<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, 1997         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, 1998 was $75,409,000.

The number of shares outstanding of the Registrant's common stock as of March 1,
1998 was 1,921,253 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,
1997, are incorporated by reference into Parts II, III, and IV 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, from Southern Michigan National Bank. The
Bank operates thirteen (13) 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 securities custody
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 Banks' service area and offer additional
competition. The Bank is also faced with increasing competition from
non-depository financial intermediaries, such as large retailers and investment
banking 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 considered 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

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, or direct or indirect ownership or control
of more than five percent of the voting shares of a bank or a bank holding
company or merging or consolidating with any other bank holding company.

Under the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
(the "Riegle-Neal Act"), since September 29, 1995, the FRB is permitted, under
specified circumstances, to approve the acquisition by a bank holding company
located in one state of a bank or a bank holding company located in another
state, without regard to any prohibition contained in state law. 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 FRB 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 authorized, effective June 1, 1997, the responsible
Federal banking agency to approve applications for mergers of depository
institutions across state lines without regard to whether such activity is
contrary to state law. Any state could, however, by adoption of a
nondiscriminatory law after September 29, 1994 and before June 1, 1997, either
elect to have this provision take effect before June 1, 1997 or opt-out of the
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 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. Only Texas
opted-out of the interstate merger provision. Michigan exercised its right to
opt-in early to such provision.

In addition, Michigan law also has been amended as authorized by the Riegle-Neal
Act to permit the de novo establishment of a branch in Michigan by FDIC-insured
banks located in other states having laws permitting a Michigan-chartered bank
to establish a branch in such jurisdiction and the sale by a Michigan-chartered
bank of one 



                                       3
<PAGE>   4

or more of its branches to an FDIC-insured bank, savings bank or savings and
loan association located in a state in which a Michigan-chartered bank could
purchase one or more branches of the purchasing entity. Branches acquired in a
host state by both out-of-state state-chartered banks and national banks will be
subject to community reinvestment, consumer protection, fair lending and
interstate branching laws of the host state to the same extent as branches of a
national bank having its main office in the host state.

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 is the Bank's payment of dividends on
the stock of the Bank owned by the Company. Michigan law restricts the Bank's
ability to pay these dividends. Under the Michigan Banking Code, no dividend may
be declared by a Michigan state-chartered bank in an amount greater than net
profits then on hand after deducting losses and bad debts. In addition, if the
surplus of the Bank is less than the amount of its capital stock, 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, 1997, the amount of dividends the Bank could pay to the Company
without prior regulatory approval was $3,467,000 in addition to 1998 net income.

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").


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, 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. 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.


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 ration of 1.25 percent of insured deposits has been established for the
BIF. However, the FDIC may set a higher designated reserve ration 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 ration or, if the ratio is less than the designated ratio, to
increase the ratio to the designated ratio within a reasonable period of time.




                                       4
<PAGE>   5

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, currently 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. In addition, in 1996, pursuant to the
Deposit Insurance Funds Act enacted by Congress, 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 further
significant changes in the deposit insurance assessment rate 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 of 8.0 percent. In addition, a
bank holding company must maintain a minimum ratio of Tier I capital equal to
4.0 percent of risk-weighted assets. Tier I capital includes common
shareholder's equity, qualifying perpetual preferred stock and minority interest
in equity accounts of consolidated subsidiaries, less goodwill. At December 31,
1997, the Company's total capital to risk-weighted assets was 14.3 percent,
which is above the regulatory minimum requirements.

As a supplement 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 most highly rated bank holding companies. All other bank holding
companies are required to maintain additional Tier I capital yielding a leverage
ration of 4 percent to 5 percent, depending on the particular circumstances and
risk profile of the institution. The Company's total capital to total assets
ratio at December 31, 1997 was 10.1 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, 1997, 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.

Safety and Soundness Guidelines

As required by federal law, the federal banking regulators have adopted
interagency guidelines (the "Guidelines") establishing standards for safety and
soundness for depository institutions on matters such as internal controls,
internal audit systems, loan documentation, credit underwriting, interest rate
risk exposure, asset growth and quality, earnings, and compensation and other
benefits. In general, the Guidelines prescribe the goals to be achieved in each
area, and each institution will be responsible for establishing its own
procedures to achieve these goals. If an institution fails to comply with any of
the standards set forth in the Guidelines, the institution's primary federal
regulator may require the institution to submit a plan for achieving and
maintaining compliance. The preamble to the Guidelines states that an agency
expects a compliance plan from an institution whose failure to meet one or more
standards is of such severity that it would threaten the safe and sound
operation of the institution. Failure to submit an acceptable compliance plan,
or failure to adhere to a compliance plan that has been accepted by the
appropriate regulator, would constitute grounds for further enforcement action.



                                       5
<PAGE>   6

FDIC regulations also require all depository institutions to be examined
annually by the banking regulators and require insured depository institutions
having $500 million or more in total assets to prepare annual financial
statements which are audited by an independent public accountant, to have an
audit committee comprised solely of outside directors, and to hire outside
auditors to evaluate the institution's internal control structure and procedures
and compliance with laws and regulations relating to safety and soundness. For
institutions that are subsidiaries of bank holding companies, the financial
statement requirement can be satisfied by audited financial statements of the
consolidated bank holding company. Other audit related requirements for
subsidiary institutions that have total assets of less than $5 billion or assets
of $5 billion or more and a composite CAMEL rating of 1 or 2 also may be
satisfied by the parent bank holding company. The FDIC, in adopting the
regulations, reiterated its belief that every depository institution, regardless
of size, should have an annual independent audit and an independent audit
committee.

Money 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, 1997, 152 persons were employed by the Bank; 126 were full
time employees and 26 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 AN SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                                 Year Ended December 31 (Dollars in thousands)
                                                                 ---------------------------------------------         
                                                       1997                            1996                         1995
                                      ----------------------------------------------------------------------------------------------
                                         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)               $  158,193.   $ 15,789.    10.0%   $137,273.  $ 13,740.   10.0% $123,684.   $11,982.     9.7%
      Taxable investment              
       securities (D)                     33,538.      2,189.     6.5      36,372.     2,443.    6.7    37,326.     2,634.     7.1
      Tax-exempt investment           
       securities (A)                     16,864.      1,253.     7.4      14,732.     1,144.    7.8    12,986.     1,121.     8.6
      Federal funds sold                   1,357.         74.     5.5       1,309.        69.    5.3     2,333.       135.     5.8
                                      -----------   ---------            ---------  ---------         ---------   --------
                                                                                                                  
        Total interest earning        
         assets                          209,952.     19,305.     9.2     189,686.    17,396.    9.2   176,329.    15,872.     9.0
                                                                                                                  
   Non-interest earnings assets:                                                                                  
      Cash and due from banks             10,442.                          10,572.                      14,358.   
      Other assets                        14,871.                          12,106.                      10,120.   
      Less allowance for loan loss        (1,866.)                         (1,784.)                     (1,606.)  
                                      -----------                        ---------                    ---------   
        Total assets                  $  233,399.                        $210,580.                    $199,201.   
                                      ===========                        =========                    =========
  LIABILITIES AND SHAREHOLDERS' EQUITY                                                                             
   Interest bearing liabilities:                                                                                     
      Demand deposits                 $   63,856.   $  2,163.     3.4    $ 62,657.  $  1,956.    3.1  $ 57,349.   $ 1,834.     3.2
      Savings deposits                    43,505.      1,485.     3.4      37,971.     1,293.    3.4    37,681.     1,243.     3.3
      Time deposits                       67,993.      3,612.     5.3      60,466.     3,178.    5.3    58,161.     3,039.     5.2
      Federal funds purchased                784.         42.     5.4         592.        33.    5.6              
      Subordinated notes                                                       82.         9.   11.0     1,000.       110.    11.0
                                        
      Other borrowings                     1,404.        141.    10.0       1,105.       135.   12.2       994.       154.    15.5
                                      -----------   ---------            ---------  ---------         ---------    -------
        Total interest bearing        
          liabilities                    177,542.      7,443.     4.2     162,873.     6,604.    4.1   155,185.     6,380.     4.1
</TABLE>

  (continued)



                                       7
<PAGE>   8

   DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY - CONTINUED

<TABLE>
<CAPTION>
                                                                 Year Ended December 31 (Dollars in thousands)     
                                                                ---------------------------------------------     
                                                    1997                           1996                            1995      
                                       -------------------------------------------------------------------------------------------
                                        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> 
LIABILITIES AND SHAREHOLDERS'                                                                                                     
 EQUITY-continued                                                                                                                 
  Non-interest bearing liabilities:                                                                                               
     Demand deposits                  $ 30,004.                      $  24,557.                       $ 22,996.                   
     Other                               1,355.                          1,248.                          1,312.                   
     Common stock subject to                                                                                                      
        repurchase obligation            4,227.                          2,894.                          1,848.                   
     Shareholders' equity               20,271.                         19,008.                         17,860.                   
                                      ---------                      ----------                       ---------                   
     Total liabilities and                                                                                                        
        shareholders' equity          $233,399.                      $ 210,580.                       $199,201.                   
                                      =========                      ==========                       =========                   
     Net interest earnings                       $ 11,862.                       $  10,792.                       $  9,492.       
                                                 =========                       ==========                       =========       
     Net yield on interest                                                                                                        
        earning assets                                       5.6%                             5.7%                            5.4%
                                                             ===                              ===                             === 
</TABLE>

(A)  Includes tax equivalent adjustment of interest (assuming a 34% tax rate)
     for securities and loans of $392,000 and $48,000, respectively, for 1997;
     $369,000 and $23,000, respectively, for 1996; and $379,000 and $17,000,
     respectively, for 1995.

(B)  Average balance includes average nonaccrual loan balances of $500,000 in
     1997; $443,000 in 1996; and $284,000 in 1995.

(C)  Interest income includes loan fees of $813,000 in 1997; $884,000 in 1996;
     and $472,000 in 1995.

(D)  Average balance includes average unrealized gain (loss) of ($13,000) in
     1997; $31,000 in 1996; and $69,000 in 1995 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>
                                            1997 COMPARED TO 1996                 1996 COMPARED TO 1995
        (Dollars in thousands)           Increase (Decrease) Due To             Increase (Decrease) Due To
---------------------------------------------------------------------------------------------------------------
<S>                                     <C>             <C>       <C>           <C>          <C>        <C>   
Interest Income on:                     Volume          Rate        Net         Volume       Rate         Net

   Loans                                $2,088          $(39)     $2,049        $1,350       $ 408      $1,758
                                                                                                  
   Taxable investment securities          (186)          (68)       (254)          (66)       (125)       (191)
                                                                                                       
   Tax-exempt investment securities        160           (51)        109           142        (119)         23

   Federal funds sold                        3             2           5           (55)        (11)        (66)
                                        ------         -----      ------        ------       -----      ------ 
    Total interest earning assets       $2,065         $(156)     $1,909        $1,371       $ 153      $1,524
                                        ======         =====      ======        ======       =====      ======

Interest expense on:

   Demand deposits                      $   38         $ 169         207        $  167       $ (45)     $  122
                                                                                         
   Savings deposits                        189             3         192            10          40          50
                                                                                               
   Time deposits                           400            34         434           121          18         139

   Federal funds purchased                  10            (1)          9            33           0          33
                                                                                                                 
   Subordinated notes                       (9)            0          (9)         (101)          0        (101)

   Other borrowings                         33           (27)          6            16         (35)        (19)
                                        ------         -----      ------        ------       -----      ------ 
                                                                                                
    Total interest bearing liabilities  $  661         $ 178      $  839        $  246       $ (22)     $  224
                                        ======         =====      ======        ======       =====      ======
</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
                                          1997                         1996                        1995
                               -------------------------------------------------------------------------------------
                                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                  $ 6,262           $ 6,262    $15,320         $15,320        $24,847       $24,847
States and political                       
  subdivisions                   20,885            20,560     19,342          19,035         14,934        14,534
Corporate securities             15,590            15,564     19,566          19,588         12,424        12,310
                                                                            
Other securities                  2,688             2,688      2,657           2,656          3,667         3,662
                                -------           -------    -------         -------        -------       -------
                                                                              
Total investment                $45,425           $45,074    $56,885         $56,599        $55,872       $55,353
 securities                     =======           =======    =======         =======        =======       =======
</TABLE>



         The following table sets forth the carrying value of the maturities (of
         anticipated call date, if earlier) and weighted average yield for each
         range of maturities at December 31, 1997.

<TABLE>
<CAPTION>
                                                                      MATURING
------------------------------------------------------------------------------------------------------------------
 (Dollars in thousands)         WITHIN 1 YEAR           1 TO 5 YEARS         5 TO 10 YEARS         AFTER 10 YEARS
------------------------------------------------------------------------------------------------------------------
                              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                $ 4,210        6.21%      $ 2,052    5.75%
------------------------------------------------------------------------------------------------------------------
States and political
subdivisions                  4,108        5.06        12,801    5.27       $ 3,040   5.38%       $  611     5.72%
------------------------------------------------------------------------------------------------------------------
Corporate securities          4,847        6.29        10,717    6.41
------------------------------------------------------------------------------------------------------------------
Other securities                325        5.53         1,642    6.14                                721     7.49
------------------------------------------------------------------------------------------------------------------

------------------------------------------------------------------------------------------------------------------
      Total                 $13,490                   $27,212               $ 3,040               $1,332
------------------------------------------------------------------------------------------------------------------
</TABLE>



         The weighted average interest yields were computed by multiplying the
         amortized cost 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 amortized cost 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)                    1997                1996               1995           1994           1993
--------------------------------------------------------------------------------------------------------------------------
<S>                                         <C>                <C>                <C>             <C>             <C>     
Commercial, financial, and
agricultural                                $ 74,819           $ 72,108           $ 51,940        $ 49,514        $ 47,011
Real estate mortgage                          49,144             47,561             41,293          43,054          42,525
Installment                                   34,778             33,009             30,004          27,771          22,978
                                            --------           --------           --------        --------          ------

         Total Loans                        $158,741           $152,678           $123,237        $120,339        $112,514
                                            ========           ========           ========        ========        ========
</TABLE>


Maturities

         The following table sets forth the maturities of the loan portfolio at
         December 31, 1997, 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                    $    26,653             $ 26,118              $ 22,048              $ 74,819     
------------------------------------------------------------------------------------------------------------     
Real estate mortgages                 3,864                3,395                41,885                49,144     
------------------------------------------------------------------------------------------------------------     
Installment                           2,256               25,649                 6,873                34,778     
------------------------------------------------------------------------------------------------------------     
                                                                                                                 
------------------------------------------------------------------------------------------------------------     
           Total                $    32,773             $ 55,162              $ 70,806              $158,741     
------------------------------------------------------------------------------------------------------------     
                                                                                                                 
                                                                                                                 
------------------------------------------------------------------------------------------------------------     
Loans maturing after one                                                                                         
year with:                                                                                                       
------------------------------------------------------------------------------------------------------------     
Fixed interest rates                                      33,677                 4,414                           
------------------------------------------------------------------------------------------------------------     
Variable interest rates                                   21,485                66,392                           
------------------------------------------------------------------------------------------------------------     
                                                                                                                 
------------------------------------------------------------------------------------------------------------     
           Total                                        $ 55,162              $ 70,806                           
------------------------------------------------------------------------------------------------------------     
</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 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)              1997              1996             1995               1994               1993
------------------------------------------------------------------------------------------------------------------------  
<S>                                    <C>                <C>               <C>                <C>                <C>     
Nonaccrual Loans:                                                                                                         
Commercial, financial, and                                                                                                
agricultural                           $ 1,026            $   448           $   380            $  142             $  160  
Real estate mortgage                         0                  0                24                 0                 71  
Installment                                 61                  2                40                10                 68  
                                 ---------------------------------------------------------------------------------------  
                                                                                                                          
                                                                                                                          
                                         1,087                450               444               152                299  
                                                                                                                          
Loans contractually past due                                                                                              
90 days or more:                                                                                                          
Commercial, financial, and                                                                                                
agricultural                             1,067                 82               353                 6                150  
Real estate mortgage                       630                129                56                 0                 25  
Installment                                966                165                 4                 5                  7  
                                 ---------------------------------------------------------------------------------------  
                                                                                                                          
                                                                                                                          
                                         2,663                376               413                11                182  
                                 ---------------------------------------------------------------------------------------  

                 Total                 $ 3,750            $   826           $   857            $  163             $  481
                                       =======            =======           ========           ======             ======
Percent of total loans
outstanding                               2.36%               .54%              .70%              .14%               .43%
                                       =======            =======           ========           ======             ======
</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 $73,000 and $27,000 was realized on nonaccrual loans during
         1997 and 1996, respectively. Under original terms for these loans,
         interest income which would have been recorded approximates $137,000
         and $55,000 in 1997 and 1996, respectively. There are no loan
         commitments outstanding to extend credit to these customers.




                                       12
<PAGE>   13

Potential Problem Loans

At December 31, 1997, the Company had approximately $3,136,000 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)               1997             1996               1995               1994               1993
-----------------------------------------------------------------------------------------------------------------------------
<S>                                      <C>              <C>                <C>                <C>                <C>     
-----------------------------------------------------------------------------------------------------------------------------
Balance at beginning of year             $  1,814         $  1,609           $  1,498           $  1,365           $  1,401
-----------------------------------------------------------------------------------------------------------------------------

Charge offs:
-----------------------------------------------------------------------------------------------------------------------------
 Commercial, financial, and            
 agricultural                                 122               13                 87                 69                193
-----------------------------------------------------------------------------------------------------------------------------
  Installment                                 386              157                124                 93                124
-----------------------------------------------------------------------------------------------------------------------------
  Real estate                                   0                0                  0                  0                  0
-----------------------------------------------------------------------------------------------------------------------------
                                              508              170                211                162                317
-----------------------------------------------------------------------------------------------------------------------------

Recoveries:
-----------------------------------------------------------------------------------------------------------------------------
  Commercial, financial, and             
  agricultural                                 31               43                 43                 30                138
-----------------------------------------------------------------------------------------------------------------------------
  Installment                                  66               62                 54                 82                139
-----------------------------------------------------------------------------------------------------------------------------
  Real estate                                                    3                  3                  3                  4
-----------------------------------------------------------------------------------------------------------------------------

                                               97              108                100                115                281
                                               --              ---                ---                ---                ---
-----------------------------------------------------------------------------------------------------------------------------
                    Net charge offs           411               62                111                 47                 36
-----------------------------------------------------------------------------------------------------------------------------
  Provision for loan losses                   460              267                222                180                  0
                                              ---              ---                ---                ---                  -
-----------------------------------------------------------------------------------------------------------------------------
            Balance at end of year       $  1,863         $  1,814           $  1,609           $  1,498           $  1,365
                                         ========         ========           ========           ========           ========
-----------------------------------------------------------------------------------------------------------------------------
    Average loans outstanding            $158,193         $137,273           $123,684           $119,637           $115,524
                                         ========         ========           ========           ========           ========
-----------------------------------------------------------------------------------------------------------------------------
Ratio of net charge offs to average
loans outstanding                             .26%             .05%               .09%               .04%               .03%
                                         ========         ========           ========           ========           ========
-----------------------------------------------------------------------------------------------------------------------------
</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.

In determining the 1993 provision for loan losses, management considered the
fact that nonaccrual loan and past due loan amounts decreased from prior years.
Also considered in determining the 1993 provision was the low level of charge
offs and the decline in outstanding loans. The 1996, 1995 and 1994 provisions
increased 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.











                                       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 possible
problems in collection, results of examination by regulatory agencies and
current economic conditions. The entire allowance is available to absorb any
future 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
                                         1997                        1996                         1995                             
                             --------------------------------------------------------------------------------------         
                                                                                                                            
                                           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                  
-------------------------------------------------------------------------------------------------------------------          
<S>                          <C>             <C>         <C>                <C>        <C>                <C>               
Commercial, financial, and                                                                                                  
agricultural                 $     628       47.1%       $     351           47.2%      $     313          42.1%            
-------------------------------------------------------------------------------------------------------------------          
Real estate mortgage                98       31.0               95           31.2             83           33.5               
-------------------------------------------------------------------------------------------------------------------          
Installment                        321       21.9              177           21.6            157           24.4               
-------------------------------------------------------------------------------------------------------------------          
Unallocated                        816                       1,191                         1,056                              
                             ---------                   ---------                     ---------                              
-------------------------------------------------------------------------------------------------------------------          
                                                                                                                            
-------------------------------------------------------------------------------------------------------------------          
                             $   1,863      100.0%       $   1,814          100.0%     $   1,609          100.0%              
                             =========      =====        =========          =====      =========          =====               
-------------------------------------------------------------------------------------------------------------------          
                                             


<CAPTION>
                                                            DECEMBER 31
                                              1994                       1993                        
                                     --------------------------------------------------------- 
                                                                                               
                                                    Percent of                  Percent of
                                                    Loans                       Loans          
                                                    in each                     in each        
                                                    category of                 category of    
(Dollars in thousands)               Allowance      Total Loans   Allowance     Total Loans    
---------------------------------------------------------------------------------------------- 
<S>                                  <C>            <C>          <C>             <C>           
Commercial, financial, and                                                                     
agricultural                          $    369      41.1%        $  344          41.8%         
---------------------------------------------------------------------------------------------- 
Real estate mortgage                        86      35.8             85          37.8  
---------------------------------------------------------------------------------------------- 
Installment                                147      23.1            133          20.4  
---------------------------------------------------------------------------------------------- 
Unallocated                                896                      803                 
                                      --------                   ------                    
----------------------------------------------------------------------------------------------
                                              
----------------------------------------------------------------------------------------------
                                      $  1,498    100.00%        $1,365         100.0%  
                                      ========    ======         ======         ======  
---------------------------------------------------------------------------------------------- 
</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
                                                 1997                            1996                             1995
                               -------------------------------------------------------------------------------------------------
   (Dollars in thousands)              AMOUNT           RATE            AMOUNT           RATE           AMOUNT            RATE
--------------------------------------------------------------------------------------------------------------------------------
<S>                                 <C>                <C>           <C>               <C>            <C>                <C>
Non interest
 bearing demand                      $  30,004                         $ 24,557                         $ 22,996
 deposits
--------------------------------------------------------------------------------------------------------------------------------
Interest bearing
 demand deposits                        63,856              3.4%         62,657             3.1%          57,349             3.2%
--------------------------------------------------------------------------------------------------------------------------------
Saving deposits                         43,505              3.4          37,971             3.4           37,681             3.3
--------------------------------------------------------------------------------------------------------------------------------
Time deposits                           67,993              5.3          60,466             5.3           58,161             5.2
                                                                       --------                         --------
--------------------------------------------------------------------------------------------------------------------------------
                                     $ 205,358                         $185,651                         $176,187
                                     =========                         ========                         ========
                               -------------------------------------------------------------------------------------------------
</TABLE>



The following table sets forth as of December 31, 1997, the aggregate amount of
outstanding deposits (certificates of deposits) of $100,000 or more by maturity
(in thousands of dollars):


          Three months or less                                 $   7,132.
          Over three months through six months                     5,278.
          Over six months through twelve months                    2,141.
          Over twelve months                                       1,886.
                                                               ----------
                                                               $  16,437.
                                                               ==========

RETURN ON EQUITY AND ASSETS

The following table sets forth consolidated operating and capital ratios:


<TABLE>
<CAPTION>
                                                                               YEAR ENDED DECEMBER 31
---------------------------------------------------------------------------------------------------------------------
                                                                 1997                 1996              1995
---------------------------------------------------------------------------------------------------------------------
<S>                                                              <C>                  <C>              <C>  
Return on average assets                                          1.30%                1.45%            1.31%
---------------------------------------------------------------------------------------------------------------------
Return on average equity                                         14.96                16.09            14.64
---------------------------------------------------------------------------------------------------------------------
Dividend payout ratio                                            36.58                32.73            35.18
---------------------------------------------------------------------------------------------------------------------
Average equity to average assets ratio                            8.69                 9.03             8.97
---------------------------------------------------------------------------------------------------------------------
</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.
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 it's 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 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 STOCK
         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, 1997 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, 1997 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 10 of the Annual Report to Shareholders for the
year ended December 31, 1997 is incorporated herein by reference.


ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

"Quantitative and Qualitative Disclosures About Market Risk" on page 10 of the
Annual Report to Shareholders for the year ended December 31, 1997 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, 1997 are incorporated herein by
reference.


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

None





                                       18
<PAGE>   19

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The following table lists the names of the directors, their ages as of February
28, 1998 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)                  63     President and Chief Executive
                                            Officer of Southern Michigan                        1982
                                            Bancorp, Inc. (Chairman of
                                            Southern Michigan Bank & Trust)

James T. Grohalski (3)               57     Executive Vice President and
                                            Chief Financial Officer of
                                            Southern Michigan Bancorp, Inc.                     1982
                                            (President of Southern Michigan
                                            Bank & Trust)

James Briskey                        64     Owner-Briskey Elevator (grain                       1982
                                            elevator operator)

H. Kenneth Cole                      49     Treasurer - Hillsdale College                       1998

William E. Galliers                  55     Co-owner and Chief Executive
                                            Officer-G & W Display Fixtures,                     1993
                                            Inc.

Nolan E. Hooker                      46     Owner-Hooker Oil Co. (distributor                   1991
                                            of heating oil)

Gregory J. Hull                      49     Farmer                                              1995

Thomas E. Kolassa                    50     Owner-The Planning Group                            1995
                                            (insurance)

James J. Morrison                    49     Owner-Morrison & Associates                         1991
                                            (insurance)

Jane L. Randall                      76     Owner-Dally Tire Co. (tire                          1982
                                            distributor)

Freeman E. Riddle                    65     Owner-Spoor & Parlin Farm                           1982
                                            Equipment
======================================================================================================
</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) have held the same positions
                  since the organization of Registrant in 1982.


                                       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, 1997 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
      President and Chief Executive             1997                $146,059                     $5,978
      Officer of the Registrant and             1996                $149,201                     $5,978
      Chairman of the Bank                      1995                $134,190                     $6,038

James T. Grohalski
      Executive Vice President and              1997                $130,320                     $7,202
      Chief Financial Officer of the            1996                $135,225                     $7,191
      Registrant and President of the           1995                $123,968                     $7,239
      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 1997: (i) employer
                  contributions to accounts in the ESOP and the Deferred
                  Compensation Plan of $2,600 and $3,000, respectively for Mr.
                  Towns; and $3,796 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 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 26 years of credited service and $131,000 current covered
remuneration. James T. Grohalski has 31 years of credited service and $118,000
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 the executive officers attaining 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 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 $6,000, which will be indexed for inflation
beginning in 1998. 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 1997 bonus paid to each
outside director was $4,467.



                                       21
<PAGE>   22



ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth, as of February 28, 1998, 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                                371,160.5118 (a)                 19.319
                           Coldwater, Michigan  49036
----------------------------------------------------------------------------------------------------------------------

      Common Stock         Southern Michigan Bank & Trust
                           Employee Stock Ownership Plan                            144,125 (b)                  7.502
                           51 West Pearl Street
                           Coldwater, Michigan  49036

----------------------------------------------------------------------------------------------------------------------
      Common Stock         Harvey B. Randall
                           8391 Old U.S. 27 South                              132,885.6024 (c)                  6.917
                           Marshall, Michigan  49068
----------------------------------------------------------------------------------------------------------------------

      Common Stock         Estate of Max I. Larsen
                           410 East Chicago Street                             118,747.3964                      6.181
                           Coldwater, Michigan  49036
----------------------------------------------------------------------------------------------------------------------
</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.

                           (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, 1998, 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 Briskey                           9,680      (a)
                                        9,680      (b)                   19,360              1.008

H. Kenneth Cole                             0                                 0                  0

William E. Galliers                     1,490.7000 (b)                    1,490.7000            (2)

James T. Grohalski                      2,954.3759                        2,954.3759            (2)

Nolan E. Hooker                           737.4478 (b)                      737.4478            (2)

Gregory J. Hull                           636.9112 (b)                      636.9112            (2)

Thomas E. Kolassa                       1,035.1013                        1,035.1013            (2)

James J. Morrison                       2,233.6652 (b)                    2,233.6652            (2)

Jane L. Randall                         5,042.1587                        5,042.1587            (2)

Freeman E. Riddle                       4,050.1614 (a)
                                        2,224      (b)                    6,274.1614            (2)

Jerry L. Towns                             56      (a)
                                          153.3262 (b)                      209.3262            (2)

All directors and executive officers
as a group (11 persons)                39,973.8477                       39,973.8477         2.081
</TABLE>


         (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.

                           (a)      Sole voting and investment power.

                           (b)      Shared voting and investment power.

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




                                       23
<PAGE>   24



ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The second paragraph of Note C to the consolidated financial statements on page
21 of the Annual Report to Shareholders for the year ended December 31, 1997 is
incorporated herein by reference.
































                                       24
<PAGE>   25

                                     PART IV

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

         (a)(1) and (2) The response to this portion of Item 14 is submitted as
a separate section of this report.

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

                           Exhibit  2 -     Not applicable.

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

                                            Amended and Restated By-Laws are
                                            included and filed as part of this
                                            Form 10-K.

                           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 -     Statement Re: Computation of Per 
                                            Share Earnings. See Note A, Notes to
                                            Consolidated Financial Statements,
                                            page 18.

                           Exhibit 12 -     Not applicable.

                           Exhibit 13 -     Registrant's 1997 Annual Report to 
                                            Shareholders.

                                            With the exception of the
                                            information incorporated by
                                            reference included in Items
                                            3,5,6,7,7A,8 and 13, the 1997 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 21 -     Subsidiary of Registrant.

                           Exhibit 22 -     Not applicable.

                           Exhibit 23 -     Consent of Independent Auditors.

                           Exhibit 24 -     Not applicable.


                                       25
<PAGE>   26

                         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.


















                                       26
<PAGE>   27

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 23, 1998                          By:     JAMES T. GROHALSKI
       ---------------------------                   ---------------------------
                                                           James T. Grohalski
                                                           Executive Vice 
                                                           President and
                                                           Secretary/Treasurer

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 BRISKEY                                      THOMAS E. KOLASSA
----------------------------------                  ----------------------------
James 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
Executive Vice President and Director
(Principal Financial & Accounting Officer)



        NOLAN E. HOOKER                                    JERRY L. TOWNS
----------------------------------                  ----------------------------
Nolan E. Hooker - Director                          Jerry L. Towns - President
                                                    Chief Executive Officer & 
                                                    Director




         GREGORY J. HULL                              MARCH 23, 1998
----------------------------------                 -----------------------------
Gregory J. Hull - Director                         Date








                                       27


<PAGE>   28

                                 EXHIBIT INDEX


                                                              SEQUENTIALLY
EXHIBIT                                                         NUMBERED
NUMBER                         DESCRIPTION                        PAGE
-------                        -----------                    ------------
   3                      By-laws
  13                      Registrant's 1997 Annual Report 
                          to Shareholders
  21                      Subsidiary of Registrant
  23                      Consent of Independent Auditors
  27                      Financial Data Schedule