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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION 
Washington, D.C. 20549

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FORM 10-K

x  ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2003

o  TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the Transition Period from to

Commission File Number 2-78178

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SOUTHERN MICHIGAN BANCORP, INC. 
(Exact Name of Registrant as Specified in Its Charter)

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

51 West Pearl Street, Coldwater, Michigan 49036
(Address of Principal Executive Offices) (Zip Code)
(517) 279-5500
(Registrant's Telephone Number, Including Area Code)

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

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

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

|Common Stock, $2.50 par value
|-----------------------------
|(Title of Class)             

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 past 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 o

Indicate by check mark if disclosure of delinquent filers in response 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. o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). YES o    NO x

The aggregate market value of the registrant's common stock, par value $2.50 per share (based on the last sale of the day) held by non-affiliates of the registrant as of June 30, 2003 was approximately $26,590,000. For purposes of this computation, all executive officers, directors and 5% shareholders of the registrant have been assumed to be affiliates. Certain of such persons may disclaim that they are affiliates of the registrant. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

The number of shares outstanding of the registrant's common stock as of February 27, 2004 was 1,849,328 shares.

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DOCUMENTS INCORPORATED BY REFERENCE

|Identity of Document                                                                         | Parts of Form 10-K Into Which Document is Incorporated
|-------------------------------------------------------------------------------------------- | ------------------------------------------------------
|Definitive Proxy Statement regarding the 2004 Annual
Meeting of Shareholders of the Company. | Part III                                              

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PART I

INTRODUCTORY NOTE

This Annual Report on Form 10-K may be deemed to contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. The forward-looking statements included are based on current expectations that involve a number of risks and uncertainties. Regarding the Company's operating results, business prospects or any other aspect of the Company, please be advised that the Company's actual financial condition, operating results and business performance may differ materially from that projected or estimated by the Company in forward-looking statements. The differences may be caused by a variety of factors, including but not limited to, adverse economic conditions, intense competition, including intensification of price competition and entry of new competitors and products, adverse federal, state and local government regulation, inadequate capital, unexpected costs and operating deficits, increases in general and administrative costs, lower sales and revenue than forecast, loss of customers, inability to raise prices, failure to obtain new customers, litigation and administrative proceedings involving the Company, the possible acquisition of new businesses that result in operating losses or that do not perform as anticipated, resulting in unanticipated losses, the possible fluctuation and volatility of the Company's operating results, financial condition and stock price, losses incurred in litigation and settling cases, dilution in the Company's ownership of its business, adverse publicity and news coverage, inability to carry out marketing and sales plans, loss or retirement of key executives, changes in interest rates, inflationary factors, and other specific risks that may be alluded to in this Annual Report or in other reports issued by the Company. In addition, the business and operations of the Company are subject to substantial risks, which increase the uncertainty inherent in the forward-looking statements. In light of the significant uncertainties inherent in the forward-looking information included herein, the inclusion of such information should not be regarded as a representation by the Company or any other person that the objectives or plans of the Company will be achieved.

ITEM 1.          BUSINESS

Overview

The registrant, Southern Michigan Bancorp, Inc. (the "Company"), is a registered bank holding company incorporated under the laws of the State of Michigan, headquartered in Coldwater, Michigan. The Company was formed in 1982 for the purpose of acquiring all of the outstanding shares of Southern Michigan National Bank, which it did in November, 1982. In December, 1992, Southern Michigan National Bank converted its charter to that of a Michigan state banking corporation and changed its name to, Southern Michigan Bank & Trust (the "Bank"), with its main office located at 51 West Pearl Street, Coldwater, Michigan 49036. The Bank operates 10 branch offices in the primarily rural areas of Branch, Hillsdale, and Calhoun counties in southwestern Michigan. In addition to the operations of the Bank described below, the Company owns and leases certain real estate to the Bank and third parties (see Item 2. Properties below); and SMB&T Financial Services, Inc., a subsidiary of the Bank, has been established to provide insurance and investment services, which services currently consist of the sale of certain insurance products to the Bank and limited sales of insurance products to the public. None of such activities are significant to the operations of the Company. In August, 2000, SMB Mortgage Company was established as a subsidiary of the Bank. At that time all residential mortgage loans held by the Bank and all residential mortgage loan applications in the pipeline were transferred to SMB Mortgage Company. All of the residential mortgage activities previously conducted by the Bank were undertaken by SMB Mortgage Company.

Banking Services

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

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

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Residential mortgage loans are originated by SMB Mortgage Company. Some residential mortgage loans are retained by SMB Mortgage Company while others are sold to investors in the secondary market. When SMB Mortgage Company sells originated mortgage loans to investors, it makes a determination to either retain or sell the servicing rights to such loans.

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

Competition

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

Supervision and Regulation

General

Bank holding companies and banks are highly regulated by both state and federal agencies. As a bank holding company, the Company is subject to supervision and regulation by the Federal Reserve Board (the "FRB") pursuant to 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 as to be a proper incident thereto. The BHCA requires a bank holding company to obtain the prior approval of the FRB before acquiring a non-banking company, or substantially all of the assets of a bank or a bank holding company, or direct or indirect ownership or control of more than five percent of the voting shares of a bank or a bank holding company.

Under FRB regulations, the Company is required to serve as a source of financial and managerial strength to the Bank and must conduct its operations in a safe and sound manner.

The Bank is subject to regulation, supervision, and regular bank examinations by the Federal Deposit Insurance Corporation ("FDIC") and the Michigan Office of Financial and Insurance Services ("OFIS"). OFIS is the Bank's chartering authority and primary regulator. Under OFIS and FDIC regulations, the Bank is required to maintain reserves against its deposits and to maintain certain levels of capital and surplus. In addition, the Bank is subject to restrictions on the nature and amount of loans which may be made, the types and amounts of investments it may make, and certain limitations on the payment of dividends to its sole shareholder, the Company.

Dividend Restrictions

The Company's principal source of income consists of dividends paid by the Bank on its common stock (all of which is owned by the Company). Michigan law restricts the Bank's ability to pay dividends to its shareholder. Under the Michigan Banking Code of 1999, as amended, no dividend may be declared by the Bank in an amount greater than net income then on hand after deducting losses and bad debts. After payment of a dividend, the Bank must have a surplus amounting to not less than 20% of its capital. In addition, if the surplus of the Bank is less than the amount of its capital, before a dividend may be declared, the Bank must transfer to surplus not less than 10% of the net income of the Bank for the preceding 6 months in the case of quarterly or semiannual dividends or not less than 10% of its net profits for the preceding two consecutive 6 month periods in the case of annual dividends. Dividends cannot be paid from the Bank's capital or surplus.

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The payment of dividends by the Company and the Bank is also affected by various regulatory requirements and policies, such as the requirement to maintain adequate capital above regulatory guidelines. The "prompt corrective action" provisions of the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") impose further restrictions on the payment of dividends by insured banks which fail to meet specified capital levels and, in some cases, their parent bank holding companies. FDICIA generally prohibits a depository institution from making any capital distribution (including payment of a dividend) or paying any management fee to its holding company if the depository institution would thereafter be undercapitalized (see "Capital Requirements"). These regulations and restrictions may limit the Company's ability to obtain funds from the Bank for the Company's cash needs, including funds for acquisitions, payments of dividends and interest, and the payment of operating expenses. Based on the Bank's balance sheet as of December 31, 2003, the Bank could pay a dividend to the Company in the amount of $9,991,000 without prior regulatory approval.

The FDIC may prevent an insured bank from paying dividends if the bank is in default of payment of any assessment due to the FDIC. In addition, payment of dividends by a bank may be prevented by the applicable federal regulatory authority if such payment is determined, by reason of the financial condition of such bank, to be an unsafe and unsound banking practice. The FRB has issued a policy statement providing that bank holding companies and insured banks should generally only pay dividends out of current operating earnings.

Federal Regulation

The following is a summary of certain statutes and regulations affecting the Company and the Bank. This summary is qualified in its entirety by such statutes and regulations, which are subject to change based on pending and future legislation and action by regulatory agencies. Proposals to change the laws and regulations governing the operation of banks and companies which control banks and other financial institutions are frequently raised in Congress. The likelihood of any major legislation and the impact such legislation might have on the Company or the Bank are, however, impossible to predict.

USA Patriot Act

Enacted in 2001, the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the "USA Patriot Act") requires each financial institution to implement additional policies and procedures with respect to money laundering, suspicious activities, currency transaction reporting, and currency crimes. The USA Patriot Act also contains a provision encouraging cooperation among financial institutions, regulatory authorities and law enforcement authorities with respect to individuals, entities and organizations engaged in, or reasonably suspected of engaging in, terrorist acts or money laundering activities.

Gramm-Leach-Bliley

Enacted late in 1999, the Gramm-Leach-Bliley Act ("Gramm-Leach-Bliley"), broadens the scope of financial services that banks may offer to consumers, essentially removing the barriers erected during the Depression that separated banks and securities firms, closes the loophole which permitted commercial enterprises to own and operate a thrift institution, and provides some new consumer protections with respect to privacy issues and ATM usage fees. Gramm-Leach-Bliley permits affiliations between banks, securities firms and insurance companies (which affiliations were previously prohibited under the Glass-Steagall Act). Under Gramm-Leach-Bliley, a bank holding company may qualify as a financial holding company and thereby offer expanded range of financial oriented products and services which products and services may not be offered by bank holding companies. To qualify as a financial holding company, a bank holding company's subsidiary depository institutions must be well-managed, well-capitalized and have received a "satisfactory" rating on its latest examination under the Community Reinvestment Act. Gramm-Leach-Bliley provides for some regulatory oversight by the Securities and Exchange Commission for bank holding companies engaged in certain activities, and reaffirms that insurance activities are to be regulated on the state level. States, however, may not prevent depository institutions and their affiliates from engaging in insurance activities. Commercial enterprises are no longer able to establish or acquire a thrift institution and thereby become a unitary thrift holding company. Thrift institutions may only be established or acquired by financial organizations. Gramm-Leach-Bliley provides new consumer protections with respect to the transfer and use of a consumer's nonpublic personal information and generally enables financial institution customers to "opt-out" of the dissemination of their personal financial information to unaffiliated third parties.

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Riegle-Neal

Prior to September 29, 1995, the BHCA prohibited a bank holding company from acquiring shares of any bank located outside the state in which the operations of the bank holding company's banking subsidiaries were primarily conducted unless the acquisition was specifically authorized by statute of the state of the bank whose shares were to be acquired. Under the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Riegle-Neal Act"), the restriction on interstate bank acquisitions was repealed effective September 29, 1995. The FRB is now generally authorized to approve bank acquisitions by out-of-state bank holding companies that are adequately capitalized and managed irrespective of the permissibility of such acquisition under state law, but subject to any state requirement that the bank has been organized and operating for a minimum period of time, not to exceed five (5) years.

Each State is permitted to prohibit interstate branch acquisitions (i.e., acquisition of a branch without acquisition of the entire target bank or the establishment of de novo branches) and to examine acquired and de novo branches of out-of-state banks with respect to compliance with certain host State laws.

FDICIA

In December 1991, FDICIA was enacted, substantially revising the bank regulatory and funding provisions of the Federal Deposit Insurance Act and making revisions to several other federal banking statutes. Among other things, FDICIA requires the federal banking agencies to take "prompt corrective action" in respect of depository institutions that do not meet minimum capital requirements. FDICIA establishes five capital tiers: "well-capitalized," "adequately capitalized," "undercapitalized," "significantly under capitalized" and "critically undercapitalized." A depository institution's capital tier will depend upon where its capital levels are in relation to various relevant capital measures, which will include a risk-based capital measure and a leverage ratio capital measure, and certain other factors. As of December 31, 2003, the Bank's capital ratios exceed the requirements to be considered a well-capitalized institution under FDIC regulation.

FDICIA also contains a variety of other provisions that may affect the operations of depository institutions including reporting requirements, regulatory standards for real estate lending, "truth in savings" provisions, the requirement that a depository institution give 90 days prior notice to customers and regulatory authorities before closing any branch, and a prohibition on the acceptance or renewal of brokered deposits by depository institutions that are not well capitalized or are adequately capitalized and have not received a waiver from the FDIC.

FIRREA

Under the Financial Institutions Reform and Recovery and Enforcement Act of 1989 ("FIRREA"), a depository institution insured by the FDIC is liable for any loss incurred by, or reasonably expected to be incurred by, the FDIC in connection with (i) the default of a commonly controlled FDIC-insured depository institution, or (ii) any assistance provided by the FDIC to any commonly controlled FDIC-insured depository institution "in danger of default." "Default" is defined generally as the appointment of a conservator or receiver and "in danger of default" is defined as the existence of certain conditions indicating that a default is likely to occur in the absence of regulatory assistance.

Transactions with Affiliates and Insiders

The Bank and the Company are affiliates of each other and, as such, are subject to certain federal restrictions with respect to loans and extensions of credit to the Company and other Company affiliates, investments in the Company's and its affiliates' securities, acceptance of such securities as collateral for loans to any borrowers, and leases, services and other agreements between the Bank and the Company. Additionally, regulations allow a bank to extend credit to the bank's and its affiliates' executive officers, directors, principal shareholders, and their related interests, only if the loan is made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with non-insiders, and if credit underwriting standards are

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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. 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. Each financial institution is assigned to one of three capital groups -- well capitalized, adequately capitalized or undercapitalized -- and further assigned to one of three subgroups within a capital group, on the basis of supervisory evaluations by the institution's primary federal and, if applicable, state supervisors and other information relevant to the institution's financial condition and the risk posed to the applicable insurance fund. The assessment rate applicable to the bank in the future will depend in part upon the risk assessment classification assigned to the Bank by the FDIC and in part on the BIF assessment schedule adopted by the FDIC.

Capital Requirements

The FRB has imposed risk-based capital guidelines applicable to the Company. These guidelines require that bank holding companies maintain capital commensurate with both on and off balance sheet credit and other risks of their operations. Under the guidelines, a bank holding company must have a minimum ratio of total capital to risk-weighted assets ("Total Capital") of 8 percent. In addition to risk-based capital requirements, the FRB has also imposed leverage capital ratio requirements. The leverage ratio requirements establish a minimum required ratio of Tier I Capital to total assets less goodwill of 3 percent for bank holding companies having the highest regulatory rating. All other bank holding companies are required to maintain a minimum Tier I capital yielding a leverage ratio of 4 percent. 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 applicable to bank holding companies. A presentation showing current regulatory capital levels of the Company and the Bank appears in Note Q to the Consolidated Financial Statements. At December 31, 2003, the Bank was classified as "well capitalized" under all applicable capital requirements.

Community Reinvestment Act

Under the Community Reinvestment Act of 1977, as amended (the "CRA"), a financial institution is required to help meet the credit needs of its entire community, including low-income and moderate-income areas. The Bank's CRA rating is determined by evaluation of the Bank's lending, service and investment performance. The Federal banking agencies may take CRA compliance into account in an agency's review of applications for mergers, acquisitions, and to establish branches or facilities.

Monetary Policy and Economic Conditions

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

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

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Employees

As of December 31, 2003, 141 persons were employed by the Bank; 127 were full time employees and 14 were part time employees.

Selected Statistical Information

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

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|I. | Distribution of Assets, Liabilities and Shareholders' Equity; Interest Rates and Interest Differential
|-- | ------------------------------------------------------------------------------------------------------

The following are the average balance sheets for the years ending December 31: (Dollars in Thousands)

|                                                 | 2 0 0 3         |         | 2 0 0 2 
|------------------------------------------------ | --------------- | ------- | --------
|                                                 | Average
Balance |         | Interest
|ASSETS                                           |                 |         |         
|Interest earning assets:                         |                 |         |         
|Loans (A) (B) (C)                                | $               | 236,322 |         
|Taxable investment securities (D)                |                 | 28,880  |         
|Tax-exempt investment 
   securities (A)         |                 | 22,149  |         
|Federal funds sold                               |                 | 0       |         
|Total interest earning assets                    |                 | 287,351 |         
|                                                 |                 |         |         
|Non-interest earning assets:                     |                 |         |         
|Cash and due from banks                          |                 | 14,907  |         
|Other assets                                     |                 | 20,861  |         
|Less allowance for loan loss                     |                 | (3,615  | )       
|                                                 |                 |         |         
|Total assets                                     | $               | 319,504 |         
|                                                 |                 |         |         
|LIABILITIES AND SHAREHOLDERS' EQUITY             |                 |         |         
|Interest bearing liabilities:                    |                 |         |         
|Demand deposits                                  | $               | 101,558 |         
|Savings deposits                                 |                 | 46,314  |         
|Time deposits                                    |                 | 73,215  |         
|Federal funds purchased                          |                 | 3,040   |         
|Other borrowings                                 |                 | 23,838  |         
|Total interest bearing liabilities               |                 | 247,965 |         
|                                                 |                 |         |         
|Non-interest bearing liabilities:                |                 |         |         
|Demand deposits                                  |                 | 39,829  |         
|Other                                            |                 | 4,189   |         
|Common stock subject to repurchase
   obligation |                 | 1,816   |         
|Shareholders' equity                             |                 | 25,705  |         
|Total liabilities and shareholders'
   equity    | $               | 319,504 |         
|Net interest earnings                            |                 |         |         
|Interest rate spread                             |                 |         |         
|Net yield on interest earning assets             |                 |         |         

|2 0 0 1         |        
|--------------- | -------
|Average
Balance |        
|                |        
|                |        
|$               | 208,298
|                | 36,203 
|                | 18,698 
|                | 767    
|                | 263,965
|                |        
|                |        
|                | 22,327 
|                | 20,784 
|                | (1,854 
|                |        
|$               | 305,223
|                |        
|                |        
|                |        
|$               | 89,282 
|                | 43,054 
|                | 80,387 
|                | 28     
|                | 23,367 
|                | 236,118
|                |        
|                |        
|                | 38,676 
|                | 2,715  
|                | 1,501  
|                | 26,214 
|$               | 305,223
|                |        
|                |        
|                |        

|(A) | Includes tax equivalent adjustment of interest (assuming a 34% tax rate) for securities and loans of $428,000 and $18,000, respectively for 2003; $489,000 and $19,000, respectively for 2002; and $444,000 and $24,000, respectively for 2001.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(B) | Average balance includes average nonaccrual loan balances of $4,303,000 in 2003; $2,730,000 in 2002; and $1,543,000 in 2001.                                                                                                                   
|(C) | Interest income includes loan fees of $750,000, in 2003; $933,000 in 2002; and $815,000 in 2001.                                                                                                                                               
|(D) | Average balance includes average unrealized gain (loss) of $1,056,000 in 2003; $883,000 in 2002; and $907,000 in 2001 on available for sale securities. The yield was calculated without regard to this average unrealized gain (loss).        

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|I. | Distribution of Assets, Liabilities and Shareholders' Equity; Interest Rates and Interest Differential (Continued)
|-- | ------------------------------------------------------------------------------------------------------------------

(Dollars in Thousands)

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

Volume Variance - change in volume multiplied by the previous year's rate.

Rate Variance - change in rate multiplied by the previous year's volume.

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

Interest on non-taxable securities has been adjusted to a fully tax equivalent basis using a statutory tax rate of 34% in 2003, 2002 and 2001.

|                                    | 2003 Compared to 2002
Increase (Decrease) Due To |     | 2002 Compared to 2001
Increase (Decrease) Due To |  
|----------------------------------- | ------------------------------------------------ | --- | ------------------------------------------------ | -
|                                    |                                                  |     |                                                  |  
|Interest income on:                 | Volume                                           |     | Rate                                             |  
|                                    |                                                  |     |                                                  |  
|Loans                               | $                                                | 534 |                                                  | $
|Taxable investment securities       |                                                  | (13 | )                                                |  
|Tax-exempt investment
   securities |                                                  | (67 | )                                                |  
|Federal funds sold                  |                                                  | (2  | )                                                |  
|                                    |                                                  |     |                                                  |  
|Total interest earning assets       | $                                                | 452 |                                                  | $
|                                    |                                                  |     |                                                  |  
|Interest expense on:                |                                                  |     |                                                  |  
|                                    |                                                  |     |                                                  |  
|Demand deposits                     | $                                                | (11 | )                                                | $
|Savings deposits                    |                                                  | 5   |                                                  |  
|Time deposits                       |                                                  | 149 |                                                  |  
|Federal funds purchased             |                                                  | 2   |                                                  |  
|Other borrowings                    |                                                  | (89 | )                                                |  
|                                    |                                                  |     |                                                  |  
|Total interest bearing liabilities  | $                                                | 56  |                                                  | $
|                                    |                                                  |     |                                                  |  
|Net interest income                 | $                                                | 396 |                                                  | $

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|II. | Investment Portfolio
|--- | --------------------

(Dollars in Thousands)

The following table sets forth the fair value and amortized cost of securities at December 31:

|                                                                           | 2 0 0 3    |        | 2 0 0 2        |   | 2 0 0 1   
|-------------------------------------------------------------------------- | ---------- | ------ | -------------- | - | ----------
|                                                                           | Fair
Value |        | Amortized
Cost |   | Fair
Value
|U.S. Treasury and other
   U.S. Government
   agencies and
   corporations | $          | 23,985 |                | $ | 23,722    
|States and political
   subdivisions                                       |            | 27,292 |                |   | 26,783    
|Corporate securities                                                       |            | 1,444  |                |   | 1,415     
|Mortgage backed
   securities                                              |            | 124    |                |   | 118       
|Equity securities                                                          |            | 1,347  |                |   | 1,347     
|Total investment 
   securities                                            | $          | 54,192 |                | $ | 53,385    

The following table sets forth the market value of debt securities by maturity (or anticipated call date, if earlier) and weighted average yield for each range of maturities at December 31, 2003:

|                                                                        | -----------------------------------------------Maturing--------------------------------------------------
|----------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------
|                                                                        | Within One Year                                                                                          
|                                                                        | Amount                                                                                                   
|U.S. Treasury and other
   U.S. Government agencies
   and corporations | $                                                                                                        
|States and political
   subdivisions (1)                                |                                                                                                          
|Corporate securities                                                    |                                                                                                          
|Mortgage backed securities                                              |                                                                                                          
|Total (1)                                                               | $                                                                                                        

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

The weighted average interest rates are based on coupon rates for securities purchased at par value and on effective interest rates considering amortization or accretion if the securities were purchased at a premium or discount.

Except as indicated and for U.S. Treasury and other U.S. Government agencies, total securities of any state (including all its political subdivisions) were less than 10% of shareholders' equity. At year-end 2003 and 2002, the market value of securities issued by the state of Michigan and all its political subdivisions totaled $10,295,000 and $10,358,000, respectively.

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|III. | Loan Portfolio
|---- | --------------

(Dollars in Thousands)

Types of Loans

The following table sets forth the classification of loans by major category at December 31:

|                                        | 2003 |         | 2002 |   | 2001    |  | 2000 |         | 1999 |  
|--------------------------------------- | ---- | ------- | ---- | - | ------- |  | ---- | ------- | ---- | -
|Commercial, financial,
and agricultural | $    | 143,192 |      | $ | 152,500 |  | $    | 130,903 |      | $
|Real estate mortgage                    |      | 75,063  |      |   | 66,118  |  |      | 57,651  |      |  
|Installment                             |      | 14,815  |      |   | 15,548  |  |      | 22,118  |      |  
|                                        |      |         |      |   |         |  |      |         |      |  
|Total loans                             | $    | 233,070 |      | $ | 234,166 |  | $    | 210,672 |      | $

Maturities and Sensitivities of Loans to Changes in Interest Rates

The following table sets forth the maturities of the loan portfolio at December 31, 2003. Also provided are the amounts due after one year classified according to interest rate sensitivity.

|                                        | Within 1
Year (A) |        | 1 to 5
Years |   | After 5
Years |  | Total |       
|--------------------------------------- | ----------------- | ------ | ------------ | - | ------------- |  | ----- | ------
|Commercial, financial, and agricultural | $                 | 48,598 |              | $ | 85,590        |  | $     | 9,004 
|Real estate mortgages                   |                   | 11,926 |              |   | 16,091        |  |       | 47,046
|Installment                             |                   | 3,012  |              |   | 8,272         |  |       | 3,531 
|                                        |                   |        |              |   |               |  |       |       
|Total                                   | $                 | 63,536 |              | $ | 109,953       |  | $     | 59,581
|Loans maturing after one year with:     |                   |        |              |   |               |  |       |       
|Fixed interest rates                    |                   |        |              | $ | 46,654        |  | $     | 5,399 
|Variable interest rates                 |                   |        |              |   | 63,299        |  |       | 54,182
|                                        |                   |        |              |   |               |  |       |       
|Total                                   |                   |        |              | $ | 109,953       |  | $     | 59,581

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

---

Non-Performing Loans

Non-performing loans include nonaccrual 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:

December 31

|Non-accrual loans:                                                           | 2003 |       | 2002 |   | 2001  |   | 2000 |       | 1999 |  
|---------------------------------------------------------------------------- | ---- | ----- | ---- | - | ----- | - | ---- | ----- | ---- | -
|Commercial, financial and agricultural                                       | $    | 3,325 |      | $ | 3,600 |   | $    | 1,853 |      | $
|Real estate mortgage                                                         |      | 261   |      |   | 198   |   |      | 84    |      |  
|Installment                                                                  |      | -     |      |   | -     |   |      | -     |      |  
|Total                                                                        |      | 3,586 |      |   | 3,798 |   |      | 1,937 |      |  
|                                                                             |      |       |      |   |       |   |      |       |      |  
|Loans contractually past due 90 days or
   more and still accruing interest: |      |       |      |   |       |   |      |       |      |  
|Commercial, financial, and agricultural                                      |      | -     |      |   | -     |   |      | 510   |      |  
|Real estate mortgage                                                         |      | -     |      |   | 162   |   |      | 223   |      |  
|Installment                                                                  |      | 2     |      |   | 9     |   |      | 36    |      |  
|                                                                             |      | 2     |      |   | 171   |   |      | 769   |      |  
|Total                                                                        | $    | 3,588 |      | $ | 3,969 |   | $    | 2,706 |      | $
|                                                                             |      |       |      |   |       |   |      |       |      |  
|Percent of total loans outstanding                                           |      | 1.54  | %    |   | 1.69  | % |      | 1.28  | %    |  

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 fair 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 $39,000 was realized on nonaccrual loans during 2003. Under original terms for these loans, interest income which would have been recorded approximates $291,000 in 2003. There are no loan commitments outstanding to extend credits to these customers.

Potential Problem Loans

At December 31, 2003, the Company had approximately $10,477,000 in commercial, financial, 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 special mention classification is reviewed on a monthly basis. At December 31, 2003, the Company also had loans of $7,138,000 that were considered impaired but are not included in the non-performing table above. All loans classified for regulatory purposes as loss, doubtful, substandard, or special mention have been included in the above disclosures.

---

|IV. | Summary of Loan Loss Experience
|--- | -------------------------------

(Dollars in Thousands)

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

|                                                             | Year Ended December 31
|------------------------------------------------------------ | ----------------------
|                                                             | 2003                  
|Balance at beginning of year                                 | $                     
|                                                             |                       
|Charge offs:                                                 |                       
|Commercial, financial and agricultural                       |                       
|Installment                                                  |                       
|Real estate                                                  |                       
|                                                             |                       
|                                                             |                       
|Recoveries:                                                  |                       
|Commercial, financial and agricultural                       |                       
|Installment                                                  |                       
|Real estate                                                  |                       
|                                                             |                       
|Net charge offs                                              |                       
|                                                             |                       
|Provision for loan losses                                    |                       
|                                                             |                       
|Balance at end of year                                       | $                     
|                                                             |                       
|Average loans outstanding                                    | $                     
|                                                             |                       
|Ratio of net charge offs to average   
    loans outstanding |                       

---

|V. | Summary of Loan Loss Experience (Continued)
|-- | -------------------------------------------

Allocation of the Allowance for Loan Losses

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

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

The following table sets forth the allocation of the allowance for loan losses at December 31:

|                                             | 2 0 0 3   |       | 2 0 0 2                                          |       | 2 0 0 1   |  
|-------------------------------------------- | --------- | ----- | ------------------------------------------------ | ----- | --------- | -
|                                             | Allowance |       | Percent of
Loans in
Each Category
Of Total
Loans |       | Allowance |  
|Commercial,
   financial and
   agricultural | $         | 3,001 |                                                  | 61.4  | %         | $
|Real estate
   mortgage                      |           | 111   |                                                  | 32.2  |           |  
|Installment                                  |           | 140   |                                                  | 6.4   |           |  
|Unallocated                                  |           | -     |                                                  | -     |           |  
|                                             | $         | 3,252 |                                                  | 100.0 | %         | $

|2 0 0 0   |       | 1 9 9 9                                          |      
|--------- | ----- | ------------------------------------------------ | -----
|Allowance |       | Percent of
Loans in
Each Category
Of Total
Loans |      
|$         | 1,236 |                                                  | 52.9 
|          | 35    |                                                  | 32.4 
|          | 325   |                                                  | 14.7 
|          | 500   |                                                  | -    
|$         | 2,096 |                                                  | 100.0

The allowance for loan losses is maintained at a level which, in management's opinion, is adequate to absorb probable incurred loan losses in the portfolio. In assessing the adequacy of the allowance, management reviews the characteristics of the loan portfolio in order to determine overall quality and risk profiles. Some factors 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, historical loan loss experience, loan volume, portfolio mix, concentrations of credit and lending policies, procedures, and personnel.

The decrease in the 2003 allowance and provision for loan losses occurred as allocations for specific loans decreased, therefore, less provision was recorded. The increase in the 2002 allowance and provision for loan losses resulted from higher charge-offs and higher non-performing and impaired loans. The increase in the 2001 provision for loan losses occurred to provide for increased charge-offs and increased impaired loans and higher delinquency rates. The 2000 provision was set at a level considered necessary to cover expected loan losses. The 1999 provisions increased to provide for loan growth and increased charge-offs, primarily as a result of increased customer bankruptcies.

---

|VI. | Deposits
|--- | --------

(Dollars in Thousands)

The following table sets forth the average amount of deposits and rates paid for deposits for the years ended December 31:

|                                        | 2 0 0 3 |         | 2 0 0 2 |     | 2 0 0 1
|--------------------------------------- | ------- | ------- | ------- | --- | -------
|                                        | Amount  |         | Rate    |     | Amount 
|Non interest
bearing demand
   deposits | $       | 39,829  |         |     |        
|Interest bearing demand
   deposits     |         | 101,558 |         | ..9 | %      
|Savings deposits                        |         | 46,314  |         | 1.4 |        
|Time deposits                           |         | 73,215  |         | 2.6 |        
|                                        |         |         |         |     |        
|                                        | $       | 260,916 |         |     |        

The following table sets forth as of December 31, 2003, the aggregate amount of outstanding time deposits of $100,000 or more by maturity (in thousands of dollars):

| | Three months or less                  |  | $ | 8,926  | 
| | ------------------------------------- |  | - | ------ | 
| | Over three months through six months  |  |   | 4,666  | 
| | Over six months through twelve months |  |   | 6,266  | 
| | Over twelve months                    |  |   | 11,821 | 
| |                                       |  | $ | 31,679 | 

|VII. | Return on Equity and Assets
|---- | ---------------------------

The following table sets forth consolidated operating and capital ratios for the years ended December 31:

|                                     | 2 0 0 3 |   | 2 0 0 2 |        | 2 0 0 1
|------------------------------------ | ------- | - | ------- | ------ | -------
|Return on average assets             | 1.02    | % |         | .33    | %      
|Return on average equity (1)         | 12.69   |   |         | 4.04   |        
|Dividend payout ratio (2)            | 36.25   |   |         | 115.68 |        
|Average equity to average assets (1) | 8.05    |   |         | 8.09   |        

|(1) |  | Average equity used in the above table excludes common stock subject to repurchase obligation but includes average accumulated other comprehensive income.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) |  | Dividends declared divided by net income.                                                                                                                 

|ITEM 2. | PROPERTIES
|------- | ----------

The Bank's main office is located at 51 West Pearl Street, Coldwater, Michigan and is owned by the Bank. This facility, which opened in 1955 and expanded in 1976, consists of a one story structure comprising 27,945 square feet. Parking is available for approximately 125 cars and 6 teller windows are available to serve the Bank's customers. The Bank owns nine branch offices, two of which are in Coldwater, two in Union City, Michigan, one in Tekonsha, Michigan, one in Hillsdale, Michigan, one in Camden, Michigan, one in Athens, Michigan, and one in North Adams, Michigan. In addition, the Company 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 its Battle Creek branch, 3,500 square feet is leased to a local college, 2,300 square feet is leased

---

All of the Company's and the Bank's facilities are maintained in good condition and are believed to be adequately insured. Management of Company 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 Company 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 Company, except as disclosed in Note A of the Notes to Consolidated Financial Statements described in Item 15(a)(1) below.

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

Not Applicable.

PART II

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

The Company's common stock is regularly quoted on the OTC Bulletin Board (OTCBB). The bid prices described below are quotations reflecting inter-dealer prices, without retail markup, markdown or commissions, and may not necessarily represent actual transactions. There were 526 shareholders of record at February 27, 2004.

The following table sets forth the range of high and low bid information and dividends declared for the Company's two most recent fiscal years:

|              | 2003      |       | 2002   
|------------- | --------- | ----- | -------
|              | Bid Price |       | Cash   
|              | High Bid  |       | Low Bid
|Quarter Ended |           |       |        
|March 31      | $         | 18.00 |        
|June 30       |           | 18.50 |        
|September 30  |           | 18.99 |        
|December 31   |           | 21.80 |        

There are restrictions that currently limit the Company's ability to pay cash dividends. Information regarding dividend payment restrictions is described in Note N to the consolidated financial statements disclosed in Item 15(a)(1) below.

Equity Compensation Plan Information

The Following table summarizes certain information about equity compensation plans of the Company as of December 31, 2003:

---

|Plan Category                                                     | Number of Securities
to be Issued Upon
Exercise of
Outstanding Options,
Warrants and Rights |  | Weighted-Average
Exercise Price of
Outstanding Options,
Warrants and Rights |  | Number of Securities
Remaining Available
for Issuance Under
Equity Compensation
Plans (Excluding
Securities Reflected
in Column (a))
|----------------------------------------------------------------- | ------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------
|                                                                  | (a)                                                                                         |  | (b)                                                                         |  | (c)                                                                                                                                 
|Equity Compensation 
   Plans Approved by 
   Security Holders    | 15,592                                                                                      |  | $16.15                                                                      |  | 94,408                                                                                                                              
|Equity Compensation 
   Plans Not Approved
   by Security Holders | 0                                                                                           |  | 0                                                                           |  | 0                                                                                                                                   
|Total                                                             | 15,592                                                                                      |  | $16.15                                                                      |  | 94,408                                                                                                                              

|ITEM 6. | SELECTED FINANCIAL DATA
|------- | -----------------------

The following is an unaudited summary of certain financial information of the Company (dollars in thousands except for per share data).

|                                     | Year Ended December 31
|------------------------------------ | ----------------------
|                                     | 2003                  
|Total interest income                | $                     
|Net interest income                  |                       
|Provision for loan losses            |                       
|Net income                           |                       
|Per share data (1):                  |                       
|Basic and diluted earnings per share |                       
|Cash dividends                       |                       
|Balance sheet data:                  |                       
|Gross loans                          |                       
|Deposits                             |                       
|Other borrowings                     |                       
|Common stock subject to repurchase   |                       
|Equity                               |                       
|Total assets                         |                       
|Return on average assets             |                       
|Return on average equity (2)         |                       
|Dividend payout ratio (3)            |                       
|Average equity to average assets (2) |                       

|(1) | All per share amounts have been adjusted for a 10% stock dividend declared in 1999.                                                                                                         
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Average equity used in the above table excludes common stock subject to repurchase obligation but includes average unrealized appreciation or depreciation on securities available for sale.
|(3) | Dividends declared divided by net income.                                                                                                                                                   

---

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

Introduction

The following discussion provides information about the Company's financial condition which supplements the Consolidated Financial Statements. The analysis should be read in conjunction with such financial statements.

In 2003 net income increased over 215% from 2002. While net interest income was down slightly, stabilization of non-performing assets led to a lower provision for loan losses. Non-interest income increased in excess of 44% as the Company saw increased income from the sale of mortgage loans and service fees on deposit accounts. Non-interest expenses decreased by almost 1% from 2002 to 2003.

|                          | Percent Change
from Prior Year |   | Percent Change
from Prior Year
|------------------------- | ------------------------------ | - | ------------------------------
|                          | 2003                           |   | 2002                          
|Net interest income       | -3.59                          | % | 1.89                          
|Provision for loan losses | -66.30                         | % | 113.68                        
|Non-interest income       | 44.77                          | % | -2.08                         
|Non-interest expense      | -0.95                          | % | 10.70                         
|Net income                | 215.88                         | % | -62.35                        
|                          |                                |   |                               

Forward-Looking Statements

Statements contained in Management's Discussion and Analysis of Financial Condition and Results of Operations include forward-looking statements that are based on management's beliefs, assumptions, current expectations, estimates and projections about the financial services industry, the economy, and about the Company itself. Words such as "anticipate," "believe," "can be," "estimate," "expect," "intend," "is likely," "may be," "probable," "project," variations of such terms, and similar expressions are intended to identify such forward-looking statements. In addition, the information under the heading "Interest Rate Sensitivity" is forward-looking and management's determination of the provision and allowance for loan losses involve judgment's which are inherently forward-looking. These statements are not guarantees of future performance and involve certain risks, uncertainties, and assumptions that are difficult to predict with regard to timing, extent, likelihood, and degree of occurrence. Therefore, actual results and outcomes may materially differ from what may be expressed or forecasted in such forward-looking statements. Internal and external factors that may cause such a difference include changes in interest rates and interest rate relationships; demand for products and services; the degree of competition by traditional and non-traditional competitors; the banks ability to manage non-earning assets; changes in banking laws and regulations; changes in tax laws; changes in prices, levies, and assessments; the impact of technological advances; governmental and regulatory policy changes; the outcomes of pending and future litigation and contingencies; trends in customer behavior and customer ability to repay loans; and changes in the local, national or world economy. The Company undertakes no obligation to update, amend or clarify forward-looking statements, whether as a result of new information, future events, or otherwise.

Critical Accounting Policies

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

---

Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and potentially result in materially different results under different assumptions and conditions. Below are critical accounting policies the Company has identified. For a detailed discussion on the application of these and other accounting policies, see Note A - Nature of Operation and Significant Accounting Policies to the audited consolidated financial statements.

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

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

Accrued Pension Costs: The Bank has a defined benefit pension plan that covers substantially all full-time employees. The benefits are based on years of service and the employee's average highest compensation during five consecutive years of employment. The funding policy is to contribute annually an amount sufficient to meet the minimum funding requirements set forth in the Employee Retirement Income Security Act of 1974, plus additional amounts as may be appropriate from time to time. Contributions are intended to provide not only for benefits attributed to service to date but also for those expected to be earned in the future. An actuary is engaged to estimate what the obligation of the Bank is as of year end. Assumptions used include the long-term expected rate of return on the plan assets, the discount rate on benefit obligation and the rate of increase for employee compensation. Changes in the assumptions used could have a significant effect on the computed benefit obligation and expense.

Financial Condition

In 2003, the Company spent considerable time and resources improving internal control policies and procedures in the loan area. This focus was aimed at improving long term credit quality. To implement the improved procedures, the Bank hired additional staff for the credit area as well as in managed assets. The Bank began to see the benefits from these procedures during the last quarter of 2003 as several loans were moved off of nonaccrual status either by paying off or by improved collateral position and payment history. The Bank is anticipating significant improvement in its non-earning assets in 2004.

Loans: The Company uses its funds primarily to support its lending activities. There were no significant concentrations in any loan category as to borrower or industry. Substantially all loans are granted to customers located in the Bank's service area, which is primarily southern Michigan. Loans in 2003 decreased by .5% and increased by 11.2% in 2002. Commercial loans decreased $9,308,000 or 6.1% in 2003, real estate mortgage loans increased $8,945,000 or 13.5% while consumer loans decreased $733,000 or 4.7%. The decrease in commercial loans was due to the focus being on improving credit quality not on growth. The Bank was encouraged to see some of the decline in this portfolio as it had asked borrowers who did not meet specific credit quality criteria to seek other financing. The real estate mortgage loan portfolio continued to increase as the refinance boom continued through the summer. The real estate portfolio largely consists of variable rate residential mortgages within the local area with a low risk of loss. In 2003, the Bank concluded that the consumer loan market in our area was being under served. The Bank hired experienced staff to serve this market.

The 2002 increase came in the commercial and real estate mortgage loan categories. In August of 2001, the Bank hired a commercial lender who was well known and respected in his market area. During 2002 loan growth in

---

Loan commitments, consisting of unused credit card and home equity lines, available amounts on revolving lines of credit and other approved loans which have not been funded, were $36,438,000 and $38,473,000 at December 31, 2003 and 2002, respectively. Most of these commitments are priced at a variable interest rate thus minimizing the Bank's risk in a changing interest rate environment.

Securities: Another significant component of cash flow is the securities portfolio. Total securities increased by 11.0% in 2003 and decreased by 20.7% in 2002. In 2003, the Bank increased investments in the portfolio as better investment returns were available than overnight funds. In 2002, the funds received from maturing securities were used to partially fund loan growth.

The securities available for sale portfolio had net unrealized gains of $807,000 and $1,201,000 at December 31, 2003 and 2002, respectively. There are no concentrations of securities in the portfolio which would constitute an unusual risk except at year-end 2003 and 2002, securities issued by the State of Michigan and all of its political subdivisions totaled $10,295,000 and $10,358,000, respectively.

Deposits: Deposits have traditionally represented the Company's principal source of funds. Total deposits decreased 3.0% in 2003 and increased .5% in 2002. In 2003, the Bank reduced the rates it paid on many interest bearing accounts. Attracting and keeping traditional deposit relationships will continue to be a challenge to the Bank, particularly with the increased competition from non-deposit products. As an alternate funding source, the Bank added $-0- and $10,206,000 in brokered certificates of deposit in 2003 and 2002, respectively. The Bank has found that these brokered funds can be less expensive and more readily available than other long term deposits.

Other borrowings: As another alternate funding source, the Bank obtains bullet or putable advances from the Federal Home Loan Bank (FHLB). The advances are secured by a blanket collateral agreement with the FHLB giving the FHLB an unperfected security interest in the Bank's one-to-four family mortgage and SBA loans. FHLB advances may be a less expensive way to obtain longer term funds than paying a premium for long term deposits. During the fourth quarter of 2003, the Bank obtained a $5,000,000 bullet advance from the FHLB. This three year advance is priced at 2.97%.

Capital Resources

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

The Federal Reserve Board (FRB) has imposed risk-based capital guidelines applicable to the Company. These guidelines require that banks and bank holding companies maintain capital commensurate with both on and off balance sheet credit risks of their operations. Under the guidelines, a bank must have a minimum ratio of total capital to risk-weighted assets of 8 percent. In addition, a bank and a bank holding company must maintain a minimum ratio of Tier 1 capital equal to 4 percent of risk-weighted assets. Tier 1 capital includes common shareholders' equity, qualifying perpetual preferred stock and minority interests in equity accounts of consolidated subsidiaries less goodwill, core deposit intangibles and 10% of mortgage servicing rights assets.

As a supplement to the risk-based capital requirements, the FRB has also adopted leverage capital ratio requirements. The leverage ratio requirements are intended to ensure that adequate capital is maintained against risk other than credit risk. The leverage ratio requirements establish a minimum ratio of Tier 1 capital to total assets of 3 percent for the most highly rated bank holding companies and banks that do not anticipate and are not experiencing significant growth. All other bank holding companies are required to maintain a ratio of Tier 1 capital to assets of 4 to 5 percent, depending on the particular circumstances and risk profile of the institution.

Regulatory agencies have determined that the capital component created by the adoption of FASB Statement 115 should not be included in Tier 1 capital. As such, the net unrealized appreciation or depreciation on available for sale securities is not included in the ratios listed in Note Q to the financial statements. The ratios include the

---

In addition to these regulatory requirements, a certain level of capital growth must be achieved to maintain appropriate levels of equity to total assets. During 2003 the ratio of average equity to average assets remained unchanged. In 2002 it decreased .5%. The decrease in 2002 occurred as the Company repurchased and retired 56,605 shares of common stock. Future growth opportunities will focus on maintaining the existing customer base and growing within selected other markets identified as providing significant growth potential.

Liquidity

Liquidity management involves the ability to meet the cash flow requirements of customers who may be either depositors wanting to withdraw funds or borrowers needing assurance that sufficient funds will be available to meet their credit needs. The Bank maintains certain levels of liquid assets (the most liquid of which are cash and cash equivalents and investment securities) in order to meet these demands. Maturing loans and investment securities are the principal sources of asset liquidity. Securities maturing within 1 year were $17,286,000 at December 31, 2003 representing 31.9% of the market value of the investment securities portfolio, a slight decrease from the 34.1% level of 2002. Loans maturing within 1 year were $63,536,000 at December 31, 2003 representing 27.3% of the gross loan portfolio, a decrease from the 33.4% level of 2002.

The Bank maintains correspondent accounts with a number of other banks for various purposes. In addition, cash sufficient to meet the operating needs of its branches is maintained at its lowest practical levels. At times, the Bank is a participant in the federal funds market. Federal funds are generally borrowed or sold for one-day periods. During 2003 and 2002 federal funds were purchased with an average balance of $3,040,000 and $2,931,000 respectively. As disclosed in Note M, the Bank has available credit arrangements enabling it to purchase up to $22,000,000 in federal funds should the need arise.

Interest Rate Sensitivity

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

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

A number of tools are used to monitor and manage interest rate risk, including income simulation and market value of equity analyses. The income simulation model is used to estimate the effect that specific interest rate changes would have on net interest income assuming 1-2% up and down ramped changes to interest rates. Assumptions in the simulation are based on management's best estimates, and are inherently uncertain. As a result, the models cannot predict precisely the impact of higher or lower interest rates on net interest income. Based on the results of the simulation model as of December 31, 2003, the Bank would expect a maximum potential reduction in net interest income of less than 4% if market rates increased or decreased under a 200 basis point ramp over one year.

The market value of equity analysis estimates the change in the market value of the Bank's equity using interest rate change scenarios from +2% to -2% in 1% increments. The following table illustrates the percent change in the Bank's equity based on changes in market interest rates:

---

|                            | Change in market
value of equity |   
|--------------------------- | -------------------------------- | --
|2% increase in market rates | 9.93                             | % 
|1% increase in market rates | 5.27                             | % 
|                            |                                  |   
|No change                   | 0.00                             | % 
|                            |                                  |   
|1% decrease in market rates | -5.47                            | % 
|2% decrease in market rates | N/A                              | **

** With the current federal funds rate at 1%, management did not feel a 2% rate cut was a reasonable simulation to run.

The results of both simulations at December 31, 2003 are within the guidelines set and approved by the Company's Board of Directors.

The following tables provide information about the Company's financial instruments that are sensitive to changes in interest rates as of December 31, 2003 and 2002. The Company had no derivative financial instruments, or trading portfolio, at either date. The expected maturity date values for loans receivable, mortgage-backed securities and investment securities were calculated without adjusting the instrument's contractual maturity date for expectations of prepayments. Expected maturity date values for interest-bearing core deposits were not based upon estimates of the period over which the deposits would be outstanding, but rather the opportunity for repricing. Similarly, with respect to its variable rate instruments, the Company believes that repricing dates, as opposed to expected maturity dates may be more relevant in analyzing the value of such instruments and are reported as such in the following table. Company borrowings are also reported based on conversion or repricing dates.

---

Principal Amount Maturing in:

|                                           |   | 2004    |   | 2005   |   | 2006   |   | 2007   |   | 2008  |   | There-
after |   | Total   |   | Fair Value
12/31/03
|------------------------------------------ | - | ------- | - | ------ | - | ------ | - | ------ | - | ----- | - | ------------ | - | ------- | - | -------------------
|Rate sensitive assets:                     |   |         |   |        |   |        |   |        |   |       |   |              |   |         |   |                    
|Fixed interest rate loan                   | $ | 16,533  | $ | 8,800  | $ | 11,970 | $ | 27,667 | $ | 732   | $ | 3,814        | $ | 69,516  | $ | 72,160             
|Average interest rate                      |   | 6.50    | % | 7.97   | % | 7.69   | % | 7.45   | % | 7.81  | % | 5.15         | % | 7.21    | % |                    
|Variable interest rate loans               |   | 122,615 |   | 10,185 |   | 10,759 |   | 19,579 |   | 973   |   |              |   | 164,111 |   | 164,111            
|Average interest rate                      |   | 5.35    |   | 5.92   |   | 5.76   |   | 5.79   |   | 5.43  |   |              |   | 5.47    |   |                    
|Fixed interest rate securities             |   | 17,286  |   | 7,721  |   | 6,392  |   | 10,676 |   | 6,142 |   | 5,975        |   | 54,192  |   | 54,192             
|Average interest rate                      |   | 4.01    |   | 3.76   |   | 4.09   |   | 2.82   |   | 3.78  |   | 4.49         |   | 3.77    |   |                    
|Other interest bearing assets              |   | 481     |   |        |   |        |   |        |   |       |   |              |   | 481     |   | 481                
|Average interest rate                      |   | .82     |   |        |   |        |   |        |   |       |   |              |   | .82     |   |                    
|                                           |   |         |   |        |   |        |   |        |   |       |   |              |   |         |   |                    
|Rate sensitive liabilities:                |   |         |   |        |   |        |   |        |   |       |   |              |   |        
|Interest bearing checking
and money market |   | 99,954  |   |        |   |        |   |        |   |       |   |              |   | 99,954  |   | 99,954             
|Average interest rate                      |   | .61     |   |        |   |        |   |        |   |       |   |              |   | .61     |   |                    
|Savings                                    |   | 34,515  |   |        |   |        |   |        |   |       |   |              |   | 34,515  |   | 34,515             
|Average interest rate                      |   | .38     |   |        |   |        |   |        |   |       |   |              |   | .38     |   |                    
|Time deposits                              |   | 52,224  |   | 17,600 |   | 5,660  |   | 4,155  |   | 36    |   |              |   | 79,635  |   | 80,534             
|Average interest rate                      |   | 2.09    |   | 3.09   |   | 3.05   |   | 3.89   |   | 2.33  |   |              |   | 2.48    |   |                    
|Federal funds purchased                    |   | 7,000   |   |        |   |        |   |        |   |       |   |              |   | 7,000   |   | 7,000              
|Average interest rate                      |   | 1.19    |   |        |   |        |   | 1.19   |   |       |   |              |   | 1.19    |   |                    
|Fixed interest rate
borrowings             |   | 88      |   | 90     |   | 5,094  |   | 97     |   | 102   |   | 451          |   | 5,922   |   | 5,922              
|Average interest rate                      |   | 4.57    |   | 4.57   |   | 3.00   |   | 4.57   |   | 4.57  |   | 4.57         |   | 3.22    |   |                    
|Variable interest rate borrowings          |   | 21,699  |   |        |   |        |   |        |   |       |   |              |   | 21,699  |   | 22,414             
|Average interest rate                      |   | 6.35    |   |        |   |        |   |        |   |       |   |              |   | 6.35    |   |                    

---

Principal Amount Maturing in:

|                                           |   | 2003    |   | 2004   |   | 2005   |   | 2006   |   | 2007   |   | There-
after |   | Total   |   | Fair Value
12/31/02
|------------------------------------------ | - | ------- | - | ------ | - | ------ | - | ------ | - | ------ | - | ------------ | - | ------- | - | -------------------
|Rate sensitive assets:                     |   |         |   |        |   |        |   |        |   |        |   |              |   |         |   |                    
|Fixed interest rate loans                  | $ | 21,101  | $ | 8,522  | $ | 8,323  | $ | 12,787 | $ | 20,358 | $ | 1,194        | $ | 72,285  |   | 75,201             
|Average interest rate                      |   | 7.95    | % | 8.52   | % | 8.45   | % | 7.98   | % | 7.75   | % | 6.72         | % | 7.90    | % |                    
|Variable interest rate
loans               |   | 57,109  |   | 12,704 |   | 11,133 |   | 19,479 |   | 12,180 |   | 50,359       |   | 162,964 |   | 162,964            
|Average interest rate                      |   | 5.40    |   | 5.62   |   | 5.69   |   | 5.63   |   | 5.73   |   | 6.25         |   | 5.84    |   |                    
|Fixed interest rate
securities             |   | 16,692  |   | 18,788 |   | 6,727  |   | 2,535  |   | 1,703  |   | 2,366        |   | 48,811  |   | 48,811             
|Average interest rate                      |   | 4.59    |   | 4.29   |   | 4.30   |   | 4.33   |   | 4.52   |   | 5.46         |   | 4.46    |   |                    
|Other interest bearing
assets              |   | 507     |   |        |   |        |   |        |   |        |   |              |   | 507     |   | 507                
|Average interest rate                      |   | 1.06    |   |        |   |        |   |        |   |        |   |              |   | 1.06    |   |                    
|                                           |   |         |   |        |   |        |   |        |   |        |   |              |   |         |   |                    
|Rate sensitive liabilities:                |   |         |   |        |   |        |   |        |   |        |   |              |   |         |   |                    
|Interest bearing
checking and money
market |   | 101,046 |   |        |   |        |   |        |   |        |   |              |   | 101,046 |   | 101,046            
|Average interest rate                      |   | 1.26    |   |        |   |        |   |        |   |        |   |              |   | 1.26    |   |                    
|Savings                                    |   | 34,978  |   |        |   |        |   |        |   |        |   |              |   | 34,978  |   | 34,978             
|Average interest rate                      |   | 1.77    |   |        |   |        |   |        |   |        |   |              |   | 1.77    |   |                    
|Time deposits                              |   | 51,741  |   | 14,099 |   | 13,803 |   | 2,214  |   | 1,910  |   |              |   | 83,767  |   | 85,419             
|Average interest rate                      |   | 2.83    |   | 3.15   |   | 3.19   |   | 3.57   |   | 2.95   |   |              |   | 3.57    |   |                    
|Federal funds purchased                    |   | 5,000   |   |        |   |        |   |        |   |        |   |              |   | 5,000   |   | 5,000              
|Average interest rate                      |   | 1.38    |   |        |   |        |   |        |   |        |   |              |   | 1.38    |   |                    
|Fixed interest rate
borrowings             |   | 78      |   | 88     |   | 90     |   | 94     |   | 97     |   | 553          |   | 1,000   |   | 1,000              
|Average interest rate                      |   | 4.57    |   | 4.57   |   | 4.57   |   | 4.57   |   | 4.57   |   | 4.57         |   | 4.57    |   |                    
|Variable interest rate
borrowings          |   | 21,646  |   |        |   |        |   |        |   |        |   |              |   | 21,646  |   | 22,768             
|Average interest rate                      |   | 6.31    |   |        |   |        |   |        |   |        |   |              |   | 6.31    |   |                    

Impact of Inflation and Changing Prices

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

Management believes the most significant impact on financial results is the Company's ability to react to changes in interest rates as discussed above.

Results of Operations

Results of operations can be measured by various ratio analyses. Two widely recognized performance indicators are the return on equity and the return on assets. The Company's return on equity was 12.69% in 2003, 4.04% in 2002 and 10.47% in 2001. The return on average assets was 1.02% in 2003, .33% in 2002 and .90% in 2001.

Net interest income: Net interest income is an effective measurement of how well management has balanced the Company's interest rate sensitive assets and liabilities. Net interest income decreased by 3.6% in 2003, increased by 1.9% in 2002, and decreased by 3.7% in 2001. The 2003 decrease results almost entirely from rate variances. As variable rate loan products repriced at their repricing dates, interest income decreased. Offsetting this partially was a decrease in deposit rates. With deposit rates so low, and local competition for deposits so high, rates could not be

---

The uncertain economic environment and uncertainty of interest rate movement are expected to continue to impact the Company and the industry in 2004. The Company has positioned itself to benefit when interest rates increase. Without increases in interest rates during 2004 the Company will continue to be challenged by declining interest margins. The Company monitors deposit rates on a weekly basis and adjusts deposit rates as the market dictates. Loan rates are subject to change as the national prime rate changes and are also influenced by competitors' rates.

Provisions for loan losses: The provision for loan losses is based on an analysis of the required additions to the allowance for loan losses. The allowance for loan losses is maintained at a level believed adequate by management to absorb probable incurred losses in the loan portfolio. Some factors considered by management in determining the level at which the allowance is maintained include specific credit reviews, historical loan loss experience, current economic conditions and trends, results of examinations by regulatory agencies and the volume, growth and composition of the loan portfolio.

The provision for loan losses was $900,000 in 2003, $2,671,000 in 2002 and $1,250,000 in 2001. The 2003 provision decreased as loan balances remained fairly constant, non-performing assets decreased slightly and specific loan allocations decreased as impaired loans made payments, paid-off, were charged-off or additional collateral was obtained. The provision increased in 2002 primarily to account for loan growth, charge-offs, increased levels of non-performing and impaired loans and to provide for increases in allowance allocations for specific loan credits. The increase in the 2001 provision occurred to provide for increased charge-offs, which included one loan totaling $673,000 during the first quarter. Also contributing to the increase were higher levels of impaired loans and delinquency rates.

The provision is adjusted quarterly, if necessary, to reflect actual charge-off experience and any known losses. For further information, see "Allowance for Loan Losses" below.

Non-interest income: Non-interest income excluding security gains and losses, increased 44.8% in 2003, 13.0% in 2002 and 16.3% in 2001. In 2003, the largest increases came from service charges on deposit account and net gains on loan sales. Increases totaling $660,000 and $655,000, respectively, were realized. In May of 2002, the Bank introduced a new overdraft product. The Bank began paying checks for qualifying customers, up to a specified dollar limit, rather than return the checks. A significant increase in overdraft volume has occurred since this product was introduced. The Bank also implemented fee changes as of January 1, 2003 that accounted for a significant increase in service charge income. Service charge income is expected to level off as these changes have been in place for an entire year during 2003.

In order to reduce the risk associated with changing interest rates, the Bank regularly sells fixed rate real estate mortgage loans on the secondary market. The Bank recognizes a profit at the time of the sale. Gains recognized on the sale of real estate mortgage loans to the secondary market increased in 2003 to $2,097,000 from $1,442,000 in 2002. The secondary market loan activity increased in 2003 as mortgage rates reached 45 year lows. Large numbers of customers refinanced their homes to take advantage of the low rates. As rates began to increase during the third quarter of 2003, the volume of loans refinancing declined sharply. The Bank does not expect this level of gains in 2004 and has prepared budgets and projections anticipating a large decline in this area.

Other non-interest income increased as the Bank received a $199,000 insurance settlement payment relating to a previously settled lawsuit.

In 2002, service charges on deposit accounts increased $374,000 from 2001. This increase was due to the overdraft product described above. Also in 2002, gains recognized on the sale of real estate mortgage loans to the secondary market increased $281,000 or 24.2% from 2001. This increase was due to continued low mortgage rates making refinancing and new home purchases very attractive. Offsetting the increases was the $283,000 second quarter 2002 loss on viatical insurance contracts.

---

In 2001, gains recognized on the sale of real estate mortgage loans to the secondary market increased $628,000 or 117.8% from 2000. In addition, security gains increased $532,000 during 2001.

Security gains of $-0-, $4,000 and $529,000 were recognized in 2003, 2002 and 2001, respectively.

Non-interest expenses: Non-interest expense decreased by 1.0% in 2003, increased by 10.7% in 2002 and increased by 9.0% in 2001. In 2003 salaries and employee benefits increased 7.3%. $310,000 of the increase related to commissions paid to the mortgage loan originators. During the fourth quarter of 2002, the Bank hired an outside consulting firm to review selected areas of the Bank looking for potential cost savings, revenue enhancements and efficiency measures. Occupancy, equipment and other non-interest expenses were down as management implemented the cost saving recommendations made by the consulting firm. Professional and outside services remained high during 2003, but are expected to decline in 2004.

In 2002, the largest increase came in the salaries and employee benefit category. Over $260,000 more in commissions was paid to mortgage loan originators based on loan volumes generated for the year. In addition, health insurance increased $194,000 or 49.8% as insurance premiums increased and the Bank had more participants in the plan during 2002. The other large increase in non-interest expense came in the professional and outside services which increased $374,000. As mentioned above, during the fourth quarter of 2002, the Bank hired an outside consulting firm to review selected areas of the Bank looking for potential cost savings, revenue enhancements and efficiency measures.

In 2001, salaries and benefit expenditures increased as additional employees were added in Battle Creek to assist with the commercial and mortgage volumes projected in this region. In addition, over $100,000 more in commissions were paid to mortgage loan originators based on loan volumes generated for the year. Other non interest expenses increased $562,000. $190,000 was charged to earnings to write down impaired assets from cost to market value. In addition, $220,000 was charged to earnings relating to a potential liability arising out of litigation. In February of 2002, the Company resolved the litigation resulting in $60,000 of additional losses to the Company. In February 2003, the Company received an insurance settlement related to this loss of approximately $150,000, net of legal fees.

Income tax expense: Income tax expense was $1,060,000 in 2003, $118,000 in 2002 and $875,000 in 2001. Tax-exempt income continues to have a major impact on the Company's tax expense. The benefit offsetting lower coupon rates on municipal instruments is the nontaxable feature of the income earned on such instruments. This resulted in a lower effective tax rate and reduced federal income tax expense by approximately $269,000 in 2003, $305,000 in 2002 and $267,000 in 2001.

Non-performing Assets

Non-performing assets include nonaccrual loans, accruing loans past due 90 days or more, and other real estate which includes foreclosures and deeds in lieu of foreclosure.

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

The following table sets forth the aggregate amount of non-performing assets in each of the following categories:

---

|                                              |   | December 31            |  
|--------------------------------------------- | - | ---------------------- | -
|                                              |   | 2003                   |  
|Nonaccrual loans:                             |   | (Dollars in thousands) |  
|Commercial, financial and agricultural        | $ | 3,325                  | $
|Real estate mortgage                          |   | 261                    |  
|Installment                                   |   | -                      |  
|                                              |   | 3,586                  |  
|Loans contractually past due 90 days or more: |   |                        |  
|Commercial, financial and agricultural        |   | -                      |  
|Real estate mortgage                          |   | -                      |  
|Installment                                   |   | 2                      |  
|                                              |   | 2                      |  
|                                              |   |                        |  
|Total non-performing loans                    |   | 3,588                  |  
|Other real estate owned                       |   | 1,040                  |  
|                                              |   |                        |  
|Total non-performing assets                   | $ | 4,628                  | $
|Non-performing loans to year-end loans        |   | 1.54                   | %
|Non-performing assets to total assets         |   | 1.44                   | %

During 2002, the Bank hired a consulting firm to work with the Bank loan officers to reduce non-performing loans. In May of 2003 the Bank hired a managed assets manager to work with the consulting firm. Significant amounts of time have been spent working on these loans. $2,611,000 of loans classified as non-performing at December 31, 2002 have been removed from non-earning status. These loans were either paid off, brought current or charged-off. At December 31, 2003, 85% of the nonaccrual commercial, financial and agricultural loans made payments during 2003. Of the loans making payments, 69% made payments during the fourth quarter of 2003. Management is expecting reductions in non-performing assets during 2004.

Non-performing loans increased in 2002 with the increase coming in nonaccrual commercial, financial and agricultural loans. A number of loans were added to nonaccrual status in 2002 as the economy softened and borrowers experienced financial difficulty.

Non-performing loans increased in 2001 with the largest increase coming in commercial, financial and agricultural loans contractually past due 90 days or more. In 2001, nonaccrual loans were made up of several commercial and agricultural loans where the borrower experienced severe financial difficulties and therefore became delinquent.

Non-performing loans are subject to continuous monitoring by management and estimated losses are specifically allocated for in the allowance for loan losses where appropriate. At December 31, 2003, 2002 and 2001, the Company had loans of $10,463,000, $9,473,000 and $4,507,000, which were considered impaired. Of these amounts, $7,138,000, $3,008,000 and $2,097,000 are not past due as of December 31, 2003, 2002 and 2001.

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

Provision for Loan Losses

In 2003, $900,000 was recorded as provision for loan losses compared to $2,671,000 in 2002 and $1,250,000 in 2001. The provision is charged to income to bring the allowance for loan losses to a level deemed appropriate by management based on the factors discussed under "Allowance for Loan Losses" below.

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Allowance for Loan Losses

The allowance for loan losses is based on regular, quarterly assessments of the probable estimated incurred losses inherent in the loan portfolio. The allowance is based on two principles of accounting, Statement of Financial Accountings Standards (SFAS) No. 5 "Accounting for Contingencies," and SFAS No. 114, "Accounting by Creditors for Impairment of a Loan." The methodology used relies on several key features, including historical loss experience, specific allowances for identified problem loans and a number of other factors recommended in regulatory guidance.

The historical loss component of the allowance is based on considering the three and five year historical loss experience for each loan category. The component may be adjusted for significant factors that, in management's opinion, will affect the collectibility of the portfolio. The resulting loss estimate could differ from the losses actually incurred in the future.

Specific allowances are established in cases where management has identified significant conditions or circumstances related to a specific loan credit. These allowances are calculated in accordance with SFAS No. 114.

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

The allowance is maintained at a level, which in management's opinion, is adequate to absorb probable incurred loan losses in the loan portfolio. While management uses the best information available to make these estimates, future adjustments to allowances may be necessary due to economic, operating or regulatory conditions beyond the Company's control.

The allowance for loan losses was $3,252,000 or 1.40% of loans at December 31, 2003 compared to $3,512,000 or 1.50% of loans at December 31, 2002. The December 31, 2003 allowance consists of $1,921,000 in the historical loss experience component and specifically allocated reserves, leaving $1,331,000 from the other factors. This compares to $2,336,000 and $1,176,000 at December 31, 2002, respectively. The decrease in the historical and specific allocations is attributable to $499,000 lower specific allocations partially offset by an increase in the historical loss experience as a result of higher historical charge offs in the last few years. The increase in the other factors is the result of a number of trends, the largest being a higher average delinquency rate for 2003 compared to 2002.

Commitments and Off-Balance Sheet Risk

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

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

The following tables represent the Company's contractual obligations and commitments at December 31, 2003:

---

|Contractual Obligations: | Payments Due By Period |                  |  
|------------------------ | ---------------------- | ---------------- | -
|                         |                        | Less
than 1
year |  
|FHLB advances            | $                      | 10,088           | $
|Other borrowing          |                        | 1,699            |  
|Federal funds purchased  |                        | 7,000            |  
|Operating leases         |                        | 136              |  
|Totals                   | $                      | 18,923           | $

|Commitments:              |   | Payments Due By Period |   |             |  
|------------------------- | - | ---------------------- | - | ----------- | -
|                          |   | Less
than 1
year       |   | 1 - 3
years |  
|Lines of credit           | $ | 30,136                 | $ | 1,309       | $
|Letters of credit         |   | 34                     |   | -           |  
|Standby letters of credit |   | 288                    |   | -           |  
|Totals                    | $ | 30,458                 | $ | 1,309       | $

Regulatory Matters

Representatives of the Federal Deposit Insurance Corporation (FDIC) completed an examination at the Company's subsidiary bank using financial information as of September 30, 2003. The purpose of the examination was to determine the safety and soundness of the bank.

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

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

New Accounting Pronouncements

During 2003, the Company adopted FASB Statement 143, "Accounting for Asset Retirement Obligations," FASB Statement 145, regarding extinguishment of debt and accounting for leases, FASB Statement 146, "Accounting for Costs Associated with Exit or Disposal Activities," FASB Statement 148, "Accounting for Stock-Based Compensation - Transition and Disclosure - an amendment to FASB Statement No. 123," FASB Statement 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities," FASB Statement 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equities," FASB Statement 132 (revised 2003), "Employers' Disclosures about Pensions and Other Postretirement Benefits," FASB Interpretation 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees," and FASB Interpretation 46, "Consolidation of Variable Interest Entities." Adoption of the new standards did not materially affect the Company's operating results or financial condition.

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|ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|-------- | ----------------------------------------------------------

The information required by this Item is set forth in the Section entitled "Interest Rate Sensitivity" included under Item 7 of this annual report on Form 10-K and is incorporated here by reference.

|ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
|------- | -------------------------------------------

The consolidated financial statements of the Company which are included in Item "15(a)(1) Exhibits, Financial Statement Schedules and Reports on Form 8-K," and begin on page FS-1 are incorporated here by reference.

|ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
|------- | ------------------------------------------------------------------------------------

Not Applicable.

|ITEM 9A. | CONTROLS AND PROCEDURES
|-------- | -----------------------

The Company's management, with the participation of the Company's Chairman and Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15 and 15d-15) as of December 31, 2003. Based upon that evaluation, the Company's Chairman and Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective to reasonably ensure that material information relating to the Company (including its consolidated subsidiaries) required to be included in our periodic SEC filings is accumulated and communicated to management as appropriate to allow timely discussions regarding required disclosures.

The Company's management, including the Company's Chairman and Chief Executive Officer and Chief Financial Officer, are responsible for establishing and maintaining adequate internal control over financial reporting. There have been no significant changes in the Company's internal controls or in other factors that have materially affected or are reasonably likely to materially affect internal controls over financial reporting during the Company's last fiscal quarter, including any corrective actions with regard to significant deficiencies and material weaknesses.

PART III

|ITEM 10. | DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
|-------- | --------------------------------------------------

The information regarding the directors and officers of the Company included in the Company's Proxy Statement relating to its 2004 Annual Meeting of Shareholders under the heading "Proposal (1) - Election of Directors" is incorporated here by reference. Information regarding beneficial ownership compliance included in the Company's Proxy Statement relating to its 2004 Annual Meeting of Shareholders under the heading "Disclosure of Delinquent Filers" is incorporated here by reference. The Company has adopted a Code of Ethics that applies to its principal executive officer, principal financial officer, principal accounting officer or controller and person performing similar functions.

|ITEM 11. | EXECUTIVE COMPENSATION
|-------- | ----------------------

Information regarding executive compensation included in the Company's Proxy Statement relating to its 2004 Annual Meeting of Shareholders under the headings "Executive Compensation," Compensation of the Board of Directors," and "Compensation Committee Interlocks and Insider Participation," is incorporated here by reference.

|ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
|-------- | --------------------------------------------------------------

Information regarding equity compensation plan information is included in this annual report on Form 10-K in "Item 5. Market For Registrant's Common Equity and Related Stockholder Matters," and information regarding security ownership of certain beneficial owners and management included in the Company's Proxy

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|ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
|-------- | ----------------------------------------------

Information regarding certain relationships and related transactions included in the Company's Proxy Statement relating to its 2004 Annual Meeting of Shareholders under the heading "Transactions with Directors and Officers" is incorporated here by reference.

|ITEM 14. | PRINCIPAL ACCOUNTING FEES AND SERVICES
|-------- | --------------------------------------

Audit Fees

The aggregate fees billed by Crowe Chizek and Company LLC for professional services rendered for the audit of the Company's financial statements for the year ended December 31, 2003 and 2002 (including fees relating to annual report on Form 10-K and quarterly reports on Form 10-Q) were $56,000 and $54,500, respectively. These fees are considered to be reasonably related to the performance of a review of the Company's financial statements.

Audit-Related Fees

The aggregate fees billed by Crowe Chizek and Company LLC for audit related professional services rendered in 2003 were $1,440. These fees were related to review of S-8 Registration Statement.

The aggregate fees billed by Crowe Chizek and Company LLC for audit related professional services rendered in 2002 were $4,875. These fees were related to consulting services related to allowance for loan losses methodology, accounting treatment for viatical insurance investments, accounting for trust conflict of interest judgment and assistance with disclosure in quarterly press releases.

Tax Fees

The aggregate fees billed by Crowe Chizek and Company LLC for tax compliance services in 2003 and 2002 were $3,950 and $11,250.

        The aggregate fees billed by Crowe Chizek and Company LLC for professional services rendered related to tax consulting services were $1,195 in 2003 and $618 in 2002.

All Other Fees

The aggregate fees billed for services rendered by Crowe Chizek and Company LLC, other than services included above under the captions for the year ended December 31, 2003, were as follows:

| |  | Services related to web site maintenance and support: $10,000.  
| | - | ----------------------------------------------------------------
| |  | Review of a press release for the first quarter of 2003: $1,985.
| |  | Consulting regarding salary based pay systems: $227.            
| |  | Consulting regarding various accounting matters: $695.          
| |  | Audit of Bank's Schedule of Eligible Collateral: $2,200.        
| |  | Completion of remainder of 2002 extended audit services: $4,000.

The aggregate fees billed for services rendered by Crowe Chizek and Company LLC, other than services included above under the captions for the year ended December 31, 2002, were as follows:

| |  | Outsourced internal audit services: $46,337.                 
| | - | -------------------------------------------------------------
| |  | Sarbanes-Oxley Act consulting: $14,767.                      
| |  | Services related to web-site maintenance and support: $5,000.
| |  | Services related to marketing and support services: $5,000.  

The Audit Committee of the Company believes the services provided by Crowe Chizek and Company LLC in exchange for the fees set forth above and under the captions set forth above are compatible with maintaining Crowe Chizek and Company LLC's independence. All of the hours expended on Crowe Chizek and Company

---

The Audit Committee has the authority and responsibility to pre-approve all audit and permissible non-audit services provided to the Company by the Company's independent external auditors. The Audit Committee may delegate to one or more designated members of the Audit Committee the authority to grant pre-approvals of permissible non-audit services. Approvals of permissible non-audit services are disclosed to investors by the Company in its periodic reports. All pre-approvals of audit and permissible non-audit services are to be reasonably detailed and particular as to the services provided. In no case may the Audit Committee delegated its pre-approval responsibilities to management. The Audit Committee will pre-approve only those non-audits services that are permitted by law. The actual compensation paid to the independent external auditor, for all such pre-approved services and fees, are reported to the Audit Committee on at least a quarterly basis.

PART IV

|ITEM 15. | EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
|-------- | ----------------------------------------------------------------

| | (a)(1) | The following consolidated financial statements of the Company are filed as a part of this report and are included herewith beginning on page FS-1:
| | ------ | ---------------------------------------------------------------------------------------------------------------------------------------------------
| |        |                                                                                                                                                    
| |        | -                                                                                                                                                  
| |        |                                                                                                                                                    
| |        | -                                                                                                                                                  
| |        |                                                                                                                                                    
| |        | -                                                                                                                                                  
| |        |                                                                                                                                                    
| |        | -                                                                                                                                                  
| |        |                                                                                                                                                    
| |        | -                                                                                                                                                  
| |        |                                                                                                                                                    
| |        | -                                                                                                                                                  
| |        |                                                                                                                                                    
| | (a)(2) | Not applicable                                                                                                                                     
| |        |                                                                                                                                                    
| | (a)(3) | Exhibits (Numbered in accordance with Item 601 of Regulation S-K)                                                                                  

|Exhibit No. |  | Description of Exhibit                                                                                                                                                                                              
|----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|            |  |                                                                                                                                                                                                                     
|2           |  | Not applicable.                                                                                                                                                                                                     
|            |  |                                                                                                                                                                                                                     
|3.1         |  | Articles of Incorporation incorporated by reference to Exhibit 3 to the Company's Annual Report on Form 10-K for the year ended December 31, 1991 and Exhibit 3 to Form S-3D filed April 30, 1998, File No. 2-78178.
|            |  |                                                                                                                                                                                                                     
|3.2         |  | Amended and Restated By-Laws are incorporated by reference to Exhibit 3 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997, File No. 2-78178.                                         
|            |  |                                                                                                                                                                                                                     
|4           |  | Instruments Defining the Rights of Security Holders of the Company are the Articles of Incorporation and By-Laws (see Exhibits 3.1 and 3.2 above).                                                                  
|            |  |                                                                                                                                                                                                                     
|9           |  | Not applicable.                                                                                                                                                                                                     

---

|Exhibit No. |  | Description of Exhibit                                                                                                                                                                                                                                                                                                                                                                                                                              
|----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|10.1        |  | 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 Company's Annual Report on Form 10-K for the year ended December 31, 1994, File No. 2-78178.
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|10.2        |  | Southern Michigan Bancorp, Inc. 2000 Stock Option Plan is incorporated by reference to Exhibit 10(b) to the Company's Annual Report on Form 10-K for the year ended December 31, 1999, File No. 2-78178.                                                                                                                                                                                                                                            
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|10.3        |  | Employment Agreement dated January 1, 2002 by and between the Bank and the Company and James T. Grohalski is incorporated by reference to Exhibit 10(C) to the Company's Annual Report on Form 10-K for the year ended December 31, 2001, File No. 2-78178.                                                                                                                                                                                         
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|10.4        |  | Employment Agreement dated June 7, 2002 by and between the Bank and the Company and John H. Castle is incorporated by reference to Exhibit 10.4 to the Company's Annual Report on Form 10-K for the year ended December 31, 2002, File No. 2-78178.                                                                                                                                                                                                 
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|10.5        |  | Standard Form of Executive's Deferred Compensation Agreement.                                                                                                                                                                                                                                                                                                                                                                                       
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|10.6        |  | Standard Form of Director's Deferred Fee Agreement.                                                                                                                                                                                                                                                                                                                                                                                                 
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|14          |  | Code of Ethics.                                                                                                                                                                                                                                                                                                                                                                                                                                     
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|21          |  | Subsidiaries of the Company.                                                                                                                                                                                                                                                                                                                                                                                                                        
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|23          |  | Consent of Independent Auditors.                                                                                                                                                                                                                                                                                                                                                                                                                    
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|24          |  | Power of Attorney.                                                                                                                                                                                                                                                                                                                                                                                                                                  
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|31.1        |  | Certification of the Company's Chief Executive Officer, John H. Castle.                                                                                                                                                                                                                                                                                                                                                                             
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|31.2        |  | Certification of the Company's Chief Financial Officer, Danice Chartrand.                                                                                                                                                                                                                                                                                                                                                                           
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|32          |  | Section 1350 Certificate furnished pursuant to this Item is not deemed "filed" for purposes of section 18 of the Exchange Act, or otherwise subject to the liability of that section. This certification is not deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act.                                                                                                                                

| | (b) | The Company did not file any Current Reports on Form 8-K during the quarter ended December 31, 2003.                                                  
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                       
| | (c) | Exhibits - See Item 15(a)(3) above.                                                                                                                   
| |     |                                                                                                                                                       
| | (d) | Financial Statement Schedules - Omitted due to inapplicability or because required information is shown in the Financial Statements and Notes thereto.

---

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

|                        |  | SOUTHERN MICHIGAN BANCORP, INC.
|----------------------- |  | -------------------------------
|                        |  |                                
|                        |  |                                
|Dated:   March 29, 2004 |  | By:                            
|                        |  |                                
|                        |  | Its:                           

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.

|/s/ Marcia S. Albright                                           |  | /s/ Nolan E. Hooker        
|---------------------------------------------------------------- |  | ---------------------------
|Marcia S. Albright, Director                                     |  | Nolan E. Hooker, Director  
|                                                                 |  |                            
|                                                                 |  |                            
|/s/ James P. Briskey                                             |  | /s/ Gregory J. Hull        
|James P. Briskey, Director                                       |  | Gregory J. Hull, Director  
|                                                                 |  |                            
|                                                                 |  |                            
|/s/ John H. Castle                                               |  | /s/ Thomas E. Kolassa      
|John H. Castle, Director                                         |  | Thomas E. Kolassa, Director
|                                                                 |  |                            
|                                                                 |  |                            
|/s/ H. Kenneth Cole                                              |  | /s/ Kurt G. Miller         
|H. Kenneth Cole, Director                                        |  | Kurt G. Miller, Director   
|                                                                 |  |                            
|                                                                 |  |                            
|/s/ William E. Galliers                                          |  | /s/ Freeman E. Riddle      
|William E. Galliers, Director
By John H. Castle
Attorney-in-fact |  | Freeman E. Riddle, Director
|                                                                 |  |                            
|                                                                 |  |                            
|                                                                 |  | Dated: March 29, 2004      

---

Southern Michigan Bancorp, Inc.
Report of Independent Auditors



Shareholders and Board of Directors
Southern Michigan Bancorp, Inc.
Coldwater, Michigan

We have audited the accompanying consolidated balance sheets of Southern Michigan Bancorp, Inc. as of December 31, 2003 and 2002 and the related consolidated statements of income and comprehensive income, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 2003. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Southern Michigan Bancorp, Inc. as of December 31, 2003 and 2002 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America.

| | /s/ Crowe Chizek and Company LLC
| | --------------------------------
| |                                 
| | Crowe Chizek and Company LLC    

South Bend, Indiana
January 23, 2004

| | FS-1 | 
| | ---- | 

---

Southern Michigan Bancorp, Inc.
Consolidated Balance Sheets(In thousands, except number of shares)

|                                                                       | December 31, |        
|---------------------------------------------------------------------- | ------------ | -------
|                                                                       | 2003         |        
|ASSETS                                                                 |              |        
|Cash                                                                   | $            | 3,491  
|Due from banks                                                         |              | 12,840 
|Cash and cash equivalents                                              |              | 16,331 
|Securities available for sale                                          |              | 54,192 
|Loans held for sale, net of valuation of -0- in 2003 & 2002            |              | 557    
|Loans, net of allowance for loan losses $ 3,252 - 2003 ($3,512 - 2002) |              | 229,818
|Premises and equipment, net                                            |              | 6,792  
|Accrued interest receivable                                            |              | 1,910  
|Net cash surrender value of life insurance                             |              | 7,059  
|Goodwill                                                               |              | 620    
|Other intangible assets                                                |              | 108    
|Other assets                                                           |              | 4,200  
|Total Assets                                                           | $            | 321,587
|                                                                       |              |        
|LIABILITIES AND SHAREHOLDERS' EQUITY                                   |              |        
|Liabilities                                                            |              |        
|Deposits                                                               |              |        
|Non-interest bearing                                                   | $            | 40,597 
|Interest bearing                                                       |              | 214,104
|Total deposits                                                         |              | 254,701
|Accrued expenses and other liabilities                                 |              | 4,091  
|Federal funds purchased                                                |              | 7,000  
|Other borrowings                                                       |              | 27,621 
|                                                                       |              |        
|Common stock subject to repurchase obligation in                       |              |        
|Employee Stock Ownership Plan, shares outstanding - 87,524 in 2003     |              |        
|(104,841 in 2002)                                                      |              | 1,816  
|                                                                       |              |        
|Shareholders' equity                                                   |              |        
|Preferred stock, 100,000 shares authorized; none issued or outstanding |              |        
|Common stock, $2.50 par value:                                         |              |        
|Authorized - 4,000,000 shares                                          |              |        
|Issued - 1,849,328 shares in 2003 (1,864,046 shares in 2002)           |              |        
|Outstanding - 1,761,804 shares in 2003 (1,759,205 shares in 2002)      |              | 4,404  
|Additional paid-in capital                                             |              | 8,259  
|Retained earnings                                                      |              | 13,446 
|Accumulated other comprehensive income, net                            |              | 533    
|Unearned Employee Stock Ownership Plan shares                          |              | (284   
|Total Shareholders' Equity                                             |              | 26,358 
|Total Liabilities and Shareholders' Equity                             | $            | 321,587

See accompanying notes to consolidated financial statements.

| | FS-2 | 
| | ---- | 

---

Southern Michigan Bancorp, Inc.
Consolidated Statements of Income and Comprehensive Income(In thousands, except per share data)

|                                                                | Year ended December 31, |       
|--------------------------------------------------------------- | ----------------------- | ------
|                                                                | 2003                    |       
|Interest income:                                                |                         |       
|Loans, including fees                                           | $                       | 15,247
|Securities:                                                     |                         |       
|Taxable                                                         |                         | 999   
|Tax-exempt                                                      |                         | 835   
|                                                                |                         | 1,834 
|Other                                                           |                         | -     
|Total interest income                                           |                         | 17,081
|Interest expense:                                               |                         |       
|Deposits                                                        |                         | 3,489 
|Other                                                           |                         | 1,727 
|Total interest expense                                          |                         | 5,216 
|Net Interest Income                                             |                         | 11,865
|Provision for loan losses                                       |                         | 900   
|Net Interest Income after Provision for Loan Losses             |                         | 10,965
|                                                                |                         |       
|Non-interest income:                                            |                         |       
|Service charges on deposit accounts                             |                         | 2,096 
|Trust fees                                                      |                         | 556   
|Net securities gains                                            |                         | -     
|Net gains on loan sales                                         |                         | 2,097 
|Earnings on life insurance assets                               |                         | 245   
|Loss on viatical settlement contracts                           |                         | -     
|Other                                                           |                         | 587   
|                                                                |                         | 5,581 
|Non-interest expense:                                           |                         |       
|Salaries and employee benefits                                  |                         | 6,716 
|Occupancy, net                                                  |                         | 744   
|Equipment                                                       |                         | 902   
|Printing, postage and supplies                                  |                         | 396   
|Advertising and marketing                                       |                         | 223   
|Professional and outside services                               |                         | 1,058 
|Amortization of goodwill                                        |                         | -     
|Amortization of other intangibles                               |                         | 42    
|Other                                                           |                         | 2,142 
|                                                                |                         | 12,223
|Income before income taxes                                      |                         | 4,323 
|Federal income taxes                                            |                         | 1,060 
|Net Income                                                      |                         | 3,263 
|Other comprehensive income:                                     |                         |       
|Unrealized gains (losses) on securities arising during the year |                         | (394  
|Reclassification adjustment for accumulated gains               |                         |       
|included in net income                                          |                         | -     
|Tax effect                                                      |                         | 134   
|Other comprehensive income (loss)                               |                         | (260  
|                                                                |                         |       
|Comprehensive Income                                            | $                       | 3,003 
|Basic and Diluted Earnings Per Common Share                     | $                       | 1.77  

See accompanying notes to consolidated financial statements.

| | FS-3 | 
| | ---- | 

---

Southern Michigan Bancorp, Inc.
Consolidated Statements of Changes in Shareholders' Equity(In thousands, except number of shares and per share data)

|                                          | Common
Stock |       | Additional
Paid-In
Capital |   | Retained
Earnings |   | Accumulated
Other
Comprehensive
Income
(Loss), Net |        | Unearned
ESOP
Shares |   | Total |  
|----------------------------------------- | ------------ | ----- | -------------------------- | - | ----------------- | - | -------------------------------------------------- | ------ | -------------------- | - | ----- | -
|                                          |              |       |                            |   |                   |   |                                                    |        |                      |   |       |  
|Balance at January 1, 2001                | $            | 4,578 |                            | $ | 10,072            |   | $                                                  | 9,964  |                      | $ | 185   |  
|                                          |              |       |                            |   |                   |   |                                                    |        |                      |   |       |  
|Net income for 2001                       |              |       |                            |   |                   |   |                                                    | 2,744  |                      |   |       |  
|Cash dividends declared - $.61 per share  |              |       |                            |   |                   |   |                                                    | (1,180 | )                    |   |       |  
|Common stock repurchased and              |              |       |                            |   |                   |   |                                                    |        |                      |   |       |  
|retired (19,851 shares)                   |              | (50   | )                          |   | (348              | ) |                                                    |        |                      |   |       |  
|Change in common stock subject            |              |       |                            |   |                   |   |                                                    |        |                      |   |       |  
|to repurchase                             |              | 27    |                            |   | (72               | ) |                                                    |        |                      |   |       |  
|Net change in unrealized gain (loss) on   |              |       |                            |   |                   |   |                                                    |        |                      |   |       |  
|available for sale securities, net of tax |              |       |                            |   |                   |   |                                                    |        |                      |   | 215   |  
|Balance at December 31, 2001              |              | 4,555 |                            |   | 9,652             |   |                                                    | 11,528 |                      |   | 400   |  
|                                          |              |       |                            |   |                   |   |                                                    |        |                      |   |       |  
|Net income for 2002                       |              |       |                            |   |                   |   |                                                    | 1,033  |                      |   |       |  
|Cash dividends declared - $.64 per share  |              |       |                            |   |                   |   |                                                    | (1,195 | )                    |   |       |  
|Common stock repurchased and              |              |       |                            |   |                   |   |                                                    |        |                      |   |       |  
|retired (56,605 shares)                   |              | (142  | )                          |   | (763              | ) |                                                    |        |                      |   |       |  
|Change in common stock subject            |              |       |                            |   |                   |   |                                                    |        |                      |   |       |  
|to repurchase                             |              | (15   | )                          |   | (80               | ) |                                                    |        |                      |   |       |  
|Tax effect of benefit plan                |              |       |                            |   | 30                |   |                                                    |        |                      |   |       |  
|Reduction of ESOP obligation              |              |       |                            |   | (87               | ) |                                                    |        |                      |   |       |  
|Net change in unrealized gain (loss) on   |              |       |                            |   |                   |   |                                                    |        |                      |   |       |  
|available for sale securities, net of tax |              |       |                            |   |                   |   |                                                    |        |                      |   | 393   |  
|Balance at December 31, 2002              |              | 4,398 |                            |   | 8,752             |   |                                                    | 11,366 |                      |   | 793   |  
|                                          |              |       |                            |   |                   |   |                                                    |        |                      |   |       |  
|Net income for 2003                       |              |       |                            |   |                   |   |                                                    | 3,263  |                      |   |       |  
|Cash dividends declared - $.64 per share  |              |       |                            |   |                   |   |                                                    | (1,183 | )                    |   |       |  
|Common stock repurchased and              |              |       |                            |   |                   |   |                                                    |        |                      |   |       |  
|retired (14,718 shares)                   |              | (37   | )                          |   | (210              | ) |                                                    |        |                      |   |       |  
|Change in common stock subject            |              |       |                            |   |                   |   |                                                    |        |                      |   |       |  
|to repurchase                             |              | 43    |                            |   | (241              | ) |                                                    |        |                      |   |       |  
|Tax effect of benefit plan                |              |       |                            |   | 18                |   |                                                    |        |                      |   |       |  
|Reduction of ESOP obligation              |              |       |                            |   | (60               | ) |                                                    |        |                      |   |       |  
|Net change in unrealized gain (loss) on   |              |       |                            |   |                   |   |                                                    |        |                      |   |       |  
|available for sale securities, net of tax |              |       |                            |   |                   |   |                                                    |        |                      |   | (260  | )
|Balance at December 31, 2003              | $            | 4,404 |                            | $ | 8,259             |   | $                                                  | 13,446 |                      | $ | 533   |  

See accompanying notes to consolidated financial statements.

| | FS-4 | 
| | ---- | 

---

Southern Michigan Bancorp, Inc.
Consolidated Statements of Cash Flows(In thousands)

|                                                | Year ended December 31, |        
|----------------------------------------------- | ----------------------- | -------
|                                                | 2003                    |        
|Operating Activities                            |                         |        
|Net income                                      | $                       | 3,263  
|Adjustments to reconcile net income to net cash |                         |        
|provided by operating activities:               |                         |        
|Provision for loan losses                       |                         | 900    
|Depreciation                                    |                         | 694    
|Net amortization of investment securities       |                         | 449    
|Net securities gains                            |                         | -      
|Loans originated for sale                       |                         | (96,419
|Proceeds on loans sold                          |                         | 99,042 
|Net gains on loan sales                         |                         | (2,097 
|Net realized loss on disposal of fixed assets   |                         | -      
|Earnings on life insurance assets               |                         | (245   
|Loss on viatical settlement contracts           |                         | -      
|Amortization of goodwill                        |                         | -      
|Amortization of other intangible assets         |                         | 42     
|Reduction of obligation under ESOP              |                         | 92     
|Net change in:                                  |                         |        
|Accrued interest receivable                     |                         | 208    
|Other assets                                    |                         | 333    
|Accrued expenses and other liabilities          |                         | (85    
|Net cash from operating activities              |                         | 6,177  
|                                                |                         |        
|Investing Activities                            |                         |        
|Activity in available-for-sale securities:      |                         |        
|Proceeds from sales                             |                         | -      
|Proceeds from maturities and calls              |                         | 17,505 
|Purchases                                       |                         | (23,729
|Purchase of life insurance                      |                         | (390   
|Loan originations and payments, net             |                         | (64    
|Proceeds from sale of premises and equipment    |                         | -      
|Additions to premises and equipment             |                         | (349   
|Net cash from investing activities              |                         | (7,027 
|                                                |                         |        
|Financing Activities                            |                         |        
|Net change in deposits                          |                         | (7,648 
|Net change in federal funds purchased           |                         | 2,000  
|Proceeds from other borrowings                  |                         | 5,530  
|Repayments of other borrowings                  |                         | (555   
|Cash dividends paid                             |                         | (1,186 
|Repurchase of common stock                      |                         | (247   
|Net cash from financing activities              |                         | (2,106 
|Net change in cash and cash equivalents         |                         | (2,956 
|Beginning cash and cash equivalents             |                         | 19,287 
|Ending cash and cash equivalents                | $                       | 16,331 
|                                                |                         |        
|Cash paid for interest                          | $                       | 5,269  
|Cash paid for income taxes                      |                         | 825    

See accompanying notes to consolidated financial statements.

| | FS-5 | 
| | ---- | 

---

Southern Michigan Bancorp, Inc.
Notes To Consolidated Financial Statements

Note A - Nature of Operations and Significant Accounting Policies

Nature of Operations and Industry Segments: Southern Michigan Bancorp, Inc. is a bank holding company. The Company's business is concentrated in the banking industry segment. The business of commercial and retail banking accounts for more than 90% of its revenues, operating income and assets. While the Company's chief decision makers monitor the revenue stream of various company products and services, operations are managed and financial performance is evaluated on a company-wide basis. Accordingly, all of the Company's banking operations are considered by management to be aggregated into one operating segment. The Bank offers individuals, businesses, institutions and government agencies a full range of commercial banking services primarily in the southern Michigan communities in which the Bank is located and in areas immediately surrounding these communities. The Bank grants commercial and consumer loans to customers. The majority of loans are secured by business assets, commercial real estate, and consumer assets. There are no foreign loans. SMB Mortgage Company was established in August 2000 as a wholly-owned subsidiary of the Bank. All residential real estate loans are transacted through this subsidiary. The majority of loans are secured by residential real estate.

Principles of Consolidation: The consolidated financial statements include the accounts of Southern Michigan Bancorp, Inc. (the Company) and its wholly owned subsidiary, Southern Michigan Bank & Trust (the Bank) and its wholly-owned subsidiary, SMB Mortgage Company, after elimination of significant intercompany balances and transactions.

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

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

Premiums and discounts on securities are recognized in interest income using the level yield method over the estimated life of the security. Gains and losses on the sale of available for sale securities are determined using the specific identification method. Securities are written down to fair value when a decline in fair value is not temporary.

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

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

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

| | FS-6 | 
| | ---- | 

---

Southern Michigan Bancorp, Inc.
Notes To Consolidated Financial Statements (continued)

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

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

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

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

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

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

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

Goodwill and Other Intangible Assets:Goodwill results from prior business acquisitions and represents the excess of the purchase price over the fair value of acquired tangible assets and liabilities and identifiable assets. Upon adopting new accounting guidance on January 1, 2002, the Company ceased amortizing goodwill. Goodwill is assessed at least annually for impairment and any such impairment will be recognized in the period identified.

Other intangible assets consist of core deposit intangible assets arising from branch acquisitions. They are initially measured at fair value and then are amortized on the straight line method over their estimated useful lives, which is 10 years.

Other Real Estate: Other real estate was $1,040,000 and $1,016,000 at December 31, 2003 and 2002 and is included in other assets. Other real estate is comprised of properties acquired through a foreclosure proceeding or acceptance of a deed in lieu of foreclosure. These properties are initially recorded at the lower of the loan balance or fair value at the date of foreclosure, establishing a new cost basis. After foreclosure, valuations are periodically performed by management and real estate is carried at fair value less estimated cost of disposal. Expenses, gains and losses on disposition, and changes in any valuation allowance are reported in other expense.

| | FS-7 | 
| | ---- | 

---

Southern Michigan Bancorp, Inc.
Notes To Consolidated Financial Statements (continued)

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

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

|                                         | 2003                                  |       | 2002 |   | 2001  |  
|---------------------------------------- | ------------------------------------- | ----- | ---- | - | ----- | -
|                                         | (In thousands, except per share data) |      
|Net income as reported                   | $                                     | 3,263 |      | $ | 1,033 |  
|Deduct: stock based compensation expense |                                       |       |      |   |       |  
|determined under fair value based method |                                       | (8    | )    |   | (1    | )
|Pro forma net income                     | $                                     | 3,255 |      | $ | 1,032 |  
|                                         |                                       |       |      |   |       |  
|Basic earnings per share as reported     | $                                     | 1.77  |      | $ | .55   |  
|Pro forma basic earnings per share       |                                       | 1.77  |      |   | .55   |  
|                                         |                                       |       |      |   |       |  
|Diluted earnings per share as reported   |                                       | 1.77  |      |   | .55   |  
|Pro forma diluted earnings per share     |                                       | 1.77  |      |   | .55   |  

The pro forma effects are computed using option pricing models, using the following weighted-average assumptions as of grant date.

|                                | 2003    |  | 2002 |  | 2001    | 
|------------------------------- | ------- |  | ---- |  | ------- | 
|                                |         |  |      |  |         | 
|Risk-free interest rate         | 3.75%   |  | N/A  |  | 5.00%   | 
|Expected option life            | 8 years |  | N/A  |  | 6 years | 
|Expected stock price volatility | 17.55%  |  | N/A  |  | 19.04%  | 
|Dividend yield                  | 4.04%   |  | N/A  |  | 3.95%   | 

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

Income Taxes: Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized.

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

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

Comprehensive Income: Comprehensive income consists of net income and other comprehensive income or loss. Other comprehensive income or loss includes the net change in unrealized gains and losses on securities available for sale, net of tax, which is also recognized as a separate component of shareholders' equity.

| | FS-8 | 
| | ---- | 

---

Southern Michigan Bancorp, Inc.
Notes To Consolidated Financial Statements (continued)

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

Fair Values of Financial Instruments: Fair values of financial instruments are estimated using relevant market information and other assumptions. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect such estimates. The fair value estimates of existing on- and off-balance sheet financial instruments does not include the value of anticipated future business or values of assets and liabilities not considered financial instruments.

Concentrations of Credit Risk: The Company grants commercial, real estate and installment loans to customers mainly in Southern Michigan. Commercial loans include loans collateralized by commercial real estate, business assets and agricultural loans collateralized by crops and farm equipment. Commercial, financial and agricultural loans make up approximately 61% of the loan portfolio and the loans are expected to be repaid from cash flow from operations of businesses. Residential mortgage loans make up approximately 32% of the loan portfolio and are collateralized by mortgages on residential real estate. Consumer loans make up approximately 7% of the loan portfolio and are primarily collateralized by consumer assets.

Financial Instruments with Off-Balance-Sheet Risk: Financial instruments include off-balance-sheet credit instruments, such as commitments to make loans and standby letters of credit issued to meet customer needs. The face amount for these items represents the exposure to loss before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded.

Adoption of New Accounting Standards:During 2003, the Company adopted FASB Statement 143, "Accounting for Asset Retirement Obligations", FASB Statement 145, regarding extinguishment of debt and accounting for leases, FASB Statement 146, "Accounting for Costs Associated with Exit or Disposal Activities", FASB Statement 148, "Accounting for Stock-Based Compensation - Transition and Disclosure - an amendment to FASB Statement No. 123", FASB Statement 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities",FASB Statement 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equities",FASB Statement 132 (revised 2003), "Employers' Disclosures about Pensions and Other Postretirement Benefits",FASB Interpretation 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees",and FASB Interpretation 46, "Consolidation of Variable Interest Entities".Adoption of the new standards did not materially affect the Company's operating results or financial condition.

Loss Contingencies: Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. While management does not believe there are such matters that will have a material effect on the consolidated financial statements as of December 31, 2003, the Bank is defending legal claims and counterclaims of approximately $5,000,000.

Reclassifications: Some items in the prior year consolidated financial statements have been reclassified to conform with the current year presentation.

| | FS-9 | 
| | ---- | 

---

Southern Michigan Bancorp, Inc.
Notes To Consolidated Financial Statements (continued)

Note B - Basic and Diluted Earnings Per Common Share

A reconciliation of the numerators and denominators of basic and diluted earnings per common share for the years ended December 31, 2003, 2002 and 2001 is presented below:

|                                                            | 2003 |           | 2002 |   | 2001      |  
|----------------------------------------------------------- | ---- | --------- | ---- | - | --------- | -
|Basic Earnings Per Common Share                             |      |           |      |   |           |  
|                                                            |      |           |      |   |           |  
|Net income (in thousands)                                   | $    | 3,263     |      | $ | 1,033     |  
|                                                            |      |           |      |   |           |  
|Weighted average common shares outstanding                  |      | 1,849,347 |      |   | 1,877,990 |  
|                                                            |      |           |      |   |           |  
|Less: Unallocated ESOP shares                               |      | (8,873    | )    |   | (11,430   | )
|                                                            |      |           |      |   |           |  
|Weighted average common shares outstanding for basic        |      |           |      |   |           |  
|earnings per common share                                   |      | 1,840,474 |      |   | 1,866,560 |  
|                                                            |      |           |      |   |           |  
|Basic earnings per common share                             |      | 1.77      |      | $ | .55       |  
|                                                            |      |           |      |   |           |  
|Diluted Earnings Per Common Share                           |      |           |      |   |           |  
|                                                            |      |           |      |   |           |  
|Net income (in thousands)                                   | $    | 3,263     |      | $ | 1,033     |  
|                                                            |      |           |      |   |           |  
|Weighted average common shares outstanding for basic        |      |           |      |   |           |  
|earnings per common share                                   |      | 1,840,474 |      |   | 1,866,560 |  
|                                                            |      |           |      |   |           |  
|Add: Dilutive effects of assumed exercises of stock options |      | 1,044     |      |   | 264       |  
|                                                            |      |           |      |   |           |  
|Average shares and dilutive potential                       |      |           |      |   |           |  
|of common shares outstanding                                |      | 1,841,518 |      |   | 1,866,824 |  
|                                                            |      |           |      |   |           |  
|Diluted earnings per common share                           | $    | 1.77      |      | $ | .55       |  

| | FS-10 | 
| | ----- | 

---

Southern Michigan Bancorp, Inc.
Notes To Consolidated Financial Statements (continued)

Note C - Securities

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

|Available for sale, 2003              | Fair
Value |        | Gross
Unrealized
Gains |   | Gross
Unrealized
Losses | 
|------------------------------------- | ---------- | ------ | ---------------------- | - | ----------------------- | 
|                                      |            |        |                        |   |                         | 
|U.S. Treasury and Government agencies | $          | 23,985 |                        | $ | 264                     | 
|States and political subdivisions     |            | 27,292 |                        |   | 521                     | 
|Corporate securities                  |            | 1,444  |                        |   | 29                      | 
|Mortgage-backed securities            |            | 124    |                        |   | 6                       | 
|Total debt securities                 |            | 52,845 |                        |   | 820                     | 
|Equity securities                     |            | 1,347  |                        |   | -                       | 
|Total                                 | $          | 54,192 |                        | $ | 820                     | 

|Available for sale, 2002              | Fair
Value |        | Gross
Unrealized
Gains |   | Gross
Unrealized
Losses | 
|------------------------------------- | ---------- | ------ | ---------------------- | - | ----------------------- | 
|                                      |            |        |                        |   |                         | 
|U.S. Treasury and Government agencies | $          | 16,103 |                        | $ | 401                     | 
|States and political subdivisions     |            | 27,505 |                        |   | 722                     | 
|Corporate securities                  |            | 3,288  |                        |   | 70                      | 
|Mortgage-backed securities            |            | 532    |                        |   | 13                      | 
|Total debt securities                 |            | 47,428 |                        |   | 1,206                   | 
|Equity securities                     |            | 1,383  |                        |   | -                       | 
|Total                                 | $          | 48,811 |                        | $ | 1,206                   | 

Securities with unrealized losses at year end 2003 not recognized in income are as follows (in thousands):

|                                  | Continued Unrealized
Loss forLess than 12 Months |       | Continued Unrealized
Loss for12 Months or More |   | Total     |  
|--------------------------------- | ------------------------------------------------ | ----- | ---------------------------------------------- | - | --------- | -
|Description of Securities         | FairValue                                        |       | UnrealizedLoss                                 |   | FairValue |  
|                                  |                                                  |       |                                                |   |           |  
|U.S. Treasury and Government      |                                                  |       |                                                |   |           |  
|agencies                          | $                                                | 999   |                                                | $ | (1        | )
|States and political subdivisions |                                                  | 2,466 |                                                |   | (12       | )
|Total temporarily impaired        | $                                                | 3,465 |                                                | $ | (13       | )

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

| |              | 2003 |   | 2002 |   | 2001 | 
| | ------------ | ---- | - | ---- | - | ---- | 
| |              |      |   |      |   |      | 
| | Proceeds     | $    | - |      | $ | 254  | 
| | Gross gains  |      | - |      |   | 4    | 
| | Gross losses |      | - |      |   | -    | 

| | FS-11 | 
| | ----- | 

---

Southern Michigan Bancorp, Inc.
Notes To Consolidated Financial Statements (continued)

Note C - Securities (continued)

Contractual maturities of debt securities at year-end 2003 were as follows (in thousands). Securities not due at a single maturity date, primarily mortgage-backed securities, are shown separately. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

|                           | FairValue |       
|-------------------------- | --------- | ------
|                           |           |       
|Due in one year or less    | $         | 17,286
|Due from one to five years |           | 30,931
|Due from five to ten years |           | 3,296 
|Due after ten years        |           | 1,208 
|Mortgage-backed securities |           | 124   
|                           | $         | 52,845

Securities with a carrying value of $7,253,000 and $8,072,000 were pledged as collateral for public deposits and for other purposes in 2003 and 2002.

Except as indicated, total securities of any state (including all its political subdivisions) were less than 10% of shareholders' equity. At year-end 2003 and 2002, the market value of securities issued by the state of Michigan and all its political subdivisions totaled $10,295,000 and $10,358,000, respectively.

Note D - Loans

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

|                               | 2003 |         | 2002 |  
|------------------------------ | ---- | ------- | ---- | -
|                               |      |         |      |  
|Commercial                     | $    | 143,192 |      | $
|Consumer                       |      | 14,815  |      |  
|Real estate mortgage           |      | 75,063  |      |  
|                               |      | 233,070 |      |  
|Less allowance for loan losses |      | (3,252  | )    |  
|Loans, net                     | $    | 229,818 |      | $

Certain directors and executive officers of the Company and the Bank, including their associates and companies in which they are principal owners, were loan customers of the Bank. The following is a summary of loans (in thousands) exceeding $60,000 in the aggregate to these individuals and their associates. Other changes include adjustments for loans applicable to one reporting period that are excludable from the other reporting period.

|                                           | 2003 |        | 2002 |  
|------------------------------------------ | ---- | ------ | ---- | -
|                                           |      |        |      |  
|Balance at January 1                       | $    | 4,473  |      | $
|New loans, including renewals and advances |      | 9,437  |      |  
|Repayments                                 |      | (9,618 | )    |  
|Other changes, net                         |      | (44    | )    |  
|Balance at December 31                     | $    | 4,248  |      | $

The unpaid principal balance of mortgage loans serviced for others, which are not included on the consolidated balance sheet, was $11,887,000 and $24,928,000 at December 31, 2003 and 2002, respectively.

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

|                       | 2003 |      | 2002 |   | 2001 |  
|---------------------- | ---- | ---- | ---- | - | ---- | -
|                       |      |      |      |   |      |  
|Balance at January 1   | $    | 169  |      | $ | 424  |  
|Amortized to expense   |      | (112 | )    |   | (255 | )
|Balance at December 31 | $    | 57   |      | $ | 169  |  

No valuation allowance for capitalized mortgage servicing rights was necessary at December 31, 2003, 2002 or 2001.

| | FS-12 | 
| | ----- | 

---

Southern Michigan Bancorp, Inc.
Notes To Consolidated Financial Statements (continued)

Note E - Allowances For Loan Losses

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

|                          | 2003 |        | 2002 |   | 2001   |  
|------------------------- | ---- | ------ | ---- | - | ------ | -
|                          |      |        |      |   |        |  
|Balance at January 1      | $    | 3,512  |      | $ | 2,065  |  
|Provision for loan losses |      | 900    |      |   | 2,671  |  
|Loans charged off         |      | (1,460 | )    |   | (1,704 | )
|Recoveries                |      | 300    |      |   | 480    |  
|Net charge-offs           |      | (1,160 | )    |   | (1,224 | )
|                          |      |        |      |   |        |  
|Balance at December 31    | $    | 3,252  |      | $ | 3,512  |  

|                                                             | 2003 |        | 2002 |  
|------------------------------------------------------------ | ---- | ------ | ---- | -
|Information regarding impaired loans follows (in thousands): |      |        |      |  
|                                                             |      |        |      |  
|Year end loans with allowance for loan losses allocated      | $    | 2,763  |      | $
|Year end loans with no allowance for loan losses allocated   |      | 7,700  |      |  
|                                                             |      |        |      |  
|Total impaired loans                                         | $    | 10,463 |      | $
|                                                             |      |        |      |  
|Amount of allowance allocated to these loans                 | $    | 905    |      | $

|                                                      | 2003 |        | 2002 |   | 2001   | 
|----------------------------------------------------- | ---- | ------ | ---- | - | ------ | 
|                                                      |      |        |      |   |        | 
|Average balance of impaired loans during the year     | $    | 12,297 |      | $ | 11,059 | 
|                                                      |      |        |      |   |        | 
|Cash basis interest income recognized during the year | $    | 420    |      | $ | 319    | 
|                                                      |      |        |      |   |        | 
|Interest income recognized during the year            | $    | 444    |      | $ | 319    | 

Nonperforming loans were as follows (in thousands):

|                                             | 2003 |       | 2002 |  
|-------------------------------------------- | ---- | ----- | ---- | -
|Loans past due over 90 days still on accrual | $    | 2     |      | $
|Nonaccrual loans                             |      | 3,586 |      |  

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

Note F - Premises and Equipment, Net

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

|                              | 2003 |        | 2002 |  
|----------------------------- | ---- | ------ | ---- | -
|                              |      |        |      |  
|Land                          | $    | 793    |      | $
|Buildings and improvements    |      | 8,961  |      |  
|Equipment                     |      | 5,289  |      |  
|                              |      | 15,043 |      |  
|Less accumulated depreciation |      | (8,251 | )    |  
|Totals                        | $    | 6,792  |      | $

Depreciation and amortization expense charged to operations was approximately $694,000, $918,000 and $900,000 in 2003, 2002 and 2001, respectively.

| | FS-13 | 
| | ----- | 

---

Southern Michigan Bancorp, Inc.
Notes To Consolidated Financial Statements (continued)

Note F - Premises and Equipment, Net (continued)

Equipment rental expense was $185,000, $293,000 and $322,000 for 2003, 2002 and 2001. Lease commitments under noncancelable operating equipment leases were as follows (in thousands):

| | 2004         | $ | 136 | 
| | ------------ | - | --- | 
| | 2005         |   | 111 | 
| | 2006         |   | 8   | 
| | 2007         |   | 8   | 
| | 2008         |   | 4   | 
| | 2009 & after |   | 0   | 
| |              |   |     | 
| | Total        | $ | 267 | 

Note G - Goodwill and Intangible Assets

Goodwill
The change in the carrying amount of goodwill for the year is as follows (in thousands):

| | Beginning of year                     | $ | 620 | 
| | ------------------------------------- | - | --- | 
| | Goodwill from acquisition during year |   | -   | 
| | End of year                           | $ | 620 | 

Goodwill is no longer amortized starting in 2002. The effect of not amortizing goodwill is summarized as follows (in thousands):

|                                            | 2003 |       | 2002 |   | 2001  | 
|------------------------------------------- | ---- | ----- | ---- | - | ----- | 
|                                            |      |       |      |   |       | 
|Reported net income                         | $    | 3,263 |      | $ | 1,033 | 
|Add back: goodwill amortization, net of tax |      | -     |      |   | -     | 
|Adjusted net income                         | $    | 3,263 |      | $ | 1,033 | 
|                                            |      |       |      |   |       | 
|Basic earnings per share:                   |      |       |      |   |       | 
|Reported net income                         | $    | 1.77  |      | $ | .55   | 
|Add back: goodwill amortization, net of tax |      | -     |      |   | -     | 
|Adjusted net income                         | $    | 1.77  |      | $ | .55   | 
|                                            |      |       |      |   |       | 
|Diluted earnings per share:                 |      |       |      |   |       | 
|Reported net income                         | $    | 1.77  |      | $ | .55   | 
|Add back: goodwill amortization, net of tax |      | -     |      |   | -     | 
|Adjusted net income                         | $    | 1.77  |      | $ | .55   | 

Acquired Intangible Assets
Acquired intangible assets were as follows as of year end (in thousands):

|                             | December 31, 2003     |                          | December 31, 2002  
|---------------------------- | --------------------- | ------------------------ | -------------------
|                             | Gross
Carrying
Amount | Accumulated
Amortization | Net
Carrying
Amount
|Amortized intangible assets: |                       |                          |                    
|Core deposit intangibles     | $  559                | $  451                   | $  108             

| | FS-14 | 
| | ----- | 

---

Southern Michigan Bancorp, Inc.
Notes To Consolidated Financial Statements (continued)

Note G - Goodwill and Intangible Assets (continued)

Aggregate amortization expense was $42,000, $39,000 and $131,000 for 2003, 2002 and 2001, respectively.

Estimated amortization expense for each of the next five years (in thousands):

| | 2004  | $ | 39  | 
| | ----- | - | --- | 
| | 2005  |   | 39  | 
| | 2006  |   | 30  | 
| | 2007  |   | -   | 
| | 2008  |   | -   | 
| | Total | $ | 108 | 

Note H - Deposits

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

|                              | 2003 |         | 2002 |  
|----------------------------- | ---- | ------- | ---- | -
|                              |      |         |      |  
|Non-interest bearing checking | $    | 40,597  |      | $
|Interest bearing checking     |      | 49,138  |      |  
|Savings                       |      | 34,515  |      |  
|Money market accounts         |      | 50,816  |      |  
|Time deposits                 |      | 79,635  |      |  
|Totals                        | $    | 254,701 |      | $

The carrying amount of time deposits over $100,000 was $31,679,000 and $32,674,000 at December 31, 2003 and 2002, respectively. Interest expense on time deposits over $100,000 was $891,000, $854,000 and $1,810,000 for the years ended December 31, 2003, 2002 and 2001, respectively.

At year-end 2003, scheduled maturities of time deposits were as follows for the years ending December 31 (in thousands):

|2004  | $ | 52,224 | 
|----- | - | ------ | 
|2005  |   | 17,600 | 
|2006  |   | 5,620  | 
|2007  |   | 4,155  | 
|2008  |   | 36     | 
|Total | $ | 79,635 | 

Related party deposits were $2,609,000 and $2,021,000 at December 31, 2003 and 2002, respectively.

Note I - Other Borrowings

Other borrowings primarily represent advances obtained by the Bank from the Federal Home Loan Bank (FHLB) of Indianapolis and advances by the Company on a line of credit. $20,000,000 of the FHLB advances have interest rates ranging from 6.28% to 6.89% and have quarterly stated interest adjustment dates. On the stated interest adjustment dates, the FHLB will have the option to adjust the interest rate and will continue to have this option quarterly thereafter. The advances may not be prepaid by the Bank prior to the FHLB exercising its option to adjust the interest rate. In addition, the Bank has a $5,000,000 fixed rate advance maturing in October, 2006 at a rate of 2.97%. The remaining $922,000 FHLB advance is at a fixed rate of 4.57% with principal payments beginning in December of 2003 and continuing through December of 2013. The advances are secured by a blanket collateral agreement with the FHLB which gives the FHLB an unperfected security interest in the Bank's one-to-four family mortgage and SBA loans. Eligible FHLB mortgage and SBA loan collateral at December 31, 2003 and 2002 was approximately $53,573,000 and $52,018,000.

| | FS-15 | 
| | ----- | 

---

Southern Michigan Bancorp, Inc.
Notes To Consolidated Financial Statements (continued)

Note I - Other Borrowings (continued)

At year-end 2003, scheduled principal reductions on these FHLB advances were as follows for the years ending December 31 (in thousands):

|2004                | $ | 10,088 | 
|------------------- | - | ------ | 
|2005                |   | 10,090 | 
|2006                |   | 5,094  | 
|2007                |   | 97     | 
|2008                |   | 102    | 
|Thereafter          |   | 451    | 
|Total FHLB advances | $ | 25,922 | 

Other borrowings also includes a loan with Fifth Third Bank for the ESOP with a balance at December 31, 2003 and 2002 of $284,000 and $436,000. The loan does not have a formal repayment schedule, matures on April 30, 2004 and is unsecured.

On February 22, 2003, the Company renewed a $4,000,000 revolving line of credit with LaSalle Bank, which matures on February 22, 2004 and is secured by the Bank's stock. At year end 2003 and 2002, the balance was $1,400,000 and $1,170,000. The line allows the Company to choose its interest rate for each draw, based on the LaSalle Bank National Association prime rate or adjusted LIBOR. All advances outstanding on this line are based on adjusted LIBOR at a rate of 2.92% which adjusts quarterly.

The Company had $15,000 and $40,000 in repurchase agreements at December 31, 2003 and 2002.

Note J - Income Taxes

Income tax expense consists of (in thousands):

|         | 2003 |       | 2002 |   | 2001 |  
|-------- | ---- | ----- | ---- | - | ---- | -
|         |      |       |      |   |      |  
|Current  | $    | 974   |      | $ | 731  |  
|Deferred |      | 86    |      |   | (613 | )
|Totals   | $    | 1,060 |      | $ | 118  |  

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

|                                                                | 2003 |       | 2002 |   | 2001 |  
|--------------------------------------------------------------- | ---- | ----- | ---- | - | ---- | -
|                                                                |      |       |      |   |      |  
|Income tax at statutory rates                                   | $    | 1,470 |      | $ | 391  |  
|Tax-exempt interest income, net                                 |      | (269  | )    |   | (305 | )
|Increase in net cash surrender value of life insurance policies |      | (67   | )    |   | (97  | )
|Loss on viatical investment                                     |      | -     |      |   | 28   |  
|Valuation allowance against capital loss                        |      | -     |      |   | 54   |  
|Low income housing partnership tax credit                       |      | (118  | )    |   | (25  | )
|Other items, net                                                |      | 44    |      |   | 72   |  
|Totals                                                          | $    | 1,060 |      | $ | 118  |  

| | FS-16 | 
| | ----- | 

---

Southern Michigan Bancorp, Inc.
Notes To Consolidated Financial Statements (continued)

Note J - Income Taxes (continued)

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

|                                                             | 2003 |       | 2002 |  
|------------------------------------------------------------ | ---- | ----- | ---- | -
|Deferred tax assets:                                         |      |       |      |  
|Allowance for loan losses                                    | $    | 801   |      | $
|Deferred compensation and supplemental retirement liability  |      | 659   |      |  
|Intangible asset amortization                                |      | 64    |      |  
|Pension liability                                            |      | 28    |      |  
|Write off of viatical investment                             |      | 68    |      |  
|Write down of other real estate                              |      | 44    |      |  
|Deferred loan fees                                           |      | -     |      |  
|Nonaccrual loan interest                                     |      | 57    |      |  
|Other                                                        |      | 15    |      |  
|Subtotals                                                    |      | 1,736 |      |  
|Valuation allowance against capital loss                     |      | (54   | )    |  
|Totals                                                       |      | 1,682 |      |  
|                                                             |      |       |      |  
|Deferred tax liabilities:                                    |      |       |      |  
|Net unrealized appreciation on available for sale securities |      | (274  | )    |  
|Mortgage servicing rights                                    |      | (19   | )    |  
|Goodwill                                                     |      | (43   | )    |  
|Other                                                        |      | (34   | )    |  
|Totals                                                       |      | (370  | )    |  
|Net deferred tax asset                                       | $    | 1,312 |      | $

An allowance against the net deferred tax asset was considered necessary at December 31, 2003 and 2002 as the likelihood of receiving a tax benefit on a portion of the capital loss on the viatical investment is considered doubtful.

Note K - Benefit Plans

The defined benefit pension plan covers substantially all full-time employees. The benefits are based on years of service and the employee's average highest compensation during five consecutive years of employment. The funding policy is to contribute annually an amount sufficient to meet the minimum funding requirements set forth in the Employee Retirement Income Security Act of 1974, plus additional amounts as may be appropriate from time to time. Contributions are intended to provide not only for benefits attributed to service to date but also for those expected to be earned in the future. Assets held by the plan primarily include corporate and foreign bonds and common equity securities. The Company uses a December 31 measurement date for the plan.

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

|                                                           | 2003 |        | 2002 |  
|---------------------------------------------------------- | ---- | ------ | ---- | -
|Change in benefit obligation:                              |      |        |      |  
|Beginning benefit obligation                               | $    | (1,509 | )    | $
|Service cost                                               |      | (134   | )    |  
|Interest cost                                              |      | (118   | )    |  
|Actuarial (gain) loss from change in actuarial assumptions |      | (385   | )    |  
|Benefits paid                                              |      | 201    |      |  
|Ending benefit obligation                                  | $    | (1,945 | )    | $
|                                                           |      |        |      |  
|Change in plan assets, at fair value:                      |      |        |      |  
|Beginning plan assets                                      | $    | 1,454  |      | $
|Actual return                                              |      | 217    |      |  
|Employer contribution                                      |      | 199    |      |  
|Benefits paid                                              |      | (201   | )    |  
|Ending plan assets                                         | $    | 1,669  |      | $

| | FS-17 | 
| | ----- | 

---

Southern Michigan Bancorp, Inc.
Notes To Consolidated Financial Statements (continued)

Note K - Benefit Plans (continued)

|                                       | 2003 |      | 2002 |  
|-------------------------------------- | ---- | ---- | ---- | -
|Net amount recognized:                 |      |      |      |  
|Funded status                          | $    | (276 | )    | $
|Unrecognized net actuarial (gain) loss |      | 227  |      |  
|Unrecognized transition obligation     |      | -    |      |  
|Unrecognized prior service cost        |      | -    |      |  
|Accrued pension cost                   | $    | (49  | )    | $

The accumulated benefit obligation for the defined benefit pension plan was $1,421,000 and $1,254,000 at December 31, 2003 and 2002.

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

|                                         | 2003 |      | 2002 |   | 2001 |  
|---------------------------------------- | ---- | ---- | ---- | - | ---- | -
|Components of net periodic benefit cost: |      |      |      |   |      |  
|Service cost                             | $    | 134  |      | $ | 118  |  
|Interest cost                            |      | 118  |      |   | 105  |  
|Expected return on plan assets           |      | (114 | )    |   | (104 | )
|Net amortization and deferral            |      | -    |      |   | 16   |  
|Net periodic benefit cost                | $    | 138  |      | $ | 135  |  

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

|Discount rate on benefit obligation              | 7.0% |  | 7.0% |  | 7.0%
|------------------------------------------------ | ---- |  | ---- |  | ----
|Long-term expected rate of return on plan assets | 7.0% |  | 7.5% |  | 8.0%
|Rate of compensation increase                    | 3.0% |  | 3.0% |  | 3.0%

|                  |  | Target
Allocation |  | Percentage
of Plan
Assets
at Year-end |  | Weighted
Average
Expected
Long-Term
Rate of
|----------------- |  | ----------------- |  | ------------------------------------- |  | -------------------------------------------
|Asset Category    |  | 2004              |  | 2003                                  |  | 2002                                       
|                  |  |                   |  |                                       |  |                                            
|Equity securities |  | 60%               |  | 53%                                   |  | 44%                                        
|Debt securities   |  | 35%               |  | 44%                                   |  | 55%                                        
|Cash              |  | 5%                |  | 3%                                    |  | 1%                                         
|                  |  | 100%              |  | 100%                                  |  | 100%                                       

The overall expected long term rate of return of the investments of the plan are based on the ten year historical returns of the S&P 500 Index Fund, the Lehman Aggregate Bond Index Fund and the T-Bill Index. A weighted average of these were used for the equities, debt securities and cash.

The pension plan assets are managed by the Trust Department. A written investment policy which meet the standards of the prudent investor rule is followed. In addition The Northern Trust Company of Chicago, and Wabash Capital Management of Terre Haute, Indiana provide investment advisory services, guidance and expertise.

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

| | FS-18 | 
| | ----- | 

---

Southern Michigan Bancorp, Inc.
Notes To Consolidated Financial Statements (continued)

Note K - Benefit Plans (continued)

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

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

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

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

The investment objective is a balanced approach with a target of 60% stocks, 35% bonds and 5% cash. The allocation percentages may be reduced or increased depending upon market conditions and interest rates.

The investments in the plan are managed for the benefit of the participants. They are structured to meet the cash flow necessary to pay retiring employees. ERISA guidelines for diversification of the investments are followed.

The Company expects to contribute $300,000 to its pension plan in 2004.

The Company has an employee stock ownership plan (ESOP) for substantially all full-time employees. The Board of Directors determines the Company's contribution level annually. Assets of the plan are held in trust by the Bank and administrative costs of the plan are borne by the plan participants. Expense charged to operations for contributions to the plan totaled $106,000, $86,000 and $91,000 in 2003, 2002 and 2001. An additional contribution of $60,000 and $87,000 was made to the plan in 2003 and 2002 to allow the plan to pay down the ESOP loan. During 2000, the Company amended its ESOP plan to adopt 401(k) provisions allowing for employee salary deferrals to purchase mutual funds. Company matching is provided in Company stock. Substantially all employees have converted their ESOP accounts to the amended plan.

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

|                   | 2003 |        | 2002 | 
|------------------ | ---- | ------ | ---- | 
|                   |      |        |      | 
|Allocated shares   |      | 87,524 |      | 
|Unallocated shares |      | 7,451  |      | 
|                   |      |        |      | 
|Total ESOP shares  |      | 94,975 |      | 

The fair value of the allocated shares held by the ESOP is approximately $1,816,000 and $1,618,000 at December 31, 2003 and 2002, respectively. The ESOP obtained a loan for $588,000 to purchase 15,400 shares. The balance of the loan at December 31, 2003 and 2002 is $284,000 and $436,000. Upon distribution of shares to a participant, the participant has the right to require the Company to purchase shares at their fair value in accordance with terms and conditions of the plan. As such these shares are not classified in shareholders' equity as permanent equity.

| | FS-19 | 
| | ----- | 

---

Southern Michigan Bancorp, Inc.
Notes To Consolidated Financial Statements (continued)

Note K - Benefit Plans (continued)

As an incentive to retain key members of management and directors, the Bank has a deferred compensation plan whereby participants defer a portion of current compensation. Benefits are based on salary and length of service and are vested as service is provided from the date of participation through age 65. A liability is recorded on a present value basis and discounted at current interest rates. This liability may change depending upon changes in long-term interest rates. Current rates paid on deferred compensation balances range from 5.76% - 12.98%. Deferred compensation expense was $260,000, $248,000 and $204,000 in 2003, 2002 and 2001. The liability for vested benefits was $1,621,000 and $1,658,000 at December 31, 2003 and 2002, respectively.

The Bank also maintains a supplemental retirement plan to provide annual payments to particular executives subsequent to their retirement. The plan covers two individuals, both of whom are retired. Liabilities associated with this plan totaled $237,000 and $244,000 at December 31, 2003 and 2002. Expense associated with this plan totaled $27,000, $29,000 and $27,000 in 2003, 2002 and 2001.

Note L - Stock Options

On April 17, 2000, the Company approved a Stock Option Plan to advance the interests of the Company and its shareholders by affording to directors, officers and other employees of the Company an opportunity to acquire or increase their proprietary interest in the Company using stock options. Option shares authorized under the plan total 110,000. Options are to be granted with an exercise period of 10 years or less, an exercise price of not less than the fair market value of the stock on the date the options are granted and a vesting period as determined by the Board of Directors. The plan will terminate on the earliest of: (i) March 20, 2010; (ii) when all shares have been issued through exercise of options granted under this Plan; or (iii) at any earlier time that the Board of Directors may determine. A total of 10,500 options were granted in 2003. 28,500 options were granted subsequent to year-end in January 2004.

A summary of the activity in the plan is as follows for the years ended December 31, 2003 and 2002.

|                                 | 2003   |        | 2002                            |   | 2001  
|-------------------------------- | ------ | ------ | ------------------------------- | - | ------
|                                 | Shares |        | Weighted
Average
Exercise
Price |   | Shares
|                                 |        |        |                                 |   |       
|Outstanding at beginning of year |        | 5,092  |                                 | $ | 15.32 
|Granted                          |        | 10,500 |                                 |   | 16.55 
|Forfeited                        |        | -      |                                 |   | -     
|Outstanding at end of year       |        | 15,592 |                                 | $ | 16.15 
|                                 |        |        |                                 |   |       
|                                 |        |        |                                 |   |       
|                                 |        |        |                                 |   |       
|Options exercisable at year-end  |        | 5,092  |                                 | $ | 15.32 
|Weighted-average fair value of   |        |        |                                 |   |       
|options granted during year      | $      | 2.43   |                                 | $ | -     

| | FS-20 | 
| | ----- | 

---

Southern Michigan Bancorp, Inc.
Notes To Consolidated Financial Statements (continued)

Note L - Stock Options (continued)

Options outstanding at year-end 2003 were as follows:

| |                          |  | Outstanding |  | Exercisable                                
| | ------------------------ |  | ----------- |  | -------------------------------------------
| | Range of Exercise Prices |  | Number      |  | Weighted Average
Remaining
Contractual
Life
| |                          |  |             |  |                                            
| | $15 - $17                |  | 15,592      |  | 8.62 years                                 

Note M - Commitments

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

At December 31, 2003 and 2002, respectively, the Bank had $34,000 and $0 commitments under commercial letters of credit, used to facilitate customers' trade transactions.

Under standby letter of credit agreements, the Bank agrees to honor certain commitments in the event that its customers are unable to do so. At December 31, 2003 and 2002, commitments under outstanding standby letters of credit were $288,000.

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

|              | 2003 |        | 2002 |  
|------------- | ---- | ------ | ---- | -
|              |      |        |      |  
|Fixed rate    | $    | 4,261  |      | $
|Variable rate |      | 32,177 |      |  
|Totals        | $    | 36,438 |      | $

The fixed rate commitments have stated interest rates ranging from 4.50% to 9.90%. The terms of the above commitments range from 1 to 60 months.

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

At December 31, 2003, the Company had line of credit agreements with LaSalle Bank and Fifth Third Bank totaling $4,000,000 and $750,000, respectively. The balances on these lines were $1,400,000 and $284,000 respectively, at December 31, 2003. The line of credit at LaSalle Bank is secured by the Bank's stock and matures on February 22, 2004. The line of credit at Fifth Third Bank is unsecured and matures on April 30, 2004. In addition, at December 31, 2003, the Bank had line of credit arrangements to be able to purchase federal funds totaling $22,000,000, subject to quarterly and annual reviews. The balance on these lines at December 31, 2003 was $7,000,000.

Certain executives of the Bank have employment contracts which have change of control clauses. The employment contracts provide for the payment of three years worth of the officers' salaries upon a change of control.

| | FS-21 | 
| | ----- | 

---

Southern Michigan Bancorp, Inc.
Notes To Consolidated Financial Statements (continued)

Note N - Restrictions On Transfers From Subsidiary

Banking laws, regulations and regulatory agreements restrict the amount the Bank may transfer to the Company in the form of cash dividends, loans and advances. Approximately $9,991,000 of the Bank's retained earnings is available for transfer to the Company in 2004 in the form of dividends without prior regulatory approval.

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

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

|Balance Sheets                                        | December 31, |       
|----------------------------------------------------- | ------------ | ------
|                                                      | 2003         |       
|                                                      |              |       
|Assets                                                |              |       
|Cash                                                  | $            | -     
|Securities available for sale                         |              | 1,416 
|Investment in subsidiary                              |              | 27,339
|Premises and equipment, net                           |              | 1,094 
|Other                                                 |              | 319   
|Total Assets                                          | $            | 30,168
|                                                      |              |       
|Liabilities and Shareholders' Equity                  |              |       
|Dividends payable                                     | $            | 296   
|Other liabilities                                     |              | 14    
|Other borrowings                                      |              | 1,684 
|Common stock subject to repurchase obligation in ESOP |              | 1,816 
|Shareholders' equity                                  |              | 26,358
|Total Liabilities and Shareholders' Equity            | $            | 30,168

|Statements of Income                         | Year ended December 31, |      
|-------------------------------------------- | ----------------------- | -----
|                                             | 2003                    |      
|                                             |                         |      
|Dividends from Bank                          | $                       | 1,184
|Interest income                              |                         | 54   
|Other income                                 |                         | 232  
|Loss on viatical settlement contracts        |                         | -    
|Other expenses                               |                         | (178 
|                                             |                         | 1,292
|Federal income tax expense                   |                         | (20  
|                                             |                         | 1,272
|Equity in undistributed net income of        |                         |      
|Subsidiary Bank                              |                         | 1,991
|Net Income                                   |                         | 3,263
|Net change in unrealized gains on securities |                         |      
|available for sale, net of tax               |                         | (260 
|Other comprehensive income                   |                         | (260 
|Comprehensive income                         | $                       | 3,003

| | FS-22 | 
| | ----- | 

---

Southern Michigan Bancorp, Inc.
Notes To Consolidated Financial Statements (continued)

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

|Statements of Cash Flows                        | Year ended December 31, |       
|----------------------------------------------- | ----------------------- | ------
|                                                | 2003                    |       
|Operating Activities                            |                         |       
|Net income                                      | $                       | 3,263 
|Adjustments to reconcile net income to net cash |                         |       
|provided by operating activities:               |                         |       
|Equity in undistributed net income of           |                         |       
|Subsidiary Bank                                 |                         | (1,991
|Depreciation                                    |                         | 28    
|Net amortization of investment securities       |                         | 4     
|Reduction of obligation under ESOP              |                         | 92    
|Net securities gains                            |                         | -     
|Loss on viatical settlement contracts           |                         | -     
|Other                                           |                         | (270  
|Net cash from operating activities              |                         | 1,126 
|                                                |                         |       
|Investing Activities                            |                         |       
|Activity in available-for-sale securities:      |                         |       
|Proceeds from sales                             |                         | -     
|Proceeds from maturities and calls              |                         | 460   
|Purchases                                       |                         | (232  
|Additions to premises and equipment             |                         | -     
|Net cash from (for) investing activities        |                         | 228   
|                                                |                         |       
|Financing Activities                            |                         |       
|Proceeds from other borrowings                  |                         | 530   
|Repayments of other borrowings                  |                         | (452  
|Cash dividends paid                             |                         | (1,186
|Repurchase of common stock                      |                         | (247  
|Net cash from financing activities              |                         | (1,355
|                                                |                         |       
|Net change in cash and cash equivalents         |                         | (1    
|Beginning cash and cash equivalents             |                         | 1     
|                                                |                         |       
|Ending cash and cash equivalents                | $                       | -     

Note P - Fair Value Information

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

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

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

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

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

| | FS-23 | 
| | ----- | 

---

Southern Michigan Bancorp, Inc.
Notes To Consolidated Financial Statements (continued)

Note P - Fair Value Information (Continued)

Mortgage servicing rights:The carrying amount reported in the balance sheet approximates fair value.

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

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

Federal funds purchased:The carrying amount reported in the balance sheet approximates fair value.

Other borrowings: The fair value of other borrowings is estimated using discounted cash flows analysis based on the Bank's current incremental borrowing rate for similar types of borrowing arrangements.

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

While these estimates of fair value are based on management's judgment of the most appropriate factors, there is no assurance that if the Company had disposed of such items at December 31, 2003 and 2002, the estimated fair values would have been achieved. Market values may differ depending on various circumstances not taken into consideration in this methodology. The estimated fair values at December 31, 2003 and 2002 should not necessarily be considered to apply at subsequent dates.

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

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

|                                        | 2003            |          | 2002       |  
|--------------------------------------- | --------------- | -------- | ---------- | -
|                                        | Carrying
Amount |          | Fair
Value |  
|Financial assets:                       |                 |          |            |  
|Cash and cash equivalents               | $               | 16,331   |            | $
|Securities available for sale           |                 | 54,192   |            |  
|Loans held for sale                     |                 | 557      |            |  
|Loans, net of allowance for loan losses |                 | 229,818  |            |  
|Accrued interest receivable             |                 | 1,910    |            |  
|Mortgage servicing rights               |                 | 57       |            |  
|                                        |                 |          |            |  
|Financial liabilities:                  |                 |          |            |  
|Deposits                                | $               | (254,701 | )          | $
|Federal funds purchased                 |                 | (7,000   | )          |  
|Other borrowings                        |                 | (27,621  | )          |  
|Accrued interest payable                |                 | (113     | )          |  

| | FS-24 | 
| | ----- | 

---

Southern Michigan Bancorp, Inc.
Notes To Consolidated Financial Statements (continued)

Note Q - Regulatory Matters

The Company and Bank are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and prompt corrective action regulations involve quantitative measures of assets, liabilities and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weightings and other factors, and the regulators can lower classifications in certain cases. Failure to meet various capital requirements can initiate regulatory action that could have a direct material effect on the consolidated financial statements.

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

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

|                                         | Actual |        | Minimum Required
For Capital
Adequacy Purposes |      | Minimum Required
To Be
Well Capitalized
Under Prompt Corrective
Action Regulations
|---------------------------------------- | ------ | ------ | ---------------------------------------------- | ---- | ----------------------------------------------------------------------------------
|                                         | Amount |        | Ratio                                          |      | Amount                                                                            
|2003                                     |        |        |                                                |      |                                                                                   
|Total capital (to risk weighted assets)  |        |        |                                                |      |                                                                                   
|Consolidated                             | $      | 29,909 |                                                | 12.5 | %                                                                                 
|Bank                                     |        | 29,070 |                                                | 12.2 |                                                                                   
|Tier 1 capital (to risk weighted assets) |        |        |                                                |      |                                                                                   
|Consolidated                             |        | 26,907 |                                                | 11.2 |                                                                                   
|Bank                                     |        | 26,086 |                                                | 10.9 |                                                                                   
|Tier 1 capital (to average assets)       |        |        |                                                |      |                                                                                   
|Consolidated                             |        | 26,907 |                                                | 8.4  |                                                                                   
|Bank                                     |        | 26,086 |                                                | 8.2  |                                                                                   

|                                         | Actual |        | Minimum Required
For Capital
Adequacy Purposes |      | Minimum Required
To Be
Well Capitalized
Under Prompt Corrective
Action Regulations
|---------------------------------------- | ------ | ------ | ---------------------------------------------- | ---- | ----------------------------------------------------------------------------------
|                                         | Amount |        | Ratio                                          |      | Amount                                                                            
|2002                                     |        |        |                                                |      |                                                                                   
|Total capital (to risk weighted assets)  |        |        |                                                |      |                                                                                   
|Consolidated                             | $      | 27,952 |                                                | 11.5 | %                                                                                 
|Bank                                     |        | 27,067 |                                                | 11.2 |                                                                                   
|Tier 1 capital (to risk weighted assets) |        |        |                                                |      |                                                                                   
|Consolidated                             |        | 24,912 |                                                | 10.3 |                                                                                   
|Bank                                     |        | 24,042 |                                                | 10.0 |                                                                                   
|Tier 1 capital (to average assets)       |        |        |                                                |      |                                                                                   
|Consolidated                             |        | 24,912 |                                                | 7.8  |                                                                                   
|Bank                                     |        | 24,042 |                                                | 7.5  |                                                                                   

Both the Company and the Bank, at year-end 2003 and 2002, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the institution's category.

| | FS-25 | 
| | ----- | 

---

Southern Michigan Bancorp, Inc.
Notes To Consolidated Financial Statements (continued)

Note R - Quarterly Financial Data (Unaudited)

|     |                | Interest |       | Net Interest | Net | Earnings (Loss) Per Share
|---- | -------------- | -------- | ----- | ------------ | --- | -------------------------
|2003 |                | Income   |       | Income       |     | Income (Loss)            
|     | First Quarter  | $        | 4,277 |              | $   | 2,834                    
|     | Second Quarter |          | 4,431 |              |     | 3,098                    
|     | Third Quarter  |          | 4,159 |              |     | 2,904                    
|     | Fourth Quarter |          | 4,214 |              |     | 3,029                    
|     |                |          |       |              |     |                          
|2002 |                |          |       |              |     |                          
|     | First Quarter  | $        | 4,734 |              | $   | 3,081                    
|     | Second Quarter |          | 4,767 |              |     | 3,176                    
|     | Third Quarter  |          | 4,599 |              |     | 3,049                    
|     | Fourth Quarter |          | 4,654 |              |     | 3,001                    

The net income for the second quarter of 2002 was negatively affected by provisions for loan losses in excess of the prior year by $150,000 and a $283,000 loss on viatical settlement contracts, as a result of new information learned about the ability of the company servicing the policies to have sufficient funds to pay continuing premiums necessary to keep the policies in force.

The net income for the third quarter of 2002 was negatively affected by provisions for loan losses in excess of the prior year by $1,175,000.

The net income for the fourth quarter of 2002 was negatively affected by provisions for loan losses in excess of the prior years by $196,000 and by adjustments to certain accruals.

| | FS-26 | 
| | ----- | 

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EXHIBIT INDEX

|Exhibit No. |  | Description of Exhibit                                                                                                                                                                                                                                                                                                                                                                                                                              
|----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|2           |  | Not applicable.                                                                                                                                                                                                                                                                                                                                                                                                                                     
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|3.1         |  | Articles of Incorporation incorporated by reference to Exhibit 3 to the Company's Annual Report on Form 10-K for the year ended December 31, 1991 and Exhibit 3 to Form S-3D filed April 30, 1998, File No. 2-78178.                                                                                                                                                                                                                                
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|3.2         |  | Amended and Restated By-Laws are incorporated by reference to Exhibit 3 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997, File No. 2-78178.                                                                                                                                                                                                                                                                         
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|4           |  | Instruments Defining the Rights of Security Holders of the Company are the Articles of Incorporation and By-Laws (see Exhibits 3.1 and 3.2 above).                                                                                                                                                                                                                                                                                                  
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|9           |  | Not applicable.                                                                                                                                                                                                                                                                                                                                                                                                                                     
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|10.1        |  | 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 Company's Annual Report on Form 10-K for the year ended December 31, 1994, File No. 2-78178.
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|10.2        |  | Southern Michigan Bancorp, Inc. 2000 Stock Option Plan is incorporated by reference to Exhibit 10(b) to the Company's Annual Report on Form 10-K for the year ended December 31, 1999, File No. 2-78178.                                                                                                                                                                                                                                            
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|10.3        |  | Employment Agreement dated January 1, 2002 by and between the Bank and the Company and James T. Grohalski is incorporated by reference to Exhibit 10(C) to the Company's Annual Report on Form 10-K for the year ended December 31, 2001, File No. 2-78178.                                                                                                                                                                                         
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|10.4        |  | Employment Agreement dated June 7, 2002 by and between the Bank and the Company and John H. Castle is incorporated by reference to Exhibit 10.4 to the Company's Annual Report on Form 10-K for the year ended December 31, 2002, File No. 2-78178.                                                                                                                                                                                                 
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|10.5        |  | Standard Form of Executive's Deferred Compensation.                                                                                                                                                                                                                                                                                                                                                                                                 
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|10.6        |  | Standard Form of Director's Deferred Fee Agreement.                                                                                                                                                                                                                                                                                                                                                                                                 
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|14          |  | Code of Ethics.                                                                                                                                                                                                                                                                                                                                                                                                                                     
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|21          |  | Subsidiaries of the Company.                                                                                                                                                                                                                                                                                                                                                                                                                        
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|23          |  | Consent of Independent Auditors.                                                                                                                                                                                                                                                                                                                                                                                                                    
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|24          |  | Power of Attorney.                                                                                                                                                                                                                                                                                                                                                                                                                                  
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|31.1        |  | Certification of the Company's Chief Executive Officer, John H. Castle.                                                                                                                                                                                                                                                                                                                                                                             
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|31.2        |  | Certification of the Company's Chief Financial Officer, Danice Chartrand.                                                                                                                                                                                                                                                                                                                                                                           

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|Exhibit No. |  | Description of Exhibit                                                                                                                                                                                                                                                                                              
|----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|            |  |                                                                                                                                                                                                                                                                                                                     
|32          |  | Section 1350 Certificate furnished pursuant to this Item is not deemed "filed" for purposes of section 18 of the Exchange Act, or otherwise subject to the liability of that section. This certification is not deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act.

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