Document:

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                                                                   EXHIBIT 10.13
                                                                       2000 10-K

                           FIRST NORTHERN SAVINGS BANK

                  MANAGEMENT INCENTIVE COMPENSATION PLAN (MIP)

         This document describes the annual Management Incentive Compensation
Plan (the Plan) covering the key managers of First Northern Savings Bank

PURPOSE

         Incentive compensation is an essential element of a cash compensation
program. The Plan is designed to direct the efforts of those whose duties,
responsibilities and decisions have a significant impact on the achievement of
the Savings Bank's basic business objectives by initiating actions, rather than
merely responding to external conditions. Specific objectives of the Plan are
to:

         -        Contribute toward achieving short-term performance goals;

         -        Recognize and reward superior individual performance;

         -        Assure corporate financial gain before incentive payments are
                  earned;

         -        Provide compensation which is competitive with the market
                  place; and

         -        Restrict participation to key officers.

PLAN DESCRIPTION

         To meet the above objectives, the Plan provides incentive reward
opportunities in return for outstanding performance. The Plan is a "look
forward" plan which generates incentive funds based on actual operating results
measured against predetermined performance goals.

         The Plan is integrally related to the Savings Bank's salary program in
that the incentive award opportunities are measured as a designated percent of
each Participant's Base Salary. The combination of Base Salary and Targeted
Incentive Award is designed to provide the Participant with total cash
compensation that is consistent with each Participant's respective position and
individual performance.

Under the Plan, two factors determine the amount of incentive awards each
Participant will receive:

         -        The Savings Bank's corporate performance measured against
                  predetermined financial goals, and

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         -        Each Participant's individual performance measured against
                  predetermined individual goals.

PLAN ADMINISTRATION

         The Board of Directors has final authority for Plan provisions and the
Compensation Committee of the Board (the Committee) has the responsibility for
supervising the administration of the Plan.

ELIGIBILITY

         Eligible positions are those whose decisions have a material and direct
impact on annual operating results. Eligibility for participation does not
necessarily mean participation every year. Participants will be designated
annually by the Committee. This designation will take place prior to the
beginning of the Savings Bank's fiscal year, except:

         (a)      If an officer is hired during the program year, it is up to
                  the discretion of the Committee to determine if that person is
                  included in the Plan and to what extent of their annual Base
                  Salary.

         (b)      If a promotion places a person into the plan during the year,
                  they will receive a pro-rated share for the time they are into
                  their new position based on their salary while in the Plan.

SIZE OF AWARDS

         Targeted Incentive Awards should be consistent with the competitive
labor market and should reflect the responsibility levels of the Participants.
The Participants are grouped into tiers to reflect the various responsibility
levels of the Participants, and a targeted incentive percentage of Base Salary
is established for each tier. The incentive percentages for the responsibility
tiers are shown below:

                          Incentive Award Opportunities
                               (As a % of Salary)

<TABLE>
<CAPTION>
      Responsibility
           Tier                      Threshold                   Target                     Maximum
           ----                      ---------                   ------                     -------
<S>                                  <C>                         <C>                        <C>
          Tier I                       17.5%                      25.0%                      50.0%
          Tier II                      14.0%                      20.0%                      40.0%
         Tier III                      10.5%                      15.0%                      30.0%
          Tier IV                      7.0%                       10.0%                      20.0%
</TABLE>

         Participant's base salaries are multiplied by their respective target
incentive percentage to determine their Targeted Incentive Award. Targeted
Incentive Awards

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represent incentive funds that will be earned for each position if the Savings
Bank and the Participant achieved the predetermined goals. Actual incentive
awards may be higher or lower than targeted levels, depending on actual
operating results compared to predetermined goals.

INCENTIVE MIX

         A portion of each Participant's incentive opportunities is based on
corporate performance and a portion on individual performance. The following
table shows the distribution of awards based on corporate performance and awards
based on individual performance. The higher the responsibility tier, the greater
percentage of the award opportunity is based on corporate performance.

<TABLE>
<CAPTION>
                                             Performance Mix
                                             ---------------
                          Tier                   Corporate                Individual
                          ----                   ---------                ----------
<S>                                          <C>                          <C>
                            I                       100%                      ---
                           II                        75                       25
                           III                       50                       50
                           IV                        50                       50
</TABLE>
         The individual portion of the incentive award will be based on the
measured performance of each Participant, based on the results of the targets
and goals performance appraisal process.

         Individual awards can be earned independently of the financial
performance of the Savings Bank. Therefore, individuals may receive incentive
awards even if the Savings Bank does not meet its goals. Individual incentive
awards will only be paid for outstanding performance. Individual incentive
awards will be recommended by the Chief Executive Officer (CEO) and approved by
the Committee.

INCENTIVE POOL

         The size of the incentive pool will be based on the Savings Bank's
operating success relative to goal. The Plan requires establishing annual
performance goals and measures actual operating results relative to the
established goals to generate the incentive awards.

         GOAL SETTING

         Annual performance goals will be established at the beginning of each
year. The CEO will make such recommendations to the Committee for subsequent
approval. If mutually agreed upon performance goals cannot be reached, the
Committee has final

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authority to set the performance goals. The performance criteria will be
communicated in Appendix A to the Plan for that year.

         INCENTIVE MATRIX

         Each year an incentive compensation matrix is prepared that relates the
performance criteria to the Factor Applied to Targeted Incentive Award (the
Factor). In the matrix, the performance criteria are expressed as a percentage
of the predetermined performance goals.

         At the beginning of each year, the CEO will recommend an incentive
compensation matrix to the Committee for their approval. The matrix approved by
the Committee shall become Appendix A to the Plan for that year.

         PERFORMANCE THRESHOLD

         To protect ownership interests, there will be a threshold performance
level below which no Corporate Incentive Awards will be earned. If actual
operating results do not meet the minimum levels on the matrix, no Corporate
Incentive Awards will be funded, but Individual Awards can still be earned by
Participants if the Savings Bank earned profits. If there are not profits,
however, no Individual Incentive Awards can be earned.

         MAXIMUM

         The maximum incentive award that can be funded shall be two times the
Targeted Incentive Award to protect against windfall profits and poor planning.
The maximum Factor that may be used in the incentive matrix is two times.

CORPORATE INCENTIVES

         If the Savings Bank achieves or exceeds the annual goals, then
incentive pool is generated. The corporate portion of the incentive pool is
automatically earned by Participants.

INDIVIDUAL INCENTIVES

         If an incentive pool is generated by Savings Bank performance, the
individual portion for each Participant is based on measured individual
performance. The portion of incentive that is based on individual performance
can be earned regardless of overall Savings Bank performance. If the Savings
Bank failed to meet the threshold performance, individual incentive
opportunities are still possible and would be measured as a percent of targeted
individual portions.

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         Individual incentive awards will be based on measured performance of
each Participant, as reflected in the Savings Bank's performance evaluation
process. The CEO will recommend incentive awards based on individual
performance, for Committee approval.

FORM AND TIMING

         Distribution of the earned incentive awards shall be paid in cash to
the Participants in one installment within thirty (30) days following the close
of the Savings Bank's fiscal year for which the incentive was computed. To the
extent that it is not possible to compute the incentive within thirty (30) days
following the close of the Savings Bank's fiscal year, an estimated payment may
be made with proper adjustment as soon as practical.

         In the case of death of a Participant, between the end of the fiscal
year and the following 30 days, the total incentive earned shall be paid to the
beneficiary designated in writing by the Participant. In case of a failure of
the Participant to designate a beneficiary, payment will be made to the
Participant's estate.

TERMINATION

         Upon voluntary termination or involuntary termination during the year,
all accrued benefits of the Participant are lost. In the case of retirement,
death or permanent disability during the Plan year, funded incentive awards will
be paid at the end of the year, on a pro-rata basis.

         If the Participant takes a leave of absence during the year, they will
not accrue any benefits for the time they are absent (adjusted to the nearest
half-month).

REORGANIZATION CLAUSE

         In the event of a significant change in organization by reason of
merger, acquisition, or other changes, the Committee will take any appropriate
action necessary to assure that outstanding incentive opportunities for the
Participants are not adversely affected by any such type of reorganization.

AMENDMENT

         The Board of Directors can change, amend or terminate the Plan at any
time, except that no such action will adversely affect any outstanding incentive
opportunities of the Participants.

DEFINITIONS

         1.       Average Assets shall mean the monthly average of assets for
                  the calendar year.

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         2.       Base Salary shall mean the total base salary earned by each
                  Participant during the calendar year of the Plan.

         3.       Corporate Incentive Award shall mean the amount that is
                  actually accrued for and paid Participant based on each
                  Participant's individual performance.

         4.       Individual Incentive Award shall mean the amount that is
                  actually accrued for and paid to each Participant based on
                  each Participant's individual performance.

         5.       Return on Assets shall mean net income after taxes, before
                  dividends, for the year, divided by average assets.

         6.       Targeted Incentive Award shall mean the amount that would be
                  earned if the Savings Bank and the individual achieved
                  predetermined goals.

                                       6<PAGE>   1

                                                                   EXHIBIT 10(C)

                         SOUTHERN MICHIGAN BANCORP, INC.
                         SOUTHERN MICHIGAN BANK & TRUST

                              EMPLOYMENT AGREEMENT

         This Agreement, made this 23rd day of January, 2001, by and between
SOUTHERN MICHIGAN BANCORP, INC., a Michigan corporation, and SOUTHERN MICHIGAN
BANK & TRUST, a Michigan banking corporation (collectively "Employer"), and
JAMES T. GROHALSKI ("Employee").

         WITNESSETH:

         WHEREAS, the Board of Directors of Southern Michigan Bancorp, Inc. (the
"Board of Directors") recognizes that, as is the case with publicly held
corporations generally, the possibility of a change in control of Employer may
exist and that such possibility, and the uncertainty and questions which it may
raise among management, may result in the departure or distraction of key
management personnel to the detriment of Employer, its subsidiaries and its
stockholders; and

         WHEREAS, the Board of Directors believes it is in the best interests of
Employer to enter into this Agreement with Employee in order to reinforce and
encourage the continued attention and dedication of Employee to his assigned
duties without distraction in the face of potentially disruptive circumstances
arising from the possibility of a change in control of Employer, although no
such change is now contemplated; and

         WHEREAS, the Board of Directors has approved and authorized the
execution of this Agreement; and

         WHEREAS, Employee acknowledges that this Agreement shall supersede,
terminate and replace any and all employment contracts, severance agreements,
change in control agreements or any other compensation or benefit type
arrangement between Employee and Employer or any of its subsidiaries; and

         WHEREAS, Employer desires to employ Employee and Employee desires to be
employed by Employer upon the terms and conditions set forth herein.

         NOW, THEREFORE, in consideration of the foregoing and of the respective
covenants and agreements of the parties herein contained, it is agreed as
follows:

         1.        Employment. Employer hereby employs Employee as President and
Chief Executive Officer (CEO) of Southern Michigan Bancorp, Inc. and as
President and Chief Executive Officer (CEO) of Southern Michigan Bank & Trust,
and Employee hereby accepts employment by Employer upon the terms and conditions
herein set forth. The primary place of employment shall be at Employer's
principal offices in Coldwater, Michigan, or at such other location as Employer
may designate.

         2.        Term. The term of this Agreement shall commence as of January
23, 2001 for a term of one (1) year ending on January 21, 2002, unless sooner
terminated as hereinafter set forth. This Agreement may be renewed for
additional one (1) year periods upon the written agreement of Employer and
Employee.

        3.         Duties. Employee will, during the term hereof:

                  (A) Faithfully and diligently do and perform all such acts and
duties and furnish such services as the Board of Directors shall direct, and do
and perform all acts in the ordinary course of Employer's business, with such
limits as the Board of Directors may prescribe, necessary and conducive to
Employer's best interests; and

<PAGE>   2

                  (B) Devote his full time, energy, and skill to the business of
Employer and to the promotion of Employer's best interests, except for vacations
and absences made necessary because of illness. Employee may not be an employee,
consultant, director or other agent of any other person, firm or corporation
(other than affiliates of Employer) without the prior signed written approval of
the Chairman of the Board of Directors. Employee may engage in passive business
activities which do not interfere with his employment under this Agreement and
which do not conflict with Employer's interests. Employee may engage in
professional, civic and charitable activities which do not interfere with his
employment under this Agreement and which do not conflict with Employer's
interests.

         4.       Compensation.

                  (A) Subject to the provisions of paragraphs 6 and 7 hereof,
Employer shall pay to Employee for all services to be performed by Employee
during the term of this Agreement:

                           (i) a salary at the rate of One Hundred Sixty-Three
         Thousand Dollars ($163,000) per annum, payable in periodic payments in
         accordance with Employer's practices for other executive, managerial,
         and supervisory employees, as such practices may be determined from
         time to time. The Board of Directors will review such fixed salary
         annually and, in its discretion, may grant increases or decreases
         thereof based upon Employee's performance; and

                           (ii) any additional or special compensation, such as
         incentive pay or bonuses, based upon Employee's performance, as the
         Board of Directors in its discretion, may from time to time determine.

All such payments will be subject to such deductions as may be required to be
made pursuant to law, government regulation or order, or by agreement with, or
consent of, Employee.

                  (B) In addition to the salary payments set forth above,
Employer agrees that during the term of this Agreement:

                           (i) Employee shall be entitled to reimbursement by
         Employer for all reasonable expenses actually and necessarily incurred
         by him on its behalf in the course of his employment hereunder, for
         which he shall submit vouchers in a form satisfactory to Employer and
         which are approved by Employer in its sole discretion; and

                           (ii) Employer shall reimburse Employee for automobile
         expenses incurred by Employee on behalf of Employer pursuant to
         Employer's standard policies, as amended from time to time.

         5. Benefits. Employee shall be entitled to participate in such life
insurance, medical, pension, retirement, and stock option plans and other
programs, including sick leave, as may be approved from time to time by Employer
for the benefit of its employees. Employee also shall be entitled to Four (4)
weeks of vacation under Employer's current policy, as amended. The said vacation
shall not be carried over from year to year.

         6.       Termination.

                  (A) Employee's employment with Employer shall terminate by
reason of Employee's death or Total Disability (subject to the terms of
paragraph 6(C) below). In the event of a termination of employment described in
the immediately preceding sentence or Employee's voluntary termination of
employment (other than for Good Reason), all obligations of Employer hereunder
shall terminate (except obligations under paragraphs 6(B) and 7 arising after a
voluntary termination with Good Reason).

<PAGE>   3

                  (B) In addition to the foregoing, the Board of Directors may
terminate Employee's employment at any time, but any termination by the Board of
Directors other than termination for Cause, shall not prejudice Employee's right
to compensation or other benefits under this contract. Employee shall have no
right to receive compensation or other benefits for any period after termination
for Cause. In the event the Board of Directors terminates Employee's employment,
other than for Cause, or in the event of Employee's voluntary termination of
Employment for Good Reason, in addition to receiving the compensation and
benefits under this contract, Employer shall, upon expiration of the term of
this Agreement, pay to Employee monthly installments of 1/12th of Employee's
annual salary described in paragraph 4(A) above commencing thirty (30) days
after the expiration of the term of this Agreement and continuing on the same
date of each month thereafter until the earlier of: the date of Employee's
death; the date Employee attains the age of 65; or Employee receives twelve (12)
monthly installments under this subsection 6(B).

                  (C) In the event Employee is determined to be disabled (by a
doctor selected as set forth below) and is unable to perform the essential
functions of his job ("Total Disability"), the following shall apply:

                           (i) Employee shall, upon written request, be granted
         a leave of absence for up to ninety (90) calendar days (which leave
         shall run concurrently with any leave for which Employee is eligible
         under the Family Medical Leave Act). This leave of absence shall be
         with compensation and benefits under this Agreement and all other
         provisions of this Agreement shall remain in full force and effect.

                           (ii) Upon expiration of the leave of absence (not
         exceeding ninety (90) calendar days), if Employee is unable to perform
         the essential functions of his job with or without reasonable
         accommodation (and with a written release from the doctor setting forth
         any restrictions), this Agreement shall automatically terminate and
         Employer shall have no further obligations under this Agreement except
         as required by applicable law.

                           (iii) The determination of Total Disability of
         Employee shall be made by a doctor selected by Employer's disability
         insurance carrier or the Board of Directors (if no such carrier exists)
         and such doctor may be assisted in his or her determination by such
         other doctors as he or she believes should examine Employee. Either the
         Chairman of the Board of Directors, Employee or Employee's guardian or
         legal representative may request that a determination of Total
         Disability be made. The cost of the doctor(s)' services shall be borne
         equally by Employer.

                           (iv) If Total Disability of Employee is determined as
         set forth above, then for purposes of this Agreement, the period of
         disability shall be deemed to commence on the day of such
         determination.

         7. Change In Control and Definitions. If within three (3) years after a
Change in Control (as defined in this Agreement) Employer shall terminate
Employee without Cause (as defined in this Agreement) or Employee shall
voluntarily terminate such employment with Good Reason (as defined in this
Agreement) Employer shall, within ninety (90) days of the termination make a
lump sum cash payment to him equal to two (2) year's salary in accordance with
Internal Revenue Code Section 280(G), as amended. If it is mutually in the best
interest of Employer and Employee, Employee shall have the right to elect by
written request to the Board of Directors to receive a cash payment equal to one
year's salary and the remaining one (1) years' salary on an installment basis in
accordance with Internal Revenue Code Section 280(G). Employee shall not be paid
any compensation under this Agreement other than that specified in this
paragraph.

         For purposes of this Agreement:

                  (A)      "Cause" shall include in its meaning:

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                           (i) Employee's conviction of any criminal violation
         involving dishonesty, fraud, or breach of trust;

                           (ii) Employee's willful engagement in any misconduct
         in the performance of his duty that materially injures Employer or any
         of its subsidiaries;

                           (iii) Employee's performance of any act which, if
         known to the customers, clients or stockholders of Employer or any of
         its subsidiaries would materially and adversely impact on the business
         of Employer or any of its subsidiaries;

                           (iv) Employee's willful and substantial
         nonperformance of his duties and such nonperformance continues more
         than ten (10) days after Employer has given written notice of such
         nonperformance and of its intention to terminate Employee's employment
         because of such nonperformance;

                           (v) Employee's willful violation of paragraphs 8 or 9
         herein; or

                           (vi) Employee is suspended and/or temporarily
         prohibited (or is removed and/or permanently prohibited) from
         participating in the conduct of Employer's (or any of its affiliates')
         affairs by a notice, order, ruling or other finding of any state or
         federal agency (including, but not limited to, any federal reserve
         bank, the Federal Deposit Insurance Corporation, or Office of Financial
         and Insurance Services of the State of Michigan) or any such federal or
         state regulatory agency makes any determination or takes any action
         that the Board of Directors of Employer, in its sole discretion,
         determines to reflect adversely on Employer and to be related to the
         duties of Employee under this Agreement.

                  (B) "Good Reason" shall exist if, without Employee's express
written consent:

                           (i) Employer shall assign to Employee duties of a
         nonexecutive nature or for which Employee is not reasonably equipped by
         his skills and experience;

                           (ii) Employer, without reasonable justification,
         shall reduce the salary of Employee, or materially reduce the amount of
         paid vacations to which he is entitled, or his fringe benefits and
         perquisites;

                           (iii) Employer shall require Employee to relocate his
         principal business office or his principal place of residence outside a
         sixty (60) mile radius from Coldwater, Michigan (the "Area"), or assign
         to Employee duties that would reasonably require such relocation;

                           (iv) Employer shall require Employee, or assign
         duties to Employee which would reasonably require him to spend more
         than ninety (90) normal working days away from the Area during any
         consecutive twelve (12) month period;

                           (v) Employer shall fail to provide office facilities,
         secretarial services, and other administrative services to Employee
         which are substantially equivalent to the facilities and services
         provided to Employee on the date hereof; or

                           (vi) Employer shall terminate incentive and benefit
         plans or arrangements, or reduce or limit Employee's participation
         therein relative to the level of participation of other executives of
         similar rank, to such an extent as to materially reduce the aggregate
         value of Employee's incentive compensation and benefits below their
         aggregate value as of the date hereof.

<PAGE>   5

                  (C) "Change in Control" shall be deemed to occur on the
earliest of:

                           (i) The acquisition by any entity, person, or group
         of beneficial ownership, as that term is defined in Rule 13d-3 under
         the Securities Exchange Act of 1934, of more than fifty percent (50%)
         of the outstanding capital stock of Employer entitled to vote for the
         election of directors ("Voting Stock");

                           (ii) The commencement by any entity, person, or group
         (other than Employer or a subsidiary of Employer) of a tender offer or
         an exchange offer for more than twenty-five percent (25 %) of the
         outstanding Voting Stock of Employer;

                           (iii) The effective time of (1) a merger or
         consolidation of Employer with one or more other corporations as a
         result of which the holders of the outstanding Voting Stock of Employer
         immediately prior to such merger hold less than fifty percent (50%) of
         the Voting Stock of the surviving or resulting corporation, or (2) a
         transfer of substantially all of the assets of Employer other than to
         an entity of which Employer owns at least eighty percent (80%) of the
         Voting Stock; or

                           (iv) The election to the Board of Directors of
         Employer without the recommendation or approval of the incumbent Board
         of Directors of Employer, of the lesser of three directors or directors
         constituting a majority of the number of Directors of Employer then in
         office.

         8. Restrictive Covenant. During the term of this Agreement, and for a
period of one (1) year following the termination of Employee's employment with
Employer pursuant to this Agreement including termination occasioned by the
expiration of this Agreement, Employee shall not:

                  (A) Within a geographic radius of seventy-five (75) miles from
Coldwater, Michigan, engage in, or work for, manage, operate, control or
participate in the ownership, management, operation or control of, or be
connected with, or have any financial interest in, any individual, partnership,
firm corporation or institution engaged in the same or similar activities to
those now or hereafter carried on by Employer;

                  (B) Interfere with the relationship of Employer and any of its
employees, agents or representatives; and

                  (C) Directly or indirectly divert or attempt to divert from
Employer any business in which Employer has been actively engaged during the
term hereof, nor interfere with the relationships of Employer with its dealers,
distributors, sources of supply or customers.

         Any breach of the covenant not to compete by Employee will, in addition
to any other remedies Employer may have, result in the forfeiture by Employee
and all other persons of any and all rights to unpaid benefits and payments at
the time of breach and in such event Employer shall have no further obligation
to pay any amounts related thereto.

         9. Nondisclosure of Confidential Information. Employee acknowledges
that Employer may disclose certain Confidential Information (as defined in this
Agreement) to Employee during the term of this Agreement to enable him to
perform his duties hereunder. Employee hereby covenants and agrees that he will
not, without the prior written consent of Employer, during the term of this
Agreement or at any time thereafter, disclose or permit to be disclosed to any
third party by any method whatsoever any of the Confidential Information of
Employer. For purposes of this Agreement, "Confidential Information" shall
include, but not be limited to, any and all records, notes, memoranda, data,
ideas, techniques, programs, computer software, writings, research, personnel
information, customer information, Employer's financial information, plans, or
any other information of whatever nature in the possession or control of
Employer which has not been published or

<PAGE>   6

disclosed to the general public, or which gives to Employer an opportunity to
obtain an advantage over competitors who do not know of or use it. Employee
further agrees that if his employment hereunder is terminated for any reason, he
will leave with Employer and will not take originals or copies of any and all
records, papers, programs, computer software and documents and all matter of
whatever nature which bears secret or confidential information of Employer.

         The foregoing paragraph shall not be applicable if and to the extent
Employee is required to testify in a judicial or regulatory proceeding pursuant
to an order of a judge or administrative law judge issued after Employee and his
legal counsel urge that the aforementioned confidentiality be preserved.

         Both during the term of his employment by Employer and at all times
thereafter, Employee shall not remove from Employer offices or premises any
documents, records, notebooks, files, correspondence, reports, memoranda and
similar materials or property of any kind unless necessary in accordance with
the duties and responsibilities of his employment (and, in the event that any
such material or property is removed, it shall be returned to its proper file or
place of safekeeping as promptly as possible) nor shall Employee make, retain,
remove or distribute any copies, or divulge to any third person the nature or
contents of any of the foregoing or of any other oral or written information to
which he may have access or with which for any reason he may have access or with
which for any reason he may become familiar, except as disclosure shall be
necessary in the performance of his assigned duties. Upon the termination of his
employment with Employer, Employee shall leave with or return to Employer all
originals and copies of the foregoing then in his possession or subject to his
control, whether prepared by Employee or by others.

         The covenants set forth in this paragraph which are made by Employee
are in consideration of the employment, or continuing employment of, and the
compensation paid to, Employee during his employment by Employer. The foregoing
covenants will not prohibit Employee from disclosing confidential or other
information to other employees of Employer or to third parties to the extent
that such disclosure is necessary to the performance of his duties under this
Agreement.

         10. Additional Remedies. It is expressly understood and agreed that
although Employee and Employer consider the restrictions contained in this
Agreement to be reasonable for the purpose of preserving the going business
value and goodwill of Employer, if a final judicial determination is made by a
court having jurisdiction at the time or territory or any other restriction
contained in this Agreement is an unenforceable restriction against Employee,
provisions of such restrictions shall not be rendered void but shall be deemed
amended to apply as to such maximum time and territory and to such other extent
as such court may judicially determine or indicate to be reasonable.
Alternatively, if the court referred to above finds that any restriction
contained in this Agreement is unenforceable, and such restriction cannot be
amended so as to make it enforceable, such findings shall not affect the
enforceability of any of the other restrictions contained herein.

         Employee acknowledges and agrees that Employer's remedy at law for a
breach or threatened breach of any of the provisions of this Agreement would be
inadequate and, in recognition of this fact, in the event of a breach or a
threatened breach by Employee of any of the provisions, it is agreed that, in
addition to its remedy at law, Employer shall be entitled, without posting any
bond, to obtain equitable relief, and Employee agrees not to oppose Employer's
request for equitable relief in the form of specific performance, temporary
restraining order, temporary or permanent injunction, or any other equitable
remedy which may then be available. Employee acknowledges that the granting of a
temporary injunction, temporary restraining order or permanent injunction merely
prohibiting a breach or threatened breach would not be an adequate remedy, and
consequently agrees upon any such breach or threatened breach to the granting of
injunctive relief. Nothing herein contained shall be construed as prohibiting
Employer from pursuing any other remedies available to it for such breach or
threatened breach. In any action successfully brought by Employer against
Employee to enforce the rights of Employer under this Agreement, Employer shall
also be entitled to recover from Employee its reasonable attorneys' fees and
costs of the action. The terms of paragraphs 8, 9 and 10 shall survive
termination of this Agreement.

<PAGE>   7

         11. Nonassignment. This Agreement is personal to Employee and shall not
be assigned by him. Employee shall not delegate, encumber, alienate, transfer or
otherwise dispose of his rights and duties hereunder. Employer may assign this
Agreement without Employee's consent to any other entity who, in connection with
such assignment, acquires all or substantially all of Employer's assets or into
or with which Employer is merged or consolidated.

         12. No Implied Waivers. Failure of either party to insist upon strict
performance of any part of this Agreement shall not be considered a waiver of
such performance and shall not prevent either party from subsequently insisting
upon strict performance.

         13. Severability. If any clause, phrase, provision or portion of this
Agreement or the application thereof to any person or circumstance shall be
invalid or unenforceable under any applicable law, such event shall not affect
or render invalid or unenforceable the remainder of this Agreement and shall not
affect the application of any clause, provision, or portion hereof to other
persons or circumstances.

         14. Benefit. The provisions of this Agreement shall inure to the
benefit of Employer, its successors and assigns, and shall be binding upon
Employer and Employee, its and his heirs, personal representatives and
successors, including without limitation Employee's estate and the executors,
administrators, or trustees of such estate.

        15. Governing Law and Choice of Forum. Michigan law shall govern the
construction and enforceability of this Agreement. Any and all actions
concerning any dispute arising hereunder shall be filed and maintained only in a
state or federal court sitting in the State of Michigan.

         16. Notices. All notices, requests, demands and other communications in
connection with this Agreement shall be made in writing and shall be deemed to
have been given when delivered by hand or 48 hours after mailing at any general
or branch United States Post Office, by registered or certified mail, postage
prepaid, addressed as follows, or to such other address as shall have been
designated in writing by the addressee:

                  (A)      If to Employer:
                           Southern Michigan Bancorp, Inc.
                           Attn: Chairman of the Board
                           51 West Pearl Street
                           Coldwater, Michigan 49036

                  (B)      If to Employee:
                           James T. Grohalski
                           1147 South Road
                           Union City, Michigan 49094

         17. Entire Agreement. This Agreement sets forth the entire
understanding of the parties and supersedes all prior agreements, arrangements,
and communications, whether oral or written, pertaining to the subject matter
hereof; and this Agreement shall not be modified or amended except by written
agreement of Employer and Employee.

         18. Limitation. Employee agrees not to commence any action or suit
relating to Employee's employment with Employer more than twelve (12) months
after the date of termination of this Agreement and agrees to waive any statute
of limitations to the contrary.

<PAGE>   8

         IN WITNESS WHEREOF, the parties hereto have executed this Agreement
effective as of the date first set forth above.

                 Employer:       SOUTHERN MICHIGAN BANCORP, INC.

                                 By:      /s/ James J. Morrison
                                          ------------------------------------

                                 Its:     Chairman of the Board of Directors
                                          ------------------------------------

                                 SOUTHERN MICHIGAN BANK & TRUST

                                 By:      /s/ Jaylen T. Johnson
                                          ------------------------------------

                                 Its:     Executive Vice President and Chief
                                          ------------------------------------
                                          Operations Officer
                                          ------------------

                 Employee:
                                 /s/ James T. Grohalski
                                 ---------------------------------------------
                                 James T. Grohalski

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