<PAGE>   1

                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D. C. 20549

                                    FORM 10-K

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


FOR FISCAL YEAR ENDED DECEMBER 31, 1998          COMMISSION FILE NO.   2-78178
                                                                    ------------

                         SOUTHERN MICHIGAN BANCORP, INC.
          -------------------------------------------------------------
             (Exact name of registrant as specified in its charter)

       Michigan                                              38-2407501
-------------------------------                         --------------------
(State or other jurisdiction of                          (I.R.S.Employer
 incorporation or organization)                          Identification No.)

51 West Pearl Street, Coldwater, Michigan                      49036
-----------------------------------------               --------------------
(Address of principal executive offices)                     (Zip Code)

Registrant's telephone number, including area code:  (517) 279-5500
                                                     --------------

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


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 disclosures of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.  X
            --
The aggregate market value of the Registrant's common stock, par value $2.50 per
share (based on the average of the bid and asked prices) held by non-affliliates
of the registrant as of March 1, 1999 was $63,142,000.

The number of shares outstanding of the Registrant's common stock as of March 1,
1999 was 1,857,130 shares (including common stock subject to repurchase
obligation).


DOCUMENT INCORPORATED BY REFERENCE

Portions of the Annual Report to Shareholders for the year ended December 31,
1998, are incorporated by reference into Part II hereof.


<PAGE>   2

                                     PART I

ITEM 1.  BUSINESS

Overview

The Registrant, Southern Michigan Bancorp, Inc. (the "Company"), was organized
as a Michigan corporation in March 1982 for the purpose of becoming a bank
holding company by acquiring all of the outstanding shares of Southern Michigan
National Bank, which it did in November of 1982. The Company's business
currently consists of wholly owning and operating Southern Michigan Bank & Trust
(the "Bank"), a general commercial bank with its main office located at 51 West
Pearl Street, Coldwater, Michigan 49036.

The Bank is a Michigan banking corporation and a successor, by conversion of
charter effective December 15, 1992, to Southern Michigan National Bank. The
Bank operates twelve (12) branch offices in the primarily rural areas of Branch,
Hillsdale, and Calhoun counties in southwestern Michigan.


Banking Services

The Bank offers a full range of banking services to individuals, businesses,
governmental entities and other institutions. These services include checking,
savings, and NOW accounts, time deposits, safe deposit facilities, and money
transfers. The Bank's lending operations provide secured and unsecured
commercial and personal loans, real estate loans, consumer installment loans,
lines of credit and accounts receivable financing.

The Bank's Trust Department offers a wide variety of fiduciary services to
individuals, businesses, not-for-profit organizations and governmental entities,
including services as trustee for personal, corporate, pension, profit sharing,
and other employee benefit trusts. The Bank also provides security custodial
services as an agent, acts as the personal representative for estates and as a
fiscal, paying and escrow agent for corporate customers and governmental
entities.

The Bank also offers securities brokerage services through an unaffiliated
broker. The Bank maintains correspondent banking relationships with several
other larger banks, which involve check clearing operations, transfer of funds,
loan participations, and the purchase and sale of federal funds and other
similar services.

Competition

The banking business in the Bank's market area is highly competitive. The Bank
competes with other banks, savings and loan associations, credit unions and
finance companies. Banks and other financial institutions from surrounding areas
maintain branches within the Bank's service area and offer additional
competition. The Bank is also faced with increasing competition from
non-depository financial intermediaries, such as large retailers, investment
banks and securities brokerage firms.

                                       2

<PAGE>   3


Supervision and Regulation

General

Various federal and state banking laws and regulations affect the business of
the Company and the Bank. They are subject to supervision, regulation, and
periodic examination by the Board of Governors of the Federal Reserve System
(the "FRB") and the Financial Institutions Bureau of the State of Michigan (the
"FIB") and the Federal Deposit Insurance Corporation (the "FDIC"), respectively.
The following is a summary of certain statutes and regulations affecting the
Company and the Bank. This summary is qualified in its entirety by such statutes
and regulations, which are subject to change based on pending and future
legislation and action by regulatory agencies. Proposals to change the laws and
regulations governing the operation of banks and companies which control banks
and other financial institutions are frequently raised in Congress. The
likelihood of any major legislation and the impact such legislation might have
on the Company or the Bank are, however, impossible to predict.

The Bank Holding Company Act/Reigle-Neal Act

As a bank holding company, the Company is subject to regulation by the FRB under
the Bank Holding Company Act of 1956, as amended (the "BHCA"). The BHCA
restricts the product range of a bank holding company by circumscribing the
types of businesses it may own or acquire. The BHCA limits a bank holding
company to owning and managing banks or companies engaged in activities
determined by the FRB to be closely related to banking. The BHCA requires a bank
holding company to obtain the prior approval of the FRB before acquiring
substantially all of the assets of a bank or a bank holding company or direct or
indirect ownership or control of more than five percent of the voting shares of
a bank or a bank holding company.

Prior to September 29, 1995, the BHCA prohibited a bank holding company from
acquiring shares of any bank located outside the state in which the operations
of the bank holding company's banking subsidiaries were primarily conducted
unless the acquisition was specifically authorized by statute of the state of
the bank whose shares were to be acquired. Under the Riegle-Neal Interstate
Banking and Branching Efficiency Act of 1994 (the "Riegle-Neal Act"), the
restriction on interstate bank acquisitions was repealed effective September 29,
1995. The Federal Reserve Board is now generally authorized to approve bank
acquisitions by out-of-state bank holding companies that are adequately
capitalized and managed whether or not such acquisition is prohibited by law of
the host state.

The Riegle-Neal Act permits States to require that a target bank have been in
operation for a minimum period, up to five years, and to impose
nondiscriminatory limits on the percentage of the total amount of deposits with
insured depository institutions in the State which may be controlled by a single
bank or bank holding company. In addition, the Riegle-Neal Act imposes Federal
deposit concentration limits (10% of nationwide total deposits, and 30% of total
deposits in the host State on applications subsequent to the applicant's initial
entry to the host State), and adds new statutory conditions to Federal Reserve
Board approval, i.e., the applicant meets or exceeds all applicable Federal
regulatory capital standards and is "adequately managed".

Also effective September 29 , 1995, any bank subsidiary (and, in certain
circumstances thrift subsidiary) of a bank holding company may receive deposits
to existing accounts, renew time deposits, and close service and receive
payments on (but not disburse proceeds of) loans, as an agent for its depository
institution affiliates without being considered a branch of the affiliate under
any otherwise applicable law. Such agency activities must be conducted on terms
consistent with safe and sound banking practices.

The Riegle-Neal Act also authorizes, effective June 1, 1997, the responsible
Federal banking agency to approve applications for the interstate acquisition of
branches or mergers of depository institutions across State lines without regard
to whether such activity is contrary to State law. Any State may, however, by
adoption of a nondiscriminatory law after September 29, 1994 and before June 1,
1997, may elect to "opt-in" or "opt-out" of the provision. The State of Michigan
has "opted-in" to the Riegle-Neal Act's interstate branching provision. The
effect of "opting out" is to prevent banks chartered by, or having their main
office located in, such State from participating in any interstate branch
acquisition or merger. Each State is permitted to prohibit interstate branch
acquisitions (i.e., acquisition of a branch without acquisition of the entire
target bank), to examine acquired or de novo branches of out-of-state 

                                       3
<PAGE>   4

banks with respect to compliance with certain host State laws, and to retain a
minimum age requirement of up to five years, a nondiscriminatory deposit cap,
and nondiscriminatory notice or filing requirements. The responsible Federal
agency will apply the same Federal concentration limits and capital and
management adequacy requirements noted above with respect to BHCA applications.
Branches acquired in a host State by a State-chartered bank will be subject to
the activity limits and other laws of the host State to the same extent as a
branch of a bank chartered by the host State. Branches acquired in a host State
by an out-of-State national bank will be subject to community reinvestment,
consumer protection, fair lending and interstate branching laws of the host
State (except to the extent the application of such laws to national banks is
preempted by Federal law or is determined by the Comptroller of the Currency to
be discriminatory), and to other nontax laws of the host State to the same
extent as branches of a national bank having its main office in the host State.
The establishment of de novo branches by an out-of-State bank will continue to
require express statutory authority under the law of the host State and of the
chartering jurisdiction.

Among other things, the Riegle-Neal Act also preserves State taxation authority,
prohibits the operation by out-of-State banks of interstate branches as deposit
production offices, imposes additional notice requirements upon interstate banks
proposing to close branch offices in a low or moderate-income area, and creates
new Community Reinvestment Act evaluation requirements for interstate depository
institutions. The Act mandates new restrictions on interstate activities of
foreign banks, and requires public notice of, and opportunity to comment on,
proposed ruling by a Federal banking agency which would preempt certain State
laws.


Dividend Restrictions

The Company's principal source of income consists of dividends paid by the Bank
on its Common Stock (all of which is owned by the Company). Michigan law
restricts the Bank's ability to pay these dividends. Under the Michigan Banking
Code of 1969, as amended, no dividend may be declared by the Bank in an amount
greater than net profits then on hand after deducting losses and bad debts.
After payment of a dividend, the Bank must have a Surplus amounting to not less
than 20% of its capital. In addition, if the surplus of the Bank is less than
the amount of its capital, before a dividend may be declared, the Bank must
transfer to surplus not less than 10% of the net profits of the Bank for the
preceding half year in the case of quarterly or semiannual dividends or not less
than 10% of its net profits for the preceding two consecutive half year periods
in the case of annual dividends. The term "net profits" means the remainder of
all earnings from current operations plus actual recoveries on loans,
investments and other assets, after deducting from the total thereof all current
operating expenses, actual losses, accrued dividends on preferred stock, if any,
and all federal and state taxes. As of December 31, 1998, the amount of
dividends the Bank could pay to the Company without prior regulatory approval
was $1,410,000.

Under the Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"), no insured depository institution may declare any dividend if,
following the payment of such dividend, the institution would be under
capitalized (see "Capital Requirements").

These regulations and restrictions may limit the Company's ability to obtain
funds from its subsidiary for its cash needs, including funds for acquisitions,
payments of dividends and interest and the payment of operating expenses.

Transactions with Affiliates and Insiders

The Bank and the Company are affiliates of each other and, as such, are subject
to certain federal restrictions on loans and extensions of credit to the
Company, and other affiliates on investments in the Company's and its
affiliates' securities, on acceptance of such securities as collateral for loans
to any borrowers and on leases and services and other contracts between the Bank
and the Company. Additionally, regulations allow a bank to extend credit to the
bank's and its affiliates' executive officers, directors and principal
shareholders or their related interest only if the loan is made on substantially
the same terms, including interest rates and collateral, as those prevailing at
the time for comparable transactions with non-insiders, and if credit
underwriting standards are followed that are no less stringent than those
applicable to comparable transactions with non-insiders. Moreover, loans to
insiders must not involve more than the normal risk of repayment or present
other unfavorable features and must in certain circumstances be approved in
advance by a majority of the entire board of directors of the Bank. The
aggregate amount that can be lent to all insiders is limited to the Bank's
unimpaired capital and surplus.

                                       4
<PAGE>   5


Deposit Insurance

Deposits held by the Bank are insured, to the extent permitted by law, by the
Bank Insurance Fund ("BIF") administered by the FDIC. A minimum designated
reserve ratio of 1.25 percent of insured deposits has been established for the
BIF. However, the FDIC may set a higher designated reserve ratio if
circumstances raise a significant risk of substantial future losses to the BIF.
Assessment rates are established sufficient to maintain reserves at the
designated reserve ratio or, if the ratio is less than the designated ratio, to
increase the ratio to the designated ratio within a reasonable period of time.

The FDIC began collecting FDIC assessments on a quarterly basis in 1995. As
required under FDICIA, the FDIC has established a system of risk-based deposit
insurance premiums. Under this system each insured institution's assessment is
based on the probability that the BIF will incur a loss related to that
institution, the likely amount of the loss, and the revenue needs of the BIF.

Under the risk-based assessment system and effective January 1, 1997, a
depository institution pays an assessment of between 0 cents and 27 cents per
$100 of insured deposits based on its capital level and risk classification. To
arrive at a risk based assessment for an insured institution, the FDIC places it
in one of nine risk categories using a two step analysis based first on capital
ratios and then on other relevant supervisory information. For 1996, a $2,000
minimum deposit insurance assessment was imposed on the most highly rated banks.
Pursuant to the Deposit Insurance Funds Act, enacted by Congress in September
1996, the FDIC imposed a special assessment on bank deposits at a rate not tied
to risk classification in order to service debt on the Financing Corporation
(FICO) bonds issued in connection with the federal government's bail out of the
thrift industry. Any significant changes in the deposit insurance
assessment rate or FICO bond servicing imposed by the FDIC could have a material
effect on the earnings of the Company.

Capital Requirements

The FRB has imposed risk-based capital guidelines applicable to the Company.
These guidelines require that bank holding companies maintain capital
commensurate with both on and off balance sheet credit and other risks of their
operations. Under the guidelines, a bank holding company must have a minimum
ratio of total capital to risk-weighted assets ("Total Capital") of 8.0 percent.
At least half of Total Capital must be composed of common shareholder's equity,
qualifying perpetual preferred stock and minority interest in equity accounts of
consolidated subsidiaries, less goodwill and certain other intangible assets
("Tier I Capital"). At December 31, 1998, the Company's Total Capital to
risk-weighted assets was 13.7 percent, which is above the regulatory minimum
requirements.

In addition to risk-based capital requirements, the FRB has also imposed
leverage capital ratio requirements. The leverage ratio requirements establish a
minimum required ratio of Tier I Capital to total assets less goodwill of 3
percent for the bank holding companies having the highest regulatory rating. All
other bank holding companies are required to maintain a minimum Tier I capital
yielding a leverage ratio of 4 percent to 5 percent, depending on the particular
circumstances and risk profile of the institution. The Company's Tier I Capital
leverage ratio at December 31, 1998 was 9.4 percent.

The Bank is also subject to risk-weighted capital standards and leverage
measures which are similar, but in some cases not identical , to the
requirements for bank holding companies which apply to the Company. At December
31, 1998, the Bank met all applicable capital requirements. Under FDICIA, the
Federal bank regulators must take various specified prompt corrective actions
based on levels of an insured depository institution's capital that are below
the adequately capitalized level. These prescribed actions increase restrictions
on the institution as its capital declines.

                                       5

<PAGE>   6


Monetary Policy and Economic Conditions

The business of commercial banks, such as the Bank, is affected by monetary and
fiscal policies of various regulatory agencies, including the FRB. Among the
regulatory techniques available to the FRB are open market operations in United
States Government securities, changing the discount rate for member bank
borrowings, and imposing and changing the reserve requirement applicable to
member bank deposits and to certain borrowings by member banks and their
affiliates (including parent companies). These policies influence to a
significant extent the overall growth and distribution of bank loans,
investments and deposits and the interest rates charged on loans, as well as the
interest rates paid on savings and time deposits.

The monetary policies of the FRB have had a significant effect on the operating
results of commercial banks in the past and are expected to continue to do so in
the future. In view of constantly changing conditions in the national economy
and the money market, as well as the effect of acts by the monetary and fiscal
authorities, including the FRB, no definitive predictions can be made by the
Company or the Bank as to future changes in interest rates, credit availability,
deposit levels, or the effect of any such changes on the Company's or the Bank's
operations and financial condition.

Employees

As of December 31, 1998, 139 persons were employed by the Bank; 118 were full
time employees and 21 were part time employees.


                                       6

<PAGE>   7

   Selected Statistical Information

   The following tables describe certain aspects of the Company's business in
   statistical form.

   DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>

                                                                     Year Ended December 31 (Dollars in thousands)
                                          ------------------------------------------------------------------------------------------
                                                         1998                            1997                       1996
                                          ------------------------------------------------------------------------------------------
                                            Average               Yield/    Average             Yield/   Average              Yield/
                                            Balance    Interest    Rate     Balance   Interest   Rate    Balance    Interest   Rate
                                          ------------------------------------------------------------------------------------------
<S>                                        <C>          <C>          <C>   <C>         <C>        <C>   <C>         <C>         <C> 
ASSETS
   Interest earning assets:
    Loans (A) (B) (C)                      $160,666.    $15,816.     9.8%  $158,193.   $15,593.   9.9%  $137,273.   $13,523.    9.9%
    Taxable investment securities (D)        32,449.      2,305.     7.1     33,538.     2,189.   6.5     36,372.     2,443.    6.7
    Tax-exempt investment securities (A)     22,342.      1,657.     7.4     16,864.     1,253.   7.4     14,732.     1,144.    7.8
    Federal funds sold                        4,782.        266.     5.6      1,357.        74.   5.5      1,309.        69.    5.3
                                           --------     -------            --------    -------          --------    -------
     Total interest earning assets          220,239.     20,044.     9.1    209,952.    19,109.   9.1    189,686.    17,179.    9.1

    Non-interest earnings assets:
      Cash and due from banks                15,591.                         10,442.                      10,572.
      Other Assets                           16,415.                         14,871.                      12,106.
      Less allowance for loan loss           (1,955.)                        (1,866.)                     (1,784.)
                                           --------                        --------                     --------
                   Total assets            $250,290.                       $233,399.                    $210,580.
                                           ========                        ========                     ========

LIABILITIES AND SHAREHOLDERS' EQUITY 
 Interest bearing liabilities:
      Demand deposits                         74,154.   $ 2,440.     3.3    $63,856$     2,163.   3.4    $62,657.  $ 1,956.     3.1
      Savings deposits                        44,356.     1,509.     3.4     43,505.     1,485.   3.4     37,971.    1,293.     3.4
      Time Deposits                           68,177.     3,673.     5.4     67,993.     3,612.   5.3     60,466.    3,178.     5.3
      Federal funds purchased                                                   784.        42.   5.4        592.       33.     5.6
      Subordinated notes                                                                                      82.        9.    11.0
      Other borrowings                         6,146.      410.      6.7      1,404.       141.  10.0      1,105.      135.    12.2
                                             -------     -----              -------      -----           -------    ------    

         Total interest bearing liabilities  192,833.    8,032.      4.2    177,542.     7,443.   4.2    162,873.    6,604.     4.1
</TABLE>
                                       7
<PAGE>   8
   DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY- CONTINUED

<TABLE>
<CAPTION>

                                                                  Year Ended December 31 (Dollars in thousands)
                                                                  ---------------------------------------------
                                                        1998                           1997                          1996
                                          ------------------------------------------------------------------------------------------
                                            Average               Yield/    Average              Yield/  Average              Yield/
                                            Balance    Interest    Rate     Balance   Interest    Rate   Balance    Interest   Rate 
                                          ------------------------------------------------------------------------------------------
<S>                                         <C>         <C>                <C>         <C>               <C>         <C>        
  LIABILITIES AND SHAREHOLDERS' EQUITY-
  continued 
Non-interest bearing liabilities:
 Demand Deposits                           $  30,570.                       $ 30,004.                    $ 24,557.
 Other                                         1,124.                          1,355.                       1,248. 
 Common Stock subject to repurchase
   obligation                                  5,464.                          4,227.                       2,894. 
 Shareholders' equity                         20,299.                         20,271.                      19,008.
                                            --------                        --------                     --------

       Total liabilities and shareholders'  $250,290.                       $233,399.                    $210,580.
       equity                               ========                        ========                     ========

       Net interest earnings                $ 12,012.                       $ 11,666.                    $ 10,575.
                                            ========                        ========                     ========

      Net yield on interest earning assets                5.5%                              5.6%                       5.6%
                                                          ===                               ===                        === 
</TABLE>



    (A) Includes tax equivalent adjustment of interest (assuming a 34% tax rate)
        for securities and loans of $563,000 and $35,000, respectively for 1998;
        $392,000 and $48,000 respectively for 1997 and $369,000 and $23,000,
        respectively, for 1996.

    (B) Average balance includes average nonaccrual loan balances of  $815,000
        in 1998; $500,000 in 1997; and $443,000 in 1996.

    (C) Interest income includes loan fees of $563,000 in 1998; $617,000 in 
        1997; and $668,000 in 1996.

    (D) Average balance includes average unrealized gain (loss) of $128,000 in
        1998; ($13,000) in 1997; and $31,000 in 1996 on available for sale
        securities. The yield was calculated without regard to this average
        unrealized gain (loss).

                                       8

<PAGE>   9


The following table sets forth 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:


<TABLE>
<CAPTION>


                                                           1998 COMPARED TO 1997                   1997 COMPARED TO 1996
        (Dollars in thousands)                            Increase (Decrease) Due To              Increase (Decrease) Due To
------------------------------------------------------------------------------------------------------------------------------------

Interest Income on:                                    Volume          Rate           Net        Volume          Rate          Net

<S>                                                   <C>           <C>           <C>           <C>           <C>           <C>    
   Loans                                              $   243           (20)      $   223       $ 2,062             8       $ 2,070
   Taxable investment securities                          (73)          189           116          (186)          (68)         (254)
   Tax-exempt investment securities                       406            (2)          404           160           (51)          109
    Federal funds sold                                    190             2           192             3             2             5
                                                      -------       -------       -------       -------       -------       -------

     Total interest earning assets                    $   766       $   169       $   935       $ 2,039       $  (109)      $ 1,930
                                                      =======       =======       =======       =======       =======       =======



Interest expense on:

   Demand deposits                                    $   340       $   (63)      $   277       $    38       $   169       $   207
   Savings deposits                                        29            (5)           24           189             3           192
   Time deposits                                           10            51            61           400            34           434
   Federal funds purchased                                (42)            0           (42)           10            (1)            9
   Subordinated notes                                                                                (9)            0            (9)
   Other borrowings                                       331           (62)          269            33           (27)            6
                                                      -------       -------       -------       -------       -------       -------


    Total interest bearing liabilities                $   668       $   (79)      $   589       $   661       $   178       $   839
                                                      =======       =======       =======       =======       =======       =======


      Net Interest Income                             $    98       $   248       $   346       $ 1,378       $  (287)      $ 1,091
                                                      =======       =======       =======       =======       =======       =======
</TABLE>

                                       9
<PAGE>   10


INVESTMENT PORTFOLIO

         The following table sets forth the fair value and carrying value of
investment securities. The carrying value of available-for-sale securities is
equal to fair value.

     
<TABLE>
<CAPTION>
                                                                    DECEMBER 31
                                          1998                         1997                        1996
                               ---------------------------------------------------------------------------------

                                FAIR          CARRYING        FAIR          CARRYING      FAIR          CARRYING
   (Dollars in thousands)       VALUE          VALUE         VALUE            VALUE       VALUE           VALUE
----------------------------------------------------------------------------------------------------------------
<S>                            <C>            <C>           <C>             <C>          <C>             <C>    
US Treasury and other US
Government agencies
   and corporations            $ 9,087        $  9,087      $ 6,262         $  6,262     $15,320         $15,320
                                                                               
States and political
   subdivisions                 37,903          37,006       20,885           20,560      19,342          19,035
                                                                                            
Corporate securities            15,942          15,902       15,590           15,564      19,566          19,588
                                                                                   
Other securities                 5,899           5,899        2,688            2,688       2,657           2,656            
                               -------        --------      -------         --------     -------         -------

Total investment
   securities                  $68,831        $ 67,894      $45,425         $ 45,074     $56,885         $56,599
                               =======        ========      =======         ========     =======         =======
</TABLE>

         The following table sets forth the carrying value of the maturities (or
anticipated call date, if earlier) and weighted average yield for each range of
maturities at December 31, 1998.

<TABLE>
<CAPTION>
                                                                 MATURING
----------------------------------------------------------------------------------------------------------------
        (Dollars in          WITHIN 1 YEAR           1 TO 5 YEARS        5 TO 10 YEARS          AFTER 10 YEARS
        thousands)         
----------------------------------------------------------------------------------------------------------------
                           AMOUNT      YIELD       AMOUNT    YIELD       AMOUNT   YIELD         AMOUNT    YIELD
----------------------------------------------------------------------------------------------------------------
<S>                       <C>           <C>       <C>         <C>       <C>        <C>         <C>         <C>  
US Treasury and other US
Government agencies and
corporations              $ 2,687       4.46%     $ 6,400     5.22%
----------------------------------------------------------------------------------------------------------------
States and political
subdivisions               12,002       4.91       15,239     5.32      $ 7,152    4.74%       $ 2,613     5.30%
----------------------------------------------------------------------------------------------------------------
Corporate securities       12,110       6.37        3,792     6.23
----------------------------------------------------------------------------------------------------------------
Other securities            2,487       4.76        2,133     5.96                               1,279     6.87
----------------------------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------------------------
      Total               $29,286       5.46%     $27,564     5.47%     $ 7,152    4.74%       $ 3,892     5.82%
----------------------------------------------------------------------------------------------------------------
</TABLE>



         The weighted average interest yields were computed by multiplying the
         carrying value of each security by its interest yield to give an annual
         dollar yield per security, adding the dollar yields per category an
         dividing the sum by the total carrying value of securities of that
         category. Interest yields given above are not on a tax equivalent
         basis.


                                       10
<PAGE>   11


LOAN PORTFOLIO

Type of Loans

         The following table sets forth the classification of loans by major
         category:


<TABLE>
<CAPTION>
                                                                            DECEMBER 31
     (Dollars in thousands)              1998               1997               1996               1995               1994
--------------------------------------------------------------------------------------------------------------------------
<S>                                   <C>                <C>                <C>                <C>                <C>     
Commercial, financial, and
agricultural                          $ 82,533           $ 74,819           $ 72,108           $ 51,940           $ 49,514
Real estate mortgage                    51,567             50,057             47,561             41,293             43,054
Installment                             29,203             33,865             33,009             30,004             27,771
                                      --------           --------           --------           --------           --------

         Total Loans                  $163,303           $158,741           $152,678           $123,237           $120,339
                                      ========           ========           ========           ========           ========
</TABLE>

Maturities

         The following table sets forth the maturities of the loan portfolio at
         December 31, 1998. Also provided are the amounts due after one year
         classified according to interest rate sensitivity.


<TABLE>
<CAPTION>
                                                                     MATURING
------------------------------------------------------------------------------------------------------------
(Dollars in thousands)        Within 1 Year (A)         1 to 5 Years         After 5 Years            Total
------------------------------------------------------------------------------------------------------------
<S>                                <C>                      <C>                   <C>               <C>     
Commercial, financial, and                                                 
agricultural                       $ 32,005                 $ 25,401              $ 25,127          $ 82,533
------------------------------------------------------------------------------------------------------------
Real estate mortgages                 3,703                    5,426                42,438            51,567
------------------------------------------------------------------------------------------------------------
Installment                           2,255                   20,221                 6,727            29,203
------------------------------------------------------------------------------------------------------------

------------------------------------------------------------------------------------------------------------
              Total                $ 37,963                 $ 51,048              $ 74,292          $163,303
------------------------------------------------------------------------------------------------------------



------------------------------------------------------------------------------------------------------------
Loans maturing after one 
year with:
------------------------------------------------------------------------------------------------------------
Fixed interest rates                                          36,899                11,582
------------------------------------------------------------------------------------------------------------
Variable interest rates                                       14,149                62,710
------------------------------------------------------------------------------------------------------------

------------------------------------------------------------------------------------------------------------
              Total                                         $ 51,048              $ 74,292
------------------------------------------------------------------------------------------------------------
</TABLE>


         (A) Amounts include demand loans, loans having no stated schedule of
             repayments, or no stated maturity and overdrafts.




                                       11
<PAGE>   12

Non-Performing Loans

         Non performing loans include impaired loans, nonaccrual loans and
         accruing loans past due 90 days or more. The following table sets forth
         the aggregate amount of non-performing loans in each of the following
         categories:



<TABLE>
<CAPTION>
                                                                       DECEMBER 31
     (Dollars in thousands)              1998               1997          1996        1995         1994
-------------------------------------------------------------------------------------------------------
<S>                                   <C>                 <C>           <C>        <C>          <C>    
Nonaccrual Loans:
Commercial, financial, and                             
agricultural                          $   343            $ 1,026        $  448     $   380      $   142
                                   
Real estate mortgage                        0                  0             0          24            0
Installment                                 0                 61             2          40           10
                                      -----------------------------------------------------------------

                                          343              1,087           450         444          152

Loans contractually past due 
90 days or more:

Commercial, financial, and                
agricultural                              807              1,067            82         353            6
Real estate mortgage                      161                630           129          56            0
Installment                               120                966           165           4            5
                                      -----------------------------------------------------------------
                                        1,088              2,663           376         413           11
                                      -----------------------------------------------------------------

                Total                 $ 1,431             $3,750        $  826     $   857      $   163
                                      =======             ======        ======     =======      =======
Percent of total loans              
outstanding                               .88%              2.36%          .54%        .70%         .14%
                                      =======             ======        ======     =======      =======
</TABLE>


         The accrual of interest income generally is discontinued when a loan
         becomes over 90 days past due as to principal or interest. When
         interest accruals are discontinued, interest credited to income in the
         current year and accrued interest from the prior year is reversed.
         Management may elect to continue the accrual of interest when: (1) the
         estimated net realizable value of collateral is sufficient to cover the
         principal balance and accrued interest and; (2) the loan is in the
         process of collection.

         Interest of $19,000 and $73,000 was realized on nonaccrual loans during
         1998 and 1997, respectively. Under original terms for these loans,
         interest income which would have been recorded approximates $91,000 and
         $137,000 in 1998 and 1997, respectively. There are no loan commitments
         outstanding to extend credit to these customers.






                                       12
<PAGE>   13

Potential Problem Loans

At December 31, 1998, the Company had approximately $3,931,000 in commercial,
financial, and agricultural loans for which payments are presently current, but
the borrowers are experiencing certain financial and/or operational
difficulties. These loans are subject to frequent management review and their
classification is reviewed on a monthly basis.

All loans classified for regulatory purposes as loss, doubtful, substandard, or
special mention have been included in the above disclosures.

SUMMARY OF LOAN LOSS EXPERIENCE

The following table sets forth changes in the allowance for loan losses:


<TABLE>
<CAPTION>
                                                                Year Ended December 31
-----------------------------------------------------------------------------------------------------
       (Dollars in thousands)           1998            1997             1996       1995        1994
-----------------------------------------------------------------------------------------------------

-----------------------------------------------------------------------------------------------------
<S>                                  <C>             <C>             <C>         <C>         <C>     
Balance at beginning of year         $  1,863        $  1,814        $  1,609    $  1,498    $  1,365
-----------------------------------------------------------------------------------------------------


Charge offs:
-----------------------------------------------------------------------------------------------------
  Commercial, financial, and            
  agricultural                            227             122              13          87          69
-----------------------------------------------------------------------------------------------------
  Installment                             352             386             157         124          93
  Real estate                               0               0               0           0           0
-----------------------------------------------------------------------------------------------------
                                          579             508             170         211         162
-----------------------------------------------------------------------------------------------------

Recoveries:
-----------------------------------------------------------------------------------------------------
  Commercial, financial, and             
  agricultural                             41              31              43          43          30
-----------------------------------------------------------------------------------------------------
  Installment                             101              66              62          54          82
-----------------------------------------------------------------------------------------------------
  Real estate                               0                               3           3           3
-----------------------------------------------------------------------------------------------------
                                          142              97             108         100         115
-----------------------------------------------------------------------------------------------------
                Net charge offs          (437)           (411)            (62)       (111)        (47)
-----------------------------------------------------------------------------------------------------
  Provision for loan losses               600             460             267         222         180
-----------------------------------------------------------------------------------------------------
            Balance at end of year   $  2,026        $  1,863        $  1,814    $  1,609    $  1,498
=====================================================================================================
    Average loans outstanding        $160,666        $158,193        $137,273    $123,684    $119,637
=====================================================================================================
Ratio of net charge offs to average                     
loans outstanding                         .27%            .26%            .05%        .09%        .04%
=====================================================================================================
</TABLE>





                                       13
<PAGE>   14


The allowance for loan losses is maintained at a level which, in management's
opinion, is adequate to absorb possible loan losses in the loan portfolio. In
assessing the adequacy of the allowance, management reviews the characteristics
of the loan portfolio in order to determine overall quality and risk profits.
Some factors considered by management 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, and historical
loan loss experience.

The 1996 and 1995 provisions increased from 1994 levels to provide for loan
growth. The 1997 provision was increased to provide for loan growth and the
increase in charge-offs and delinquencies. Several customers, including a large
commercial borrower, declared bankruptcy during 1997 resulting in increased
charge-offs. The 1998 provision increased to provide for increased charge-offs
and delinquencies, primarily as a result of increased customer bankruptcies.















                                       14
<PAGE>   15


Allocation of the Allowance for Loan Losses

The Securities and Exchange Commission's guide to the presentation of
statistical information provides for a break down of the allowance for loan
losses into major loan categories. The Company allocates 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.

Even though such an allocation has inherent limitations, the Company has
compiled the results of its various reviews and has made estimates of the risks
which might be allocated to the respective loan categories.

The following table sets forth the allocation of the allowance for loan losses:



<TABLE>
<CAPTION>
                                                                         DECEMBER 31
                                     1998                      1997                      1996 
                                     -----------------------------------------------------------------
                                        Percent of                Percent of                Percent of                   
                                        Loans                     Loans                     Loans                        
                                        in each                   in each                   in each                      
                                        category of               category of               category of                  
(Dollars in thousands)       Allowance  Total Loans    Allowance  Total Loans    Allowance  Total Loans   Allowance      
-------------------------------------------------------------------------------------------------------------------
<S>                          <C>              <C>      <C>        <C>            <C>        <C>           <C>            
-------------------------------------------------------------------------------------------------------------------
Commercial, financial, and                                         
agricultural                 $     777         50.5%   $     628     47.1%       $     351         47.2%  $     313      
-------------------------------------------------------------------------------------------------------------------
Real estate mortgage               103         31.6           98     31.0               95         31.2          83      
-------------------------------------------------------------------------------------------------------------------
Installment                        521         17.9          321     21.9              177         21.6         157      
-------------------------------------------------------------------------------------------------------------------
Unallocated                        625                       816                     1,191                    1,056      
-------------------------------------------------------------------------------------------------------------------

-------------------------------------------------------------------------------------------------------------------
                             $   2,026        100.0%       1,863    100.0%       $   1,814        100.0%  $   1,609      
===================================================================================================================
</TABLE>


<TABLE>
<CAPTION>
                                         DECEMBER 31
                           1995                        1994
                           ------------------------------------------
                             Percent of                  Percent of                                
                             Loans                       Loans       
                             in each                     in each     
                             category of                 category of 
(Dollars in thousands)       Total Loans   Allowance     Total Loans 
                           ------------------------------------------
<S>                                 <C>         <C>             <C>  
Commercial, financial, and                                           
agricultural                        42.1%       $  369          41.1%   
--------------------------------------------------------------------
Real estate mortgage                33.5            86          35.8   
-------------------------------------------------------------------- 
Installment                         24.4           147          23.1   
-------------------------------------------------------------------- 
Unallocated                                        896                  
--------------------------------------------------------------------

-------------------------------------------------------------------- 
                                   100.0%       $1,498        100.00%   
--------------------------------------------------------------------
</TABLE>
                             





                                       15
<PAGE>   16



                                                         
DEPOSITS



The following table sets forth the average amount of deposits and rates paid for
deposits:


<TABLE>
<CAPTION>
                                                               YEAR ENDED DECEMBER 31
                                          1998                         1997                 1996
                                ----------------------------------------------------------------------
   (Dollars in thousands)         AMOUNT       RATE            AMOUNT       RATE      AMOUNT     RATE
------------------------------------------------------------------------------------------------------
<S>                             <C>                          <C>                   <C>           <C>
Non interest bearing demand
deposits                        $  30,570                    $  30,004             $  24,557   
------------------------------------------------------------------------------------------------------
Interest bearing demand
deposits                           74,154       3.3%            63,856       3.4%     62,657      3.1%
------------------------------------------------------------------------------------------------------
Saving deposits                    44,356       3.4             43,505       3.4      37,971      3.4
------------------------------------------------------------------------------------------------------
Time deposits                      68,177       5.4             67,993       5.3      60,466      5.3
------------------------------------------------------------------------------------------------------
                                $ 217,257                    $ 205,358             $ 185,651
                                ======================================================================
</TABLE>




The following table sets forth as of December 31, 1998, the aggregate amount of
outstanding deposits (certificates of deposits) of $100,000 or more by maturity
(in thousands of dollars):


<TABLE>
<CAPTION>
<S>                                                                  <C>      
                    Three months or less                             $  5,983.
                    Over three months through six months                5,184.
                    Over six months through twelve months               3,645.
                    Over twelve months                                  6,246.
                                                                     ---------       
                                                                     $ 21,058.
</TABLE>

RETURN ON EQUITY AND ASSETS

The following table sets forth consolidated operating and capital ratios:


<TABLE>
<CAPTION>
                                                            YEAR ENDED DECEMBER 31
----------------------------------------------------------------------------------------
                                              1998                 1997            1996
----------------------------------------------------------------------------------------
<S>                                           <C>                  <C>             <C>  
Return on average assets                      1.42%                1.30%           1.45%
----------------------------------------------------------------------------------------
Return on average equity                     17.48                14.96           16.09
----------------------------------------------------------------------------------------
Dividend payout ratio                        35.56                36.58           32.73
----------------------------------------------------------------------------------------
Average equity to average assets ratio        8.11                 8.69            9.03
----------------------------------------------------------------------------------------
</TABLE>


Average equity used in the above table excludes common stock subject to
repurchase obligation.







                                       16

<PAGE>   17
ITEM 2.  PROPERTIES

The Bank's main office is located at 51 West Pearl Street, Coldwater, Michigan
and is owned by the Bank. This facility, which opened in 1955 and expanded in
1976, consists of a one story structure comprising 27,945 square feet. Parking
is available for approximately 125 cars and 9 teller windows are available to
serve the Bank's customers. The Bank owns eleven branch offices, two of which
are in Coldwater, two in Union City, Michigan, one in Kinderhook, Michigan, one
in Tekonsha, Michigan, one in Hillsdale, Michigan, one in Camden, Michigan, one
in Athens, Michigan, one in North Adams, Michigan and one in Pennfield Township
(Battle Creek), Michigan. The Bank also leases 1,700 square feet from a third
party for use in its Battle Creek Loan Production Office. In addition, the
Registrant owns a 15,000 square foot building in Battle Creek, Michigan and a
14,000 square foot building in Coldwater, Michigan. 6,000 square feet of the
Battle Creek building is leased to the Bank for use by one of its Battle Creek
branches. 3,500 square feet is leased to a local college, 2,300 square feet is
leased as office space to local businesses and the remaining space is presently
unoccupied. 7,446 square feet of the Coldwater building is leased to the Bank
for use as a Consumer Loan center, 3,420 square feet is leased to a local title
office, 762 square feet is leased to a local insurance company and 394 square
feet is leased to community nonprofit organizations. The Bank's branch offices
range in size from 465 square feet to 6,000 square feet, with nine of the branch
offices having drive-in facilities and seven of the branches having automated
teller machines.

All of the Registrant's and the Bank's facilities are maintained in good
condition and are adequately insured. Management of Registrant believes the
present facilities are adequate to meet both current and future needs.


ITEM 3.  LEGAL PROCEEDINGS

The Bank is frequently engaged in litigation, both as plaintiff and defendant,
which is incident to its business. In certain proceedings, claims or
counterclaims may be asserted against the Bank. Based on the facts known to it
to date, management of the Registrant does not currently anticipate that the
ultimate liability, if any, arising out of any such litigation will have a
material effect on the consolidated financial statements of the Registrant.


ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable

                                       17

<PAGE>   18



                                     PART II

ITEM 5.  MARKET FOR THE REGISTRANT'S COMMON EQUITY
            AND RELATED STOCKHOLDER MATTERS

"Common Stock Market Prices and Dividends" on page 2 of the Annual Report to
Shareholders for the year ended December 31, 1998 is incorporated herein by
reference.


ITEM 6.  SELECTED FINANCIAL DATA

"Selected Financial Data" on page 2 of the Annual Report to Shareholders for the
year ended December 31, 1998 is incorporated herein by reference.


ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS
            OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

"Management's Discussion and Analysis of Financial Condition and Results of
Operations" on pages 5 through 11 of the Annual Report to Shareholders for the
year ended December 31, 1998 is incorporated herein by reference.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

"Quantitative and Qualitative Disclosures About Market Risk" on pages 11 and 12
of the Annual Report to Shareholders for the year ended December 31, 1998 is
incorporated herein by reference.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The consolidated Financial Statements, the Notes thereto and Report of
Independent Auditors included on pages 13 through 29 in the Annual Report to
Shareholders for the year ended December 31, 1998 are incorporated herein by
reference.


ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
            ON ACCOUNTING AND FINANCIAL DISCLOSURES

None

                                       18

<PAGE>   19
                                    PART III


ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The following table lists the names of the directors, their ages as of February
28, 1999 principal occupations and year in which each was elected.

<TABLE>
<CAPTION>

                                           PRINCIPAL OCCUPATION(S)              YEAR FIRST BECAME
      NAME OF DIRECTOR (1)          AGE    FOR PAST 5 YEARS (2)                 DIRECTOR OF REGISTRANT
---------------------------------------------------------------------------------------------------------------------
<S>                                 <C>    <C>                                              <C> 
                                           
Jerry L. Towns  (3)                 64     Chairman of Southern Michigan                   1982
                                           Bancorp, Inc. (Chairman of
                                           Southern Michigan Bank & Trust)

                                           President and Chief Executive
                                           Financial Officer of Southern
James T. Grohalski (3)              58     Michigan Bancorp, Inc.                           1982
                                           (President and Chief Executive 
                                           Officer of Southern Michigan
                                           Bank & Trust 

James P. Briskey                    65     Owner-Briskey Elevator (grain                    1982
                                           elevator operator)


H. Kenneth Cole                     50     Treasurer - Hillsdale College                    1998


                                           Co-owner and Chief Executive
William E. Galliers                 56     Officer-G & W Display Fixtures,                  1993
                                           Inc.

Nolan E. Hooker                     47     Owner-Hooker Oil Co. (distributor                1991
                                           of heating oil)

Gregory J. Hull                     50     Farmer                                           1995

Thomas E. Kolassa                   51     Owner-The Planning Group                         1995
                                           (insurance)

James J. Morrison                   50     Owner-Morrison & Associates                      1991
                                           (insurance)

Jane L. Randall                     77     Owner-Dally Tire Co. (tire                       1982
                                           distributor)

Freeman E. Riddle                   66     Owner-Spoor & Parlin Farm Equipment              1982
=====================================================================================================================
</TABLE>

Notes:
         (1)      Current directors of Registrant are also directors of Southern
                  Michigan Bank & Trust.

         (2)      The business experience of each director during the past five
                  years was that typical of a person engaged in the principal
                  occupation listed for each.

         (3)      Messrs. Towns and Grohalski, the Registrant's two executive
                  officers (who are also directors) served as President and 
                  Chief Executive Officer and Executive Vice-President and 
                  Chief Financial Officer, respectively, from the organization 
                  of the Registrant in 1982 until Mr. Towns' retirement on 
                  December 31, 1998.

                                       19

<PAGE>   20

ITEM 11.  EXECUTIVE COMPENSATION

The following table sets forth compensation paid by the Registrant and the Bank
with respect to the fiscal year ended December 31, 1998 to the Company's Chief
Executive Officer and the only other executive officer whose combined salary and
bonus exceeded $100,000.

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>

                                                                           ANNUAL COMPENSATION
                                                                           -------------------
                                                                                     ALL OTHER 
NAME AND PRINCIPAL POSITION                     YEAR             SALARY ($) (1)      COMPENSATION ($)(2)
--------------------------------------------------------------------------------------------------------------------
<S>                                             <C>                 <C>                  <C>   
Jerry L. Towns
      Chairman of the Registrant and             1998               $151,844              $5,878
      Chairman of the Bank                       1997               $146,059              $5,978
                                                 1996               $149,201              $5,978


James T. Grohalski
      President and Chief                        1998               $133,813              $7,400
      Executive Officer of the                   1997               $135,225              $7,202
      Registrant and President and               1996               $123,968              $7,191
      Chief Executive Officer 
      of the Bank
</TABLE>



         (1)      The amounts shown includes amounts deferred under the 401(k)
                  provisions of the Bank's Employee Stock Ownership Plan
                  ("ESOP") and the Bank's Executives' Deferred Compensation Plan
                  ("Deferred Compensation Plan").

         (2)      The amounts shown include the following for 1998: (i) employer
                  contributions to accounts in the ESOP and the Deferred
                  Compensation Plan of $2,500 and $3,000, respectively for Mr.
                  Towns; and $3,994 and $3,000 respectively for Mr. Grohalski;
                  (ii) $378 and $406 constituting the value of insurance
                  premiums paid by the Bank for term life insurance for Mr.
                  Towns' and Mr. Grohalski's benefit, respectively.


Retirement Benefits

Officers of the Registrant participate in the Southern Michigan Bank & Trust
Retirement Plan (the "Retirement Plan"), which has been adopted by the
Registrant. Under the terms of the Retirement Plan, a normal monthly retirement 
benefit is provided to covered employees who attain the age of 65. It provides 
for a normal retirement benefit after 30 years of credited service equal to 35% 
of a participant's actual monthly compensation based on the participant's 
highest consecutive five year average compensation (see column captioned
"Remuneration"). For participants with less than 30 years credited service,
reduced benefits are available in an amount equal to the normal retirement
benefit reduced by 1/30 for each year of service less than 30. Participants are
100% vested after five years of credited service, and are subject to forfeiture
upon termination of employment with credited service less than five years. The
following table represents estimated normal annual benefits payable on a
straight-life annuity basis upon retirement at age 65 and are not subject to
deduction for social security benefits:

                                       20

<PAGE>   21

                               PENSION PLAN TABLE

<TABLE>
<CAPTION>

                                                                                YEARS OF SERVICE
----------------------------------------------------------------------------------------------------------------------------------
                REMUNERATION                              25                          30                           35
----------------------------------------------------------------------------------------------------------------------------------
<S>                                                    <C>                         <C>                         <C>    
                  110,000                              $32,100                     $38,500                      $38,500
                  120,000                               35,000                      42,000                       42,000
                  130,000                               37,900                      45,500                       45,500
                  140,000                               40,800                      49,000                       49,000
                  150,000                               43,750                      52,500                       52,500
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>


Jerry L. Towns has 27 years of credited service and $139,000 current covered
remuneration. James T. Grohalski has 32 years of credited service and $125,000
current covered remuneration.

The Bank also has in effect supplemental retirement arrangements in the form of
Executive Employee Salary Continuation Agreements with its executive officers
under which a specified annual benefit, in addition to that provided under the
Retirement Plan, is payable to the officer upon retirement at age 65, subject to
reduction for credited service of less than 30 years on the same basis as under
the Retirement Plan. The specified benefit under the salary continuation
agreements is also payable beginning at age 65, if the officer is terminated or
has his title, responsibility or compensation significantly lessened or the
situs of his employment is changed without his consent. The specified annual
benefit, when added to the benefit under the Retirement Plan, is intended to be
approximately equal to the benefit the officer would have received under the
Retirement Plan but for a plan amendment which changed the Plan's benefit
formula to comply with changes in pension laws and which substantially reduced
the executive officers' benefits. For Jerry L. Towns, the specified annual
benefits payable upon retirement at age 65 under the supplemental retirement
arrangement is $16,860. For James T. Grohalski, the specified annual benefit
payable upon retirement at age 65 under the supplemental retirement arrangement
is $22,060.

The Bank also has a Deferred Compensation Plan for directors and certain
executive officers. Under the Deferred Compensation Plan, participants elect to
defer a portion of their compensation (in the case of directors, their fees) on
a pretax basis. Upon retirement at or after age 65, the participant or his
designated beneficiary is entitled to a benefit equal to the amount of the
participant's deferrals to the Plan plus earnings on such deferrals at a
specified rate of interest compounded annually, payable in equal monthly amounts
for not less than 180 months. Upon the participant's termination of employment
or retirement before age 65, the benefit payable to the participant at age 65 is
determined by multiplying the amount deferred under the Plan by the ratio of the
number of months for which the participant made deferrals to the number of
months from the time the participant began making deferrals to the participant's
reaching age 65. The amounts shown in the summary compensation table above
include amounts deferred as contributions under the Plan, which amounts are
subject to forfeiture pursuant to the formula described above for determining
the applicable benefit in the event the participant's employment terminates
before retirement at age 65.


Directors' Fees

Currently, each director of the Bank whose principal occupation is not with the
Bank, receives an annual fee of $6,108, which will be indexed for inflation in
1999. In addition, outside directors are compensated $150 for each Committee
meeting attended and participate in a bonus program based upon the achievement
of growth and profitability goals. The 1998 bonus paid to each outside director
was $1,595.

                                       21

<PAGE>   22


ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth, as of February 28, 1999, the names and addresses
of all beneficial owners of 5% or more of Registrant's common stock (its only
authorized class of stock), showing the amount and nature of such beneficial
ownership:

<TABLE>
<CAPTION>

--------------------------------------------------------------------------------------------------------------------
                            NAME & ADDRESS OF                               AMOUNT & NATURE OF            PERCENT
     TITLE OF CLASS         BENEFICIAL OWNER                             BENEFICIAL OWNERSHIP(1)          OF CLASS
--------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------
<S>                        <C>                                                       <C>                    <C>
      Common Stock         Southern Michigan Bank & Trust
                           51 West Pearl Street                                      323,463 (a)            17.42
                           Coldwater, Michigan  49036
--------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------
      Common Stock         Southern Michigan Bank & Trust
                           Employee Stock Ownership Plan                             133,609 (b)             7.19
                           51 West Pearl Street
                           Coldwater, Michigan  49036
--------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------
      Common Stock         Harvey B. Randall
                           8391 Old U.S. 27 South                                    132,839 (c)             7.15
                           Marshall, Michigan  49068
--------------------------------------------------------------------------------------------------------------------
</TABLE>



         (1)      Based upon information furnished to the Registrant by the
                  individuals named above. The nature of beneficial ownership
                  for shares shown is sole voting and investment power, except
                  as set forth below. Shares have been rounded to the nearest
                  whole share.

                           (a)      Shares are held by Bank's Trust Department
                                    in various fiduciary capacities which
                                    include power to vote the shares.

                           (b)      Shares are voted in accordance with
                                    instructions from plan participants.

                           (c)      Sole voting and investment power.

                                       22

<PAGE>   23


The following table sets forth, as of February 28, 1999, the total number of
shares of Registrant's common stock beneficially owned, and the percent of such
shares so owned, by each director and by all directors and executive officers of
the Registrant as a group.


<TABLE>
<CAPTION>

NAME OF INDIVIDUALS OR
NUMBER OF PERSONS IN                           AMOUNT AND NATURE OF                                   PERCENT OF
GROUP                                          BENEFICIAL OWNERSHIP (1)              TOTAL               CLASS
--------------------------------------------------------------------------------------------------------------------

<S>                                                            <C>                   <C>                <C>   
James P. Briskey                                               9,680                 19,360              1.04
                                                               9,680(a)

H. Kenneth Cole                                                  150                    150                (2)


William E. Galliers                                            1,517(a)               1,517                (2)


James T. Grohalski                                            19,667(b)              19,667              1.06


Nolan E. Hooker                                                  750(a)                 750                (2)


Gregory J. Hull                                                  789(a)                 789                (2)


Thomas E. Kolassa                                              1,356                  1,356                (2)


James J. Morrison                                              2,272(a)               2,272                (2)


Jane L. Randall                                                5,129                  5,129                (2)


Freeman E. Riddle                                              4,120                  6,344                (2)
                                                               2,224(a)

Jerry L. Towns                                                   212(a)              11,930                (2)
                                                              11,718(c)

All directors and executive officers
as a group (11 persons)                                       69,264                 69,264              3.72
</TABLE>

                                       23
<PAGE>   24




         (1)      Based upon information furnished to the Registrant by the
                  individual named and the members of the designated group. The
                  nature of beneficial ownership for shares shown is sole voting
                  and investment power except as set forth below. Shares have
                  been rounded to the nearest whole share.

                           (a)      Shared voting and investment power
                           (b)      Includes 16,662 shares held by the
                                    Bank's Employee Stock Ownership Plan
                                    as to which Mr. Grohalski has voting power.
                           (c)      Includes 11,718 shares held by the
                                    Bank's Employee Stock Ownership Plan
                                    as to which Mr. Towns has voting power.

         (2)      Less than one percent (1%).

                                       24

<PAGE>   25

   
    

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Directors and Officers of the Registrant and their associates were customers of,
and had transactions with the Bank in the ordinary course of business during
1998. All loans and commitments included in such transactions 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 the normal risk of
collectibility or present other unfavorable features.

                                       25

<PAGE>   26

                                     PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

                  (a)(1)   The following consolidated financial statements and
                           report of independent auditors of Southern Michigan
                           Bancorp, Inc. and subsidiary included in the Annual
                           Report to Shareholders of the Registrant for the year
                           ended December 31, 1998 are incorporated by reference
                           in Item 8:

           -    Report of Crowe, Chizek and Company LLP, independent auditors

           -    Consolidated  balance sheets - December 31, 1998 and 1997

           -    Consolidated statements of shareholders' equity - Years ended
                         December 31, 1998, 1997 and 1996

           -    Consolidated statements of income - Years ended December 31,
                1998, 1997 and 1996

           -    Consolidated statements of cash flows - Years ended December 31,
                1998, 1997 and 1996

           -    Notes to consolidated financial statements - December 31, 1998

                  (a)(2)   Schedules to the consolidated financial statements
                           required by Article 9 of Regulation S-X are not
                           required under the related instructions or are
                           inapplicable, and therefore have been omitted.

                  (a)(3)   Exhibits (Numbered in accordance with Item 601 of
                           Regulation S-K).

                           Exhibit  2 -     Not applicable.

                           Exhibit  3 -     Articles of Incorporation and
                                            By-Laws incorporated by reference to
                                            Exhibit 3 to the Registrant's Annual
                                            Report on Form 10-K for the year
                                            ended December 31, 1991 (file number
                                            2-78178).

                                            Amended and Restated By-Laws are
                                            incorporated by reference to Exhibit
                                            3 to the Registrant's Annual Report
                                            on Form 10-K for the year ended
                                            December 31, 1997 (file number
                                            2-78178)

                           Exhibit  4 -     Instruments Defining the Rights
                                            of Security Holders of the
                                            Registrant are the Articles of
                                            Incorporation and By-Laws (see
                                            Exhibit 3, above).

                           Exhibit  9 -     Not applicable.

                           Exhibit 10 -     Material Contracts - Executive
                                            Compensation Plans and Arrangements:
                                            (1) Master Agreements for Directors'
                                            Deferred Income Plan; (2) Composite
                                            form of Executive Employee Salary
                                            Continuation Agreement, as amended;
                                            and; (3) Master Agreements for
                                            Executives' Deferred Compensation
                                            Plan, as amended, are incorporated
                                            by reference to Exhibit 10 to the
                                            Registrant's Annual Report on Form
                                            10-K for the year ended December 31,
                                            1994 (file number 2-78178).

                           Exhibit 11 -     Not applicable.

                           Exhibit 12 -     Not applicable.

                           Exhibit 13 -     Registrant's 1998 Annual Report to 
                                            Shareholders.

                                            With the exception of the
                                            information incorporated by
                                            reference included in Items 5, 6, 7,
                                            7A and 8 and 13, the 1998 Annual
                                            Report to Shareholders is furnished
                                            for the Commission's information
                                            only and is not deemed filed as part
                                            of this report.

                           Exhibit 16 -     Not applicable.

                           Exhibit 18 -     Not applicable.

                           Exhibit 19 -     Not applicable.

                           Exhibit 21 -     Subsidiary of Registrant.

                           Exhibit 22 -     Not applicable.

                                       26

<PAGE>   27

                           Exhibit 23 -     Consent of Independent Auditors.

                           Exhibit 24 -     Not applicable.

                           Exhibit 27 -     Financial Data Schedule.


                  (b)      No reports on Form 8-K were filed in the last Quarter
                           of the period by this report.

                  (c)      Exhibits - See Item 14(a)(3) above.

                  (d)      Financial Statement Schedules - Omitted due to
                           inapplicability or because required information is
                           shown in the Financial Statements and Notes thereto.

                                       27

<PAGE>   28

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.

Dated:      MARCH 29, 1999                By:   JAMES T GROHALSKI
                                             ----------------------------------
                                                  James T. Grohalski
                                                  President and
                                                  Chief Executive Officer

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



    JAMES P. BRISKEY                              THOMAS E KOLASSA 
--------------------------------              ----------------------------------
James P. Briskey - Director                   Thomas E. Kolassa - Director



   H. KENNETH COLE                               JAMES J MORRISON 
--------------------------------              ----------------------------------
H. Kenneth Cole - Director                    James J. Morrison - Director



  WILLIAM E GALLIERS                             JANE L RANDALL 
--------------------------------              ----------------------------------
William E. Galliers - Director                Jane L. Randall - Director



   JAMES T. GROHALSKI                            FREEMAN E RIDDLE
--------------------------------              ----------------------------------
James T. Grohalski -                          Freeman E. Riddle - Director
President, Chief Executive Officer
and Director
(Principal Financial & Accounting Officer)



    NOLAN E HOOKER                               JERRY L TOWNS 
--------------------------------              ----------------------------------
Nolan E. Hooker - Director                    Jerry L. Towns - President
                                              Chairman & Director



  GREGORY J HULL                                 MARCH 29, 1999 
--------------------------------              ----------------------------------
Gregory J. Hull - Director                    Date

                                       28


<PAGE>   29
                                  EXHIBIT INDEX

Exhibit No.          Exhibit
-----------          -------


       

       Exhibit 3  -  Articles of Incorporation and By-Laws incorporated by 
                     reference to Exhibit 3 to the Registrant's Annual Report on
                     Form 10-K for the year ended December 31, 1991 (file number
                     2-78178).

                     Amended and Restated By-Laws are incorporated by reference
                     to Exhibit 3 to the Registrant's Annual Report on Form 10-K
                     for the year ended December 31, 1997 (file number 2-78178)

       Exhibit 4  -  Instruments Defining the Rights of Security Holders of the
                     Registrant are the Articles of Incorporation and By-Laws
                     (see Exhibit 3, above).


       Exhibit 10 -  Material Contracts - Executive Compensation Plans and
                     Arrangements:

                     (1) Master Agreements for Directors' Deferred Income Plan;

                     (2) Composite form of Executive Employee Salary
                     Continuation Agreement, as amended; and; (3) Master
                     Agreements for Executives' Deferred Compensation Plan, as
                     amended, are incorporated by reference to Exhibit 10 to the
                     Registrant's Annual Report on Form 10-K for the year ended
                     December 31, 1994 (file number 2-78178).

       Exhibit 13 -  Registrant's 1998 Annual Report to Shareholders.

                     With the exception of the information incorporated by
                     reference included in Items 5,6,7,7A and 8, the 1998
                     Annual Report to Shareholders is furnished for the
                     Commission's information only and is not deemed filed as
                     part of this report.

       Exhibit 21 -  Subsidiary of Registrant.

       Exhibit 23 -  Consent of Independent Auditors.

       Exhibit 27 -  Financial Data Schedule.