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within 90 days of the date of such opinion, subject to United States federal income tax with respect to income received or accrued on the Debentures; (ii) if the Debenture Issuer is organized and existing under the laws of the United States or any state thereof or the District of Columbia, interest payable by the Debenture Issuer on the Debentures is not, or within 90 days of the date of such opinion, will not be, deductible by the Debenture Issuer, in whole or in part, for United States federal income tax purposes; or (iii) the Trust is, or will be within 90 days of the date of such opinion, subject to or otherwise required to pay, or required to withhold from Distributions, more than a de minimis amount of other taxes (including withholding taxes), duties, assessments or other governmental charges.

                   "Investment Company Event" means the receipt by the Debenture Issuer and the Trust of an opinion of counsel experienced in such matters to the effect that, as a result of a change in law or regulation or written change in interpretation or application of law or regulation by any legislative body, court, governmental agency or regulatory authority, there is more than an insubstantial risk that the Trust is or, within 90 days of the date of such opinion will be, considered an Investment Company that is required to be registered under the Investment Company Act, which change becomes effective or would become effective, as the case may be, on or after the date of the original issuance of the Debentures.

                   "Capital Treatment Event" means, if the Debenture Issuer is organized and existing under the laws of the United States or any state thereof or the District of Columbia, the receipt by the Debenture Issuer and the Trust of an opinion of counsel experienced in such matters to the effect that, as a result of any amendment to, or change in, the laws, rules or regulations of the United States or any political subdivision thereof or therein, or as the result of any official or administrative pronouncement or action or decision interpreting or applying such laws, rules or regulations, which amendment or change is effective or which pronouncement, action or decision is announced on or after the date of original issuance of the Debentures, there is more than an insubstantial risk that the Debenture Issuer will not, within 90 days of the date of such opinion, be entitled to treat an amount equal to the aggregate liquidation amount of the Capital Securities as "Tier 1 Capital" (or the then equivalent thereof) for purposes of the capital adequacy guidelines of the Federal Reserve (or any successor regulatory authority with jurisdiction over bank holding companies), as then in effect and applicable to the Debenture Issuer; provided, however, that the distribution of the Debentures in connection with the Liquidation of the Trust by the Debenture Issuer shall not in and of itself constitute a Capital Treatment Event unless such Liquidation shall have occurred in connection with a Tax Event or an Investment Company Event.

                   "Optional Redemption Price" means an amount in cash equal to 100% of the principal amount of the Debentures being redeemed plus unpaid interest accrued on such Debentures to the related Optional Redemption Date.

                   "Special Event" means any of a Tax Event, an Investment Company Event or a Capital Treatment Event.

                   "Special Redemption Price" means, with respect to the redemption of the Debentures following a Special Event, an amount in cash equal to 103.525% of the principal amount of the Debentures to be redeemed prior to April 7, 2005 and thereafter equal to the

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percentage of the principal amount of the Debentures that is specified below for the Special Redemption Date plus, in each case, unpaid interest accrued thereon to the Special Redemption Date:

Special Redemption During the 12-Month Period Beginning April 7,	Percentage of Principal Amount
2005	103.140%
2006	102.355%
2007	101.570%
2008	100.785%
2009 and thereafter	100.000%

                   (b)         Upon any repayment of the Debentures at maturity or in whole or in part upon redemption (other than following the distribution of the Debentures to the Holders of the Securities), the proceeds from such repayment shall concurrently be applied to redeem Pro Rata, at a redemption price corresponding to the applicable Maturity Redemption Price, Optional Redemption Price or Special Redemption Price for the Debentures, as the case may be, Securities having an aggregate liquidation amount equal to the aggregate principal amount of the Debentures so repaid; provided, however, that Holders of such Securities shall be given not less than 30 nor more than 60 days' prior written notice of such redemption (other than a redemption resulting from the maturity of the Debentures on the Maturity Date).

                   (c)         If fewer than all the outstanding Securities are to be so redeemed, the Common Securities and the Capital Securities will be redeemed Pro Rata and the Capital Securities to be redeemed will be as described in Section 4(e)(ii) below.

                   (d)         The Trust may not redeem fewer than all the outstanding Capital Securities unless all accrued and unpaid Distributions have been paid on all Capital Securities for all Distribution Periods terminating on or before the related date of redemption.

                   (e)         Redemption or Distribution Procedures.

                   (i)         Written notice of any redemption of, or written notice of distribution of the Debentures in exchange for, the Securities (a "Redemption/Distribution Notice") will be given by the Trust by mail to each Holder of Securities to be redeemed or exchanged not fewer than 30 nor more than 60 days before the date of redemption or exchange thereof which, in the case of a redemption, will be the date of redemption of the Debentures. For purposes of the calculation of the date of redemption or exchange and the dates on which notices are given pursuant to this Section 4(e)(i), a Redemption/Distribution Notice shall be deemed to be given on the day such notice is first mailed by first-class mail, postage prepaid, to Holders of such Securities. Each Redemption/Distribution Notice shall be addressed to the Holders of such Securities

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at the address of each such Holder appearing on the books and records of the Registrar. No defect in the Redemption/Distribution Notice or in the mailing thereof with respect to any Holder shall affect the validity of the redemption or exchange proceedings with respect to any other Holder.

                   (ii)         In the event that fewer than all the outstanding Capital Securities are to be redeemed, the Capital Securities to be redeemed shall be redeemed Pro Rata from each Holder.

                   (iii)         If the Securities are to be redeemed and the Trust gives a Redemption/Distribution Notice, which notice may only be issued if the Debentures are redeemed or repaid as set out in this Section (which notice will be irrevocable), then, provided, that the Institutional Trustee has a sufficient amount of cash in connection with the related redemption or maturity of the Debentures, the Institutional Trustee will pay the price payable upon redemption of the Securities to the Holders of such Securities by check mailed to the address of each such Holder appearing on the books and records of the Trust on the related date of redemption. If a Redemption/Distribution Notice shall have been given and funds deposited as required, then immediately prior to the close of business on the date of such deposit, Distributions will cease to accrue on the Securities so subject to redemption and all rights of Holder s of such Securities so subject to redemption will cease, except the right of the Holders of such Securities to receive the applicable price specified in Section 4(a), but without interest on such price. If any date of redemption of the Securities falls on a day that is not a Business Day, then payment of all amounts payable on such date will be made on the next succeeding Business Day, and no additional Distributions will accrue in respect of such payment on such next succeeding Business Day. If any amount payable upon redemption of the Securities is improperly withheld or refused and not paid either by the Trust, the Debenture Issuer or the Sponsor as guarantor pursuant to the Guarantee, Distributions on such Securities will continue to accrue at the Coupon Rate applicable from the date of redemption to the actual date of payment, in which case the actual payment date will be considered the date of redemption for purposes of calculating the price payable upon redemption of the Securities. In the event of any redemption of the Capital Securities issued by the Trust in part, the Trust shall not be required to (i) issue, register the transfer of or exchange any Security during a period beginning at the opening of business 15 days before any selection for redemption of the Capital Securities and ending at the close of business on the earliest date on which the relevant notice of redemption is deemed to have been given to all Holders of the Capital Securities to be so redeemed or (ii) register the transfer of or exchange any Capital Securities so selected for redemption, in whole or in part, except for the unredeemed portion of any Capital Securities being redeemed in part.

                   (iv)         Redemption/Distribution Notices shall be sent by the Administrators on behalf of the Trust (A) in respect of the Capital Securities, to the Holders thereof, and (B) in respect of the Common Securities, to the Holder thereof.

                   (v)         Subject to the foregoing and applicable law (including, without limitation, United States federal securities laws), and provided, that the acquiror is not the Holder of the Common Securities or the obligor under the Indenture, the Sponsor or any

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of its subsidiaries may at any time and from time to time purchase outstanding Capital Securities by tender, in the open market or by private agreement.

                   5.         Voting Rights - Capital Securities. (a)  Except as provided under Sections 5(b) and 7 and as otherwise required by law and the Declaration, the Holders of the Capital Securities will have no voting rights. The Administrators are required to call a meeting of the Holders of the Capital Securities if directed to do so by Holders of not less than 10% in liquidation amount of the Capital Securities.

                   (b)         Subject to the requirements of obtaining a tax opinion by the Institutional Trustee in certain circumstances set forth in the last sentence of this paragraph, the Holders of a Majority in liquidation amount of the Capital Securities, voting separately as a class, have the right to direct the time, method, and place of conducting any proceeding for any remedy available to the Institutional Trustee, or exercising any trust or power conferred upon the Institutional Trustee under the Declaration, including (i) directing the time, method, place of conducting any proceeding for any remedy available to the Debenture Trustee, or exercising any trust or power conferred on the Debenture Trustee with respect to the Debentures, (ii) waiving any past default and its consequences that are waivable under the Indenture, (iii) exercising any right to rescind or annul an acceleration of the principal of all the De bentures or (iv) consenting on behalf of all the Holders of the Capital Securities to any amendment, modification or termination of the Indenture or the Debentures where such consent shall be required; provided, however, that, where a consent or action under the Indenture would require the consent or act of the holders of greater than a simple majority in principal amount of Debentures (a "Super Majority") affected thereby, the Institutional Trustee may only give such consent or take such action at the written direction of the Holders of not less than the proportion in liquidation amount of the Capital Securities outstanding which the relevant Super Majority represents of the aggregate principal amount of the Debentures outstanding. If the Institutional Trustee fails to enforce its rights under the Debentures after the Holders of a Majority or Super Majority, as the case may be, in liquidation amount of such Capital Securities have so directed the Institutional Trustee, to the fulles t extent permitted by law, a Holder of the Capital Securities may institute a legal proceeding directly against the Debenture Issuer to enforce the Institutional Trustee's rights under the Debentures without first instituting any legal proceeding against the Institutional Trustee or any other person or entity. Notwithstanding the foregoing, if an Event of Default has occurred and is continuing and such event is attributable to the failure of the Debenture Issuer to pay interest or premium, if any, on or principal of the Debentures on the date such interest, premium, if any, or principal is payable (or in the case of redemption, the date of redemption), then a Holder of the Capital Securities may directly institute a proceeding for enforcement of payment, on or after the respective due dates specified in the Debentures, to such Holder directly of the principal of or premium, if any, or interest on the Debentures having an aggregate principal amount equal to the aggregate liquidation amount of the Capital Sec urities of such Holder. The Institutional Trustee shall notify all Holders of the Capital Securities of any default actually known to the Institutional Trustee with respect to the Debentures unless (x) such default has been cured prior to the giving of such notice or (y) the Institutional Trustee determines in good faith that the withholding of such notice is in the interest of the Holders of such Capital Securities, except where the default relates to the payment of principal of or interest on any of the Debentures. Such notice shall state that such Indenture Event of Default also constitutes an Event of Default hereunder. Except with respect to directing the time, method and place of

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conducting a proceeding for a remedy, the Institutional Trustee shall not take any of the actions described in clause (i), (ii), (iii) or (iv) above unless the Institutional Trustee has obtained an opinion of tax counsel to the effect that, as a result of such action, the Trust will not be classified as other than a grantor trust for United States federal income tax purposes.

                   A waiver of an Indenture Event of Default will constitute a waiver of the corresponding Event of Default hereunder. Any required approval or direction of Holders of the Capital Securities may be given at a separate meeting of Holders of the Capital Securities convened for such purpose, at a meeting of all of the Holders of the Securities in the Trust or pursuant to written consent. The Institutional Trustee will cause a notice of any meeting at which Holders of the Capital Securities are entitled to vote, or of any matter upon which action by written consent of such Holders is to be taken, to be mailed to each Holder of the Capital Securities. Each such notice will include a statement setting forth the following information (i) the date of such meeting or the date by which such action is to be taken, (ii) a description of any resolution proposed for adoption at such meeting on which such Holders are entitled to vote or of such matter upon which written consent is sought and (iii) instructions for the delivery of proxies or consents. No vote or consent of the Holders of the Capital Securities will be required for the Trust to redeem and cancel Capital Securities or to distribute the Debentures in accordance with the Declaration and the terms of the Securities.

                   Notwithstanding that Holders of the Capital Securities are entitled to vote or consent under any of the circumstances described above, any of the Capital Securities that are owned by the Sponsor or any Affiliate of the Sponsor shall not entitle the Holder thereof to vote or consent and shall, for purposes of such vote or consent, be treated as if such Capital Securities were not outstanding.

                   In no event will Holders of the Capital Securities have the right to vote to appoint, remove or replace the Administrators, which voting rights are vested exclusively in the Sponsor as the Holder of all of the Common Securities of the Trust. Under certain circumstances as more fully described in the Declaration, Holders of Capital Securities have the right to vote to appoint, remove or replace the Institutional Trustee and the Delaware Trustee.

                   6.         Voting Rights - Common Securities. (a)  Except as provided under Sections 6(b), 6(c) and 7 and as otherwise required by law and the Declaration, the Common Securities will have no voting rights.

                   (b)         The Holder of the Common Securities is entitled, in accordance with Article IV of the Declaration, to vote to appoint, remove or replace any Administrators.

                   (c)         Subject to Section 6.7 of the Declaration and only after each Event of Default (if any) with respect to the Capital Securities has been cured, waived or otherwise eliminated and subject to the requirements of the second to last sentence of this paragraph, the Holder of the Common Securities, voting separately as a class, may direct the time, method, and place of conducting any proceeding for any remedy available to the Institutional Trustee, or exercising any trust or power conferred upon the Institutional Trustee under the Declaration, including (i) directing the time, method, place of conducting any proceeding for any remedy available to the Debenture Trustee, or exercising any trust or power conferred on the Debenture

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Trustee with respect to the Debentures, (ii) waiving any past default and its consequences that are waivable under the Indenture, or (iii) exercising any right to rescind or annul an acceleration of the principal of all the Debentures. Notwithstanding this Section 6(c), the Institutional Trustee shall not revoke any action previously authorized or approved by a vote or consent of the Holders of the Capital Securities. Other than with respect to directing the time, method and place of conducting any proceeding for any remedy available to the Institutional Trustee or the Debenture Trustee as set forth above, the Institutional Trustee shall not take any action described in clause (i), (ii) or (iii) above, unless the Institutional Trustee has obtained an opinion of tax counsel to the effect that for the purposes of United States federal income tax the Trust will not be classified as other than a grantor trust on account of such action. If the Institutional Trustee fails to enforce its rights under the Decl aration, to the fullest extent permitted by law, the Holder of the Common Securities may institute a legal proceeding directly against any Person to enforce the Institutional Trustee's rights under the Declaration, without first instituting a legal proceeding against the Institutional Trustee or any other Person.

                   Any approval or direction of the Holder of the Common Securities may be given at a separate meeting of Holders of the Common Securities convened for such purpose, at a meeting of all of the Holders of the Securities in the Trust or pursuant to written consent. The Administrators will cause a notice of any meeting at which the Holder of the Common Securities is entitled to vote, or of any matter upon which action by written consent of such Holder is to be taken, to be mailed to the Holder of the Common Securities. Each such notice will include a statement setting forth (i) the date of such meeting or the date by which such action is to be taken, (ii) a description of any resolution proposed for adoption at such meeting on which such Holder is entitled to vote or of such matter upon which written consent is sought and (iii) instructions for the delivery of proxies or consents.

                   No vote or consent of the Holder of the Common Securities will be required for the Trust to redeem and cancel Common Securities or to distribute the Debentures in accordance with the Declaration and the terms of the Securities.

                   7.         Amendments to Declaration and Indenture. In addition to any requirements under Section 11.1 of the Declaration, if any proposed amendment to the Declaration provides for, or the Trustees otherwise propose to effect, (i) any action that would adversely affect the powers, preferences or special rights of the Securities, whether by way of amendment to the Declaration or otherwise, or (ii) the Liquidation of the Trust, other than as described in Section 7.1 of the Declaration, then the Holders of outstanding Securities, voting together as a single class, will be entitled to vote on such amendment or proposal and such amendment or proposal shall not be effective except with the approval of the Holders of a Majority in liquidation amount of the Securities affected thereby; provided, however, if any amendment or proposal referred to in clause (i) above would adversely affect only the Cap ital Securities or only the Common Securities, then only Holders of the affected Securities will be entitled to vote on such amendment or proposal and such amendment or proposal shall not be effective except with the approval of the Holders of a Majority in liquidation amount of such Securities.

                   (a)         In the event the consent of the Institutional Trustee, as the holder of the Debentures, is required under the Indenture with respect to any amendment, modification or

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termination of the Indenture or the Debentures, the Institutional Trustee shall request the written direction of the Holders of the Securities with respect to such amendment, modification or termination and shall vote with respect to such amendment, modification, or termination as directed by a Majority in liquidation amount of the Securities voting together as a single class; provided, however, that where a consent under the Indenture would require a Super Majority, the Institutional Trustee may only give such consent at the written direction of the Holders of not less than the proportion in liquidation amount of the Securities which the relevant Super Majority represents of the aggregate principal amount of the Debentures outstanding.

                   (b)         Notwithstanding the foregoing, no amendment or modification may be made to the Declaration if such amendment or modification would (i) cause the Trust to be classified for purposes of United States federal income taxation as other than a grantor trust, (ii) reduce or otherwise adversely affect the powers of the Institutional Trustee or (iii) cause the Trust to be deemed an Investment Company which is required to be registered under the Investment Company Act.

                   (c)         Notwithstanding any provision of the Declaration, the right of any Holder of the Capital Securities to receive payment of Distributions and payments upon redemption, Liquidation or otherwise, on or after their respective due dates, or to institute a suit for the enforcement of any such payment on or after such respective dates, shall not be impaired or affected without the consent of such Holder. For the protection and enforcement of the foregoing provision, each and every Holder of the Capital Securities shall be entitled to such relief as can be given either at law or equity.

                   8.         Pro Rata. A reference in these terms of the Securities to any payment, distribution or treatment as being "Pro Rata" shall mean pro rata to each Holder of the Securities according to the aggregate liquidation amount of the Securities held by the relevant Holder in relation to the aggregate liquidation amount of all Securities outstanding unless, in relation to a payment, an Event of Default has occurred and is continuing, in which case any funds available to make such payment shall be paid first to each Holder of the Capital Securities Pro Rata according to the aggregate liquidation amount of the Capital Securities held by the relevant Holder relative to the aggregate liquidation amount of all Capital Securities outstanding, and only after satisfaction of all amounts owed to the Holders of the Capital Securities, to each Holder of the Common Securities Pro Rata according to the aggreg ate liquidation amount of the Common Securities held by the relevant Holder relative to the aggregate liquidation amount of all Common Securities outstanding.

                   9.         Ranking. The Capital Securities rank pari passu with, and payment thereon shall be made Pro Rata with, the Common Securities except that, where an Event of Default has occurred and is continuing, the rights of Holders of the Common Securities to receive payment of Distributions and payments upon Liquidation, redemption and otherwise are subordinated to the rights of the Holders of the Capital Securities with the result that no payment of any Distribution on, or any amount payable upon the redemption of, any Common Security, and no payment to the Holder of any Common Security on account of the Liquidation of the Trust, shall be made unless payment in full in cash of (i) all accrued and unpaid Distributions on all outstanding Capital Securities for all Distribution Periods terminating on or prior thereto, (ii) all amounts payable upon Capital Securities then subject to redemption and (iii) all amounts

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payable upon Capital Securities in the event of the Liquidation of the Trust, in each case, shall have been made or provided for, and all funds immediately available to the Institutional Trustee shall first be applied to the payment in full in cash of the amounts specified in clause (i), (ii) and (iii) above that are then due and payable.

                   10.         Acceptance of Guarantee and Indenture. Each Holder of the Capital Securities and the Common Securities, by the acceptance of such Securities, agrees to the provisions of the Guarantee and the Indenture, including the subordination provisions therein.

                   11.         No Preemptive Rights. The Holders of the Securities shall have no, and the issuance of the Securities is not subject to, preemptive or similar rights to subscribe for any additional securities.

                   12.         Miscellaneous. These terms constitute a part of the Declaration. The Sponsor will provide a copy of the Declaration, the Guarantee and the Indenture to a Holder without charge on written request to the Sponsor at its principal place of business.

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EXHIBIT A-1

FORM OF CAPITAL SECURITY CERTIFICATE

[FORM OF FACE OF SECURITY]

                   THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS OR ANY OTHER APPLICABLE SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. THE HOLDER OF THIS SECURITY OR ANY INTEREST OR PARTICIPATION HEREIN, BY ITS ACCEPTANCE HEREOF OR THEREOF, AS THE CASE MAY BE, AGREES TO OFFER, SELL OR OTHERWISE TRANSFER SUCH SECURITY OR ANY INTEREST OR PARTICIPATION HEREIN PRIOR TO THE DATE WHICH IS THE LATER OF (i) TWO YEARS (OR SUCH SHORTER PERIOD OF TIME AS PERMITTED BY RULE 144(k) UNDER THE SECURITIES ACT) AFTER THE LATER OF (Y) THE DATE OF ORIGINAL ISSUANCE HEREOF AND (Z) THE LAST DATE ON WHICH THE TRUST OR ANY AFFILIATE (AS DEFINED IN RULE 405 UNDER THE SECURITIES ACT) OF THE TRUST WAS THE HOLDER OF THIS SECURITY OR SUCH INTEREST OR PARTICIPATION (OR ANY PREDECESSOR THERETO) AND (ii) SUCH LATER DATE, IF ANY, AS MAY BE REQUIRED BY ANY SUBSEQUENT CHANGE IN APPLICABLE LAW, ONLY (A) TO THE DEBENTURE ISSUER OR THE TRUST, (B) PURSUANT TO RULE 144A UNDER THE SECURITIES ACT ("RULE 144A"), TO A PERSON THE HOLDER REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER," AS DEFINED IN RULE 144A, THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (C) PURSUANT TO AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT TO AN "ACCREDITED INVESTOR" WITHIN THE MEANING OF SUBPARAGRAPH (a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TRUST, A COPY OF WHICH MAY BE OBTAINED FROM THE DEBENTURE ISSUER OR THE TRUST. THE HOLDER OF THIS SECURITY OR ANY INTEREST OR PARTICIPATION HEREIN, BY ITS ACCEPTANCE HEREOF OR THEREOF, AS THE CASE MAY BE, AGREES THAT IT WILL COMPLY WITH THE FOREGOING RESTRICTIONS.

                   THE HOLDER OF THIS SECURITY OR ANY INTEREST OR PARTICIPATION HEREIN, BY ITS ACCEPTANCE HEREOF OR THEREOF, AS THE CASE MAY BE, ALSO AGREES, REPRESENTS AND WARRANTS THAT IT IS NOT AN EMPLOYEE BENEFIT, INDIVIDUAL RETIREMENT ACCOUNT OR OTHER PLAN OR ARRANGEMENT SUBJECT TO TITLE I OF THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED ("ERISA"), OR SECTION 4975 OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE "CODE") (EACH A "PLAN"), OR AN ENTITY WHOSE UNDERLYING ASSETS INCLUDE "PLAN ASSETS" BY REASON OF ANY PLAN'S INVESTMENT IN THE ENTITY AND NO PERSON INVESTING "PLAN ASSETS" OF ANY PLAN MAY ACQUIRE OR HOLD THIS SECURITY OR ANY INTEREST OR PARTICIPATION HEREIN, UNLESS SUCH PURCHASER OR HOLDER IS ELIGIBLE FOR THE EXEMPTIVE RELIEF AVAILABLE UNDER U.S. DEPARTMENT OF LABOR PROHIBITED TRANSACTION CLASS EXEMPTION 96-23, 95-60, 91-38, 90-1 OR 84-14 OR ANOTHER APPLICABLE EXEMPTION OR ITS PURCHASE AND HOLDING OF THIS SECURITY OR SUCH INTEREST OR PARTICIPATION IS NOT PROHIBITED BY SECTION 406 OF ERISA OR SECTION 4975 OF THE CODE WITH RESPECT TO SUCH PURCHASE OR HOLDING. ANY PURCHASER OR HOLDER OF THIS SECURITY OR ANY INTEREST OR PARTICIPATION HEREIN WILL BE DEEMED TO HAVE REPRESENTED BY ITS PURCHASE AND HOLDING HEREOF OR THEREOF, AS THE CASE MAY BE, THAT EITHER (i) IT IS NOT AN EMPLOYEE BENEFIT PLAN WITHIN THE MEANING OF SECTION 3(3) OF ERISA, OR A PLAN TO WHICH SECTION 4975 OF THE CODE IS APPLICABLE, A TRUSTEE OR OTHER PERSON ACTING ON BEHALF OF AN EMPLOYEE BENEFIT PLAN OR PLAN, OR ANY OTHER PERSON OR ENTITY USING THE ASSETS OF ANY EMPLOYEE BENEFIT PLAN OR PLAN TO FINANCE SUCH PURCHASE, OR (ii) SUCH PURCHASE AND HOLDING WILL NOT RESULT IN A PROHIBITED TRANSACTION UNDER SECTION 406 OF ERISA OR SECTION 4975 OF THE CODE FOR WHICH THERE IS NO APPLICABLE STATUTORY OR ADMINISTRATIVE EXEMPTION.

                   IN CONNECTION WITH ANY TRANSFER, THE HOLDER OF THIS SECURITY WILL DELIVER TO THE REGISTRAR AND TRANSFER AGENT SUCH CERTIFICATES AND OTHER INFORMATION AS MAY BE REQUIRED BY THE AMENDED AND RESTATED DECLARATION OF TRUST TO CONFIRM THAT THE TRANSFER COMPLIES WITH THE FOREGOING RESTRICTIONS.

                   THIS SECURITY WILL BE ISSUED AND MAY BE TRANSFERRED ONLY IN BLOCKS HAVING A LIQUIDATION AMOUNT OF NOT LESS THAN $100,000 AND MULTIPLES OF $1,000 IN EXCESS THEREOF. ANY ATTEMPTED TRANSFER OF THIS SECURITY IN A BLOCK HAVING A LIQUIDATION AMOUNT OF LESS THAN $100,000 SHALL BE DEEMED TO BE VOID AND OF NO LEGAL EFFECT WHATSOEVER. ANY

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SUCH PURPORTED TRANSFEREE SHALL BE DEEMED NOT TO BE THE HOLDER OF THIS SECURITY OR ANY INTEREST OR PARTICIPATION HEREIN FOR ANY PURPOSE, INCLUDING, BUT NOT LIMITED TO, THE RECEIPT OF DISTRIBUTIONS ON THIS SECURITY OR SUCH INTEREST OR PARTICIPATION, AND SUCH PURPORTED TRANSFEREE SHALL BE DEEMED TO HAVE NO INTEREST WHATSOEVER IN THIS SECURITY OR ANY INTEREST OR PARTICIPATION HEREIN.

                   THIS SECURITY DOES NOT EVIDENCE A DEPOSIT AND IS NOT INSURED BY THE UNITED STATES OR ANY AGENCY OR FUND OF THE UNITED STATES, INCLUDING THE FEDERAL DEPOSIT INSURANCE CORPORATION (THE "FDIC").

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Certificate Number         P-1 Number of Capital Securities [           ]

CUSIP NO [       ]

Certificate Evidencing Capital Securities

of

SOUTHERN MICHIGAN BANCORP CAPITAL TRUST I

Capital Securities

(liquidation amount $1,000 per Capital Security)

                   Southern Michigan Bancorp Capital Trust I, a statutory trust created under the laws of the State of Delaware (the "Trust"), hereby certifies that [                                         ] is the registered owner (the "Holder") of [     ] capital securities of the Trust representing undivided beneficial interests in the assets of the Trust, designated as MMCapS^SM (liquidation amount $1,000 per Capital Security) (the "Capital Securities"). Subject to the Declaration (as defined below), the Capital Securities are transferable on the books and records of the Trust, in person or by a duly authorized attorney, upon surrender of this Certificate duly endorsed and in proper fo rm for transfer. The Capital Securities represented hereby are issued pursuant to, and the designation, rights, privileges, restrictions, preferences and other terms and provisions of the Capital Securities shall in all respects be subject to, the provisions of the Amended and Restated Declaration of Trust of the Trust, dated as of March 25, 2004, among John H. Castle, Kurt G. Miller and Danice L. Chartrand, as Administrators, Wilmington Trust Company, as Delaware Trustee, Wilmington Trust Company, as Institutional Trustee, Southern Michigan Bancorp, Inc., as Sponsor, and the holders from time to time of undivided beneficial interests in the assets of the Trust, including the designation of the terms of the Capital Securities as set forth in Annex I to the Declaration, as the same may be amended from time to time (the "Declaration"). Capitalized terms used herein but not defined shall have the meaning given them in the Declaration. The Holder is entitled to the benefits of the Guarantee and the I ndenture to the extent provided therein. The Sponsor will provide a copy of the Declaration, the Guarantee, and the Indenture to the Holder without charge upon written request to the Sponsor at its principal place of business.

                   By acceptance of this Certificate, the Holder is bound by the Declaration and is entitled to the benefits thereunder.

                   By acceptance of this Certificate, the Holder agrees to treat, for United States federal income tax purposes, the Debentures as indebtedness and the Capital Securities as evidence of undivided beneficial ownership in the Debentures.

                   This Certificate and the Capital Securities evidenced hereby are governed by, and shall be construed in accordance with, the laws of the State of Delaware, without regard to principles of conflict of laws.

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                   IN WITNESS WHEREOF, the Trust has duly executed this Certificate.

SOUTHERN MICHIGAN BANCORP      CAPITAL TRUST I
By:
	Name: Title: Administrator

Dated:

CERTIFICATE OF AUTHENTICATION

                   This Certificate represents Capital Securities referred to in the within-mentioned Declaration.

WILMINGTON TRUST COMPANY, not in its individual capacity but solely as the Institutional Trustee
By:
	Authorized Officer

Dated:

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[FORM OF REVERSE OF SECURITY]

                   Distributions payable on each Capital Security will be payable at a floating rate of interest per annum, which, with respect to any Distribution Period (as defined herein), will be equal to LIBOR, as determined on the LIBOR Determination Date for such Distribution Period (or, in the case of the first Distribution Period, will be 1.11%), plus 2.75% (the "Coupon Rate"); provided, however, that the Coupon Rate for any Distribution Period may not exceed the Interest Rate (as defined in the Indenture) for the related Interest Period (as defined in the Indenture). Distributions in arrears for more than one Distribution Period will bear interest thereon, compounded quarterly, at the applicable Coupon Rate for each Distribution Period thereafter (to the extent permitted by applicable law). The term "Distributions", as used herein, includes cash Distributions, any such compounded Distributions and any Additiona l Amounts payable on the Debentures, unless otherwise stated. A Distribution is payable only to the extent that payments are made in respect of the Debentures held by the Institutional Trustee and to the extent the Institutional Trustee has funds legally available in the Property Account therefor. The amount of Distributions payable for any Distribution Period will be computed on the basis of a 360-day year and the actual number of days elapsed in such Distribution Period.

                   Except as otherwise described below, Distributions on the Capital Securities will be cumulative, will accrue from the date of original issuance and will be payable quarterly in arrears on January 7, April 7, July 7 and October 7 of each year, commencing on July 7, 2004 (each, a "Distribution Payment Date"), and on any earlier date of redemption, subject, in each case, to the Business Day convention specified in the Declaration. The Debenture Issuer has the right under the Indenture to defer payments of interest on the Debentures by extending the interest payment period for up to 20 consecutive quarterly periods (each such extended interest payment period, together with all previous and future consecutive extensions thereof, is referred to herein as an "Extension Period") at any time and from time to time on the Debentures, subject to the conditions described below and in the Declaration and t he Indenture. No Extension Period may end on a date other than a Distribution Payment Date or extend beyond the Maturity Date, any Optional Redemption Date or the Special Redemption Date, as the case may be. During any Extension Period, interest will continue to accrue on the Debentures, and interest on such accrued interest (such accrued interest and interest thereon referred to herein as "Deferred Interest") will accrue, at an annual rate equal to the Coupon Rate applicable during such Extension Period, compounded quarterly from the date such Deferred Interest would have been payable were it not for the Extension Period, to the extent permitted by applicable law. At the end of any Extension Period, the Debenture Issuer shall pay all Deferred Interest then accrued and unpaid on the Debentures; provided, however, that prior to the termination of any Extension Period, the Debenture Issuer may further extend such Extension Period, provided, that no Extension Period (including all previous and further consecutive extensions that are part of such Extension Period) shall exceed 20 consecutive quarterly periods. Upon the termination of any Extension Period and upon the payment of all Deferred Interest, the Debenture Issuer may commence a new Extension Period, subject to the requirements set forth herein and in the Declaration and the Indenture. No interest or Deferred Interest (except any Additional Amounts that may be due and payable) shall be due and payable during an Extension Period, except at the end thereof, but Deferred Interest shall accrue upon each installment of interest that would otherwise have been due and payable during such Extension Period until such installment is paid.

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                   As a consequence of any Extension Period, Distributions will be deferred. If Distributions are deferred, the Distributions due shall be paid on the date that the related Extension Period terminates to Holders of the Capital Securities as they appear on the books and records of the Trust on the regular record date immediately preceding the Distribution Payment Date on which such Extension Period terminates to the extent that the Trust has funds legally available for the payment of such Distributions in the Property Account of the Trust.

                   The Capital Securities shall be redeemable, and shall be entitled to the Liquidation Distribution, as provided in the Declaration.

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ASSIGNMENT

                   FOR VALUE RECEIVED, the undersigned assigns and transfers the Capital Securities evidenced by this Capital Security Certificate to:

(Insert assignee's social security or tax identification number)

(Insert address and zip code of assignee),

and irrevocably appoints ________________________________________________________ as agent to transfer the Capital Securities evidenced by this Capital Security Certificate on the books of the Trust. The agent may substitute another to act for it, him or her.

Date:

Signature:

                   (Sign exactly as your name appears on the other side of this Capital Security Certificate)

                   Signature Guarantee:¹ ___________________________

______________________________

¹Signature must be guaranteed by an"eligible guarantor institution" that is a bank, stockbroker, savings and loan association or credit union, meeting the requirements of the Security registrar, which requirements include membership or participation in the Securities Transfer Agents Medallion Program ("STAMP") or such other "signature guarantee program" as may be determined by the Security Registrar in addition to, or in substitution for, STAMP, all in accordance with the Securities Exchange Act of 1934, as amended.

A-1-8

EXHIBIT A-2

FORM OF COMMON SECURITY CERTIFICATE

                   THIS COMMON SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS OR ANY OTHER APPLICABLE SECURITIES LAWS AND MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EXEMPTION FROM REGISTRATION.

                   EXCEPT AS SET FORTH IN SECTION 8.1(b) OF THE DECLARATION (AS DEFINED BELOW), THIS SECURITY MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED.

A-2-1

Certificate Number         C-1 Number of Capital Securities 155

Certificate Evidencing Common Securities

of

SOUTHERN MICHIGAN BANCORP CAPITAL TRUST I

                   Southern Michigan Bancorp Capital Trust I, a statutory trust created under the laws of the State of Delaware (the "Trust"), hereby certifies that Southern Michigan Bancorp, Inc. is the registered owner (the "Holder") of 155 common securities of the Trust representing undivided beneficial interests in the assets of the Trust (liquidation amount $1,000 per Common Security)(the "Common Securities"). The Common Securities represented hereby are issued pursuant to, and the designation, rights, privileges, restrictions, preferences and other terms and provisions of the Common Securities shall in all respects be subject to, the provisions of the Amended and Restated Declaration of Trust of the Trust, dated as of March 25, 2004, among John H. Castle, Kurt G. Miller and Danice L. Chartrand, as Administrators, Wilmington Trust Company, as Delaware Trustee, Wilmington Trust Company, as Institutional Trustee, the Holde r, as Sponsor, and the holders from time to time of undivided beneficial interests in the assets of the Trust, including the designation of the terms of the Common Securities as set forth in Annex I to the Declaration, as the same may be amended from time to time (the "Declaration"). Capitalized terms used herein but not defined shall have the meaning given them in the Declaration. The Sponsor will provide a copy of the Declaration and the Indenture to the Holder without charge upon written request to the Sponsor at its principal place of business.

                   As set forth in the Declaration, when an Event of Default has occurred and is continuing, the rights of the Holder of Common Securities to payment in respect of Distributions and payments upon Liquidation, redemption or otherwise are subordinated to the rights of payment of holders of the Capital Securities.

                   By acceptance of this Certificate, the Holder is bound by the Declaration and is entitled to the benefits thereunder.

                   By acceptance of this Certificate, the Holder agrees to treat, for United States federal income tax purposes, the Debentures as indebtedness and the Common Securities as evidence of undivided beneficial ownership in the Debentures.

                   This Certificate and the Common Securities evidenced hereby are governed by, and shall be construed in accordance with, the laws of the State of Delaware, without regard to principles of conflict of laws.

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                   IN WITNESS WHEREOF, the Trust has executed this Certificate this ___ day of _________________, 2004.

SOUTHERN MICHIGAN BANCORP      CAPITAL TRUST I
By:
	Name: Title:  Administration

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[FORM OF REVERSE OF SECURITY]

                   Distributions payable on each Common Security will be identical in amount to the Distributions payable on each Capital Security, which is at a floating rate of interest per annum, which, with respect to any Distribution Period (as defined herein), will be equal to LIBOR, as determined on the LIBOR Determination Date for such Distribution Period (or in the case of the first Distribution Period, will be 1.11%), plus 2.75% (the "Coupon Rate"); provided, however, that the Coupon Rate for any Distribution Period may not exceed the Interest Rate (as defined in the Indenture) for the related Interest Period (as defined in the Indenture). Distributions in arrears for more than one Distribution Period will bear interest thereon, compounded quarterly, at the applicable Coupon Rate for each Distribution Period thereafter (to the extent permitted by applicable law). The term "Distributions", as used herein, includ es cash Distributions, any such compounded Distributions and any Additional Amounts payable on the Debentures, unless otherwise stated. A Distribution is payable only to the extent that payments are made in respect of the Debentures held by the Institutional Trustee and to the extent the Institutional Trustee has funds legally available in the Property Account therefor. The amount of Distributions payable for any Distribution Period will be computed on the basis of a 360-day year and the actual number of days elapsed in such Distribution Period.

                   Except as otherwise described below, Distributions on the Common Securities will be cumulative, will accrue from the date of original issuance and will be payable quarterly in arrears on January 7, April 7, July 7 and October 7 of each year, commencing on July 7, 2004 (each, a "Distribution Payment Date"), and on any earlier date of redemption, subject, in each case, to the Business Day convention specified in the Declaration. The Debenture Issuer has the right under the Indenture to defer payments of interest on the Debentures by extending the interest payment period for up to 20 consecutive quarterly periods (each such extended interest payment period, together with all previous and future consecutive extensions thereof, is referred to herein as an "Extension Period") at any time and from time to time on the Debentures, subject to the conditions described below and in the Declaration and th e Indenture. No Extension Period may end on a date other than a Distribution Payment Date or extend beyond the Maturity Date, any Optional Redemption Date or the Special Redemption Date, as the case may be. During any Extension Period, interest will continue to accrue on the Debentures, and interest on such accrued interest (such accrued interest and interest thereon referred to herein as "Deferred Interest") will accrue, at an annual rate equal to the Coupon Rate applicable during such Extension Period, compounded quarterly from the date such Deferred Interest would have been payable were it not for the Extension Period, to the extent permitted by applicable law. At the end of any Extension Period, the Debenture Issuer shall pay all Deferred Interest then accrued and unpaid on the Debentures; provided, however, that prior to the termination of any Extension Period, the Debenture Issuer may further extend such Extension Period, provided, that no Extension Period (including a ll previous and further consecutive extensions that are part of such Extension Period) shall exceed 20 consecutive quarterly periods. Upon the termination of any Extension Period and upon the payment of all Deferred Interest, the Debenture Issuer may commence a new Extension Period, subject to the requirements set forth herein and in the Declaration and the Indenture. No interest or Deferred Interest (except any Additional Amounts that may be due and payable) shall be due and payable during an Extension Period, except at the end thereof, but Deferred Interest shall accrue upon each installment of interest that would otherwise have been due and payable during such Extension Period until such installment is paid.

A-2-4

                   As a consequence of any Extension Period, Distributions will be deferred. If Distributions are deferred, the Distributions due shall be paid on the date that the related Extension Period terminates to Holders of the Securities as they appear on the books and records of the Trust on the regular record date immediately preceding the Distribution Payment Date on which such Extension Period terminates to the extent that the Trust has funds legally available for the payment of such Distributions in the Property Account of the Trust.

                   The Common Securities shall be redeemable, and shall be entitled to the Liquidation Distribution, as provided in the Declaration.

A-2-5

ASSIGNMENT

                   FOR VALUE RECEIVED, the undersigned assigns and transfers the Common Securities evidenced by this Common Security Certificate to:

(Insert assignee's social security or tax identification number)

(Insert address and zip code of assignee),

and irrevocably appoints ________________________________________________________ as agent to transfer the Common Securities evidenced by this Common Security Certificate on the books of the Trust. The agent may substitute another to act for it, him or her.

Date:

Signature:

                   (Sign exactly as your name appears on the other side of this Common Security Certificate)

                   Signature Guarantee:¹ ___________________________

______________________________

¹Signature must be guaranteed by an"eligible guarantor institution" that is a bank, stockbroker, savings and loan association or credit union, meeting the requirements of the Security registrar, which requirements include membership or participation in the Securities Transfer Agents Medallion Program ("STAMP") or such other "signature guarantee program" as may be determined by the Security Registrar in addition to, or in substitution for, STAMP, all in accordance with the Securities Exchange Act of 1934, as amended.

A-2-6

EXHIBIT B

FORM OF TRANSFEREE CERTIFICATE
TO BE EXECUTED BY ACCREDITED INVESTORS

__________, [     ]

Southern Michigan Bancorp, Inc.
Southern Michigan Bancorp Capital Trust I
51 West Pearl Street, Coldwater, Michigan 49036

Re: Purchase of $[SPECIFY] liquidation amount of MMCapS^SM
(the "Capital Securities") of Southern Michigan Bancorp Capital Trust I (the "Trust")

Ladies and Gentlemen:

                   In connection with our purchase of the Capital Securities, we confirm that:

                   1.         We understand that the Capital Securities of the Trust have not been registered under the Securities Act of 1933, as amended (the "Securities Act"), and may not be offered or sold except as permitted in the following sentence. We agree on our own behalf and on behalf of any investor account for which we are purchasing the Capital Securities that, if we decide to offer, sell or otherwise transfer any such Capital Securities prior to the date which is the later of (i) two years (or such shorter period of time as permitted by Rule 144(k) under the Securities Act) after the later of (Y) the date of original issuance of the Capital Securities and (Z) the last date on which the Trust or any Affiliate (as defined in Rule 405 under the Securities Act) of the Trust was the holder of any such Capital Securities (or any predecessor thereto) and (ii) such later date, if any, as may be required by any sub sequent change in applicable law (the "Resale Restriction Termination Date"), then such offer, sale or other transfer will be made only (a) to the Company or the Trust, (b) pursuant to Rule 144A under the Securities Act, to a person we reasonably believe is a qualified institutional buyer under Rule 144A (a "QIB"), that purchases for its own account or for the account of a QIB and to whom notice is given that the transfer is being made in reliance on Rule 144A, (c) pursuant to an exemption from registration, to an "accredited investor" within the meaning of subparagraph (a) (1), (2), (3), (7) or (8) of Rule 501 under the Securities Act that is acquiring any such Capital Securities for its own account or for the account of such an accredited investor for investment purposes and not with a view to, or for offer or sale in connection with, any distribution thereof in violation of the Securities Act, (d) pursuant to offers and sales to a non-U.S. Person that occur outside the United States pursuant to Regulation S under the Securities Act, or (e) pursuant to another available exemption from the registration requirements of the Securities Act, and in each of the foregoing cases in accordance with any applicable state securities laws and any requirements of law that govern the disposition of our property. If any resale or other transfer of the Capital Securities is proposed to be made pursuant to clause (c) above, the transferor shall deliver a letter from the transferee substantially in the form of this letter to the Institutional Trustee as Transfer Agent, which shall provide as applicable, among other things, that the transferee is an accredited investor within the meaning of subparagraph (a)(1), (2), (3), (7) or (8) of Rule 501 under the Securities Act that is acquiring such Capital Securities for investment purposes and not for any distribution in violation of the

B-1

Securities Act. We acknowledge on our behalf and on behalf of any investor account for which we are purchasing Capital Securities that the Company and the Trust reserve the right prior to any offer, sale or other transfer pursuant to clause (c) or (e) to require the delivery of any opinion of counsel, certifications and/or other information satisfactory to Southern Michigan Bancorp, Inc. (the "Company") and the Trust. We understand that the certificates for any Capital Securities that we receive prior to the Resale Restriction Termination Date will bear a legend substantially to the effect of the foregoing.

                   2.         We are an accredited investor within the meaning of subparagraph (a) (1), (2), (3), (7) or (8) of Rule 501 under the Securities Act purchasing for our own account or for the account of such an accredited investor, and we are acquiring the Capital Securities for investment purposes and not with view to, or for offer or sale in connection with, any distribution in violation of the Securities Act, and we have such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of our investment in the Capital Securities, and we and any account for which we are acting are each able to bear the economic risks of our or its investment.

                   3.         We are acquiring the Capital Securities purchased by us for our own account (or for one or more accounts as to each of which we exercise sole investment discretion and have authority to make, and do make, the statements contained in this letter) and not with a view to any distribution of the Capital Securities in violation of the Securities Act, subject, nevertheless, to the understanding that the disposition of our property will at all times be and remain within our control.

                   4.         In the event that we purchase any Capital Securities, we will acquire such Capital Securities having an aggregate liquidation amount of not less than $100,000 for our own account and for each separate account for which we are acting.

                   5.         We acknowledge that we either (A) are not a fiduciary of a pension, profit-sharing or other employee benefit plan or arrangement subject to the Employee Retirement Income Security Act of 1974, as amended, or to Section 4975 of the Internal Revenue Code of 1986, as amended (a "Plan"), or an entity whose assets include "plan assets" by reason of any Plan's investment in the entity and are not purchasing the Capital Securities on behalf of or with "plan assets" by reason of any Plan's investment in the entity and are not purchasing the Capital Securities on behalf of or with "plan assets" of any Plan or (B) are eligible for the exemptive relief available under one or more of the following prohibited transaction class exemptions ("PTCEs") issued by the U.S. Department of Labor: PTCE 96-23, 95-60, 91-38, 90-1 or 84-14.

                   6.         We acknowledge that each Plan, by its purchase of the Capital Securities, will be deemed to have directed the Trust to invest in the junior subordinated debt securities of the Company, and to have consented to the appointment of the institutional trustee of the Trust.

                   7.         We acknowledge that the Company, the Trust and others will rely upon the truth and accuracy of the foregoing acknowledgments, representations, warranties and agreements and agree that if any of our acknowledgments, representations, warranties and agreements are no longer accurate, we shall promptly notify the applicable Placement Agent. If we are acquiring any Capital Securities as a fiduciary or agent for one or more investor accounts,

B-2

we represent that we have sole discretion with respect to each such investor account and that we have full power to make the foregoing acknowledgments, representations and agreements on behalf of each such investor account.

                   You are entitled to rely upon this letter and are irrevocably authorized to produce this letter or a copy thereof to any interested party in any administrative or legal proceeding or other inquiry with respect to matters covered hereby.

(Name of Purchaser)

By:

Date:

                   Upon transfer, the Capital Securities should be registered in the name of the new beneficial owner as follows.

Name:

Address:

Taxpayer ID Number:

B-3

EXHIBIT C

FORM OF TRANSFEROR CERTIFICATE
TO BE EXECUTED FOR QIBs

__________, [     ]

Southern Michigan Bancorp, Inc.
Southern Michigan Bancorp Capital Trust I
51 West Pearl Street, Coldwater, Michigan 49036

Re: Purchase of $[SPECIFY] liquidation amount of MMCapS^SM
(the "Capital Securities") of Southern Michigan Bancorp Capital Trust I (the "Trust")

                   Reference is hereby made to the Amended and Restated Declaration of Trust of Southern Michigan Bancorp Capital Trust I, dated as of March 25, 2004 (the "Declaration"), among John H. Castle, Kurt G. Miller and Danice L. Chartrand, as Administrators, Wilmington Trust Company, as Delaware Trustee, Wilmington Trust Company, as Institutional Trustee, Southern Michigan Bancorp, Inc., as Sponsor, and the holders from time to time of undivided beneficial interests in the assets of the Trust. Capitalized terms used but not defined herein shall have the meanings given them in the Declaration.

                   This letter relates to $[           ] aggregate liquidation amount of Capital Securities which are held in the name of [name of transferor] (the "Transferor").

                   In accordance with Section 8.2(b) of the Declaration, the Transferor does hereby certify that such Capital Securities are being transferred in accordance with (i) the transfer restrictions set forth in the Capital Securities and (ii) Rule 144A under the Securities Act ("Rule 144A"), to a transferee that the Transferor reasonably believes is purchasing the Capital Securities for its own account or an account with respect to which the transferee exercises sole investment discretion and the transferee and any such account is a "qualified institutional buyer" within the meaning of Rule 144A, in a transaction meeting the requirements of Rule 144A and in accordance with applicable securities laws of any state of the United States or any other jurisdiction.

                   You are entitled to rely upon this letter and are irrevocably authorized to produce this letter or a copy thereof to any interested party in any administrative or legal proceeding or other inquiry with respect to matters covered hereby.

	(Name of Transferor)
By
	Name:
	Title:
	Date:

C-1

EXHIBIT D

FORM OF TRANSFEREE CERTIFICATE
TO BE EXECUTED BY NON-U.S. PERSONS

__________, [     ]

Southern Michigan Bancorp, Inc.
Southern Michigan Bancorp Capital Trust I
51 West Pearl Street, Coldwater, Michigan 49036

Re: Purchase of $[SPECIFY] liquidation amount of MMCapS^SM
(the "Capital Securities") of Southern Michigan Bancorp Capital Trust I (the "Trust")

                   Reference is hereby made to the Amended and Restated Declaration of Trust of Southern Michigan Bancorp Capital Trust I, dated as of March 25, 2004 (the "Declaration"), among John H. Castle, Kurt G. Miller and Danice L. Chartrand, as Administrators, Wilmington Trust Company, as Delaware Trustee, Wilmington Trust Company, as Institutional Trustee, Southern Michigan Bancorp, Inc., as Sponsor, and the holders from time to time of undivided beneficial interests in the assets of the Trust. Capitalized terms used but not defined herein shall have the meanings given them in the Declaration.

                   This letter relates to $[             ] aggregate liquidation amount of Capital Securities which are held in the name of [name of transferor].

                   In accordance with Section 8.2(b) of the Declaration, we do hereby certify that (i) we are not a "U.S. person" (as such term is defined in Rule 902 under the Securities Act), (ii) we are not acquiring the Capital Securities for the account or benefit of any U.S. person, and (iii) the offer and sale of Capital Securities to us constitutes an "offshore transaction" under Regulation S under the Securities Act.

                   You are entitled to rely upon this letter and are irrevocably authorized to produce this letter or a copy thereof to any interested party in any administrative or legal proceeding or other inquiry with respect to matters covered hereby.

	(Name of Transferor)
By
	Name:
	Title:
	Date:

D-1

EX-15.15

EXHIBIT 10.15

GUARANTEE AGREEMENT

Southern Michigan Bancorp, Inc.

Dated as of March 25, 2004

TABLE OF CONTENTS

Page

ARTICLE I

DEFINITIONS AND INTERPRETATION

SECTION 1.1 Definitions and Interpretation 1

ARTICLE II

POWERS, DUTIES AND RIGHTS OF THE GUARANTEE TRUSTEE

SECTION 2.1	Powers and Duties of the Guarantee Trustee	4
SECTION 2.2	Certain Rights of the Guarantee Trustee	5
SECTION 2.3	Not Responsible for Recitals or Issuance of Guarantee	7
SECTION 2.4	Events of Default; Waiver	7
SECTION 2.5	Events of Default; Notice	8

ARTICLE III

THE GUARANTEE TRUSTEE

SECTION 3.1	The Guarantee Trustee; Eligibility	8
SECTION 3.2	Appointment, Removal and Resignation of the Guarantee Trustee	9

ARTICLE IV

GUARANTEE

SECTION 4.1	Guarantee	9
SECTION 4.2	Waiver of Notice and Demand	10
SECTION 4.3	Obligations Not Affected	10
SECTION 4.4	Rights of Holders	11
SECTION 4.5	Events of Default; Notice	11
SECTION 4.6	Guarantee of Payment	11
SECTION 4.7	Subrogation	12
SECTION 4.8	Independent Obligations	12

ARTICLE V

LIMITATION OF TRANSACTIONS; SUBORDINATION

SECTION 5.1	Limitation of Transactions	12
SECTION 5.2	Ranking	13

i

ARTICLE VI

TERMINATION

SECTION 6.1 Termination 13

ARTICLE VII

INDEMNIFICATION

SECTION 7.1	Exculpation	13
SECTION 7.2	Indemnification	14
SECTION 7.3	Compensation; Reimbursement of Expenses	15

ARTICLE VIII

MISCELLANEOUS

SECTION 8.1	Successors and Assigns	15
SECTION 8.2	Amendments	16
SECTION 8.3	Notices	16
SECTION 8.4	Benefit	16
SECTION 8.5	Governing Law	16
SECTION 8.6	Counterparts	17

ii

GUARANTEE AGREEMENT

                   This GUARANTEE AGREEMENT (the "Guarantee"), dated as of March 25, 2004, is executed and delivered by Southern Michigan Bancorp, Inc., a bank holding company incorporated in Michigan (the "Guarantor"), and Wilmington Trust Company, a Delaware banking corporation, as trustee (the "Guarantee Trustee"), for the benefit of the Holders (as defined herein) from time to time of the Capital Securities (as defined herein) of Southern Michigan Bancorp Capital Trust I, a Delaware statutory trust (the "Issuer").

                   WHEREAS, pursuant to an Amended and Restated Declaration of Trust (the "Declaration"), dated as of March 25, 2004, among the trustees named therein of the Issuer, Southern Michigan Bancorp, Inc., as sponsor, and the Holders from time to time of undivided beneficial interests in the assets of the Issuer, the Issuer is issuing on the date hereof securities, having an aggregate liquidation amount of $5,000,000, designated in the Declaration as MMCapS^SM (the "Capital Securities"); and

                   WHEREAS, as incentive for the Holders to purchase the Capital Securities, the Guarantor desires irrevocably and unconditionally to agree, to the extent set forth in this Guarantee, to pay to the Holders of Capital Securities the Guarantee Payments (as defined herein) and to make certain other payments on the terms and conditions set forth herein.

                   NOW, THEREFORE, in consideration of the purchase by each Holder of the Capital Securities, which purchase the Guarantor hereby agrees shall benefit the Guarantor, the Guarantor executes and delivers this Guarantee for the benefit of the Holders.

ARTICLE I

DEFINITIONS AND INTERPRETATION

                   SECTION 1.1  Definitions and Interpretation.

                   In this Guarantee, unless the context otherwise requires:

                   (a)         capitalized terms used in this Guarantee but not defined in the preamble above have the respective meanings assigned to them in this Section 1.1;

                   (b)         a term defined anywhere in this Guarantee has the same meaning throughout;

                   (c)         all references to "the Guarantee" or "this Guarantee" are to this Guarantee as modified, supplemented or amended from time to time;

                   (d)         all references in this Guarantee to Articles and Sections are to Articles and Sections of this Guarantee, unless otherwise specified;

                   (e)         terms defined in the Declaration as of the date of execution of this Guarantee have the same meanings when used in this Guarantee, unless otherwise defined in this Guarantee or unless the context otherwise requires; and

                   (f)         a reference to the singular includes the plural and vice versa.

                   "Beneficiaries" means any Person to whom the Issuer is or hereafter becomes indebted or liable.

                   "Common Securities" has the meaning specified in the Declaration.

                   "Corporate Trust Office" means the office of the Guarantee Trustee at which at any particular time its corporate trust business shall be principally administered, which at all times shall be located within the United States and at the time of the execution of this Guarantee shall be Rodney Square North, 1100 North Market Street, Wilmington, DE 19890-0001.

                   "Covered Person" means any Holder of Capital Securities.

                   "Debenture Issuer" means Southern Michigan Bancorp, Inc. or any successor entity resulting from any consolidation, amalgamation, merger or other business combination, in its capacity as issuer of the Debentures.

                   "Debentures" means the junior subordinated debentures of the Debenture Issuer that are designated in the Indenture as the "Floating Rate Junior Subordinated Debt Securities due 2034" and held by the Institutional Trustee (as defined in the Declaration) of the Issuer.

                   "Event of Default" has the meaning set forth in Section 2.4.

                   "Guarantee Payments" means the following payments or distributions, without duplication, with respect to the Capital Securities, to the extent not paid or made by the Issuer: (i) any accrued and unpaid Distributions (as defined in the Declaration) which are required to be paid on such Capital Securities to the extent the Issuer has funds available in the Property Account (as defined in the Declaration) therefor at such time, (ii) the price payable upon the redemption of any Capital Securities to the extent the Issuer has funds available in the Property Account therefor at such time, with respect to any Capital Securities that are (1) called for redemption by the Issuer or (2) mandatorily redeemed by the Issuer, in each case, in accordance with the terms of such Capital Securities, and (iii) upon a voluntary or involuntary liquidation, dissolution, winding-up or termination of the Issuer (other than in connection with the distri bution of Debentures to the Holders of the Capital Securities in exchange therefor as provided in the Declaration), the lesser of (a) the aggregate of the liquidation amount of the Capital Securities and all accrued and unpaid Distributions on the Capital Securities to the date of payment, to the extent the Issuer has funds available in the Property Account therefor at such time, and (b) the amount of assets of the Issuer remaining available for distribution to Holders in liquidation of the Issuer after satisfaction of liabilities to creditors of the Issuer as required by applicable law (in either case, the "Liquidation Distribution").

                   "Guarantee Trustee" means Wilmington Trust Company, until a Successor Guarantee Trustee has been appointed and has accepted such appointment pursuant to the terms of this Guarantee and thereafter means each such Successor Guarantee Trustee.

                   "Holder" means any Person in whose name any Capital Securities are registered on the books and records of the Issuer; provided, however, that, in determining whether the

2

holders of the requisite percentage of Capital Securities have given any request, notice, consent or waiver hereunder, "Holder" shall not include the Guarantor or any Affiliate of the Guarantor.

                   "Indemnified Person" means the Guarantee Trustee (including in its individual capacity), any Affiliate of the Guarantee Trustee, or any officers, directors, shareholders, members, partners, employees, representatives, nominees, custodians or agents of the Guarantee Trustee.

                   "Indenture" means the Indenture, dated as of March 25, 2004, between the Debenture Issuer and Wilmington Trust Company, not in its individual capacity but solely as trustee, and any indenture supplemental thereto pursuant to which the Debentures are to be issued to the Institutional Trustee of the Issuer.

                   "Liquidation Distribution" has the meaning set forth in the definition of "Guarantee Payments" herein.

                   "Majority in liquidation amount of the Capital Securities" means Holder(s) of outstanding Capital Securities, voting together as a class, but separately from the holders of Common Securities, of more than 50% of the aggregate liquidation amount (including the amount that would be paid upon the redemption, liquidation or otherwise on the date upon which the voting percentages are determined, plus unpaid Distributions accrued thereon to such date) of all Capital Securities then outstanding.

                   "Obligations" means any costs, expenses or liabilities (but not including liabilities related to taxes) of the Issuer, other than obligations of the Issuer to pay to holders of any Trust Securities the amounts due such holders pursuant to the terms of the Trust Securities.

                   "Officer's Certificate" means, with respect to any Person, a certificate signed by one Authorized Officer of such Person. Any Officer's Certificate delivered with respect to compliance with a condition or covenant provided for in this Guarantee shall include:

                   (a)         a statement that such officer signing the Officer's Certificate has read the covenant or condition and the definitions relating thereto;

                   (b)         a brief statement of the nature and scope of the examination or investigation undertaken by such officer in rendering the Officer's Certificate;

                   (c)         a statement that such officer has made such examination or investigation as, in such officer's opinion, is necessary to enable such officer to express an informed opinion as to whether or not such covenant or condition has been complied with; and

                   (d)         a statement as to whether, in the opinion of such officer, such condition or covenant has been complied with.

                   "Person" means a legal person, including any individual, corporation, estate, partnership, joint venture, association, joint stock company, limited liability company, trust,

3

unincorporated association, or government or any agency or political subdivision thereof, or any other entity of whatever nature.

                   "Responsible Officer" means, with respect to the Guarantee Trustee, any officer within the Corporate Trust Office of the Guarantee Trustee with direct responsibility for the administration of any matters relating to this Guarantee, including any vice president, any assistant vice president, any secretary, any assistant secretary, the treasurer, any assistant treasurer, any trust officer or other officer of the Corporate Trust Office of the Guarantee Trustee customarily performing functions similar to those performed by any of the above designated officers and also means, with respect to a particular corporate trust matter, any other officer to whom such matter is referred because of that officer's knowledge of and familiarity with the particular subject.

                   "Successor Guarantee Trustee" means a successor Guarantee Trustee possessing the qualifications to act as Guarantee Trustee under Section 3.1.

                   "Trust Securities" means the Common Securities and the Capital Securities.

ARTICLE II

POWERS, DUTIES AND RIGHTS OF THE GUARANTEE TRUSTEE

                   SECTION 2.1  Powers and Duties of the Guarantee Trustee.

                   (a)         This Guarantee shall be held by the Guarantee Trustee for the benefit of the Holders of the Capital Securities, and the Guarantee Trustee shall not transfer this Guarantee to any Person except a Holder of Capital Securities exercising his or her rights pursuant to Section 4.4 (b) or to a Successor Guarantee Trustee on acceptance by such Successor Guarantee Trustee of its appointment to act as Successor Guarantee Trustee. The right, title and interest of the Guarantee Trustee shall automatically vest in any Successor Guarantee Trustee, and such vesting and cessation of title shall be effective whether or not conveyancing documents have been executed and delivered pursuant to the appointment of such Successor Guarantee Trustee.

                   (b)         If an Event of Default actually known to a Responsible Officer of the Guarantee Trustee has occurred and is continuing, the Guarantee Trustee shall enforce this Guarantee for the benefit of the Holders of the Capital Securities.

                   (c)         The Guarantee Trustee, before the occurrence of any Event of Default and after the curing or waiving of all Events of Default that may have occurred, shall undertake to perform only such duties as are specifically set forth in this Guarantee, and no implied covenants shall be read into this Guarantee against the Guarantee Trustee. In case an Event of Default has occurred (that has not been cured or waived pursuant to Section 2.4(b)) and is actually known to a Responsible Officer of the Guarantee Trustee, the Guarantee Trustee shall exercise such of the rights and powers vested in it by this Guarantee, and use the same degree of care and skill in its exercise thereof, as a prudent person would exercise or use under the circumstances in the conduct of his or her own affairs.

4

                   (d)         No provision of this Guarantee shall be construed to relieve the Guarantee Trustee from liability for its own negligent action, its own negligent failure to act, or its own willful misconduct or bad faith, except that:

                   (i)         prior to the occurrence of any Event of Default and after the curing or waiving of all Events of Default that may have occurred:

         (A)         the duties and obligations of the Guarantee Trustee shall be determined solely by the express provisions of this Guarantee, and the Guarantee Trustee shall not be liable except for the performance of such duties and obligations as are specifically set forth in this Guarantee, and no implied covenants or obligations shall be read into this Guarantee against the Guarantee Trustee; and

         (B)         in the absence of bad faith on the part of the Guarantee Trustee, the Guarantee Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon any certificates or opinions furnished to the Guarantee Trustee and conforming to the requirements of this Guarantee; but in the case of any such certificates or opinions furnished to the Guarantee Trustee, the Guarantee Trustee shall be under a duty to examine the same to determine whether or not on their face they conform to the requirements of this Guarantee;

                   (ii)         the Guarantee Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer of the Guarantee Trustee, unless it shall be proved that such Responsible Officer of the Guarantee Trustee or the Guarantee Trustee was negligent in ascertaining the pertinent facts upon which such judgment was made;

                   (iii)         the Guarantee Trustee shall not be liable with respect to any action taken or omitted to be taken by it in good faith in accordance with the written direction of the Holders of a Majority in liquidation amount of the Capital Securities relating to the time, method and place of conducting any proceeding for any remedy available to the Guarantee Trustee, or exercising any trust or power conferred upon the Guarantee Trustee under this Guarantee; and

                   (iv)         no provision of this Guarantee shall require the Guarantee Trustee to expend or risk its own funds or otherwise incur personal financial liability in the performance of any of its duties or in the exercise of any of its rights or powers, if the Guarantee Trustee shall have reasonable grounds for believing that the repayment of such funds is not reasonably assured to it under the terms of this Guarantee, or security and indemnity, reasonably satisfactory to the Guarantee Trustee, against such risk or liability is not reasonably assured to it.

                   SECTION 2.2  Certain Rights of the Guarantee Trustee.

                   (a)         Subject to the provisions of Section 2.1:

5

                   (i)         The Guarantee Trustee may conclusively rely, and shall be fully protected in acting or refraining from acting upon, any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document believed by it to be genuine and to have been signed, sent or presented by the proper party or parties.

                   (ii)         Any direction or act of the Guarantor contemplated by this Guarantee shall be sufficiently evidenced by an Officer's Certificate.

                   (iii)         Whenever, in the administration of this Guarantee, the Guarantee Trustee shall deem it desirable that a matter be proved or established before taking, suffering or omitting any action hereunder, the Guarantee Trustee (unless other evidence is herein specifically prescribed) may, in the absence of bad faith on its part, request and conclusively rely upon an Officer's Certificate of the Guarantor which, upon receipt of such request, shall be promptly delivered by the Guarantor.

                   (iv)         The Guarantee Trustee shall have no duty to see to any recording, filing or registration of any instrument or other writing (or any rerecording, refiling or reregistration thereof).

                   (v)         The Guarantee Trustee may consult with counsel of its selection, and the advice or opinion of such counsel with respect to legal matters shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in accordance with such advice or opinion. Such counsel may be counsel to the Guarantor or any of its Affiliates and may include any of its employees. The Guarantee Trustee shall have the right at any time to seek instructions concerning the administration of this Guarantee from any court of competent jurisdiction.

                   (vi)         The Guarantee Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Guarantee at the request or direction of any Holder, unless such Holder shall have provided to the Guarantee Trustee such security and indemnity, reasonably satisfactory to the Guarantee Trustee, against the costs, expenses (including attorneys' fees and expenses and the expenses of the Guarantee Trustee's agents, nominees or custodians) and liabilities that might be incurred by it in complying with such request or direction, including such reasonable advances as may be requested by the Guarantee Trustee; provided, however, that nothing contained in this Section 2.2(a)(vi) shall be taken to relieve the Guarantee Trustee, upon the occurrence of an Event of Default, of its obligation to exercise the rights and powers vested in it by this Guarantee.

                   (vii)         The Guarantee Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document, but the Guarantee Trustee, in its discretion, may make such further inquiry or investigation into such facts or matters as it may see fit.

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                   (viii)         The Guarantee Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents, nominees, custodians or attorneys, and the Guarantee Trustee shall not be responsible for any misconduct or negligence on the part of any agent or attorney appointed with due care by it hereunder.

                   (ix)         Any action taken by the Guarantee Trustee or its agents hereunder shall bind the Holders of the Capital Securities, and the signature of the Guarantee Trustee or its agents alone shall be sufficient and effective to perform any such action. No third party shall be required to inquire as to the authority of the Guarantee Trustee to so act or as to its compliance with any of the terms and provisions of this Guarantee, both of which shall be conclusively evidenced by the Guarantee Trustee's or its agent's taking such action.

                   (x)         Whenever in the administration of this Guarantee the Guarantee Trustee shall deem it desirable to receive instructions with respect to enforcing any remedy or right or taking any other action hereunder, the Guarantee Trustee (A) may request instructions from the Holders of a Majority in liquidation amount of the Capital Securities, (B) may refrain from enforcing such remedy or right or taking such other action until such instructions are received and (C) shall be protected in conclusively relying on or acting in accordance with such instructions.

                   (xi)         The Guarantee Trustee shall not be liable for any action taken, suffered, or omitted to be taken by it in good faith and reasonably believed by it to be authorized or within the discretion or rights or powers conferred upon it by this Guarantee.

                   (b)         No provision of this Guarantee shall be deemed to impose any duty or obligation on the Guarantee Trustee to perform any act or acts or exercise any right, power, duty or obligation conferred or imposed on it, in any jurisdiction in which it shall be illegal or in which the Guarantee Trustee shall be unqualified or incompetent in accordance with applicable law to perform any such act or acts or to exercise any such right, power, duty or obligation. No permissive power or authority available to the Guarantee Trustee shall be construed to be a duty.

                   SECTION 2.3  Not Responsible for Recitals or Issuance of Guarantee.

                   The recitals contained in this Guarantee shall be taken as the statements of the Guarantor, and the Guarantee Trustee does not assume any responsibility for their correctness. The Guarantee Trustee makes no representation as to the validity or sufficiency of this Guarantee.

                   SECTION 2.4  Events of Default; Waiver.

                   (a)         An "Event of Default" under this Guarantee will occur upon the failure of the Guarantor to perform any of its payment or other obligations hereunder.

                   (b)         The Holders of a Majority in liquidation amount of the Capital Securities may, voting or consenting as a class, on behalf of the Holders of all of the Capital Securities,

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waive any past Event of Default and its consequences. Upon such waiver, any such Event of Default shall cease to exist, and shall be deemed to have been cured, for every purpose of this Guarantee, but no such waiver shall extend to any subsequent or other default or Event of Default or impair any right consequent thereon.

                   SECTION 2.5  Events of Default; Notice.

                   (a)         The Guarantee Trustee shall, within 90 days after the occurrence of an Event of Default, transmit by mail, first class postage prepaid, to the Holders of the Capital Securities, notices of all Events of Default actually known to a Responsible Officer of the Guarantee Trustee, unless such defaults have been cured before the giving of such notice, provided, however, that the Guarantee Trustee shall be protected in withholding such notice if and so long as a Responsible Officer of the Guarantee Trustee in good faith determines that the withholding of such notice is in the interests of the Holders of the Capital Securities.

                   (b)         The Guarantee Trustee shall not be charged with knowledge of any Event of Default unless the Guarantee Trustee shall have received written notice thereof from the Guarantor or a Holder of the Capital Securities, or a Responsible Officer of the Guarantee Trustee charged with the administration of this Guarantee shall have actual knowledge thereof.

ARTICLE III

THE GUARANTEE TRUSTEE

                   SECTION 3.1  The Guarantee Trustee; Eligibility.

                   (a)         There shall at all times be a Guarantee Trustee which shall:

                   (i)         not be an Affiliate of the Guarantor; and

                   (ii)         be a corporation or national association organized and doing business under the laws of the United States of America or any state thereof or of the District of Columbia, or Person authorized under such laws to exercise corporate trust powers, having a combined capital and surplus of at least 50 million U.S. dollars ($50,000,000), and subject to supervision or examination by federal, state or District of Columbia authority. If such corporation or national association publishes reports of condition at least annually, pursuant to law or to the requirements of the supervising or examining authority referred to above, then, for the purposes of this Section 3.1(a)(ii), the combined capital and surplus of such corporation or national association shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published.

                   (b)         If at any time the Guarantee Trustee shall cease to be eligible to so act under Section 3.1(a), the Guarantee Trustee shall immediately resign in the manner and with the effect set forth in Section 3.2(c).

                   (c)         If the Guarantee Trustee has or shall acquire any "conflicting interest" within the meaning of Section 310(b) of the Trust Indenture Act, the Guarantee Trustee shall

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either eliminate such interest or resign to the extent and in the manner provided by, and subject to, this Guarantee.

                   SECTION 3.2  Appointment, Removal and Resignation of the Guarantee Trustee.

                   (a)         Subject to Section 3.2(b), the Guarantee Trustee may be appointed or removed without cause at any time by the Guarantor except during an Event of Default.

                   (b)         The Guarantee Trustee shall not be removed in accordance with Section 3.2(a) until a Successor Guarantee Trustee has been appointed and has accepted such appointment by written instrument executed by such Successor Guarantee Trustee and delivered to the Guarantor.

                   (c)         The Guarantee Trustee appointed to office shall hold office until a Successor Guarantee Trustee shall have been appointed or until its removal or resignation. The Guarantee Trustee may resign from office (without need for prior or subsequent accounting) by an instrument in writing executed by the Guarantee Trustee and delivered to the Guarantor, which resignation shall not take effect until a Successor Guarantee Trustee has been appointed and has accepted such appointment by an instrument in writing executed by such Successor Guarantee Trustee and delivered to the Guarantor and the resigning Guarantee Trustee.

                   (d)         If no Successor Guarantee Trustee shall have been appointed and accepted appointment as provided in this Section 3.2 within 60 days after delivery of an instrument of removal or resignation, the Guarantee Trustee resigning or being removed may petition any court of competent jurisdiction for appointment of a Successor Guarantee Trustee. Such court may thereupon, after prescribing such notice, if any, as it may deem proper, appoint a Successor Guarantee Trustee.

                   (e)         No Guarantee Trustee shall be liable for the acts or omissions to act of any Successor Guarantee Trustee.

                   (f)         Upon termination of this Guarantee or removal or resignation of the Guarantee Trustee pursuant to this Section 3.2, the Guarantor shall pay to the Guarantee Trustee all amounts owing to the Guarantee Trustee under Sections 7.2 and 7.3 accrued to the date of such termination, removal or resignation.

ARTICLE IV

GUARANTEE

                   SECTION 4.1  Guarantee.

                   (a)         The Guarantor irrevocably and unconditionally agrees to pay in full to the Holders the Guarantee Payments (without duplication of amounts theretofore paid by the Issuer), as and when due, regardless of any defense (except defense of payment by the Issuer), right of set-off or counterclaim that the Issuer may have or assert. The Guarantor's obligation to make a Guarantee Payment may be satisfied by direct payment of the required amounts by the Guarantor to the Holders or by causing the Issuer to pay such amounts to the Holders.

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                   (b)         The Guarantor hereby also agrees to assume any and all Obligations of the Issuer and in the event any such Obligation is not so assumed, subject to the terms and conditions hereof, the Guarantor hereby irrevocably and unconditionally guarantees to each Beneficiary the full payment, when and as due, of any and all Obligations to such Beneficiaries. This Guarantee is intended to be for the Beneficiaries who have received notice hereof.

                   SECTION 4.2  Waiver of Notice and Demand.

                   The Guarantor hereby waives notice of acceptance of this Guarantee and of any liability to which it applies or may apply, presentment, demand for payment, any right to require a proceeding first against the Issuer or any other Person before proceeding against the Guarantor, protest, notice of nonpayment, notice of dishonor, notice of redemption and all other notices and demands.

                   SECTION 4.3  Obligations Not Affected.

                   The obligations, covenants, agreements and duties of the Guarantor under this Guarantee shall in no way be affected or impaired by reason of the happening from time to time of any of the following:

                   (a)         the release or waiver, by operation of law or otherwise, of the performance or observance by the Issuer of any express or implied agreement, covenant, term or condition relating to the Capital Securities to be performed or observed by the Issuer;

                   (b)         the extension of time for the payment by the Issuer of all or any portion of the Distributions, the price payable upon the redemption of the Capital Securities, the Liquidation Distribution or any other sums payable under the terms of the Capital Securities or the extension of time for the performance of any other obligation under, arising out of, or in connection with, the Capital Securities (other than an extension of time for the payment of the Distributions, the price payable upon the redemption of the Capital Securities, the Liquidation Distribution or other sums payable that results from the extension of any interest payment period on the Debentures);

                   (c)         any failure, omission, delay or lack of diligence on the part of the Holders to enforce, assert or exercise any right, privilege, power or remedy conferred on the Holders pursuant to the terms of the Capital Securities, or any action on the part of the Issuer granting indulgence or extension of any kind;

                   (d)         the voluntary or involuntary liquidation, dissolution, sale of any collateral, receivership, insolvency, bankruptcy, assignment for the benefit of creditors, reorganization, arrangement, composition or readjustment of debt of, or other similar proceedings affecting, the Issuer or any of the assets of the Issuer;

                   (e)         any invalidity of, or defect or deficiency in, the Capital Securities;

                   (f)         the settlement or compromise of any obligation guaranteed hereby or hereby incurred; or

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                   (g)         any other circumstance whatsoever that might otherwise constitute a legal or equitable discharge or defense of a guarantor, it being the intent of this Section 4.3 that the obligations of the Guarantor hereunder shall be absolute and unconditional under any and all circumstances.

                   There shall be no obligation of the Holders to give notice to, or obtain consent of, the Guarantor with respect to the happening of any of the foregoing.

                   SECTION 4.4  Rights of Holders.

                   (a)         The Holders of a Majority in liquidation amount of the Capital Securities have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Guarantee Trustee in respect of this Guarantee or to direct the exercise of any trust or power conferred upon the Guarantee Trustee under this Guarantee; provided, however, that (subject to Sections 2.1 and 2.2) the Guarantee Trustee shall have the right to decline to follow any such direction if the Guarantee Trustee shall determine that the actions so directed would be unjustly prejudicial to the Holders not taking part in such direction or if the Guarantee Trustee being advised by legal counsel determines that the action or proceeding so directed may not lawfully be taken or if the Guarantee Trustee in good faith by its board of directors or trustees, executive committee or a trust committee of directors or trustee s and/or Responsible Officers shall determine that the action or proceeding so directed would involve the Guarantee Trustee in personal liability.

                   (b)         Any Holder of Capital Securities may institute a legal proceeding directly against the Guarantor to enforce the Guarantee Trustee's rights under this Guarantee, without first instituting a legal proceeding against the Issuer, the Guarantee Trustee or any other Person. The Guarantor waives any right or remedy to require that any such action be brought first against the Issuer, the Guarantee Trustee or any other Person before so proceeding directly against the Guarantor.

                   SECTION 4.5  Guarantee of Payment.

                   This Guarantee creates a guarantee of payment and not of collection.

                   SECTION 4.6  Subrogation.

                   The Guarantor shall be subrogated to all (if any) rights of the Holders of Capital Securities against the Issuer in respect of any amounts paid to such Holders by the Guarantor under this Guarantee; provided, however, that the Guarantor shall not (except to the extent required by applicable provisions of law) be entitled to enforce or exercise any right that it may acquire by way of subrogation or any indemnity, reimbursement or other agreement, in all cases as a result of payment under this Guarantee, if, after giving effect to any such payment, any amounts are due and unpaid under this Guarantee. If any amount shall be paid to the Guarantor in violation of the preceding sentence, the Guarantor agrees to hold such amount in trust for the Holders and to pay over such amount to the Holders.

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                   SECTION 4.7  Independent Obligations.

                   The Guarantor acknowledges that its obligations hereunder are independent of the obligations of the Issuer with respect to the Capital Securities and that the Guarantor shall be liable as principal and as debtor hereunder to make Guarantee Payments pursuant to the terms of this Guarantee notwithstanding the occurrence of any event referred to in subsections (a) through (g), inclusive, of Section 4.3 hereof.

                   SECTION 4.8  Enforcement.

                   A Beneficiary may enforce the Obligations of the Guarantor contained in Section 4.1(b) directly against the Guarantor, and the Guarantor waives any right or remedy to require that any action be brought against the Issuer or any other person or entity before proceeding against the Guarantor.

                   The Guarantor shall be subrogated to all rights (if any) of any Beneficiary against the Issuer in respect of any amounts paid to the Beneficiaries by the Guarantor under this Guarantee; provided, however, that the Guarantor shall not (except to the extent required by applicable provisions of law) be entitled to enforce or exercise any rights that it may acquire by way of subrogation or any indemnity, reimbursement or other agreement, in all cases as a result of payment under this Guarantee, if, after giving effect to such payment, any amounts are due and unpaid under this Guarantee. If any amount shall be paid to the Guarantor in violation of the preceding sentence, the Guarantor agrees to hold such amount in trust for the Beneficiaries and to pay over such amount to the Beneficiaries.

ARTICLE V

LIMITATION OF TRANSACTIONS; SUBORDINATION

                   SECTION 5.1  Limitation of Transactions.

                   So long as any Capital Securities remain outstanding, if (a) there shall have occurred and be continuing a Default or an Event of Default or (b) Debenture Issuer shall have selected an Extension Period as provided in the Indenture and such period, or any extension thereof, shall have commenced and be continuing, then the Guarantor may not (x) declare or pay any dividends or distributions on, or redeem, purchase, acquire, or make a liquidation payment with respect to, any of the Guarantor's capital stock, (y) make any payment of principal of or interest or premium, if any, on or repay, repurchase or redeem any debt securities of the Guarantor that rank in all respects pari passu with or junior in interest to the Debentures or (z) make any payment under any guarantees of the Guarantor that rank in all respects pari passu with or junior in interest to this Guarantee (other than (i) repurchases, redemptions or other acquisition s of shares of capital stock of the Guarantor (A) in connection with any employment contract, benefit plan or other similar arrangement with or for the benefit of one or more employees, officers, directors, or consultants, (B) in connection with a dividend reinvestment or stockholder stock purchase plan or (C) in connection with the issuance of capital stock of the Guarantor (or securities convertible into or exercisable for such capital stock), as consideration in an acquisition transaction entered into prior to the occurrence of the Event of Default or the

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applicable Extension Period, (ii) as a result of any exchange or conversion of any class or series of the Guarantor's capital stock (or any capital stock of a subsidiary of the Guarantor) for any class or series of the Guarantor's capital stock or of any class or series of the Guarantor's indebtedness for any class or series of the Guarantor's capital stock, (iii) the purchase of fractional interests in shares of the Guarantor's capital stock pursuant to the conversion or exchange provisions of such capital stock or the security being converted or exchanged, (iv) any declaration of a dividend in connection with any stockholder's rights plan, or the issuance of rights, stock or other property under any stockholder's rights plan, or the redemption or repurchase of rights pursuant thereto, or (v) any dividend in the form of stock, warrants, options or other rights where the dividend stock or the stock issuable upon exercise of such warrants, options or other rights is the same stock as that on which the divi dend is being paid or ranks pari passu with or junior in interest to such stock).

                   SECTION 5.2  Ranking.

                   This Guarantee will constitute an unsecured obligation of the Guarantor and will rank subordinate and junior in right of payment to all present and future Senior Indebtedness (as defined in the Indenture) of the Guarantor. By their acceptance thereof, each Holder of Capital Securities agrees to the foregoing provisions of this Guarantee and the other terms set forth herein.

ARTICLE VI

TERMINATION

                   SECTION 6.1  Termination.

                   This Guarantee shall terminate as to the Capital Securities (i) upon full payment of the price payable upon redemption of all Capital Securities then outstanding, (ii) upon the distribution of all of the Debentures to the Holders of all of the Capital Securities or (iii) upon full payment of the amounts payable in accordance with the Declaration upon dissolution of the Issuer. This Guarantee will continue to be effective or will be reinstated, as the case may be, if at any time any Holder of Capital Securities must restore payment of any sums paid under the Capital Securities or under this Guarantee.

ARTICLE VII

INDEMNIFICATION

                   SECTION 7.1  Exculpation.

                   (a)         No Indemnified Person shall be liable, responsible or accountable in damages or otherwise to the Guarantor or any Covered Person for any loss, damage or claim incurred by reason of any act or omission of such Indemnified Person in good faith in accordance with this Guarantee and in a manner that such Indemnified Person reasonably believed to be within the scope of the authority conferred on such Indemnified Person by this Guarantee or by law, except that an Indemnified Person shall be liable for any such loss, damage or claim

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incurred by reason of such Indemnified Person's negligence, willful misconduct or bad faith with respect to such acts or omissions.

                   (b)         An Indemnified Person shall be fully protected in relying in good faith upon the records of the Issuer or the Guarantor and upon such information, opinions, reports or statements presented to the Issuer or the Guarantor by any Person as to matters the Indemnified Person reasonably believes are within such other Person's professional or expert competence and who, if selected by such Indemnified Person, has been selected with reasonable care by such Indemnified Person, including information, opinions, reports or statements as to the value and amount of the assets, liabilities, profits, losses, or any other facts pertinent to the existence and amount of assets from which Distributions to Holders of Capital Securities might properly be paid.

                   SECTION 7.2  Indemnification.

                   (a)         The Guarantor agrees to indemnify each Indemnified Person for, and to hold each Indemnified Person harmless against, any and all loss, liability, damage, claim or expense incurred without negligence, willful misconduct or bad faith on the part of the Indemnified Person, arising out of or in connection with the acceptance or administration of the trust or trusts hereunder, including but not limited to the costs and expenses (including reasonable legal fees and expenses) of the Indemnified Person defending itself against, or investigating, any claim or liability in connection with the exercise or performance of any of the Indemnified Person's powers or duties hereunder. The obligation to indemnify as set forth in this Section 7.2 shall survive the resignation or removal of the Guarantee Trustee and the termination of this Guarantee.

                   (b)         Promptly after receipt by an Indemnified Person under this Section 7.2 of notice of the commencement of any action, such Indemnified Person will, if a claim in respect thereof is to be made against the Guarantor under this Section 7.2, notify the Guarantor in writing of the commencement thereof; but the failure so to notify the Guarantor (i) will not relieve the Guarantor from liability under paragraph (a) above unless and to the extent that the Guarantor did not otherwise learn of such action and such failure results in the forfeiture by the Guarantor of substantial rights and defenses and (ii) will not, in any event, relieve the Guarantor from any obligations to any Indemnified Person other than the indemnification obligation provided in paragraph (a) above. The Guarantor shall be entitled to appoint counsel of the Guarantor's choice at the Guarantor's expense to represent the Indemnified Person in any action for which indemnification is sought (in which case the Guarantor shall not thereafter be responsible for the fees and expenses of any separate counsel retained by the Indemnified Person or Persons except as set forth below); provided, however, that such counsel shall be satisfactory to the Indemnified Person. Notwithstanding the Guarantor's election to appoint counsel to represent the Indemnified Person in any action, the Indemnified Person shall have the right to employ separate counsel (including local counsel), and the Guarantor shall bear the reasonable fees, costs and expenses of such separate counsel, if (i) the use of counsel chosen by the Guarantor to represent the Indemnified Person would present such counsel with a conflict of interest, (ii) the actual or potential defendants in, or targets of, any such action include both the Indemnified Person and the Guarantor and the Indemnified Person shall have reasonably concluded that there may be legal defenses available to it and/or other Ind emnified Persons

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which are different from or additional to those available to the Guarantor, (iii) the Guarantor shall not have employed counsel satisfactory to the Indemnified Person to represent the Indemnified Person within a reasonable time after notice of the institution of such action or (iv) the Guarantor shall authorize the Indemnified Person to employ separate counsel at the expense of the Guarantor. The Guarantor will not, without the prior written consent of the Indemnified Persons, settle or compromise or consent to the entry of any judgment with respect to any pending or threatened claim, action, suit or proceeding in respect of which indemnification or contribution may be sought hereunder (whether or not the Indemnified Persons are actual or potential parties to such claim or action) unless such settlement, compromise or consent includes an unconditional release of each Indemnified Person from all liability arising out of such claim, action, suit or proceeding.

                   SECTION 7.3  Compensation; Reimbursement of Expenses.

                   The Guarantor agrees:

                   (a)         to pay to the Guarantee Trustee from time to time such compensation for all services rendered by it hereunder to the extent agreed upon in the Fee Agreement between the Guarantor and Guarantee Trustee dated March 25, 2004 (the "Fee Agreement") (which compensation shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust); and

                   (b)         except as otherwise expressly provided herein, to reimburse the Guarantee Trustee upon request for all reasonable expenses, disbursements and advances incurred or made by it in accordance with any provision of this Guarantee (including the reasonable compensation and the expenses and disbursements of its agents and counsel), except any such expense, disbursement or advance as may be attributable to the negligence, willful misconduct or bad faith of the Guarantee Trustee.

                   The provisions of this Section 7.3 shall survive the resignation or removal of the Guarantee Trustee and the termination of this Guarantee.

ARTICLE VIII

MISCELLANEOUS

                   SECTION 8.1  Successors and Assigns.

                   All guarantees and agreements contained in this Guarantee shall bind the successors, assigns, receivers, trustees and representatives of the Guarantor and shall inure to the benefit of the Holders of the Capital Securities then outstanding. Except in connection with any merger or consolidation of the Guarantor with or into another entity or any sale, transfer or lease of the Guarantor's assets to another entity, in each case to the extent permitted under the Indenture, the Guarantor may not assign its rights or delegate its obligations under this Guarantee without the prior approval of the Holders of a Majority in liquidation amount of the Capital Securities.

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                   SECTION 8.2  Amendments.

                   Except with respect to any changes that do not adversely affect the powers, preferences, rights or interests of Holders of the Capital Securities in any material respect (in which case no approval of Holders will be required), this Guarantee may be amended only with the prior approval of the Holders of a Majority in liquidation amount of the Capital Securities. The provisions of the Declaration with respect to amendments thereof shall apply equally with respect to amendments of the Guarantee.

                   SECTION 8.3  Notices.

                   All notices provided for in this Guarantee shall be in writing, duly signed by the party giving such notice, and shall be delivered, telecopied or mailed by first class mail, as follows:

                   (a)         if given to the Guarantee Trustee, at the Guarantee Trustee's mailing address set forth below (or such other address as the Guarantee Trustee may give notice of to the Holders of the Capital Securities): Wilmington Trust Company, Rodney Square North, 1100 North Market Street, Wilmington, Delaware 19890-0001, Attention: Corporate Trust Administration, Telecopy: 302-651-8882, Telephone: 302-651-1000;

                   (b)         if given to the Guarantor, at the Guarantor's mailing address set forth below (or such other address as the Guarantor may give notice of to the Holders of the Capital Securities and to the Guarantee Trustee): Southern Michigan Bancorp, Inc., 51 West Pearl Street, Coldwater, Michigan 49036, Attention: Danice L. Chartrand, Telecopy: (517) 278-8469, Telephone: (517) 279-5500; or

                   (c)         if given to any Holder of the Capital Securities, at the address set forth on the books and records of the Issuer.

                   All such notices shall be deemed to have been given when received in person, telecopied with receipt confirmed, or mailed by first class mail, postage prepaid, except that if a notice or other document is refused delivery or cannot be delivered because of a changed address of which no notice was given, such notice or other document shall be deemed to have been delivered on the date of such refusal or inability to deliver.

                   SECTION 8.4  Benefit.

                   This Guarantee is solely for the benefit of the Holders of the Capital Securities and, subject to Section 2.1(a), is not separately transferable from the Capital Securities.

                   SECTION 8.5  Governing Law.

                   THIS GUARANTEE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO CONFLICT OF LAW PRINCIPLES OF SAID STATE OTHER THAN SECTION 5-1401 OF THE NEW YORK GENERAL OBLIGATIONS LAW.

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                   SECTION 8.6  Counterparts.

                   This Guarantee may contain more than one counterpart of the signature page and this Guarantee may be executed by the affixing of the signature of the Guarantor and the Guarantee Trustee to any of such counterpart signature pages. All of such counterpart signature pages shall be read as though one, and they shall have the same force and effect as though all of the signers had signed a single signature page.

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                   THIS GUARANTEE is executed as of the day and year first above written.

SOUTHERN MICHIGAN BANCORP, INC., as Guarantor
By:	/s/ John H. Castle
	John H. Castle Chief Executive Officer

WILMINGTON TRUST COMPANY, as Guarantee Trustee
By:	/s/ Denise M. Geran
	Denise M. Geran Vice President

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EX-21

EXHIBIT 21

SUBSIDIARIES OF THE REGISTRANT

          The following is a list of the subsidiaries of Southern Michigan Bancorp, Inc. and their jurisdiction of corporation or organization:

Name of Subsidiary	Jurisdiction of Incorporation or Organization
Southern Michigan Bank & Trust	Michigan
Southern Michigan Bancorp Capital Trust I	Delaware
SMB Mortgage Company*	Michigan
SMB&T Financial Services, Inc.*	Michigan
FNB Financial	Michigan
FNB Financial Services, Inc.**	Michigan

* Wholly-owned subsidiary of Southern Michigan Bank & Trust.

** Wholly-owned subsidiary of FNB Financial.

EX-24

EXHIBIT 24

POWER OF ATTORNEY

          The undersigned, in his or her capacity as a director or officer of Southern Michigan Bancorp, Inc., does hereby appoint John H. Castle, Kurt G. Miller, and Danice L. Chartrand, and each of them, his or her attorneys or attorney, with full power of substitution and resubstitution, for such individual and in his or her name, place and stead, in any and all capacities, to sign the Form 10-K of Southern Michigan Bancorp, Inc. for its fiscal year ended December 31, 2007, and any and all amendments thereto, and to file the same, with all exhibits and related documents, with the Securities and Exchange Commission.

Signature:	/s/ Marcia S. Albright
Print Name:	Marcia S. Albright
Title:	Director
Date:	2/18/08

POWER OF ATTORNEY

          The undersigned, in his or her capacity as a director or officer of Southern Michigan Bancorp, Inc., does hereby appoint John H. Castle, Kurt G. Miller, and Danice L. Chartrand, and each of them, his or her attorneys or attorney, with full power of substitution and resubstitution, for such individual and in his or her name, place and stead, in any and all capacities, to sign the Form 10-K of Southern Michigan Bancorp, Inc. for its fiscal year ended December 31, 2007, and any and all amendments thereto, and to file the same, with all exhibits and related documents, with the Securities and Exchange Commission.

Signature:	/s/ Dean Calhoun
Print Name:	Dean Calhoun
Title:	Director
Date:	3/18/08

POWER OF ATTORNEY

          The undersigned, in his or her capacity as a director or officer of Southern Michigan Bancorp, Inc., does hereby appoint John H. Castle, Kurt G. Miller, and Danice L. Chartrand, and each of them, his or her attorneys or attorney, with full power of substitution and resubstitution, for such individual and in his or her name, place and stead, in any and all capacities, to sign the Form 10-K of Southern Michigan Bancorp, Inc. for its fiscal year ended December 31, 2007, and any and all amendments thereto, and to file the same, with all exhibits and related documents, with the Securities and Exchange Commission.

Signature:	/s/ John S. Carton
Print Name:	John S. Carton
Title:	Director
Date:	2-17-08

POWER OF ATTORNEY

          The undersigned, in his or her capacity as a director or officer of Southern Michigan Bancorp, Inc., does hereby appoint John H. Castle, Kurt G. Miller, and Danice L. Chartrand, and each of them, his or her attorneys or attorney, with full power of substitution and resubstitution, for such individual and in his or her name, place and stead, in any and all capacities, to sign the Form 10-K of Southern Michigan Bancorp, Inc. for its fiscal year ended December 31, 2007, and any and all amendments thereto, and to file the same, with all exhibits and related documents, with the Securities and Exchange Commission.

Signature:	/s/ H. Kenneth Cole
Print Name:	H. Kenneth Cole
Title:	Director
Date:	Feb. 19, 2008

POWER OF ATTORNEY

          The undersigned, in his or her capacity as a director or officer of Southern Michigan Bancorp, Inc., does hereby appoint John H. Castle, Kurt G. Miller, and Danice L. Chartrand, and each of them, his or her attorneys or attorney, with full power of substitution and resubstitution, for such individual and in his or her name, place and stead, in any and all capacities, to sign the Form 10-K of Southern Michigan Bancorp, Inc. for its fiscal year ended December 31, 2007, and any and all amendments thereto, and to file the same, with all exhibits and related documents, with the Securities and Exchange Commission.

Signature:	/s/ Richard E. Dyer
Print Name:	Richard E. Dyer
Title:	Executive Vice President and Director
Date:	2-26-08

POWER OF ATTORNEY

          The undersigned, in his or her capacity as a director or officer of Southern Michigan Bancorp, Inc., does hereby appoint John H. Castle, Kurt G. Miller, and Danice L. Chartrand, and each of them, his or her attorneys or attorney, with full power of substitution and resubstitution, for such individual and in his or her name, place and stead, in any and all capacities, to sign the Form 10-K of Southern Michigan Bancorp, Inc. for its fiscal year ended December 31, 2007, and any and all amendments thereto, and to file the same, with all exhibits and related documents, with the Securities and Exchange Commission.

Signature:	/s/ Robert L. Hance
Print Name:	Robert L. Hance
Title:	Director
Date:	Feb 19, 2008

POWER OF ATTORNEY

          The undersigned, in his or her capacity as a director or officer of Southern Michigan Bancorp, Inc., does hereby appoint John H. Castle, Kurt G. Miller, and Danice L. Chartrand, and each of them, his or her attorneys or attorney, with full power of substitution and resubstitution, for such individual and in his or her name, place and stead, in any and all capacities, to sign the Form 10-K of Southern Michigan Bancorp, Inc. for its fiscal year ended December 31, 2007, and any and all amendments thereto, and to file the same, with all exhibits and related documents, with the Securities and Exchange Commission.

Signature:	/s/ Gary Hart Haberl
Print Name:	Gary Hart Haberl
Title:	Director
Date:	2/19/08

POWER OF ATTORNEY

          The undersigned, in his or her capacity as a director or officer of Southern Michigan Bancorp, Inc., does hereby appoint John H. Castle, Kurt G. Miller, and Danice L. Chartrand, and each of them, his or her attorneys or attorney, with full power of substitution and resubstitution, for such individual and in his or her name, place and stead, in any and all capacities, to sign the Form 10-K of Southern Michigan Bancorp, Inc. for its fiscal year ended December 31, 2007, and any and all amendments thereto, and to file the same, with all exhibits and related documents, with the Securities and Exchange Commission.

Signature:	/s/ Nolan E. Hooker
Print Name:	Nolan E. Hooker
Title:	Director
Date:	2-19-08

POWER OF ATTORNEY

          The undersigned, in his or her capacity as a director or officer of Southern Michigan Bancorp, Inc., does hereby appoint John H. Castle, Kurt G. Miller, and Danice L. Chartrand, and each of them, his or her attorneys or attorney, with full power of substitution and resubstitution, for such individual and in his or her name, place and stead, in any and all capacities, to sign the Form 10-K of Southern Michigan Bancorp, Inc. for its fiscal year ended December 31, 2007, and any and all amendments thereto, and to file the same, with all exhibits and related documents, with the Securities and Exchange Commission.

Signature:	/s/ Gregory J. Hull
Print Name:	Gregory J. Hull
Title:	Director
Date:	2/19/08

POWER OF ATTORNEY

          The undersigned, in his or her capacity as a director or officer of Southern Michigan Bancorp, Inc., does hereby appoint John H. Castle, Kurt G. Miller, and Danice L. Chartrand, and each of them, his or her attorneys or attorney, with full power of substitution and resubstitution, for such individual and in his or her name, place and stead, in any and all capacities, to sign the Form 10-K of Southern Michigan Bancorp, Inc. for its fiscal year ended December 31, 2007, and any and all amendments thereto, and to file the same, with all exhibits and related documents, with the Securities and Exchange Commission.

Signature:	/s/ Thomas E. Kolassa
Print Name:	Thomas E. Kolassa
Title:	Director
Date:	3-18-08

POWER OF ATTORNEY

          The undersigned, in his or her capacity as a director or officer of Southern Michigan Bancorp, Inc., does hereby appoint John H. Castle, Kurt G. Miller, and Danice L. Chartrand, and each of them, his or her attorneys or attorney, with full power of substitution and resubstitution, for such individual and in his or her name, place and stead, in any and all capacities, to sign the Form 10-K of Southern Michigan Bancorp, Inc. for its fiscal year ended December 31, 2007, and any and all amendments thereto, and to file the same, with all exhibits and related documents, with the Securities and Exchange Commission.

Signature:	/s/ Donald J. Labrecque
Print Name:	Donald J. Labrecque
Title:	Director
Date:	2/17/08

POWER OF ATTORNEY

          The undersigned, in his or her capacity as a director or officer of Southern Michigan Bancorp, Inc., does hereby appoint John H. Castle, Kurt G. Miller, and Danice L. Chartrand, and each of them, his or her attorneys or attorney, with full power of substitution and resubstitution, for such individual and in his or her name, place and stead, in any and all capacities, to sign the Form 10-K of Southern Michigan Bancorp, Inc. for its fiscal year ended December 31, 2007, and any and all amendments thereto, and to file the same, with all exhibits and related documents, with the Securities and Exchange Commission.

Signature:	/s/ Brian P. McConnell
Print Name:	Brian P. McConnell
Title:	Director
Date:	March 11, 2008

POWER OF ATTORNEY

          The undersigned, in his or her capacity as a director or officer of Southern Michigan Bancorp, Inc., does hereby appoint John H. Castle, Kurt G. Miller, and Danice L. Chartrand, and each of them, his or her attorneys or attorney, with full power of substitution and resubstitution, for such individual and in his or her name, place and stead, in any and all capacities, to sign the Form 10-K of Southern Michigan Bancorp, Inc. for its fiscal year ended December 31, 2007, and any and all amendments thereto, and to file the same, with all exhibits and related documents, with the Securities and Exchange Commission.

Signature:	/s/ Freeman E. Riddle
Print Name:	Freeman E. Riddle
Title:	Director
Date:	February 26, 2008

POWER OF ATTORNEY

          The undersigned, in his or her capacity as a director or officer of Southern Michigan Bancorp, Inc., does hereby appoint Kurt G. Miller and Danice L. Chartrand, and each of them, his or her attorneys or attorney, with full power of substitution and resubstitution, for such individual and in his or her name, place and stead, in any and all capacities, to sign the Form 10-K of Southern Michigan Bancorp, Inc. for its fiscal year ended December 31, 2007, and any and all amendments thereto, and to file the same, with all exhibits and related documents, with the Securities and Exchange Commission.

Signature:	/s/ John H. Castle
Print Name:	John H. Castle
Title:	Chairman, Chief Executive Officer and Director
Date:	2/29/08

POWER OF ATTORNEY

          The undersigned, in his or her capacity as a director or officer of Southern Michigan Bancorp, Inc., does hereby appoint John H. Castle and Danice L. Chartrand, and each of them, his or her attorneys or attorney, with full power of substitution and resubstitution, for such individual and in his or her name, place and stead, in any and all capacities, to sign the Form 10-K of Southern Michigan Bancorp, Inc. for its fiscal year ended December 31, 2007, and any and all amendments thereto, and to file the same, with all exhibits and related documents, with the Securities and Exchange Commission.

Signature:	/s/ Kurt G. Miller
Print Name:	Kurt G. Miller
Title:	President and Director
Date:	February 29, 2008

POWER OF ATTORNEY

          The undersigned, in his or her capacity as a director or officer of Southern Michigan Bancorp, Inc., does hereby appoint John H. Castle and Kurt G. Miller, and each of them, his or her attorneys or attorney, with full power of substitution and resubstitution, for such individual and in his or her name, place and stead, in any and all capacities, to sign the Form 10-K of Southern Michigan Bancorp, Inc. for its fiscal year ended December 31, 2007, and any and all amendments thereto, and to file the same, with all exhibits and related documents, with the Securities and Exchange Commission.

Signature:	/s/ Danice L. Chartrand
Print Name:	Danice L. Chartrand
Title:	Senior Vice President and Chief Financial Officer
Date:	2-18-08

EX-31.1

Exhibit 31.1

Certification

I, John H. Castle, certify that:

1.	I have reviewed this annual report on Form 10-K of Southern Michigan Bancorp, Inc. for the fiscal year ended December 31, 2007;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)	Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c)	Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date:  March 28, 2008
	/s/ John H. Castle
	John H. Castle Chairman of the Board and Chief Executive Officer Southern Michigan Bancorp, Inc.

EX-31.2

Exhibit 31.2

Certification

I, Danice L. Chartrand, certify that:

1.	I have reviewed this annual report on Form 10-K of Southern Michigan Bancorp, Inc. for the fiscal year ended December 31, 2007;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)	Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c)	Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: March 28, 2008
	/s/ Danice L. Chartrand
	Danice L. Chartrand Senior Vice President, Chief Financial Officer, Secretary and Treasurer Southern Michigan Bancorp, Inc.

EX-32

Exhibit 32

Certification

Pursuant to 18 U.S.C. § 1350, each of the undersigned hereby certifies in his or her capacity as an officer of Southern Michigan Bancorp, Inc. (the "Company") that the Annual Report of the Company on Form 10-K for the fiscal year ended December 31, 2007 fully complies with the requirements of Section 15(d) of the Securities Exchange Act of 1934, as amended, and that the information contained in such report fairly presents, in all material respects, the financial condition of the Company at the end of such period and the results of operations of the Company for such period.

Date:  March 28, 2008	/s/ John H. Castle
	John H. Castle Chairman of the Board and Chief Executive Officer
Date:  March 28, 2008	/s/ Danice L. Chartrand
	Danice L. Chartrand Senior Vice President, Chief Financial Officer, Secretary and Treasurer

A signed original of this written statement required by Section 906 has been provided to Southern Michigan Bancorp, Inc. and will be retained by Southern Michigan Bancorp, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

EX-99.1

EXHIBIT 99.1

To Our Shareholders

     I am pleased to report that Southern Michigan Bancorp, Inc. earned a record $4,133,000 for 2007. Net income for the year represented an increase of more than three percent compared to 2006. Earnings per share of $2.28 for 2007 also were a record for the company.
     Our financial performance throughout 2007 resulted in a return on average shareholders' equity of 12.72 percent and a return on average assets of 1.18 percent. The financial results for 2007 reflect the impact of consolidation of Southern and FNB Financial Corporation which took effect in December. At year-end 2007, total assets exceeded $480 million while total shareholders' equity rose to $44.2 million.
     Compared with our industry peers in Michigan and throughout the Midwest, Southern's measures of earnings, capital strength, asset quality and net interest margin are exemplary. Southern's tier one capital ratio of 9.47 percent, total risk-based capital ratio of 10.88 percent and leverage ratio of 10.35 percent are all above well-capitalized levels used by bank regulators to measure capital strength. At year-end, our allowance for loan and lease losses was 1.53 percent of total loans while the net loan losses to total loans measured .13 percent of average loans. Southern's net interest margin of 4.7 percent as of year-end 2007 is very strong especially when measured against our peers.
     The merger of Southern and FNB created what is now the 19th largest commercial banking company in Michigan as measured by total assets. Our two-bank holding company spans five counties in the southern tier of Michigan with a total of 19 banking locations. The initial response from customers, employees, shareholders and local communities to the new partnership has exceeded our expectations.
     As I have communicated through shareholder letters and annual reports in the past, the successes of Southern are attributable to a number of factors. Most important among these are Southern's clients. This year's Annual Report highlights Union Pallet/Container Co., Inc., and Kilgore International, Inc., two Southern Michigan Bank & Trust business customers, and Precision Wire Forms, Inc., and Brussee/Brady, Inc., both of whom are valuable business clients of FNB Financial.
     Looking forward, our directors, management and staff recognize that 2008 may be the most challenging business and banking environment many of us have experienced in more than a quarter of a century. The Michigan economy continues to struggle, resulting in the downsizing and layoffs that have become all too familiar. Financial institutions, facing historically high residential mortgage foreclosures, deteriorating loan portfolios and dramatically shrinking margins, have experienced sharp declines in stock values from mid-year 2007 through the first several months of 2008.
     Southern has not been immune to the impact of these trends on the financial services industry. We anticipate a further narrowing of our net interest margin through at least mid-year 2008 as the full brunt of Federal Reserve interest rate cuts take hold. In addition, we are likely to incur some one-time data processing conversion and other charges to complete the integration of FNB with Southern. However, our focus on prudent balance sheet management strategies, disciplined pricing for deposits and loans, and sound expense control practices will position us to emerge from today's unfavorable business climate as one of the strongest community banking corporations throughout our tri-state service area. Southern's track record of success during good times as well as in less-than-ideal conditions provides both confidence and optimism for the future.
     I have appreciated the many thoughtful comments and suggestions from Southern shareholders since the announcement last year of the merger with FNB. On behalf of the management, staff and directors of Southern Michigan Bancorp, I extend the warmest welcome to the shareholders who have joined the Southern family as a result of the merger. Please feel free to contact me directly by email at jcastle@smb-t.com or by calling 517.279.5504 with any suggestions or comments about Southern or how we might better serve our customers and local communities.
     Thank you for your cooperation and support.

Sincerely,

John H. Castle
Chairman and Chief Executive Officer

SOUTHERN MICHIGAN BANCORP, INC. / 2007 ANNUAL REPORT     1

Celebrating 281 Combined Years of Community Banking

     In 1871, Chicago had its great fire. Orville Wright was born. High-wheel bicycles were invented. The first professional baseball league was formed, and the foundation of the Southern Michigan Bank & Trust was started in Coldwater, Michigan.
     The fledgling institution was incorporated in early 1872 and began serving customers out of S.M. Steeley's back rooms in the Southern Michigan Hotel, next to the public town square. Land was soon purchased on the corner of Monroe and Chicago Streets, where construction commenced, and by July the Southern Michigan National Bank opened its doors.
     As the Great depression deepened in the early 1930's, newly elected President Franklin D. Roosevelt proclaimed a banking holiday to relieve the financial crisis. Southern Michigan National Bank, however, did not close its doors. Through careful management, the bank had the funds to meet customer needs. Southern Michigan National Bank remained strong.
     After World War II, Branch County commerce boomed along with the rest of the country, and Southern Michigan National Bank prospered by serving the area's consumer, commercial and agricultural financial needs. In 1992, the bank changed its name to Southern Michigan Bank & Trust to reflect its broader mission. As the institution moved into the twenty-first century, Southern Michigan continued serving its communities and customers with new products, services, and delivery channels while prioritizing customer service.
     Throughout the 130-year history of Southern Michigan Bank & Trust, service has been the key to success. As the institution helps the people in Branch, Calhoun and Hillsdale Counties meet their financial goals, its customers can look to Southern as their trusted partner in keeping our local economy strong and vibrant.                    

2     SOUTHERN MICHIGAN BANCORP, INC. / 2007 ANNUAL REPORT

     The roots of FNB Financial (FNB) are deeply interwoven into the historical fabric of this country. Founded by a local group of businessmen on October 8, 1864, a charter was issued on December 3, 1864 to The First National Bank of Three Rivers by the first Comptroller of the Currency of the United States, Mr. Hugh McCulloch. Mr. McCulloch was appointed by President Abraham Lincoln to enact provisions set forth in The National Currency Act of 1863 and the National Banking Act of 1864 which provided for a sound and dependable currency and a strong system of national banks.
     The first of ten presidents for FNB was Edward S. Moore, who presided over the bank from 1864 - 1883. During Mr. Moore's tenure, a second national bank was chartered - The Manufacturer's National Bank of Three Rivers. Lasting only a few years, this bank was merged into a third - The Three Rivers National Bank - in 1885 and both were absorbed by FNB in 1897.
     After leasing space for seven years on the east side of Main Street, FNB moved across the street into a newly constructed bank building on North Main Street in the early 1870s. Over the next several decades, the bank was remodeled numerous times and, in 1958, expanded into adjacent property formerly occupied by the old "Hotel De Hamburg".
     By 1968, a new facility was being contemplated for FNB at the southwest corner of Main and Moore Street. In 1970, as the site was being prepared for the new bank, a disastrous fire claimed the North Main location. After operating out of temporary facilities for several months, the bank moved into its new quarters at 88 North Main on January 4, 1971 with assets topping $20 million.
     In March 1996, the bank reorganized and a one-bank holding company, FNB Financial Corporation, was formed to better enable FNB to provide more services, more easily obtain capital, and make a more liquid market for its stock. As FNB closed out the 20th century, it introduced new technologies ranging from networked computers and voice mail to e-mail, the Internet and the bank's first automated voice response telephone system.
     Today, as part of Southern Michigan Bancorp, Inc., FNB employs 60 full-time people and has assets approaching $159 million.                    

SOUTHERN MICHIGAN BANCORP, INC. / 2007 ANNUAL REPORT     3

TEAMWORK -
A Growing Partnership

Union Pallet and Container Company, originally started as a hobby in a garage in the early 1990's, now operates in a 33,000 square foot office/manufacturing and warehousing facility, and provides employment for thirty-nine local individuals.      A manufacturer and recycler	of wooden pallets for the food, plastics, chemical supply and other industries, Union Pallet serves customers within a 60 mile radius of its home in Coldwater, MI. Owner and President, Jon Slack, appreciates that Southern Michigan Bank & Trust is a local bank helping the local economy,	and he values the relationship he has built with SMB&T since the early days of his business. Southern Michigan Bank & Trust is proud to partner with this successful business.
		Union Pallet and Container Company owner and President Jon Slack explains part of the process to John Castle, Chairman and CEO of Southern Michigan Bank & Trust.

	John Castle and Jody Trenary, Vice President and Commercial Lender at Southern Michigan Bank & Trust, are given a tour of the facility by owner Jon Slack.
	Jody Trenary meets with Jon and Twyla Slack in the offices of Union Pallet and Container Company.

4     SOUTHERN MICHIGAN BANCORP, INC. / 2007 ANNUAL REPORT

SUCCESS -
A Shared Vision

Partnering with area businesses

to encourage their success and

the growth of our community is an

important part of Southern

Michigan Bank & Trust's commit-

ment to a better future. Following

in the 30 year tradition of his

father, Charles, Craig Kilgore

President of Kilgore International has been partnering with

Southern Michigan Bank & Trust

for over 20 years - relying on

Southern to provide cash

management services and

retirement services. A family

business, Kilgore International

provides medical and dental

models for patient education and dental school training, with sales to

clients in countries around the world.

Craig relies on Southern Michigan

Bank & Trust to make things easy for

him, so he can concentrate on

growing his business, and says, "It's

a community bank with comprehen-

sive services and helpful, supportive

people."

                   

Craig Kilgore, President of Kilgore                     International, demonstrates a dental                     model to John Castle, Chairman and CEO                     and Dave Rumsey, Vice President and                     Senior Investment Officer of Southern                     Michigan Bank & Trust.
Kilgore employees Mike Gregory, Brian Wright and Melissa Houtz highlight some of their products to Dave Rumsey.		John Castle observes as Brian Wright prepares a model for dental school training.

SOUTHERN MICHIGAN BANCORP, INC. / 2007 ANNUAL REPORT     5

		Community - Making a Difference
			In recent years, Three Rivers, Michigan and St. Joseph County have been successful in expanding local commercial and industrial enterprises as well as attracting new investment to the community. At the heart of this expansion has been Brussee/Brady, Inc., a commercial and residential contracting company, with its banking partner, FNB Financial. Since its inception in 1997, Brussee/Brady, Inc. has relied on FNB to provide the working capital and support necessary to pursue key local projects including Health Trac, an athletic/wellness facility, numerous downtown building renovations, and significant		expansions for both the St. Joseph County Sheriff's Department and the Immaculate Conception Church of Three Rivers.      In early 2008, Brussee/Brady, Inc. looks forward to completing expansions and renovations for FNB customers Armstrong International and Bruce Monroe, owner of the Riviera Theatre. Armstrong International sub- sidiary, Armstrong Hot Water, Inc., is completing a 20,000 square foot expansion and the Riviera Theatre, which was built in 1925, will soon re-open as a venue for live music and theater as well as movies and other community events.
	Tom Brady looks over completed work with Bruce Monroe, owner of the Riviera Theatre, and Rick Dyer, President & CEO of FNB Financial.				Tom Brady reviews expansion plans for Armstrong Hot Water, Inc. with Larry Daugherty, President of Armstrong Hot Water Group, and Rick Dyer.

6     SOUTHERN MICHIGAN BANCORP, INC. / 2007 ANNUAL REPORT

Commitment -
Building Strong
Relationships Few customers have stronger ties

to FNB Financial than HBE

Engineering and its affiliated

companies HBE International,

HBDM, HB Imports, Amigo R & L

and Precision Wire Forms. Herbert

Beuter, and his wife, Francoise,

own and operate the various

entities with their son Frederic.

     Herbert served as a longtime
  board member for FNB and

continues to be a valued advisor to

the bank.

     For more than 24 years Herbert,

Francoise, and Frederic have

turned to FNB for their companies'

banking and lending needs. FNB is

proud to partner with the Beuters

in their many successful ventures.

		Francoise Beuter, President and owner of Precision Wire Forms, demonstrates a product to Rick Dyer, President & CEO of FNB Financial and Dave Allen, VP/Business Development of FNB Financial.
Herbert Beuter, President and owner of HBE Engineering, explains to Rick Dyer how wire is bent for use in one of the many products manufactured and distributed by his companies.

SOUTHERN MICHIGAN BANCORP, INC. / 2007 ANNUAL REPORT     7

Financial Summary

For the Year		2007		2006
Net interest income	$	14,960,000	$	14,495,000
Provision for loan losses		745,000		500,000
Non-interest income		4,268,000		4,105,000
Non-interest expense		12,860,000		12,600,000
Net income		4,133,000		4,009,000
Per Share
Basic earnings		$2.29		$2.27
Diluted earnings		$2.28		$2.26
Cash dividends declared		0.80		0.78
At Year End
Assets	$	480,178,000	$	329,891,000
Gross loans		335,978,000		252,825,000
Allowance for loan loss		5,156,000		3,302,000
Deposits		399,169,000		282,509,000
Other borrowings		14,753,000		6,973,000
Shareholders' equity		44,219,000		28,482,000
Ratios
Return on average assets		1.18%		1.25%
Return on average equity		12.72%		14.54%
Total risk-based capital ratio		10.88%		14.14%
ALLL as percentage of loans		1.53%		1.31%

8     SOUTHERN MICHIGAN BANCORP, INC. / 2007 ANNUAL REPORT

Contents

Management's Discussion and Analysis	10
Management's Responsibility for Financial Information	22
Report of Independent Auditors	23
Consolidated Financial Statements	24
Notes to Consolidated Financial Statements	28
Selected Financial Data/Common Stock Market Prices and Dividends	54
Board of Directors	56
Southern Michigan Bank & Trust Board of Directors and Officers	58
FNB Financial Board of Directors and Officers	59
Shareholder Information	60

Southern Michigan Bancorp, Inc. is a two banking holding company. The Company's wholly-owned subsidiaries,

Southern Michigan Bank & Trust (SMB&T) and FNB Financial (FNB) offer individuals, businesses, institutions and

governmental agencies a full range of commercial banking services primarily in the southern Michigan communities

in which they are located and in areas immediately surrounding these communities.

SOUTHERN MICHIGAN BANCORP, INC. / 2007 ANNUAL REPORT     9

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

          The following discussion is designed to provide a review of the consolidated financial condition and results of operations of Southern Michigan Bancorp, Inc. ("Southern"), and its wholly-owned subsidiaries, Southern Michigan Bank & Trust ("SMB&T") and FNB Financial ("FNB"). This discussion should be read in conjunction with the consolidated financial statements and related footnotes.

          Forward-Looking Statements

          Statements contained in Management's Discussion and Analysis of Financial Condition and Results of Operations include forward-looking statements that are based on management's beliefs, assumptions, current expectations, estimates and projections about the financial services industry, the economy, and about Southern itself.   Forward-looking statements are identifiable by words or phrases such as "outlook," or "strategy"; that an event or trend "may," "should," "will," or "is likely" to occur or "continue" or "is scheduled" or "on track" or that Southern Michigan Bancorp, Inc. or its management "anticipates," "believes," "estimates," "plans," "forecasts," "intends," "predicts," "projects," or "expects" a particular result, or is "confident" or "optimistic" that an event will occur, and variations of such words and similar expressions.  All of the information concerning interest rate sensitivity is forward-looking.  Management's determination of the pro vision and allowance for loan losses involves judgments that are inherently forward-looking.  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 Southern's Annual Report on Form 10-K to be filed with the Securities and Exchange Commission on or before March 31, 2008; the timing and level of asset growth; changes in banking laws and regulations; changes in tax laws; changes in prices, levies and assessments; the impact of technological advances and issues; governmental and regulatory policy changes; opportunities for acquisitions and the effective completion of acquisitions and integration of acquired entities; the possibility that anticipated cost savings and revenue enhancements from acquisitions, restructurings, reorganizations and bank consolidations may not be realized at amounts projected, at all or within expected time frames; the local and global effects of the ongoing war on terrorism and other military actions, including actions in Iraq; and current uncertainties and fluctuations in the financial markets and stocks of financial s ervices providers due to concerns about credit availability and concerns about the Michigan economy in particular. 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.

          This section is intended to provide meaningful cautionary statements.  This should not be construed as a complete list of all economic, competitive, governmental, technological, and other factors that could adversely affect our expected consolidated financial position, results of operations or liquidity.  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 annual report.

          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

10     SOUTHERN MICHIGAN BANCORP, INC. / 2007 ANNUAL REPORT

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 requires the use of significant management estimates.

          Mortgage Servicing Rights: Mortgage servicing rights represent the estimated 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.

          Merger with FNB Financial Corporation

          On December 1, 2007, Southern merged with FNB Financial Corporation. The 2007 results of operations include one month of combined financial results after the close of the merger and the 2007 year end balance sheet includes all of the assets acquired and liabilities assumed from FNB Financial Corporation. Therefore, a comparison of 2007 and 2006 financial condition and results of operations is materially affected as a result of the merger. For more detailed information concerning the merger, see note C to the consolidated financial statements.

          Results of Operations

          Southern's net income for 2007 was $4,133,000, a 3.1% improvement from 2006. Provision for loan losses in the amount of $745,000 was expensed in 2007; up from $500,000 in 2006. Non-interest income of Southern, including gain on loan sales, increased 4.0% to $4,268,000 in 2007. Non-interest expense of $12,860,000 in 2007 was 2.1% higher than the 2006 costs.

	Percent Change from Prior Year			Percent Change from Prior Year
	2007	2006		2007	2006
Net interest income	2.84%	7.87%	Assets	45.56%	3.75%
Provision for loan losses	49.00%	-33.33%	Gross loans	32.89%	4.17%
Non-interest income	3.97%	-2.86%	Allowance for loan losses	56.15%	4.26%
Non-interest expense	2.06%	6.77%	Deposits	41.29%	5.38%
Net income	3.09%	5.44%	Other borrowings	111.57%	-41.16%
			Shareholders' equity	55.25%	9.08%

          Results of operations can be measured by various ratio analyses. Two widely recognized performance indicators are return on equity and the return on assets. Southern's return on average equity was 12.72% in 2007, 14.54% in 2006 and 14.81% in 2005. The return on average assets was 1.18% in 2007, 1.25% in 2006 and 1.19% in 2005.

SOUTHERN MICHIGAN BANCORP, INC. / 2007 ANNUAL REPORT     11

          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.

          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 2007, Southern's net interest margin (FTE) was 4.83% compared to 5.05% for 2006 and 4.73% in 2005. Beginning in 2004 and continuing in 2005 and the first six months of 2006, the Federal Reserve increased rates 25 basis points 17 different times. From mid 2006 through August 2007 the prime rate remained steady. Beginning with a 50 basis point drop in September 2007, the Federal Reserve began a campaign of decreasing overnight borrowing rates to stimulate the economy. In both October and December rates were dropped an additional 25 basis points, for a 100 basis point total drop in 2007. Even as overnight borrowing rates began to decline, many larger banks continued to pay relatively high rates for deposits as they looked for sources of funding their loan commitments.

          Despite the lower net interest margin in 2007, net interest income increased during the year by $508,000. The increase was a result of a $2,187,000 improvement in interest income partially offset by an increase in interest expense of $1,679,000. The increase in interest income was primarily a result of $24.9 million of additional earning assets. Approximately $10.5 million of the increase in average earning assets was a result of the merger with FNB. The average rate realized on earning assets in 2007 was 7.55%, an increase of 13 basis points from the 2006 results of 7.42%, and 97 basis points higher than the 6.58% realized in 2005. This increase in average rates also contributed to the increase in interest income.

          Increases in interest expense partially offset the interest income. Deposit rate increases that went into effect during the last half of 2006 impacted the full year of interest expense of 2007.          

12     SOUTHERN MICHIGAN BANCORP, INC. / 2007 ANNUAL REPORT

          The following table presents a summary of net interest income (FTE) for 2007, 2006 and 2005.

Table 1. Average Balances and Tax Equivalent Interest Rates

(Dollars in Thousands)

	2007							2006							2005
	Average Balance			Interest		Yield/ Rate		Average Balance			Interest		Yield/ Rate		Average Balance			Interest		Yield/ Rate
ASSETS
Interest earning assets:
Loans(1)(2)(3)	$	259,811		$	20,824	8.02	%	$	248,088		$	19,494	7.86	%	$	245,637		$	17,225	7.01	%
Taxable investment securities(4)		31,586			1,648	5.22			22,909			1,018	4.44			26,215			875	3.34
Tax-exempt investment securities(1)		16,189			982	6.07			14,533			841	5.79			13,478			786	5.83
Federal funds sold		9,419			492	5.22			7,746			406	5.24			4,904			206	4.20
Total interest earning assets		317,005			23,946	7.55			293,276			21,759	7.42			290,234			19,092	6.58
Non-interest earning assets:
Cash and due from banks		8,940							9,056							10,240
Other assets		28,156							22,737							21,759
Less allowance for loan losses		(3,474	)						(3,175	)						(3,584	)
Total assets	$	350,627						$	321,894						$	318,649
LIABILITIES AND   SHAREHOLDERS' EQUITY
Interest bearing liabilities:
Demand deposits	$	119,118		$	3,106	2.61	%	$	104,108		$	2,249	2.16	%	$	97,013		$	1,249	1.29	%
Savings deposits		31,874			188	.59			29,295			113	0.39			32,296			121	0.37
Time deposits		103,819			4,464	4.30			96,751			3,721	3.85			88,629			2,672	3.01
Securities sold under agreements    to repurchase and overnight    borrowings		3,235			114	3.52			39			2	5.13			229			6	2.62
Other borrowings		5,340			362	6.78			10,519			475	4.52			19,732			1,015	5.14
Subordinated debentures		5,155			404	7.84			5,155			399	7.74			5,155			308	5.97
Total interest bearing liabilities		268,541			8,638	3.22			245,867			6,959	2.83			243,054			5,371	2.21
Non-interest bearing liabilities:
Demand deposits		42,618							42,146							43,218
Other		4,887							4,285							4,552
Common stock subject to    repurchase obligation		2,089							2,030							2,155
Shareholders' equity		32,492							27,566							25,670
Total liabilities and shareholders'    equity	$	350,627						$	321,894						$	318,649
Net interest income				$	15,308						$	14,800						$	13,721
Interest rate spread						4.33	%						4.59	%						4.37	%
Net yield on interest earning assets						4.83	%						5.05	%						4.73	%

(1)	Includes tax equivalent adjustment of interest (assuming a 34% tax rate) for securities and loans of $334,000 and $68,000, respectively for 2007; $286,000 and $19,000, respectively for 2006; and $267,000 and $17,000, respectively for 2005.
(2)	Average balance includes average nonaccrual loan balances of $3,373,000 in 2007; $2,951,000 in 2006; and $2,926,000 in 2005.
(3)	Interest income includes loan fees of $353,000 in 2007; $400,000 in 2006; and $412,000 in 2005.
(4)	Average balance includes average unrealized gain (loss) of $14,000 in 2007; ($199,000) in 2006; and ($53,000) in 2005 on available for sale securities. The yield was calculated without regard to this average unrealized gain (loss).

SOUTHERN MICHIGAN BANCORP, INC. / 2007 ANNUAL REPORT     13

          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)

	2007 Compared to 2006 Increase (Decrease) Due To									2006 Compared to 2005 Increase (Decrease) Due To
Interest income on:	Rate			Volume			Net			Rate			Volume			Net
Loans	$	396		$	934		$	1,330		$	2,096		$	173		$	2,269
Taxable investment securities		198			432			630			263			(120	)		143
Tax-exempt investment securities		42			99			141			(6	)		61			55
Federal funds sold		(1	)		87			86			60			140			200
Total interest earning assets	$	635		$	1,552		$	2,187		$	2,413		$	254		$	2,667
Interest expense on:
Demand deposits	$	505		$	352		$	857		$	903			97		$	1,000
Savings deposits		64			11			75			3			(11	)		(8	)
Time deposits		459			284			743			787			262			1,049
Federal funds purchased		(1	)		113			112			3			(7	)		(4	)
Other borrowings		179			(292	)		(113	)		(112	)		(428	)		(540	)
Subordinated debentures		5			-			5			91			-			91
Total interest bearing liabilities	$	1,211		$	468		$	1,679		$	1,675		$	(87	)	$	1,588
Net interest income	$	(576	)	$	1,084		$	508		$	738		$	341		$	1,079

          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 deemed appropriate by management. The allowance for loan losses is maintained at 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, if necessary, 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" on page 17.

14     SOUTHERN MICHIGAN BANCORP, INC. / 2007 ANNUAL REPORT

          The provision for loan losses was $745,000 in 2007, $500,000 in 2006 and $750,000 in 2005. In both 2007 and 2006, the provision for loan losses reflects net charge off experience, the growth of the commercial portfolio as well as the continued decline in the Michigan economy and the local real estate market. Net charge offs were $349,000 and $365,000 for 2007 and 2006, respectively. Commercial loans increased $52 million in 2007 with approximately $43 million coming from the FNB merger. The commercial loan portfolio increased in excess of $18 million in 2006. In 2005, Southern charged off a commercial loan, which necessitated provision expense.

          Non-Interest Income

          Non-interest income increased $163,000 or 4.0% in 2007 and decreased 2.9% in 2006, and 1.0% in 2005. The 2007 increase is due to the merger with FNB, which provided $174,000 of income in 2007.

          In order to reduce the risk associated with changing interest rates, Southern regularly sells fixed rate real estate mortgage loans on the secondary market. Southern recognizes a profit at the time of the sale. Southern originated real estate mortgage loans of $17,015,000 in 2007 compared to $26,343,000 in 2006 and $35,572,000 during 2005. Net gains on loan sales decreased $237,000 in 2007, $169,000 in 2006 and $58,000 in 2005 as residential mortgage refinancing activity declined as rates moved up from 2004 historic lows.

          In 2007, offsetting the decrease in net gains on loan sales was an 11.5% or $82,000 increase in trust fees and $152,000 or 8.3% increase in deposit account service charges. The average balance of loans serviced for others increased over $16 million in 2007 increasing the associated fees by $39,000. Southern also recorded a $128,000 gain on the sale of other real estate owned (OREO) during 2007.

          Net security gains of $13,000, $1,000 and $4,000 were recognized in 2007, 2006 and 2005, respectively.

          Non-Interest Expense

          Non-interest expenses increased $260,000 or 2.1% in 2007, 6.8% in 2006 and 1.2% in 2005. During 2007, salaries and employee benefits increased 8.7% or $611,000. The FNB merger added 60 full time equivalent employees in December 2007 which added $247,000 of salary and benefits expense. Reductions in pension expense due to the partial freeze of the plan in 2006 were offset by increases to the 401(k) plan as Southern enhanced the employer match and added a safe harbor 3% contribution provision. Health insurance costs increased 12.4% or $71,000 in 2007 compared to 2006.

          In 2006, Southern recorded over $900,000 in unusual expenses. These included a loss on a repossessed asset associated with a prior year failed commercial loan, payments for marketing consultants and legal expenses.

          As a result of lower volumes of mortgage loans being generated, commissions paid to mortgage loan originators were down in 2007 and 2006 compared to 2005. Offsetting the decrease in 2005 was an increase in employee benefit plan costs, with the largest increase in pension costs.

          Income Tax Expense

          Income tax expense was $1,436,000 in 2007, $1,491,000 in 2006, and $1,310,000 in 2005. 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 approximately $234,000 in 2007, $180,000 in 2006, and $170,000 in 2005.

SOUTHERN MICHIGAN BANCORP, INC. / 2007 ANNUAL REPORT     15

          Financial Condition

          Securities Available for Sale

          The securities available for sale portfolio increased by 117.7%, or $41,913,000, from December 31, 2006 to December 31, 2007. Securities totaling $40 million were acquired in December 2007 from the merger with FNB.

          Securities available for sale were approximately the same in 2006 as in 2005. Approximately $31 million of securities matured or were called in 2007 as compared to $21 million in 2006, substantially all of which were replaced with new securities. The portfolio is monitored and securities or federal funds are purchased as deemed prudent by the asset liability management committee.

          The securities available for sale portfolio had net unrealized gains of $271,000 at December 31, 2007 and net unrealized losses of $64,000 December 31, 2006.

          Loans

          Substantially all loans are granted to customers located in Southern's service area, which is primarily Southern Michigan. Gross loans increased by $83.2 million or 32.9% in 2007, and 4.2% in 2006. The 2007 increase reflects $78.3 million of loans acquired from the merger with FNB. Excluding the loans acquired in the merger with FNB, total loans increased $4.9 million entirely in the commercial and commercial real estate categories with declines in the real estate mortgage, consumer and construction categories.

          In 2006, commercial loans increased $18,479,000 or 12.1%, while consumer loans and real estate mortgage loans were down $2,571,000 and $5,797,000, respectively. Likewise, in 2005, commercial loans increased $3,153,000 or 2.1%, while consumer loans and real estate mortgage loans were down $478,000 and $1,345,000, respectively. Commercial loans increased as lenders saw positive relationships with current customers lead to new customer opportunities. Real estate mortgage loans decreased as payments on existing loans exceeded new loan volume. A decrease in home values and general economic conditions in Michigan has led to a large number of homes on the market, making it difficult for people to refinance or move. Consumer loans have decreased due to fewer originations of automobile, recreational vehicles and personal loans.

          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 $64,041,000 and $57,141,000 at December 31, 2007 and 2006, 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, 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 collectibility 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.

16     SOUTHERN MICHIGAN BANCORP, INC. / 2007 ANNUAL REPORT

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

	December 31
	2007			2006			2005
	(Dollars in thousands)
Nonaccrual loans:
Commercial, financial and agricultural	$	3,032		$	3,062		$	2,472
Real estate mortgage		1,342			449			118
Installment		31			7			-
		4,405			3,518			2,590
Loans contractually past due 90 days or
more and still on accrual:
Commercial, financial and agricultural		411			-			934
Real estate mortgage		-			-			-
Installment		18			6			62
		429			6			996
Total nonperforming loans		4,834			3,524			3,586
Other real estate owned		866			693			706
Total nonperforming assets	$	5,700		$	4,217		$	4,292
Nonperforming loans to year-end loans		1.44	%		1.39	%		1.48	%
Nonperforming assets to total assets		1.19	%		1.28	%		1.35	%

          Nonperforming loans are subject to continuous monitoring by management and estimated losses are specifically allocated for in the allowance for loan losses where appropriate. At December 31, 2007, 2006 and 2005, Southern had loans of $9,144,000, $7,281,000 and $6,421,000, respectively, which were considered impaired.

          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 regular, quarterly assessments of the probable estimated incurred losses inherent in the loan portfolio. The allowance is based on two principles of accounting: Statement of Financial Accountings Standards (SFAS) No. 5, "Accounting for Contingencies" and SFAS No. 114, "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 the three and five year historical loss experience for each loan category. The component may be adjusted for significant factors that, in management's opinion, will affect the collectibility of the portfolio. The resulting loss estimate could 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. These allowances are calculated in accordance with SFAS No. 114.

SOUTHERN MICHIGAN BANCORP, INC. / 2007 ANNUAL REPORT     17

          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 is maintained at a level, which in management's opinion, is adequate to absorb probable incurred loan losses in the loan portfolio. While management uses the best 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 for loan losses was $5,156,000 or 1.53% of loans at December 31, 2007 compared to $3,302,000 or 1.31% of loans at December 31, 2006. The FNB transaction added $1,462,000 to the December 31, 2007 allowance. The December 31, 2007 allowance consists of $2,354,000 in the historical loss experience component and specifically allocated reserves, leaving $2,802,000 from the other factors. This compares to $1,880,000 from the historical loss experience component and specifically allocated reserves and $1,422,000 from other factors at December 31, 2006.

          Deposits

          Deposits have traditionally represented Southern's principal source of funds. Total deposits increased 41.3% or $116,660,000 in 2007 and 5.4% or $14,431,000 in 2006. Approximately $118 million of deposits were acquired in the merger with FNB in December 2007. Of the deposits acquired, checking and savings accounts totaled $71 million and time deposits totaled $47 million. In 2006, time deposits and higher rate money market accounts increased while non-interest bearing and savings accounts decreased. Attracting and keeping traditional deposit relationships will continue to be a focus of Southern.

          Securities Sold Under Agreements to Repurchase

          Securities sold under agreements to repurchase increased $9.6 million during 2007 as one large deposit customer converted to this product.

          Other Borrowings

          Southern borrowed $8,000,000 in December 2007 which was used to partially fund the FNB merger. The borrowings consisted of a $7,000,000 variable rate term loan and a $1,000,000 under the $3,000,000 variable rate revolving line of credit, both with a correspondent bank. At December 31, 2007, $7,000,000 was outstanding on the term loan and $1,000,000 was outstanding on the line of credit.

          As another alternate funding source, Southern obtains bullet advances from the Federal Home Loan Bank (FHLB). The advances are secured by a blanket collateral agreement with the FHLB giving the FHLB an unperfected security interest in Southern's one-to-four family mortgage and SBA loans. FHLB advances may be a less expensive way to obtain longer term funds than paying a premium for long term deposits. Southern acquired $3 million in FHLB advances in the FNB merger. At December 31, 2007 Southern had $5,536,000 in FHLB advances with interest rates between 3.29% - 4.57%, averaging 3.98%.

          Other borrowings decreased in 2006, as Southern paid off a $5,000,000 advance. At December 31, 2006, Southern had $5,651,000 in FHLB advances with interest rates between 3.49% - 4.57%.

18     SOUTHERN MICHIGAN BANCORP, INC. / 2007 ANNUAL REPORT

          Subordinated Debentures

          In March 2004, Southern Michigan Bancorp Capital Trust I, a Delaware statutory 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 security of the trust and the proceeds of the preferred securities sold by the trust. Southern may redeem the subordinated debentures, in whole or in part, in a principal amount with integral multiples of $1,000, on or after April 7, 2009 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 or 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 no t to exceed five consecutive years.

          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 sum of the three month London Interbank Offered Rate (LIBOR) and 2.75%. The rate at December 31, 2007 was 7.99%. Southern's investment in the common stock of the trust was $155,000 and is included in other assets.

          Capital Resources

          Southern maintains a strong capital base to take advantage of business opportunities and absorb the risks inherent in the business.

          Shareholder equity increased 55.3% or $15,737,000 from $28,482,000 at December 31, 2006 to $44,219,000 at December 31, 2007. A total of $12.7 million of common stock was issued to FNB shareholders in December 2007 as part of the merger with FNB. Other growth in equity resulted primarily from current year's earnings offset by cash dividends declared.

          The Federal Reserve Board (FRB) has imposed risk-based capital guidelines applicable to Southern. These guidelines require that banks and bank holding companies maintain capital commensurate with both on and off balance sheet credit risks of their operations. Under the guidelines, a bank must have a minimum ratio of total capital to risk-weighted assets of 8 percent. In addition, a bank and a bank holding company must maintain a minimum ratio of Tier 1 capital equal to 4 percent of risk-weighted assets. Tier 1 capital includes common shareholders' equity, qualifying perpetual preferred stock and minority interests in equity accounts of consolidated subsidiaries less goodwill, core deposit intangibles and 10 percent of mortgage servicing rights assets.

          As a supplement to the risk-based capital requirements, the FRB has also adopted leverage capital ratio requirements. The leverage ratio requirements are intended to ensure that adequate capital is maintained against risk other than credit risk. The leverage ratio requirements establish a minimum ratio of Tier 1 capital to total assets of 3 percent for the most highly rated bank holding companies and banks that do not anticipate and are not experiencing significant growth. All other bank holding companies are required to maintain a ratio of Tier 1 capital to assets of 4 to 5 percent, depending on the particular circumstances and risk profile of the institution.

          Regulatory agencies have determined that the capital component created by the adoption of FASB Statement 115 should not be included in Tier 1 capital. As such, the net unrealized gain or loss on available for sale securities is not included in the ratios listed in Note U to the consolidated financial statements. The ratios include the common stock subject to repurchase obligation in Southern's employee stock ownership plan (ESOP). As discussed in Note U, Southern and its subsidiary banks all exceed the well capitalized requirements at December 31, 2007.

SOUTHERN MICHIGAN BANCORP, INC. / 2007 ANNUAL REPORT     19

          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.

          Southern maintains correspondent accounts with a number of other banks for various purposes. In addition, cash sufficient to meet the operating needs of its branches is maintained at its lowest practical levels. At times, Southern is a participant in the federal funds market. Federal funds are generally borrowed or sold for one-day periods. During 2007 and 2006, federal funds were sold with an average balance of $9,419,000 and $7,746,000, respectively. As disclosed in Note J to Southern's consolidated financial statements, Southern has available credit arrangements enabling it to purchase up to $32,000,000 in federal funds should the need arise.

          Southern's principal source of funds to pay cash dividends is the earnings and dividends paid by SMB&T and FNB, which are restricted under current banking regulations as described in Note U to the consolidated financial statements. As discussed under Other Borrowings, Southern also has a $3,000,000 bank line of credit agreement to meet cash demands.

          Impact of Inflation and Changing Prices

          The majority of assets and liabilities of a financial institution are monetary in nature and therefore 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, 2007, Southern had commitm ents of $64,041,000 for lines of credit, $1,340,000 in standby letters of credit and $21,000 in 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.

20     SOUTHERN MICHIGAN BANCORP, INC. / 2007 ANNUAL REPORT

Regulatory Matters

          Representatives of the FDIC completed an examination of Southern's subsidiary bank using financial information as of September 30, 2006. The purpose of the examination was to determine the safety and soundness of Southern.

          Examination procedures require individual judgments about a borrower's ability to repay loans, sufficiency of collateral values and the effects of changing economic circumstances. These procedures are similar to those employed by Southern in determining the adequacy of the allowance for loan losses and in classifying loans. Judgments made by regulatory examiners may differ from those made by management. Southern's level and classification of identified potential problem loans was not revised significantly as a result of this regulatory examination process.

          Management and the board of directors evaluate existing practices and procedures on an ongoing basis. In addition, regulators often make recommendations during the course of their examination that relate to the operations of Southern. As a matter of practice, management and the board of directors consider such recommendations promptly.

SOUTHERN MICHIGAN BANCORP, INC. / 2007 ANNUAL REPORT     21

MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL INFORMATION

Management of Southern Michigan Bancorp, Inc. has prepared and is responsible for the accompanying 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 Company maintains a system of internal accounting controls designed to provide reasonable assurance that assets are safeguarded and that transactions are executed in accordance with the Company's authorizations and policies. Further, such a system provides reasonable assurances as to the integrity and reliability of the financial statements which fairly present financial position and results of operations in conformity with accounting principles generally accepted in the United States of America. Internal accounting controls are augmented by written policies covering standards of personal and business conduct and an organizational structure providing for division of responsibility and authority.

Management monitors the effectiveness of and compliance with established control systems through a continuous program of internal audit and credit examinations and recommends possible improvements thereto. Management believes that, as of December 31, 2007, the Company's system of internal controls has prevented or detected on a timely basis any occurrences that could be material to the financial statements and that timely corrective actions have been initiated when appropriate.

The Board of Directors exercises its responsibility for the financial statements and related information through the Audit Committee, which is composed entirely of outside directors. The Audit Committee meets regularly with management, internal auditors and Clifton Gunderson LLP. Clifton Gunderson LLP has direct and confidential access to the Audit Committee to discuss the results of their audit.

The 2007 financial statements have been audited by the independent accounting firm of Clifton Gunderson 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. The Company believes that all representations made to the independent auditors during their audit were valid and appropriate. Clifton Gunderson LLP's audit report is presented on the following page.

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

22     SOUTHERN MICHIGAN BANCORP, INC. / 2007 ANNUAL REPORT

SOUTHERN MICHIGAN BANCORP, INC.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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, 2007 and 2006, and the related consolidated statements income, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 2007. 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, 2007 and 2006, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2007 in conformity with accounting principles generally accepted in the United States of America.

Toledo, Ohio
March 11, 2008

SOUTHERN MICHIGAN BANCORP, INC. / 2007 ANNUAL REPORT     23

SOUTHERN MICHIGAN BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)

	December 31,
	2007			2006
ASSETS
Cash	$	4,027		$	3,211
Due from banks		10,443			6,158
Cash and cash equivalents		14,470			9,369
Federal funds sold		6,449			10,429
Securities available for sale		77,515			35,602
Loans held for sale, net of valuation of $0 in 2007		624			-
Loans, net of allowance for loan losses of $5,156 - 2007 ($3,302 - 2006)		330,822			249,523
Premises and equipment, net		13,335			8,665
Accrued interest receivable		3,387			2,506
Net cash surrender value of life insurance		10,015			7,502
Goodwill		13,422			620
Other intangible assets		3,091			-
Other assets		7,048			5,675
Total Assets	$	480,178		$	329,891
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Non-interest bearing	$	57,027		$	42,281
Interest bearing		342,142			240,228
Total deposits		399,169			282,509
Securities sold under agreements to repurchase and overnight         borrowings		9,776			184
Accrued expenses and other liabilities		5,077			4,440
Other borrowings		14,753			6,973
Subordinated debentures		5,155			5,155
Total Liabilities		433,930			299,261
Common stock subject to repurchase obligation in   Employee Stock Ownership Plan, 92,203 shares outstanding in 2007   (89,122 shares in 2006)		2,029			2,148
Shareholders' equity
Preferred stock, 100,000 shares authorized; none issued or outstanding		-			-
Common stock, $2.50 par value:
Authorized - 4,000,000 shares
Issued - 2,307,924 shares in 2007 (1,769,248, shares in 2006)
Outstanding (other than ESOP shares) - 2,215,721 shares
in 2007 (1,680,126 shares in 2006)		5,539			4,200
Additional paid-in capital		17,087			5,446
Retained earnings		21,629			19,021
Accumulated other comprehensive income (loss), net		122			(42	)
Unearned Employee Stock Ownership Plan shares		(103	)		(143	)
Unearned restricted stock compensation		(55	)		-
Total Shareholders' Equity		44,219			28,482
Total Liabilities and Shareholders' Equity	$	480,178		$	329,891

See accompanying notes to consolidated financial statements.

24     SOUTHERN MICHIGAN BANCORP, INC. / 2007 ANNUAL REPORT

SOUTHERN MICHIGAN BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)

	Year ended December 31,
	2007		2006		2005
Interest income:
Loans, including fees	$	20,756	$	19,475	$	17,208
Securities:
Taxable		1,648		1,018		875
Tax-exempt		648		555		519
Other		492		406		206
Total interest income		23,544		21,454		18,808
Interest expense:
Deposits		7,758		6,083		4,042
Other		880		876		1,329
Total interest expense		8,638		6,959		5,371
Net Interest Income		14,906		14,495		13,437
Provision for loan losses		745		500		750
Net Interest Income after Provision for Loan Losses		14,161		13,995		12,687
Non-interest income:
Service charges on deposit accounts		1,990		1,838		1,953
Trust fees		791		709		652
Net securities gains		13		1		4
Net gains on loan sales		390		627		796
Earnings on life insurance assets		286		272		293
Gain on life insurance proceeds		-		124		-
Other		798		534		528
Total non-interest income		4,268		4,105		4,226
Non-interest expense:
Salaries and employee benefits		7,652		7,041		6,998
Occupancy, net		954		766		759
Equipment		839		756		837
Printing, postage and supplies		378		373		351
Advertising and marketing		237		284		236
Professional and outside services		747		951		588
Amortization of other intangibles		31		22		39
Other		2,022		2,407		1,993
Total non-interest expense		12,860		12,600		11,801
Income before income taxes		5,569		5,500		5,112
Federal income taxes		1,436		1,491		1,310
Net Income	$	4,133	$	4,009	$	3,802
Basic Earnings Per Common Share	$	2.29	$	2.27	$	2.13
Diluted Earnings Per Common Share	$	2.28	$	2.26	$	2.12

See accompanying notes to consolidated financial statements.

SOUTHERN MICHIGAN BANCORP, INC. / 2007 ANNUAL REPORT     25

SOUTHERN MICHIGAN BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands, except number of shares and per share data)
Years ended December 31, 2007, 2006 and 2005

	Common Stock			Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss), Net			Unearned ESOP Shares			Unearned Compen- sation			Total
Balance at January 1, 2005	$	4,354		$	7,218		$	15,822		$	111		$	(40	)	$	-		$	27,465
Comprehensive income:
Net income for 2005								3,802												3,802
Net change for the year in other
comprehensive income items											(235	)								(235	)
Total comprehensive income																				3,567
Cash dividends declared - $.67 per share								(1,205	)											(1,205	)
Common stock repurchased and
retired (142,765 shares)		(357	)		(3,733	)														(4,090	)
Change in common stock subject
to repurchase		23			465															488
Purchase of shares by ESOP (7,568
shares)														(204	)					(204	)
Reduction of ESOP obligation														60						60
Stock options exercised (1,811 shares)		5			24															29
Balance at December 31, 2005		4,025			3,974			18,419			(124	)		(184	)		-			26,110
Comprehensive income:
Net income for 2006								4,009												4,009
Net change for the year in other
comprehensive income items											82									82
Total comprehensive income																				4,091
Cash dividends declared - $.78 per share								(1,381	)											(1,381	)
Common stock repurchased and
retired (10,050 shares)		(25	)		(215	)														(240	)
Issuance of shares for 5% stock   dividend, net of fractional shares
(84,355 shares)		211			1,813			(2,026	)											(2	)
Change in common stock subject
to repurchase		(25	)		(212	)														(237	)
Reduction of ESOP obligation														41						41
Stock options exercised (5,581 shares)		14			86															100
Balance at December 31, 2006		4,200			5,446			19,021			(42	)		(143	)		-			28,482
Comprehensive income:
Net income for 2007								4,133												4,133
Net change for the year in other
comprehensive income items											223									223
Total comprehensive income																				4,356
Cash dividends declared - $.80 per share								(1,525	)											(1,525	)
Issuance of restricted stock (2,740   shares of common stock at   $24.58 per share)		7			60												(67	)		- -
Vesting of restricted stock																	12			12
Issuance of 535,936 shares in merger   with FNB		1,340			11,371															12,711
Change in common stock subject
to repurchase		(8	)		127															119
Reduction of ESOP obligation														40						40
Stock option expense					83															83
Adjustment to initially apply SFAS 158,   net of tax											(59	)								(59	)
Balance at December 31, 2007	$	5,539		$	17,087		$	21,629		$	122		$	(103	)	$	(55	)	$	44,219

See accompanying notes to consolidated financial statements.

26     SOUTHERN MICHIGAN BANCORP, INC. / 2007 ANNUAL REPORT

SOUTHERN MICHIGAN BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

	Year ended December 31,
	2007			2006			2005
Operating Activities
Net income	$	4,133		$	4,009		$	3,802
Adjustments to reconcile net income to net cash
from operating activities:
Provision for loan losses		745			500			750
Depreciation		835			696			643
Net amortization (accretion) of investment securities		(33	)		(69	)		140
Stock option and restricted stock grant compensation expense		95			-			-
Net securities gains		(13	)		(1	)		(4	)
Loans originated for sale		(17,015	)		(26,343	)		(35,572	)
Proceeds on loans sold		17,140			27,195			35,931
Net gains on loan sales		(390	)		(627	)		(796	)
Net realized loss on disposal of fixed assets		1			2			-
Gain on life insurance proceeds		-			(124	)		-
Amortization of other intangible assets		31			22			39
Net change in obligation under ESOP		40			41			(144	)
Net change in:
Accrued interest receivable		(52	)		(395	)		(170	)
Cash surrender value		(286	)		38			(293	)
Other assets		1,041			1,693			(232	)
Accrued expenses and other liabilities		(821	)		(144	)		187
Net cash from operating activities		5,451			6,493			4,281
Investing Activities
Bank acquisition, net of $4,199 cash assumed		(9,565	)		-			-
Activity in available for sale securities:
Proceeds from sales		-			-			105
Proceeds from maturities and calls		30,733			20,628			18,289
Purchases		(32,007	)		(20,066	)		(10,561	)
Net change in federal funds sold		9,495			(2,993	)		(7,436	)
Proceeds from life insurance		67			-			-
Loan originations and payments, net		(7,438	)		(10,974	)		(3,375	)
Proceeds from sale of equipment		2			-			-
Additions to premises and equipment		(2,564	)		(2,168	)		(1,247	)
Net cash from investing activities		(11,277	)		(15,573	)		(4,225	)
Financing Activities
Net change in deposits		(1,938	)		14,431			16,210
Net change in securities sold under agreements to repurchase and           overnight borrowings		9,592			-			(625	)
Proceeds from other borrowings		9,084			1,127			400
Repayments of other borrowings		(4,286	)		(6,134	)		(10,139	)
Cash dividends paid		(1,525	)		(1,331	)		(901	)
Cash paid in lieu of fractional shares for 5% stock dividend		-			(2	)		-
Stock options exercised		-			100			29
Repurchase of common stock		-			(240	)		(4,090	)
Net cash from financing activities		10,927			7,951			884
Net change in cash and cash equivalents		5,101			(1,129	)		940
Beginning cash and cash equivalents		9,369			10,498			9,558
Ending cash and cash equivalents	$	14,470		$	9,369		$	10,498

See accompanying notes to consolidated financial statements.

SOUTHERN MICHIGAN BANCORP, INC. / 2007 ANNUAL REPORT     27

SOUTHERN MICHIGAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note A - Nature of Operations and Significant Accounting Policies

Nature of Operations and Industry Segments: Southern Michigan Bancorp, Inc. (the Company) is a two bank holding company. The Company's business is concentrated in the banking industry segment. The subsidiary banks offer individuals, businesses, institutions and government agencies a full range of commercial banking services primarily in the southern Michigan communities in which the banks are located and in areas immediately surrounding these communities. The banks grant 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 Southern Michigan Bancorp, Inc. and its wholly-owned subsidiaries, Southern Michigan Bank & Trust (SMB&T) and FNB Financial (FNB) after elimination of significant inter-company balances and transactions. SMB&T owns SMB Mortgage Company, which transacts all residential real estate loans. It is consolidated into SMB&T financial statements. FNB owns FNB Financial Services, which conducts a brokerage business and is consolidated into FNB financial statements. 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, loss contingencies, 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 Company's ability and intent to hold the security for a period sufficient to allow for any anticipated recovery in fair value.

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.

28     SOUTHERN MICHIGAN BANCORP, INC. / 2007 ANNUAL REPORT

SOUTHERN MICHIGAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Note A - Nature of Operations and Significant Accounting Policies (continued)

Loans (Continued): 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.

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 less recoveries. Estimating the risk of loss and the amount of loss on any loan is necessarily subjective. Accordingly, 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.

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 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 existing 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 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.

Premises and Equipment: Premises and equipment are stated at cost, less accumulated depreciation. Depreciation is computed principally using accelerated methods over their estimated useful lives. The estimated useful lives are 10 to 40 years for buildings and improvements and 3 to 10 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.

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.

SOUTHERN MICHIGAN BANCORP, INC. / 2007 ANNUAL REPORT     29

SOUTHERN MICHIGAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Note A - Nature of Operations and Significant Accounting Policies (continued)

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 will be recognized in the period identified.

Other intangible assets consist of core deposit intangible assets arising from whole bank or branch acquisitions. They are initially measured at fair value and then are amortized on an accelerated method over their estimated useful life, which is 10 years.

Other Real Estate: Other real estate was $866,000 and $693,000 at December 31, 2007 and 2006 and is included in other assets. Other real estate 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 cost to sell at the date of foreclosure, establishing a new cost basis. After foreclosure, valuations are periodically performed by management and real estate is carried at the lower of carrying amount or fair value less estimated cost of disposal. Expenses, gains and losses on disposition, and reductions in carrying value are reported in other expense.

Stock Compensation: Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 123R, Share-based Payment, using the modified prospective transition method. Under this method, the Company began recognizing compensation cost for equity-based compensation for all new or modified grants after the date of adoption. Awards issued prior to 2006 that have not been modified are not affected by SFAS 123R. For 2006 no stock based employee cost was recorded as no options were granted in 2006 and all prior options were fully vested prior to January 1, 2006.

Prior to January 1, 2006 employee compensation expense under stock option plans was reported using the intrinsic value method. No stock-based compensation cost is reflected in net income for the year ending December 31, 2005 as all options granted had an exercise price equal to or greater than the market price of the underlying common stock at date of grant. The following table illustrates the effect on net income and earnings per share if expense was measured using the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock Based Compensation.

(In thousands, except per share data)	2005
Net income as reported	$	3,802
Deduct: stock based compensation expense
determined under fair value based method		(144	)
Pro forma net income	$	3,658
Basic earnings per share as reported	$	2.13
Pro forma basic earnings per share		2.05
Diluted earnings per share as reported	$	2.12
Pro forma diluted earnings per share		2.04

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

Advertising Costs: Advertising costs are expensed as incurred.

30     SOUTHERN MICHIGAN BANCORP, INC. / 2007 ANNUAL REPORT

SOUTHERN MICHIGAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Note A - Nature of Operations and Significant Accounting Policies (continued)

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.

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.

Income Taxes: Income tax expense 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.

Stock Dividends: The Company issued 84,355 common shares in connection with a 5% stock dividend effected in February 2006. All prior year information relating to earnings and dividends per share has been restated to reflect these dividends.

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. Earnings and dividends per share are restated for all stock splits and stock dividends through the date of issue 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 pension accounting required by SFAS 158, 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 a separate note. 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 southern Michigan. Commercial loans include loans collateralized by commercial real estate, business assets and agricultural loans collateralized by crops and farm equipment. Commercial, financial and agricultural loans make up approximately 67% of the loan portfolio at December 31, 2007 and the loans are expected to be repaid from cash flow from operations of businesses. Residential mortgage loans make up approximately 28% of the loan portfolio at December 31, 2007 and are collateralized by mortgages on residential real estate. Consumer loans make up approximately 5% of the loan portfolio at December 31, 2007 and are primarily collateralized by consumer assets.

SOUTHERN MICHIGAN BANCORP, INC. / 2007 ANNUAL REPORT     31

SOUTHERN MICHIGAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Note A - Nature of Operations and Significant Accounting Policies (continued)

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.

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, 2007 and 2006.

Adoption of New Accounting Standards: In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48), which was issued to require that all tax positions be evaluated using consistent criteria and measurement and further supplemented by enhanced disclosure. FIN 48, an interpretation of FASB Statement No. 109, Accounting for Income Taxes, prescribes the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. This interpretation provides clear criteria for subsequently recognizing, derecognizing, and measuring such tax positions for financial statement purposes as well as provides guidance on accrual of interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 was effective January 1, 2007 for the Company and the adoption of FIN 48 did not have a material impact on the financial statements.

In February 2006, the FASB issued Statement of Financial Accounting Standards No. 155, Accounting for Certain Hybrid Financial Instruments (SFAS No. 155), which permits fair value remeasurement for hybrid financial instruments that contain an embedded derivative that otherwise would require bifurcation. Additionally, SFAS No. 155 clarifies the accounting guidance for beneficial interests in securitizations. Under SFAS No. 155, all beneficial interests in a securitization will require an assessment in accordance with SFAS No. 133 to determine if an embedded derivative exists within the instrument. In January 2007, the FASB issued Derivatives Implementation Group Issue B40, Application of Paragraph 13(b) to Securitized Interests in Prepayable Financial Assets (DIG Issue B40). DIG Issue B40 provides an exemption from the embedded derivative test of paragraph 13(b) of SFAS No. 133 for instruments that would otherwise require bifurcation if the test is met solely because of a prepayment feature i ncluded within the securitized interest and prepayment is not controlled by the security holder. SFAS No. 155 and DIG Issue B40 are effective for fiscal years beginning after September 15, 2006. The adoption of SFAS No. 155 and DIG Issue B40 did not have a material impact on the Company's consolidated financial position or results of operations.

In September 2006, the FASB issued SFAS No. 158, Employers' Accounting for Defined Benefit Pension and Other Post-retirement Plans (SFAS 158), that requires companies to recognize the funded status of its defined benefit pension and post-retirement plans as an asset or liability on the balance sheet rather than being disclosed in the notes to the financial statements. The over-funded or under-funded status (asset or liability) is measured as the difference between the fair value of the plan assets and the projected benefit obligation for pensions and the accumulated post-retirement benefit obligation for other post-retirement benefits. The requirement to recognize the funded status in the balance sheet was effective for fiscal years ending after December 15, 2006 for public entities and years ending after June 15, 2007 for non-public entities. Since the Company did not become a public entity until 2007, the Company adopted the balance sheet recognition requirement for its year ending December 31, 2007. The adoption of SFAS 158 reduced accumulated other comprehensive income by $59,000, net of $31,000 in taxes.

32     SOUTHERN MICHIGAN BANCORP, INC. / 2007 ANNUAL REPORT

SOUTHERN MICHIGAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Note A - Nature of Operations and Significant Accounting Policies (continued)

Effect of Newly Issued But Not Yet Effective Accounting Standards: In September 2006, the FASB issued Statement No. 157, Fair Value Measurements. This Statement defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. This Statement establishes a fair value hierarchy about the assumptions used to measure fair value and clarifies assumptions about risk and the effect of a restriction on the sale or use of an asset. The standard is effective for fiscal years beginning after November 15, 2007. The impact of adopting this Statement is not expected to have a material impact on the Company's consolidated financial statements.

In February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. The standard provides companies with an option to report selected financial assets and liabilities at fair value and establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. The new standard is effective for fiscal years beginning after November 15, 2007, with early adoption permitted. The Company did not elect the fair value option for any financial assets or financial liabilities in 2007 and is in process of evaluating what, if any, impact the adoption of the Statement will have on the Company's consolidated financial statements.

In December 2007, the FASB issued Statement No. 141 (Revised 2007), Business Combinations (SFAS 141R) which establishes principles and requirements for how an acquirer in a business combination recognizes and measures in its financial statements identifiable assets acquired, liabilities assumed, and any noncontrolling interests of the acquiree. SFAS 141R also recognizes and measures any goodwill acquired, as well as gain resulting from a bargain purchase option. SFAS 141R applies to all transactions or other events in which an entity obtains control of one or more entities and also requires that costs incurred in connection with a business acquisition be expensed as incurred. SFAS 141R applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008, and early adoption is not permitted.

The FASB Emerging Issues Task Force finalized Issues No. 06-4 and 06-10, dealing with the accounting for deferred compensation and post-retirement benefit aspects of endorsement and collateral assignment split-dollar life insurance arrangements. These Issues require that a liability be recorded during the service period when a split-dollar life insurance agreement continues after participants' employment or retirement. The required accrued liability will be based on either the post-employment benefit cost for the continuing life insurance or based on the future death benefit depending on the contractual terms of the underlying agreement. The Issues are effective for fiscal years beginning after December 15, 2007. Management does not believe the adoption of the Issues will have a material impact on the Company's consolidated financial statements.

On November 5, 2007, the SEC issued Staff Accounting Bulletin No. 109, Written Loan Commitments Recorded at Fair Value through Earnings ("SAB 109"). Previously, SAB 105, Application of Accounting Principles to Loan Commitments, stated that in measuring the fair value of a derivative loan commitment, a company should not incorporate the expected net future cash flows related to the associated servicing of the loan. SAB 109 supersedes SAB 105 and indicates that the expected net future cash flows related to the associated servicing of the loan should be included in measuring fair value for all written loan commitments that are accounted for at fair value through earnings. SAB 105 also indicated that internally-developed intangible assets should not be recorded as part of the fair value of a derivative loan commitment, and SAB 109 retains that view. SAB 109 is effective for derivative loan commitments issued or modified in fiscal quarters beginning after December 15, 2007. The Company doe s not expect the impact of this standard to be material to the consolidated financial statements.

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 that will have a material effect on the consolidated financial statements as of December 31, 2007.

SOUTHERN MICHIGAN BANCORP, INC. / 2007 ANNUAL REPORT     33

SOUTHERN MICHIGAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Note A - Nature of Operations and Significant Accounting Policies (continued)

Reclassifications: Certain items in the 2006 and 2005 consolidated financial statements have been reclassified to conform with the current year presentation.

Note B - Basic and Diluted Earnings Per Common Share

A reconciliation of the numerators and denominators of basic and diluted earnings per common share for the years ended December 31, 2007, 2006 and 2005 is presented below:

	2007			2006			2005
Basic Earnings Per Common Share
Net income (in thousands)	$	4,133		$	4,009		$	3,802
Weighted average common shares outstanding		1,813,003			1,771,211			1,787,346
Less: Unallocated ESOP shares		(5,090	)		(6,679	)		(2,810	)
Weighted average common shares outstanding for basic
earnings per common share		1,807,913			1,764,532			1,784,536
Basic earnings per common share	$	2.29		$	2.27		$	2.13
Diluted Earnings Per Common Share
Net income (in thousands)	$	4,133		$	4,009		$	3,802
Weighted average common shares outstanding for basic
earnings per common share		1,807,913			1,764,532			1,784,536
Add: Dilutive effects of assumed exercises of stock options		5,393			6,303			7,185
Average shares and dilutive potential
of common shares outstanding		1,813,306			1,770,835			1,791,721
Diluted earnings per common share	$	2.28		$	2.26		$	2.12

Stock options for 131,145; 28,560 and 28,770 shares of common stock were not considered in computing diluted earnings per share for 2007, 2006 and 2005, respectively, because they were anti-dilutive.

Note C - Purchase of FNB Financial

On December 1, 2007, the Company completed a merger with FNB Financial Corporation, parent company of First National Bank of Three Rivers. Upon completion of the merger, the name of First National Bank of Three Rivers was changed to FNB Financial (FNB). The merger was accounted for using the purchase method of accounting and, accordingly, the purchase price was allocated to the assets acquired and the liabilities assumed based upon the estimated fair values as of the date of merger. For federal income tax purposes, the tax basis of the assets and liabilities of FNB at November 30, 2007 carryover. The purchase provided the Company the strategic opportunity to expand into adjacent markets since the opportunity to grow organically within the Company's existing market was limited by competition and economic conditions.

34     SOUTHERN MICHIGAN BANCORP, INC. / 2007 ANNUAL REPORT

SOUTHERN MICHIGAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Note C - Purchase of FNB Financial (Continued)

The aggregate purchase price was $26,475,000, representing $13,764,000 of cash and acquisition costs and issuance of 535,936 shares of the Company's common stock valued at $12,711,000, net of $125,000 of offering costs. The cash portion of the acquisition was financed with a $5,000,000 special dividend from SMB&T, the proceeds from a $7,000,000 five-year term loan with a correspondent bank and $1,000,000 from a line of credit with the same correspondent bank, as described in note I.

The following table summarizes the estimated fair values of the assets acquired and the liabilities assumed at the date of the merger with FNB (in thousands):

		Fair Value
Cash and cash equivalents	$	4,199
Federal funds sold		5,515
Securities		40,218
Loans, net of $1,458 allowance		76,828
Premises & equipment		2,944
Cash surrender value of bank owned life insurance		2,294
Core deposit intangible asset		3,122
Goodwill		12,802
Other assets		2,484
Total assets acquired		150,406
Deposits		118,598
Advances from Federal Home Loan Bank		2,982
Other liabilities		2,351
Total liabilities assumed		123,931
Net assets acquired	$	26,475

The purchase accounting fair value adjustments are being amortized under various methods and over the estimated lives of the corresponding assets and liabilities. Goodwill recorded from the merger amounted to $12,802,000 bringing total goodwill for the Company to $13,422,000 at December 31, 2007. Goodwill is not being amortized but is subject to an annual impairment test. A core deposit intangible asset of $3,122,000 was recorded as part of the deposits assumed and is being amortized using an accelerated basis over a period of 10 years. Amortization of the core deposit intangible asset for the period ended December 31, 2007 was $31,000, resulting in an unamortized balance of $3,091,000 at December 31, 2007. The estimated amortization expense for each of the next five years ending December 31 is as follows: 2008, $374,000; 2009, $362,000; 2010, $350,000; 2011, $339,000; and 2012 $325,000.

The following summarizes pro forma information for the years ended December 31, 2007, 2006 and 2005, assuming the merger occurred at the beginning of each year (in thousands, except share data):

	2007		2006		2005
Net interest income after provision for loan losses	$	18,253	$	17,552	$	16,969
Net income		4,155		3,987		3,620
Basic earnings per common share		1.77		1.73		1.56
Diluted earnings per common share		1.77		1.73		1.56

The pro forma information includes purchase accounting adjustments relating to interest income on loans acquired, amortization of intangible asset arising from the transaction, depreciation expense on property acquired, interest expense on deposits acquired and debt borrowings and related tax effects. The pro forma results do not necessarily represent results which would have occurred if the merger had taken place on the basis assumed above, nor are they indicative of the results of future combined operations.

SOUTHERN MICHIGAN BANCORP, INC. / 2007 ANNUAL REPORT     35

SOUTHERN MICHIGAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Note D - Securities

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

Available for sale, 2007	Fair Value		Gross Unrealized Gains		Gross Unrealized Losses
U.S. Treasury and Government agencies	$	26,430	$	92	$	(18	)
States and political subdivisions		33,352		152		(32	)
Mortgage-backed securities		17,733		86		(9	)
Total	$	77,515	$	330	$	(59	)

Available for sale, 2006	Fair Value		Gross Unrealized Gains		Gross Unrealized Losses
U.S. Treasury and Government agencies	$	13,997	$	10	$	(70	)
States and political subdivisions		17,741		52		(57	)
Corporate securities		3,000		-		-
Mortgage-backed securities		864		1		-
Total	$	35,602	$	63	$	(127	)

Included above for 2007 and 2006 are $6,468,000 and $4,200,000, respectively, of floating rate securities that are putable on a weekly basis.

Securities with unrealized losses at year end 2007 and 2006 that have not been recognized in income are as follows (in thousands):

2007	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
U.S. Treasury and Government
agencies	$	7,279	$	(10	)	$	2,485	$	(8	)	$	9,764	$	(18	)
States and political subdivisions		2,335		(21	)		1,171		(11	)		3,506		(32	)
Mortgage-backed securities		2,731		(9	)		-		-			2,731		(9	)
Total temporarily impaired	$	12,345	$	(40	)	$	3,656	$	(19	)	$	16,001	$	(59	)

2006	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
U.S. Treasury and Government
agencies	$	6,160	$	(9	)	$	5,417	$	(61	)	$	11,577	$	(70	)
States and political subdivisions		1,696		(9	)		6,452		(48	)		8,148		(57	)
Total temporarily impaired	$	7,856	$	(18	)	$	11,869	$	(109	)	$	19,725	$	(127	)

Unrealized losses have not been recognized into income as the issuers are of high credit quality, management has the intent and ability to hold for the time necessary to recover the unrealized loss, 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.

36     SOUTHERN MICHIGAN BANCORP, INC. / 2007 ANNUAL REPORT

SOUTHERN MICHIGAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Note D - Securities (continued)

Sales of available for sale securities were (in thousands):

	2007		2006		2005
Proceeds	$	-	$	-	$	105
Gross gains		-		-		4

Gains on calls of securities were $13,000 and $1,000 for 2007 and 2006, respectively. There were no such gains or losses for 2005. Contractual maturities of debt securities at year-end 2007 were as follows (in thousands):

	Fair Value
Due in one year or less	$	11,288
Due from one to five years		31,289
Due from five to ten years		13,786
Due after ten years		3,419
Mortgage-backed securities		17,733
	$	77,515

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 $26,263,000 and $7,234,000 were pledged as collateral for public deposits and for other purposes at year-end 2007 and 2006.

At year-end 2007 and 2006, the market value of securities issued by the state of Michigan and all its political subdivisions totaled $20,900,000 and $11,383,000, respectively. No other securities of any state (including all its political subdivisions) were greater than 10% of shareholders' equity.

Investments in the Federal Home Loan Bank totaled $2,057,000 and $1,173,000 at December 31, 2007 and 2006, respectively, and are included in other assets since such investments are considered restricted.

Note E - Loans

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

	2007			2006
Commercial	$	84,937		$	63,709
Real estate - commercial		129,065			97,144
Real estate - construction		11,686			10,025
Consumer		15,730			15,745
Real estate mortgage		94,560			66,202
		335,978			252,825
Less allowance for loan losses		(5,156	)		(3,302	)
Loans, net	$	330,822		$	249,523

At December 31, 2007 and 2006, certain directors and executive officers of the Company, including their associates and companies in which they are principal owners, were indebted to the banks.

The following is a summary of loans (in thousands) exceeding $60,000 in the aggregate to these individuals and their associates. Other changes include adjustments for loans applicable to one reporting period that are excludable from the other reporting period.

	2007			2006
Balance at January 1	$	11,922		$	7,555
New loans, including renewals		5,459			10,454
Repayments		(6,659	)		(7,928	)
Other changes, net		108			1,841
Balance at December 31	$	10,830		$	11,922

The unpaid principal balance of mortgage loans serviced for others, which are not included on the consolidated balance sheet, was $121,365,000 and $56,399,000 at December 31, 2007 and 2006, respectively.

SOUTHERN MICHIGAN BANCORP, INC. / 2007 ANNUAL REPORT     37

SOUTHERN MICHIGAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Note E - Loans (continued)

Activity for capitalized mortgage servicing rights was as follows (in thousands):

	2007			2006			2005
Balance at January 1	$	399		$	274		$	102
Additions		157			210			235
Acquisition of servicing rights from FNB		308			-			-
Amortized to expense		(115	)		(85	)		(63	)
Balance at December 31	$	749		$	399		$	274

No valuation allowance for capitalized mortgage servicing rights was necessary at December 31, 2007, 2006 or 2005 since the fair value of such rights approximated or exceeded the carrying value.

Note F - Allowance For Loan Losses

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

	2007			2006			2005
Balance at January 1	$	3,302		$	3,167		$	3,459
Provision for loan losses		745			500			750
Addition resulting from FNB acquisition		1,458			-			-
Loans charged off		(525	)		(485	)		(1,171	)
Recoveries		176			120			129
Net charge-offs		(349	)		(365	)		(1,042	)
Balance at December 31	$	5,156		$	3,302		$	3,167

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

	2007		2006
Year end loans with allowance for loan losses allocated	$	6,099	$	5,758
Year end loans with no allowance for loan losses allocated		3,045		1,523
Total impaired loans	$	9,144	$	7,281
Amount of allowance allocated to these loans	$	1,013	$	906

	2007		2006		2005
Average balance of impaired loans during the year	$	9,362	$	7,826	$	8,042
Cash basis interest income recognized during the year	$	364	$	425	$	309
Interest income recognized during the year	$	366	$	418	$	317

Nonperforming loans at December 31 were as follows (in thousands):

	2007		2006
Loans past due over 90 days still on accrual	$	429	$	6
Nonaccrual loans		4,405		3,518

Nonperforming loans and impaired loans are defined differently. Some loans may be included in both categories, whereas other loans may only be included in one category.

38     SOUTHERN MICHIGAN BANCORP, INC. / 2007 ANNUAL REPORT

SOUTHERN MICHIGAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Note G - Premises and Equipment, Net

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

	2007			2006
Land	$	2,150		$	1,322
Buildings and improvements		14,285			10,903
Furniture and equipment		6,935			5,677
		23,370			17,902
Less accumulated depreciation		(10,035	)		(9,237	)
Totals	$	13,335		$	8,665

Depreciation and amortization expense charged to operations was approximately $835,000, $696,000 and $643,000 in 2007, 2006 and 2005, respectively.

Lease commitments under noncancelable operating equipment leases at December 31, 2007 were as follows (in thousands):

2008	$	68
2009		46
2010		19
2011		2
Total	$	135

Note H - Deposits

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

	2007		2006
Non-interest bearing checking	$	57,027	$	42,281
Interest bearing checking		86,971		50,177
Savings		56,877		28,693
Money market accounts		63,665		60,835
Time deposits		134,629		100,523
Totals	$	399,169	$	282,509

The carrying amount of time deposits over $100,000 was $42,514,000 and $42,153,000 at December 31, 2007 and 2006, respectively. Interest expense on time deposits over $100,000 was $1,835,000, $1,691,000 and $1,125,000 for the years ended December 31, 2007, 2006 and 2005, respectively.

At year end 2007, scheduled maturities of time deposits were as follows for the years ending December 31 (in thousands):

2007	$	86,368
2008		26,555
2009		11,034
2010		4,143
2011		4,398
Thereafter		2,131
Totals	$	134,629

Related party deposits were $11,552,000 and $17,197,000 at December 31, 2007 and 2006, respectively.

SOUTHERN MICHIGAN BANCORP, INC. / 2007 ANNUAL REPORT     39

SOUTHERN MICHIGAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Note I - Other Borrowings

Other borrowings at December 31, 2007 include $5,536,000 in advances from the Federal Home Loan Bank (FHLB) of Indianapolis. The advances have maturities from December 2009 through December 2013 with fixed interest rates ranging from 3.29% to 4.57%, averaging 3.98%. Principal is due at maturity for $4,983,000 of the advances. The remaining $553,000 FHLB advance is at a fixed rate of 4.57% with principal payments beginning in December 2003 and continuing through December 2013.

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, commercial real estate and SBA loans. Eligible FHLB loan collateral at December 31, 2007 and 2006 was approximately $66,069,000 and $40,049,000, respectively.

At December 31, 2006, FHLB fixed rate advances with principal due at maturity of $5,000,000 were outstanding. They had a weighted average interest rate of 3.81%. In addition, $651,000 in fixed rate FHLB advances at a fixed rate of 4.57% with principal payments beginning in December of 2003 and continuing through December of 2013 were outstanding.

On November 20, 2007, the Company entered into a Business Loan agreement with LaSalle Bank N.A., consisting of two credit facilities. The first consisted of a $3,000,000 secured revolving line of credit, maturing in three years with a LIBOR plus 150 basis point interest rate (6.62375% at December 31, 2007). Repayment terms are interest only on a quarterly basis with the principal due at maturity. The second was a $7,000,000 secured term loan, with a maturity of five years subject to a twelve year amortization with an interest rate of LIBOR plus 145 basis points (6.57375% at December 31, 2007). Repayment terms are interest and principal on a quarterly basis (based on a 12 year amortization), with the remaining principal amount due at maturity. Both credit facilities are secured by a pledge of 100% of the stock of the Company's wholly-owned subsidiary, SMB&T. At December 31, 2007, $1,000,000 was outstanding on the line of credit and $7,000,000 on the term note.

Other borrowings also include a loan to the Company with a balance at December 31, 2007 and 2006 of $133,000 and $176,000, respectively. The loan matures on September 15, 2010 and is unsecured.

Also included in other borrowings at December 31, 2007 are $1,084,000 ($1,146,000 in 2006) of amounts due for overdrawn correspondent bank balances. This amount was repaid on January 2, 2008.

At year-end 2007, scheduled principal reductions on other borrowings were as follows for the years ending December 31 (in thousands):

	FHLB		LaSalle Bank		Other		Total
2008	$	102	$	397	$	1,130	$	1,629
2009		3,090		424		48		3,562
2010		112		3,453		39		3,604
2011		1,117		483		-		1,600
2012		115		3,243		-		3,358
Thereafter		1,000		-		-		1,000
Total FHLB advances	$	5,536	$	8,000	$	1,217	$	14,753

40     SOUTHERN MICHIGAN BANCORP, INC. / 2007 ANNUAL REPORT

SOUTHERN MICHIGAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Note J - Securities Sold Under Agreements to Repurchase and Overnight 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):

		2007		2006
At December 31:
Outstanding balance	$	8,976	$	184
Average interest rate		4.06%		2.38%
Daily average for the year:
Outstanding balance	$	2,818	$	342
Average interest rate		3.44%		1.84%
Maximum outstanding at any month end	$	9,958	$	612

At December 31, 2007, the subsidiary banks had lines of credit arrangements available to purchase federal funds totaling $32,000,000, subject to quarterly and annual reviews. The balance on these lines at December 31, 2007 and 2006 was $800,000 and $0, respectively.

Note K - Subordinated Debentures And Trust Preferred Securities

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 security of the trust and the proceeds of the preferred securities sold by the trust. The Company may redeem the subordinated debentures, in whole or in part, in a principal amount with integral multiples of $1,000, on or after April 7, 2009 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 or in part from time to time, upon the occurrence of specific events defined within the trust indenture. The Company has the option to defer interest payments on the subordinated debentures from time to time for a period not to exceed five consecutive years.

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 sum of the three month London Interbank Offered Rate (LIBOR) and 2.75%. The rate at December 31, 2007 was 7.99%. The Company's investment in the common stock of the trust was $155,000 and is included in other assets.

Note L - Income Taxes

Income tax expense consists of (in thousands):

	2007			2006		2005
Current	$	1,460		$	1,453	$	1,320
Deferred		(24	)		38		(10	)
Totals	$	1,436		$	1,491	$	1,310

SOUTHERN MICHIGAN BANCORP, INC. / 2007 ANNUAL REPORT     41

SOUTHERN MICHIGAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Note L - Income Taxes (continued)

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

	2007			2006			2005
Income tax at statutory rate	$	1,893		$	1,870		$	1,738
Tax-exempt interest income, net		(234	)		(180	)		(170	)
Increase in net cash surrender value of life insurance policies		(97	)		(135	)		(100	)
Low income housing partnership tax credit		(127	)		(127	)		(127	)
Other items, net		1			63			(31	)
Totals	$	1,436		$	1,491		$	1,310

Year-end deferred tax assets and liabilities consist of the following (in thousands):

	2007			2006
Deferred tax assets:
Allowance for loan losses	$	1,305		$	800
Deferred compensation and supplemental retirement liability		739			701
Net operating loss carryforward		434			-
Intangible asset amortization		50			62
Pension liability		19			115
Pension liability - SFAS 158		31			-
Write off of investment		60			68
Write down of other real estate		-			22
Nonaccrual loan interest		226			170
Net unrealized loss on available for sale securities		-			21
Other		116			63
		2,980			2,022
Valuation allowance		(54	)		(54	)
Total deferred tax assets, net of valuation allowance		2,926			1,968
Deferred tax liabilities:
Mortgage servicing rights		(255	)		(136	)
Goodwill		(128	)		(106	)
Purchase accounting adjustments		(951	)		-
Net unrealized gain on available for sale securities		(90	)		-
Other		(237	)		(81	)
Total deferred tax liabilities		(1,661	)		(323	)
Net deferred tax assets, included in other assets	$	1,265		$	1,645

At the date of acquisition, FNB had a net operating loss carryforward (NOL) of approximately $1,277,000 for federal income tax purposes. The NOL resulted from FNB's 2007 operating results through November 30, 2007 and is available to reduce FNB's future taxable income through 2027.

A valuation allowance against deferred tax assets of $54,000 was considered necessary at December 31, 2007 and 2006 as the likelihood of receiving a tax benefit on a portion of the capital loss on the write off of an investment is considered doubtful. Remaining deferred tax assets are deemed more likely than not to be realized.

The Company and its subsidiaries file income tax returns in the U.S. federal and certain state jurisdictions. Such returns are no longer subject to tax examinations by tax authorities for years before 2004.

42     SOUTHERN MICHIGAN BANCORP, INC. / 2007 ANNUAL REPORT

SOUTHERN MICHIGAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Note M - Benefit Plans

Defined Benefit Pension Plan: The Company adopted SFAS 158 effective December 31, 2007. The impact of the adoption of SFAS 158 on the 2007 consolidated balance sheet was to increase pension liability by $90,000 with a corresponding increase of $31,000 to deferred tax assets and a charge to accumulated other comprehensive income of $59,000.

Effective December 31, 2006 the Southern Michigan Bank & Trust Pension Plan was frozen on a partial basis. Current plan-eligible employees who meet specific age and years of service requirements have been grand-fathered in and will continue to accrue benefits under the plan. All other employees will continue to vest in their December 31, 2006 benefit balances, however, no further benefits will accrue. This curtailment resulted in a $687,000 reduction in the projected benefit obligation during 2006. The curtailment gain was entirely used to offset the unrecognized net actuarial loss; and therefore, there was no impact of this gain on net income. The Company uses a December 31 measurement date for the plan.

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

	2007			2006
Change in benefit obligation:
Beginning benefit obligation	$	(2,136	)	$	(2,354	)
Service cost		(37	)		(275	)
Interest cost		(130	)		(155	)
Curtailment gain		-			687
Actuarial loss from change in actuarial assumptions		(39	)		(233	)
Benefits paid		142			194
Ending benefit obligation		(2,200	)		(2,136	)
Change in plan assets, at fair value:
Beginning plan assets		1,763			1,325
Actual return		108			147
Employer contribution		432			485
Benefits paid		(142	)		(194	)
Ending plan assets		2,161			1,763
Net amount recognized:
Funded status		(39	)		(373	)
Unrecognized net actuarial loss		-			34
Accrued benefit cost	$	(39	)	$	(339	)

The accumulated benefit obligation for the defined benefit pension plan was $2,075,000 and $1,935,000 at December 31, 2007 and 2006, respectively.

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

	2007			2006			2005
Components of net periodic benefit cost:
Service cost	$	37		$	275		$	211
Interest cost		130			155			176
Expected return on plan assets		(129	)		(98	)		(134	)
Recognized net actuarial loss		-			35			22
Settlement charge		-			-			194
Net periodic benefit cost	$	38		$	367		$	469

At December 31, 2007, a net actuarial loss of $94,000 has 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 2008 has not yet been determined.

SOUTHERN MICHIGAN BANCORP, INC. / 2007 ANNUAL REPORT     43

SOUTHERN MICHIGAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Note M - Benefit Plans (continued)

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

	2007		2006		2005
Discount rate on benefit obligation		6.0%		6.0%		6.5%
Long-term expected rate of return on plan assets		7.0%		7.0%		7.0%
Rate of compensation increase		4.0%		4.0%		4.0%

	Target Allocation 2008	Percentage of Plan Assets at Year-end		Weighted Average Expected Long-Term Rate of Return - 2007
Asset Category		2007	2006
Equity securities	0%	0%	56%	0%
Debt securities	22%	22%	31%	6.0%
Cash	78%	78%	13%	3.8%
	100%	100%	100%	4.3%

The expected return on plan assets has been based upon actual historical long-term returns of the overall stock and bond markets and actual portfolio returns.

The pension plan assets are managed by the Trust Department. A written investment policy which meets the standards of the prudent investor rule is followed. In addition, the Northern Trust Company and Main Street Advisors, both of Chicago, have provided investment advisory services, guidance and expertise.

The investment policy is established to provide direction for the purchase of equity and debt securities of good quality, determined by careful analysis and investigation. Factors to be considered include relative price, yield, earnings, dividends, assets, ratings and ability to repay debts.

The equity philosophy has been driven by the long term objective of growth. Diversification is achieved by diversifying by industry in order to reduce the portfolio's sensitivity to any one sector of the economy.

Debt securities (bonds), as a general rule, must have an "A" rating or better to meet the criteria as an investment of the plan. Bond maturities are laddered over several years in order to provide predictable income flow and reduce interest rate risk.

Only trust quality investments will be allowed in the plan. Those include blue chip stocks, bonds with an A rating or better, mutual funds that meet established investment criteria and money market funds. Investments not allowed in the plan include derivatives, puts, calls, options and futures. No single issue may have a concentration greater than 10% of the total fair value.

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, 2007 is primarily fixed income investments with a target of 90% bonds and 10% cash. The allocation percentages may be reduced or increased depending upon market conditions and interest rates. Due to the partial freeze of the plan, the investment allocations have been reevaluated with shorter term objectives.

44     SOUTHERN MICHIGAN BANCORP, INC. / 2007 ANNUAL REPORT

SOUTHERN MICHIGAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Note M - Benefit Plans (continued)

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.

During 2005, the Company distributed a lump sum distribution to a highly compensated employee which triggered a plan settlement in the amount of $194,000 in addition to the Company's expense of $275,000, bringing the total expense to $469,000 for the year.

The Company expects to contribute $100,000 to its pension plan in 2008.

At year-end 2007, estimated future benefit payments from the plan were as follows for the years ending December 31 (in thousands):

2008	$	24
2009		26
2010		26
2011		31
2012		37
2013 - 2017		463

Employee Stock Ownership Plan: The Company has an employee stock ownership plan (ESOP) for substantially all full-time employees. The Board of Directors determines the Company's contribution level annually. Effective January 1, 2007, the Company increased its discretionary and matching contribution levels. Assets of the plan are held in trust by SMB&T and administrative costs of the plan are borne by the plan participants. Expense charged to operations for contributions to the plan totaled $426,000, $122,000 and $117,000 in 2007, 2006 and 2005, respectively. Company matching is provided in Company stock.

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

	2007		2006
Allocated shares		92,203		89,122
Unallocated shares		3,990		5,579
Total ESOP shares		96,193		94,701

The fair value of the allocated shares held by the ESOP is approximately $2,029,000 and $2,148,000 at December 31, 2007 and 2006, 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 2005, the ESOP obtained a loan for $204,000 to purchase 7,568 shares. The balance of the loan at December 31, 2007 and 2006 was $103,000 and $143,000, respectively.

SOUTHERN MICHIGAN BANCORP, INC. / 2007 ANNUAL REPORT     45

SOUTHERN MICHIGAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Note M - Benefit Plans (continued)

Deferred Compensation Plan: As an incentive to retain key members of management and directors, the Bank has a deferred compensation plan whereby participants defer a portion of current compensation. Benefits are based on salary and length of service and are vested as service is provided from the date of participation through age 65. A liability is recorded on a present value basis and discounted at current interest rates. This liability may change depending upon changes in long-term interest rates. Current rates paid on deferred compensation balances range from 5.81% - 12.98%. Deferred compensation expense was $225,000, $225,000 and $227,000 in 2007, 2006 and 2005, respectively. The liability for vested benefits was $1,787,000 and $1,780,000 at December 31, 2007 and 2006, respectively, and is included in accrued expenses and other liabilities.

Supplemental Retirement Plan: The Bank also maintains a supplemental retirement plan to provide annual payments to particular executives subsequent to their retirement. The plan covers two individuals, both of whom are retired. Liabilities associated with this plan totaled $212,000 and $235,000 at December 31, 2007 and 2006. Expense associated with this plan totaled $11,000, $13,000 and $20,000 in 2007, 2006 and 2005, respectively.

Note N - Stock Options

The Company has stock based compensation plans as described below. Total compensation cost that has been charged against income for those plans was $95,000 in 2007 (none in 2006 and 2005).

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 157,500 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, 2007, 20,502 shares are available 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 total 115,500. Options are to be 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 are granted and a vesting period as determined by the Board of Directors. The plan will terminate on the earliest of: (i) March 20, 2010; (ii) when all shares have been issued through exercise of options granted under this Plan; or (iii) at any earlier time that the Board of Directors may determine. At December 31, 2007, 44,841 shares are available under the plan.

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.

	2007	2006	2005
Risk-free interest rate	4.75%	NA	3.00%
Expected option life	8 years	NA	8 years
Expected stock price volatility	14.05%	NA	13.49%
Dividend yield	3.59%	NA	2.72%
Weighted-average fair value of options granted during year	$3.58	NA	$3.13

46     SOUTHERN MICHIGAN BANCORP, INC. / 2007 ANNUAL REPORT

SOUTHERN MICHIGAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Note N - Stock Options (continued)

A summary of the activity in the plans (as restated for the 5% stock dividends in February 2006) is as follows for the years ended December 31, 2007, 2006 and 2005:

	2007				2006				2005
	Shares		Weighted Average Price		Shares		Weighted Average Price		Shares		Weighted Average Price
Outstanding at beginning of year	95,663		$	22.17	102,084		$	22.00	43,555		$	18.46
Granted	103,110			24.09	-			-	61,691			24.32
Exercised	-			-	(5,581	)		17.92	(1,902	)		15.17
Forfeited	(1,665	)		23.90	(840	)		24.23	(1,260	)		22.05
Outstanding at end of year	197,108			23.16	95,663			22.17	102,084			22.00
Options exercisable at year-end	94,298			22.15	95,663			22.17	102,084			22.00

At December 31, 2007 the weighted average remaining contractual life for all options outstanding was 6.8 years.

At December 31, 2007, the aggregate intrinsic value of options outstanding and exercisable totaled $119,000. This value represents the difference between the Company's closing stock price on the last day of trading for the year and the exercise price multiplied by the number of in-the-money options assuming all option holders had exercised their stock options on December 31, 2007. The aggregate intrinsic value of stock options exercised during 2007, 2006 and 2005 was $0, $34,000 and $14,000, respectively. Exercise of the options resulted in cash payments of $0, $100,000 and $29,000 for 2007, 2006 and 2005, respectively.

As of December 31, 2007, there was $286,000 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 3.4 years.

Restricted Stock - Restricted shares may be issued under the plans 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. During 2007, the Company issued 2,740 shares of restricted stock at a fair value of $24.58 and recorded $12,000 of compensation cost. All shares are unvested as of December 31, 2007. As of December 31, 2007, there is $55,000 of total unrecognized compensation cost related to nonvested shares granted under the Plan. The cost is expected to be recognized over a weighted average period of 4.3 years.

SOUTHERN MICHIGAN BANCORP, INC. / 2007 ANNUAL REPORT     47

SOUTHERN MICHIGAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Note O - Commitments

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, 2007 and 2006, the Company had $21,000 and $0, respectively, of 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, 2007 and 2006, commitments under outstanding standby letters of credit were $1,340,000 and $2,240,000, respectively.

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

	2007		2006
Fixed rate	$	7,670	$	5,782
Variable rate		56,371		51,359
Totals	$	64,041	$	57,141

The fixed rate commitments have stated interest rates ranging from 4.75% to 14.00%. The terms of the above commitments range from 1 to 62 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 three years worth of the officers' salaries upon a change of control.

Note P - Accumulated Other Comprehensive Income (loss)

Accumulated other comprehensive income (loss) amounted to $122,000 at December 31, 2007 and ($42,000) at December 31, 2006 and is summarized as follows (in thousands):

	2007			2006
Unrealized gain (loss) on available-for-sale securities, net of
income taxes of $90 in 2007 and $21 in 2006	$	181		$	(42	)
Pension liability, net of income taxes of $31		(59	)		-
Total	$	122		$	(42	)

The changes in the components of accumulated comprehensive income (loss), excluding the impact in 2007 of initially applying SFAS 158 pension accounting, and related tax effects for the years ended December 31, 2007, 2006 and 2005 are as follows (in thousands):

	2007			2006			2005
Unrealized gain (loss) on available for sale securities	$	347		$	124		$	(352	)
Reclassification adjustments for net realized gains
included in net income		(13	)		(1	)		(4	)
Net unrealized gain (loss) arising during the year		334			123			(356	)
Tax effect		(111	)		(41	)		121
Other comprehensive income (loss) for the year	$	223		$	82		$	(235	)

48     SOUTHERN MICHIGAN BANCORP, INC. / 2007 ANNUAL REPORT

SOUTHERN MICHIGAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Note Q - Restrictions On Transfers From Subsidiaries

Capital guidelines adopted by Federal and State regulatory agencies and restrictions imposed by law limit the amount of cash dividends the banks can pay to the Company. At December 31, 2007, using the most restrictive of these conditions for each bank, the aggregate cash dividends that the banks can pay the Company without prior approval was approximately $4,993,000.

Note R - Southern Michigan Bancorp, Inc. (Parent Company Only) Financial Information

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

Balance Sheets	December 31,
	2007		2006
Assets
Cash and cash equivalents	$	377	$	304
Investment in subsidiary banks		57,834		34,357
Investment in non banking subsidiary		193		195
Premises and equipment, net		972		1,007
Other		770		629
Total Assets	$	60,146	$	36,492
Liabilities and Shareholders' Equity
Dividends payable	$	462	$	354
Other liabilities		148		177
Other borrowings		8,133		176
Subordinated debentures		5,155		5,155
Common stock subject to repurchase obligation in ESOP		2,029		2,148
Shareholders' equity		44,219		28,482
Total Liabilities and Shareholders' Equity	$	60,146	$	36,492

Statements of Income	Year ended December 31,
	2007			2006			2005
Dividends from subsidiary banks	$	7,459		$	1,791		$	1,515
Interest income		18			11			12
Interest expense		(458	)		(412	)		(312	)
Other income		209			246			260
Other expenses		(175	)		(72	)		(175	)
		7,053			1,564			1,300
Federal income tax benefit		(139	)		(78	)		(73	)
		7,192			1,642			1,373
Equity in net income, less dividends received, of:
Subsidiary banks		(3,057	)		2,368			2,431
Non-banking subsidiary		(2	)		(1	)		(2	)
Net Income	$	4,133		$	4,009		$	3,802

SOUTHERN MICHIGAN BANCORP, INC. / 2007 ANNUAL REPORT     49

SOUTHERN MICHIGAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Note R - Southern Michigan Bancorp, Inc. (Parent Company Only) Financial Information (continued)

Statements of Cash Flows	Year ended December 31,
	2007			2006			2005
Operating Activities
Net income	$	4,133		$	4,009		$	3,802
Adjustments to reconcile net income to net cash
from operating activities:
Equity in net income, less dividends received, of:
Subsidiary banks		3,057			(2,368	)		(2,431	)
Non-banking subsidiary		2			1			2
Stock option and restricted stock grant compensation expense		95			-			-
Depreciation		35			31			31
Net change of obligation under ESOP		40			41			(144	)
Other		43			(138	)		(244	)
Net cash from operating activities		7,405			1,576			1,016
Investing Activities
Subsidiary bank acquisition		(13,764	)		-			-
Proceeds from maturities and calls of available for sale securities		-			-			495
Net cash from investing activities		(13,764	)		-			495
Financing Activities
Proceeds from other borrowings		8,000			-			236
Repayments of other borrowings		(43	)		(40	)		(60	)
Cash dividends paid		(1,525	)		(1,331	)		(901	)
Cash paid in lieu of fractional shares for 5% stock dividend		-			(2	)		-
Stock options exercised		-			100			29
Repurchase of common stock		-			(240	)		(4,090	)
Net cash from financing activities		6,432			(1,513	)		(4,786	)
Net change in cash and cash equivalents		73			63			(3,275	)
Beginning cash and cash equivalents		304			241			3,516
Ending cash and cash equivalents	$	377		$	304		$	241

Note S - Supplemental Cash Flow Disclosures

The following supplemental cash flow disclosures are provided for the years ended December 31, 2007, 2006 and 2005 (in thousands):

	2007			2006			2005
Cash paid during the year for:
Interest	$	8,595		$	6,906		$	5,313
Income taxes		1,305			1,465			1,445
Non-cash operating activities:
Change in deferred income taxes on net unrealized gain (loss)       on available for sale securities		(111	)		(41	)		121
Non-cash investing activities:
Change in unrealized gain (loss) on available for sale securities		334			123			(356	)
Transfers from loans to foreclosed assets		1,863			498			1,003
Non-cash financing activities:
Issuance of common stock, net of issuance cost		12,711			-			-

50     SOUTHERN MICHIGAN BANCORP, INC. / 2007 ANNUAL REPORT

SOUTHERN MICHIGAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Note T - Fair Value Information

The following methods and assumptions were used by the Company in estimating fair values for financial instruments:

Cash and cash equivalents: The carrying amount reported in the balance sheet approximates fair value.

Securities available for sale: Fair values for securities available for sale are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. The fair value of restricted equity securities approximates amortized cost.

Loans and loans held for sale, net: For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. 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. The allowance for loan losses is considered to be a reasonable estimate of discount for credit quality concerns.

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). 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.

Securities sold under agreements to repurchase, federal funds sold and purchased: The carrying amount reported in the balance sheet approximates fair value.

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.

Subordinated debentures: The carrying amount reported in the balance sheet approximates fair value of the variable-rate subordinated debentures.

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

While these estimates of fair value are based on management's judgment of the most appropriate factors, there is no assurance that if the Company had disposed of such items at December 31, 2007 and 2006, 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, 2007 and 2006 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.

SOUTHERN MICHIGAN BANCORP, INC. / 2007 ANNUAL REPORT     51

SOUTHERN MICHIGAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Note T - Fair Value Information (Continued)

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

	2007						2006
	Carrying Amount			Fair Value			Carrying Amount			Fair Value
Financial assets:
Cash and cash equivalents	$	14,470		$	14,470		$	9,369		$	9,369
Federal funds sold		6,449			6,449			10,429			10,429
Securities available for sale		77,515			77,515			35,602			35,602
Loans held for sale		624			624			-			-
Loans, net of allowance for loan losses		330,822			334,523			249,523			248,544
Accrued interest receivable		3,387			3,387			2,506			2,506
Financial liabilities:
Deposits	$	(399,169	)	$	(399,817	)	$	(282,509	)	$	(282,115	)
Securities sold under agreements to repurchase      and overnight borrowings		(9,776	)		(9,776	)		(184	)		(184	)
Other borrowings		(14,753	)		(14,840	)		(6,973	)		(6,811	)
Subordinated debentures		(5,155	)		(5,155	)		(5,155	)		(5,155	)
Accrued interest payable		(611	)		(611	)		(225	)		(225	)

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

Note U - Regulatory Matters

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 effect on the consolidated financial statements. Prompt corrective action provisions are not applicable to bank holding companies.

The prompt corrective action regulations provide five classifications, including well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized, although these terms are not used to represent overall financial condition. If only adequately capitalized, regulatory approval is required to 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 2007 and 2006, the most recent regulatory notifications categorized the Company as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the classification.

52     SOUTHERN MICHIGAN BANCORP, INC. / 2007 ANNUAL REPORT

SOUTHERN MICHIGAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Note U - Regulatory Matters (continued)

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
2007
Total capital (to risk weighted assets)
Consolidated	$39,724	10.9	%	$29,198	8.0	%	N/A	N/A
SMB&T	34,052	12.5		21,816	8.0		$27,269	10.0	%
FNB	11,679	12.6		7,428	8.0		9,285	10.0
Tier 1 capital (to risk weighted assets)
Consolidated	34,568	9.5		14,599	4.0		N/A	N/A
SMB&T	30,640	11.2		10,908	4.0		16,362	6.0
FNB	10,515	11.3		3,714	4.0		5,571	6.0
Tier 1 capital (to average assets)
Consolidated	34,568	10.3		13,362	4.0		N/A	N/A
SMB&T	30,640	9.1		13,410	4.0		16,763	5.0
FNB	10,515	8.3		5,041	4.0		6,301	5.0

	Actual			Minimum Required For Capital Adequacy Purposes			Minimum Required To Be Well Capitalized Under Prompt Corrective Action Regulations
	Amount	Ratio		Amount	Ratio		Amount	Ratio
2006
Total capital (to risk weighted assets)
Consolidated	$38,313	14.1	%	$21,673	8.0	%	N/A	N/A
SMB&T	37,041	13.7		21,575	8.0		$26,969	10.0	%
Tier 1 capital (to risk weighted assets)
Consolidated	35,011	12.9		10,836	4.0		N/A	N/A
SMB&T	33,739	12.5		10,788	4.0		16,182	6.0
Tier 1 capital (to average assets)
Consolidated	35,011	10.8		13,019	4.0		N/A	N/A
SMB&T	33,739	10.4		12,979	4.0		16,224	5.0

Note V - Quarterly Financial Data (in thousands, except per share data) (Unaudited)

	Interest Income		Net Interest Income		Net Income		Earnings Per Share
							Basic		Fully Diluted
2007
First Quarter	$	5,570	$	3,570	$	978	$	.55	$	.55
Second Quarter		5,722		3,649		1,069		.61		.60
Third Quarter		5,895		3,683		1,082		.61		.61
Fourth Quarter		6,357		4,004		1,004		.52		.52
2006
First Quarter	$	5,078	$	3,560	$	926	$	.52	$	.52
Second Quarter		5,245		3,613		1,017		.58		.57
Third Quarter		5,563		3,696		1,029		.58		.58
Fourth Quarter		5,568		3,626		1,037		.59		.59

SOUTHERN MICHIGAN BANCORP, INC. / 2007 ANNUAL REPORT     53

Selected Financial Data
(in thousands, except per share data)

	Year Ended December 31
	2007			2006			2005			2004			2003
Total interest income	$	23,544		$	21,454		$	18,808		$	16,638		$	17,081
Net interest income		14,906			14,495			13,437			12,264			11,865
Provision for loan losses		745			500			750			-			900
Net income		4,133			4,009			3,802			3,604			3,263
Per share data*:
Basic earnings per share		2.29			2.27			2.13			1.87			1.68
Diluted earnings per share		2.28			2.26			2.12			1.86			1.68
Cash dividends		.80			.78			.67			.63			.61
Balance sheet data:
Gross loans		335,978			252,825			242,714			241,384			233,070
Deposits		399,169			282,509			268,078			251,868			254,701
Other borrowings		14,753			6,973			12,164			21,903			27,621
Common stock subject to repurchase		2,029			2,148			1,911			2,399			1,816
Equity		44,219			28,482			26,110			27,465			26,358
Total assets		480,178			329,891			317,952			313,458			321,587
Return on average assets		1.18	%		1.25	%		1.19	%		1.14	%		1.02	%
Return on average equity (1)		12.72			14.54			14.81			13.34			12.69
Dividend payout ratio (2)		36.90			34.44			31.69			34.07			36.25
Average equity to average assets (1)		9.27			8.56			8.06			8.55			8.05

*	Per share data has been adjusted for a 5% stock dividend declared and paid in February, 2006.
(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.
(3)	The 2007 information reflects the purchase of FNB Financial Corporation, effective December 1, 2007, as described in Note C to the consolidated financial statements.

Common Stock Market Prices and Dividends

The Company's common stock is regularly quoted on the OTC Bulletin Board (OTCBB) under the symbol SOMC.OB. The bid prices described below are quotations reflecting inter-dealer prices, without retail markup, markdown or commissions, and may not necessarily represent actual transactions. There were 454 shareholders of record at March 14, 2007.

The following table sets forth the range of high and low bid information and dividends declared for the Company's two most recent fiscal years:

	2007						2006
					Cash Dividends Declared						Cash Dividends Declared
	Bid Price						Bid Price
	High Bid		Low Bid				High Bid		Low Bid
Quarter Ended
March 31	$	24.75	$	24.06	$	.20	$	24.70	$	22.00	$	.18
June 30		24.20		23.00		.20		23.70		22.90		.20
September 30		24.50		22.50		.20		23.90		22.95		.20
December 31		24.45		21.00		.20		24.30		23.80		.20

There are restrictions that currently limit the Company's ability to pay cash dividends.  Information regarding dividend payment restrictions is described in Note Q to the consolidated financial statements for the year ended December 31, 2007.

54     SOUTHERN MICHIGAN BANCORP, INC. / 2007 ANNUAL REPORT

SOUTHERN MICHIGAN BANCORP, INC. / 2007 ANNUAL REPORT     55

Southern Michigan Bancorp, Inc. Board of Directors

Marcia S. Albright
Cequent Electrical
Products, Inc. Dean Calhoun
Coldwater
Veneer, Inc. John S. Carton
Retired
Business Executive John H. Castle
Chairman & CEO
of SMB, Inc. and SMB&T H. Kenneth Cole
Hillsdale College Richard E. Dyer
President & CEO,
FNB Financial Robert L. Hance
Midwest Energy

Officers of Southern Michigan Bancorp, Inc.

John H. Castle
Chairman &
Chief Executive
Officer Kurt G. Miller
President Richard E. Dyer
Executive
Vice President Danice L. Chartrand
Senior Vice President/
Chief Financial
Officer Loren V. Happel
Senior Vice President

56     SOUTHERN MICHIGAN BANCORP, INC. / 2007 ANNUAL REPORT

Gary H. Hart
Infinisource, Inc. Nolan E. (Rick) Hooker
Hooker Oil/
Best American Car
Washes Gregory J. Hull
Farmer Thomas E. Kolassa
HUB
International, Inc. Donald J. Labrecque
Labrecque
Management Brian P. McConnell
Burr Oak Tool, Inc. Kurt G. Miller
President of
SMB, Inc. and
SMB&T Freeman E. Riddle
Spoor-Parlin, Inc.

SOUTHERN MICHIGAN BANCORP, INC. / 2007 ANNUAL REPORT     57

Southern Michigan Bank & Trust Board of Directors

		Nolan E. (Rick) Hooker
	John H. Castle	Hooker Oil/	Donald J. Labrecque
	Chairman & CEO	Best American Car	Labrecque Management
Marcia S. Albright	of SMB, Inc. and SMB&T	Washes		Kurt G. Miller
Cequent Electrical			Brian P. McConnell	President of
Products, Inc.	H. Kenneth Cole	Gregory J. Hull	Burr Oak Tool, Inc.	SMB, Inc. and
	Hillsdale College	Farmer		SMB&T
Dean Calhoun
Coldwater	Gary H. Hart	Thomas E. Kolassa		Freeman E. Riddle
Veneer, Inc.	Infinisource, Inc.	HUB International, Inc.		Spoor-Parlin, Inc.

Officers of Southern Michigan Bank & Trust

EXECUTIVE	MARKETING	David Rumsey	CAMDEN BRANCH	NORTH ADAMS BRANCH
		Vice President
John H. Castle	Patty Parker	Senior Investment Officer	Jody Pope	Leonce Towers
Chairman & Chief Executive	Vice President		Branch Supervisor*	Branch Supervisor*
Officer		Susan White
	COMMERCIAL LOANS	Vice President /	COLDWATER MAIN &	TEKONSHA BRANCH
Kurt G. Miller		Trust Officer	EAST CHICAGO BRANCHES
President	David Clow			Dawn Copas
	Senior Vice President /	RETAIL BANKING SERVICES	Veronica Hannah	Branch Manager
Danice L. Chartrand	Head of Commercial Lending		Assistant Vice President /
Senior Vice President /		Rick Feller	Branch Manager	UNION CITY BRANCH
Chief Financial Officer	Joan Trenary	Senior Vice President
	Vice President		HILLSDALE BRANCH	Ken Brooks
Loren V. Happel		Jodie Johnson		Vice President /
Senior Vice President	Tom Swoish	Vice President /	Jason Williams	Regional Branch Manager
	Vice President	Retail Loan Officer	Vice President /
OPERATIONS			Commercial Lender	*Non Officer Position
	Doug Kiessling	Phyllis Wingate
Kelli Talbot	Vice President	Vice President /	Ann Marie Bentley
Vice President		Head of Retail Loan Operations	Assistant Vice President /
	Nick Grabowski		Regional Branch Manager
Christine Hagaman	Vice President	DeAnne Hawley
Vice President /		Assistant Vice President /	Shari Kline
Compliance Officer	Heidi O'Dell	Retail Loan Officer	Assistant Vice President /
	Assistant Vice President		Retail Loan Officer
Paul Mahle		ATHENS BRANCH
Assistant Vice President /	Marcia McClellan		MARSHALL BRANCH
Senior Data Processing Officer	Administration Officer	Marcia Carman
		Branch Manager	Catherine Yates
INFORMATION SYSTEMS	HUMAN RESOURCES		Vice President /
		BATTLE CREEK BRANCH	Commercial Lender
Jeff Kiersey	Andrew Karr
First Vice President /	Vice President	Deborah Davis	Annette Campau
Network and Systems Manager		Vice President /	Assistant Vice President /
	TRUST DEPARTMENT	Loan Officer	Community Bank Officer
Matt Siefken
Network and Systems Officer	Mary Guthrie	Claudia Murch	Diane Krimmel
	Senior Vice President /	Assistant Vice President /	Retail Loan Officer
Erik Reed	Senior Trust Officer	Branch Manager
IT Specialist

58     SOUTHERN MICHIGAN BANCORP, INC. / 2007 ANNUAL REPORT

FNB Board of Directors

		Dr. Glendora G. Greene
	Richard E. Dyer	Primary Care One	Robert L. Hance
	President & CEO,		Midwest Energy	Kurt G. Miller
John S. Carton	FNB Financial	Patrick J. Haas		President of
Retired Business		T.H. Plastics	Kelly M. Hostetler	SMB, Inc. and
Executive	Michael J. Eley		St. Joseph County	SMB&T
	Eley Funeral Homes, Inc.		United Way
John H. Castle				Alfred H. Peterson, III
Chairman & CEO				Peterson American Corp.
of SMB, Inc. and SMB&T

Officers of FNB Financial

EXECUTIVE	Joseph Silvia	THREE RIVERS WESTLAND
	Assistant Vice President /	BRANCH
Richard E. Dyer	Commercial Loan Officer
President, CEO & Chairman of		Lynette Lorenz
the Board	Richard Green	Branch Officer
	Commercial Loan Officer
FINANCE		CONSTANTINE BRANCH
	TRUST DEPARTMENT
Sara Herrmann		Lorraine Fifer
Assistant Vice President /	Jean Winans	Branch Officer
Chief Financial Officer	Vice President /
	Senior Trust Officer	CASSOPOLIS BRANCH
COMPLIANCE
	Melissa Natzke-Barlow	Janet Nosich
Trisha Pawloski	Vice President /	Branch Officer
Assistant Vice President /	Investment Services Manager
Risk Management Officer		CENTREVILLE BRANCH
	Jared Hoffmaster
INFORMATION SYSTEMS	Investment Sales Officer	Phyllis Nusbaum
		Branch Officer
Vikki Kline	RETAIL BANKING SERVICES
Information Systems Officer		MENDON BRANCH
	Sally Cotton
COMMERCIAL LOANS	Vice President /	Doreen Tobin
	Retail Manager	Branch Officer
David Allen
Vice President /	Debbie Leer
Business Development	Collections Officer
Robert Hungerford	THREE RIVERS MAIN BRANCH
Vice President /
Commercial Loan Officer	Sharon Bachinski
	Branch Officer
William Mars
Vice President /
Commercial Loan Officer

SOUTHERN MICHIGAN BANCORP, INC. / 2007 ANNUAL REPORT     59

Shareholder Information

Annual Meeting

The annual meeting of Southern Michigan Bancorp, Inc. will be held on May 15,

2008 at 4:00 p.m. at the Dearth Community Center on the Branch County

Fairgrounds in Coldwater, Michigan.

Market Information

The Trust Department of Southern Michigan Bank & Trust acts as the

transfer and dividend paying agent for the Company's stock. For information

concerning the Company's stock, call the Trust Department at (517) 279-5503

or (800) 379-7628.

Market Makers

Ferris, Baker Watts, Inc.

Dublin, Ohio

(614) 718-2224

(866) 313-4803

Howe Barnes Investments, Inc.

Chicago, Illinois

(312) 655-2954 or

(800) 800-4693

Stifel, Nicolaus & Company, Inc.

Grand Rapids, Michigan

(800) 676-0477

Hilliard Lyons, Inc.

Coldwater, Michigan

(517) 278-4333 or

(800) 211-5257

Robert Baird & Company

Grand Rapids, Michigan

(616) 459-4491 or

(800) 888-6200

60     SOUTHERN MICHIGAN BANCORP, INC. / 2007 ANNUAL REPORT

EX-99.2

EXHIBIT 99.2

SOUTHERN MICHIGAN BANCORP, INC.
51 West Pearl Street
Coldwater, Michigan  49036

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS

          The annual meeting of shareholders of Southern Michigan Bancorp, Inc. will be held on Thursday, May 15, 2008 at 4:00 p.m. local time, at the Dearth Community Center, located at the Fairgrounds, in Coldwater, Michigan. At the meeting, we will:

(1)	Vote on the election of five directors;
(2)	Vote on a proposal to ratify and approve the Stock Incentive Plan of 2005, as amended and restated; and
(3)	Transact any other business that may properly come before the meeting.

          Shareholders of record at the close of business on March 14, 2008 are entitled to notice of and to vote at the annual meeting and any adjournment of the meeting.

By Order of the Board of Directors



John H. Castle
Chairman of the Board

Date:  March 25, 2008

It is important that your shares of Southern common stock be represented at the meeting. We urge you to sign and return the enclosed proxy as promptly as possible, whether or not you plan to attend the meeting in person. If you do attend the meeting, you may revoke your proxy and vote in person.

SOUTHERN MICHIGAN BANCORP, INC.
51 West Pearl Street
Coldwater, Michigan 49036

PROXY STATEMENT

GENERAL INFORMATION

          This proxy statement and the enclosed proxy card are being furnished to you in connection with the solicitation of proxies by the board of directors of Southern Michigan Bancorp, Inc., a Michigan corporation (the "Company"), for use at the annual meeting of shareholders of the Company or any adjournment of the meeting. The annual meeting will be held on Thursday, May 15, 2008 at 4:00 p.m. local time at the Dearth Community Center, located at the Fairgrounds, in Coldwater, Michigan. This proxy statement and accompanying proxy card were first sent or given to shareholders on and after April 1, 2008.

Purpose of the Meeting

          The purpose of the annual meeting is to consider and vote on the election of five directors and the ratification and approval of the Stock Incentive Plan of 2005, as amended and restated (the "Plan"). Your board of directors recommends that you vote FOR each of the nominees discussed in this proxy statement and FOR ratification and approval of the Plan.

How to Vote Your Shares

          You may vote at the annual meeting in person or by proxy if you were a shareholder of record of common stock of the Company on March 14, 2008. You are entitled to one vote per share of common stock of the Company that you own on each matter presented at the annual meeting. As of March 14, 2008, there were 2,307,924 shares of common stock of the Company, par value $2.50 per share, issued and outstanding.

          Your shares of common stock of the Company will be voted at the annual meeting if you properly sign and return to us the enclosed proxy. If you specify a choice, your shares will be voted as specified. If you do not specify a choice, your shares will be voted for the election of each nominee for director named in this proxy statement and for ratification and approval of the Plan. If other matters are presented at the annual meeting, the individuals named in the enclosed proxy will vote your shares on those matters in their discretion. As of the date of this proxy statement, we do not know of any other matters to be considered at the annual meeting.

          You may revoke your proxy at any time before it is exercised by:

Ø	delivering written notice to the Secretary of the Company;
Ø	signing and delivering a later dated proxy to the Secretary of the Company; or
Ø	attending and voting at the annual meeting.

- - 1 -

Who Will Solicit Proxies

          Directors, officers and employees of the Company will solicit proxies on behalf of the Company by mail, in person, or by telephone. These individuals will not receive additional compensation for soliciting proxies. The Company will request brokers, custodians, nominees, and other fiduciaries to forward proxy materials to beneficial owners of shares of common stock of the Company held of record by such parties and will reimburse them for their reasonable charges and out-of-pocket expenses in connection with forwarding proxy materials to beneficial owners. The Company will pay all of the costs of soliciting proxies.

Required Vote and Quorom

          A plurality of the shares voting at the annual meeting is required to elect directors. This means that if there are more nominees than director positions to be filled, the nominees for whom the most votes are cast will be elected. In counting votes on the election of directors, shares for which voting authority is withheld and other shares not voted will not be counted as voted, and the number of shares of which a plurality is required will be reduced by the number of shares not voted.

          A majority of shares voting on Proposal 2 at the annual meeting is required to ratify and approve the Plan. In counting votes for the ratification and approval of the Plan, abstentions, broker non-votes and other shares not voted will not be counted as voted, and the number of shares of which a majority is required will be reduced by the number of shares not voted.

          A majority of shares entitled to vote at the annual meeting must be present or represented at the meeting to constitute a quorum. If you submit a proxy or attend the meeting in person, your shares will count towards establishing a quorum, even if you withhold voting authority or abstain from voting on some or all of the matters introduced at the meeting. Broker non-votes also count towards establishing a quorum.

          The signing of a proxy does not preclude you from attending the annual meeting and voting in person. You are encouraged to promptly complete, date and sign the enclosed proxy card and return it to Southern Michigan Bank & Trust, Attn: Trust Department, the transfer agent for the Company's common stock even if you intend to attend the meeting.

PROPOSAL 1 - ELECTION OF DIRECTORS

          The Company's Board of Directors is currently composed of fifteen directors who are divided into three classes. One class is elected each year for a three year term. Five directors are nominated for election at the annual meeting to serve for a three year term ending with the annual meeting of shareholders following the year ended December 31, 2010. All of the nominees currently serve as directors. If any of the nominees are unable or unwilling to serve as a director, your proxy will be voted for the election of the person nominated by the Board of Directors in substitution, if any. The Company has no reason to believe that any nominee of the Board of Directors is unwilling or unable to serve as a director, if elected.

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          The following table lists the names of the nominees and the other current directors and their ages as of March 14, 2008, their principal occupations, and the year in which each became a director.

Name of Director	Age	Principal Occupation(s)	Year First Became a Director of the Company
Nominees of the Board of Directors for election at the annual meeting:
Marcia S. Albright	44	VP & General Manager - Cequent Electrical Products, Inc.	2002
Dean Calhoun	49	CEO - Coldwater Veneer, Inc.	2006
John H. Castle	50	Chairman of the Board of the Company and Southern Michigan Bank & Trust; Chief Executive Officer of the Company and Southern Michigan Bank & Trust	2002
Robert L. Hance	52	President - Midwest Energy Cooperative	2007
Nolan E. Hooker	56	Owner - Hooker Oil Co.; Co- Owner - Best American Car Washes	1991
Directors Whose Terms Continues until the 2009 Annual Meeting:
Richard E. Dyer	50	Executive Vice President of the Company; Chief Executive Officer and President of FNB Financial	2007
Gregory J. Hull	60	President - Hull Farms, Inc.	1995
Thomas E. Kolassa	60	Executive Vice President - Hub International, Inc.	1995
Donald J. Labrecque	50	Owner - Labrecque Management	2004
Freeman E. Riddle	75	Vice President - Spoor & Parlin, Inc.	1982
Directors Whose Terms Continues until the 2010 Annual Meeting:
John S. Carton	67	Retired business executive	2007
H. Kenneth Cole	59	Chief Administrative Officer and Treasurer - Hillsdale College	1998
Gary H. Hart	55	CEO & President - Infinisource, Inc.	2004
Brian P. McConnell	45	President & COO - Burr Oak Tool, Inc.	2007
Kurt G. Miller	52	President of the Company and Southern Michigan Bank & Trust	2002

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          The following table presents, as of March 14, 2008, the total number of shares of common stock of the Company beneficially owned, and the percent of such shares so owned, by each director and by all directors of the Company as a group.

	Amount and Nature of Beneficial Ownership(1)
Name of Beneficial Owner	Sole Voting and Dispositive Power	Shared Voting or Dispositive Power(2)	Stock Options (3)	Total Beneficial Ownership	Percent of Class
Marcia S. Albright	1,540	-	1,733	3,273	*
Dean Calhoun	10	40,032	-	40,042	1.74%
John S. Carton	1,474	-	-	1,474	*
John H. Castle	8,955	170	29,925	39,050	1.67%
H. Kenneth Cole	447	-	2,048	2,495	*
Richard E. Dyer	-	7,269	-	7,269	*
Robert L. Hance	-	200	-	200	*
Gary H. Hart	10	5,000	893	5,903	*
Nolan E. Hooker	2,570	3,705	2,048	8,323	*
Gregory J. Hull	10	2,613	2,048	4,671	*
Thomas E. Kolassa	6,639	-	2,048	8,687	*
Donald J. Labrecque	1,455	-	893	2,348	*
Brian McConnell	1,500	-	-	1,500	*
Kurt G. Miller	5,660	12	23,625	29,297	1.26%
Freeman E. Riddle	1,000	9,000	1,418	11,418	*
Totals	31,270	68,001	66,679	165,950	6.99%

(1)	The number 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 are considered to be otherwise beneficially owned by that person. Voting power includes the power to vote or direct the voting of the security. Dispositive power includes the power to dispose or direct the disposition of the security. A person will also be considered the beneficial owner of a security if the person has a right to acquire beneficial ownership of the security within 60 days, such as through the exercise of a stock option. Shares held in fiduciary capacities by the Company are not included in shares beneficially owned by individuals unless otherwise indicated. The directors and officers of the Company may, by reason of their positions, be in a position to influence the voting or disposition of shares held in trust by the Company to some degree, but disclaim beneficial ownership of these shares. The Company and its subsi diary banks disclaim beneficial ownership of shares held by the banks in fiduciary capacities.
(2)	These numbers of shares shown in this column include shares over 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 and children over whom the listed person may have substantial influence by reason of relationship.
(3)	The stock options included in this column are only those options that are exercisable within 60 days. Options that vest at later dates are not reported in this table.
(*)	Less than one percent (1%).

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          The Board of Directors recommends that you vote FOR election of all nominees as directors.

PROPOSAL 2 - RATIFICATION AND APPROVAL OF THE PLAN

          On March 18, 2008, the Board of Directors adopted the Stock Incentive Plan of 2005, as amended and restated, subject to shareholder ratification and approval. The amended Plan increases the number shares of common stock of the Company available under the Plan from 150,000 shares to 300,000 shares. The proposed amendments are also intended to comply with recent amendments to the Internal Revenue Code section that governs deferred compensation and recent IRS regulations. A copy of the Plan, as amended and restated, is attached to this proxy statement as Appendix A. The discussion in this proxy statement about the Plan is qualified in its entirety by reference to the Plan.

          The Plan was initially adopted by the Board, and ratified and approved by the shareholders, in 2005. The purpose of the Plan is to advance the Company's long-term interests by aligning the interests of its directors, officers, and other key employees with the interest of its shareholders. The Plan permits the grant and award of stock options (both incentive and non-qualified stock options), stock appreciation rights, restricted stock, and stock awards ("Incentive Awards"). By combining in a single plan the many types of incentives commonly used in long-term incentive compensation programs, the Plan provides significant flexibility for the Company to design specific long-term incentives to best promote Plan objectives and in turn promote the interests of the Company's shareholders. The Company has reserved 300,000 (initially 150,000) shares of its common stock, $2.50 par value, that may be issued to participants in the Plan.

          The Plan will be administered by the Compensation Committee of the Board of Directors (the "Committee"). The Committee determines, subject to the terms of the Plan, the persons to receive Incentive Awards, the amount of Incentive Awards to be granted to each person (subject to the limits specified in the Plan), the time of each grant, the terms and duration of each grant, and all other determinations necessary or advisable for the administration of the Plan.

          The term of each stock option or stock appreciation right will be determined by the Committee. No stock option or stock appreciation right under the Plan may be exercisable after ten years from the date it was granted. Stock options or stock appreciation rights generally would be exercisable for limited periods of time if a participant dies, becomes disabled (as defined in the Plan), is terminated without cause, or voluntarily leaves his or her employment or directorship. If a participant is terminated for cause (as defined in the Plan), the participant would forfeit all rights to exercise any outstanding stock options or stock appreciation rights. If a participant retires, the participant could exercise stock options or stock appreciation rights for the remainder of their terms, unless the terms of the option agreement or award provide otherwise. Stock options granted to participants under the Plan generally can not be transferred except by will or by the laws of descen t and distribution.

          The Committee is allowed to award restricted stock, subject to such terms and conditions, consistent with the provisions of the Plan. As with stock option and stock appreciation rights

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grants, the Committee would set forth the terms of individual awards of restricted stock in restricted stock agreements or certificates of award. Restricted stock granted to a participant would "vest" (i.e., the restrictions on it would lapse) in the manner and at the times that the Committee determines. Without Committee authorization, a recipient of restricted stock would not be allowed to sell, exchange, transfer, pledge, assign or otherwise dispose of the stock other than to the Company or by will or the laws of descent or distribution. In addition, the Committee could impose other restrictions on shares of restricted stock. However, holders of restricted stock would enjoy all other rights of a shareholder with respect to restricted stock, including the right to vote restricted shares at shareholders' meetings and the right to receive all dividends paid with respect to shares of common stock. Any securities received by a participant of restricted stock pursuant to a stock dividend, stock split, recapital ization, merger, consolidation, combination or exchange of shares would be subject to the same terms, conditions, and restrictions that were applicable to the restricted stock for which the shares were received.

          The Plan gives the Committee authority to make stock awards. A stock award is an award of common stock that is subject to terms and conditions determined by the Committee at the time of the award. Stock award recipients would generally have all voting, dividend, liquidation and other rights with respect to shares of common stock received upon becoming the holder of record of the common stock. However, the Committee could impose restrictions on the assignment or transfer of common stock awarded under a stock award.

          The Plan also provides that each non-employee director of the Company may be granted a stock option on an annual basis, at a time determined by the Board of Directors. These stock options will grant to the non-employee directors the right to purchase that number of shares of common stock having an aggregate market value (as defined in the Plan) at the grant date no greater than the annual director fee then in effect. These stock options will be issued for a term of 10 years using a form of agreement approved by the Committee in its discretion. The Board of Directors may suspend, modify or terminate these non-employee director stock options in its sole discretion.

          If the Board of Directors decides to terminate or suspend the annual grant of stock options to non-employee directors, the Plan provides that the Board of Directors may decide, in its sole discretion, to grant each non-employee director who is serving on the date of the close of the annual meeting of shareholders, a number of shares of restricted stock in an amount no greater than one-half (1/2) times the annual director fee then in effect. The shares of restricted stock will be evidenced using a form of agreement approved by the Committee in its discretion.

          If a change in control of the Company occurs, then all outstanding Incentive Awards will become immediately vested and exercisable in full and will remain exercisable during their remaining term, regardless of whether the participants to whom such Incentive Awards remain in the employ or service of the Company or any subsidiary.

          The Board of Directors recommends that you vote FOR ratification and approval of the Plan, as amended and restated.

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SHAREHOLDER COMMUNICATIONS

          Shareholders who wish to send communications to the Company's Board of Directors may do so by sending them in care of the Secretary of the Company at the address that appears on the first page of this proxy statement. Communications may be addressed either to specified individual directors or the entire Board of Directors. The Secretary has the discretion to screen and not forward to directors any communications that the Secretary determines in his or her discretion are communications unrelated to the business or governance of the Company and its subsidiaries, including, without limitation, commercial solicitations and offensive, obscene, or otherwise inappropriate communications. The Secretary will, however, compile all shareholder communications that are not forwarded and the communications will be available to any director.

By Order of the Board of Directors



Danice Chartrand
Secretary

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EX-99.3

EXHIBIT 99.3

PROXY SOUTHERN MICHIGAN BANCORP, INC.
51 West Pearl Street
Coldwater, Michigan 49036

Annual Meeting of Shareholders - May 15, 2008 PROXY

          The undersigned shareholder appoints Danice L. Chartrand and Loren V. Happel, or either of them, each with the power to appoint his or her substitute, attorneys and proxies to represent the shareholder and to vote and act with respect to all shares that the shareholder would be entitled to vote on all matters that come before the annual meeting of shareholders of Southern Michigan Bancorp, Inc. referred to above or any adjournment of that meeting.

          This proxy is solicited on behalf of the Board of Directors. If this proxy is properly executed, the shares represented by this proxy will be voted as specified. If no specification is made, the shares will be voted for election of all nominees named on this proxy as directors and for approval of each proposal identified on this proxy. The shares represented by this proxy will be voted in the discretion of the proxies on any other matters that may come before the meeting.

1.	Election of Directors.		Nominees:
	[   ]	FOR all nominees listed	Marcia S. Albright
		(except as indicated below)	Dean Calhoun
			John H. Castle
	[   ]	WITHHOLD AUTHORITY to	Robert L. Hance
		vote for all nominees listed	Nolan E. Hooker

Your Board of Directors recommends that you vote FOR all nominees.

(Instruction: To withhold authority for any individual nominee, write that nominee's name in the space provided below.)

2.	Ratification and approval of the Stock Incentive Plan of 2005, as amended and restated.
	[   ]	VOTE FOR	Your Board of Directors recommends
	[   ]	VOTE AGAINST	that you vote FOR this proposal.
	[   ]	ABSTAIN

IMPORTANT! PLEASE DATE AND SIGN.

Please sign exactly as your name appears on this proxy. If signing for estates, trusts, or corporations, title or capacity should be stated. If shares are held jointly, each holder should sign.

Signature X

Signature X

Date , 2008