Document:

Southern Michigan Exhibit 10.6 to Form S-4 - 07/13/07

EXHIBIT 10.6

SOUTHERN MICHIGAN BANK & TRUST

DEFERRED COMPENSATION AGREEMENT

          THIS AGREEMENT is made this _________ day of ___________________, 20__, by and between Southern Michigan Bank & Trust (the "Company"), and [NAME OF EXECUTIVE] (the "Executive").

INTRODUCTION

          To encourage the Executive to remain an employee of the Company, the Company is willing to provide to the Executive a deferred compensation opportunity. The Company will pay the Executive's benefits from the Company's general assets. This Agreement between the Executive and the Company modifies the terms of the Executive's participation in the Plan, replaces all benefits which otherwise were payable under the Plan, and supercedes all previous Agreements under this Plan.

AGREEMENT

          The Executive and the Company agree as follows:

Article 1

Definitions

          Whenever used in this Agreement, the following words and phrases shall have the meanings specified:

          1.1   "Change of Control" means the transfer of shares of the Company's voting common stock such that one entity or one person acquires (or is deemed to acquire when applying Section 318 of the Code) more than 50 percent of the Company's outstanding voting common stock followed within twelve (12) months by the Executive's Termination of Employment for reasons other than death, Disability or retirement.

          1.2   "Code" means the Internal Revenue Code of 1986, as amended. References to a Code section shall be deemed to be to that section as it now exists and to any successor provision.

          1.3   "Compensation" means the total annual base salary paid to the Executive during a Plan Year.

          1.4   "Deferral Account" means the Company's accounting of the Executive's accumulated Deferrals plus accrued interest. 

          1.5   "Deferrals" means the amount of the Executive's Compensation, which the Executive elects to defer according to this Agreement.

          1.6   "Disability" means the Participant's suffering a sickness, accident or injury which has been determined by the carrier of any individual or group disability insurance policy covering the Participant, or by the Social Security Administration, to be a disability rendering the Participant totally and permanently disabled. The Participant must submit proof to the Company of the carrier's or Social Security Administration's determination upon the request of the Company.

          1.7   "Early Retirement Date" means the Executive attaining age 60.

          1.8   "Effective Date" means January 1, 20__.

          1.9   "Election Form" means the Form attached as Exhibit 1.

          1.10   "Normal Retirement Age" means the Executive's 65th birthday.

          1.11   "Normal Retirement Date" means the later of the Normal Retirement Age or Termination of Employment.

          1.12   "Plan Year" means the calendar year. 

          1.13   "Termination of Employment" means that the Executive ceases to be employed by the Company for any reason whatsoever other than by reason of a leave of absence, which is approved by the Company. For purposes of this Agreement, if there is a dispute over the employment status of the Executive or the date of the Executive's Termination of Employment, the Company shall have the sole and absolute right to decide the dispute.

          1.14   "Years of Service" means the total number of twelve-month periods during which the Executive is employed on a full-time basis by the Company, inclusive of any approved leaves of absence.

          1.15   "Net Death Proceeds" means the amount of total death proceeds that exceeds cash surrender value for any bank-owned life insurance policy on the Executive's life for which the Company is owner and beneficiary. Any such policy shall be a general asset of the Company, and neither the Executive nor his/her beneficiaries shall have any preferred or secured claim to such policy.

          1.16   "Projected Benefit" means the amount the Deferral Account would have been assuming (i) the Executive lived to Normal Retirement Age; (ii) the Executive continued to make contributions from the date of death until Normal Retirement Age at a contribution rate equal to the average of the Executive's deferrals for the twelve (12) months prior to death; and (iii) interest continued to be credited at the rate in effect as of the date of death, with such rate not to exceed seven percent (7%).

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Article 2

Deferral Election

          2.1   Initial Election. The Executive shall make an initial deferral election under this Agreement by filing with the Company a signed Election Form within thirty (30) days after the Effective Date of this Agreement. The Election Form shall set forth the amount of Compensation to be deferred and shall be effective to defer only Compensation earned after the date the Election Form is received by the Company.

          2.2   Election Changes

          2.2.1   Generally. The Executive may modify the amount of Compensation to be deferred annually by filing a new Election Form with the Company prior to the beginning of the Plan Year in which the Compensation is to be deferred. The modified deferral election shall not be effective until the calendar year following the year in which it received and approved by the Company. 

          2.2.2   Hardship. If an unforeseeable financial emergency arising from the death of a family member, divorce, sickness, injury, catastrophe or similar event outside the control of the Executive occurs, the Executive, by written instructions to the Company, may reduce future deferrals under this Agreement.

Article 3

Deferral Account

          3.1   Establishing and Crediting. The Company shall establish a Deferral Account on its books for the Executive and shall credit to the Deferral Account the following amounts:

          3.1.1   Deferrals. The Compensation deferred by the Executive as of the time the Compensation would have otherwise been paid to the Executive.

          3.1.2   Interest. On the first day of each month and immediately prior to the payment of any benefits, interest on the account balance since the preceding credit under this Section 3.1.2, if any, at an annual rate, compounded monthly, equal to the Merrill Lynch 10+ year high quality corporate bond rate as published in the Wall Street Journal on the first business day following January 1.

          3.2   Statement of Accounts. The Company shall provide to the Executive, within one hundred twenty (120) days after each Anniversary Date, a statement setting forth the Deferral Account balance.

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          3.3   Accounting Device Only. The Deferral Account is solely a device for measuring amounts to be paid under this Agreement. The Deferral Account is not a trust fund of any kind. The Executive is a general unsecured creditor of the Company for the payment of benefits. The benefits represent the mere Company promise to pay such benefits. The Executive's rights are not subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, attachment, or garnishment by the Executive's creditors.

Article 4

Lifetime Benefits

          4.1   Normal Retirement Benefit. If the Executive's Termination of Employment occurs after the Early Retirement Date for reasons other than death or Disability, the Company shall pay to the Executive the benefit in this Section 4.1.

          4.1.1   Amount of Benefit. The benefit under this Section 4.1 is the Deferral Account balance at the Executive's Termination of Employment Date.

          4.1.2   Payment of Benefit. The Company shall pay the benefit to the Executive in the manner elected by the Executive on the Form of Benefit Election, attached as Exhibit II. The Company shall continue to credit interest under Section 3.1.2 on the remaining account balance, if applicable, during any installment period.

          4.2   Early Termination Benefit. If the Executive's Termination of Employment occurs before the Early Retirement Date for reasons other than death and Disability, the Company shall pay to the Executive the benefit in this Section 4.2.

          4.2.1   Amount of Benefit. The benefit under this Section 4.2 is the Deferral Account balance at the Executive's Termination of Employment Date.

          4.2.2   Payment of Benefit. The Company shall pay the benefit to the Executive in a lump sum within 90 days after the Executive's Termination of Employment. 

          4.3   Disability Benefit. If the Executive terminates employment due to Disability prior to Normal Retirement Age, the Company shall pay to the Executive the benefit described in this Section 4.3 in lieu of any other benefit under this Agreement.

          4.3.1   Amount of Benefit. The benefit under this Section 4.3 is the Deferral Account balance at the Executive's Termination of Employment. 

          4.3.2   Payment of Benefit. The Company shall pay the benefit to the Executive in the manner elected by the Executive on the Form of Benefit Election, attached as Exhibit II. The Company shall continue to credit interest under Section 3.1.2 on the remaining account balance, if applicable, during any installment period.

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          4.4   Change of Control Benefit. Upon a Change of Control, followed within twelve (12) months by the Executive's Termination of Employment for reasons other than death, Disability or retirement, the Company shall pay to the Executive the benefit described in this Section 4.4 in lieu of any other benefit under this Agreement. 

          4.4.1   Amount of Benefit. The benefit under this Section 4.4 shall be the Deferral Account balance on the Executive's Termination of Employment.

          4.4.2   Payment of Benefit. The Company shall pay the benefit to the Executive in the manner elected by the Executive on the Form of Benefit Election, attached as Exhibit II. The Company shall continue to credit interest under Section 3.1.2 on the remaining account balance, if applicable, during any installment period. 

          4.5   Hardship Distribution. Upon the Board of Director's determination (following petition by the Executive) that the Executive has suffered an unforeseeable financial emergency as described in Section 2.2.2, the Company shall distribute to the Executive all or a portion of the Deferral Account balance as determined by the Company, but in no event shall the distribution be greater than is necessary to relieve the financial hardship. 

Article 5

Death Benefits

          5.1          Death During Active Service. If the Executive dies while in the active service of the Company, the Company shall pay to the Executive's beneficiary the benefit described in this Section 5.1 in lieu of any other benefit under this Agreement.

                    5.1.1   Amount of Benefit. The benefit under Section 5.1 is the Deferral Account balance at the date of the Executive's death.

                    5.1.2   Payment of Benefit. The Company shall pay the benefit to the beneficiary in the form of a lump sum amount payable within 90 days of the death of the Executive.

                    5.1.3   Supplemental Death Benefit. The Company shall pay to the beneficiary a Supplemental Death Benefit. This Supplemental Death Benefit will be the Projected Benefit as defined in Section 1.15. However, the Projected Benefit shall not exceed the amount of Net Death Proceeds of any insurance policy(ies) in which the Company is the owner and the Executive is the insured. The Company shall pay the benefit to the beneficiary in One Hundred Eighty (180) consecutive equal monthly installments commencing within sixty (60) days of the Executive's death and payable on the first of each month thereafter.

          5.2   Death During Benefit Period. If the Executive dies after benefit payments have commenced under this Agreement but before receiving all such payments, the Company shall pay the remaining benefits to the Executive's beneficiary at the same time and in the same amounts they would have been paid to the Executive had the Executive survived.

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          5.3   Death After Termination of Employment But Before Benefit Payments Commence. If the Executive is entitled to benefit payments under this Agreement, but dies prior to the commencement of said benefit payments, the Company shall pay the benefit payments to the Executive's beneficiary that the Executive was entitled to prior to death except that the benefit payments shall commence on the first day of the month following the date of the Executive's death.

Article 6

Beneficiaries

          6.1   Beneficiary Designations. The Executive shall designate a beneficiary by filing a written designation with the Company. The Executive may revoke or modify the designation at any time by filing a new designation. However, designations will only be effective if signed by the Executive and accepted by the Company during the Executive's lifetime. The Executive's beneficiary designation shall be deemed automatically revoked if the beneficiary predeceases the Executive or if the Executive names a spouse as beneficiary and the marriage is subsequently dissolved. If the Executive dies without a valid beneficiary designation, all payments shall be made to the Executive's estate.

          6.2   Facility of Payment. If a benefit is payable to a minor, to a person declared incompetent, or to a person incapable of handling the disposition of his or her property, the Company may pay such benefit to the guardian, legal representative or person having the care or custody of such minor, incompetent person or incapable person. The Company may require proof of incompetence, minority or guardianship as it may deem appropriate prior to distribution of the benefit. Such distribution shall completely discharge the Company from all liability with respect to such benefit.

Article 7

General Limitations

          7.1   Termination for Cause. Notwithstanding any provision of this Agreement to the contrary, the Company shall not pay any benefit under this Agreement that is in excess of the Executive's Deferrals if the Company terminates the Executive's employment for:

          (a)          Gross negligence or gross neglect of duties to the Company;

          (b)          Commission of a felony or of a gross misdemeanor involving moral turpitude in connection with the Executive's employment with the Company; or

          (c)          Fraud, disloyalty, dishonesty or willful violation of any law or significant Company policy committed in connection with the Executive's employment and resulting in an adverse effect on the Company.

          7.2   Suicide or Misstatement. The Company shall not pay any benefit under this Agreement if the Executive commits suicide within two years after the date of this Agreement, or if the

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Executive has made any material misstatement of fact on any application for life insurance purchased by the Company. 

          7.3   Excess Parachute Payment Gross-up. If any benefit payable under this Agreement would create an excise tax under the excess parachute rules of Section 280G of the Code, the Company shall pay to the Executive an additional amount (the "Gross-up") equal to the Executive's excise penalty tax amount divided by the sum of (one minus the sum of the penalty tax rate plus the Executive's marginal income tax rate). The Gross-up shall be paid in the same manner as elected by the Executive under Section 4.4.2.

          7.4   Deferral Unwind Provision. If, for any reason, all or any portion of the Executive's benefits becomes taxable prior to receipt, the Executive may petition the Company for a distribution of that portion of the Executive's benefit that has become taxable. Upon the grant of such a petition, the Company shall distribute to the Executive immediately available funds in an amount equal to the taxable portion of the benefit. If the petition is granted, the tax liability distribution shall be made within 90 days of the date when the Executive's petition is granted.

Article 8

Claims and Review Procedures

          8.1   Claims Procedure. A Participant or beneficiary ("claimant") who has not received benefits under the Plan that he or she believes should be paid shall make a claim for such benefits as follows:

                    8.1.1.   Initiation - Written Claim. The claimant initiates a claim by submitting to the Company a written claim for the benefits.

                    8.1.2.   Timing of Company Response. The Company shall respond to such claimant within 90 days after receiving the claim. If the Company determines that special circumstances require additional time for processing the claim, the Company can extend the response period by an additional 90 days by notifying the claimant in writing, prior to the end of the initial 90-day period, that an additional period is required. The notice of extension must set forth the special circumstances and the date by which the Company expects to render its decision.

                    8.1.3.   Notice of Decision. If the Company denies part or all of the claim, the Company shall notify the claimant in writing of such denial. The Company shall write the notification in a manner calculated to be understood by the claimant. The notification shall set forth:

	
 
	
8.1.3.1
	
The specific reasons for the denial.

	
 
	
8.1.3.2
	
A reference to the specific provisions of the Plan on which the denial is based.

	
 
	
8.1.3.3
	
A description of any additional information or material necessary for the claimant to perfect the claim and an explanation of why it is needed.

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8.1.3.4
	
An explanation of the Plan's review procedures and the time limits applicable to such procedures, and

	
 
	
8.1.3.5
	
A statement of the claimant's right to bring a civil action under ERISA Section 502 (a) following an adverse benefit determination on review.

          8.2   Review Procedure. If the Company denies part or all of the claim, the claimant shall have the opportunity for a full and fair review by the Company of the denial, as follows:

                    8.2.1   Initiation - Written Request. To initiate the review, the claimant, within 60 days after receiving the Company's notice of denial, must file with the Company a written request for review.

                    8.2.2.   Additional Submissions - Information Access. The claimant shall then have the opportunity to submit written comments, documents, records and other information relating to the claim. The Company shall also provide the claimant, upon request and free of charge, reasonable access to, and copies of, all documents, records and other information relevant (as defined in applicable ERISA regulations) to the claimant's claim for benefits.

                    8.2.3.   Considerations on Review. In considering the review, the Company shall take into account all materials and information the claimant submits relating to the claim, without regard to whether such information was submitted or considered, in the initial benefit determination. 

                    8.2.4.   Timing of Company Response. The Company shall respond in writing to such claimant within 60 days after receiving the request for review. If the Company determines that special circumstances require additional time for processing the claim, the Company can extend the response period by an additional 60 days by notifying the claimant in writing, prior to the end of the initial 60 day period that an additional period is required. The notice of extension must set forth the special circumstances and the date by which the Company expects to render its decision.

                    8.2.5.   Notice of Decision. The Company shall notify the claimant in writing of its decision on review. The Company shall write the notification in a manner calculated to be understood by the claimant. The notification shall set forth:

	
 
	
8.2.5.1
	
The specific reasons for the denial.

	
 
	
8.2.5.2
	
A reference to the specific provisions of the Plan on which the denial is based.

	
 
	
8.2.5.3
	
A statement that the claimant is entitled to receive, upon request and free of charge, reasonable access to, and copies of, all documents, records and other information (as defined in applicable ERISA regulations) to the claimant's claim for benefits, and

	
 
	
8.2.5.4
	
A statement of the claimant's right to bring a civil action under ERISA Section 502 (a).

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Article 9

Amendments and Termination

          The Company may amend or terminate this Agreement at any time prior to the Executive's Termination of Employment by written notice to the Executive. In no event shall this Agreement be terminated without payment to the Executive of the Deferral Account balance attributable to the Executive's deferrals and interest credited on such amounts.

Article 10

Miscellaneous

          10.1   Binding Effect. This Agreement shall bind the Executive and the Company, and their beneficiaries, survivors, executors, administrators and transferees.

          10.2   No Guarantee of Employment. This Agreement is not a contract for employment. It does not give the Executive the right to remain an employee of the Company, nor does it interfere with the shareholders' rights to replace the Executive. It also does not require the Executive to remain an employee nor interfere with the Executive's right to terminate employment at any time.

          10.3   Non-Transferability. Benefits under this Agreement cannot be sold, transferred, assigned, pledged, attached or encumbered in any manner.

          10.4   Tax Withholding. The Company shall withhold any taxes that are required to be withheld from the benefits provided under this Agreement.

          10.5   Applicable Law. The Agreement and all rights hereunder shall be governed by the laws of the State of Michigan, except to the extent preempted by the laws of the United States of America.

          10.6   Unfunded Arrangement. The Executive and the Executive's beneficiary are general unsecured creditors of the Company for the payment of benefits under this Agreement. The benefits represent the mere promise by the Company to pay such benefits. The rights to benefits are not subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, attachment, or garnishment by creditors. Any insurance on the Executive's life is a general asset of the Company to which the Executive and the Executive's beneficiary have no preferred or secured claim.

          10.7   Reorganization. The Company shall not merge or consolidate into or with another company, or reorganize, or sell substantially all of its assets to another company, firm, or person unless such succeeding or continuing company, firm, or person agrees to assume and discharge the obligations of the Company under this Agreement.

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          10.8   Entire Agreement. This Agreement constitutes the entire agreement between the Company and the Executive as to the subject matter hereof. No rights are granted to the Executive by virtue of this Agreement other than those specifically set forth herein.

          10.9   Administration. The Company shall have powers which are necessary to administer this Agreement, including but not limited to:

          (a)          Interpreting the provisions of the Agreement;

          (b)          Establishing and revising the method of accounting for the Agreement;

          (c)          Maintaining a record of benefit payments; and

          (d)          Establishing rules and prescribing any forms necessary or desirable to administer the Agreement.

          10.10   Named Fiduciary. For purposes of the Employee Retirement Income Security Act of 1974, if applicable, the Company shall be the named fiduciary and plan administrator under the Agreement. The named fiduciary may delegate to others certain aspects of the management and operation responsibilities of the plan including the employment of advisors and the delegation of ministerial duties to qualified individuals.

          IN WITNESS WHEREOF, the Executive and a duly authorized Company officer have signed this Agreement.

	
 
	
 
	
COMPANY:

	
 
	
 
	
 

	
EXECUTIVE:
	
 
	
Southern Michigan Bank & Trust

	
 
	
 
	
 

	
 
	
 
	
 

	
 
	
 
	
By
	
 

	
 

	
 
	
 
	
 

	
Name of Executive
	
 
	
Title
	
 

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SOUTHERN MICHIGAN BANK & TRUST

EXECUTIVE DEFERRED COMPENSATION AGREEMENT

Deferral Election

I elect to defer my Compensation received under the Executive Deferred Compensation Agreement with the Company, as follows:

	
 
	
Amount of Deferral

	
Duration

	
 

	
 
	
 
	
 
	
 

	
 
	
[Initial and Complete one]
	
[Initial One]
	
 

	
 
	
 
	
 
	
 

	
 
	
____
	
 
	
I elect to defer ____% of my

Compensation.
	
____
	
 
	
One Year only
	
 

	
 
	
 
	
 
	
 
	
 
	
 
	
 
	
 

	
 
	
____
	
 
	
I elect to defer $______ of all

Compensation.
	
____
	
 
	
For ______ [Insert

Number] Years
	
 

	
 
	
 
	
 
	
 
	
 
	
 
	
 
	
 

	
 
	
____
	
 
	
I elect not to defer any of my

Compensation.
	
____
	
 
	
Until Termination

of Employment
	
 

	
 
	
 
	
 
	
 
	
 
	
 
	
 
	
 

	
 
	
 
	
 
	
 
	
____
	
 
	
Until ___________,

___________ (date)
	
 

I understand that I may change the amount and duration of my deferrals by filing a new election form with the Company; provided, however, that any subsequent election will not be effective until the calendar year following the year in which the new election is received by the Company. 

Signature   ____________________________________

Date   ____________________________

Accepted by the Company this ________ day of ___________________, 20__.

By  __________________________________________

Title  ______________________________

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Beneficiary Designation

SOUTHERN MICHIGAN BANK & TRUST

EXECUTIVE DEFERRED COMPENSATION AGREEMENT

I designate the following as beneficiary of benefits under the Executive Deferred Compensation Agreement payable following my death:

	
Primary:
	
 

	
 
	
 

	
 

	
 

	
 
	
 

	
Contingent:
	
 

	
 
	
 

	
 

	
 

	
Note:
	
To name a trust as beneficiary, please provide the name of the trustee(s) and the exact name and date of the trust agreement.

I understand that I may change these beneficiary designations by filing a new written designation with the Company. I further understand that the designations will be automatically revoked if the beneficiary predeceases me, or, if I have named my spouse as beneficiary and our marriage is subsequently dissolved.

Signature   ____________________________________

Date   _____________________________

Accepted by the Company this ________ day of ___________________, 20__.

By  __________________________________________

Title  _________________________________

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EXHIBIT 2

FORM OF BENEFIT ELECTION

FOR

SOUTHERN MICHIGAN BANK & TRUST

DEFERRED COMPENSATION AGREEMENT

I elect to receive benefits under the Agreement in the following form:

	
4.1.2
	
Normal Retirement Benefit

	
 
	
 

	
____
	
The Company shall pay the benefit to the Executive in 180 equal monthly installments commencing on the first day of the month following the Executive's Termination of Employment. The Company shall credit interest on the remaining account balance at the rate determined in Section 3.1.2.

	
 
	
 

	
____
	
The Company shall pay the benefit to the Executive in a lump sum within 90 days from the Executive's Normal Retirement Date.

	
 
	
 

	
 
	
 

	
4.3.2
	
Disability Benefit

	
 
	
 

	
____
	
The Company shall pay the benefit to the Executive in 180 equal monthly installments commencing on the first day of the month following the Executive's Termination of Employment. The Company shall credit interest on the remaining account balance at the rate determined in Section 3.1.2.

	
 
	
 

	
____
	
The Company shall pay the benefit to the Executive in a lump sum within 90 days from the Executive's Termination of Employment.

	
 
	
 

	
 
	
 

	
4.4.2
	
Change of Control Benefit

	
 
	
 

	
____
	
The Company shall pay the benefit to the Executive in 180 equal monthly installments commencing on the first day of the month following the Executive's Termination of Employment. The Company shall credit interest on the remaining account balance at the rate determined in Section 3.1.2.

	
 
	
 

	
____
	
The Company shall pay the benefit to the Executive in a lump sum within 90 days from the Executive's Termination of Employment.

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Signature
	
 

	
 

	
 
	
Bank Executive
	
 

Date   _______________________________

Received by the Company this ________ day of ___________________, 20__.

By  _________________________________

Title  ________________________________

14Southern Michigan Bancorp, Inc. Exhibit 10.7 to Form S-4 - 07-13-07

EXHIBIT 10.7

SOUTHERN MICHIGAN BANCORP, INC.

2000 STOCK OPTION PLAN

          1.          Purpose.  The purpose of the Southern Michigan Bancorp, Inc. 2000 Stock Option Plan (this "Plan") is to advance the interests of Southern Michigan Bancorp, Inc., a Michigan corporation (the "Corporation"), and its subsidiaries by providing a larger personal and financial interest in the success of the Corporation and its subsidiaries to employees and directors upon whose judgment, interest and special efforts the Corporation and its subsidiaries are dependent for the successful conduct of its and their operations and to enable the Corporation and its subsidiaries to attract and retain key employees and directors.

          2.          Participants.  Options may be granted under this Plan to any employee or director of the Corporation and its subsidiaries.  The employees and directors of the Corporation and its subsidiaries to whom options are granted and the terms of such options shall be determined by the Board of Directors.  A grantee may hold more than one option.  Nothing contained in this Plan, nor in any option granted pursuant to this Plan, shall confer upon any employee or director any right to the continuation of his or her employment or directorship nor limit in any way the right of the Corporation or its subsidiaries to terminate such employment or directorship at any time.  As used herein, the term "subsidiary" shall mean any present or future entity that is controlled by the Corporation, directly or through one or more intermediaries.

          3.          Effectiveness and Termination of Plan.  This Plan shall become effective upon approval thereof by the shareholders of the Corporation at a meeting held, among other things, for such purpose.  The adoption date of this Plan shall be March 20, 2000, the date of its adoption by the Board of Directors of the Corporation.  This Plan shall terminate on the earliest of:  (i) ten (10) years from its adoption date; (ii) when all shares of Common Stock (as defined in Section 4 hereof) that may be issued under this Plan shall have been issued through exercise of options granted under this Plan; or (iii) at any earlier time that the Board of Directors may determine.  Any option outstanding under this Plan at the time of its termination shall remain in effect in accordance with its terms and conditions and those of this Plan.

          4.          Common Stock.  The aggregate number of shares of common stock, $2.50 par value per share, of the Corporation (the "Common Stock") that may be issued under this Plan shall consist of 110,000 shares, subject to further adjustment as provided in Section 7 hereof.  Such number of shares may be set aside out of the authorized but unissued shares of Common Stock of the Corporation not reserved for any other purpose or out of shares of Common Stock acquired by the Corporation.  All or any shares of Common Stock subjected under this Plan to an option that, for any reason, is canceled, terminates, lapses or expires unexercised as to such shares may again be subjected to an option under this Plan.

          5.          Types of Options and Terms and Conditions.

                    (a)          Options granted under this Plan shall be in the form of:  (i) incentive stock options ("Incentive Stock Options") as defined in Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"); or (ii) options not qualifying under Section 422 of the Code ("Nonstatutory Stock Options"), all in such amounts as determined by the Board of Directors.

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                    (b)          Options may be granted at any time and from time to time prior to the termination of this Plan.  Except as hereinafter provided, all options granted pursuant to this Plan shall be subject to the following terms and conditions:

          (i)          Price.  The purchase price of the shares of Common Stock issuable upon exercise of options granted under this Plan shall be not less than 100% of the fair market value of the Common Stock on the date of the grant of the option.  For purposes of this Plan, "fair market value" of the Common Stock shall mean: (A) the mean between the closing high bid and low asked prices as reported by the National Association of Securities Dealers Automated Quotation System (or, if not so reported, by the system then regarded as the most reliable source of such quotation); or (B) if the Common Stock is quoted in the domestic over-the-counter market, but there are not reported quotations on the given date, the value determined pursuant to (A) above using the reported quotations on the last previous date on which so reported; or (C) if neither of the foregoing clauses apply, the price determined in good faith by the Board of Directors.

The purchase price shall be paid in full at the time of such purchase, in: (A) cash; (B) shares of Common Stock of the Corporation valued at the fair market value of the Common Stock on the date of purchase; or (C) any combination of cash and Common Stock.  Notwithstanding the foregoing, the Board of Directors may, in order to prevent any possible violation of law, require the purchase price to be paid in cash and further provide that the right to deliver Common Stock in payment of the purchase price may be limited or denied in any Option Agreements (as defined in Section 11 hereof).  The purchase price shall be subject to adjustment, but only as provided in Section 7 hereof.

          (ii)          Duration and Exercise of Options.  Options may be granted for terms of up to but not exceeding ten (10) years from the date the particular option is granted.  Options shall be exercisable as provided by the Board of Directors at the time of grant thereof.

          (iii)          Termination of Employment or Service as a Director.  Upon the termination of the grantee's employment or service as a director, his or her rights to exercise an option shall be only as follows:

          (1)          Death, Disability or Retirement.  If the grantee's employment or service as a director is terminated by reason of death or disability (as described in Section 22(e)(3) of the Code), the grantee or the grantee's estate may, within one (1) year following such termination, exercise the option with respect to only such number of shares of Common Stock as to which the right of exercise had accrued on or before the last day on which the grantee was either an employee or director of the Corporation or any subsidiary.  If the grantee's employment or service as a director is terminated by reason of retirement, the grantee or the grantee's estate (in the event of the grantee's death after such termination) may, within three (3) months following such termination, exercise the option with respect to only such number of shares of Common Stock as to which the right of exercise had accrued on or before the last day on which the grantee was either an employee or director of the Corporation or any subsidiary. For purposes of this Plan, "retirement" shall mean termination of employment or service as a director with the Corporation and/or its subsidiaries on or after the grantee's 65th birthday or the grantee's 60th

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birthday if the grantee has completed ten (10) years of service with the Corporation and/or its subsidiaries.

          (2)          Other Reasons.  If the grantee ceases to be an employee or director for any reason other than those provided above under "Death, Disability or Retirement," the grantee or the grantee's estate (in the event of the grantee's death after such termination) may, within the one (1) month period following such termination, exercise the option with respect to only such number of shares of Common Stock as to which the right of exercise had accrued on or before the last day on which the grantee was either an employee or director of the Corporation or any subsidiary.

          (3)          General.  Notwithstanding the foregoing, no option shall be exercisable in whole or in part: (A) after the termination date provided in the option; or (B) except as provided in the second paragraph of Section 10, for one (1) year following the date the option was granted.  A grantee's "estate" shall mean the grantee's legal representatives upon the grantee's death or any person who acquires the right under the laws of descent and distribution to exercise an option by reason of the grantee's death.

          (iv)          Transferability of Option.  Except as otherwise provided herein, options shall be transferable only by will or the laws of descent and distribution and shall be exercisable during the grantee's lifetime only by him or her.  An option and all rights thereunder shall terminate immediately if the holder attempts to or does sell, assign, transfer, pledge, hypothecate or otherwise dispose of the option or any rights thereunder to any person except as permitted herein.

          (v)          Other Terms and Conditions.  Options may also contain such other provisions, which shall not be inconsistent with any of the foregoing terms, as the Board of Directors shall deem appropriate.

          (c)          Incentive Stock Options granted pursuant to this Plan shall be subject to all the terms and conditions included in subsection (b) and to the following terms and conditions:

          (i)          No Incentive Stock Option shall be granted to an individual who is not an employee of the Corporation or a "subsidiary corporation" as defined in Section 424(f) of  the Code;

          (ii)          No Incentive Stock Option shall be granted to an employee who owns stock possessing more than 10% of the total combined voting power of all classes of stock of the Corporation unless the grant complies with the requirements of Section 422(c)(5) of the Code;

          (iii)          The aggregate fair market value (determined as of the date the option is granted) of the shares of Common Stock with respect to which Incentive Stock Options are exercisable for the first time by any grantee during any calendar year (under all plans of the Corporation) shall not exceed $100,000 or such other amount as may subsequently be specified by the Code; provided that, to the extent that such limitation is exceeded, any

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excess options (as determined by the Code) shall be deemed to be Nonstatutory Stock Options; and

          (iv)          No Incentive Stock Option may be granted under this Plan if such grant, together with any applicable prior grants that are Incentive Stock Options within the meaning of Section 422(b) of the Code, would exceed any maximum established under the Code for incentive stock options that may be granted to an individual employee.

          6.          Rights of a Shareholder.  A recipient of an option shall have no rights as a shareholder with respect to any shares issuable or transferable upon exercise thereof until the date of issuance of a stock certificate for such shares.  Except as otherwise provided pursuant to Section 7 hereof, no adjustment shall be made for dividends or other rights for which the record date is prior to the date of such stock certificate.

          7.          Adjustment of and Changes in Common Stock.  In the event that the shares of Common Stock of the Corporation, as presently constituted, shall be changed into or exchanged for a different number or kind of shares of stock or other securities of the Corporation or of another corporation (whether by reason of merger, consolidation, recapitalization, reclassification, split-up, combination of shares, or otherwise) or if the number of such shares of Common Stock shall be increased through the payment of a stock dividend or a dividend on the shares of Common Stock of rights or warrants to purchase securities of the Corporation shall be made, then there shall be substituted for or added to each share of Common Stock theretofore appropriated or thereafter subject or that may become subject to an option under this Plan, the number and kind of shares of stock or other securities into which each outstanding share of Common Stock of the Corporation shall be so changed, or for which each such share shall be exchanged, or to which each such share shall be entitled, as the case may be, and references herein to the Common Stock shall be deemed to be references to any such stock or other securities as appropriate.  Outstanding options shall also be appropriately amended as to price and other terms as may be necessary to reflect the foregoing events.  In the event there shall be any other change in the number or kind of the outstanding shares of the Common Stock of the Corporation, or of any stock or other securities into which such Common Stock shall have been changed or for which it shall have been exchanged, then if the Board of Directors shall, in its sole discretion, determine that such change equitably requires an adjustment in any option theretofore granted or that may be granted under this Plan, such adjustments shall be made in accordance with such determination.  Fractional shares resulting from any adjustment in options pursuant to this Section 7 may be settled in cash or otherwise as the Board of Directors shall determine.  Notice of any adjustment shall be given by the Corporation to each holder of an option that shall have been so adjusted and such adjustment (whether or not such notice is given) shall be effective and binding for all purposes of this Plan.  Any options granted or which may be granted pursuant to this Plan, and which such options are or are intended to be Incentive Stock Options within the meaning of Section 422 of the Code, shall, to the extent it is reasonably feasible to do so (determined in the sole discretion of the Board of Directors), be adjusted or modified pursuant to this Section 7 in a manner which will allow such options to continue to be classified as Incentive Stock Options within the meaning of Section 422 of the Code or successor legislation.

          8.          Securities Act Requirements.  No option granted pursuant to this Plan shall be exercisable in whole or in part, and the Corporation shall not be obligated to sell any shares of Common Stock subject to any such option, if such exercise and sale would, in the opinion of

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counsel for the Corporation, violate the Securities Act of 1933 (or other Federal or State statutes having similar requirements), as in effect at that time.  Each option shall be subject to the further requirement that, if at any time the Board of Directors shall determine in its discretion that the listing or qualification of the shares of Common Stock subject to such option under any securities exchange requirements or under any applicable law, or the consent or approval of any governmental regulatory body, is necessary or desirable as a condition of, or in connection with, the issue of shares thereunder, such option may not be exercised in whole or in part unless such listing, qualification, consent or approval shall have been effected or obtained free of any conditions not acceptable to the Board of Directors.

          9.          Withholding.  Appropriate provision (which may, in accordance with rules determined by the Board of Directors, include the election by the grantee to have the Corporation withhold from the Common Stock to be issued upon exercise of an option a number of shares having an aggregate fair market value that would satisfy the withholding amount due or to deliver to the Corporation shares of Common Stock already owned having such aggregate fair market value to satisfy the withholding amount) shall be made for all taxes required to be withheld from shares of Common Stock issued under this Plan under the applicable laws or other regulations of any governmental authority, whether federal, state or local, and domestic or foreign.  To that end, the Corporation may at any time take such steps as it may deem necessary or appropriate (including sale or retention of shares) to provide for payment of such taxes.

          10.          Administration and Amendment of Plan.  The Board of Directors from time to time may adopt rules and regulations for carrying out this Plan.  The interpretation and construction by the Board of Directors of any provision of this Plan or any option granted pursuant hereto shall be final and conclusive.  No member of the Board of Directors shall be liable for any action or determination made in good faith with respect to this Plan or any option granted pursuant thereto.  The Board of Directors may from time to time make such changes in and additions to this Plan as it may deem proper and in the best interests of the Corporation, without further action on the part of the shareholders of the Corporation except as required by law, regulation or by the rules of the principal trading market of the Corporation's Common Stock at that time; provided, however, that, unless the shareholders of the Corporation shall have first approved thereof: (i) except as provided in Section 7 hereof, the total number of shares of Common Stock subject to this Plan shall not be increased and the minimum purchase price shall not be changed; (ii) no option shall be exercisable more than ten (10) years after the date it is granted; and (iii) the expiration date of this Plan shall not be extended.

          The Board of Directors shall have the power, in the event of any disposition of substantially all of the assets of the Corporation, its dissolution or of any consolidation or merger of the Corporation with and into any other corporation, to amend all outstanding options to permit the exercise of all such options prior to the effectiveness of any such transaction and to terminate such options as of such effectiveness.  If the Board of Directors shall exercise such power, all options then outstanding and subject to such requirement shall be deemed to have been amended to permit the exercise thereof in whole or in part by the grantee at any time or from time to time as determined by the Board of Directors prior to the effectiveness of such transaction and such options shall be deemed to terminate upon such effectiveness.

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          11.          Miscellaneous.

                    (a)          Separate Plan.  This Plan is separate and independent from any other stock option plan or similar plan of the Corporation.

                    (b)          Option Agreements.  Options granted hereunder shall be evidenced by option agreements ("Option Agreements") containing such terms and conditions as the Board of Directors shall establish from time to time consistent with this Plan.  Option Agreements need not be identical but each Option Agreement shall contain, without limitation, language including the substance of the following provisions:

          (i)          Number of Shares and Exercise Price.  Each Option Agreement shall state the number of shares to which it pertains and the exercise price therefor.

          (ii)          Exercise of Options.  Options may be exercised only in accordance with the terms of each Option Agreement which shall include the period of time during which the option may be exercised.

          (iii)          Method of Exercise and Payment of Purchase Price.  An option may be exercised, as to all or part of the shares covered by the option, by the grantee delivering to the Board of Directors:  (A) a written notice identifying the option being exercised, stating the number of shares being purchased and enclosing payment to the Corporation of the purchase price for the number of shares being exercised; and (B) such items as the Corporation may reasonably request.  If the option is being exercised by any person or persons other than the grantee, the written notice exercising the option shall be accompanied by appropriate proof of the right of such person or persons to exercise the option.

          (iv)          Additional Terms and Conditions.  The Board of Directors may specify such additional terms and conditions as it deems appropriate.

                    (c)          Loans.  Subject to the sole discretion of the Board of Directors, the Corporation may loan the grantee funds to finance the exercise of any option.

                    (d)           Governing Law.  This Plan and the Option Agreements shall be interpreted and enforced in accordance with the laws of the State of Michigan.

          IN WITNESS WHEREOF, this Plan has been executed by the Corporation on the 20th day of March, 2000.

	 	
SOUTHERN MICHIGAN BANCORP, INC.

	 	 
	 	 
	 	
By:
	
/s/ James T. Grohalski

	 	 	
James T. Grohalski

	 	
Its:
	
President and Chief Executive Officer

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