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

FORM 10-Q

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(Mark One)

| | [X]  |  | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2009               
| | ---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------
| |      |  |                                                                                                                                                     
| | [  ] |  | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from ____________ to ____________

Commission File Number:  000-49772

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

|Michigan
(State or Other Jurisdiction
of Incorporation or Organization)           |  | 38-2407501
(I.R.S. Employer
Identification No.)
|--------------------------------------------------------------------------------- |  | -----------------------------------------------
|                                                                                  |  |                                                
|51 West Pearl Street
Coldwater, Michigan
(Address of Principal Executive Offices) |  | 49036
(Zip Code)                               

(517) 279-5500
(Registrant's Telephone Number, Including Area Code)

Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  X    No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ___ No ___

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

Large accelerated filer      Accelerated filer      Non-accelerated filer  Smaller reporting company X

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

The number of shares outstanding of the Registrant's Common Stock, $2.50 par value, as of May 14, 2009, was 2,323,970 shares.

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Forward-Looking Statements

This report contains forward-looking statements that are based on management's beliefs, assumptions, current expectations, estimates and projections about the financial services industry, the economy, and Southern Michigan Bancorp, Inc. Forward-looking statements are identifiable by words or phrases such as "outlook", or "strategy"; that an event or trend "may", "should", "will", "is likely", or is "probable" to occur or "continue" or "is scheduled" or "on track" or that Southern Michigan Bancorp, Inc. or its management "anticipates", "believes", "estimates", "plans", "forecasts", "intends", "predicts", "projects", or "expects" a particular result, or is "confident," "optimistic" or has an "opinion" that an event will occur, or other words or phrases such as "ongoing", "future", or "tend" and variations of such words and similar expressions. Management's determination of the provision and allowance for loan losses and other accounting estimates, such as the carrying value of goodwill and mortgage servicing rights, involve judgments that are inherently forward-looking. There can be no assurance that future loan losses will be limited to the amounts estimated. Our ability to successfully implement new programs and initiatives, increase efficiencies and improve profitability is not entirely within our control and is not assured. The future effect of changes in the real estate markets and the Michigan and national economy on the banking industry, generally, and Southern Michigan Bancorp, Inc., specifically, are also inherently uncertain. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions ("risk factors") that are difficult to predict with regard to timing, extent, likelihood and degree of occurrence. Therefore, actual results and outcomes may materially differ from what may be expressed or forecasted in such forward-looking statements. Southern Michigan Bancorp, Inc. undertakes no obligation to update, amend or clarify forward-looking statements, whether as a result of new information, future events or otherwise.

Risk factors include, but are not limited to, the risk factors described in "Item 1A - Risk Factors" of Southern Michigan Bancorp, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2008; the timing and level of asset growth; changes in banking laws and regulations; changes in tax laws; changes in prices, levies and assessments; the impact of technological advances and issues; governmental and regulatory policy changes; opportunities for acquisitions and the effective completion of acquisitions and integration of acquired entities; the possibility that anticipated cost savings and revenue enhancements from acquisitions, restructurings, reorganizations and bank consolidations may not be realized at amounts projected, at all or within expected time frames; the local and global effects of the ongoing war on terrorism and other military actions; and current uncertainties and fluctuations in the financial and credit markets and stocks of financial services providers due to concerns about credit availability and concerns about the Michigan economy in particular. These and other factors are representative of the risk factors that may emerge and could cause a difference between an ultimate actual outcome and a preceding forward-looking statement.

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Part I.  Financial Information

|Item 1. | Financial Statements
|------- | --------------------

SOUTHERN MICHIGAN BANCORP, INC.
UNAUDITED INTERIM FINANCIAL STATEMENTS

CONSOLIDATED BALANCE SHEETS (UNAUDITED)(In thousands, except share data)

|                                                                                                                                         | March 31,
2009 |         | December 31,
2008 |  
|---------------------------------------------------------------------------------------------------------------------------------------- | -------------- | ------- | ----------------- | -
|ASSETS                                                                                                                                   |                |         |                   |  
|Cash and cash equivalents                                                                                                                | $              | 12,898  |                   | $
|Federal funds sold                                                                                                                       |                | 2,020   |                   |  
|Securities available for sale                                                                                                            |                | 65,535  |                   |  
|Loans held for sale, net of valuation of -0- in 2009 and 2008                                                                            |                | 1,412   |                   |  
|Loans, net of allowance for loan losses of $6,890 - 2009 ($7,104 - 2008)                                                                 |                | 325,344 |                   |  
|Premises and equipment, net                                                                                                              |                | 13,026  |                   |  
|Accrued interest receivable                                                                                                              |                | 2,347   |                   |  
|Net cash surrender value of life insurance                                                                                               |                | 9,607   |                   |  
|Goodwill                                                                                                                                 |                | 13,422  |                   |  
|Other intangible assets                                                                                                                  |                | 2,627   |                   |  
|Other assets                                                                                                                             |                | 9,174   |                   |  
|TOTAL ASSETS                                                                                                                             | $              | 457,412 |                   | $
|                                                                                                                                         |                |         |                   |  
|LIABILITIES                                                                                                                              |                |         |                   |  
|Deposits:                                                                                                                                |                |         |                   |  
|Non-interest bearing                                                                                                                     | $              | 53,933  |                   | $
|Interest bearing                                                                                                                         |                | 323,387 |                   |  
|Total deposits                                                                                                                           |                | 377,320 |                   |  
|Securities sold under agreements to repurchase and overnight borrowings                                                                  |                | 14,305  |                   |  
|Accrued expenses and other liabilities                                                                                                   |                | 4,435   |                   |  
|Other borrowings                                                                                                                         |                | 11,314  |                   |  
|Subordinated debentures                                                                                                                  |                | 5,155   |                   |  
|Total liabilities                                                                                                                        |                | 412,529 |                   |  
|                                                                                                                                         |                |         |                   |  
|Common stock subject to repurchase obligation in
  Employee Stock Ownership Plan, 101,415 shares outstanding in 2009
  (100,392 in 2008) |                | 700     |                   |  
|                                                                                                                                         |                |         |                   |  
|SHAREHOLDERS' EQUITY                                                                                                                     |                |         |                   |  
|Preferred stock, 100,000 shares authorized; none issued or outstanding                                                                   |                | -       |                   |  
|Common stock, $2.50 par value:                                                                                                           |                |         |                   |  
|Authorized - 4,000,000 shares                                                                                                            |                |         |                   |  
|Issued - 2,323,970 shares in 2009 (2,311,740 shares in 2008)                                                                             |                |         |                   |  
|Outstanding (other than ESOP shares) - 2,222,555 shares in 2009
          (2,211,348 shares in 2008)                                     |                | 5,556   |                   |  
|Additional paid-in capital                                                                                                               |                | 18,700  |                   |  
|Retained earnings                                                                                                                        |                | 20,204  |                   |  
|Accumulated other comprehensive income, net                                                                                              |                | 481     |                   |  
|Unearned Employee Stock Ownership Plan shares                                                                                            |                | (563    | )                 |  
|Unearned restricted stock compensation                                                                                                   |                | (195    | )                 |  
|Total shareholders' equity                                                                                                               |                | 44,183  |                   |  
|TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                                                                                               | $              | 457,412 |                   | $

See accompanying notes to interim consolidated financial statements.

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

|                                                    | Three Months Ended March 31, |      
|--------------------------------------------------- | ---------------------------- | -----
|                                                    | 2009                         |      
|Interest income:                                    |                              |      
|Loans, including fees                               | $                            | 4,944
|Federal funds sold                                  |                              | 9    
|Securities:                                         |                              |      
|Taxable                                             |                              | 389  
|Tax-exempt                                          |                              | 230  
|                                                    |                              | 619  
|Total interest income                               |                              | 5,572
|                                                    |                              |      
|Interest expense:                                   |                              |      
|Deposits                                            |                              | 1,288
|Other                                               |                              | 195  
|Total interest expense                              |                              | 1,483
|Net Interest Income                                 |                              | 4,089
|Provision for loan losses                           |                              | 1,450
|Net Interest Income after Provision for Loan Losses |                              | 2,639
|                                                    |                              |      
|Non-interest income:                                |                              |      
|Service charges on deposit accounts                 |                              | 568  
|Trust fees                                          |                              | 251  
|Net gains on security calls and sales               |                              | -    
|Net gains on loan sales                             |                              | 193  
|Earnings on life insurance assets                   |                              | 84   
|Gain on life insurance proceeds                     |                              | -    
|Income and fees from automated teller machines      |                              | 157  
|Other                                               |                              | 235  
|Total non-interest income                           |                              | 1,488
|Non-interest expense:                               |                              |      
|Salaries and employee benefits                      |                              | 2,510
|Occupancy, net                                      |                              | 397  
|Equipment                                           |                              | 224  
|Printing, postage and supplies                      |                              | 153  
|Telecommunication expenses                          |                              | 91   
|Professional and outside services                   |                              | 385  
|Software maintenance                                |                              | 72   
|FDIC assessments                                    |                              | 112  
|Amortization of other intangibles                   |                              | 90   
|Other                                               |                              | 713  
|Total non-interest expense                          |                              | 4,747
|INCOME (LOSS) BEFORE INCOME TAXES                   |                              | (620 
|Federal income tax provision (credit)               |                              | (349 
|NET INCOME (LOSS)                                   | $                            | (271 
|Basic Earnings (Loss) Per Common Share              | $                            | (0.12
|Diluted Earnings (Loss) Per Common Share            | $                            | (0.12
|Dividends Declared Per Common Share                 | $                            | 0.05 

See accompanying notes to interim consolidated financial statements.

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SOUTHERN MICHIGAN BANCORP, INC.CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)(In thousands, except number of shares and per share data)
For the Three Months Ending March 31, 2008 and 2009

|                                                                                    | Common
Stock |       | Additional
Paid-In
Capital |   | Retained
Earnings |  | Accumulated
Other
Comprehensive
Income, Net |        | Unearned
ESOP
Shares |   | Unearned
Compen-
sation |  | Total |     
|----------------------------------------------------------------------------------- | ------------ | ----- | -------------------------- | - | ----------------- |  | ------------------------------------------- | ------ | -------------------- | - | ----------------------- |  | ----- | ----
|Balance at January 1, 2008                                                          | $            | 5,539 |                            | $ | 17,087            |  | $                                           | 21,629 |                      | $ | 122                     |  | $     | (103
|                                                                                    |              |       |                            |   |                   |  |                                             |        |                      |   |                         |  |       |     
|Comprehensive income:                                                               |              |       |                            |   |                   |  |                                             |        |                      |   |                         |  |       |     
|Net income                                                                          |              |       |                            |   |                   |  |                                             | 1,201  |                      |   |                         |  |       |     
|Net change in other comprehensive                                                   |              |       |                            |   |                   |  |                                             |        |                      |   |                         |  |       |     
|income items                                                                        |              |       |                            |   |                   |  |                                             |        |                      |   | 652                     |  |       |     
|Total comprehensive income                                                          |              |       |                            |   |                   |  |                                             |        |                      |   |                         |  |       |     
|Cash dividends declared - $.20 per share                                            |              |       |                            |   |                   |  |                                             | (461   | )                    |   |                         |  |       |     
|Change in common stock subject                                                      |              |       |                            |   |                   |  |                                             |        |                      |   |                         |  |       |     
|to repurchase                                                                       |              | (19   | )                          |   | 203               |  |                                             |        |                      |   |                         |  |       |     
|Purchase of shares by ESOP (28,500
  shares)                                        |              |       |                            |   |                   |  |                                             |        |                      |   |                         |  |       | (609
|Vesting of restricted stock                                                         |              |       |                            |   |                   |  |                                             |        |                      |   |                         |  |       |     
|Stock option expense                                                                |              |       |                            |   | 26                |  |                                             |        |                      |   |                         |  |       |     
|Balance at March 31, 2008                                                           | $            | 5,520 |                            | $ | 17,316            |  | $                                           | 22,369 |                      | $ | 774                     |  | $     | (712
|                                                                                    |              |       |                            |   |                   |  |                                             |        |                      |   |                         |  |       |     
|                                                                                    |              |       |                            |   |                   |  |                                             |        |                      |   |                         |  |       |     
|Balance at January 1, 2009                                                          | $            | 5,528 |                            | $ | 18,588            |  | $                                           | 20,593 |                      | $ | 413                     |  | $     | (591
|                                                                                    |              |       |                            |   |                   |  |                                             |        |                      |   |                         |  |       |     
|Comprehensive income:                                                               |              |       |                            |   |                   |  |                                             |        |                      |   |                         |  |       |     
|Net loss                                                                            |              |       |                            |   |                   |  |                                             | (271   | )                    |   |                         |  |       |     
|Net change in other comprehensive                                                   |              |       |                            |   |                   |  |                                             |        |                      |   |                         |  |       |     
|income items                                                                        |              |       |                            |   |                   |  |                                             |        |                      |   | 68                      |  |       |     
|Total comprehensive loss                                                            |              |       |                            |   |                   |  |                                             |        |                      |   |                         |  |       |     
|Cash dividends declared - $.05 per share                                            |              |       |                            |   |                   |  |                                             | (118   | )                    |   |                         |  |       |     
|Change in common stock subject                                                      |              |       |                            |   |                   |  |                                             |        |                      |   |                         |  |       |     
|to repurchase                                                                       |              | (2    | )                          |   | 30                |  |                                             |        |                      |   |                         |  |       |     
|Issuance of restricted stock (12,230
  shares of common stock at $7.40 per
  share) |              | 30    |                            |   | 60                |  |                                             |        |                      |   |                         |  |       |     
|Reduction of ESOP obligation                                                        |              |       |                            |   |                   |  |                                             |        |                      |   |                         |  |       | 28  
|Vesting of restricted stock                                                         |              |       |                            |   |                   |  |                                             |        |                      |   |                         |  |       |     
|Stock option expense                                                                |              |       |                            |   | 22                |  |                                             |        |                      |   |                         |  |       |     
|Balance at March 31, 2009                                                           | $            | 5,556 |                            | $ | 18,700            |  | $                                           | 20,204 |                      | $ | 481                     |  | $     | (563

See accompanying notes to interim consolidated financial statements.

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SOUTHERN MICHIGAN BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)(Dollars in thousands)

|                                                                                                | Three Months Ended March 31, |        
|----------------------------------------------------------------------------------------------- | ---------------------------- | -------
|                                                                                                | 2009                         |        
|Operating Activities                                                                            |                              |        
|Net income (loss)                                                                               | $                            | (271   
|Adjustments to reconcile net income (loss) to net cash                                          |                              |        
|from operating activities:                                                                      |                              |        
|Provision for loan losses                                                                       |                              | 1,450  
|Depreciation                                                                                    |                              | 268    
|Net amortization (accretion) of investment securities                                           |                              | 31     
|Loans originated for sale                                                                       |                              | (13,541
|Proceeds on loans sold                                                                          |                              | 12,443 
|Net gains on loan sales                                                                         |                              | (193   
|Gain on life insurance proceeds                                                                 |                              | -      
|Stock option and restricted stock grant compensation expense                                    |                              | 32     
|Net securities gains                                                                            |                              | -      
|Amortization of other intangible assets                                                         |                              | 90     
|Net loss on disposal of fixed assets                                                            |                              | 2      
|Net change in obligation under ESOP                                                             |                              | 28     
|Net change in:                                                                                  |                              |        
|Accrued interest receivable                                                                     |                              | 267    
|Cash surrender value                                                                            |                              | (84    
|Other assets                                                                                    |                              | 290    
|Accrued expenses and other liabilities                                                          |                              | 165    
|Net cash from operating activities                                                              |                              | 977    
|                                                                                                |                              |        
|Investing Activities                                                                            |                              |        
|Activity in available for sale securities:                                                      |                              |        
|Proceeds from maturities and calls                                                              |                              | 13,024 
|Purchases                                                                                       |                              | (12,769
|Net change in federal funds sold                                                                |                              | 1,300  
|Loan originations and payments, net                                                             |                              | (7     
|Additions to premises and equipment                                                             |                              | (10    
|Net cash from investing activities                                                              |                              | 1,538  
|                                                                                                |                              |        
|Financing Activities                                                                            |                              |        
|Net change in deposits                                                                          |                              | (16,723
|Net change in securities sold under agreements to repurchase and
          overnight borrowings |                              | 415    
|Proceeds from other borrowings                                                                  |                              | -      
|Repayments of other borrowings                                                                  |                              | (1,180 
|Purchase of ESOP shares                                                                         |                              | -      
|Cash dividends paid                                                                             |                              | (118   
|Net cash from financing activities                                                              |                              | (17,606
|Net change in cash and cash equivalents                                                         |                              | (15,091
|Beginning cash and cash equivalents                                                             |                              | 27,989 
|Ending cash and cash equivalents                                                                | $                            | 12,898 
|                                                                                                |                              |        
|Cash paid for interest                                                                          | $                            | 1,668  
|Cash paid for income taxes                                                                      |                              | -      
|Transfers from loans to other real estate owned                                                 |                              | 1,419  

See accompanying notes to interim consolidated financial statements.

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

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation: The consolidated financial statements include the accounts of Southern Michigan Bancorp, Inc. and its wholly-owned subsidiaries, Southern Michigan Bank & Trust (SMB&T) and FNB Financial (FNB) after elimination of significant inter-company balances and transactions. SMB&T owns SMB Mortgage Company, which transacts all residential real estate loans and it is consolidated into SMB&T's financial statements. FNB owns FNB Financial Services, which conducts a brokerage business and is consolidated into FNB's financial statements. During 2004, the Company formed a special purpose trust, Southern Michigan Bancorp Capital Trust I, for the sole purpose of issuing trust preferred securities. Under generally accepted accounting principles, the trust is not consolidated into the financial statements of the Company.

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions for Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments considered necessary in order to make the financial statements not misleading have been included. Operating results for the three months ended March 31, 2009 are not necessarily indicative of the results that may be expected for the year ending December 31, 2009.

The accompanying consolidated financial statements should be read in conjunction with the consolidated financial statements and footnotes of the Company for December 31, 2008 included in the Company's Annual Report on Form 10-K for the year ended December 31, 2008, filed with the Securities and Exchange Commission on March 30, 2009.

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

NOTE B - NEW ACCOUNTING PRONOUNCEMENTS

Adoption of New Accounting Standards:
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141 (Revised 2007), Business Combinations ("SFAS 141 (R)"). SFAS 141(R) recognizes and measures the goodwill acquired in the business combination and defines a bargain purchase, and requires the acquirer to recognize that excess as a gain attributable to the acquirer. In contrast, Statement 141 required the "negative goodwill" amount to be allocated as a pro rata reduction of the amounts assigned to assets acquired. SFAS 141(R) applies prospectively to business combinations for which the acquisition date is on or after December 15, 2008. The Company had no transactions in 2009 applicable to SFAS No. 141(R).

In December 2007, the FASB issued SFAS 160, Noncontrolling Interests in Consolidated Financial Statements - an amendment of ARB No. 51 ("SFAS 160"), to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statement, but separate from the parent's equity.  SFAS 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Since the Company owns 100% of all subsidiaries, SFAS 160 has no impact on the Company's consolidated financial condition or results of operations.

Statement of Financial Accounting Standards No. 161, Disclosures about Derivative Instruments and Hedging Activities -an amendment of FASB Statement No. 133 ("SFAS 161") requires qualitative disclosures about objectives and strategies for using derivative instruments, quantitative disclosures about fair value amounts of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. Adoption of SFAS No. 141R did not have a material impact on the consolidated financial statements.

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During May 2008, the FASB issued SFAS 162, The Hierarchy of Generally Accepted Accounting Principles("SFAS 162"). This Statement identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (GAAP) in the United States. Adoption of SFAS 162 was not a change in the Company's current accounting practices; therefore, it did not have a material impact on the Company's consolidated financial condition or results of operations.

FASB Staff Position EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating Securities("FSP EITF 03-6-1"). FSP EITF 03-6-1 requires companies to treat unvested share-based payment awards that have non-forfeitable rights to dividend or dividend equivalents as a separate class of securities in calculating earnings per share. FSP EITF 03-6-1 is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2008, and requires a company to retrospectively adjust its earnings per share data. The Company adopted FSP EITF 03-6-1 effective January 1, 2009, and adoption did not have a material effect on consolidated results of operations or earnings per share.

Effect of Newly Issued But Not Yet Effective Accounting Standards:
In April 2009, the FASB issued Staff Positions (FSP) No. 115-2 and No. 124-2, Recognition and Presentation of Other-Than-Temporary Impairments,which amends existing guidance for determining whether an impairment is other-than-temporary for debt securities. The FSP requires an entity to assess whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost and fair value is recognized in earnings. For securities that do not meet the aforementioned criteria, the amount of impairment recognized in earnings is limited to the amount related to credit losses, while impairment related to other factors is recognized in other comprehensive income. Additionally, the FSP expands and increases the frequency of existing disclosures about other-than-temporary impairments for debt and equity securities. This FSP is effective for interim and annual reporting periods ending after June 15, 2009. The Company plans to adopt this FSP in the second quarter of 2009. The Company does not expect the adoption to have a material effect on its results of operations or financial position.

In April 2009, the FASB issued Staff Position (FSP) No. 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly. This FSP emphasizes that even if there has been a significant decrease in the volume and level of activity, the objective of a fair value measurement remains the same. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants. The FSP provides a number of factors to consider when evaluating whether there has been a significant decrease in the volume and level of activity for an asset or liability in relation to normal market activity. In addition, when transactions or quoted prices are not considered orderly, adjustments to those prices based on the weight of available information may be needed to determine the appropriate fair value. The FSP also requires increased disclosures. This FSP is effective for interim and annual reporting periods ending after June 15, 2009, and shall be applied prospectively. Early adoption is permitted for periods ending after March 15, 2009. The Company plans to adopt this FSP in the second quarter of 2009. The Company does not expect the adoption to have a material effect on its results of operations or financial position.

In April 2009, the FASB issued Staff Position (FSP) No. 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments. This FSP amends FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments, to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies that were previously only required in annual financial statements. This FSP is effective for interim reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009, subject to specified conditions. The Company plans to adopt this FSP in the second quarter of 2009.

NOTE C - EARNINGS PER SHARE

Basic earnings per common share is 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 includes the dilutive effect of additional potential common shares issuable under

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stock options. Earnings and dividends per common share are restated for all stock splits and dividends through the date of issue of the financial statements.

A reconciliation of the numerators and denominators of basic and diluted earnings per share for the three month periods ended March 31, 2009 and 2008 is as follows (dollars in thousands, except per share data):

|                                                                                 | Three Months
Ended
March 31,
2009 |           | Three Months
Ended
March 31,
2008 |  
|-------------------------------------------------------------------------------- | --------------------------------- | --------- | --------------------------------- | -
|                                                                                 |                                   |           |                                   |  
|Basic earnings per share:                                                        |                                   |           |                                   |  
|Net income (loss)                                                                | $                                 | (271      | )                                 | $
|                                                                                 |                                   |           |                                   |  
|Weighted average common
    shares outstanding                                   |                                   | 2,320,912 |                                   |  
|                                                                                 |                                   |           |                                   |  
|Less unallocated ESOP shares                                                     |                                   | 31,133    |                                   |  
|                                                                                 |                                   |           |                                   |  
|Weighted average common shares
    outstanding for basic earnings per
    share  |                                   | 2,289,779 |                                   |  
|                                                                                 |                                   |           |                                   |  
|Basic earnings (loss) per share                                                  | $                                 | (0.12     | )                                 | $
|                                                                                 |                                   |           |                                   |  
|Diluted earnings per share:                                                      |                                   |           |                                   |  
|Net income (loss)                                                                | $                                 | (271      | )                                 | $
|                                                                                 |                                   |           |                                   |  
|Weighted average common shares
    outstanding for basic earnings per
    share  |                                   | 2,289,779 |                                   |  
|                                                                                 |                                   |           |                                   |  
|Add: Dilutive effect of assumed
    exercise of stock options                    |                                   | -         |                                   |  
|                                                                                 |                                   |           |                                   |  
|Weighted average common and
    dilutive potential common
    shares outstanding |                                   | 2,289,779 |                                   |  
|                                                                                 |                                   |           |                                   |  
|Diluted earnings (loss) per share                                                | $                                 | (0.12     | )                                 | $

Shares outstanding in 2008 included the issuance of 535,936 shares in connection with the purchase of FNB.

Stock option awards outstanding that were anti-dilutive, and therefore not included in the computation of earnings per share, were as follows: 229,778 and 186,338 for the three months ended March 31, 2009 and 2008, respectively.

NOTE D - STOCK OPTIONS

Shareholders of the Company approved a stock option plan in April 2000 and a stock incentive plan in June 2005. The plans were authorized to issue up to 115,500 and 157,500 shares, respectively. In May 2008, shareholders of the Company ratified amendments to the Stock Incentive Plan of 2005, which among other things increased the authorized shares from 157,500 to 300,000. As of March 31, 2009, there were 44,841 shares available for future issuance under the 2000 plan and 113,467 shares available for future issuance under the 2005 plan.

A summary of stock option activity is as follows for the three months ended March 31, 2009:

---



|                                      | Shares  |  | Weighted Average
Price | 
|------------------------------------- | ------- |  | ---------------------- | 
|                                      |         |  |                        | 
|Outstanding at beginning of year      | 215,118 |  | $ 22.72                | 
|Granted                               | 14,660  |  | 7.40                   | 
|Exercised                             | -       |  | -                      | 
|Forfeited                             | -       |  | -                      | 
|Outstanding at March 31, 2009         | 229,778 |  | 21.74                  | 
|                                      |         |  |                        | 
|Options exercisable at March 31, 2009 | 121,808 |  | 22.70                  | 

The Company has recorded $22,000 in compensation expense related to the stock options for the three month period ended March 31, 2009.

In January 2007, 2,740 shares of restricted stock were issued to employees and directors. In June 2008, 5,535 shares of restricted stock were issued to employees and directors. In January 2009, 12,230 shares of restricted stock were issued to employees and directors. All shares of restricted stock issued and outstanding vest 20% per year over five years. Compensation expense related to the issuance of shares of restricted stock of $10,000 was recorded during the three months ended March 31, 2009.

Note E - Fair Value Measurements

As of January 1, 2008, the Company adopted Financial Accounting Standards No. 157, Fair Value Measurements(FAS 157). In accordance with Financial Accounting Standards Board Staff Position (FSP) No. 157-2, Effective Date of FASB Statement No. 157, the Company adopted January 1, 2009 the application of SFAS 157 for most nonfinancial assets and nonfinancial liabilities not recognized or disclosed at least annually at fair value. Items affected by this deferral included repossessions and other real estate, all for which any necessary impairment analyses are performed using fair value measures.

SFAS 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability shall not be adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact, and (iv) willing to transact.

SFAS 157 requires the use of valuation techniques that are consistent with the market approach, the income approach, and/or the cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert future amounts, such as cash flows or earnings, to a single present amount on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement cost). Valuation techniques should be consistently applied. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity's own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. In that regard, SFAS 157 establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

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

---



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

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

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

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

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

Impaired Loans. The Company does not record impaired loans at fair value on a recurring basis. However, periodically, a loan is considered impaired and is reported at the fair value of the underlying collateral, less estimated costs to sell, if repayment is expected solely from the collateral. Impaired loans measured at fair value typically consist of loans on nonaccrual status and loans with a portion of the allowance for loan losses allocated specific to the loan. Some loans may be included in both categories whereas other loans may only be included in one category. Collateral values are estimated using level 2 inputs, including recent appraisals and Level 3 inputs based on customized discounting criteria.  Due to the significance of the level 3 inputs, impaired loans fair values have been classified as level 3.

Other Real Estate Owned (OREO). The Company values OREO at the fair value of the underlying collateral less expected selling costs. Collateral values are estimated primarily using appraisals and reflect a market value approach.

The following table summarizes financial and nonfinancial assets (there were no financial or nonfinancial liabilities) measured at fair value as of March 31, 2009, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value (in thousands):

|                              | Level 1
Inputs |        | Level 2
Inputs |   | Level 3
Inputs |  | Total
Fair Value
|----------------------------- | -------------- | ------ | -------------- | - | -------------- |  | ----------------
|                              |                |        |                |   |                |  |                 
|Recurring:                    |                |        |                |   |                |  |                 
|Securities available for sale | $              | 58,765 |                | $ | 3,781          |  | $               
|                              |                |        |                |   |                |  |                 
|Nonrecurring:                 |                |        |                |   |                |  |                 
|Impaired loans                | $              | -      |                | $ | -              |  | $               
|                              |                |        |                |   |                |  |                 
|Other real estate owned       | $              | -      |                | $ | -              |  | $               

---



Impaired loans are reported net of a $2,536,000 allowance for loan losses.

The following table summarizes financial assets (there were no financial liabilities) measured at fair value as of December 31, 2008, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value (in thousands):

|                              | Level 1
Inputs |        | Level 2
Inputs |   | Level 3
Inputs |  | Total
Fair Value
|----------------------------- | -------------- | ------ | -------------- | - | -------------- |  | ----------------
|                              |                |        |                |   |                |  |                 
|Recurring:                    |                |        |                |   |                |  |                 
|Securities available for sale | $              | 58,701 |                | $ | 4,015          |  | $               
|                              |                |        |                |   |                |  |                 
|Nonrecurring:                 |                |        |                |   |                |  |                 
|Impaired loans                | $              | -      |                | $ | -              |  | $               

Impaired loans are reported net of a $2,327,000 allowance for loan losses.

The following is a reconciliation of the beginning and ending balances of securities available for sale which are measured at fair value on a recurring basis using significant unobservable (Level 3) inputs during the quarter ending March 31, 2009 (in thousands):

|Balance at January 1, 2009                                  | $    3,002 |  
|----------------------------------------------------------- | ---------- | -
|Net maturities and calls                                    | (12        | )
|Unrealized net gains included in other comprehensive income | (1         | )
|                                                            |            |  
|Balance at March 31, 2009                                   | $    2,989 |  

NOTE F - SUBSEQUENT EVENT

At the close of business on April 24, 2009, SMB&T and FNB united under a single charter and single name: Southern Michigan Bank & Trust.

|Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations
|------- | -------------------------------------------------------------------------------------

The following discussion provides information about the financial condition and results of operations of the Company and its subsidiary banks, Southern Michigan Bank & Trust (SMB&T) and FNB Financial (FNB) for the three month periods ending March 31, 2009 and 2008. At the close of business on April 24, 2009, SMB&T and FNB united under a single charter and single name: Southern Michigan Bank & Trust.

The continuing decline in economic conditions is having a direct negative impact on the Company. High unemployment, reduced business activity and falling home prices have adversely affected the credit quality of the Company's portfolio. The continued decline in collateral values and cash flows for the Company's commercial and retail borrowers has resulted in higher delinquency rates, increased foreclosure activity and higher charge offs.

Results of Operations

For the first three months of 2009, Southern recorded a net loss of $271,000 and basic and diluted loss per share of $0.12, compared with net income of $1,201,000 and basic and diluted earnings per share of $0.52 for the first three months of 2008. A $1.1 million increase in the provision for loan losses as compared to the same period last year and a reduced net interest margin were the primary reasons for the decrease.

Return on average assets was -0.23% for the first three months of 2009 compared to 0.99% for the first three months of 2008. Return on average shareholders' equity was -2.40% for the first three months of 2009, compared to 10.64% for the same period in 2008.

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Net Interest Income

The Company derives the greatest portion of its income from net interest income. During 2008, the Federal Open Market Committee lowered short-term rates eight times for a total of 400 basis points. The Company has been able to lower its cost of funds by 98 basis points compared to March 31, 2008, but tax equivalent yields on average assets declined to 5.45% from 6.82% for the same periods. This resulted in a decline in the interest rate spread and net interest margin.

The following tables provide information regarding interest income and expense for the three-month periods ended March 31, 2009 and 2008, respectively. Table 1 shows the year-to-date daily average balances for interest earning assets and interest bearing liabilities, interest earned or paid, and the annualized effective rate, for the three-month periods ended March 31, 2009 and 2008. Table 2 shows the effect on interest income and expense of changes in volume and interest rates on a tax equivalent basis.

Table 1 - Average Balances and Tax Equivalent Interest Rates

(Dollars in Thousands):

|                                                                                 | 2009            |         | 2008     |  
|-------------------------------------------------------------------------------- | --------------- | ------- | -------- | -
|                                                                                 | Average
Balance |         | Interest |  
|ASSETS                                                                           |                 |         |          |  
|Interest earning assets:                                                         |                 |         |          |  
|Loans(1)(2)(3)                                                                   | $               | 335,240 |          | $
|Federal funds sold(6)                                                            |                 | 20,008  |          |  
|Taxable investment securities(4)                                                 |                 | 41,150  |          |  
|Tax-exempt investment
   securities(1)                                           |                 | 23,491  |          |  
|Total interest earning assets                                                    |                 | 419,889 |          |  
|                                                                                 |                 |         |          |  
|Non-interest earning assets:                                                     |                 |         |          |  
|Cash and due from banks                                                          |                 | 10,189  |          |  
|Other assets(5)                                                                  |                 | 49,051  |          |  
|Less allowance for loan losses                                                   |                 | (6,582  | )        |  
|                                                                                 |                 |         |          |  
|Total assets                                                                     | $               | 472,547 |          |  
|                                                                                 |                 |         |          |  
|                                                                                 |                 |         |          |  
|Interest bearing liabilities:                                                    |                 |         |          |  
|Demand deposits                                                                  | $               | 151,361 |          |  
|Savings deposits                                                                 |                 | 52,675  |          |  
|Time deposits                                                                    |                 | 132,345 |          |  
|Securities sold under agreements to
   repurchase and federal funds
   purchased |                 | 14,648  |          |  
|Other borrowings                                                                 |                 | 12,278  |          |  
|Subordinated debentures                                                          |                 | 5,155   |          |  
|Total interest bearing liabilities                                               |                 | 368,462 |          |  
|                                                                                 |                 |         |          |  
|Non-interest bearing liabilities:                                                |                 |         |          |  
|Demand deposits                                                                  |                 | 55,549  |          |  
|Other                                                                            |                 | 2,689   |          |  
|Common stock subject to
   repurchase obligation                                 |                 | 714     |          |  
|Shareholders' equity                                                             |                 | 45,133  |          |  
|Total liabilities and shareholders'
   equity                                    | $               | 472,547 |          |  
|Net interest income                                                              |                 |         |          | $
|Interest rate spread                                                             |                 |         |          |  
|Net yield on interest earning assets                                             |                 |         |          |  

---



|(1) | Includes tax equivalent adjustment of interest (assuming a 34% tax rate) for securities and loans of $118,000 and $29,000, respectively, for 2009 and $125,000 and $25,000, respectively, for 2008.           
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Average balance includes average non-accrual loan balances of $8,776,000 in 2009 and $6,113,000 in 2008.                                                                                                      
|(3) | Interest income includes loan fees of $103,000 in 2009 and $97,000 in 2008.                                                                                                                                   
|(4) | Average balance includes average unrealized gain of $1,151,000 in 2009 and $761,000 in 2008 on available for sale securities. The yield was calculated without regard to this average unrealized gain or loss.
|(5) | Includes $16,099,000 in 2009 and $16,478,009 in 2008 relating to goodwill and other intangible assets.                                                                                                        
|(6) | Includes $16,885,000 in 2009 of federal reserve deposit accounts.                                                                                                                                             

Table 2 - Changes in Tax-Equivalent Net Interest Income

(Dollars in Thousands)

|                                                                               | Three Months Ended March 31,
2009 Over 2008
Increase (Decrease) Due To |        | Three Months Ended March 31,
2008 Over 2007
Increase (Decrease) Due To |  
|------------------------------------------------------------------------------ | ---------------------------------------------------------------------- | ------ | ---------------------------------------------------------------------- | -
|Interest income on:                                                            | Rate                                                                   |        | Volume                                                                 |  
|                                                                               |                                                                        |        |                                                                        |  
|Loans                                                                          | $                                                                      | (1,232 | )                                                                      | $
|Taxable investment securities                                                  |                                                                        | (104   | )                                                                      |  
|Tax-exempt investment securities                                               |                                                                        | -      |                                                                        |  
|Federal funds sold                                                             |                                                                        | (149   | )                                                                      |  
|                                                                               |                                                                        |        |                                                                        |  
|Total interest earning assets                                                  | $                                                                      | (1,485 | )                                                                      | $
|                                                                               |                                                                        |        |                                                                        |  
|Interest expense on:                                                           |                                                                        |        |                                                                        |  
|                                                                               |                                                                        |        |                                                                        |  
|Demand deposits                                                                | $                                                                      | (493   | )                                                                      | $
|Savings deposits                                                               |                                                                        | (103   | )                                                                      |  
|Time deposits                                                                  |                                                                        | (215   | )                                                                      |  
|Securities sold under agreements to
  repurchase and federal funds
  purchased |                                                                        | (63    | )                                                                      |  
|Other borrowings                                                               |                                                                        | 4      |                                                                        |  
|Subordinated debentures                                                        |                                                                        | (41    | )                                                                      |  
|                                                                               |                                                                        |        |                                                                        |  
|Total interest bearing liabilities                                             | $                                                                      | (911   | )                                                                      | $
|                                                                               |                                                                        |        |                                                                        |  
|Net interest income                                                            | $                                                                      | (574   | )                                                                      | $

As shown in Tables 1 and 2, tax equivalent net interest income decreased $616,000, or 12.7% in the first three months of 2009 compared to the same period in 2008. Net interest income decreased $574,000 due to rate changes comparing the first quarter of 2009 with the first quarter of 2008 on a tax equivalent basis. This decrease is due to the rate decreases described above.

The presentation of net interest income on a tax equivalent basis is not in accordance with generally accepted accounting principles ("GAAP"), but is customary in the banking industry. This non-GAAP measure ensures comparability of net interest income arising from both taxable and tax-exempt loans and investment securities. The adjustments to determine net interest income on a tax equivalent basis were $147,000 and $150,000 for the three months ended March 31, 2009 and 2008, respectively. These adjustments were computed using a 34% federal income tax rate.

Provision for Loan Losses

The provision for loan losses is based on an analysis of the required additions to the allowance for loan losses. The provision is charged to income to bring the allowance for loan losses to a level deemed appropriate by

---

management. The allowance for loan losses is maintained at a level believed adequate by management to absorb probable incurred losses in the loan portfolio. Some factors considered by management in determining the level at which the allowance is maintained include specific credit reviews, historical loan loss experience, current economic conditions and trends, results of examinations by regulatory agencies and the volume, growth and composition of the loan portfolio. The provision is adjusted quarterly, if necessary, to reflect changes in the factors above as well as actual charge-off experience and any known losses.

The provision for loan losses was $1,450,000 for the first quarter of 2009, down from $2,350,000 for the fourth quarter of 2008, but up from $350,000 for the first quarter of 2008. Ongoing economic issues have resulted in stresses on borrowers causing the increase in the Company's provision for loan losses. While specific reserves have decreased at March 31, 2009 from December 31, 2008 levels, it was a result of a number of loans with specific reserves being charged off. Net charge-offs increased significantly in the first quarter of 2009 compared to the first quarter of 2008 and delinquency rates were higher during the first quarter of 2009 as well.

The allowance was 2.07% of total loans at March 31, 2009 compared to 2.12% at December 31, 2008.

Charge-offs and recoveries for respective loan categories for the three months ended March 31, 2009 and 2008 were as follows:

(Dollars in Thousands)

|                        | 2009        |       | 2008      
|----------------------- | ----------- | ----- | ----------
|                        | Charge-offs |       | Recoveries
|                        |             |       |           
|Commercial              | $           | 1,198 |           
|Residential real estate |             | 453   |           
|Consumer                |             | 78    |           
|Total                   | $           | 1,729 |           

Net charge-offs in the first three months of 2009 were $1,664,000, or 2.00% of loans on an annualized basis. Net charge-offs in the first three months of 2008 were $197,000, or 0.24% of loans on an annualized basis.

Non-interest income

Total non-interest income decreased from $1,950,000 at March 31, 2008 to $1,488,000 at March 31, 2009, a decrease of $462,000. During the first quarter of 2008, the Company recorded a $371,000 gain from life insurance proceeds which represents over 80% of the decrease for the first quarter of 2009. Service charges on deposit accounts also decreased during the first quarter of 2009 compared to 2008. Despite an increase in new accounts, trust fees decreased during the first three months of 2009 when compared to the same period last year as market values of assets decreased.

Partially offsetting the decreases was an increase in net gains on loan sales. Fixed rate long term residential mortgages are generally sold in the secondary market, while adjustable rate mortgages are retained in the loan portfolio. Income for loans sold in the secondary market increased $74,000 or 62.2% due to the rate driven mortgage loan refinancing activity of the first quarter of 2009.

Non-interest expense

Total non-interest expense decreased $148,000, or 3.0%, when comparing the three month periods ending March 31, 2009 and 2008.

Salaries and employee benefits decreased $177,000 or 6.6% during the first quarter of 2009 when compared to the same period in 2008 as the Company has been able to reduce staff through attrition. At March 31, 2009 the Company had 197 full time equivalent positions (FTE) compared to 204 at March 31, 2008.

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Equipment and software maintenance costs were both lower for the first quarter of 2009 compared to the first quarter of 2008. During the second quarter of 2008, the Company converted FNB Financial to the core processing system used by Southern Michigan Bank & Trust. Costs to maintain the separate core processing systems, including the software and hardware costs, were eliminated resulting in reduced expense.

Professional and outside services increased during the first quarter of 2009 compared to the same period in 2008 as the Company engaged an outside consulting firm to review non-interest income and expenses. Benefits from the engagement are expected to be recognized throughout the remainder of 2009.

The Company's FDIC insurance expense increased $86,000 or 330.8% in the first quarter of 2009 compared to the same period of 2008. Premium credits were fully exhausted during the fourth quarter of 2008 resulting in higher premium payments for 2009. The FDIC has also announced significant rate increases for the regular insurance assessment and a one-time special assessment of 20 basis points due September 30, 2009. While the FDIC has since announced it will likely cut, or possibly even eliminate, the special assessment, management nevertheless expects that the Company's FDIC insurance expense will be significantly higher in the future than the levels experienced in the first quarter of 2009.

Federal income taxes

Income taxes were a credit of $349,000 for the first quarter of 2009 compared to an expense of $206,000 for the first quarter of 2008. Because of the decline in 2009 income before taxes, a federal income tax credit resulted after consideration of tax-exempt interest income and other normal tax reconciling items. Tax-exempt income continues to have a major impact on the Company's tax provision or credit. The benefit offsetting lower coupon rates on municipal instruments is the nontaxable feature of the income earned on such investments. This resulted in a lower effective tax rate and reduced the federal income tax provision or credit.

Financial Condition

Assets

Total assets decreased $17.6 million at March 31, 2009 compared to December 31, 2008. Cash and cash equivalents decreased $15.1 million at March 31, 2009 compared to December 31, 2008, due to $14.2 million of non core deposits being eliminated from the balance sheet.

Loans held for sale increased $1.3 million at March 31, 2009 compared to December 31, 2008 as the Company saw an increase in the number of customers refinancing their home mortgages during the first quarter of 2009 due to lowered long term rates.

Gross loans decreased $3,076,000, or 0.9% as of March 31, 2009 compared to December 31, 2008. The decreases resulted from seasonal reductions from certain commercial borrowers and net charge offs.

Nonperforming assets

Nonperforming assets include non-accrual loans, accruing loans past due 90 days or more, and other real estate owned, which includes real estate acquired through foreclosure and deeds in lieu of foreclosure.

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

---



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

(Dollars in thousands)

|                                        | 3/31/09 |        | 12/31/08 |   | 3/31/08 |  
|--------------------------------------- | ------- | ------ | -------- | - | ------- | -
|Nonaccrual loans:                       |         |       
|Commercial, financial and agricultural  | $       | 5,484  |          | $ | 5,512   |  
|Real estate mortgage                    |         | 2,989  |          |   | 3,178   |  
|Installment                             |         | 67     |          |   | 25      |  
|                                        |         | 8,540  |          |   | 8,715   |  
|Loans contractually past due 90 days or |         |        |          |   |         |  
|more and still on accrual:              |         |        |          |   |         |  
|Commercial, financial and agricultural  |         | 352    |          |   | 353     |  
|Real estate mortgage                    |         | 32     |          |   | 75      |  
|Installment                             |         | 34     |          |   | 9       |  
|                                        |         | 418    |          |   | 437     |  
|                                        |         |        |          |   |         |  
|Total nonperforming loans               |         | 8,958  |          |   | 9,152   |  
|Other real estate owned                 |         | 2,208  |          |   | 1,119   |  
|                                        |         |        |          |   |         |  
|Total nonperforming assets              | $       | 11,166 |          | $ | 10,271  |  
|Nonperforming loans to total loans      |         | 2.70   | %        |   | 2.73    | %
|Nonperforming assets to total assets    |         | 2.44   | %        |   | 2.16    | %

Nonperforming loans are subject to continuous monitoring by management and estimated losses are specifically allocated for in the allowance for loan losses where appropriate. The increase in other real estate owned reflects the increased level of foreclosure activity.

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

Liabilities

Deposits decreased $16.7 million from December 31, 2008 to March 31, 2009. The decrease consisted of primarily one non core deposit relationship which was eliminated during the first quarter of 2009 totaling $14.2 million. The majority of deposits are derived from core client sources, relating to long term relationships with local personnel, business and public clients. A small amount of brokered deposits are maintained, but are not used to support growth.

Shareholders' equity

Total shareholders' equity decreased $233,000 from the year ended December 31, 2008. The decrease is primarily attributable to the current year's net loss and dividends to shareholders.

The following table summarizes the Company's regulatory capital ratios as of March 31, 2009 and December 31, 2008:

|                               | March 31, 2009 |   | December 31, 2008 |      | Minimum Required for
Capital Adequacy
Purposes
|------------------------------ | -------------- | - | ----------------- | ---- | ----------------------------------------------
|Total risk-based capital ratio | 11.0           | % |                   | 11.0 | %                                             
|Tier I capital ratio           | 9.7            | % |                   | 9.7  | %                                             
|Leverage ratio                 | 7.5            | % |                   | 7.9  | %                                             

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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 subsidiary banks maintain certain levels of liquid assets (the most liquid of which are cash and cash equivalents, federal funds sold and investment securities) in order to meet these demands. Maturing loans and investment securities are the principal sources of asset liquidity. Liquidity is monitored and closely managed by the Asset/Liability Management Committee (ALCO), whose members are comprised of senior management.

In the past, the Company has used overnight federal funds lines of credit with correspondent banks as a short term source of liquidity. The recent events within the financial industry have caused correspondent banks to eliminate these lines of credit that were previously available to the Company. As a result, to ensure adequate liquidity, collateral is pledged at the Federal Reserve Discount Window. At March 31, 2009, $10.2 million of securities were pledged that could be used for future borrowings. In addition, the Company has the ability to borrow $33.3 million from the Federal Home Loan Bank based on collateral pledged.

The Company's principal source of funds to pay cash dividends is the earnings and dividends paid by its subsidiary banks.

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.

|Item 4T. | Controls and Procedures
|-------- | -----------------------

An evaluation was performed under the supervision and with the participation of the Company's management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rule 13a - 15(e) under the Exchange Act) as of March 31, 2009. Based on and as of the time of that evaluation, the Company's management, including the Chief Executive Officer and Chief Financial Officer, concluded that as of the end of the period covered by this report the Company's disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms.

There was no change in the Company's internal control over financial reporting that occurred during the three months ended March 31, 2009 that has materially affected, or that is reasonably likely to materially affect, the Company's internal control over financial reporting.

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Part II.  Other Information

|Item 1A. | Risk Factors
|-------- | ------------

Information concerning risk factors is contained in the section entitled "Risk Factors" in Southern Michigan Bancorp, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2008, filed with the Securities and Exchange Commission on March 30, 2009. As of the date of this report, Southern does not believe that there has been a material change in the nature or categories of the Company's risk factors, as compared to the information disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2008.

|Item 6. | Exhibits
|------- | --------

Exhibits.  The following exhibits are filed as part of this report on Form 10-Q:

| | ExhibitNumber |  | Document                                                                                                                                                                                                                                                                                                                                 
| | ------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |               |  |                                                                                                                                                                                                                                                                                                                                          
| | 2             |  | Agreement and Plan of Merger between Southern Michigan Bancorp, Inc. and FNB Financial Corporation, dated April 17, 2007. Previously filed with the Commission on September 28, 2007 in Southern Michigan Bancorp Inc.'s Amendment No. 2 to Form S-4 Registration Statement, Exhibit 2. Here incorporated by reference.                  
| |               |  |                                                                                                                                                                                                                                                                                                                                          
| | 3.1           |  | Articles of Incorporation of Southern Michigan Bancorp, Inc., as amended. Previously filed with the Commission on September 28, 2007 in Southern Michigan Bancorp Inc.'s Amendment No. 2 to Form S-4 Registration Statement, Exhibit 3.1. Here incorporated by reference.                                                                
| |               |  |                                                                                                                                                                                                                                                                                                                                          
| | 3.2           |  | Amended and Restated Bylaws of Southern Michigan Bancorp, Inc., as amended. Previously filed with the Commission on September 28, 2007 in Southern Michigan Bancorp Inc.'s Amendment No. 2 to Form S-4 Registration Statement, Exhibit 3.2. Here incorporated by reference.                                                              
| |               |  |                                                                                                                                                                                                                                                                                                                                          
| | 4.1           |  | Selected provisions of Articles of Incorporation of Southern Michigan Bancorp, Inc., as amended. See Exhibit 3.1.                                                                                                                                                                                                                        
| |               |  |                                                                                                                                                                                                                                                                                                                                          
| | 4.2           |  | Selected provisions of Amended and Restated Bylaws of Southern Michigan Bancorp, Inc., as amended. See Exhibit 3.2.                                                                                                                                                                                                                      
| |               |  |                                                                                                                                                                                                                                                                                                                                          
| | 4.3           |  | Long-Term Debt. The registrant has outstanding long-term debt which at the time of this report does not exceed 10% of the registrant's total consolidated assets. The registrant agrees to furnish copies of the agreements defining the rights of holders of such long-term debt to the Securities and Exchange Commission upon request.
| |               |  |                                                                                                                                                                                                                                                                                                                                          
| | 31.1          |  | Certification of Chairman of the Board and Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                  
| |               |  |                                                                                                                                                                                                                                                                                                                                          
| | 31.2          |  | Certification of Senior Vice President, Chief Financial Officer, Secretary and Treasurer under Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                            
| |               |  |                                                                                                                                                                                                                                                                                                                                          
| | 32            |  | Certification pursuant to 18 U.S.C. § 1350.                                                                                                                                                                                                                                                                                              

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Signatures

Pursuant to the requirements 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.                                                                                                                           
|------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------
|                    |                                                                                                                                                           
|                    |                                                                                                                                                           
|Date:  May 14, 2009 | By: /s/ John H. Castle                                                                                                                                    
|                    | John H. Castle
      Chairman of the Board and Chief Executive Officer
      (Principal Executive Officer)                                                
|                    |                                                                                                                                                           
|                    |                                                                                                                                                           
|Date:  May 14, 2009 | By: /s/ Danice L. Chartrand                                                                                                                               
|                    | Danice L. Chartrand
      Senior Vice President, Chief Financial
      Officer, Secretary and Treasurer
      (Principal Financial and Accounting Officer)

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Exhibit Index

| | ExhibitNumber |  | Document                                                                                                                                                                                                                                                                                                                                 
| | ------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |               |  |                                                                                                                                                                                                                                                                                                                                          
| | 2             |  | Agreement and Plan of Merger between Southern Michigan Bancorp, Inc. and FNB Financial Corporation, dated April 17, 2007. Previously filed with the Commission on September 28, 2007 in Southern Michigan Bancorp Inc.'s Amendment No. 2 to Form S-4 Registration Statement, Exhibit 2. Here incorporated by reference.                  
| |               |  |                                                                                                                                                                                                                                                                                                                                          
| | 3.1           |  | Articles of Incorporation of Southern Michigan Bancorp, Inc., as amended. Previously filed with the Commission on September 28, 2007 in Southern Michigan Bancorp Inc.'s Amendment No. 2 to Form S-4 Registration Statement, Exhibit 3.1. Here incorporated by reference.                                                                
| |               |  |                                                                                                                                                                                                                                                                                                                                          
| | 3.2           |  | Amended and Restated Bylaws of Southern Michigan Bancorp, Inc., as amended. Previously filed with the Commission on September 28, 2007 in Southern Michigan Bancorp Inc.'s Amendment No. 2 to Form S-4 Registration Statement, Exhibit 3.2. Here incorporated by reference.                                                              
| |               |  |                                                                                                                                                                                                                                                                                                                                          
| | 4.1           |  | Selected provisions of Articles of Incorporation of Southern Michigan Bancorp, Inc., as amended. See Exhibit 3.1.                                                                                                                                                                                                                        
| |               |  |                                                                                                                                                                                                                                                                                                                                          
| | 4.2           |  | Selected provisions of Amended and Restated Bylaws of Southern Michigan Bancorp, Inc., as amended. See Exhibit 3.2.                                                                                                                                                                                                                      
| |               |  |                                                                                                                                                                                                                                                                                                                                          
| | 4.3           |  | Long-Term Debt. The registrant has outstanding long-term debt which at the time of this report does not exceed 10% of the registrant's total consolidated assets. The registrant agrees to furnish copies of the agreements defining the rights of holders of such long-term debt to the Securities and Exchange Commission upon request.
| |               |  |                                                                                                                                                                                                                                                                                                                                          
| | 31.1          |  | Certification of Chairman of the Board and Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                  
| |               |  |                                                                                                                                                                                                                                                                                                                                          
| | 31.2          |  | Certification of Senior Vice President, Chief Financial Officer, Secretary and Treasurer under Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                            
| |               |  |                                                                                                                                                                                                                                                                                                                                          
| | 32            |  | Certification pursuant to 18 U.S.C. § 1350.                                                                                                                                                                                                                                                                                              

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