SOUTHERN MICHIGAN BANCORP INC, S-4, 2000-06-30

SOUTHERN MICHIGAN BANCORP INC
S-4, 2000-06-30
STATE COMMERCIAL BANKS

Previous: UNITED GOVERNMENT SECURITIES FUND INC, 485BPOS, EX-99.B(P)GSCODE, 2000-06-30

Next: SOUTHERN MICHIGAN BANCORP INC, S-4, EX-23.(D), 2000-06-30

<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE , 2000
REGISTRATION NO. 333-
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------

FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------

SOUTHERN MICHIGAN BANCORP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<TABLE>
<S> <C> <C>
MICHIGAN 6711 38-2407501
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>

51 WEST PEARL STREET
COLDWATER, MICHIGAN 49036
(517) 279-5500
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------

JAMES T. GROHALSKI
SOUTHERN MICHIGAN BANCORP, INC.
51 WEST PEARL STREET, COLDWATER, MICHIGAN 49036
(517) 279-5500
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------

COPIES TO:

<TABLE>
<S> <C>
JOHN R. COOK, ESQ JOHN R. DRESSER, ESQ.
MILLER, CANFIELD, PADDOCK AND STONE, P.L.C. DRESSER, DRESSER, GILBERT & HAAS, P.C.
444 WEST MICHIGAN AVENUE 112 SOUTH MONROE STREET
KALAMAZOO, MICHIGAN 49007-3714 STURGIS, MICHIGAN 49091
(616) 383-5832 (616) 651-3281
</TABLE>

------------------------

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: As soon as practicable after this registration statement is declared
effective and the consolidation of Sturgis Bank & Trust Company and the
registrant pursuant to the Agreement and Plan of Consolidation dated as of
February 15, 2000 between the registrant and Sturgis Bank & Trust Company, is
completed.

If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]

If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]

If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
------------------------

CALCULATION OF REGISTRATION FEE

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------------
PROPOSED MAXIMUM PROPOSED
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PER SHARE(1)(2) OFFERING PRICE(1)(2) REGISTRATION FEE(2)(3)
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $2.50 par value per
share................................. 1,300,000 shares $6.437 $8,368,100 $2,210
---------------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>

(1) Estimated solely for purposes of calculating the registration fee.

(2) The proposed maximum offering price per share was determined by dividing the
proposed maximum aggregate offering price for such shares by the number of
shares being registered.

(3) The proposed maximum aggregate offering price is based on, and the
registration fee has been computed pursuant to, Rule 457(f)(1) under the
Securities Act of 1933, as amended. The proposed maximum aggregate offering
price and the registration fee attributable to the shares of common stock of
the registrant to be exchanged for shares of common stock of Sturgis Bank &
Trust Company are based on the average of the bid and asked price for shares
of common stock of Sturgis Bank & Trust Company reported on the
over-the-counter bulletin board on June 26, 2000 ($6.437) and the maximum
number of such shares (1,300,000 shares) that may be exchanged for the
shares of common stock of the registrant being registered.

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE> 2

COVER PAGE TO PROXY STATEMENT/PROSPECTUS]

[STURGIS LETTERHEAD]

, 2000

Dear Fellow Stockholder:

You are cordially invited to a special meeting of stockholders of Sturgis
Bank & Trust Company:

- to approve the proposed consolidation of Sturgis Bank & Trust Company and
Southern Michigan Bancorp, Inc.; and

- to conduct other business properly brought before the meeting.

If the consolidation is completed, you will receive .398 shares of Southern
Michigan Bancorp common stock for each share of Sturgis Bank & Trust Company
common stock that you own. Stockholders of Southern Michigan Bancorp will
continue to own their existing shares of Southern Michigan Bancorp common stock.
On [ , 2000] the closing price of Southern Michigan Bancorp common
stock was [$ ], making .398 shares of Southern Michigan Bancorp common
stock worth [$ ]. The closing price of Sturgis Bank & Trust Company
common stock on that date was [$ ]. These prices will, however,
fluctuate between now and the consolidation. After the consolidation, Sturgis
Bank & Trust Company stockholders will own about [ %] of the outstanding
Southern Michigan Bancorp common stock and Southern Michigan Bancorp
stockholders will own about [ %] of the outstanding Southern Michigan
Bancorp common stock.

THE CONSOLIDATION WILL BE TAX-FREE TO YOU FOR FEDERAL INCOME TAX PURPOSES,
EXCEPT FOR TAXES ON CASH RECEIVED FOR A FRACTIONAL SHARE. Following the
consolidation, you will have an interest in a bank holding company that will be
the largest bank holding company headquartered in Michigan with
over million in assets and over offices.

Your Board of Directors unanimously recommends that you vote FOR the
consolidation.

This proxy statement/prospectus provides you with detailed information
about the matters to be considered at this meeting. We encourage you to read
this entire document carefully. You can obtain additional information about
Southern Michigan Bancorp from publicly available documents it has filed with
the SEC. You can obtain additional information about Sturgis Bank & Trust
Company from publicly available documents it has filed with the FDIC.

YOUR VOTE IS VERY IMPORTANT. Whether or not you plan to attend this
meeting, please take the time to vote by completing and mailing the enclosed
proxy card to us as soon as possible in the envelope we have provided.

Leonard L. Eishen
President and Chief Executive Officer

Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities, or determined if this
proxy statement/prospectus is truthful or complete. Any representation to the
contrary is a criminal offense.

This proxy statement/prospectus is dated [ , 2000]. This proxy
statement/prospectus and a proxy card were mailed to the stockholders of Sturgis
Bank & Trust Company on or about [ , 2000].
<PAGE> 3

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON [ , 2000]

NOTICE IS HEREBY GIVEN that a special meeting of stockholders of Sturgis
Bank & Trust Company will be held at [ , AT ], local time,
on [ ], 2000, for the following purposes:

- To consider and vote on a proposal to approve the Agreement and Plan of
Consolidation dated as of February 15, 2000 between Southern Michigan
Bancorp, Inc. and Sturgis Bank & Trust Company. The consolidation
agreement provides for the consolidation of Sturgis Bank & Trust Company
and Southern Michigan Bancorp through the merger of Sturgis Bank & Trust
Company with a newly formed Michigan savings bank that is a wholly-owned
subsidiary of Southern Michigan Bancorp. If the consolidation is
completed, Sturgis Bank & Trust Company stockholders will receive .398
shares of Southern Michigan Bancorp common stock for each share of
Sturgis Bank & Trust Company common stock that they own. Southern
Michigan Bancorp stockholders will continue to own their existing shares
of Southern Michigan Bancorp common stock after the consolidation. The
consolidation and the exchange of Sturgis Bank & Trust Company common
stock for Southern Michigan Bancorp, Inc. common stock, other than for
cash paid for any fractional share, will be tax-free to Sturgis Bank &
Trust Company and its stockholders for federal income tax purposes.

- To conduct such other business as may properly come before this meeting
or any adjournments or postponements of the meeting.

Your Board of Directors is not aware of any other business to come before
this meeting.

Sturgis Bank & Trust Company common stock constitutes the only security of
Sturgis Bank & Trust Company whose holders are entitled to vote upon the
proposals to be presented at this meeting. The close of business on
[ , 2000] has been fixed as the record date for the determination of
stockholders entitled to notice of and to vote at this meeting and any
adjournments or postponements of the meeting. Only stockholders of record at the
close of business on such date are entitled to notice of and to vote at this
meeting and any adjournments or postponements of the meeting.

A complete list of stockholders entitled to vote at this meeting will be
available for examination at the meeting.

YOUR VOTE IS VERY IMPORTANT. Please sign, date and return the enclosed
proxy without delay in the enclosed postage-paid envelope. You may revoke your
proxy at any time prior to its exercise. Any stockholder of record present at
this meeting or at any adjournments or postponements of the meeting may revoke
his or her proxy and vote personally on each matter brought before the meeting.
By order of the Board of Directors,

Joyce L. Waltke
Secretary of the Board
, 2000

The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities Exchange Commission is effective. This prospectus is not an offer to
sell these securities and it is not soliciting an offer to buy these securities
in any state where the offer or sale is not permitted.
<PAGE> 4

TABLE OF CONTENTS

<TABLE>
<CAPTION>
TOPIC PAGE
----- ----
<S> <C>
Questions and Answers About the Consolidation and the
Meeting................................................... 1
Summary..................................................... 2
Forward-Looking Statements.................................. 6
Selected Condensed Consolidated Historical Financial and
Operating Data of Southern Michigan Bancorp, Inc.......... 7
Selected Condensed Consolidated Historical Financial and
Operating Data of Sturgis Bank & Trust Company............ 8
Selected Unaudited Pro Forma Financial Data of Southern
Michigan Bancorp, Inc. After the Consolidation............ 9
Unaudited Comparative Per Share Data of Southern Michigan
Bancorp, Inc. and Sturgis Bank & Trust Company............ 10
Comparative Stock Prices.................................... 11
The Shareholder Meeting..................................... 12
Date, time and place...................................... 12
Matters to be considered; Votes required.................. 12
Voting of proxies......................................... 12
Revocability of proxies................................... 13
Record dates; voting rights; quorums...................... 13
Dissenters' rights of appraisal........................... 13
Solicitation of proxies................................... 14
The Consolidation........................................... 15
General................................................... 15
Exchange ratio............................................ 15
Treatment of stock options................................ 16
Procedures for exchanging certificates.................... 16
Background of the consolidation........................... 17
Our reasons for the consolidation......................... 19
Opinion of Sturgis Bank & Trust Company financial
advisor................................................ 23
Opinion of Southern Michigan Bancorp financial advisor.... 29
Summary of the consolidation agreement.................... 37
Conditions to the consolidation........................... 41
Termination of the consolidation agreement; expenses...... 44
No solicitation of transactions........................... 46
Regulatory approvals required............................. 46
Anticipated accounting treatment.......................... 48
Resale of Southern Michigan Bancorp common stock;
restrictions on transfer............................... 50
Termination fee...........................................
Material Federal Income Tax Consequences of the
Consolidation............................................. 50
Unaudited Pro Forma Condensed Combined Financial
Statements................................................ 52
Management and Operations After the Consolidation........... 60
Directors................................................. 60
Executive officers........................................ 62
Dividends after the consolidation......................... 62
Operations after the consolidation........................ 62
Southern Michigan Bancorp Stock Ownership................... 63
</TABLE>

i
<PAGE> 5

<TABLE>
<CAPTION>
TOPIC PAGE
----- ----
<S> <C>
Interests of Certain Persons in the Consolidation........... 65
General................................................... 65
Employment agreements..................................... 65
Other matters............................................. 67
Description of Southern Michigan Bancorp Capital Stock...... 68
General................................................... 68
Preferred stock........................................... 68
Common stock.............................................. 69
Transfer agent............................................ 69
Authorized but unissued shares............................ 69
Regulatory Considerations................................... 70
General................................................... 70
Dividend restrictions..................................... 71
Restrictions on transactions with affiliates.............. 72
Capital requirements...................................... 72
Liability for bank subsidiaries........................... 74
Deposit insurance assessments............................. 74
Depositor preference statute.............................. 75
Brokered deposits......................................... 76
Regulation of proposed acquisitions....................... 76
Other legislation......................................... 76
Mortgage regulation....................................... 78
Comparison of Shareholder Rights............................ 78
General................................................... 78
Board of directors; voting for directors; removal of
directors.............................................. 79
Director nominations...................................... 79
Shareholder voting requirements........................... 80
Anti-takeover laws and charter provisions................. 81
Meetings of shareholders.................................. 83
Director liability and indemnification.................... 84
Payment of dividends...................................... 84
Charter amendments........................................ 85
Shareholder action without a meeting...................... 85
Dissenters' rights of appraisal........................... 85
Mergers and consolidations................................ 86
Selected Consolidated Financial Data of Sturgis Bank & Trust
Company................................................... 87
Management's Discussion and Analysis of Financial Condition
and Results of Operations of Sturgis Bank & Trust
Company................................................... 88
Overview..................................................
Financial condition....................................... 88
Results of operations..................................... 91
Provision for loan losses................................. 96
Cash flow changes......................................... 98
Asset/liability management................................ 98
Liquidity and capital resources........................... 101
Effect of interest rate fluctuations and inflation........ 102
Acquisitions.............................................. 102
Impact of Year 2000....................................... 102
Accounting and regulatory developments.................... 103
</TABLE>

ii
<PAGE> 6

<TABLE>
<CAPTION>
TOPIC PAGE
----- ----
<S> <C>
Business and Properties of Sturgis Bank & Trust Company..... 104
Overview.................................................. 104
Lending activities........................................ 104
Asset quality and credit risk management.................. 108
Interest rates and fee income............................. 108
Nonperforming loans....................................... 109
Investment activities..................................... 111
Sources of funds.......................................... 112
Competition............................................... 115
Trust department.......................................... 115
Subsidiaries.............................................. 115
Employees................................................. 116
Supervision and regulation................................ 116
Properties................................................ 116
Legal proceedings......................................... 117
Directors................................................... 117
Board committees and meetings............................. 119
Director compensation..................................... 120
Director nominations...................................... 121
Executive Officers.......................................... 121
Summary compensation table................................ 122
Aggregate option/SAR grants in last fiscal year...........
Aggregate option /SAR exercises in last fiscal year and
FY-end option/SAR values............................... 122
Compensation committee interlocks and insider
participation.......................................... 122
Certain relationships and related transactions............ 123
Sturgis Bank & Trust Company Stock Ownership................ 123
Legal Matters............................................... 125
Experts..................................................... 125
Where You Can Find More Information......................... 126
Index to Financial Statements of Sturgis Bank & Trust
Company................................................... FS-1
Annex A -- Southern Michigan Bancorp, Inc. Annual Report on
Form 10-K for the fiscal year ended December 31,
1999............................................. A-1
Annex B -- Southern Michigan Bancorp, Inc. Quarterly Report
on Form 10-Q for the quarterly period ended March
31, 2000......................................... B-1
Annex C -- Section 706 of the Michigan Savings Bank Act..... C-1
Annex D -- Opinion of Raymond James & Associates, Inc....... D-1
Annex E -- Opinion of Austin Associates, Inc................ E-1
Annex F -- Agreement and Plan of Consolidation dated as of
February 15, 2000 between Sturgis Bank & Trust
Company and Southern Michigan Bancorp., Inc.
(without any exhibits or schedules).............. F-1
</TABLE>

iii
<PAGE> 7

QUESTIONS AND ANSWERS ABOUT THE CONSOLIDATION AND THE MEETING

Q. WHY ARE THE TWO COMPANIES PROPOSING TO CONSOLIDATE?

A. We believe that combining Sturgis Bank & Trust Company and Southern
Michigan Bancorp will create a stronger and more diversified company that will
provide significant benefits to shareholders and customers alike. After the
consolidation, the combined companies will realize economic benefits by
combining computer operations, check processing systems, employee benefit
programs, supply purchases, and corporate insurance needs. Further, additional
benefits will be realized through the utilization of management expertise and
expansion of market areas, products and services. The combined companies will
have greater strengths and resources which will enable efficiencies and
expertise that each bank operating alone would not achieve.

Q. WHAT AM I BEING ASKED TO VOTE ON?

A. You are being asked to approve the proposed consolidation of Sturgis
Bank & Trust Company and Southern Michigan Bancorp through the consolidation of
Sturgis Bank & Trust Company with a newly formed Michigan savings bank that is a
wholly owned subsidiary of Southern Michigan Bancorp.

Q. WHAT DO I NEED TO DO NOW?

A. You need to read this proxy statement/prospectus and sign your proxy
card and mail it to us in the enclosed return envelope as soon as possible.

Q. SHOULD I SEND IN MY STOCK CERTIFICATES NOW?

A. No. You will be sent written instructions for exchanging your stock
certificates after the consolidation is completed.

Q. WHO CAN HELP ANSWER MY QUESTIONS?

A. If you have more questions about the consolidation or the meeting, you
should contact:

<TABLE>
<S> <C>
FOR SOUTHERN MICHIGAN BANCORP INFORMATION: FOR STURGIS BANK & TRUST COMPANY
INFORMATION:
Southern Michigan Bancorp Sturgis Bank & Trust Company
51 West Pearl Street 125 E. Chicago Road
Coldwater, Michigan 49036 P.O. Box 600
Attention: James T. Grohalski Sturgis Bank & Trust Company, Michigan
(517) 279-5500 49091
Attention: Leonard L. Eishen
(616) 651-9345
</TABLE>

A copy of Southern Michigan Bancorp's Annual Report on Form 10-K for the
fiscal year ended December 31, 1999 is attached to this proxy
statement/prospectus as Annex A. A copy of Southern Michigan Bancorp's Quarterly
Report on Form 10-Q for the quarterly period ended March 31, 2000 is attached to
this proxy statement/prospectus as Annex B.

This proxy statement/prospectus incorporates by reference important
business and financial information about Southern Michigan Bancorp that is not
included in or delivered with this document. The information incorporated by
reference is available without charge upon written or oral request to Mr.
Grohalski at the above address and telephone number. IN ORDER TO ENSURE TIMELY
DELIVERY OF THE INFORMATION INCORPORATED BY REFERENCE, YOUR REQUEST SHOULD BE
RECEIVED BY , 2000 [INSERT DATE THAT IS FIVE BUSINESS DAYS PRIOR TO
MEETING DATE].

1
<PAGE> 8

SUMMARY

OUR COMPANIES PROVIDE FINANCIAL SERVICES (PAGES )

Southern Michigan Bancorp is a Michigan bank holding company. Its executive
offices are located at 51 West Pearl Street, Coldwater, Michigan 49036;
telephone: (517) 279-5500. Southern Michigan Bank & Trust, a wholly owned
subsidiary of Southern Michigan Bancorp, operates twelve banking and mortgage
banking offices in the primarily rural areas of Branch, Hillsdale, and Calhoun
counties in southwestern Michigan.

Sturgis Bank & Trust Company is a Michigan savings bank. It has 12 branches
and its executive offices are located at 125 E. Chicago Road, Sturgis, Michigan
49091; telephone: (616) 651-9345. Sturgis Bank & Trust Company operates twelve
banking and mortgage banking offices in St. Joseph, Branch, Kalamazoo and Van
Buren Counties in southwestern Michigan. Sturgis Bank & Trust Company operates
one limited service branch in Sturgis, Michigan.

EXCHANGE RATIO IS .398 SHARES OF SOUTHERN MICHIGAN BANCORP COMMON STOCK FOR EACH
STURGIS BANK & TRUST COMPANY SHARE (PAGE )

Sturgis Bank & Trust Company shareholders will receive .398 shares of
Southern Michigan Bancorp common stock in exchange for each share of Sturgis
Bank & Trust Company common stock, plus cash instead of any fractional share.
The cash paid for any fractional share will be in an amount equal to such
fraction multiplied by the closing price of Southern Michigan Bancorp common
stock on the trading day immediately prior to the consolidation's completion.
Southern Michigan Bancorp shareholders will continue to own their existing
shares of Southern Michigan Bancorp common stock. After the consolidation,
Sturgis Bank & Trust Company shareholders will own about 38.2% of the
outstanding shares of Southern Michigan Bancorp common stock and Southern
Michigan Bancorp shareholders will own about 61.8% of the outstanding shares of
Southern Michigan Bancorp common stock.

Example: If you own 10 shares of Sturgis Bank & Trust Company common stock,
then after the consolidation you will be entitled to receive 3 shares of
Southern Michigan Bancorp common stock and a check for the market value of .98
of a share. If you own 10 shares of Southern Michigan Bancorp common stock, then
you will continue to hold those 10 shares after the consolidation.

ON , 2000 THE CLOSING PRICE OF SOUTHERN MICHIGAN BANCORP
COMMON STOCK WAS $ , MAKING .398 SHARES OF SOUTHERN MICHIGAN BANCORP
COMMON STOCK WORTH $ . THE CLOSING PRICE OF STURGIS BANK & TRUST
COMPANY COMMON STOCK ON THAT DATE WAS $ . You should obtain current
stock price quotations for Southern Michigan Bancorp common stock and Sturgis
Bank & Trust Company common stock. These quotations are available from your
stock broker, in major newspapers and on the Internet.

You should note that the .398 exchange ratio will not change even if the
market prices of Southern Michigan Bancorp common stock and Sturgis Bank & Trust
Company common stock increase or decrease before the consolidation is completed.
Because these stock prices fluctuate, you will not know when you vote what the
shares will be worth when issued in the consolidation, and the market value of
the shares at the time of the consolidation could be higher or lower than the
current market value.
2
<PAGE> 9

THE CONSOLIDATION WILL BE TAX-FREE TO YOU (PAGE )

The consolidation will be tax-free to Sturgis Bank & Trust Company
shareholders for federal income tax purposes, except for taxes on cash received
for a fractional share. The consolidation will also be tax-free to Sturgis Bank
& Trust Company and to Southern Michigan Bancorp and its shareholders for
federal income tax purposes. However, because tax matters are complicated, and
tax results may vary among shareholders, we urge you to contact your own tax
advisor to understand fully how the consolidation will affect you.

DIVIDENDS AFTER THE CONSOLIDATION (PAGE )

After the consolidation, it is anticipated that Southern Michigan Bancorp
will continue to pay dividends at a rate consistent with past practices.
However, the final decision as to what percentage will be paid in the future
will be made after completion of the consolidation.

DISSENTERS' RIGHTS OF APPRAISAL (PAGE )

Holders of Sturgis Bank & Trust Company common stock WILL have dissenters'
rights under Section 706 of the Michigan Savings Bank Act in connection with the
consolidation. SUCH DISSENTERS' RIGHTS WILL BE LOST, HOWEVER, IF THE PROCEDURAL
REQUIREMENTS OF SECTION 706 OF THE MICHIGAN SAVINGS BANK ACT ARE NOT FULLY AND
PRECISELY SATISFIED.

A copy of Section 706 of the Michigan Savings Bank Act is attached to this
proxy/prospectus statement as Annex C.

YOUR BOARD OF DIRECTORS RECOMMENDS THAT YOU APPROVE THE CONSOLIDATION (PAGE )

Your Board of Directors believes that the consolidation is fair to you and
in your best interests. It unanimously recommends that you vote FOR the
consolidation.

TWO INVESTMENT BANKS SAY THE EXCHANGE RATIO IS FAIR FROM A FINANCIAL POINT OF
VIEW (PAGES - )

In deciding to approve the consolidation, your Board of Directors
considered an opinion from its financial advisor, Raymond James & Associates,
Inc., as to the fairness of the exchange ratio from a financial point of view to
the holders of Sturgis Bank & Trust Company common stock. Southern Michigan
Bancorp also received an opinion from its financial advisor, Austin Associates,
Inc., that the exchange ratio is fair from a financial point of view to Southern
Michigan Bancorp. These opinions are attached to this proxy statement/prospectus
as Annex D and Annex E. We encourage you to read these opinions completely and
carefully.

WHAT WE NEED TO DO TO COMPLETE THE CONSOLIDATION (PAGE )

To complete the consolidation we must satisfy a number of conditions
including:

- approval of the consolidation by Sturgis Bank & Trust Company
shareholders with no more than shares entitled to dissent;

- the absence of any legal restraints that prevent the completion of the
consolidation;

- approval of the consolidation by federal and state regulatory
authorities;
3
<PAGE> 10

- the registration statement will have been declared effective and not be
subject to a stop order of the SEC;

- receipt of opinions about the federal income tax treatment of our
companies and our shareholders;

- to complete the consolidation as a pooling-of-interests, receipt of
letters from our independent accountants that the consolidation will
qualify for pooling-of-interests accounting treatment;

- receipt of all consents or approvals of all persons;

- receipt of a written fairness opinion from our financial consultant; and.

- adoption of a new name for Southern Michigan Bancorp and the filing of an
assumed name certificate.

In the event that certain of these conditions are not met, we could decide
to waive compliance with such conditions and complete the consolidation even
though one or more of these conditions hasn't been met. We can't be certain when
or if the conditions to the consolidation will be satisfied or waived, or that
the consolidation will be completed.

TERMINATION FEE (PAGE )

If the consolidation agreement is terminated because one party failed to
support the consolidation or to oppose an offer from a third party to acquire
it, then that party must pay the other party a termination fee of $500,000. The
termination fee is intended to increase the likelihood that the consolidation
will be completed.

STURGIS BANK & TRUST COMPANY OFFICERS AND DIRECTORS MAY HAVE INTERESTS THAT ARE
DIFFERENT FROM YOUR INTERESTS (PAGE )

When considering the recommendation of your Board of Directors, you should
be aware that some directors and officers of Sturgis Bank & Trust Company have
interests in the consolidation that are different from, or in addition to, your
interests as shareholders. These interests exist because of agreements that they
have with Sturgis Bank & Trust Company, including employment agreements, and
rights that they have under incentive compensation plans maintained by Sturgis
Bank & Trust Company. Some of these agreements and plans will provide them with
severance benefits if their employment is terminated after the consolidation.
Employment Agreements are in effect between Sturgis Bank & Trust Company and
Leonard L. Eishen, President and Chief Executive Officer, Eric L. Eishen,
Executive Vice President and Chief Operations Officer and Brian P. Hoggatt, Vice
President, Treasurer and Chief Financial Officer. Messrs. Eishen, Eishen and
Hoggatt have signed a waiver waiving the severance benefits in their employment
agreements for this transaction only and conditioned upon the execution and
deliver of employment agreements satisfactory to them.

These interests also arise from provisions in the consolidation agreement
relating to appointments to the Board of Directors of Southern Michigan Bancorp
and employment arrangements and employee benefits after the consolidation. We
were aware of these interests and considered them, among other matters, in
approving the consolidation agreement.

DIRECTORS AFTER THE CONSOLIDATION (PAGE )

If the consolidation is completed, then the Board of Directors of Southern
Michigan Bancorp will consist of nine persons, who will be divided into three
classes with staggered terms ranging from
4
<PAGE> 11

one year to three years. The members of the Board of Directors of Southern
Michigan Bancorp after the consolidation will be: Raymond H. Dresser, Jr.,
Leonard L. Eishen, Lawrence A. Franks, James A. Goethals, H. Kenneth Cole, James
T. Grohalski, Nolan E. Hooker, James J. Morrison and Freeman E. Riddle.

The present members of the Board of Directors of Sturgis Bank & Trust
Company will continue to serve as the Board of Directors of Sturgis Bank & Trust
Company following the consolidation, except that Mr. Grohalski will be appointed
to the Board of Directors of Sturgis Bank & Trust Company.

EXECUTIVE OFFICERS AFTER THE CONSOLIDATION (PAGE )

The executive officers of Southern Michigan Bancorp after the consolidation
will be: Leonard L. Eishen, who will be the President and Chief Executive
Officer; James T. Grohalski, who will be the Vice-Chairman, Chief Operating
Officer and Chief Financial Officer; James Morrison, who will be the Chairman;
and James A. Goethals, who will be the Vice-Chairman.

The present executive officers of Sturgis Bank & Trust Company will
continue to serve as the executive officers of Sturgis Bank & Trust Company
following the consolidation.

COMPARISON OF SHAREHOLDER RIGHTS

There are significant differences between the rights of Sturgis Bank &
Trust Company shareholders and the rights of Southern Michigan Bancorp
shareholders. Among the material differences are differences in:

- voting for directors and the right to remove directors (page );

- shareholder voting requirements (page );

- anti-takeover laws and charter provisions (page );

- the right to call special meetings of shareholders (page );

- the payment of dividends (page );

- the right and power to amend charter provisions (page ); and

- the right of shareholders to take action without a meeting (page ).

These differences exist because the rights of Southern Michigan Bancorp's
shareholders are governed by the Michigan Business Corporation Act and Southern
Michigan Bancorp's articles of incorporation and by-laws and the rights of
Sturgis Bank & Trust Company's shareholders are currently governed by the
Michigan Savings Bank Act and Sturgis Bank & Trust Company's articles of
incorporation and by-laws. When the consolidation is completed, Sturgis Bank &
Trust Company's shareholders will become Southern Michigan Bancorp shareholders
and their rights will be governed by the Michigan Business Corporation Act and
Southern Michigan Bancorp's articles of incorporation and by-laws.

THE CONSOLIDATION AND THE CONSOLIDATION AGREEMENT (PAGES - AND - )

A copy of the consolidation agreement without any exhibits or schedules is
attached to this proxy statement/prospectus as Annex F and is incorporated by
reference. We encourage you to read the consolidation agreement completely and
carefully as it is the legal document that governs the consolidation.
5
<PAGE> 12

FORWARD-LOOKING STATEMENTS

We have made forward-looking statements in this proxy statement/prospectus,
and in our public documents to which we refer, that are subject to risks and
uncertainties. These forward-looking statements include information about
possible or assumed future results of our operations or the performance of the
combined company after the consolidation. Also, when we use any of the words
"intends," "believes," "expects," "anticipates," "estimates" or similar
expressions we are making forward-looking statements.

We claim the protection of the safe harbor for forward-looking statements
contained in the Private Securities Litigation Reform Act of 1995 for all of our
forward-looking statements. While each of us believes that its forward-looking
statements are reasonable, you should not place undue reliance on any such
forward-looking statements, which speak only as of the date made. You should
understand that the following important factors, in addition to those discussed
elsewhere in this proxy statement/prospectus and in our public documents to
which we refer, could affect the future results and performance of each of us
and the combined company. This could cause those results to differ materially
from those expressed in our forward-looking statements. Factors that might cause
such a difference include the following:

- lower than expected revenues after the consolidation, higher than
expected restructuring charges after the consolidation, higher than
expected operating costs after the consolidation, or higher than expected
losses of deposits, customers and business after the consolidation;

- lower than expected costs savings from the consolidation, or delays in
obtaining, or an inability to obtain, the costs savings from the
consolidation;

- delays in obtaining regulatory approvals for the consolidation;

- greater than expected difficulties in integrating our businesses or
retaining key personnel;

- significantly increased competition among depository and other financial
institutions;

- inflation and changes in the interest rate environment that reduce our
margins or reduce the fair value of financial instruments;

- general economic conditions, either nationally or in the combined
company's market areas, that are worse than expected;

- adverse changes in the securities markets;

- legislative or regulatory changes that adversely affect our business; and

- the ability to enter new markets successfully and capitalize on growth
opportunities.

For additional information regarding Southern Michigan Bancorp, Sturgis
Bank & Trust Company and the combined company, please see the balance of this
proxy statement/prospectus, especially "Where You Can Find More Information."
6
<PAGE> 13

SELECTED CONDENSED CONSOLIDATED HISTORICAL FINANCIAL AND OPERATING
DATA OF SOUTHERN MICHIGAN BANCORP, INC.
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

We are providing the following financial information regarding Southern
Michigan Bancorp to aid you in your analysis of the financial aspects of the
consolidation. We derived this information from Southern Michigan Bancorp's
audited financial statements for 1995 through 1999 and unaudited financial
statements for the three months ended March 31, 1999 and 2000. All information
is presented in accordance with generally accepted accounting principles. The
per common share data has been restated to reflect the issuance of stock
dividends. The information is only a summary and you should read it in
conjunction with Southern Michigan Bancorp's historical financial statements and
related notes contained in the annual reports and other information that
Southern Michigan Bancorp has filed with the SEC. See "Where You Can Find More
Information," "Annex A -- Southern Michigan Bancorp Annual Report on Form 10-K
for the fiscal year ended December 31, 1999," and "Annex B -- Southern Michigan
Bancorp Annual Report on Form 10-Q for the quarterly period ended March 31,
2000." Interim unaudited data for the three months ended March 31, 1999 and 2000
reflect, in the opinion of management of Southern Michigan Bancorp, all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of such data. Results for the three months ended March 31,
2000 are not necessarily indicative of results that may be expected for any
other interim period or for the year as a whole.

<TABLE>
<CAPTION>
AT, OR FOR THE THREE
MONTHS ENDED,
MARCH 31, AT, OR FOR THE YEAR, ENDED DECEMBER 31,
--------------------- ----------------------------------------------------
2000 1999 1999 1998 1997 1996 1995
--------- --------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Interest income................. $ 5,434 $ 4,759 $ 20,051 $ 19,446 $ 18,669 $ 16,787 $ 15,476
Interest expense................ 2,346 2,037 8,435 8,032 7,443 6,604 6,380
Provision for loan losses....... 150 150 852 600 460 267 222
Net interest income after
Provision for loan losses..... 2,938 2,572 10,764 10,814 10,766 9,916 8,874
Non-interest income............. 694 664 3,025 3,196 2,459 1,924 1,671
Amortization of intangibles..... 65 69 327 358 168 168 168
Other non-interest expense...... 2,541 2,175 9,157 8,918 8,940 7,464 6,927
Provision for federal income
taxes......................... 269 211 1,005 1,185 1,085 1,150 835
Net income...................... 757 781 3,300 3,549 3,032 3,058 2,615
PER COMMON SHARE DATA:
Net income -- basic............. 0.39 .38 1.64 1.70 1.44 1.46 1.27
Net income -- diluted........... 0.39 .38 1.64 1.70 1.44 1.46 1.27
Cash dividends declared......... 0.19 .16 .68 .60 .52 .48 .45
Book value at period-end(1)..... 12.19 12.57 12.18 13.55 13.07 11.08 10.09
BALANCE SHEET DATA:
Total assets.................... 283,399 263,221 275,825 266,851 238,531 235,562 209,977
Loans........................... 201,059 166,218 193,371 163,303 158,741 152,678 123,237
Allowance for loan losses....... 2,149 2,124 2,132 2,026 1,863 1,814 1,609
Deposits........................ 231,528 229,631 233,303 233,361 207,065 209,467 185,524
Other borrowings................ 15,000 5,000 15,000 5,000 3,000 -- 1,000
Total shareholders' equity...... 21,669 22,333 19,990 19,345 20,590 19.616 18,497
SIGNIFICANT RATIOS:
Return on average assets........ 1.09% 1.16% 1.23% 1.42% 1.30% 1.45% 1.31%
Return on average equity........ 12.39% 14.78% 16.37% 17.48% 14.96% 16.09% 14.64%
Operating efficiency ratio...... 67.19% 64.24% 62.54% 61.04% 65.33% 61.65% 64.34%
</TABLE>

-------------------------
(1) Book value per share includes common stock subject to ESOP repurchase
obligations.

7
<PAGE> 14

SELECTED CONDENSED CONSOLIDATED HISTORICAL FINANCIAL AND OPERATING
DATA OF STURGIS BANK & TRUST COMPANY
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

We are providing the following financial information to aid you in your
analysis of the financial aspects of the consolidation. We derived this
information from Sturgis Bank & Trust Company's audited financial statements for
1995 through 1999 and unaudited financial statements for the three months ended
March 31, 1999 and 2000. All information is presented in accordance with
generally accepted accounting principles. The information is only a summary and
you should read it in conjunction with Sturgis Bank & Trust Company's historical
financial statements and related notes contained in this proxy
statement/prospectus and in the annual reports and other information that
Sturgis Bank & Trust Company has filed with the FDIC. See "Index to Financial
Statements of Sturgis Bank & Trust Company." Interim unaudited data for the
three months ended March 31, 1999 and 2000 reflect, in the opinion of management
of Sturgis Bank & Trust Company, all adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation of such data. Results
for the three months ended March 31, 2000 are not necessarily indicative of
results that may be expected for any other interim period or for the year as a
whole.

<TABLE>
<CAPTION>
AT, OR FOR THE THREE
MONTHS ENDED,
MARCH 31, AT, OR FOR THE YEAR ENDED DECEMBER 31,
--------------------- ----------------------------------------------------
2000 1999 1999 1998 1997 1996 1995
--------- --------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Interest income................. $ 4,515 $ 4,102 $ 16,963 $ 15,890 $ 14,338 $ 11,989 $ 8,876
Interest expense................ 2,439 2,157 8,673 8,770 7,985 6,554 4,386
-------- -------- -------- -------- -------- -------- --------
Net interest income............. 2,076 1,945 8,290 7,120 6,353 5,435 4,490
Provision for loan losses....... 38 39 104 174 338 155 115
-------- -------- -------- -------- -------- -------- --------
Net interest income after
provision for loan losses..... 2,038 1,906 8,186 6,946 6,015 5,280 4,375
Noninterest income.............. 694 863 3,022 2,771 1,709 1,149 996
Amortization of intangibles..... 147 140 566 386 158 130 69
Other noninterest expense....... 1,968 1,982 7,951 6,981 5,151 4,796 3,273
Provision for federal income
taxes......................... 199 200 688 635 713 413 603
-------- -------- -------- -------- -------- -------- --------
Net income...................... $ 418 $ 447 $ 2,003 $ 1,715 $ 1,702 $ 1,090 $ 1,426
======== ======== ======== ======== ======== ======== ========
PER COMMON SHARE DATA:
Net income -- basic............. $ 0.13 $ 0.14 $ 0.65 $ 0.67 $ 0.71 $ 0.45 $ 0.59
Net income -- diluted........... 0.13 0.14 0.65 0.65 0.69 0.44 0.59
Cash dividends declared......... 0.05 0.04 0.19 0.18 0.17 0.13 0.13
Book value at period-end........ 8.27 7.84 8.19 7.74 6.78 6.25 5.93
BALANCE SHEET DATA:
Total assets.................... $258,533 $239,234 $251,596 $237,496 $201,310 $180,617 $123,088
Loans........................... 214,526 181,999 207,025 182,798 170,771 157,247 104,080
Allowance for loan losses....... 751 706 730 687 693 456 357
Deposits........................ 175,604 176,222 163,680 172,440 124,825 104,037 82,514
Other borrowings................ 53,978 36,361 59,113 38,662 57,502 59,850 24,667
Total shareholders' equity...... 25,614 24,274 25,348 23,951 16,332 14,999 14,221
SIGNIFICANT RATIOS:
Return on average assets........ 0.67% 0.77% 0.82% 0.78% 0.89% 0.72% 1.30%
Return on average equity........ 6.56% 7.53% 8.13% 8.54% 10.87% 7.46% 10.44%
Operating efficiency ratio...... 71.05% 70.58% 70.28% 70.58% 63.90% 72.84% 59.67%
</TABLE>

8
<PAGE> 15

SELECTED UNAUDITED PRO FORMA FINANCIAL DATA
OF SOUTHERN MICHIGAN BANCORP, INC. AFTER THE CONSOLIDATION
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

The following selected unaudited pro forma financial data reflect the
pooling-of-interests method of accounting and combine our historical results, in
each case as of or for the fiscal years ended December 31, 1999, 1998 and 1997
and as of or for the three months ended March 31, 2000 and 1999. The unaudited
pro forma condensed combined statements of income information gives effect to
the consolidation as if it had occurred at the beginning of each period covered
by such statements of income. The unaudited pro forma condensed combined balance
sheet information gives effect to the consolidation as if it occurred at each
period end.

We expect that we will incur restructuring and consolidation related
expenses as a result of combining our companies. We also anticipate that the
consolidation will provide the combined company with financial benefits that
include reduced operating expenses and the opportunity to earn more revenue. The
pro forma information, while helpful in illustrating the financial
characteristics of the combined company under one set of assumptions, doesn't
attempt to predict or suggest future results.

The information in the following table is based on our historical financial
information. See "Unaudited Pro Forma Condensed Combined Financial Statements"
and "Where You Can Find More Information."

<TABLE>
<CAPTION>
AT, OR FOR THE THREE
MONTHS ENDED MARCH 31, AT, OR FOR THE YEAR ENDED DECEMBER 31,
------------------------ --------------------------------------
2000 1999 1999 1998 1997
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net interest income...................... $ 5,164 $ 4,667 $ 19,906 $ 18,534 $ 17,578
Provision for loan losses................ 188 189 956 774 798
Net income available to common
shareholders........................... 1,175 1,228 5,303 5,264 4,734
PER COMMON SHARE DATA:
Net income -- basic...................... 0.37 .37 1.64 1.70 1.55
Net income -- diluted.................... 0.37 .37 1.63 1.68 1.54
Book value at period end(1).............. 15.51 15.25 15.41 15.89 14.38
Weighted average shares
outstanding -- basic................... 3,177,814 3,283,116 3,243,367 3,103,152 3,058,031
Weighted average shares outstanding --
diluted................................ 3,179,066 3,294,677 3,245,217 3,134,555 3,080,354
BALANCE SHEET DATA (AT PERIOD-END):
Total assets............................. 541,932 502,455 527,421 504,347 439,841
Net loans................................ 412,687 345,387 396,771 338,962 325,586
Total deposits........................... 407,132 405,853 396,983 405,801 331,890
Total shareholders' equity............... 47,283 46,607 45,338 43,296 36,922
RATIOS:
Return on average assets................. 0.88% 0.98% 1.04% 1.10% 1.12%
Return on average common equity.......... 9.41% 10.94% 11.85% 13.22% 13.19%
Average total equity to average assets... 9.33% 8.95% 8.76% 8.33% 8.48%
</TABLE>

-------------------------
(1) Pro forma book value per share includes common stock subject to ESOP
repurchase obligations of Southern Michigan Bancorp, Inc.

9
<PAGE> 16

UNAUDITED COMPARATIVE PER SHARE DATA
OF SOUTHERN MICHIGAN BANCORP, INC.
AND STURGIS BANK & TRUST COMPANY

The following table shows information about our net income per share,
dividends per share and book value per share, and similar information reflecting
the consolidation. In presenting the comparative pro forma information for
certain time periods, we assumed that our companies had been merged throughout
those periods.

We also assumed that we will treat our companies as if they had always been
combined for accounting and financial reporting purposes. The information listed
as "Equivalent pro forma amount of Sturgis Bank & Trust Company " was obtained
by multiplying the pro forma amounts by the exchange ratio of .398. We expect
that we will incur restructuring and consolidation related expenses as a result
of combining our companies. We also anticipate that the consolidation will
provide the combined company with financial benefits that include reduced
operating expenses and the opportunity to earn more revenue. You should not rely
on the pro forma information as being indicative of the historical results that
we would have had if we had been combined or the future results that we will
experience after the consolidation.

The information in the following table is based on our historical financial
information. See "Unaudited Pro Forma Condensed Combined Financial Statements,"
"Where You Can Find More Information," and "Index to Financial Statements of
Sturgis Bank & Trust Company."

<TABLE>
<CAPTION>
AT, OR FOR THE
THREE MONTHS AT, OR FOR THE YEAR ENDED,
ENDED MARCH 31 DECEMBER 31,
---------------- --------------------------
2000 1999 1999 1998 1997
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
NET INCOME PER COMMON SHARE
Historical
Southern Michigan Bancorp
Basic..................................................... $ 0.39 $ 0.38 $ 1.64 $ 1.70 $ 1.44
Diluted................................................... 0.39 0.38 1.64 1.70 1.44
Sturgis Bank & Trust Company
Basic..................................................... 0.13 0.14 0.65 0.67 0.71
Diluted................................................... 0.13 0.14 0.65 0.65 0.69
Pro forma combined
Basic..................................................... 0.37 0.37 1.64 1.70 1.55
Diluted................................................... 0.37 0.37 1.63 1.68 1.54
Equivalent pro forma amount of Sturgis Bank & Trust Company
Basic..................................................... 0.15 0.15 0.65 0.68 0.62
Diluted................................................... 0.15 0.15 0.65 0.67 0.61
DIVIDENDS PER COMMON SHARE
Historical
Southern Michigan Bancorp................................. 0.19 0.16 0.68 0.60 0.52
Sturgis Bank & Trust Company.............................. 0.05 0.04 0.19 0.18 0.17
Pro forma combined........................................ 0.17 0.13 0.61 0.56 0.51
Equivalent pro forma amount of Sturgis Bank & Trust
Company................................................. 0.07 0.05 0.24 0.22 0.21
BOOK VALUE PER COMMON SHARE AT PERIOD-END
Historical
Southern Michigan Bancorp(1).............................. 12.19 12.57 12.18 13.55 13.07
Sturgis Bank & Trust Company.............................. 8.27 7.84 8.19 7.74 6.78
Pro forma combined(1)..................................... 15.51 15.25 15.41 15.89 14.38
Equivalent pro forma amount of Sturgis Bank & Trust
Company................................................. 6.17 6.07 6.13 6.32 5.72
</TABLE>

-------------------------
(1) Book value and pro forma book value per share include common stock subject
to ESOP repurchase obligation of Southern Michigan Bancorp, Inc.

10
<PAGE> 17

COMPARATIVE STOCK PRICES

Southern Michigan Bancorp common stock is traded on the over-the-counter
market under the symbol "SOMC." Sturgis Bank & Trust Company common stock also
is traded on the over-the-counter market under the symbol "STUR." Although
transactions in Southern Michigan Bancorp common stock and Sturgis Bank & Trust
Company common stock have been, and are expected to continue to be, facilitated
by market-makers including National Association of Securities Dealer Over the
Counter Bulletin, there can be no assurance that an established or liquid
trading market in Southern Michigan Bancorp common stock or Sturgis Bank & Trust
Company common stock will develop or continue.

The following table sets forth, for the periods indicated, the high and low
closing sale prices per share of Southern Michigan Bancorp common stock and
Sturgis Bank & Trust Company common stock as reported by The NASDAQ Stock
Market, Inc., Trading & Marketing Services Historical Research Service and cash
dividends declared per share. The stock price and cash dividend information have
been adjusted to reflect all stock dividends and stock splits on Southern
Michigan Bancorp common stock and Sturgis Bank & Trust Company common stock.

<TABLE>
<CAPTION>
SOUTHERN MICHIGAN BANCORP STURGIS BANK & TRUST COMPANY
COMMON STOCK COMMON STOCK
---------------------------------- --------------------------------
CASH CASH
DIVIDENDS DIVIDENDS
HIGH LOW DECLARED HIGH LOW DECLARED
------- ------ --------- ------ ----- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
1997 First Quarter.............. $21.15 $19.35 .11 8.84 7.25 0.04
Second Quarter............. 22.17 20.25 .12 10.50 8.50 0.04
Third Quarter.............. 25.20 21.72 .12 10.06 7.00 0.04
Fourth Quarter............. 30.60 25.20 .18 9.17 7.92 0.06
1998 First Quarter.............. 37.80 30.60 .13 11.00 9.04 0.04
Second Quarter............. 46.13 37.13 .13 21.25 8.00 0.04
Third Quarter.............. 40.50 37.13 .15 17.75 11.00 0.04
Fourth Quarter............. 37.80 29.48 .19 13.38 10.25 0.06
1999 First Quarter.............. 33.08 27.00 .16 11.875 9.75 0.04
Second Quarter............. 32.40 27.23 .17 11.50 9.25 0.05
Third Quarter.............. 29.70 26.10 .17 10.00 7.625 0.05
Fourth Quarter............. 30.60 27.23 .18 9.125 5.50 0.05
2000 First Quarter.............. 32.00 18.00 .19 8.75 5.00 0.05
Second Quarter............. 21.125 18.25 -- 7.25 5.25 --
(through May 31, 2000)
</TABLE>

The last sales prices of Southern Michigan Bancorp common stock and Sturgis
Bank & Trust Company common stock prior to the public announcement of the
consolidation agreement on February 15, 2000 were $27.25 and $6.75. The last
sales prices of Southern Michigan Bancorp common stock and Sturgis Bank & Trust
Company common stock on , 2000, the last practicable trading day
prior to the mailing of this proxy statement/prospectus, were [$ ] and
[$ ].

As of the record date for the meeting, Southern Michigan Bancorp had issued
and outstanding about [ ] shares of common stock and Sturgis Bank
& Trust Company had issued and outstanding about [ ]shares of
Sturgis Bank & Trust Company common stock.

11
<PAGE> 18

THE SHAREHOLDER MEETING

DATE, TIME AND PLACE

This proxy statement/prospectus is being furnished to Sturgis Bank & Trust
Company shareholders in connection with the solicitation by the Board of
Directors of Sturgis Bank & Trust Company of proxies to be used at the special
meeting of shareholders of Sturgis Bank & Trust Company to be held at
[ ], at [ ], local time, on [ ].

MATTERS TO BE CONSIDERED; VOTES REQUIRED

You will have one vote at the meeting for each share of Sturgis Bank &
Trust Company common stock owned by you at the close of business on
[ , 2000].

To complete the consolidation, at least two-thirds of the outstanding
shares of Sturgis Bank & Trust Company common stock must vote FOR the
consolidation.

If any other action is to be taken by a shareholder vote at the meeting, it
will be authorized by a majority of the votes cast by the holders of the shares
of Sturgis Bank & Trust Company common stock present in person or represented by
proxy at the meeting and entitled to vote on the action.

YOUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR THE
CONSOLIDATION.

On the record date for the meeting, Sturgis Bank & Trust Company's
directors and executive officers and their affiliates owned [ ],
about [ ], of the outstanding shares of Sturgis Bank & Trust Company
common stock (including [ ] shares of Sturgis Bank & Trust Company
common stock which may be acquired upon the exercise of options which are
exercisable within 60 days of such date). The directors and executive officers
of Sturgis Bank & Trust Company and of Southern Michigan Bancorp have indicated
that they intend to vote all shares of Sturgis Bank & Trust Company common stock
owned by them FOR the consolidation.

On the record date for the meeting, neither Sturgis Bank & Trust Company
nor any of its subsidiaries had or shared the right to vote any of the
outstanding shares of Sturgis Bank & Trust Company common stock, except for any
right to vote held in a fiduciary capacity. On the record date for the meeting,
neither Southern Michigan Bancorp nor its subsidiaries had or shared the right
to vote any of the outstanding shares of Sturgis Bank & Trust Company common
stock, except for any right to vote held in a fiduciary capacity.

The affirmative vote of a majority of the votes present in person or
represented by proxy at the meeting may authorize the adjournment or
postponement of the meeting. However, no proxy that was voted against any
proposal will be voted in favor of adjournment or postponement to solicit
further proxies for such proposal.

VOTING OF PROXIES

All shares of Sturgis Bank & Trust Company common stock represented by
properly executed proxies received at or prior to the meeting, and not revoked,
will be voted at that meeting in accordance with the instructions indicated in
those proxies.

Properly executed proxies which do not contain voting instructions will be
voted FOR the consolidation.

Brokers who hold shares of Sturgis Bank & Trust Company common stock for
customers are NOT authorized to vote on the consolidation without specific
voting instructions (a "broker nonvote").

12
<PAGE> 19

However, solely for purposes of determining whether the consolidation has
received the vote of shareholders required for approval, each "broker nonvote"
and each abstention is functionally equivalent to a vote "against" the
consolidation. If any other matters are properly presented at a meeting for
consideration, including, among other things, consideration of a motion to
adjourn or postpone that meeting to another time and/or place (including,
without limitation, for the purpose of soliciting additional proxies), the
persons named in the relevant form of proxy enclosed herewith and acting
thereunder will have discretion to vote on such matters in accordance with their
best judgment; provided, however, that no proxy voted against any proposal will
be voted in favor of adjournment or postponement to solicit further proxies for
such proposal.

We do not know of any other matters to be brought before the meeting other
than those referred to in this proxy statement/prospectus, but if any other
business should properly come before a meeting, the persons named in the proxy,
or authorized substitutes, intend to vote in accordance with their best
judgment.

REVOCABILITY OF PROXIES

If your shares are held in your name and not through a broker or bank, then
you can change your vote at any time before your proxy is voted at the
applicable meeting. You can do this in three ways: First, you can send a written
statement that you would like to revoke your proxy. Second, you can send a new
proxy card. You should send your revocation or new proxy card to Joyce L.
Waltke, Secretary of the Board, at Sturgis Bank & Trust Company, P.O. Box 600,
125 E. Chicago Road, Sturgis, Michigan 49091. Third, you can attend the
applicable meeting and vote in person. However, your attendance alone will not
revoke your proxy. If you instructed a broker to vote your shares, you must
follow your broker's directions for changing those instructions.

RECORD DATES; VOTING RIGHTS; QUORUMS

Only holders of record of Sturgis Bank & Trust Company common stock at the
close of business on [ , 2000] are entitled to receive notice of and
to vote at the meeting. As of the record date for the meeting,
[ ]shares of Sturgis Bank & Trust Company common stock were
outstanding. At least [ ] shares of Sturgis Bank & Trust Company
common stock must be represented in person or by proxy at the meeting in order
for a quorum to be present. "Broker nonvotes" and abstentions are counted for
purposes of determining a quorum. However, solely for purposes of determining
whether the consolidation has received the shareholder vote required for
approval, each "broker nonvote" and each abstention is functionally equivalent
to a vote "against" the consolidation.

DISSENTERS' RIGHTS OF APPRAISAL

Upon written request made to Sturgis Bank & Trust Company at any time
within 30 days after the completion of the consolidation and upon surrender of
his or her stock certificate, a shareholder of Sturgis Bank & Trust Company who
votes against the consolidation, or who, at or prior to the meeting, has given
written notice to Sturgis Bank & Trust Company that he or she dissents from the
consolidation, is entitled to receive in cash from Southern Michigan Bancorp,
the fair value of all shares held by him or her, if and when the consolidation
is completed. Upon the filing of the written request and the surrender of stock
certificates, the shareholder shall cease to have any of the rights of a
shareholder except the right to be paid the fair value of his or her shares.
Once the request is made, it may not be withdrawn except with the written
consent of Sturgis Bank & Trust Company.

13
<PAGE> 20

Upon an application in writing by a dissenting shareholder or by Sturgis
Bank & Trust Company filed with the commissioner of the financial institutions
bureau, the fair value of the shares shall be determined, as of the date of the
meeting, by a qualified and independent appraiser selected by the commissioner
of the financial institutions bureau. The appraiser selected shall file a
written report of his or her appraisal with the commissioner of the financial
institutions bureau, who in turn shall forward copies to all interested parties.
The valuation determined by the appraiser is final and binding on all parties.
Within 30 days following the receipt of the written report of the appraiser,
Southern Michigan Bancorp shall pay to each dissenting shareholder the fair
value of the shares. The fees and expenses of the appraisal, which shall be
approved by the commissioner of the Office of Financial and Insurance Services,
shall be paid by Southern Michigan Bancorp.

A failure to vote against the consolidation will not be considered a waiver
or otherwise result in a loss of dissenters' rights. However, any shareholder
who executes a proxy and who desires to assert dissenters' rights must mark the
proxy "against" the consolidation because, if the proxy is left blank, it will
be voted FOR the consolidation.

If you intend to dissent from the consolidation then you should carefully
review Section 706 of the Michigan Savings Bank Act and Annex C of this proxy
statement/prospectus. IF YOU FAIL TO STRICTLY FOLLOW THE PROCEDURE SET FORTH IN
SECTION 706 OF THE MICHIGAN SAVINGS BANK ACT THEN YOU WILL FORFEIT YOUR
DISSENTERS' RIGHTS.

SOLICITATION OF PROXIES

Sturgis Bank & Trust Company will bear the cost of soliciting proxies from
its shareholders, including the cost of printing and mailing this proxy
statement/prospectus to its shareholders. In addition to solicitation by mail,
proxies may be solicited by telephone, telegram, datagram, in person or by other
forms of communication. Arrangements will be made with brokerage firms,
nominees, fiduciaries and other custodians for the forwarding of solicitation
materials to the beneficial owners of shares held of record by such persons, and
each company will reimburse such persons for their reasonable out-of-pocket
expenses in connection therewith.

Proxies may be solicited on behalf of Sturgis Bank & Trust Company by mail
or personally, or by telephone, telegraph, datagram or other forms of
communication, by directors, officers and regular employees of Sturgis Bank &
Trust Company and its subsidiaries (none of whom will receive any additional
compensation for such services, but will be reimbursed for reasonable
out-of-pocket expenses incurred in connection with such solicitation).

Corporate Investor Communications will assist in the solicitation of
proxies by Sturgis Bank & Trust Company for a fee of approximately $5,000.00,
plus reasonable out-of-pocket expenses.

DO NOT SEND YOUR STOCK CERTIFICATES WITH YOUR PROXY CARD.

14
<PAGE> 21

THE CONSOLIDATION

The following discussion describes the material aspects of the
consolidation. Because this discussion is a summary, it may not contain all of
the information that is important to you. To understand the consolidation fully,
and for a more complete description of the legal terms of the consolidation, you
should read carefully this entire proxy statement/prospectus and the documents
we have referred you to. See "Where You Can Find More Information."

A copy of the consolidation agreement without any exhibits or schedules is
attached as Annex F to this proxy statement/prospectus and is incorporated by
reference. We encourage you to read the consolidation agreement completely and
carefully as it is the legal document that governs the consolidation.

GENERAL

Our Boards have unanimously approved the consolidation. When the
consolidation is completed:

- Southern Michigan Bancorp will own all of the issued and outstanding
stock of Sturgis Bank & Trust Company;

- the articles of incorporation and by-laws of Sturgis Bank & Trust Company
then in effect will remain the charter documents of Sturgis Bank & Trust
Company; and

- shareholders of Sturgis Bank & Trust Company will become shareholders of
Southern Michigan Bancorp.

EXCHANGE RATIO

ON [ ] THE CLOSING PRICE OF SOUTHERN MICHIGAN BANCORP COMMON
STOCK WAS [$ ], MAKING THE VALUE OF .398 SHARES OF SOUTHERN MICHIGAN
BANCORP COMMON STOCK EQUAL TO [$ ]. THE CLOSING PRICE OF STURGIS BANK &
TRUST COMPANY COMMON STOCK ON THAT DATE WAS [ ]. You should obtain
current stock price quotations for Southern Michigan Bancorp common stock and
Sturgis Bank & Trust Company common stock. These quotations are available from
your stock broker, in major newspapers and on the Internet.

15
<PAGE> 22

Each share of Southern Michigan Bancorp common stock outstanding
immediately prior to the completion of the consolidation will remain outstanding
and unchanged as a result of the consolidation.

After the consolidation, Sturgis Bank & Trust Company shareholders will own
about 38.2% of the outstanding shares of Southern Michigan Bancorp common stock
and Southern Michigan Bancorp shareholders will own about 61.8% of the
outstanding shares of Southern Michigan Bancorp common stock.

TREATMENT OF STOCK OPTIONS

The consolidation will not cause any changes to the price or terms of
outstanding Southern Michigan Bancorp stock options.

When the consolidation is completed, each Sturgis Bank & Trust Company
stock option then outstanding will be converted automatically into an option to
purchase shares of Southern Michigan Bancorp common stock. However, the number
of shares subject to, and the exercise price of, each of those Sturgis Bank &
Trust Company stock options will be adjusted as follows:

- the number of shares of Southern Michigan Bancorp common stock to be
subject to the new options will be equal to the product of the number of
shares of Sturgis Bank & Trust Company common stock subject to the
original Sturgis Bank & Trust Company stock option and .398, after
adjustments for stock splits provided that any fractional shares of
Southern Michigan Bancorp common stock resulting from such multiplication
will be rounded down to the nearest whole share; and

- the exercise price per share of Southern Michigan Bancorp common stock
under the new option will be equal to the exercise price per share of
Sturgis Bank & Trust Company common stock under the original Sturgis Bank
& Trust Company stock option divided by .398, after adjustments for stock
splits, provided that such exercised price will be rounded down to the
nearest whole cent.

With respect to any Sturgis Bank & Trust Company stock option that is an
incentive stock option under Section 422 of the Internal Revenue Code of 1986,
this adjustment will be effected in a manner consistent with Section 424(a) of
the Internal Revenue Code. The vesting, duration and other terms of the new
option will be the same as the original Sturgis Bank & Trust Company stock
option except that all references to Sturgis Bank & Trust Company will be deemed
to be references to Southern Michigan Bancorp.

PROCEDURES FOR EXCHANGING CERTIFICATES

After the consolidation is completed, Registrar and Transfer Company, as
the exchange agent, will send a notice and transmittal form to each Sturgis Bank
& Trust Company shareholder of record advising him or her of the effectiveness
of the consolidation and the procedure for surrendering to the exchange agent
outstanding certificates formerly representing Sturgis Bank & Trust Company
common stock in exchange for new certificates for Southern Michigan Bancorp
common stock. Upon surrender, each certificate representing Sturgis Bank & Trust
Company common stock will be cancelled.

STURGIS BANK & TRUST COMPANY COMMON STOCK CERTIFICATES SHOULD NOT BE
RETURNED WITH THE ENCLOSED PROXY AND SHOULD NOT BE FORWARDED TO THE EXCHANGE
AGENT UNLESS AND UNTIL YOU RECEIVE THE NOTICE AND TRANSMITTAL FORM.

16
<PAGE> 23

Until surrendered for exchange, all outstanding certificates which, before
completion of the consolidation, represented Sturgis Bank & Trust Company common
stock (other than those representing shares cancelled upon completion of the
consolidation pursuant to the consolidation agreement) will be deemed for all
corporate purposes to represent the number of whole shares of Southern Michigan
Bancorp common stock into which the shares of Sturgis Bank & Trust Company
common stock formerly represented thereby were converted and the right to
receive cash instead of a fractional share interest. However, until such
outstanding certificates are surrendered for exchange, no dividend or
distribution payable to holders of record of Southern Michigan Bancorp common
stock will be paid to any holder of those outstanding certificates. However,
when those certificates are surrendered, any unpaid dividends or distributions
will be paid, without interest. After the consolidation is completed, there will
be no transfers of Sturgis Bank & Trust Company common stock on the records of
Sturgis Bank & Trust Company. If a certificate formerly representing shares of
Sturgis Bank & Trust Company common stock is presented to Southern Michigan
Bancorp or Sturgis Bank & Trust Company, it will be forwarded to the exchange
agent for cancellation and exchanged for a certificate representing shares of
Southern Michigan Bancorp common stock and cash for any fractional share
interest, if any.

None of Sturgis Bank & Trust Company, Southern Michigan Bancorp, the
exchange agent or any other person will be liable to any former holder of shares
of Sturgis Bank & Trust Company common stock for any amount delivered in good
faith to a public official pursuant to applicable abandoned property, escheat or
similar laws.

For a description of Southern Michigan Bancorp common stock, see
"Description of Southern Michigan Bancorp Capital Stock." For a description of
the differences between the rights of the holders of Southern Michigan Bancorp
common stock, on the one hand, and Sturgis Bank & Trust Company common stock, on
the other hand, see "Comparison of Shareholder Rights."

BACKGROUND OF THE CONSOLIDATION

Over the last several years the financial services industry has become
increasingly competitive and has undergone industry-wide consolidation. Sturgis
Bank & Trust Company, on an ongoing basis, has considered strategic options for
increasing stockholder value, including branch acquisitions from other
institutions as well as monitoring the financial services market for potential
combinations with other community banks.

In July 1999, at its regular board meeting, Sturgis Bank & Trust Company
was informed of an inquiry received from two local community banks (one being
Southern Michigan Bancorp) regarding whether Sturgis Bank & Trust Company was
interested in exploring a potential business combination. Sturgis Bank & Trust
Company discussed the unsolicited inquiries, as well as other strategic
alternatives available to it, including remaining an independent company or
pursuing a consolidation.

On August 3, 1999, the Chairman and Chief Executive Officer of Sturgis Bank
& Trust Company met with a member of the board of directors and the
President/Chief Executive Officer of Southern Michigan Bancorp to discuss the
possibility of a business combination between Sturgis Bank & Trust Company and
Southern Michigan Bancorp. On August 10, 1999, the board of directors of Sturgis
Bank & Trust Company met to discuss the results of the August 3, 1999 meeting.

Near that time, the second bank made another contact and Sturgis Bank &
Trust Company management informed its board of directors that a meeting had been
scheduled to discuss a business combination with the second company. At that
time, the board of directors decided to place the Southern Michigan Bancorp
discussions on hold and appointed a committee consisting of two representatives
from the board of directors and two from management to meet with the second
bank.

17
<PAGE> 24

On August 17, 1999, the second bank and Sturgis Bank & Trust Company met to
discuss the potential combination. The second bank's President/CEO, CFO and
financial advisor were present at that meeting. A few days later, the second
bank's financial advisor informed Sturgis Bank & Trust management that the
second bank had determined not to pursue further discussions.

In the meantime, Southern Michigan Bancorp informed Sturgis Bank & Trust
Company management of its desire to enter into a confidentiality agreement in
order to discuss the consolidation in more detail. The Sturgis Bank & Trust
Company board of directors approved entering into a confidentiality agreement
with Southern Michigan Bancorp at their August 10, 1999 meeting and dated on
September 9, 1999.

In October 1999, Raymond James and Associates, Inc. was retained as a
financial advisor to assist Sturgis Bank & Trust Company to analyze, structure,
negotiate and effect a possible strategic alliance with Southern Michigan
Bancorp. In November, 1999, a committee of four Sturgis Bank & Trust Company
board members, including the President and Chief Executive Officer were
appointed to enter into negotiations with Southern Michigan Bancorp.

Over the next several weeks, meetings were held between Raymond James and
Associates, Inc. and Sturgis Bank & Trust Company management regarding
strategies, processes and a potential business combination. A special meeting of
the Sturgis Bank & Trust Company Board of Directors was held on December 30,
1999. Raymond James representatives presented and reviewed their financial
analysis. The general criteria reviewed were:

- the per share price;

- employee job retention and sensitivities to the community;

- liquidity of the potential combining institutions stock;

- exchange ratios;

- earnings potential of each institution; and

- the potential of future acquisitions by the combined company.

The Raymond James report indicated a consolidation of the two companies
would be very favorable. They indicated the consolidation would combine
institutions of complimentary size and would build a strong community bank. On
December 30, 1999 the Sturgis Bank & Trust Company Board of Directors took
action to proceed with the drafting of a definitive agreement and engaged its
accounting firm to begin work with the due diligence review.

On several occasions from late-September 1999, through mid-February 2000,
discussions were held between Sturgis Bank & Trust Company's committee and
financial advisor, and representatives from Southern Michigan Bancorp and their
financial advisor to work out details of the consolidation. During these
discussions, the parties discussed the proposals, including the proposed
exchange ratio, as well as the business philosophies and future business plans
and strategies of the respective institutions. The management representatives
also discussed the potential benefits of operating as a combined entity,
including the strength and reputation of both banks, the potential for increased
liquidity for holders of their stock, the relative strength and market share of
the respective institutions and the potential cost savings associated with the
consolidation of data processing operations, employee benefit costs, general
insurance coverage's, check processing systems and through attrition,
administrative functions. It was determined during these discussions that any
potential business combination would be structured as a consolidation-of-equals
between Sturgis Bank & Trust Company and Southern Michigan Bancorp. In
connection with these discussions, representatives of

18
<PAGE> 25

Sturgis Bank & Trust Company and Dresser, Dresser, Gilbert & Haas, P.C., Sturgis
Bank & Trust Company and its subsidiaries' legal counsel, undertook a due
diligence investigation of Southern Michigan Bancorp and its subsidiaries, and
Miller, Canfield, Paddock and Stone, P.L.C., Southern Michigan Bancorp's legal
counsel, undertook a due diligence investigation of Sturgis Bank & Trust Company
and its subsidiaries.

On February 14, 2000, at a special meeting of the Board of Directors of
Sturgis Bank & Trust Company, the Board met to consider the status of the
proposed transaction with Southern Michigan Bancorp. At the request of the Board
of Directors of Sturgis Bank & Trust Company, Raymond James outlined in detail
the terms and conditions of the proposed consolidation agreement and other
transaction documents which had been distributed, in advance of the meeting, to
the directors. Legal counsel reviewed the consolidation agreement with the
Sturgis Bank & Trust Company Board including such matters as the representations
and warranties of the proposed consolidation agreement, the conditions to the
completion of the consolidation and the termination provisions of the proposed
consolidation agreement (including the operation of the proposed break up fee).
Legal counsel also reviewed the treatment of the various other issues relating
to the transaction, such as the conversion of existing Sturgis Bank & Trust
Company stock options, as well as other matters related to employee benefit
plans and the treatment of Sturgis Bank & Trust Company employees following the
consolidation. Legal counsel also reviewed with members of Sturgis Bank & Trust
Company Board of Directors their fiduciary duties and responsibilities in
approving a transaction such as the consolidation, the expected timing of the
transaction from signing the consolidation agreement through closing and
required regulatory and stockholder approvals. Sturgis Bank & Trust Company
management discussed various aspects of the consolidation, including a review of
the possible synergies associated with the transaction and related matters. At
the meeting, Raymond James made a presentation of the results of various
financial analyses undertaken by Raymond James and advised the Sturgis Bank &
Trust Company Board of Directors that, as of such date, the proposed exchange
ratio of .398 shares of Southern Michigan Bancorp common stock per share of
Sturgis Bank & Trust Company was fair, from a financial point of view, to the
holders of Sturgis Bank & Trust Company common stock. The members of the Sturgis
Bank & Trust Company Board of Directors discussed the presentations they had
received at this and other meetings of the Sturgis Bank & Trust Company Board
from management, Raymond James and Southern Michigan Bancorp senior management
and, upon conclusion, unanimously approved the execution of the consolidation
agreement.

OUR REASONS FOR THE CONSOLIDATION

GENERAL. We expect the consolidation to create a stronger, more competitive
entity with the size and capabilities to provide a broader array of financial
products and services, and to take advantage of opportunities for geographic
expansion, acquisitions, and internal growth and diversification that would not
be available to either Southern Michigan Bancorp or Sturgis Bank & Trust Company
on its own.

When the consolidation is completed you will have a stake in one of the
dozen or so, largest bank holding companies headquartered in Michigan, with over
$500 million in assets. The combined company will have at least 23 offices
covering seven counties in Michigan. The combined company will be a leading
retail mortgage lender in their market area and is projected to have market
capitalization in excess of $50 million. The consolidation should allow the
combined company to achieve greater long-term growth, continue to provide
competitive dividends, and create stockholder value in years to come.

We also believe that by bringing our customers together, we can do a better
job of increasing our combined revenues. We believe that the consolidation will
enhance our profitability and strengthen our position as a competitor in the
rapidly changing financial services business.

19
<PAGE> 26

Before approving the consolidation, our Boards determined that the
consolidation was in the best interests of their respective entities and
stockholders because of their belief that a consolidation uniting Southern
Michigan Bancorp and Sturgis Bank & Trust Company, two financially sound
entities of comparable size with complementary businesses and business
strategies, represents a strategic alliance that will create a stronger combined
company with greater size, flexibility, breadth of products and services,
efficiency and capital strength than either Southern Michigan Bancorp or Sturgis
Bank & Trust Company possesses on a stand-alone basis or would be able to
achieve through internal growth or acquisitions of smaller financial
institutions in their respective market areas. Our Boards believe that each
entity is currently well managed and possesses management philosophies and a
strategic focus compatible with that of the other; that each entity will
contribute complementary business strengths resulting in a well-diversified
combined company; and that the enhanced capitalization of the combined company
will allow it to take advantage of future acquisition opportunities that might
otherwise be unavailable to either entity.

In evaluating the consolidation, our Boards and management's discussed the
critical importance of successfully integrating, and building on the strengths
of, the management teams and operational practices and policies of the combining
entities, and considered the uncertainties inherent in any combination of
sizable entities. Our Boards believe that if the perceived benefits of the
consolidation can be achieved in a reasonable time frame, then the consolidation
represents an opportunity for enhancements of future stock value and earnings
per share. However, our Boards did not quantify these possible enhancements.

STURGIS BANK & TRUST COMPANY. Before approving the consolidation, the
Sturgis Bank & Trust Company Board of Directors consulted with its management
and with its financial and legal advisors, and considered the factors described
in this proxy statement/prospectus. The Sturgis Bank & Trust Company Board of
Directors did not assign any relative or specific weights to such factors, and
individual directors may have given differing weights to different factors. The
factors considered by the Board consisted of the factors described above under
"-- Background of the Consolidation" and "General" and the factors that follow:

- The Sturgis Bank & Trust Company Board of Directors considered the
effectiveness of the consolidation in implementing and accelerating
Sturgis Bank & Trust Company's basic long-term external growth strategy.
By providing it with immediate access to Southern Michigan Bancorp's
existing operations, the consolidation is expected to provide it with a
better opportunity to provide financial products and services in its
market area.

- The Sturgis Bank & Trust Company Board of Directors analyzed the
financial condition, businesses and prospects of Southern Michigan
Bancorp and Sturgis Bank & Trust Company. It considered the recent and
historic stock performance of Southern Michigan Bancorp; the detailed
financial analyses, pro forma and other information with respect to
Southern Michigan Bancorp and Sturgis Bank & Trust Company discussed by
its financial advisor; its own knowledge of Sturgis Bank & Trust Company,
Southern Michigan Bancorp and their respective businesses; and the
results of Sturgis Bank & Trust Company's due diligence review of
Southern Michigan Bancorp's businesses. The Board concluded that the
consolidation would create a stronger combined company with greater size,
flexibility, breadth of products and services, efficiency, capital
strength and profitability than either possesses alone or could achieve
through internal growth or acquisitions of smaller financial institutions
in their respective markets.

- The Sturgis Bank & Trust Company Board of Directors considered the oral
opinion of its financial advisor delivered on February 14, 2000, which
opinion was subsequently confirmed in writing, that as of February 14,
2000, the consideration to be paid by Southern Michigan

20
<PAGE> 27

Bancorp in the consolidation was fair, from a financial point of view, to
Sturgis Bank & Trust Company stockholders.

- The Sturgis Bank & Trust Company Board of Directors considered (A) the
terms and structure of the consolidation, (B) that Sturgis Bank & Trust
Company would conduct significant corporate activities from its executive
office in Sturgis, Michigan, and (C) the management, management
philosophies, strategic focus and operations of each entity. It
determined that each entity possesses management philosophies and a
strategic focus compatible with that of the other, that each entity will
contribute complementary business strengths resulting in a
well-diversified combined company; and that Sturgis Bank & Trust Company
directors, senior managers and stockholders would have the ability to
influence and participate in the management of the combined company in a
meaningful way.

- The Sturgis Bank & Trust Company Board of Directors considered the effect
on the bank and its stockholders continuing as an independent entity
compared to the effect of combining with Southern Michigan Bancorp in
light of the financial condition of the two entities as independent banks
and of the combined company. In particular, it believes that the combined
company will be in a better position to participate in the consolidation
process currently occurring in the financial services industry and to
generate revenue enhancements.

- The Sturgis Bank & Trust Company Board of Directors also considered the
current and prospective economic and competitive environment facing each
entity and other financial institutions, and the likelihood of the
consolidation being approved by regulatory authorities. Sturgis Bank &
Trust Company believes that the consolidation presents a unique
opportunity to expand the bank's existing operations and that the
consolidation, by creating a combined company that will be larger and
stronger than Sturgis Bank & Trust Company alone, will enhance
acquisition and other opportunities for growth and diversification and
will improve the competitive position of the combined company in a
consolidating industry.

- The Sturgis Bank & Trust Company Board of Directors concluded that the
operations of Southern Michigan Bancorp and Sturgis Bank & Trust Company
can be effectively consolidated and integrated within a reasonable time
following completion of the consolidation.

- The Sturgis Bank & Trust Company Board of Directors considered the
expectation that the consolidation will be tax-free for federal income
tax purposes to Sturgis Bank & Trust Company and its stockholders except
for taxes on cash received for fractional shares.

- The Sturgis Bank & Trust Company Board of Directors considered the effect
of the consolidation on the Bank's other constituencies including its
senior management and other employees, and the communities and
stockholders its serves. It determined that its directors, senior
managers and stockholders will have the ability to influence and
participate in the management of the combined company in a meaningful
way, and that, based on the compatibility of the corporate cultures,
philosophies and strategies of Southern Michigan Bancorp and Sturgis Bank
& Trust Company, the combined company resulting from a transaction with
Southern Michigan Bancorp could be expected to provide service comparable
to that of Sturgis Bank & Trust Company.

- The Sturgis Bank & Trust Company Board of Directors considered the
percentage ownership of Southern Michigan Bancorp common stock that would
be held by stockholders of Sturgis Bank & Trust Company, as a group,
after completion of the consolidation.

In determining to approve the consolidation, the Sturgis Bank & Trust
Company Board of Directors did not assign any relative or specific weights to
the foregoing factors, and individual

21
<PAGE> 28

directors may have given differing weights to different factors. At a meeting
held on February 14, 2000, and after deliberating with respect to the
consolidation and considering, among other things, the matters discussed above,
the Sturgis Bank & Trust Company Board of Directors unanimously approved and
adopted the consolidation as being in the best interests of Sturgis Bank & Trust
Company and its stockholders. THE STURGIS BANK & TRUST COMPANY BOARD IS
UNANIMOUS IN ITS RECOMMENDATION THAT HOLDERS OF STURGIS BANK & TRUST COMPANY
COMMON STOCK VOTE FOR THE CONSOLIDATION.

SOUTHERN MICHIGAN BANCORP. Before approving the consolidation, the Southern
Michigan Bancorp Board consulted with Southern Michigan Bank & Trust senior
management and with its financial and legal advisors, and considered the factors
described in this proxy statement/prospectus. The Southern Michigan Bancorp
Board did not assign any relative or specific weights to such factors, and
individual directors may have given differing weights to different factors. The
factors considered by the Southern Michigan Bancorp Board consisted of the
factors described above under "-- Background of the Merger" and "-- General" and
the factors that follow:

- The Southern Michigan Bancorp Board considered the economic conditions
and prospects for the markets in which Southern Michigan Bancorp and
Sturgis Bank & Trust Company operate, including competitive pressures in
the financial services industries in general.

- The Southern Michigan Bancorp Board considered the prospect for increased
market liquidity provided by the combined company.

- The Southern Michigan Bancorp Board considered the business, results of
operations, asset quality and financial condition of Southern Michigan
Bancorp and Sturgis Bank & Trust Company, and considered the
compatibility of management and business philosophies and services and
products offered to customers by Southern Michigan Bancorp and Sturgis
Bank & Trust Company.

- The Southern Michigan Bancorp Board analyzed the financial condition,
businesses and prospects of Southern Michigan Bancorp and Sturgis Bank &
Trust Company. The Southern Michigan Bancorp Board considered the
detailed financial analyses, pro forma and other information with respect
to Southern Michigan Bancorp and Sturgis Bank & Trust Company discussed
by its financial advisor; its own knowledge of Southern Michigan Bancorp
and Sturgis Bank & Trust and their respective businesses; and the results
of Southern Michigan Bancorp's due diligence investigation of Sturgis
Bank & Trust Companys' business. The Southern Michigan Bancorp Board
concluded that the consolidation would create a stronger combined company
with greater size, flexibility, breadth of products and services,
efficiency, capital strength and profitability than either Southern
Michigan Bancorp or Sturgis Bank & Trust Company possesses on a
stand-alone basis or could achieve through internal growth or
acquisitions of smaller financial institutions in their respective market
areas.

- The Southern Michigan Bancorp Board considered the oral opinion of its
financial advisor delivered on February 14, 2000, which opinion was
subsequently confirmed in writing, that as of February 14, 2000 the
consideration to be paid by Southern Michigan Bancorp in the
consolidation was fair, from a financial point of view, to Southern
Michigan Bancorp.

- The Southern Michigan Bancorp Board considered the effect on Southern
Michigan Bancorp's stockholders' value of Southern Michigan Bancorp
continuing as a stand-alone entity compared to the effect of Southern
Michigan Bancorp's combining with Sturgis Bank & Trust Company in light
of the financial condition and prospects of the entities on a stand-alone
basis and of the combined company. In particular, the Southern Michigan
Bancorp's Board believes that the combined company will be in a better
position to participate in the consolidation

22
<PAGE> 29

process currently occurring in the financial services industry and to
generate revenue enhancements.

- The Southern Michigan Bancorp Board also considered the current and
prospective economic and competitive environment facing each entity and
other financial institutions, and the likelihood of the consolidation
being approved by regulatory authorities. The Southern Michigan Bancorp
Board determined that the consolidation presents a unique opportunity to
expand Southern Michigan Bancorp's existing operations and that the
consolidation, by creating a combined company that will be larger and
stronger than Southern Michigan alone, will enhance acquisition and other
opportunities for growth and diversification and will improve the
competitive position of the combined company in a consolidating industry.

- The Southern Michigan Bancorp Board considered the expectation that the
consolidation would result in synergies for the combined company's
operations, including expense savings from cost reductions and the
possibility of enhancing revenues through cross-selling opportunities.

- The Southern Michigan Bancorp Board considered the expectation that the
consolidation will be tax-free for federal income tax purposes to
Southern Michigan Bancorp and its stockholders.

- The Southern Michigan Bancorp Board considered the effects of the
consolidation on Southern Michigan Bancorp's other constituencies,
including its senior management and other employees and the communities
and stockholders served by Southern Michigan Bancorp. The Southern
Michigan Bancorp Board determined that Southern Michigan Bancorp's
directors, executives officers and stockholders will have the ability to
influence and participate in the management of the combined company in a
meaningful way.

- The Southern Michigan Bancorp Board considered the percentage ownership
of Southern Michigan Bancorp common stock that would be held by
stockholders of Southern Michigan Bancorp, as a group, after the
consolidation.

In determining to approve the consolidation, the Southern Michigan Bancorp
Board did not assign any relative or specific weights to the foregoing factors,
and individual directors may have given differing weights to different factors.
At a meeting held on February 14, 2000 and after deliberating with respect to
the consolidation and considering, among other things, the matters discussed
above, the Southern Michigan Bancorp Board unanimously (with 8 directors present
and 2 directors absent) approved and adopted the consolidation agreement as
being in the best interests of Southern Michigan Bancorp and its stockholders.

OPINION OF STURGIS BANK & TRUST COMPANY FINANCIAL ADVISOR

Sturgis Bank & Trust Company retained Raymond James & Associates, Inc. to
be its financial advisor in connection with the consolidation and related
matters based upon Raymond James' qualifications, expertise and reputation, as
well as Raymond James' prior investment banking relationship and general
familiarity with Sturgis Bank & Trust Company.

Raymond James has delivered to the Sturgis Bank & Trust Company Board its
opinion that, based upon and subject to the various considerations set forth in
its written opinion dated February 14, 2000, the exchange ratio is fair from a
financial point of view to holders of shares of Sturgis Bank & Trust Company
common stock as of that date. In requesting Raymond James' advice and opinion,
no limitations were imposed by Sturgis Bank & Trust Company upon Raymond James
with respect to the investigations made or procedures followed by it in
rendering its opinion.

23
<PAGE> 30

Sturgis Bank & Trust Company retained Raymond James to express an opinion
as to the fairness, from a financial point of view, to holders of shares of
Sturgis Bank & Trust Company common stock of the exchange ratio. Raymond James
did not address Sturgis Bank & Trust Companys' underlying business decision to
proceed with the consolidation and did not make any recommendation to the
Sturgis Bank & Trust Company Board or to Sturgis Bank & Trust Companys'
stockholders with respect to any approval of the consolidation.

The full text of Raymond James' opinion, which sets forth, among other
things, the assumptions made, procedures followed, matters considered and limits
on the review undertaken by Raymond James, is attached as Annex D to this proxy
statement/prospectus. Sturgis Bank & Trust Company stockholders are urged to
read the opinion in its entirety. RAYMOND JAMES' OPINION IS DIRECTED ONLY TO THE
EXCHANGE RATIO IN THE CONSOLIDATION AND DOES NOT CONSTITUTE A RECOMMENDATION TO
ANY STURGIS BANK & TRUST COMPANY STOCKHOLDER AS TO HOW SUCH STOCKHOLDER SHOULD
VOTE AT THE STURGIS BANK & TRUST COMPANY MEETING. THE SUMMARY SET FORTH IN THIS
PROXY STATEMENT/PROSPECTUS OF RAYMOND JAMES' OPINION IS QUALIFIED IN ITS
ENTIRETY BY REFERENCES TO THE FULL TEXT OF THE OPINION ATTACHED TO THIS PROXY
STATEMENT/PROSPECTUS AS ANNEX D.

During the course of its engagement, and as a basis for arriving at its
opinion, Raymond James reviewed and analyzed material bearing upon the financial
and operating condition of Sturgis Bank & Trust Company and Southern Michigan
Bancorp and material prepared in connection with the consolidation, including,
among other things, the following:

- the financial terms and conditions as stated in the consolidation
agreement;

- the unaudited financial statements of Sturgis Bank & Trust Company and
Southern Michigan Bancorp as of and for the year ended December 31, 1999
furnished to Raymond James by the respective senior management's of
Sturgis Bank & Trust Company and Southern Michigan Bancorp;

- certain publicly-available information for Sturgis Bank & Trust Company
and Southern Michigan Bancorp, including each of the Annual Reports on
Form 10-K of Sturgis Bank & Trust Company and Southern Michigan Bancorp
for each of the years ended December 31, 1996, 1997, and 1998, and each
of the Quarterly Reports on Form l0-Q of Sturgis Bank & Trust Company and
Southern Michigan Bancorp for each of the quarters ended March 31, June
30, and September 30, 1999;

- certain information, including financial forecasts, relating to earnings,
assets, liabilities and prospects of each of Sturgis Bank & Trust Company
and Southern Michigan Bancorp furnished to Raymond James by the
respective senior management's of Sturgis Bank & Trust Company and
Southern Michigan Bancorp as well as the amount and timing of the cost
savings and other synergies expected to be achieved by Sturgis Bank &
Trust Company and Southern Michigan Bancorp as a result of the
consolidation furnished to Raymond James by the senior management of
Sturgis Bank & Trust Company;

- discussions that Raymond James had with certain members of the
management's of each of Sturgis Bank & Trust Company and Southern
Michigan Bancorp concerning the historical and current business
operations, financial conditions, and prospects of Sturgis Bank & Trust
Company and Southern Michigan Bancorp and such other matters as Raymond
James deemed relevant;

- the reported price and trading histories of the shares of Sturgis Bank &
Trust Company common stock and Southern Michigan Bancorp common stock as
compared to the reported

24
<PAGE> 31

price and trading histories of certain publicly traded companies that
Raymond James deemed relevant;

- the respective financial condition of Sturgis Bank & Trust Company and
Southern Michigan Bancorp as compared to the financial condition of
certain other companies that Raymond James deemed relevant;

- certain financial terms of the consolidation as compared to the financial
terms of selected other business combinations that Raymond James deemed
relevant; and

- such other information, financial studies, analyses and investigations
and such other factors that Raymond James deemed relevant for the
purposes of its opinion.

In conducting its review and arriving at its opinion, as contemplated under
the terms of its engagement by Sturgis Bank & Trust Company, Raymond James, with
the consent of Sturgis Bank & Trust Company, relied, without independent
investigation, upon the accuracy and completeness of all financial and other
information provided to it by Sturgis Bank & Trust Company and Southern Michigan
Bancorp, respectively, or publicly available. Raymond James did not undertake
any responsibility for the accuracy, completeness or reasonableness of, or any
obligation independently to verify such information.

The material financial information provided to Raymond James by the senior
management of each of Sturgis Bank & Trust Company and Southern Michigan Bancorp
and discussed during due diligence conversations related primarily to projected
earnings for 2000 and to the cost savings and other synergies to be generated by
the consolidation.

The earnings projections of management constitute forward-looking
statements and are subject to risks and uncertainties. They were based on
assumptions concerning various factors, including the regulatory environment,
economic conditions, and unanticipated changes in business conditions, the
interest rate environment and inflation, all of which are difficult or
impossible to predict and many of which are beyond the control of Sturgis Bank &
Trust Company, Southern Michigan Bancorp, or the combined company. Consequently,
there can be no assurances that Sturgis Bank & Trust Company, Southern Michigan
Bancorp, or the combined company will achieve such results.

Raymond James assumed that all information, including the earnings
projections of management and the cost savings and other synergies, furnished to
or discussed with Raymond James by Sturgis Bank & Trust Company or Southern
Michigan Bancorp, was reasonably prepared and reflected the best currently
available estimates and judgments of the senior management of Sturgis Bank &
Trust Company and Southern Michigan Bancorp as to the future financial
performance of Sturgis Bank & Trust Company, Southern Michigan Bancorp, or the
combined entity, as the case may be. Sturgis Bank & Trust Company informed
Raymond James, and Raymond James further assumed, that the consolidation would
be recorded as a pooling-of-interests and will qualify as a tax free
reorganization under generally accepted accounting principles. Raymond James did
not make or obtain any independent evaluations, valuations or appraisals of the
assets or liabilities of Sturgis Bank & Trust Company or Southern Michigan
Bancorp, nor was Raymond James furnished with such materials. Raymond James
assumed, without independent verification, that the aggregate allowances for
credit losses for Sturgis Bank & Trust Company and Southern Michigan Bancorp
were adequate to cover such losses. Raymond James' opinion was necessarily based
upon economic and markets conditions and other circumstances as they existed and
could be evaluated by Raymond James on the date of its opinion. Raymond James
does not have any obligation to update its opinion, unless requested by Sturgis
Bank & Trust Company in writing to do so, and Raymond James expressly disclaimed
any responsibility to do so in the absence of any such request.

25
<PAGE> 32

The summary set forth below does not purport to be a complete description
of either the analyses underlying Raymond James' opinion or the presentation
made by Raymond James to the Sturgis Bank & Trust Company Board, but it does
summarize all of the material analyses performed and presented by Raymond James.
The preparation of a fairness opinion is a complex process involving subjective
judgments. Accordingly, Raymond James believes that its analyses must be
considered as a whole and that selecting portions of its analyses and the
factors considered by it, without consideration of all factors and analyses,
could create a misleading view of the analyses and the processes underlying
Raymond James' opinion. Raymond James arrived at its opinion based on the
results of all the analyses it undertook assessed as a whole and did not draw
conclusions from or with regard to any one method of analysis. With respect to
the comparable company analysis and comparable merger transaction analysis
summarized below, no public company utilized as a comparison is identical to
Sturgis Bank & Trust Company or Southern Michigan Bancorp. Such analyses
necessarily involve complex considerations and judgements concerning the
differences in financial and operating characteristics of the companies and
other factors that could affect the acquisition or public trading values of the
companies concerned.

PREMIUM ANALYSIS. Based upon the closing price of Southern Michigan Bancorp
common stock on February 10, 2000, two trading days prior to Raymond James'
presentation to the Sturgis Bank & Trust Company Board, the exchange ratio
results in an implied price of $12.74 per share of Sturgis Bank & Trust Company
common stock, representing a premium of approximately 92.2% to the closing price
of $6.63 of Sturgis Bank & Trust Company common stock as of February 10, 2000.

IMPLIED OFFER VALUE ANALYSIS BASED ON SOUTHERN MICHIGAN BANCORP HISTORICAL
TRADING VALUATION. Raymond James reviewed the implied offer value to Sturgis
Bank & Trust Company common stock based on the price of Southern Michigan
Bancorp common stock at different intervals during the period commencing 90
trading days prior to February 10, 2000 using the 5-day, 10-day, 15-day, 20-day,
30-day, 60-day, and 90-day average closing price of Southern Michigan Bancorp
common stock during such period. Using such average closing prices, Raymond
James observed that the implied value to Sturgis Bank & Trust Company common
stock was between $10.21 and $11.07 during such period.

DISCOUNTED CASH FLOW ANALYSIS. Raymond James performed a discounted cash
flow analysis to determine a present value per share of Sturgis Bank & Trust
Company common stock assuming Sturgis Bank & Trust Company continued to operate
as a stand-alone entity and was acquired at a later date. This present value was
determined by projecting Sturgis Bank & Trust Company's after-tax net income for
the five years ended December 31, 2000 through 2004. The "terminal value" per
share (i.e., the projected 2004 value per share) of Sturgis Bank & Trust Company
common stock was determined by a price to earnings multiple of 13.0 times
against Sturgis Bank & Trust Company's projected earnings at December 31, 2004.
The present value of the terminal value was then determined using an annual
discount rate of 14%, which Raymond James viewed as an appropriate discount for
a company with Sturgis Bank & Trust Company's risk characteristics. The above
calculations resulted in a net present value per fully diluted share of Sturgis
Bank & Trust Company common stock of $10.79 per share. The implied value of
$12.74 per share to Sturgis Bank & Trust Company stockholders, based on Southern
Michigan Bancorp's closing price of $32.00 as of February 10, 2000, resulted in
a premium of 18.0% to Sturgis Bank & Trust Company's net present value of $10.79
per share.

CONTRIBUTION ANALYSIS. Raymond James prepared a contribution analysis
showing percentages of assets, net loans, deposits, common equity, and net
income as of December 31, 1999, and estimated 2000 net income that would be
contributed to the combined company on a pro-forma basis by Sturgis Bank & Trust
Company and Southern Michigan Bancorp. This analysis showed, assuming an
exchange ratio of .398, that Sturgis Bank & Trust Company, as of December 31,
1999, would

26
<PAGE> 33

contribute 47.7% of pro forma consolidated total assets, 51.9% of net loans,
41.2% of total deposits, 50.8% of common equity, and 37.8% of net income, and
39.4% of estimated 2000 net income. This analysis showed that holders of Sturgis
Bank & Trust Company common stock would own approximately 38.2% of the pro-forma
common shares outstanding of Southern Michigan Bancorp.

FINANCIAL IMPLICATIONS TO STURGIS BANK & TRUST COMPANY
STOCKHOLDERS. Raymond James prepared an analysis of the financial implications
of the Southern Michigan Bancorp offer to a holder of Sturgis Bank & Trust
Company common stock. This analysis indicated that on a pro forma basis,
assuming the consolidation was completed at the exchange ratio of .398 and
including potential cost savings provided by senior management of Sturgis Bank &
Trust Company, a stockholder of Sturgis Bank & Trust Company would achieve
approximately a 2.3% accretion in earnings per share, an increase in dividends
per share of approximately 42.9% and a decrease in book value per share of
approximately 24.3% in 2000 as a result of the consummation of the
consolidation.

COMPARATIVE STOCKHOLDER RETURNS. Raymond James presented an analysis of
comparative theoretical stockholder returns in several scenarios, including
Sturgis Bank & Trust Company remaining independent, Sturgis Bank & Trust Company
being acquired in 2004, Sturgis Bank & Trust Company being acquired by Southern
Michigan Bancorp through the consolidation and Sturgis Bank & Trust Company
being acquired by Southern Michigan Bancorp through the consolidation with
Southern Michigan Bancorp in turn being acquired in 2004. This analysis, which
was based on the net present value of projected dividend streams and projected
common stock valuations, using historical acquisition price-to-book multiples,
indicated total stockholder returns of 10.03% if Sturgis Bank & Trust Company
remained independent, 10.81% for a consolidation in 2004 on the terms specified
in the following paragraph, 13.76% based on the acceptance of the offer from
Southern Michigan Bancorp at the exchange ratio of .398 Southern Michigan
Bancorp shares of common stock per Sturgis Bank & Trust Company share of common
stock, and 20.02% based on the acceptance of the offer from Southern Michigan
Bancorp at the exchange ratio of .398 Southern Michigan Bancorp shares of common
stock per Sturgis Bank & Trust Company share of common stock and Southern
Michigan Bancorp in turn being acquired in 2004.

ANALYSIS OF SELECTED MERGERS. As part of its analysis, Raymond James
reviewed comparable mergers involving thrifts nationwide that were announced
after January 1, 1999, in which the total assets of the seller and buyer were
less than $600 million, the equity to assets ratio of the seller was between 9%
and 13% and the return on average assets of the seller was less than 1.00%. This
merger group consisted of the following seven transactions:

<TABLE>
<CAPTION>
BUYER SELLER
----- ------
<S> <C>
East Texas Financial Services, Inc., Tyler,
TX Gilmer Financial Services Inc., Gilmer, TX
First Community Bancshares Inc., Blue River Federal Savings Bank, Edinburgh,
Bargersville, IN IN
FNB Corp., Asheboro, NC Carolina Fincorp Inc., Rockingham, NC
Peoples Building Loan & Savings Company, Harvest Home Financial Corporation,
Lebanon, OH Cheviot, OH
Three Rivers Financial Corp., Three Rivers,
Peoples Bancorp, Auburn, IN MI
Virginia Commonwealth Financial
Corporation, Culpeper, VA Caroline Savings Bank, Bowling Green, VA
Adirondack Financial Services Bancorp,
CNB Bancorp Inc., Gloversville, NY Gloversville, NY
</TABLE>

27
<PAGE> 34

Raymond James calculated the medians and averages for the following
relevant transaction ratios in the merger group: the multiple of the offer value
to the acquired company's earnings for the twelve months preceding the
announcement date of the transaction; the multiple of the offer value to the
acquired company's book value and tangible book value, and the percentage of the
offer value to the acquired company's total deposits and total assets, each as
of the announcement date of the transaction. Raymond James compared these
multiples and percentages with the corresponding multiples and percentages for
the merger, valuing the shares of Southern Michigan Bancorp common stock that
would be received pursuant to the merger agreement at $12.74 per share of
Sturgis Bank & Trust Company common stock. In calculating the multiples and
percentages for the merger, Raymond James used Sturgis Bank & Trust Company's
earnings for the twelve months ended December 31, 1999, and Sturgis Bank & Trust
Company's book value, tangible book value, total deposits and total assets at
December 31, 1999. The results of this analysis are as follows:

<TABLE>
<CAPTION>
OFFER VALUE TO
---------------------------------------------------------
PRECEDING BOOK TANGIBLE BOOK TOTAL TOTAL
EARNINGS VALUE VALUE DEPOSITS ASSETS
(X) (X) (X) (%) (%)
--------- ----- ------------- -------- ------
<S> <C> <C> <C> <C> <C>
Sturgis Bank & Trust Company............... 19.7 1.56 2.02 24.1 15.7
Merger group median........................ 26.4 1.58 1.58 23.3 16.6
Merger group average....................... 29.3 1.53 1.53 23.4 17.6
Merger group high.......................... 47.8 1.78 1.78 28.5 24.4
Merger group low........................... 20.6 1.22 1.23 19.6 13.7
</TABLE>

COMPARISON OF SELECTED COMPARABLE COMPANIES. Raymond James compared
selected operating and stock market characteristics of Southern Michigan Bancorp
to the publicly corresponding data of certain other companies that Raymond James
deemed to be relevant, including Bank of Marin, FNB Corporation, GB&T Bancshares
Inc., Mid Penn Bancorp, Inc., NMBT Corp., NSD Bancorp, Inc., TIB Financial Corp.
and United Financial Holdings, Inc. (collectively, the "Peer Group"). Based on
financial data as of September 30, 1999 and market prices as of February 10,
2000, this comparison showed with regard to stock trading multiples the
following:

<TABLE>
<CAPTION>
SOUTHERN PEER GROUP
MICHIGAN -----------------------------------
MARKET PRICE AS A MULTIPLE OF BANCORP MEDIAN AVERAGE HIGH LOW
----------------------------- -------- ------ ------- ----- -----
<S> <C> <C> <C> <C> <C>
Book Value Per Share............................. 2.51x 1.81x 1.99x 2.62x 1.55x
Tangible Book Value Per Share.................... 2.63x 1.92x 2.04x 2.62x 1.64x
Latest Twelve Months Earnings Per Share.......... 19.8x 15.0x 15.7x 22.8x 11.8x
</TABLE>

PEER GROUP STOCK RETURN ANALYSIS. Raymond James analyzed the compound
annual growth rates of the stock prices (excluding dividend reinvestments) of
the companies in the Peer Group and those companies that are in the NASDAQ Bank
and Thrift Index ("Index") as compared to Southern Michigan Bancorp, based on
one-year, two-year, three-year, four-year, and five-year growth rates. This
analysis showed the following:

<TABLE>
<CAPTION>
SOUTHERN PEER GROUP
MICHIGAN -----------------
GROWTH RATE BANCORP INDEX MEDIAN AVERAGE
----------- -------- ------- ------ -------
<S> <C> <C> <C> <C>
One year............................................ (4.2)% (11.7)% (7.0)% (1.4)%
Two year............................................ (1.1)% (14.1)% (3.5)% (4.8)%
Three year.......................................... 15.3 % 3.9 % 18.3 % 17.4 %
Four year........................................... 26.5 % 10.3 % 25.5 % 19.9 %
Five year........................................... 27.2 % 15.3 % 24.4 % 20.6 %
</TABLE>

28
<PAGE> 35

The Sturgis Bank & Trust Company Board retained Raymond James based upon
the recognized experience and expertise of Raymond James' financial institutions
group. Raymond James is a recognized investment banking and advisory firm.
Raymond James, as a part of its investment banking and advisory business, is
continually engaged in the valuation of businesses and securities in connection
with mergers and acquisitions, negotiated underwritings, competitive biddings,
secondary distributions of listed and unlisted securities, private placements
and valuations for estate, corporate and other purposes. Sturgis Bank & Trust
Company selected Raymond James as its financial advisor because of its
reputation and because of its substantial experience in transactions such as the
merger. In the ordinary course of business, Raymond James may trade in the
equity securities of Sturgis Bank & Trust Company and/or Southern Michigan
Bancorp for its own account or for the accounts of its customers and,
accordingly, at any time may hold a long or short position in such securities.

Sturgis Bank & Trust Company and Raymond James have entered into a letter
agreement, dated October 22, 1999, relating to the services to be provided by
Raymond James in connection with the consolidation. Raymond James will receive a
fee contingent upon the completion of the merger of approximately the greater of
$275,000 and 0.75% of the value of the exchange ratio for services rendered in
connection with advising Sturgis Bank & Trust Company regarding the
consolidation agreement, including the fairness opinion and financial advisory
services provided to Sturgis Bank & Trust Company, plus reimbursement of
out-of-pocket expenses. Based on the average closing price of Southern Michigan
Bancorp's common stock for the 20 consecutive trading days prior to signing the
consolidation agreement on February 14, 2000, such fee would be approximately
$275,000, and Raymond James has received approximately $60,000 of such fee.
Sturgis Bank & Trust Company also has agreed to indemnify Raymond James against
certain liabilities, including liabilities under the federal securities laws.

Raymond James in the past from time to time has provided financial advisory
and investment banking services to Sturgis Bank & Trust Company, for which
services Raymond James has received customary fees. Sturgis Bank & Trust Company
paid Raymond James a customary underwriting commission aggregating approximately
$390,000 in connection with Sturgis Bank & Trust Company's October 1998
secondary offering of 632,500 shares of common stock.

OPINION OF SOUTHERN MICHIGAN BANCORP FINANCIAL ADVISOR

Austin Associates, Inc. acted as financial advisor to Southern Michigan
Bancorp in connection with the consolidation. Southern Michigan Bancorp selected
Austin Associates based on its experience, expertise and familiarity with
Southern Michigan Bancorp and its business. Austin Associates is a nationally
recognized investment banking firm and is regularly engaged in the valuation of
businesses and securities in connection with mergers and acquisitions and
valuations for corporate and other purposes.

In connection with Austin Associates' engagement, Southern Michigan Bancorp
requested Austin Associates to evaluate the fairness of the exchange ratio to
Southern Michigan Bancorp and its stockholders, from a financial point of view.
At the February 14, 2000, meeting of the Southern Michigan Bancorp board of
directors, Austin Associates rendered to the Southern Michigan Bancorp board of
directors an oral opinion that, as of February 14, 2000, the Southern Michigan
Bancorp exchange ratio was fair, to Southern Michigan Bancorp stockholders, from
a financial point of view. Austin Associates confirmed this oral opinion by
delivery of a written opinion dated February 15, 2000, the date the
consolidation agreement was signed. Austin Associates' written opinion has been
updated to [ ]. The written opinion dated as of the date of this
document is sometimes referred to as the Austin Associates Opinion.

29
<PAGE> 36

Attached in Appendix E is the full text of the Austin Associates Opinion,
which describes the procedures followed, assumptions made, matters considered
and limitations on the review undertaken in connection with that opinion. Austin
Associates has consented to the inclusion of the Austin Associates Opinion as
Appendix E and has reviewed and consented to the inclusion of this disclosure
related to the Austin Associates Opinion.

The Austin Associates Opinion is directed to the Southern Michigan Bancorp
board of directors and shareholders. It relates only to the fairness of the
transaction to Southern Michigan Bancorp stockholders, from a financial point of
view. The summary of the Austin Associates Opinion in this document is qualified
in its entirety by reference to the full text of that opinion.

In arriving at its opinion, Austin Associates:

- reviewed the consolidation agreement and publicly available business and
financial information relating to Sturgis Bank & Trust Company and
Southern Michigan Bancorp that it considered relevant;

- reviewed other information relating to Sturgis Bank & Trust Company and
Southern Michigan Bancorp, including internal financial forecasts for
2000 and forecasts of cost savings to be achieved in the consolidation,
provided by Sturgis Bank & Trust Company and Southern Michigan Bancorp ;

- met with Southern Michigan Bancorp and Sturgis Bank & Trust Company
management to discuss the business and prospects of the pro forma
company;

- considered financial and stock market information about Sturgis Bank &
Trust Company and Southern Michigan Bancorp and compared that information
with similar information about other publicly held companies in similar
businesses;

- considered the financial terms of other recent business combinations and
transactions; and

- considered other information, financial studies, analyses and
investigations, and financial, economic and market criteria that Austin
Associates deemed relevant.

In connection with its review, Austin Associates did not assume any
responsibility for independent verification of any of the information provided
to or otherwise reviewed by Austin Associates. Austin Associates relied on this
information being complete and accurate in all material respects. As to the
financial forecasts, including the estimates of future cost savings and
operating synergies expected to be achieved as a result of the consolidation,
Austin Associates assumed that these forecasts were reasonably prepared and
reflected the best currently available estimates and judgments of the management
of Sturgis Bank & Trust Company and Southern Michigan Bancorp as to the future
financial performance of Sturgis Bank & Trust Company and Southern Michigan
Bancorp. In addition, Southern Michigan Bancorp did not ask Austin Associates to
make, and Austin Associates did not make, an independent evaluation or appraisal
of the assets or liabilities, contingent or otherwise, of Sturgis Bank & Trust
Company or Southern Michigan Bancorp, nor was Austin Associates furnished with
any evaluations or appraisals of this kind. Southern Michigan Bancorp placed no
limits on the scope of analysis performed, or opinion expressed, by Austin
Associates.

In preparing its opinion, Austin Associates performed a variety of
financial and comparative analyses, the material aspects of which are described
below. The preparation of a fairness opinion is a complex analytic process
involving various determinations as to the most appropriate and relevant methods
of financial analyses and the application of those methods to the particular
circumstances. Therefore, such an opinion is not readily susceptible of summary
description. In arriving at its opinion, Austin Associates made qualitative
judgments as to the significance and relevance of each

30
<PAGE> 37

analysis and factor considered by it. Accordingly, Austin Associates believes
that its analyses must be considered as a whole and that selecting portions of
its analyses and factors, without considering all analyses and factors, could
create a misleading or incomplete view of the processes underlying its analyses
and the Austin Associates Opinion.

The following is a summary of the material financial analyses performed by
Austin Associates in connection with its written opinion rendered to the
Southern Michigan Bancorp board of directors on February 14, 2000. Certain of
these summaries include information presented in tabular format. In order to
fully understand the financial analyses used by Austin Associates, these tables
must be read together with the accompanying narrative. The tables alone do not
constitute a complete description of the applicable financial analysis.

CONTRIBUTION ANALYSIS: Austin Associates analyzed selective pro forma
financial measures that Southern Michigan Bancorp and Sturgis Bank & Trust
Company would be contributing to the combined company, excluding any projected
cost savings, and compared this to the pro forma ownership of Southern Michigan
Bancorp and Sturgis Bank & Trust Company stockholders. Austin Associates noted
that, based on the Southern Michigan Bancorp's exchange ratio and the number of
shares of Southern Michigan Bancorp stock and Sturgis Bank & Trust Company stock
outstanding at December 31, 1999, Southern Michigan Bancorp stockholders would
own approximately 61.8% and Sturgis Bank & Trust Company stockholders would own
approximately 38.2% of the pro forma shares outstanding. Austin Associates
compared these percentages to the following pro forma data:

SELECTIVE CONTRIBUTION PERCENTAGES

<TABLE>
<CAPTION>
SOUTHERN STURGIS BANK &
MICHIGAN BANCORP TRUST COMPANY
---------------- --------------
<S> <C> <C>
12/31/99 Book Value(1).................................... 49.2% 50.8%
12/31/99 Tangible Book Value(1)........................... 54.5% 45.5%
1999 Net Income (GAAP).................................... 62.2% 37.8%
1999 Net Income (CASH)(2)................................. 59.0% 41.0%
Adjusted 1999 Net Income (GAAP)(3)........................ 59.7% 40.3%
Budget 2000 Net Income (GAAP)............................. 60.8% 39.2%
Budget 2000 Net Income (CASH)(2).......................... 57.9% 42.1%
Market Capitalization (02/10/00)(4)....................... 71.1% 28.9%
PROPOSED OWNERSHIP........................................ 61.8% 38.2%
</TABLE>

-------------------------
(1) Book value contribution is calculated after adding back the ESOP repurchase
obligation at Southern Michigan Bancorp.

(2) Based on net income excluding goodwill amortization expense

(3) Excluding nonrecurring income and expense items

(4) Based on 20-day average price ending February 10, 2000

DISCOUNTED CASH FLOW ANALYSIS: Austin Associates analyzed the range of
values of a share of Southern Michigan Bancorp and Sturgis Bank & Trust Company
implied by the dividends per share that could be paid based on earnings
projected over a five-year period and by the estimated value at the end of the
five-year period. Austin Associates based the projected earnings of Southern
Michigan Bancorp and Sturgis Bank & Trust Company on a review of forecasts
provided by management of both Southern Michigan Bancorp and Sturgis Bank &
Trust Company for 2000, excluding non-core net income items, and on the
reasonable long-term growth rate for Southern Michigan Bancorp's and Sturgis
Bank & Trust Company's earnings for 2001 through 2004. Earnings and dividends
were

31
<PAGE> 38

adjusted to reflect an assumed constant ratio of common equity to assets that
Austin Associates viewed as appropriate (8.00% in the case of both Southern
Michigan Bancorp and Sturgis Bank & Trust Company). Based on these assumptions,
Austin Associates determined the value of a share of Southern Michigan Bancorp
and Sturgis Bank & Trust Company at the end of the five-year period by applying
terminal multiples and discount rates that Austin Associates viewed as
appropriate for companies with Southern Michigan Bancorp's and Sturgis Bank &
Trust Company's respective risk characteristics. This analysis showed implied
values per share of Southern Michigan Bancorp stock between $22.30 and $27.13
and values per share of Sturgis Bank & Trust Company stock between $9.54 and
$11.72.

The per share discounted cash flow analysis for Southern Michigan Bancorp
is summarized in the chart below:

DISCOUNTED CASH FLOW VALUE OF SOUTHERN MICHIGAN BANCORP

<TABLE>
<CAPTION>
TERMINAL MULTIPLE OF 2004
NET INCOME
--------------------------
DISCOUNT RATE 12.0X 13.0X 14.0X
------------- ------ ------ ------
<S> <C> <C> <C>
11.0%....................................................... $24.21 $25.67 $27.13
12.0%....................................................... $23.23 $24.63 $26.02
13.0%....................................................... $22.30 $23.64 $24.97
</TABLE>

The per share discounted cash flow analysis for Sturgis Bank & Trust
Company is summarized in the chart below:

DISCOUNTED CASH FLOW VALUE OF STURGIS BANK & TRUST COMPANY

<TABLE>
<CAPTION>
TERMINAL MULTIPLE OF 2004
NET INCOME
--------------------------
DISCOUNT RATE 12.0X 13.0X 14.0X
------------- ------ ------ ------
<S> <C> <C> <C>
11.0%....................................................... $10.40 $11.06 $11.72
12.0%....................................................... $ 9.96 $10.59 $11.22
13.0%....................................................... $ 9.54 $10.14 $10.74
</TABLE>

After a review of the discounted cash flow results, Austin Associates
approximated an aggregate value for Southern Michigan Bancorp at $48.7 million
($24.72 per share) and Sturgis Bank & Trust Company at $32.9 million ($10.63 per
share). Based on the aggregate results of the discounted cash flow analysis,
Austin Associates concluded that Southern Michigan Bancorp's discounted cash
flow value approximated 59.7% of relative contribution as compared to 40.3% to
Sturgis Bank & Trust Company.

<TABLE>
<CAPTION>
RELATIVE CONTRIBUTION PERCENTAGE
---------------------------------
SOUTHERN MICHIGAN STURGIS
BANCORP BANK & TRUST
----------------- ------------
<S> <C> <C>
Discounted Cash Flow Value................................ 59.7% 40.3%
PROPOSED OWNERSHIP........................................ 61.8% 38.2%
</TABLE>

COMPARABLE COMPANY ANALYSIS: Austin Associates compared selected operating
and stock market data for Southern Michigan Bancorp and Sturgis Bank & Trust
Company to corresponding data for peer companies that Austin Associates selected
and deemed to be relevant for this purpose based on their financial, operational
and other characteristics. The Southern Michigan Bancorp peer

32
<PAGE> 39

group consisted of 12 publicly traded banks headquartered in the Midwest.
Additional criteria included total assets between $100 to $500 million, tangible
equity to assets ratio between 7.0% to 11.0% and last 12 months return on
average equity between 10.0% and 15.0%. The companies included were:

<TABLE>
<CAPTION>
COMPANY CITY STATE SYMBOL
------- ------------- ----- ------
<S> <C> <C> <C>
DCB Financial Corporation................................ Delaware OH DCBF
Cortland Bancorp......................................... Cortland OH CLDB
United Bancorp, Inc. .................................... Tecumseh MI UBMI
Monroe Bancorp........................................... Bloomington IN MORE
Bourbon Bancshares, Inc. ................................ Paris KY BBON
Upbancorp, Incorporated.................................. Chicago IL UPBN
Mid-Wisconsin Financial Services, Inc. .................. Medford WI MWFS
United Bancorp, Inc. .................................... Martins Ferry OH UBCP
Combanc, Inc. ........................................... Delphos OH COBI
Commercial National Financial Corporation................ Ithaca MI CEFC
Community Central Bank Corporation....................... Mount Clemens MI CCBD
MetroBanCorp............................................. Indianapolis IN METB
</TABLE>

The Sturgis Bank & Trust Company peer group consisted of 18 publicly traded
thrifts headquartered in the Midwest. Additional criteria included total assets
between $100 to $500 million, tangible equity to assets ratio between 6.0% to
10.0% and last 12 months return on average equity between 5.0% and 10.0%. The
companies included were:

<TABLE>
<CAPTION>
COMPANY CITY STATE SYMBOL
------- ----------------- ----- ------
<S> <C> <C> <C>
Winton Financial Corp. ................................. Cincinnati OH WFI
Ameriana Bancorp........................................ New Castle IN ASBI
FSF Financial Corp. .................................... Hutchinson MN FFHH
Home Bancorp............................................ Fort Wayne IN HBFW
North Central Bancshares, Inc. ......................... Fort Dodge IA FFFD
MFB Corp. .............................................. Mishawaka IN MFBC
LSB Financial Corp. .................................... Lafayette IN LSBI
First Franklin Corporation.............................. Cincinnati OH FFHS
BankPlus, FSB........................................... Morton IL BNKP
HFB Financial Corporation............................... Middlesboro KY HFBA
Classic Bancshares, Inc. ............................... Ashland KY CLAS
CBES Bancorp, Inc. ..................................... Excelsior Springs MO CBES
First Independence Corporation.......................... Independence KS FFSL
Hardin Bancorp, Inc. ................................... Hardin MO HFSA
First Federal Bancorporation............................ Bemedji MN BDJI
AMB Financial Corp. .................................... Munster IN AMFC
Community Investors Bancorp, Inc. ...................... Bucyrus OH CIBI
Washington Bancorp...................................... Washington IA WBIO
</TABLE>

33
<PAGE> 40

The following table compares selected information derived by Austin
Associates for Southern Michigan Bancorp with corresponding data for its peer
group, as of February 10, 2000:

<TABLE>
<CAPTION>
PEER PEER SOUTHERN MICHIGAN
MEDIAN AVERAGE BANCORP
------ ------- -----------------
<S> <C> <C> <C>
Price/Earnings......................................... 14.3 13.8 17.1
Price/Tangible Book Value.............................. 165% 165% 234%
Return on Average Assets............................... 1.18% 1.20% 1.22%
Return on Average Equity............................... 11.98% 12.26% 13.06%
Tangible Equity/Tangible Assets........................ 9.16% 9.23% 8.52%
NPAs/Assets............................................ 0.38% 0.47% 0.40%
Total Assets ($ mils.)................................. $ 304 $ 301 $ 276
</TABLE>

The following table shows the corresponding analysis for Sturgis Bank &
Trust Company:

<TABLE>
<CAPTION>
PEER PEER STURGIS BANK
MEDIAN AVERAGE & TRUST
------ ------- ------------
<S> <C> <C> <C>
Price/Earnings.............................................. 10.9 11.7 10.2
Price/Tangible Book Value................................... 89% 95% 105%
Return on Average Assets.................................... 0.77% 0.76% 0.82%
Return on Average Equity.................................... 8.17% 7.92% 8.13%
Tangible Equity/Tangible Assets............................. 9.04% 8.73% 7.95%
NPAs/Assets................................................. 0.42% 0.51% 0.89%
Total Assets ($ mils.)...................................... $ 215 $ 251 $ 252
</TABLE>

The following chart summarizes the selected minority share trading
multiples used by Austin Associates to estimate the market capitalization of
Southern Michigan Bancorp and Sturgis Bank & Trust Company based on peer group
data. The price to tangible book comparison indicated that Southern Michigan
Bancorp's relative contribution would approximate 70.7% as compared to 29.3% to
Sturgis Bank & Trust Company. The price to earnings multiple comparison
indicated that Southern Michigan Bancorp's relative contribution would
approximate 67.0% as compared to 33.0% to Sturgis Bank & Trust Company.

<TABLE>
<CAPTION>
RELATIVE
CONTRIBUTION
PERCENTAGE
STURGIS -------------------
SOUTHERN BANK & SOUTHERN STURGIS
MICHIGAN TRUST MICHIGAN BANK &
BANCORP COMPANY BANCORP TRUST
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Selected Price to Tangible Book Ratio............... 165% 95%
Comparable Price to Book Value ($ mils.).......... $42.3 $17.8 70.7% 29.3%
Selected Price to Earnings Multiple................. 14.0 11.0
Comparable Price to Earnings Value ($mils.)....... $44.9 $22.1 67.0% 33.0%
Proposed Ownership.................................. 61.8% 38.2%
</TABLE>

COMPARABLE SALE OF CONTROL ANALYSIS: Austin Associates compared a selected
group of banks and thrifts which have sold since the beginning of 1999 to the
operating and financial performance of Southern Michigan Bancorp and Sturgis
Bank & Trust Company. Austin Associates then selected comparable sale of control
multiples to Southern Michigan Bancorp's and Sturgis Bank & Trust Company's
tangible book value and 1999 net income to determine estimated sale of control
values for both companies. The Southern Michigan Bancorp group consisted of four
bank transactions announced in 1999 with the seller headquartered in the
Midwest. Additional criteria included seller's

34
<PAGE> 41

total assets between $100 to $500 million, tangible equity to assets ratio
between 7.0% to 12.0% and year-to-date return on average equity between 10.0%
and 15.0%. The following transactions were included:

<TABLE>
<CAPTION>
BUYER SELLER
----- ------
<S> <C>
First National of NE................................. Commercial Bancshares (SD)
Gold Banc Corp. ..................................... First Business Bancshares (MO)
Park National Corp. ................................. SNB Corporation (OH)
Truman Bancshares.................................... Martin County National Bank (MN)
</TABLE>

The Sturgis Bank & Trust Company group consisted of five thrift
transactions with the seller headquartered in the Midwest. Additional criteria
included seller's total assets between $100 to $500 million, tangible equity to
assets ratio between 6.0% to 10.0% and last 12 months return on average equity
between 5.0% and 13.0%. The following transactions were included:

<TABLE>
<CAPTION>
BUYER SELLER
----- ------
<S> <C>
First Place Financial..................................... Ravenna Savings Bank (OH)
Peoples Building Loan & Savings........................... Harvest Home Financial (OH)
Provident Financial Group................................. OHSL Financial Corp. (OH)
Oak Hill Financial........................................ Towne Financial Corp. (OH)
Mahaska Investment........................................ Midwest Bancshares, Inc. (IA)
</TABLE>

The following table compares selected information derived by Austin
Associates for determining the sale of control market capitalization for
Southern Michigan Bancorp with corresponding data for comparable transactions:

<TABLE>
<CAPTION>
GROUP GROUP SOUTHERN MICHIGAN
SELLER'S FINANCIAL PERFORMANCE MEDIAN AVERAGE BANCORP
------------------------------ ------ ------- -----------------
<S> <C> <C> <C>
Total Assets ($mil.)................................... $ 152 $ 181 $ 276
Tangible Equity/Assets............................... 11.79% 10.94% 8.52%
ROAA................................................. 1.31% 1.25% 1.22%
ROAE................................................. 11.47% 11.31% 13.06%
NPAs/Assets.......................................... 0.87% 0.81% 0.40%
TRANSACTION RESULTS
Price/Tangible Book.................................... 222% 211% 220%(1)
Price to Earnings.................................... 17.8 18.3 18.0(1)
</TABLE>

-------------------------
(1) Selected by Austin Associates

35
<PAGE> 42

The following table shows the corresponding analysis for Sturgis Bank &
Trust Company:

<TABLE>
<CAPTION>
GROUP GROUP STURGIS BANK &
SELLER'S FINANCIAL PERFORMANCE MEDIAN AVERAGE TRUST
------------------------------ ------ ------- --------------
<S> <C> <C> <C>
Total Assets ($000)....................................... $ 161 $ 171 $ 252
Tangible Equity/Assets.................................. 7.36% 8.11% 7.95%
ROAA.................................................... 0.82% 0.77% 0.82%
ROAE.................................................... 10.59% 9.67% 8.13%
NPAs/Assets............................................. 0.13% 0.27% 0.89%
TRANSACTION RESULTS
Price/Tangible Book....................................... 195% 182% 190%(1)
Price to Earnings....................................... 17.9 20.3 19.0(1)
</TABLE>

-------------------------
(1) Selected by Austin Associates

The following chart summarizes the results of the sale of control market
valuations for Southern Michigan Bancorp and Sturgis Bank & Trust Company. The
price to tangible book comparison indicated that Southern Michigan Bancorp's
relative contribution would approximate 61.6% as compared to 38.4% to Sturgis
Bank & Trust Company. The price to earnings multiple comparison indicated that
Southern Michigan Bancorp's relative contribution would approximate 60.2% as
compared to 39.8% to Sturgis Bank & Trust Company.

<TABLE>
<CAPTION>
RELATIVE CONTRIBUTION
PERCENTAGE
STURGIS -------------------------
SOUTHERN BANK & SOUTHERN
MICHIGAN TRUST MICHIGAN STURGIS BANK &
BANCORP COMPANY BANCORP TRUST COMPANY
-------- ------- -------- --------------
<S> <C> <C> <C> <C>
Selected Price to Tangible Book Ratio........... 220% 190%
Sale Comparable Price to Book Value ($
mils.)..................................... $57.3 $35.7 61.6% 38.4%
Selected Price to Earnings Multiple............. 18.0 19.0
Sale Comparable Price to Earnings Value
($mils.)................................... $57.8 $38.2 60.2% 39.8%
Proposed Ownership.............................. 61.8% 38.2%
</TABLE>

PRO FORMA CONSOLIDATION ANALYSIS: Austin Associates analyzed the pro forma
effect of the consolidation on the estimated earnings per share (GAAP) of
Southern Michigan Bancorp and Sturgis Bank & Trust Company for 2000 and 2001. In
performing this analysis, Austin Associates considered the cost savings expected
to be achieved in 2000 and 2001. Pre-tax cost savings were estimated at $0 for
2000 and $1.0 million in 2001.

Based on this analysis, Austin Associates calculated that the consolidation
would be 1.7% accretive to Southern Michigan Bancorp's estimated earnings per
share (GAAP) for 2000 excluding consolidation-related expenses. Austin
Associates further calculated that the transaction would be 16.0% accretive to
Southern Michigan Bancorp's estimated earnings per share (GAAP) for 2001.

Austin Associates also analyzed the pro forma effect of the consolidation
on the estimated tangible book value per share of Southern Michigan Bancorp for
2000 and 2001. Based on this analysis, Austin Associates calculated that the
consolidation would be 31.3% accretive to Southern's estimated tangible book
value per share for 2000 and the transaction would be 30.7% accretive to
Southern Michigan Bancorp's estimated tangible book value per share for 2001.

ENGAGEMENT OF AUSTIN ASSOCIATES: Under the terms of Austin Associates'
engagement, Southern Michigan Bancorp has agreed to pay Austin Associates
customary investment banking fees, a portion

36
<PAGE> 43

of the fees payable upon execution of the consolidation agreement, with the
remaining fees payable upon the consummation of the consolidation. Southern
Michigan Bancorp has also agreed to indemnify Austin Associates and various
related persons and entities against various liabilities, including liabilities
under the federal securities laws, arising out of Austin Associates' engagement,
and to reimburse Austin Associates for its reasonable out-of-pocket expenses,
including the reasonable fees and expenses of its legal counsel, incurred by
Austin Associates in connection with its engagement. In the past, Austin
Associates provided financial advisory and financial services to Southern
Michigan Bancorp and received customary fees for those services. Austin
Associates has not performed any services for Sturgis Bank & Trust Company.

SUMMARY OF THE CONSOLIDATION AGREEMENT

The following discussion summarizes the material provisions of the
consolidation agreement. A copy of the consolidation agreement without any
exhibits or schedules is attached to this proxy statement/prospectus as Annex F
and is incorporated by reference. We encourage you to read the consolidation
agreement completely and carefully as it is the legal document that governs the
consolidation.

STRUCTURE OF THE CONSOLIDATION. Pursuant to the consolidation agreement,
and in accordance with the Michigan Savings Bank Act, when the consolidation
becomes effective Sturgis Bank & Trust Company will be consolidated with and
into a newly formed Michigan savings bank that is a wholly-owned subsidiary of
Southern Michigan Bancorp.

The consolidation will become effective at the time and date when the
consolidation agreement is filed with the commissioner of the Michigan Office of
Financial and Insurance Services, Division of Financial Institutions and any
other applicable filings or notices required by any state or federal
governmental authority are filed. Such filings will occur immediately following
the closing of the consolidation and on the same day as the closing if possible,
or at such other date and time as may be agreed to by us.

The closing of the consolidation will occur on a date specified by us that
is no later than 30 days after the satisfaction or waiver of the latest to occur
of the conditions precedent to the consolidation set forth in the consolidation
agreement. We anticipate that the consolidation will be completed during the
fiscal quarter ending December 31, 2000. However, completion of the
consolidation could be delayed if there is a delay in obtaining the requisite
regulatory approvals. There can be no assurances as to if or when such approvals
will be obtained or that the consolidation will occur. If the consolidation is
not completed by December 31, 2000 or such later date as we agree to in writing,
then the consolidation agreement may be terminated by either of us, unless the
party that wants to terminate the consolidation agreement is in violation of the
consolidation agreement. See "-- Conditions to the consolidation" and
"-- Regulatory approvals required."

REPRESENTATIONS AND WARRANTIES. The consolidation agreement contains
representations and warranties of Southern Michigan Bancorp and Sturgis Bank &
Trust Company and our respective subsidiaries as to:

- the organization and existence of each party and its subsidiaries;

- the capitalization of each party and its subsidiaries;

- the ownership of each party's subsidiaries;

- the accuracy of each party's financial statements and filings with its
regulator;

- the absence of certain changes in each party's business since December
31, 1999;

37
<PAGE> 44

- the compliance of all prospectuses and proxy statements with any
regulatory rules and the accuracy of any statements contained in such
prospectuses or proxy statements;

- each party's liability for brokers' fees in connection with the
transactions contemplated by the consolidation agreement;

- the absence of material legal proceedings;

- each party's compliance with applicable laws;

- the approval of the consolidation agreement by the Board of Directors of
each party;

- power and authority of each party and the compliance of the consolidation
agreement with (A) the articles of incorporation of each party, (B) any
regulatory restraint on the acquisition, (C) any law rule, ordinance or
regulation or judgment, order, decree, award or governmental permit or
license, and (D) certain material agreements;

- the ability of each party to consummate the transactions contemplated by
the consolidation agreement without obtaining any governmental and
third-party approvals other than certain requisite regulatory approvals
(see "-- Regulatory approvals required");

- the absence of any agreements, plans or other arrangements with respect
to employment, severance or other benefits with any current or former
directors, officers or employees of it which may be terminated without
penalty or expense on thirty (30) days' or less notice to any such
person;

- no information provided in any schedule, certificate or other document
furnished contains or will contain any untrue statement of a material
fact or omit to state any material fact;

- all indebtedness is binding obligations except as enforcement may be
limited by bankruptcy, insolvency or other similar laws affecting the
enforcement of creditors' rights generally;

- the absence of derivative contracts;

- neither of us are an investment company or a company controlled by an
investment company under applicable law;

- the provisions and operation of each party's employee benefit plans and
related matters;

- the ownership of all assets reflected on the December 31, 1999 financial
statements;

- the absence of material defaults under certain contracts;

- the filing and accuracy of each party's tax returns;

- each party's real property interests and the absence of material
environmental liabilities;

- the ownership and status of each party's investment securities;

- the ownership and status of each party's intellectual property;

- the applicability of "pooling-of-interests" accounting treatment;

- Year 2000 compliance;

- the absence of any insider-trading; and

- the possession of insurance.

38
<PAGE> 45

CONDUCT OF BUSINESS PENDING THE CONSOLIDATION. Each of us and our
subsidiaries has agreed that prior to the completion of the consolidation or the
termination of the consolidation agreement and except as otherwise provided in
the consolidation agreement, it will:

- conduct its business only in the ordinary course consistent with past
practices;

- maintain its books and records in accordance with past practices; and

- use reasonable efforts to preserve in tact its business organizations and
assets, to maintain its rights, franchises and existing relations with
customers, suppliers, employees and business associates.

Each of us has also agreed that, prior to the completion of the
consolidation or the termination of the consolidation agreement and except as
otherwise provided in the consolidation agreement, it will not:

- take any action that would adversely affect the ability of it to obtain
any governmental approvals or which would reasonably be expected to
hinder or delay receipt of governmental approvals or adversely affect the
ability to perform its obligations under the consolidation agreement;

- declare, set aside or pay any dividend or make any other distribution
with respect to its capital stock, except for dividends in accordance
with past practice;

- reacquire or buy any of its outstanding shares;

- issue or sell any shares of capital stock of it, except shares of it
issued pursuant to exercise of stock options previously issued and
identified;

- effect any stock split, stock dividend, reverse stock split or other
reclassification or recapitalization of its common stock;

- issue any options or other rights to purchase its capital stock;

- sell, dispose of or pledge any significant assets of it other than in
accordance with past practice;

- merge or consolidate or acquire any other entity or acquire any
significant assets, except in accordance with its written business plan
in effect;

- sell or pledge or agree to sell or pledge or permit any lien to exist on
any stock of any of its subsidiaries owned by it;

- change its articles of incorporation, charter, by-laws or other governing
instruments of it;

- engage in any lending activities other than in the ordinary course of
business consistent with past practices;

- form any new subsidiary or cause or permit a material change in the
activities presently conducted by any subsidiary or make additional
investments in subsidiaries in excess of $50,000;

- engage in any off balance sheet interest rate swap arrangement, except to
hedge interest rate risk on certificates of deposit or mortgage servicing
rights, or to hedge interest rate risk and/or credit risk on commitments
to extend consumer credit secured by residential mortgage;

39
<PAGE> 46

- engage in any material activity not contemplated by its written business
plan in effect on the date of the consolidation agreement;

- purchase any equity securities other than Federal Home Loan Bank stock or
incur or assume any indebtedness except in the ordinary and usual course
of business;

- authorize capital expenditures other than in the ordinary course of
business;

- implement or adopt any change in its accounting principles, practices or
methods other than as may be required by generally accepted accounting
principles;

- make any change to or take any action to amend, modify or terminate its
contracts;

- grant any general increase in compensation or benefits to its employees
or officers or pay any bonuses to its employees or officers, except in
accordance with policies in effect on the date of the consolidation
agreement;

- enter into, extend, renew, modify, amend or otherwise change any
employment or severance agreements with any of its directors, officers or
employees;

- increase any fees, compensation or benefits to any of its present or
former directors; or

- establish or sponsor any new deferred compensation plans or arrangements
or employee benefit plans ("Employee Plans"), or deferred compensation,
stock option, stock appreciation right, severance pay, retirement,
incentive, group or individual health insurance, welfare, or similar plan
or arrangement (a "Benefit Arrangement"), or effect any material change
in its Employee Plans or Benefit Arrangements (unless such change is
contemplated by the consolidation agreement or is required by applicable
law or, in the opinion of its counsel, is necessary to maintain continued
qualification of tax-qualified plan that provides for retirement
benefits).

We have also agreed that before completing the consolidation we will use
our best efforts, and will take all actions necessary or appropriate, to
complete the consolidation at the earliest possible date. In addition, neither
of us will, without the prior written consent of the other: take any action that
would prevent or impede the consolidation from qualifying for
"pooling-of-interests" accounting treatment or as a reorganization within the
meaning of Section 368 of the Internal Revenue Code.

Each of us has also agreed to use its best efforts to take, or cause to be
taken, all actions necessary, proper or advisable to comply promptly with all
legal requirements which may be imposed on it or its subsidiaries to complete
the consolidation, and to obtain, and to cooperate with the other to obtain, any
consent, authorization, order or approval of, or any exemption by, any
governmental entity or authority and any other third party which is required to
be obtained by it or any of its subsidiaries in connection with the
consolidation.

We have also agreed to use our best efforts to promptly prepare and file
all necessary documentation to effect all applications, notices, petitions and
filings, and to obtain and to cooperate in obtaining permits, consents,
approvals and authorizations of all third parties and governmental entities
necessary or advisable to complete the consolidation and to comply with the
terms and conditions of all such permits, consents, approvals and
authorizations. Each party has also agreed to furnish upon request to the other
all information concerning us and our subsidiaries, directors, officers and
shareholders and such other matters as may be necessary or advisable in
connection with the consolidation. See "-- Interests of Certain Persons in the
Consolidation."

40
<PAGE> 47

Each of us has further agreed to give the other access to all of its
properties, books, contracts, commitments and records and to furnish information
concerning our businesses, properties and personnel, subject to the restrictions
and for the purposes set forth in the consolidation agreement.

EMPLOYEE BENEFIT PLANS. Following completion of the consolidation, we will
honor in accordance with their terms all deferred compensation, stock option,
stock appreciation right, severance pay, retirement, incentive, group or
individual health insurance, welfare or similar plan or arrangement of Southern
Michigan Bancorp and Sturgis Bank & Trust Company and all provisions for vested
benefits or other vested amounts earned or accrued through such time period
under all deferred compensation plans or arrangements and employee benefit plans
of Southern Michigan Bancorp and Sturgis Bank & Trust Company.

The Employee Plans will not be terminated by reason of the consolidation
but will continue thereafter as plans of Southern Michigan Bancorp and Sturgis
Bank & Trust Company until such time as the Employee Plans are integrated,
subject to the terms and conditions specified in such plans and to such changes
therein as may be necessary to reflect the completion of the consolidation.

STOCK LISTING. Southern Michigan Bancorp has agreed to use commercially
reasonable efforts to cause Southern Michigan Bancorp common stock to be listed
on the Nasdaq National Market.

AMENDMENT. The consolidation agreement may be amended, whether before or
after any shareholder approval, by an agreement in writing executed in the same
manner as the consolidation agreement and authorized or ratified by our Boards.
However, once the consolidation agreement is approved by the shareholders of
Sturgis Bank & Trust Company, no such amendment may change the amount or form of
the consideration to be delivered to the holders of Sturgis Bank & Trust Company
common stock without their approval.

OTHER COVENANTS. All information disclosed by one of us to the other,
whether prior or subsequent to the date of the consolidation agreement, must be
kept confidential and cannot be used by the other except as contemplated by the
consolidation agreement, all in accordance with the terms of the confidentiality
agreement between us dated September 9, 1999.

We have also agreed that if the consolidation agreement is terminated, then
for a period of twelve months subsequent to such termination neither of us will,
without first obtaining the prior written consent of the other, directly or
indirectly, solicit the employment of any current director, officer or employee
of the other or any subsidiary of the other, and neither of us will actively
solicit business relationships with clients of the other or any subsidiary of
such other solely as a result of review of any confidential information.

CONDITIONS TO THE CONSOLIDATION

Each party's obligation to complete the consolidation is subject to the
timely satisfaction or written waiver by such party, to the extent such
condition is waivable, of the following conditions:

- The holders of the outstanding shares of Sturgis Bank & Trust Company
common stock must approve the consolidation agreement by the requisite
affirmative votes.

- No order restraining or prohibiting the consolidation in any legal,
administrative, arbitration, investigatory or other proceedings by any
governmental or judicial or other authority must be in effect. No
statute, rule, regulation, order, injunction or decree of any
governmental or regulatory authority which prohibits, materially
restricts or makes illegal completion of the consolidation must be in
effect.

41
<PAGE> 48

- All necessary approvals of or filings with any governmental or regulatory
authority must have been obtained or made, and any applicable waiting
periods must have expired. In addition, no such approval or filing must
be conditioned or restricted in a manner that would have or result in a
material adverse effect on Southern Michigan Bancorp or Sturgis Bank &
Trust Company. All other statutory or regulatory requirements for the
valid completion of the consolidation must be satisfied.

- The registration statement must have been declared effective and must not
be subject to a stop order of the SEC, and no proceedings for that
purpose will have been initiated or threatened by the SEC, and, if the
offer and sale of Southern Michigan Bancorp common stock in the
consolidation is subject to the securities laws of any state, must not be
subject to a stop order of any state securities authority.

- Each party must receive an opinion of its independent accountants (Plante
& Moran, LLP in the case of Sturgis Bank & Trust Company, and Crowe,
Chizek and Company, LLP in the case of Southern Michigan Bancorp) dated
as of the time the consolidation is completed, to the effect that for
federal income tax purposes: (A) the consolidation will qualify as a
reorganization under Section 368 of the Internal Revenue Code; (B) no
gain or loss will be recognized by Southern Michigan Bancorp or by
Sturgis Bank & Trust Company as a result of the consolidation; (C) no
gain or loss will be recognized by any shareholder of Sturgis Bank &
Trust Company upon the exchange of Sturgis Bank & Trust Company common
stock solely for Southern Michigan Bancorp common stock in the
consolidation; (D) the basis of the Southern Michigan Bancorp common
stock received by each shareholder of Sturgis Bank & Trust Company who
exchanges Sturgis Bank & Trust Company common stock for Southern Michigan
Bancorp common stock in the consolidation will be the same as the basis
of the Sturgis Bank & Trust Company common stock surrendered in exchange
therefor (subject to any adjustments required as the result of receipt of
cash in lieu of a fractional share of common stock of the combined
company); (E) the holding period of the Southern Michigan Bancorp common
stock received by a Sturgis Bank & Trust Company shareholder in the
consolidation will include the holding period of the Sturgis Bank & Trust
Company common stock surrendered in exchange therefore, provided that
such shares of Sturgis Bank & Trust Company common stock were held as a
capital asset at the time the consolidation is completed; and (F) cash
received by a Sturgis Bank & Trust Company shareholder for a fractional
share interest of Southern Michigan Bancorp common stock as part of the
consolidation will be treated as having been received as a distribution
in full payment in exchange for the fractional share interest of Southern
Michigan Bancorp common stock which the shareholder would otherwise be
entitled to receive and will qualify as capital gain or loss (assuming
the Sturgis Bank & Trust Company common stock was a capital asset in the
shareholder's hands at the time the consolidation is completed).

- All consents or approvals of all persons required for the execution,
delivery and performance of the consolidation agreement and the
completion of the consolidation must have been obtained and be in full
force and effect, unless the failure to obtain any such consent or
approval is not reasonably likely to have, individually or in the
aggregate, a material adverse effect on Southern Michigan Bancorp or
Sturgis Bank & Trust Company.

- If the consolidation is to be completed as a pooling-of-interests, then
each party must have received a letter, effective as of the effective
time, from its independent accountants to the effect that the
consolidation will qualify for pooling-of-interests accounting treatment.

- Each party must have received its written fairness opinion from its
financial consultant.

42
<PAGE> 49

- Southern Michigan Bancorp must have entered into employment agreements in
form and substance reasonably acceptable to us with Leonard L. Eishen,
James T. Grohalski and such other individuals, if any, that are mutually
agreed upon by Southern Michigan Bancorp and Sturgis Bank & Trust
Company.

- Southern Michigan Bancorp must have adopted an assumed name which is
reasonably agreeable to us.

Sturgis Bank & Trust Company's obligation to complete the consolidation is
subject to the satisfaction or written waiver by Sturgis Bank & Trust Company of
the following additional conditions:

- Prior to the completion of the consolidation, Southern Michigan Bancorp
must not have been affected by any event or change which has had or
caused a material adverse effect or material adverse change on it.

- (A) The representations and warranties of Southern Michigan Bancorp must
be true and correct as of the date of the consolidation agreement and
completion of the consolidation with the same effect as though made at
the completion of the consolidation, or on the date when made in the case
of any representation or warranty which specifically relates to an
earlier date, except where the failure to be true and correct would not
have, or would not reasonably be expected to have, a material adverse
effect, on Southern Michigan Bancorp; (B) Southern Michigan Bancorp and
its subsidiaries must have performed all obligations and complied with
each covenant, in all material respects, and satisfied all conditions
under the consolidation agreement on its part to be satisfied at or
before the completion of the consolidation; and (C) Southern Michigan
Bancorp must have delivered to Sturgis Bank & Trust Company a
certificate, dated as of the date of completion of the consolidation and
signed by the chief executive officer and chief financial officer
certifying the satisfaction of clauses (A) and (B).

- Neither Southern Michigan Bancorp nor any of its subsidiaries can be
subject to any pending litigation which, if determined adversely to
Southern Michigan Bancorp or such subsidiary, would have a material
adverse effect on Southern Michigan Bancorp.

- Southern Michigan Bancorp must have delivered to Sturgis Bank & Trust
Company audited consolidated financial statements at and for the year
ended December 31, 1999, including an unqualified opinion of Southern
Michigan Bancorp's independent auditors related thereto.

- Southern Michigan Bancorp must have delivered to Sturgis Bank & Trust
Company such other certificates and instruments as Sturgis Bank & Trust
Company and its counsel may reasonably request.

- Southern Michigan Bancorp must have delivered to Sturgis Bank & Trust
Company an opinion of Miller, Canfield, Paddock & Stone, P.L.C., counsel
for Southern, dated as of the date of the Closing and in form reasonably
satisfactory to counsel for Sturgis Bank & Trust Company.

Southern Michigan Bancorp's obligation to complete the consolidation is
subject to the satisfaction or written waiver by Southern Michigan Bancorp of
the following additional conditions:

- Prior to completion of the consolidation, Sturgis Bank & Trust Company
must not have been affected by any event or change which has had or
caused a material adverse effect or material adverse change on Sturgis
Bank & Trust Company.

43
<PAGE> 50

- (A) The representations and warranties of Sturgis Bank & Trust Company
must be true and correct as of the date of the consolidation agreement
and at the completion of the consolidation with the same effect as though
made at the completion of the consolidation, or on the date when made in
the case of any representation or warranty which specifically relates to
an earlier date, except where the failure to be true and correct would
not have, or would not reasonably be expected to have, a material adverse
effect on Sturgis Bank & Trust Company; (B) Sturgis Bank & Trust Company
and its subsidiaries must have performed all obligations and complied
with each covenant, in all material respects, and satisfied all
conditions under the consolidation agreement on its part to be satisfied
at or before the completion of the consolidation; and (C) Sturgis Bank &
Trust Company must have delivered to Southern Michigan Bancorp a
certificate, dated as of the date of completion of the consolidation and
signed by the chief executive officer and chief financial officer
certifying the satisfaction of clauses (A) and (B).

- Neither Sturgis Bank & Trust Company nor any of its subsidiaries can be
subject to any pending litigation which, if determined adversely to
Sturgis Bank & Trust Company or such subsidiary, would have a material
adverse effect on Sturgis Bank & Trust Company.

- Sturgis Bank & Trust Company must have delivered to Southern Michigan
Bancorp audited financial statements at and for the year ended December
31, 1999, including an unqualified opinion of Sturgis Bank & Trust
Company's independent auditors related thereto.

- Sturgis Bank & Trust Company must have delivered to Southern Michigan
Bancorp such other certificates and instruments as Southern Michigan
Bancorp and its counsel may request.

- Sturgis Bank & Trust Company must have delivered to Southern Michigan
Bancorp an opinion of Dresser, Dresser, Gilbert & Haas, P.C., counsel for
Sturgis Bank & Trust Company, dated as of the date of closing and in form
reasonably satisfactory to counsel for Southern Michigan Bancorp.

No assurance can be provided as to if or when the requisite regulatory
approvals necessary to consummate the consolidation will be obtained or whether
all of the other conditions precedent to the consolidation will be satisfied or
waived by the party permitted to do so. If the consolidation is not completed by
December 31, 2000, then the consolidation agreement may be terminated by either
Southern Michigan Bancorp or Sturgis Bank & Trust Company, unless the party that
wants to terminate the consolidation agreement is in violation of the
consolidation agreement.

TERMINATION OF THE CONSOLIDATION AGREEMENT; EXPENSES

We can agree at any time to terminate the consolidation agreement without
completing the consolidation, even if the shareholders of Sturgis Bank & Trust
Company have approved it. Also, the consolidation agreement can be terminated:

- At the election of either party if the consolidation is not completed by
December 31, 2000; however, this right to terminate is not available to
any party whose failure to perform an obligation under the consolidation
agreement is the cause of, or resulted in, the failure of the
consolidation to be completed on or before that date.

- By either party (provided it has not breached the consolidation agreement
to any material extent) upon delivery of written notice of termination to
the other party if any event occurs (through no fault of the terminating
party) which renders impossible the satisfaction in any material respect
one or more of the conditions to the obligations of the terminating party
to

44
<PAGE> 51

effect the consolidation hereof and non-compliance is not waived in
writing by the terminating party.

- By either party if there has been a material breach of the other party's
representations and warranties, covenants or agreements set forth in the
consolidation agreement of which written notice has been given to such
breaching party and which has not been fully cured or cannot be fully
cured within the earlier of thirty days after receipt of such notice or
five days prior to the scheduled closing and which breach would, in the
reasonable opinion of the non-breaching party, individually or in the
aggregate, have, or be reasonably likely to have, a material adverse
effect on the non-breaching party.

- By Sturgis Bank & Trust Company if the Board of Directors of Southern
Michigan Bancorp authorizes Southern Michigan Bancorp to enter into any
agreement, letter of intent or agreement in principle with the intent to
pursue or effect a take over proposal.

- By Southern Michigan Bancorp if the Board of Directors of Sturgis Bank &
Trust Company either withdraws, modifies or changes in any manner adverse
to Southern Michigan Bancorp its recommendation that its shareholders
approve and adopt the consolidation agreement, or authorizes Sturgis Bank
& Trust Company to enter into any agreement, letter of intent or
agreement in principle with the intent to pursue or effect a take over
proposal.

For purposes of the consolidation agreement, "take over proposal" means any
proposal other than as contemplated by the consolidation agreement for a
consolidation or other business combination involving either party or for the
acquisition of a ten percent or a greater equity interest in either party or any
of their respective subsidiaries or for the acquisition of a substantial portion
of the assets of either party or any of their respective subsidiaries.

Any termination pursuant to the foregoing must be made by written notice
from the party seeking termination to the other party.

In the event the consolidation agreement is terminated, it will become void
and have no effect, except the provisions relating to the absence of broker's or
finder's fees, publicity, confidentiality, and no employment solicitation will
survive any such termination and abandonment. In addition, if the consolidation
agreement is terminated under certain limited circumstances, the breaching party
will not be relieved from liability for any uncured intentional breach of a
representation, warranty, covenant or agreement giving rise to such termination
and any liability for any costs and expenses in connection with the preparation,
negotiation, execution and performance of the consolidation agreement (including
reasonable legal and accounting fees).

The consolidation agreement also provides that each party will pay its own
expenses in connection with the consolidation. However, the payment of the costs
and expenses of printing and mailing the proxy statement/prospectus, and all
filing and other fees paid to the SEC in connection with the consolidation, will
be divided equally.

If the consolidation agreement is terminated because the Board of Directors
of Southern Michigan Bancorp has authorized Southern Michigan Bancorp to enter
into any agreement, letter of intent or agreement on principle with the intent
to pursue or effect a takeover proposal, then Southern Michigan Bancorp must pay
to Sturgis Bank & Trust Company a termination fee of $500,000 plus all costs,
fees and expenses incurred by Sturgis Bank & Trust Company in connection with
the preparation, negotiation, execution and performance of the consolidation
agreement (including reasonable legal and accounting fees).

If the consolidation agreement is terminated because the Board of Directors
of Sturgis Bank & Trust Company has either withdrawn, modified or changed in any
manner adverse to Southern

45
<PAGE> 52

Michigan Bancorp its approval or recommendation that its shareholders approve
and adopt the consolidation agreement, or authorized Sturgis Bank & Trust
Company to enter into any agreement, letter of intent or agreement in principle
with the intent to pursue or effect a takeover proposal, then Sturgis Bank &
Trust Company must pay to Southern Michigan Bancorp a termination fee of
$500,000 plus all costs, fees and expenses incurred by Southern Michigan Bancorp
in connection with the preparation, negotiation, execution and performance of
the consolidation agreement (including reasonable legal and accounting fees).

For purposes of the foregoing, a "takeover proposal" means any proposal
other than as contemplated by the consolidation agreement for a consolidation or
other business combination involving either party or for the acquisition of a
ten percent or a greater equity interest in either party or any of their
respective subsidiaries or for the acquisition of a substantial portion of the
assets of either party or any of their respective subsidiaries.

NO SOLICITATION OF TRANSACTIONS

Each party has agreed on behalf of itself and each of its subsidiaries that
it will not authorize or permit any director, officer, employee, investment
banker, financial consultant, attorney, accountant or other representative of
it, directly or indirectly to initiate contact with any person or entity in an
effort to solicit, initiate or encourage any take over proposal. Except as the
fiduciary duties of its Board of Directors may otherwise require (as determined
in good faith after consultation with its legal counsel), each party has agreed
that it will not authorize or permit any officer, director, employee, investment
banker, financial consultant, attorney, accountant or other representative of
it, directly or indirectly: to cooperate with, or furnish or cause to be
furnished any non-public information concerning its business, properties or
assets, to any person or entity in connection with any take over proposal, to
negotiate any take over proposal with any person or entity, or to enter into any
agreement, letter of intent or agreement in principle as to any take over
proposal. Each party has also agreed that it will promptly give notice to the
other upon becoming aware of any take over proposal, such notice to contain, at
a minimum, the identity of the person submitting the take over proposal, a copy
of any written inquiry or other communication, the terms of any take over
proposal, any information requested or discussion sought to be initiated and the
status of any request, negotiations or expression of interest.

REGULATORY APPROVALS REQUIRED

We have agreed to use our best efforts to obtain the requisite regulatory
approvals for the consolidation, which include approval from the Federal
Reserve, Federal Deposit Insurance Corporation, and the Michigan Office of
Financial and Insurance Services, Division of Financial Institutions and intend
to complete the filing of applications and notifications to obtain such
requisite regulatory approvals promptly after the date of this proxy
statement/prospectus. The consolidation cannot be completed in the absence of
the requisite regulatory approvals. There can be no assurance that such
requisite regulatory approvals will be obtained, and, if obtained, there can be
no assurance as to the date of any such approvals or the absence of any
litigation challenging such approvals. There can also be no assurance that the
United States Department of Justice (the "DOJ") or any state attorney general
will not attempt to challenge the consolidation on antitrust grounds or, if such
a challenge is made, as to the result thereof.

We are not aware of any other material governmental approvals or actions
that are required to complete the consolidation other than those described
below. If any additional governmental approvals or actions are required, then we
presently intend to obtain those approvals or actions. There can be no
assurance, however, that any such additional approvals or actions will be
obtained.

46
<PAGE> 53

FEDERAL RESERVE AND FDIC. The consolidation is subject to approval by the
Federal Reserve pursuant to Section 3 of the Bank Holding Company Act of 1956,
as amended (the "BHCA"), and Sections 25 and 25(a) of the Federal Reserve Act,
as amended. It is also subject to approval by the FDIC, pursuant to Section
1828(c) of the Federal Deposit Insurance Act, as amended. The required
applications and notifications will be timely filed with the Federal Reserve and
the FDIC.

The Federal Reserve and the FDIC are prohibited from approving any
transaction that would result in a monopoly, or that would be in furtherance of
any combination or conspiracy to monopolize or to attempt to monopolize the
business of banking in any part of the United States; or may have the effect in
any section of the United States of substantially lessening competition, or
tending to create a monopoly, or resulting in a restraint of trade, unless they
find that the anti-competitive effects of the transaction are clearly outweighed
in the public interest by the probable effect of the transaction in meeting the
convenience and needs of the communities to be served.

In reviewing a transaction, the Federal Reserve and the FDIC will consider
the financial and managerial resources of each of us and the convenience and
needs of the communities to be served. It is anticipated that they will also
consider the regulatory status of each of us, current and projected economic
conditions in the Midwest and the overall capital and safety and soundness
standards established under the Federal Deposit Insurance Corporation
Improvement Act of 1991.

In addition, under the Community Reinvestment Act of 1977, the Federal
Reserve and the FDIC must take into account the record of performance of each of
us in meeting the credit needs of the entire community, including low and
moderate income neighborhoods, served by each of them. Each of us has an
outstanding CRA rating with the FDIC. Neither of us received any material
negative comments from the FDIC in its last CRA examination relating to such
ratings.

The Federal Reserve will furnish notice and a copy of the application for
approval of the consolidation to the FDIC, the Office of Thrift Supervision, the
Office of the Comptroller of the Currency, the DOJ and the appropriate state
regulatory authorities. These agencies have 30 days to submit their views and
recommendations to the Federal Reserve. Furthermore, the BHCA and Federal
Reserve regulations require publication of notice of, and the opportunity for
public comment on, the applications submitted for approval of the consolidation
and authorize the Federal Reserve to hold a public hearing in connection
therewith if the Federal Reserve determines that such a hearing would be
appropriate. Any such hearing or comments provided by third parties could
prolong the period during which the application is subject to review by the
Federal Reserve.

The FDIC regulations also require publication of notice of, and the
opportunity for public comment on, the applications submitted for approval of
the consolidation. Any comments provided by third parties could prolong the
period during which the application is subject to review by the FDIC.

At any time the DOJ may challenge the consolidation on antitrust grounds
and seek the divestiture of certain assets and liabilities. The commencement of
an antitrust action by the DOJ would stay the effectiveness of regulatory
approval of the consolidation unless a court specifically orders otherwise. In
reviewing the consolidation, the DOJ could analyze the consolidation's effect on
competition differently than the Federal Reserve or the FDIC, and thus it is
possible that the DOJ could reach a different conclusion than the Federal
Reserve or the FDIC regarding the consolidation's competitive effects. Failure
of the DOJ to object to the consolidation may not prevent the filing of
antitrust actions by private persons or state attorneys general.

In general, the Federal Reserve and the DOJ will examine the impact of the
consolidation on competition in various product and geographic markets,
including competition for deposits and loans, especially loans to small and
middle market businesses.

47
<PAGE> 54

STATE AUTHORITIES. The consolidation is also subject to approval by the
Michigan Office of Financial and Insurance Services, Division of Financial
Institutions ("DFI"). The required application and notification will be filed
promptly with the DFI.

In reviewing a transaction under the applicable statutes, the DFI will
consider the financial and managerial resources of each of us and the
convenience and needs of the communities to be served. As part of, or in
addition to, consideration of the above factors, it is anticipated that the DFI
will consider the regulatory status of Sturgis Bank & Trust Company, and the
overall capital and safety and soundness standards established by the Michigan
Savings Bank Act.

The DFI regulations require publication of notice of, and the opportunity
for public comment on, the applications submitted for approval of the
consolidation. Any comments provided by third parties could prolong the period
during which the application is subject to review by the DFI.

The consolidation may be reviewed by the Michigan attorney general, who is
empowered under the applicable state laws and regulations to investigate and/or
disapprove the consolidation under the circumstances and based upon the review
set forth in applicable state laws and regulations. There can be no assurance
that the Michigan attorney general will not file an antitrust action to enjoin
the consolidation.

There can be no assurance that the regulatory authorities having
jurisdiction will approve the consolidation and if the consolidation is
approved, there can be no assurance as to the date of such approvals. There can
also be no assurance that any such approvals will not contain a materially
burdensome condition or requirement which causes such approvals to fail to
satisfy the conditions to completion of the consolidation set forth in the
consolidation agreement. There can likewise be no assurance that the DOJ or the
Michigan attorney general will not challenge the consolidation, or if such a
challenge is made, as to the result thereof.

ANTICIPATED ACCOUNTING TREATMENT

We expect the consolidation to qualify as a pooling-of-interests, which
means that we will treat our companies as if they had always been combined for
accounting and financial reporting purposes.

Under pooling-of-interests accounting, Sturgis Bank & Trust Company
shareholders will be deemed to have combined their existing interests in Sturgis
Bank & Trust Company with that of Southern Michigan Bancorp shareholders by
exchanging their shares of Sturgis Bank & Trust Company common stock for shares
of Southern Michigan Bancorp common stock. Accordingly, the book value of the
assets, liabilities and shareholders' equity of Sturgis Bank & Trust Company, as
reported on its consolidated balance sheet, will be carried over to the
consolidated balance sheet of Southern Michigan Bancorp at their recorded
amounts and no goodwill will be created. Southern Michigan Bancorp will be able
to include in its consolidated income the consolidated income of Sturgis Bank &
Trust Company and Southern Michigan Bancorp for the entire fiscal year in which
the consolidation occurs (however, certain expenses incurred to effect the
consolidation must be treated as current charges against income rather than
adjustments to the balance sheet), and the reported income of the separate
entities for prior periods will be combined and restated as income of the
combined company.

Under the pooling-of-interests method of accounting, shares purchased in
stock repurchase programs, if considered "tainted" under applicable accounting
principles, combined with intercorporate common stock holdings and fractional
shares in lieu of which cash is issued, must be less than 10 percent of the
shares expected to be issued in the consolidation. It is expected that this 10
percent de minimis test will be met when the consolidation is completed.

48
<PAGE> 55

The unaudited pro forma combined financial information contained in this
proxy statement/prospectus has been prepared using pooling-of-interests
accounting to account for the consolidation.

A condition to completion of the consolidation as a pooling-of-interests is
receipt by each party of letters from Crowe Chizek and Company, LLP and Plante &
Moran, LLP to the effect that the consolidation will qualify for
pooling-of-interests accounting treatment under generally accepted accounting
principles if closed and consummated in accordance with the consolidation
agreement. The receipt of such letters is a condition to completion of the
consolidation as a pooling-of-interests that will not be waived by either party.
There can be no assurances as to when and if such condition will be satisfied or
that the consolidation will be completed as a pooling-of-interests.

SEC guidelines regarding qualifying for pooling-of-interests accounting
also limit sales of shares of the acquiring entity and the acquired entity by
affiliates of either entity in a business combination. SEC guidelines indicate
further that pooling-of-interests accounting will generally not be challenged on
the basis of sales by affiliates of the acquiring entity or the acquired entity
of the shares of the entity they own or shares of an entity they receive in
connection with a business combination during the period beginning 30 days
before the business combination is completed and ending when financial results
covering at least 30 days of post-combination operations of the combined company
have been published, if those sales are de minimis in amount. To be viewed as de
minimis, the sales by such an affiliate must not be greater than ten percent of
such affiliate's pre-combination (or equivalent post-combination) shares, and
the aggregate sales by all affiliates of an entity party to the business
combination must not exceed the equivalent of one percent of such entity's
pre-combination outstanding shares.

Sturgis Bank & Trust Company has agreed to use its best efforts to cause
each person who is an affiliate (for purposes of Rule 145 and for purposes of
qualifying the transactions contemplated by the consolidation agreement for
pooling-of-interests accounting) of it to deliver to Southern Michigan Bancorp a
written agreement to agree to comply with the Securities Act and preserve the
ability to treat the consolidation as a pooling-of-interests. In addition,
Southern Michigan Bancorp, as the surviving entity, has agreed to use its best
efforts to publish not later than 45 days after the end of the first month after
completion of the consolidation in which there are at least 30 days of post-
consolidation combined operations, combined revenue and net income figures as
contemplated by and in accordance with the terms of the SEC's Accounting Series
Release No. 135.

While we expect the consolidation to qualify as a pooling-of-interests, the
consolidation will not qualify as a pooling-of-interests if the holders of more
than shares of Sturgis Bank & Trust Company common stock either vote
against the consolidation or give written notice that they dissent from the
consolidation. If the consolidation cannot be completed as a
pooling-of-interests, then, pursuant to Section 1.12(e) of the consolidation
agreement, we intend to take all actions necessary to complete the consolidation
as a "purchase" for accounting purposes. It is to be noted that under such
circumstances, and among other actions that would have to be taken, it would be
necessary to call a new meeting of the shareholders of Sturgis Bank & Trust and
to resolicit the shareholders of Sturgis Bank & Trust Company for their approval
of the consolidation.

If the consolidation is treated as a purchase for accounting purposes, then
the results of operations of Sturgis Bank & Trust Company will be included in
the consolidated financial statements of Southern Michigan Bancorp and the
purchase price (the aggregate consideration issued to the shareholders of
Sturgis Bank & Trust Company) will be allocated based on the fair value of the
assets acquired and the liabilities assumed. (Any such allocations would be made
based upon valuations and other studies that have not yet been undertaken.) Any
excess of the purchase price over the fair value of the net tangible assets of
Sturgis Bank & Trust Company will be recorded as

49
<PAGE> 56

goodwill and other intangible assets. Such goodwill would then be amortized, and
expensed, over a period determined in accordance with generally accepted
accounting principles.

RESALE OF SOUTHERN MICHIGAN BANCORP COMMON STOCK; RESTRICTIONS ON TRANSFER

The Southern Michigan Bancorp common stock issued to Sturgis Bank & Trust
Company shareholders in the consolidation will be freely transferable under the
Securities Act, except for shares issued to Sturgis Bank & Trust Company
shareholders who may be deemed to be affiliates of Southern Michigan Bancorp for
purposes of Rule 144 under the Securities Act or affiliates of Sturgis Bank &
Trust Company for purposes of Rule 145 under the Securities Act. Affiliates will
include persons, generally executive officers, directors and ten percent
shareholders, who control, are controlled by, or are under common control with
Southern Michigan Bancorp or Sturgis Bank & Trust Company at the time of the
meeting, or the combined company at or after the completion of the
consolidation.

This proxy statement/prospectus does not cover any resales of Southern
Michigan Bancorp common stock to be received by Sturgis Bank & Trust Company
shareholders upon completion of the consolidation agreement, and no person is
authorized to make use of this proxy statement/prospectus in connection with any
such resale.

SEC guidelines regarding qualifying for the pooling-of-interests method of
accounting will also limit sales of shares of the acquiring entity and the
acquired entity by affiliates of either entity in a business combination. See
"--Anticipated accounting treatment."

MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE CONSOLIDATION

The following discussion summarizes all of the material anticipated federal
income tax consequences of the consolidation to shareholders of Southern
Michigan Bancorp and Sturgis Bank & Trust Company. It is based on the Internal
Revenue Code of 1986, the regulations promulgated thereunder, existing
administrative interpretations and court decisions. However, it is not a
complete description of all of the federal income tax consequences of the
consolidation. No information is provided with respect to the tax consequences
of the consolidation under any other tax laws, including applicable state, local
and foreign tax laws. In addition, the following discussion may not be
applicable with respect to certain specific categories of shareholders,
including but not limited to shareholders who are not citizens or residents of
the United Sates, financial institutions, tax-exempt organizations, insurance
companies, dealers in securities or shareholders who acquired their shares of
Sturgis Bank & Trust Company common stock pursuant to the exercise of options or
similar derivative securities and otherwise as compensation. It assumes that
Sturgis Bank & Trust Company shareholders hold their shares as capital assets
within the meaning of Section 1221 of the Internal Revenue Code. Because tax
matters are complicated, and tax results may vary among shareholders, we urge
you to contact your own tax advisor to understand fully how the consolidation
will affect you. No ruling has been or will be requested from the IRS with
respect to the tax effects of the consolidation.

In connection with the filing of the registration statement, Crowe Chizek
and Company, LLP is expected to deliver to Southern Michigan Bancorp, and Plante
& Moran, LLP is expected to deliver to Sturgis Bank & Trust Company, an opinion
that, based upon certain customary factual assumptions and representations with
respect to certain aspects of their assets, liabilities, expenses and capital
structures prior to and at the time the consolidation is completed and with
respect to their

50
<PAGE> 57

plans concerning certain aspects of the combined company's assets, liabilities,
expenses and capital structure following the consolidation:

- the consolidation will qualify as a reorganization under Section 368(a)
of the Internal Revenue Code;

- no gain or loss will be recognized by Southern Michigan Bancorp or by
Sturgis Bank & Trust Company as a result of the consolidation;

- no gain or loss will be recognized by any shareholder of Sturgis Bank &
Trust Company upon the exchange of Sturgis Bank & Trust Company common
stock solely for Southern Michigan Bancorp common stock in the
consolidation;

- the basis of the Southern Michigan Bancorp common stock received by each
shareholder of Sturgis Bank & Trust Company who exchanges Sturgis Bank &
Trust Company common stock for Southern Michigan Bancorp common stock in
the consolidation will be the same as the basis of the Sturgis Bank &
Trust Company common stock surrendered in exchange therefor (subject to
any adjustments required as the result of receipt of cash in lieu of a
fractional share of common stock of Southern Michigan Bancorp);

- the holding period of the Southern Michigan Bancorp common stock received
by a Sturgis Bank & Trust Company shareholder in the consolidation will
include the holding period of the Sturgis Bank & Trust Company common
stock surrendered in exchange therefore, provided that such shares of
Sturgis Bank & Trust Company common stock were held as a capital asset at
the time the consolidation is completed; and

- cash received by a Sturgis Bank & Trust Company shareholder for a
fractional share interest of Southern Michigan Bancorp common stock as
part of the consolidation will be treated as having been received as a
distribution in full payment in exchange for the fractional share
interest of Southern Michigan Bancorp common stock which the shareholder
would otherwise be entitled to receive and will qualify as capital gain
or loss (assuming the Sturgis Bank & Trust Company common stock was a
capital asset in the shareholder's hands at the time the consolidation is
completed).

Completion of the consolidation is conditioned upon the receipt by Southern
Michigan Bancorp and Sturgis Bank & Trust Company, at the closing of the
consolidation, of an opinion from Crowe, Chizek and Company, LLP in the case of
Southern, and Plante & Moran, LLP, in the case of Sturgis Bank & Trust Company,
to the effect set forth in the preceding paragraph. These closing tax opinions
will be rendered on the basis of facts, representations and assumptions set
forth or referred to in such opinions which are consistent with the state of
facts existing at the time the consolidation is completed.

The receipt of such opinions is a condition to the completion of the
consolidation that will not be waived by either Southern Michigan Bancorp or
Sturgis Bank & Trust Company.

Payments in respect of Sturgis Bank & Trust Company common stock may be
subject to information reporting to the Internal Revenue Service and to a 31%
backup withholding tax. Backup withholding will not apply, however, to a payment
to a Sturgis Bank & Trust Company shareholder or other payee if the shareholder
or payee completes and signs a substitute Form W-9 or otherwise proves to the
combined company and the exchange agent that it is exempt from backup
withholding.

51
<PAGE> 58

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

The following unaudited pro forma condensed combined financial information
and explanatory notes are presented to show the impact on our historical
financial positions and results of operations of the consolidation under
pooling-of-interests accounting. The unaudited pro forma condensed combined
financial information combines our historical financial information as of March
31, 2000, for the three-month periods ended March 31, 2000 and 1999 and for the
twelve-month periods ended December 31, 1999, 1998 and 1997, respectively. The
unaudited pro forma condensed combined statements of income give effect to the
consolidation as if the consolidation occurred at the beginning of each period
covered by such statements of income. The pro forma condensed combined balance
sheet assumes the consolidation was completed on March 31, 2000.

The pro forma condensed combined financial information as of March 31,
2000, for the three-month periods ended March 31, 2000 and 1999 and for each of
the three years ended December 31, 1999, 1998 and 1997, respectively, is based
on and derived from, and should be read in conjunction with, the historical
consolidated financial statements and the related notes thereto of Southern
Michigan Bancorp, which are incorporated by reference, and the historical
consolidated financial statements and the related notes thereto of Sturgis Bank
& Trust Company, which are included in this proxy statement/prospectus. See
"Where You Can Find More Information" and "Index to Financial Statements of
Sturgis Bank & Trust Company."

The pro forma data are presented for comparative purposes only and are not
necessarily indicative of the future financial position or results of operations
of the combined company or of the combined financial position or the results of
operations that would have been realized had the consolidation been consummated
during the periods or as of the dates for which the pro forma data are
presented. The pro forma condensed combined financial statements do not give
effect to the anticipated cost savings or potential revenue enhancements in
connection with the consolidation.

52
<PAGE> 59

SOUTHERN MICHIGAN BANCORP, INC.
AND STURGIS BANK & TRUST COMPANY

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF INCOME
THREE MONTHS ENDED MARCH 31, 2000
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
SOUTHERN STURGIS BANK
MICHIGAN & TRUST PRO FORMA
BANCORP, INC. COMPANY COMBINED
------------- ------------ ----------
<S> <C> <C> <C>
INTEREST INCOME
Loans, including fees............................... $ 4,649 $ 4,284 $ 8,933
Securities and other................................ 785 231 1,016
---------- ---------- ----------
Total interest income............................... 5,434 4,515 9,949
---------- ---------- ----------
INTEREST EXPENSE
Deposits............................................ 2,034 1,563 3,597
Borrowings.......................................... 312 876 1,188
---------- ---------- ----------
Total interest expense.............................. 2,346 2,439 4,785
---------- ---------- ----------
NET INTEREST INCOME................................. 3,088 2,076 5,164
PROVISION FOR LOAN LOSSES........................... 150 38 188
---------- ---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN
LOSSES............................................ 2,938 2,038 4,976
NON-INTEREST INCOME................................. 694 694 1,388
NON-INTEREST EXPENSES............................... 2,606 2,115 4,721
---------- ---------- ----------
INCOME BEFORE INCOME TAXES.......................... 1,026 617 1,643
INCOME TAXES........................................ 269 199 468
---------- ---------- ----------
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS......... $ 757 $ 418 $ 1,175
========== ========== ==========
EARNINGS PER COMMON SHARE
Basic............................................... $ 0.39 $ 0.13 $ 0.37
========== ========== ==========
Diluted............................................. $ 0.39 $ 0.13 $ 0.37
========== ========== ==========
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic............................................... 1,946,047 3,094,893 3,177,814
Diluted............................................. 1,946,047 3,098,037 3,179,066
</TABLE>

See Notes to Unaudited Pro Forma Condensed Combined Financial Statements.

53
<PAGE> 60

SOUTHERN MICHIGAN BANCORP, INC.
AND STURGIS BANK & TRUST COMPANY
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF INCOME
THREE MONTHS ENDED MARCH 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
SOUTHERN STURGIS BANK
MICHIGAN & TRUST PRO FORMA
BANCORP, INC. COMPANY COMBINED
------------- ------------ ----------
<S> <C> <C> <C>
INTEREST INCOME
Loans, including fees............................... $ 3,764 $ 3,707 $ 7,471
Securities and other................................ 994 395 1,389
---------- ---------- ----------
Total interest income............................... 4,759 4,102 8,861
---------- ---------- ----------
INTEREST EXPENSE
Deposits............................................ 1,919 1,627 3,546
Borrowings.......................................... 118 530 648
---------- ---------- ----------
Total interest expense.............................. 2,037 2,157 4,194
---------- ---------- ----------
NET INTEREST INCOME................................. 2,722 1,945 4,667
PROVISION FOR LOAN LOSSES........................... 150 39 189
---------- ---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN
LOSSES............................................ 2,572 1,906 4,478
NON-INTEREST INCOME................................. 664 863 1,527
NON-INTEREST EXPENSES............................... 2,244 2,122 4,366
---------- ---------- ----------
INCOME BEFORE INCOME TAXES.......................... 992 647 1,639
INCOME TAXES........................................ 211 200 411
---------- ---------- ----------
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS......... $ 781 $ 447 $ 1,228
========== ========== ==========
EARNINGS PER COMMON SHARE
Basic............................................... $ 0.38 $ 0.14 $ 0.37
========== ========== ==========
Diluted............................................. $ 0.38 $ 0.14 $ 0.37
========== ========== ==========
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic............................................... 2,051,394 3,094,779 3,283,116
Diluted............................................. 2,051,394 3,123,827 3,294,677
</TABLE>

See Notes to Unaudited Pro Forma Condensed Combined Financial Statements.

54
<PAGE> 61

SOUTHERN MICHIGAN BANCORP, INC.
AND STURGIS BANK & TRUST COMPANY
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
SOUTHERN STURGIS BANK
MICHIGAN & TRUST PRO FORMA
BANCORP, INC. COMPANY COMBINED
------------- -------------- ---------
<S> <C> <C> <C>
INTEREST INCOME
Loans, including fees.............................. $ 16,577 $ 15,591 $ 32,168
Securities and other............................... 3,474 1,372 4,846
--------- --------- ---------
Total interest income....................... 20,051 16,963 37,014
--------- --------- ---------
INTEREST EXPENSE
Deposits........................................... 7,738 6,364 14,102
Borrowings......................................... 697 2,309 3,006
--------- --------- ---------
Total interest expense...................... 8,435 8,673 17,108
NET INTEREST INCOME................................ 11,616 8,290 19,906
PROVISION FOR LOAN LOSSES.......................... 852 104 956
--------- --------- ---------
NET INTEREST INCOME AFTER PROVISION FOR LOAN
LOSSES........................................... 10,764 8,186 18,950
NON-INTEREST INCOME................................ 3,025 3,022 6,047
NON-INTEREST EXPENSE............................... 9,484 8,517 18,001
--------- --------- ---------
INCOME BEFORE INCOME TAXES......................... 4,305 2,691 6,996
INCOME TAXES....................................... 1,005 688 1,693
--------- --------- ---------
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS........ $ 3,300 $ 2,003 $ 5,303
========= ========= =========
EARNINGS PER COMMON SHARE
Basic.............................................. $ 1.64 $ 0.65 $ 1.64
========= ========= =========
Diluted............................................ $ 1.64 $ 0.65 $ 1.63
========= ========= =========
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic.............................................. 2,011,615 3,094,854 3,243,367
Diluted............................................ 2,011,615 3,099,503 3,245,217
</TABLE>

See Notes to Unaudited Pro Forma Condensed Combined Financial Statements.

55
<PAGE> 62

SOUTHERN MICHIGAN BANCORP, INC.
AND STURGIS BANK & TRUST COMPANY

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
SOUTHERN STURGIS BANK &
MICHIGAN TRUST PRO FORMA
BANCORP, INC. COMPANY COMBINED
------------- -------------- ----------
<S> <C> <C> <C>
INTEREST INCOME
Loans, including fees............................. $ 15,781 $ 14,855 $ 30,636
Securities and other.............................. 3,665 1,035 4,700
--------- --------- ----------
Total interest income...................... 19,446 15,890 35,336
--------- --------- ----------
INTEREST EXPENSE
Deposits.......................................... 7,622 5,641 13,263
Borrowings........................................ 410 3,129 3,539
--------- --------- ----------
Total interest expense..................... 8,032 8,770 16,802
--------- --------- ----------
NET INTEREST INCOME............................... 11,414 7,120 18,534
PROVISION FOR LOAN LOSSES......................... 600 174 774
--------- --------- ----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN
LOSSES.......................................... 10,814 6,946 17,760
NON-INTEREST INCOME............................... 3,196 2,771 5,967
NON-INTEREST EXPENSE.............................. 9,276 7,367 16,643
--------- --------- ----------
INCOME BEFORE INCOME TAXES........................ 4,734 2,350 7,084
INCOME TAXES...................................... 1,185 635 1,820
--------- --------- ----------
NET INCOME........................................ $ 3,549 $ 1,715 $ 5,264
========= ========= ==========
EARNINGS PER COMMON SHARE
Basic............................................. $ 1.70 $ 0.67 $ 1.70
========= ========= ==========
Diluted........................................... $ 1.70 $ 0.65 $ 1.68
========= ========= ==========
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic............................................. 2,082,255 2,565,069 3,103,152
Diluted........................................... 2,082,255 2,643,970 3,134,555
</TABLE>

See Notes to Unaudited Pro Forma Condensed Combined Financial Statements.

56
<PAGE> 63

SOUTHERN MICHIGAN BANCORP, INC.
AND STURGIS BANK & TRUST COMPANY

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
SOUTHERN STURGIS BANK &
MICHIGAN TRUST PRO FORMA
BANCORP, INC. COMPANY COMBINED
------------- -------------- ---------
<S> <C> <C> <C>
INTEREST INCOME
Loans, including fees.............................. $ 15,545 $ 13,554 $ 29,099
Securities and other............................... 3,124 784 3,908
--------- --------- ---------
Total interest income....................... 18,669 14,338 33,007
--------- --------- ---------
INTEREST EXPENSE
Deposits........................................... 7,260 4,589 11,849
Borrowings......................................... 183 3,396 3,579
--------- --------- ---------
Total interest expense...................... 7,443 7,985 15,428
--------- --------- ---------
NET INTEREST INCOME................................ 11,226 6,353 17,579
PROVISION FOR LOAN LOSSES.......................... 460 338 798
--------- --------- ---------
NET INTEREST INCOME AFTER PROVISION FOR LOAN
LOSSES........................................... 10,766 6,015 16,781
NON-INTEREST INCOME................................ 2,459 1,709 4,168
NON-INTEREST EXPENSE............................... 9,108 5,309 14,417
--------- --------- ---------
INCOME BEFORE INCOME TAXES......................... 4,117 2,415 6,532
INCOME TAXES....................................... 1,085 713 1,798
--------- --------- ---------
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS........ $ 3,032 $ 1,702 $ 4,734
========= ========= =========
EARNINGS PER COMMON SHARE
Basic.............................................. $ 1.44 $ 0.71 $ 1.55
Diluted............................................ $ 1.44 $ 0.69 $ 1.54
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic.............................................. 2,101,494 2,403,360 3,058,031
Diluted............................................ 2,101,494 2,459,448 3,080,354
</TABLE>

See Notes to Unaudited Pro Forma Condensed Combined Financial Statements.

57
<PAGE> 64

SOUTHERN MICHIGAN BANCORP, INC. AND STURGIS BANK & TRUST COMPANY

UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
MARCH 31, 2000
(IN THOUSANDS)

<TABLE>
<CAPTION>
SOUTHERN STURGIS BANK &
MICHIGAN TRUST PRO FORMA
BANCORP, INC. COMPANY COMBINED
------------- -------------- ---------
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents.......................... $ 13,138 $ 10,160 $ 23,298
Securities held to maturity........................ 13,697 13,697
Securities available for sale...................... 53,192 -- 53,192
Loans, net......................................... 198,910 213,776 412,686
Premises and equipment............................. 6,755 7,044 13,799
Other assets....................................... 11,404 13,856 25,260
-------- -------- --------
TOTAL ASSETS................................ $283,399 $258,533 $541,932
======== ======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities
Deposits......................................... $231,526 $175,604 $407,130
Federal funds purchased.......................... 9,740 -- 9,740
Accrued expenses and other liabilities........... 3,250 3,068 6,318
Other borrowings................................. 15,000 54,247 69,247
-------- -------- --------
TOTAL LIABILITIES........................... 259,516 232,919 482,695
-------- -------- --------
COMMON STOCK SUBJECT TO REPURCHASE OBLIGATION IN
EMPLOYEE STOCK OWNERSHIP PLAN.................... 2,214 -- 2,214
-------- -------- --------
SHAREHOLDERS' EQUITY
Common stock....................................... 4,593 3,096 7,689
Additional paid-in capital......................... 9,866 10,412 20,278
Retained earnings.................................. 8,337 12,106 20,443
Accumulated other comprehensive loss............... (539) -- (539)
Unearned Employee Stock Ownership Plan shares...... (588) -- (588)
-------- -------- --------
TOTAL SHAREHOLDERS' EQUITY.................. 21,669 25,614 47,283
-------- -------- --------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY................................... $283,399 $258,533 $541,932
======== ======== ========
</TABLE>

See Notes to Unaudited Pro Forma Condensed Combined Financial Statements.

58
<PAGE> 65

NOTES TO SOUTHERN MICHIGAN BANCORP, INC.
AND STURGIS BANK & TRUST COMPANY
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

Reclassification of information has been made at times to provide
consistency in the presentation of financial information for the companies
involved. These reclassifications are not material in nature and had no effect
on net income.

Listed below are certain costs that are directly attributable to the
consolidation which can reasonably be expected to be included in the expenses of
Southern Michigan Bancorp, Inc. and Sturgis Bank & Trust Company in 2000. The
following costs were not considered in the preparation of the pro-forma
unaudited consolidated financial statements.

<TABLE>
<CAPTION>
SOUTHERN MICHIGAN STURGIS BANK
BANCORP, INC. & TRUST COMBINED
----------------- ------------ --------
<S> <C> <C> <C>
Legal............................................ $ 96,000 $ 98,000 $194,000
Accounting....................................... 77,000 84,000 161,000
Financial Advisor................................ 80,000 375,000 455,000
Other............................................ 25,000 10,000 35,000
-------- -------- --------
Total....................................... $278,000 $567,000 $845,000
======== ======== ========
</TABLE>

59
<PAGE> 66

MANAGEMENT AND OPERATIONS AFTER THE CONSOLIDATION

There are no material relationships between Southern Michigan Bancorp or
its directors or executive officers and Sturgis Bank & Trust Company or its
directors and executive officers except as contemplated by the consolidation
agreement or as described in this proxy statement/prospectus or in the materials
incorporated by reference in this proxy statement/prospectus. In the ordinary
course of business and from time to time each of Southern Michigan Bancorp and
Sturgis Bank & Trust Company may do business with the other and their respective
subsidiaries may enter into transactions with certain executive officers and
affiliates of each of them.

DIRECTORS

SOUTHERN MICHIGAN BANCORP. If the consolidation is completed, the Southern
Michigan Bancorp Board will consist of nine persons with staggered three year
terms and no director may stand for election after age seventy.

<TABLE>
<CAPTION>
CLASS OF TERM
NAME AGE DIRECTORS ENDING
---- --- --------- ------
<S> <C> <C> <C>
Raymond H. Dresser, Jr. .................................... 69 III 2003
Leonard L. Eishen........................................... 63 III 2003
Lawrence A. Franks.......................................... 66 II 2002
James A. Goethals........................................... 64 I 2001
H. Kenneth Cole............................................. 51 I 2001
James T. Grohalski.......................................... 59 I 2001
Nolan E. Hooker............................................. 48 II 2002
James J. Morrison........................................... 52 III 2003
Freeman E. Riddle........................................... 67 II 2002
</TABLE>

Raymond H. Dresser, Jr. is a principal stockholder and serves as President
of the law firm of Dresser, Dresser, Gilbert & Haas, P.C., which was founded in
Sturgis, Michigan in 1898. The firm has served as legal counsel to Sturgis Bank
& Trust Company for many years. Mr. Dresser is President and a Director of the
Economic Development Corporation of the City of Sturgis and the Sturgis
Improvement Association. He is active in many community and charitable
organizations. He has served as an Officer and Director of the State Bar of
Michigan and Chairman of the Probate and Estate Planning Council. Mr. Dresser
was awarded the Roberts P. Hudson Award, the highest award from the State Bar of
Michigan. Mr. Dresser received an AB in Economics from Amherst College and Juris
Doctorate from The University of Michigan.

Leonard L. Eishen has been President of Sturgis Bank & Trust Company since
1980 and Chief Executive Officer since 1976. He is past Chairman of the Michigan
League of Savings Institutions. He has been a member of the Board of Directors
of Sturgis Bank & Trust Company since 1977 and Vice Chairman of District V of
the Michigan Chamber of Commerce since 1998. He is a past member of the Board of
Directors of the Federal Home Loan Bank of Indianapolis having served as
Vice-Chairman in 1996. He serves on the Board of Directors of America's
Community Bankers. He is past President of the Sturgis Chamber of Commerce,
Sturgis United Fund, Sturgis Rotary Club and past Chairman of the Sturgis
Downtown Development Authority. He is also a Trustee of the Sturgis Foundation
and serves on the Board of Directors of the Sturgis Neighborhood Program and the
Sturgis Improvement Association.

Lawrence A. Franks is President of Burr Oak Tool and Gauge Company, Inc.
and Oak Products, Inc., and Chairman of the Board of Oak Japan. He is the past
President of the Sturgis Historical Society and served as Chairman of the
Sturgis Centennial Committee. He is Vice President of the

60
<PAGE> 67

Sturgis Improvement Association and the Economic Development Corporation of the
City of Sturgis. He is a Trustee (since 1984) and Chairman of the Board (since
1999) of Tri-State University, Angola, Indiana. He is a past member of the Board
of Directors of Citizens Bank, Sturgis Michigan. He is a past President of the
Sturgis Kiwanis Club and former Lieutenant Governor. Mr. Franks received a BS in
Mechanical Engineering from Tri-State University and an Honorary Doctor of
Engineering from Tri-State University in May, 2000.

James A. Goethals is the President of Sturgis Foundry Corporation. He is a
former President of the Sturgis Chamber of Commerce, Sturgis United Fund, and
Sturgis Rotary Club. Mr. Goethals is a Trustee of the Sturgis Foundation. Mr.
Goethals serves as Chairman of the Board of Directors of Sturgis Bank & Trust
Company. Mr. Goethals received a BSC in Accounting from Notre Dame and a Juris
Doctorate from Notre Dame.

H. Kenneth Cole is Vice President and Treasurer of Hillsdale College. Mr.
Cole is a resident of Hillsdale, Michigan and has been an administrator at
Hillsdale College since 1982. He served as the Controller of Hillsdale College
until 1988. Previously, Mr. Cole was an administrator at Western Michigan
University. He is a former president of the Greater Hillsdale County Chamber of
Commerce and has been active in many community organizations. Mr. Cole holds
three degrees from Western Michigan University.

James T. Grohalski has served as President and Chief Executive Officer of
Southern Michigan Bancorp and Southern Michigan Bank & Trust since December 31,
1998. From January 1, 1984 until December 31, 1998, Mr. Grohalski served as
Executive Vice President and Chief Financial Officer of Southern Michigan
Bancorp and President of Southern Michigan Bank & Trust. Mr. Grohalski joined
Southern Michigan Bank & Trust in 1967. Mr. Grohalski has a BA from Adrian
College and an MBA from Western Michigan University.

Nolan E. Hooker is the owner of Hooker Oil Company. Hooker Oil Company
serves customers in Bronson, Union City, Burlington and Sherwood, Michigan with
"in home" heating fuel and supplies farming customers with delivered packaged
petroleum products, diesel fuel and gasoline. In 1984, Mr. Hooker and his wife
purchased the Union City Car wash and since that time have added car washes in
Battle Creek, Colon, Coldwater, Hillsdale, Quincy and Litchfield, Michigan.

James J. Morrison owns and operates a life and disability income insurance
agency which specializes in estate planning, deferred compensation and
charitable giving through the use of the life insurance Mr. Morrison has served
on the Coldwater School Board, Chamber of Commerce, and spent six years as a
member of the Coldwater City Council. He is actively involved with the Catholic
Church at both the local parish and dioceses levels. He received a BA in
Communications from Michigan State University in 1970.

Freeman E. Riddle owns and operates a grain farming operation. Mr. Riddle
is also President and Secretary of Spoor & Parlin, Inc., a John Deere dealership
that has been in business for 45 years. Spoor & Parlin, Inc. is engaged in the
sale of John Deere farm equipment, consumer equipment, as well as compatible
equipment from various other manufacturers. Mr. Riddle holds an engineering
degree from Tri-State University in Angola, Indiana.

Except as described in the next sentence, no director or executive officer
of Southern Michigan Bancorp or Sturgis Bank & Trust Company is related to any
other director or to any executive officer of Southern Michigan Bancorp or
Sturgis Bank & Trust Company or of any of its subsidiaries by blood, marriage or
adoption. Eric L. Eishen, the Executive Vice President and Chief Operations
Officer of Sturgis Bank & Trust Company is the son of Leonard L. Eishen, the
President and Chief Executive Officer of Sturgis Bank & Trust Company.

61
<PAGE> 68

There are no arrangements or understandings between a director or executive
officer and any other person pursuant to which such person was elected a
director or executive officer of Southern Michigan Bancorp or Sturgis Bank &
Trust Company or any of their respective subsidiaries.

No director or executive officer of either Southern Michigan Bancorp or
Sturgis Bank & Trust Company is a party to any material legal proceeding, or has
a material interest in any such legal proceeding that is adverse to either
Southern Michigan Bancorp or Sturgis Bank & Trust Company or any of their
subsidiaries.

STURGIS BANK & TRUST COMPANY. The present members of the Board of Directors
of Sturgis Bank & Trust Company will continue to serve as the Board of Directors
of Sturgis Bank & Trust Company following the consolidation, except that Mr.
Grohalski will be added to the Board of Directors of Sturgis Bank & Trust
Company.

EXECUTIVE OFFICERS

SOUTHERN MICHIGAN BANCORP. When the consolidation is completed, the
executive officers of Southern Michigan Bancorp will consist of the persons set
forth below. Executive officers are elected annually and serve at the pleasure
of the Southern Michigan Bancorp Board.

<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- ---------------------------------------------
<S> <C> <C>
Leonard L. Eishen............................ 63 President and Chief Executive Officer
James T. Grohalski........................... 59 Vice-Chairman, Chief Operating Officer, Chief
Financial Officer and Secretary
James J. Morrison............................ 52 Chairman of the Board
James A. Goethals............................ 64 Vice Chairman
</TABLE>

For information with respect to Messrs. Eishen, Grohalski, Morrison and
Goethals, see "Directors" above.

STURGIS BANK & TRUST COMPANY. The present executive officers of Sturgis
Bank & Trust Company will continue to serve as executive officers of Sturgis
Bank & Trust Company following the consolidation.

DIVIDENDS AFTER THE CONSOLIDATION

OPERATIONS AFTER THE CONSOLIDATION

Southern Michigan Bank & Trust and Sturgis Bank & Trust Company will be
held by a multi-bank holding company. Each bank will have a governing board and
the holding company Board of Directors will consist of members from each bank's
board. The holding company will have nine board members, five from Southern
Michigan Bank & Trust and four from Sturgis Bank & Trust Company. It will have
two non-operating officers, a Chairman and Vice-Chairman, and two operating
officers, a President/Chief Executive Officer and a Vice Chairman, Chief
Financial Officer/Chief Operating Officer. The President of Southern Michigan
Bank & Trust will become a member of Sturgis Bank & Trust Company's Board of
Directors and the President of Sturgis Bank & Trust Company will become a member
of Southern Michigan Bank & Trust's Board of Directors.

62
<PAGE> 69

The consolidated banks will achieve cost savings through efficiencies due
to the consolidation. The efficiencies include combined computer operations,
check processing systems, employee benefit programs, purchasing and accounting
functions and corporate insurance needs.

Additional benefits will be realized through the increased resources and
expertise that each bank operating alone would not have as well as expansion of
market areas, products and services. The consolidation will also broaden the
geographical service for customers using ATM services as well as branch offices
services.

When the consolidation is completed, the By-laws of Southern Michigan
Bancorp shall be amended to provide that Southern Michigan Bancorp shall not
take any of the following actions unless such action is authorized by a vote of
75% of the members of the board of directors of Southern Michigan Bancorp:

- amend the Articles of Incorporation or By-laws of Southern Michigan
Bancorp;

- approve any merger, share exchange or dissolution involving Southern
Michigan Bancorp or its subsidiaries;

- sell or transfer substantially all of the corporate assets of Southern
Michigan Bancorp or its subsidiaries;

- issue and/or sell any stock of Southern Michigan Bancorp, including the
establishment of the consideration to be accepted by Southern Michigan
Bancorp for the sale of any of its shares of stock;

- acquire another business or operation by way of merger, share exchange,
purchase of stock, purchase of assets or otherwise wherein the
consideration paid or delivered exceeds either 10% of the book value of
the assets of Southern Michigan Bancorp and its subsidiaries or 10% of
the fair market value of the outstanding capital stock of Southern
Michigan Bancorp;

- any action taken by Southern Michigan Bancorp as shareholder of any
subsidiary, including without limitation, Sturgis Bank & Trust Company
and Southern Bank & Trust;

- election of officers, nomination of directors and appointment of board of
directors committee members.

SOUTHERN MICHIGAN BANCORP STOCK OWNERSHIP

The following table shows the number of shares of Southern Michigan Bancorp
common stock beneficially owned (as of April 30, 2000) by:

- each person who is, or upon completion of the consolidation will become,
an owner of more than 5% of those shares;

- each person who is, or upon completion of the consolidation will become,
a director of Southern Michigan Bancorp;

- each person who is, or upon completion of the consolidation will become,
an executive officer of Southern Michigan Bancorp; and

- all persons who are, or upon completion of the consolidation will become,
directors and executive officers of Southern Michigan Bancorp as a group.

63
<PAGE> 70

<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENTAGE OF OUTSTANDING SHARES
--------------------------------------- ---------------------------------------
NAME OF BENEFICIAL OWNER PRE-CONSOLIDATION POST-CONSOLIDATION PRE-CONSOLIDATION POST-CONSOLIDATION
------------------------ ----------------- ------------------ ----------------- ------------------
<S> <C> <C> <C> <C>
Raymond H. Dresser,
Jr.................... 0 55,511(1) 0%
Leonard L. Eishen....... 0 38,839(1) 0%
Lawrence A. Franks...... 0 40,456(1) 0%
James A. Goethals....... 0 9,021(1) 0%
H. Kenneth Cole......... 169 169 (6)
James T. Grohalski...... 21,868 21,868(2,4) 1.13%
Nolan E. Hooker......... 950 950(2,3) (6)
James J. Morrison....... 2,928 2,928 (6)
Freeman E. Riddle....... 7,000 7,000 (6)
Gregory J. Hull......... 1,099 1,099(2,3) (6)
Thomas E. Kolassa....... 1,541 1,541(2,3) (6)
William E. Galliers..... 2,281 2,281(2,5) (6)
Jane L. Randall......... 5,829 5,829(2,5) (6)
James P. Briskey........ 21,296 21,296(2,3) 1.10%
Southern Michigan Bank &
Trust................. 250,293 250,293(7,8)
Harvey B. Randall....... 146,075 146,075(7,9) 7.52%
Newell A. Franks(10).... 0 74,505 0%
All directors and
executive officers as
a group (14
persons).............. 64,961 200,724 3.34%
</TABLE>

-------------------------
(1) Including shares which may be acquired within 60 days upon exercise of
stock options.

(2) Based upon information furnished to Southern Michigan Bancorp by the
individual named and the members of the designated group. The nature of
beneficial ownership for shares shown is sole voting and investment power
except as set forth below. Shares have been rounded to the nearest whole
share.

(3) Shared voting and investment power.

(4) Includes 19,385 shares held by the Bank's Employee Stock Ownership Plan
(the "ESOP") as to which Mr. Grohalski has voting power only.

(5) Shares indicated are held as trustee.

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

(7) Based upon information furnished to Sturgis Bank & Trust Company by the
beneficial owners named above. The nature of beneficial ownership for
shares shown is sole voting and investment power, except as set forth
below. Shares have been rounded to the nearest whole share.

(8) Shares held by the Trust Department of Southern Michigan Bank & Trust in
various fiduciary capacities. 1,075 of such shares are voted by the
Southern Michigan Bank & Trust Company with no investment power.

(9) Includes 146,022 shares held by Mr. Randall as trustee.

(10) Newell A. Franks is the father of director Lawrence A. Franks.

64
<PAGE> 71

INTERESTS OF CERTAIN PERSONS IN THE CONSOLIDATION

GENERAL

Certain members of Southern Michigan Bancorp's management and the Southern
Michigan Bancorp Board, and Sturgis Bank & Trust Company's management and the
Sturgis Bank & Trust Company Board, have interests in the consolidation that are
in addition to their interests as shareholders of Southern Michigan Bancorp or
shareholders.

These interests arise from provisions in the consolidation agreement
relating to appointments to the Board of Directors or executive positions of
Southern Michigan Bancorp. See "Management and Operations After the
Consolidation." They also arise from certain employment arrangements and
employee benefits after the consolidation, and from certain employment
agreements or plans of Sturgis Bank & Trust Company.

OUR BOARDS CONSIDERED THESE INTERESTS, AMONG OTHER MATTERS, IN APPROVING
THE CONSOLIDATION AGREEMENT.

The directors, officers and principal shareholders of each of Southern
Michigan Bancorp and Sturgis Bank & Trust Company may have had in the past, and
expect to have in the future, transactions in the ordinary course of business
with each of Southern, Sturgis Bank & Trust Company, and their respective
subsidiaries. Such transactions were, and are expected to be, on substantially
the same terms as those prevailing at the time for comparable transactions with
others.

EMPLOYMENT AGREEMENTS

GENERAL. Brian P. Hoggatt, the Vice-President, Chief Financial Officer and
Treasurer of Sturgis Bank & Trust Company, Eric Eishen, the Executive
Vice-President and Chief Operating Officer of Sturgis Bank & Trust Company and
Leonard L. Eishen, President and Chief Executive Officer of Sturgis Bank & Trust
Company each have an employment agreement with Sturgis Bank & Trust Company. The
employment agreements provide for, among other things, a lump sum cash severance
payment equal to three year's salary in accordance with Section 280G of the
Internal Revenue Code in the event of a termination without cause or in the
event that either Mr. Hoggatt, Eric Eishen or Leonard Eishen shall terminate
their employment with good reason within five years of a change in control which
occurs during the term of the employment contract. The consolidation constitutes
a change in control for purposes of the employment agreements; nevertheless,
Messrs. Hoggatt, Leonard Eishen and Eric Eishen have waived their right to any
such payment.

Immediately prior to the completion of the consolidation, Southern Michigan
Bancorp and Southern Michigan Bank & Trust will offer to employ James T.
Grohalski and Southern Michigan Bancorp and Sturgis Bank & Trust Company will
offer to employ Leonard L. Eishen.

Pursuant to his employment agreement, Mr. Grohalski shall serve as the Vice
Chairman, Chief Operating Officer and Chief Financial Officer of Southern
Michigan Bancorp, Inc. and President and Chief Executive Officer of Southern
Michigan Bank & Trust. Mr. Grohalski's annual salary shall be $152,000 plus
additional or special compensation based upon his performance as the Board of
Directors, in its discretion, may from time to time determine.

Pursuant to his employment agreement, Leonard Eishen shall serve as
President and Chief Executive Officer of Southern Michigan Bancorp, Inc. and as
President and Chief Executive Officer of Sturgis Bank & Trust Company. Leonard
Eishen's annual salary shall be $174,000 plus additional or special compensation
based upon his performance as the Board of Directors, in its discretion, may
from time to time determine.

65
<PAGE> 72

It is anticipated that the two employment agreements will be virtually
identical.

Each employment agreement will provide that in the event Mr. Grohalski or
Leonard Eishen is terminated for any reason other than for cause, or in the
event of Mr. Grohalski's or Leonard Eishen's "voluntary termination for good
reason," then in addition to receiving their compensation and benefits under
their respective employment agreements, upon expiration of the term of their
respective employment agreements, they will be entitled to monthly installments
of 1/12th of their annual salary commencing thirty days after expiration of the
term of the employment agreement and continuing on the same date of each month
thereafter until the earlier of (i) death, (ii) the age of 65 or (iii) the date
they receive twelve monthly installments.

Under the employment agreements, the term "voluntary termination for good
reason" means termination of employment without express written consent, and
including (without limitation) any of the following actions unless consented to
in writing: (i) the assignment of duties of a nonexecutive nature or for which
they are not reasonably equipped by their skills and experience; (ii) without
reasonable justification, reducing their salary, materially reducing the amount
of paid vacations to which they are entitled, or materially reducing their
fringe benefits and perquisites; (iii) requiring either of them to relocate
their principal business office or their principal place of residence outside of
a sixty mile radius from Coldwater, Michigan in the case of Mr. Grohalski or
Sturgis in the case of Leonard Eishen, or assigning to them duties that would
reasonably require such relocation; (iv) requiring them, or assigning duties to
them which would reasonably require them to spend more than ninety normal
working days away from Coldwater, Michigan in the case of Mr. Grohalski or
Sturgis Michigan in the case of Leonard Eishen during any consecutive twelve
month period; (v) failing to provide office facilities, secretarial services,
and other administrative services which are substantially equivalent to the
facilities and services provided on the date the employment agreement is
executed; or (vi) terminating incentive and benefit plans or arrangements, or
reducing or limiting Mr. Grohalski's or Leonard Eishen'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 their incentive
compensation and benefits below their aggregate value as of the date of the
execution of the employment agreement.

The employment agreement also provides that in the event of a "termination
for cause," neither Mr. Grohalski nor Leonard Eishen shall be entitled to
receive compensation or other benefits for any period after such termination.
The term "termination for cause" means (i) termination of employment because of
the conviction of any criminal violation involving dishonesty, fraud or breach
of trust, (ii) willful engagement in any misconduct in the performance of their
duties that materially injures Southern Michigan Bancorp or its subsidiaries,
(iii) performance of any act which, if known to the customers, clients or
stockholders of Southern Michigan Bancorp or any of its subsidiaries would
materially and adversely impact the business of Southern Michigan Bancorp or any
of its subsidiaries, (iv) willful and substantial nonperformance of their duties
if such nonperformance continues for more than ten days after written notice of
such nonperformance and of Southern Michigan Bancorp's intention to terminate
employment, (v) willful violation of the noncompetition and nondisclosure
obligations contained in the employment agreement, (vi) suspension and/or
temporary prohibition (or is removed and/or permanently prohibited) from
participating in the conduct of Southern Michigan Bancorp'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,
in its sole discretion, determines to reflect adversely on Southern Michigan
Bancorp and to be related to the duties of Mr. Grohalski or Leonard Eishen under
their respective employment agreements.

66
<PAGE> 73

The employment agreements will also provide for a severance payment equal
to two years salary in accordance with Section 280G of the Internal Revenue Code
in the event of a termination of employment without cause or a voluntary
termination with good reason within three years after a change in control which
occurs during the term of the employment agreement. In the event that it is
mutually in the best interest of Southern Michigan Bancorp and Mr. Grohalski or
Leonard Eishen, Mr. Grohalski and Leonard Eishen shall have the right to elect
to receive a cash payment equal to one year's salary and the remaining one
year's salary on an installment basis in accordance with Section 280G of the
Internal Revenue Code.

The term "change in control" shall be deemed to occur on the earliest of:
(i) the acquisition by any entity, person, or group of beneficial ownership of
more than fifty percent of the outstanding capital stock of Southern Michigan
Bancorp entitled to vote for the election of directors; (ii) the commencement by
any entity, person, or group (other than Southern Michigan Bancorp or a
subsidiary of Southern Michigan Bancorp) of a tender offer or an exchange offer
for more than twenty-five percent of the outstanding voting stock of Southern
Michigan Bancorp entitled to vote for the election of directors; (iii) the
effective time of (1) a merger or consolidation of Southern Michigan Bancorp
with one or more other corporations as a result of which the holders of the
outstanding voting stock entitled to vote of the election of directors of
Southern Michigan Bancorp immediately prior to such merger hold less than fifty
percent of the voting stock entitled to vote for the election of directors of
the surviving or resulting corporation, or (2) a transfer of substantially all
of the assets of Southern Michigan Bancorp other than to an entity of which
Southern Michigan Bancorp owns at least eighty percent of the voting stock
entitled to vote for the election of directors; or (iv) the election to the
Board of Directors of Southern Michigan Bancorp without the recommendation or
approval of the incumbent Board of Directors, of the lesser of three directors
or directors constituting a majority of the number of Directors then in office.

Furthermore, the employment agreements will provide that during the term of
the agreements, and for a period of one year following the termination of
employment, Mr. Grohalski and Leonard Eishen will not (i) within a geographic
radius of seventy-five (75) miles from (x) Coldwater, Michigan, in the case of
Mr. Grohalski and (y) Sturgis, Michigan, in the case of Leonard Eishen, 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 Southern Michigan Bancorp; (ii) interfere with the relationship of Southern
Michigan Bancorp and any of its employees, agents or representatives; and (iii)
directly or indirectly divert or attempt to divert from Southern Michigan
Bancorp any business in which Southern Michigan Bancorp has been actively
engaged during the term of the employment agreement, nor interfere with the
relationships of Southern Michigan Bancorp with its dealers, distributors,
sources of supply or customers.

Finally, the employment agreements will provide that neither Mr. Grohalski
nor Leonard Eishen will during the term of their respective employment agreement
or at any time thereafter, disclose or permit to be disclosed any confidential
information of Southern Michigan Bancorp.

OTHER MATTERS

SOUTHERN MICHIGAN BANCORP STOCK OPTIONS. When the consolidation is
completed, each Southern Michigan Bancorp stock option then outstanding will be
an option to purchase the same number of shares of Southern Michigan Bancorp
common stock at the same exercise price. Each Southern Michigan Bancorp stock
option will continue to be governed by the terms of the applicable Southern
Michigan Bancorp stock option plan.

67
<PAGE> 74

STURGIS BANK & TRUST COMPANY STOCK OPTIONS. When the consolidation is
completed, each Sturgis Bank & Trust Company stock option as adjusted for stock
splits and outstanding will be converted automatically into an option to
purchase shares of Southern Michigan Bancorp common stock. However, the number
of shares subject to, and the exercise price of, each of those Sturgis Bank &
Trust Company stock options will be adjusted to account for the exchange ratio
in the consolidation. The vesting, duration and other terms of the new option
will be the same as the original Sturgis Bank & Trust Company stock option
except that all references to Sturgis Bank & Trust Company will be deemed to be
references to Southern Michigan Bancorp.

DESCRIPTION OF SOUTHERN MICHIGAN BANCORP CAPITAL STOCK

The following description of Southern Michigan Bancorp's capital stock is
subject to and qualified in its entirety by reference to Southern Michigan
Bancorp's articles of incorporation and by-laws, which are exhibits to the
registration statement of which this proxy statement/prospectus forms a part and
are incorporated by reference. The following description should be read
carefully by Sturgis Bank & Trust Company shareholders since, upon completion of
the consolidation, they will become Southern Michigan Bancorp shareholders. See
also "Comparison of Shareholder Rights."

GENERAL

Southern Michigan Bancorp's total authorized capital stock currently
consists of 4,000,000 shares of common stock, $2.50 par value per share and
100,000 preferred shares.

On , 2000, [ ] shares of Southern Michigan Bancorp
common stock were outstanding, and an aggregate of [ ] shares of Southern
Michigan Bancorp common stock were reserved for issuance pursuant to incentive
compensation plans of Southern Michigan Bancorp. Upon completion of the
consolidation, about [ ] shares of Southern Michigan Bancorp common stock
will be outstanding and [ ] shares of Southern Michigan Bancorp common
stock will be reserved for issuance pursuant to incentive compensation plans of
Southern Michigan Bancorp and Sturgis Bank & Trust Company.

PREFERRED STOCK

Southern Michigan Bancorp preferred stock may be issued in one or more
series at such time or times and for such consideration or considerations as the
Board of Directors of Southern Michigan Bancorp determines. The Board of
Directors of Southern Michigan Bancorp is expressly authorized at any time, and
from time to time, to provide for the issuance of Southern Michigan Bancorp
preferred stock with such voting powers, full or limited, or without voting
powers, and with such designations, preferences and relative, participating,
optional or other special rights, and qualifications, limitations or
restrictions thereof, as are expressed in the articles of incorporation of
Southern Michigan Bancorp or in the resolutions of the Board of Directors of
Southern Michigan Bancorp providing for the issuance thereof. The Board of
Directors of Southern Michigan Bancorp is authorized to, among other things,
designate the series and the number of shares comprising such series, the
dividend rate or rates on the shares of such series, the redemption rights, if
any, any purchase, retirement or sinking fund, any conversion rights and any
special voting rights. Shares of Southern Michigan Bancorp preferred stock
redeemed or acquired by Southern Michigan Bancorp return to the status of
authorized and unissued shares of Southern Michigan Bancorp preferred stock,
without designation as to series, and may be reissued by the Board of Directors
of Southern Michigan Bancorp.

68
<PAGE> 75

COMMON STOCK

The holders of Southern Michigan Bancorp common stock are entitled to
receive such dividends as may from time to time be declared by the Southern
Michigan Bancorp Board. On every issue submitted to them as Southern Michigan
Bancorp shareholders, they are entitled to one vote per share of Southern
Michigan Bancorp common stock. See "Comparison of Shareholder Rights -- Board of
directors; voting for directors; removal of directors."

In the event of dissolution they are generally entitled, after provision
for Southern Michigan Bancorp's debts, obligations and liabilities to share
ratably in all assets of Southern Michigan Bancorp available for distribution to
holders of Southern Michigan Bancorp common stock. Holders of Southern Michigan
Bancorp common stock do not have preemptive rights. All shares of Southern
Michigan Bancorp common stock now outstanding are fully paid and nonassessable.

TRANSFER AGENT

The registrar and transfer agent for Southern Michigan Bancorp common stock
is Registrar and Transfer Company.

AUTHORIZED BUT UNISSUED SHARES

The Southern Michigan Bancorp Board believes that the availability of
shares of Southern Michigan Bancorp common stock is advisable to provide
Southern Michigan Bancorp with the flexibility to take advantage of
opportunities to issue such stock in order to obtain capital, as consideration
for possible acquisitions or for other purposes (including, without limitation,
the issuance of additional shares of Southern Michigan Bancorp common stock
through stock splits and stock dividends in appropriate circumstances). There
are, at present, no plans, understandings, agreements or arrangements concerning
the issuance of additional shares of Southern Michigan Bancorp common stock,
except for the shares of Southern Michigan Bancorp common stock to be issued in
the consolidation, and shares of Southern Michigan Bancorp common stock
presently reserved for issuance.

Uncommitted authorized but unissued shares of Southern Michigan Bancorp
common stock may be issued from time to time to such persons and for such
consideration as the Southern Michigan Bancorp Board may determine and holders
of the then outstanding shares of Southern Michigan Bancorp common stock may or
may not be given the opportunity to vote thereon, depending upon the nature of
any such transactions, applicable law and the judgment of the Southern Michigan
Bancorp Board regarding the submission of such issuance to Southern Michigan
Bancorp's shareholders. Southern Michigan Bancorp shareholders have no
preemptive rights to subscribe to newly issued shares.

Moreover, it is possible that additional shares of Southern Michigan
Bancorp common stock could be issued for the purpose of making an acquisition by
an unwanted suitor of a controlling interest in Southern Michigan Bancorp more
difficult, time-consuming or costly or to otherwise discourage an attempt to
acquire control of Southern. Under these circumstances the availability of
authorized and unissued shares of Southern Michigan Bancorp common stock may
make it more difficult for shareholders to obtain a premium for their shares.
These authorized and unissued shares could be used to create voting or other
impediments or to frustrate a person seeking to obtain control of Southern
Michigan Bancorp by means of a consolidation, tender offer, proxy contest or
other means. They could also be privately placed with purchasers who might
cooperate with the Southern Michigan Bancorp Board in opposing such an attempt
by a third party to gain control of Southern. The issuance of new shares of
Southern Michigan Bancorp common stock could also be used to

69
<PAGE> 76

dilute ownership of a person or entity seeking to obtain control of Southern.
Although Southern Michigan Bancorp does not currently contemplate taking such
action, shares of Southern Michigan Bancorp common stock could be issued for the
purposes and effects described above and the Southern Michigan Bancorp Board
reserves its rights (if consistent with its fiduciary responsibilities) to issue
such stock for such purposes.

REGULATORY CONSIDERATIONS

The following discussion describes the material elements of the regulatory
framework applicable to bank holding companies and their subsidiaries and to
state chartered savings banks and their subsidiaries. It provides certain
specific information relevant to Southern Michigan Bancorp and Sturgis Bank &
Trust Company. This regulatory framework is intended primarily for the
protection of depositors and the federal deposit insurance funds and not for the
protection of security holders. To the extent that the following information
describes statutory and regulatory provisions, it is qualified in its entirety
by reference to those provisions. A change in the statutes, regulations or
regulatory policies applicable to us or our subsidiaries may have a material
effect on our businesses. The framework described in this section will also
generally be applicable to Southern Michigan Bancorp following the
consolidation.

GENERAL

Southern Michigan Bancorp is a bank holding company and a legal entity
separate and distinct from its subsidiaries. Its primary subsidiary is Southern
Michigan Bank & Trust, a Michigan state banking corporation. Sturgis Bank &
Trust Company is a Michigan savings bank and a legal entity separate and
distinct from its subsidiaries.

Financial institutions such as bank holding companies, banks, and savings
banks are extensively regulated under both federal and state law. These
regulations apply to, among other things, acquisitions, permissible types and
amounts of loans, investments and other activities, capital adequacy, branching,
interest rates on loans and on deposits and the safety and soundness of banking
practices.

The policies and regulations of financial institution regulatory
authorities have had significant effect on the operating results of financial
institutions in the past and are expected to have significant effects in the
future. These policies and regulations may be influenced by many factors,
including inflation, unemployment, short-term and long-term changes in the
international trade balance and fiscal policies of the United States government.

Periodically legislation is considered and adopted which has resulted in,
or that could result in, further regulation or deregulation of financial
institutions. In addition to the relaxation or elimination of geographic
restrictions on banks and bank holding companies, a number of regulatory and
legislative initiatives have recently eliminated many of the product line
barriers presently separating the services offered by commercial banks from
those offered by nonbanking institutions, including mutual funds, insurance
companies, securities brokerage firms and investment banking firms. We cannot
give any assurances as to whether any additional legislation will be adopted or
as to the effect such legislation might have on our businesses.

BANK HOLDING COMPANIES. As a bank holding company, Southern Michigan
Bancorp is subject to regulation under the Bank Holding Company Act of 1956, as
amended, and its examination and reporting requirements and is subject to the
supervision of the Federal Reserve (the "BHCA").

70
<PAGE> 77

Banking laws and regulations restrict transactions by insured banks owned
by a bank holding company, including loans to and certain purchases from the
parent holding company, non-bank and bank subsidiaries of the parent holding
company, principal shareholders, officers, directors and their affiliates, and
investments by the subsidiary banks in the shares or securities of the parent
holding company (or of any other non-bank or bank affiliates), and acceptance of
such shares or securities as collateral security for loans to any borrower. The
regulators also review other payments, such as management fees, made by
subsidiary banks or affiliated companies.

Under the BHCA, a bank holding company is prohibited, with certain limited
exceptions, from engaging in activities other than those of banking or of
managing or controlling banks and from acquiring or retaining direct or indirect
ownership or control of voting shares or assets of any company which is not a
bank or bank holding company, other than subsidiaries furnishing services to or
performing services for its subsidiaries, and other subsidiaries engaged in
activities which the Federal Reserve determines to be so closely related to
banking or managing or controlling banks as to be a proper incident thereto.

As a Michigan state banking corporation, Southern Michigan Bank & Trust is
subject to regulation and examination by the Michigan Office of Financial and
Insurance Services, Division of Financial Institutions. As an institution whose
deposits are insured by the Bank Insurance Fund ("BIF") of the Federal Deposit
Insurance Corporation ("FDIC"), Southern Michigan Bank & Trust is also subject
to regulation and examination by the FDIC.

SAVINGS BANKS. As a Michigan savings bank, Sturgis Bank & Trust Company is
subject to regulation and examination by the Michigan Office of Financial and
Insurance Services, Division of Financial Institutions. As an institution whose
deposits are insured by the Savings Association Insurance Fund ("SAIF") of the
FDIC, Sturgis Bank & Trust Company is also subject to regulation and examination
by the FDIC.

DIVIDEND RESTRICTIONS

SOUTHERN MICHIGAN BANCORP. Southern Michigan Bancorp is a legal entity
separate and distinct from its subsidiaries. Substantially all of Southern
Michigan Bancorp's revenues result from dividends paid to it by Southern
Michigan Bank & Trust and from earnings on investments. There are statutory and
regulatory requirements applicable to the payment of dividends by Southern
Michigan Bank & Trust as well as by Southern Michigan Bancorp to its
shareholders.

Under Michigan law, Southern Michigan Bank & Trust may not declare a cash
dividend or a dividend in kind except out of net income then on hand after
deducting all losses and bad debts, and then only if it will have a surplus
amounting to not less than 20% of its capital after the payment of the dividend.
Moreover, Southern Michigan Bank & Trust may not declare or pay any cash
dividend or dividend in kind until the cumulative dividends on its preferred
stock, if any, have been paid in full. Further, if the surplus of Southern
Michigan Bank & Trust is at any time less than the amount of its capital, before
the declaration of a cash dividend or dividend in kind, it must transfer to
surplus not less than 10% of its net income for the preceding 6 months (in the
case of quarterly or semi-annual dividends) or the preceding two consecutive 6
month periods (in the case of annual dividends). Based on Southern Michigan Bank
& Trust's balance sheet as of December 31, 1999, under these dividend
restrictions, Southern Michigan Bank & Trust, without obtaining governmental
approvals, could have declared aggregate dividends in 1999 of at least
$3,752,000 from retained net income.

STURGIS BANK & TRUST COMPANY. Under Michigan law, Sturgis Bank & Trust
Company may not declare a cash dividend or a dividend in kind except out of net
income then on hand after deducting

71
<PAGE> 78

all losses and bad debts, and then only if it will have a surplus amounting to
not less than 20% of its capital after the payment of the dividend. Moreover,
Sturgis Bank & Trust Company may not declare or pay any cash dividend or
dividend in kind until the cumulative dividends on its preferred stock, if any,
have been paid in full. Further, if the surplus of Sturgis Bank & Trust Company
is at any time less than the amount of its capital, before the declaration of a
cash dividend or dividend in kind, it must transfer to surplus not less than 10%
of its net income for the preceding 6 months (in the case of quarterly or
semi-annual dividends) or the preceding two consecutive 6 month periods (in the
case of annual dividends). Under these dividend restrictions, Sturgis Bank &
Trust Company, without obtaining governmental approvals, could have declared
aggregate dividends in 1999 of at least $7,263,162 from retained net income.

OTHER FACTORS. The payment of dividends by us and our subsidiaries may also
be affected or limited by other factors, such as the requirements to maintain
adequate capital above regulatory guidelines. In addition, if, in the opinion of
the applicable regulatory authority, a bank under its jurisdiction is engaged in
or is about to engage in an unsafe or unsound practice (which, depending on the
financial condition of the bank, could include the payment of dividends), such
authority may require, after notice and hearing, that such bank cease and desist
from such practice or prohibit the payment of future dividends. The Federal
Reserve has indicated that paying dividends that deplete a bank's capital base
to an inadequate level would be an unsafe and unsound banking practice. The
Federal Reserve, the FDIC and the DIF have issued policy statements which
provide that bank holding companies and insured banks should generally only pay
dividends out of current operating earnings.

RESTRICTIONS ON TRANSACTIONS WITH AFFILIATES

BANK HOLDING COMPANIES. There are legal restrictions on the extent to which
a bank holding company like Southern Michigan Bancorp and its nonbank
subsidiaries can borrow or otherwise obtain credit from its bank subsidiaries
(e.g., Southern Michigan Bank & Trust). The "covered transactions" that an
insured bank such as Southern Michigan Bank & Trust and its subsidiaries are
permitted to engage in with their nonbank bank affiliates are limited to the
following amounts: in the case of any one such affiliate, the aggregate amount
of "covered transactions" of the insured bank and its subsidiaries cannot exceed
10% of the capital stock and the surplus of the insured bank; and in the case of
all affiliates, the aggregate amount of "covered transactions" of the insured
bank and its subsidiaries cannot exceed 20% of the capital stock and surplus of
the insured bank. "Covered transactions" are defined by statute to include a
loan or extension of credit to the affiliate, a purchase of securities issued by
an affiliate, a purchase of assets from the affiliate, unless otherwise exempted
by the Federal Reserve, the acceptance of securities issued by the affiliate as
collateral for a loan and the issuance of a guarantee, acceptance, or letter of
credit for the benefit of an affiliate. Covered transactions must also be
collateralized. Further, a bank holding company and its subsidiaries are
prohibited from engaging in certain tie-in arrangements in connection with any
extension of credit, lease or sale of property or furnishing of services.

CAPITAL REQUIREMENTS

GENERAL. The Federal Reserve, FDIC, and state bank regulators require
banks, thrifts and holding companies to maintain minimum ratios of primary and
total capital to total assets. Regulatory authorities may increase the minimum
requirements for all banks and bank holding companies or for specified banks or
bank holding companies. Increases in the minimum required ratios could adversely
affect us and our subsidiaries, including the ability to pay dividends.

72
<PAGE> 79

BANK HOLDING COMPANIES. The Federal Reserve has adopted risk-based capital
guidelines for bank holding companies. When the guidelines became fully
phased-in at the end of 1992, the minimum guidelines for the ratio of total
capital ("Total Capital") to risk-weighted assets (including certain off-balance
sheet activities, such as standby letters of credit) increased from 7.25% to
8.00%. At least half of Total Capital must be composed of common shareholders'
equity, minority interests in the equity accounts of consolidated subsidiaries
and a limited amount of perpetual preferred stock, less goodwill and certain
other intangible assets ("Tier 1 Capital"). The remainder may consist of
subordinated debt, other preferred stock and a limited amount of loan loss
reserves. At June 30, 2000, Southern Michigan Bancorp's ratio of Tier 1 Capital
to risk-based assets was %. At June 30 , 2000, on a pro forma basis after
giving effect to the consolidation, Southern Michigan Bancorp's ratio of Tier 1
Capital to risk-based assets is expected to be %.

In addition, the Federal Reserve has established minimum leverage ratio
guidelines for bank holding companies which provide for a minimum leverage ratio
of Tier 1 Capital to total assets, less goodwill and certain other intangible
assets (the "Tier 1 Capital leverage ratio"), of 3% for bank holding companies
that meet certain specified criteria, including having the highest regulatory
rating. All other bank holding companies are required to maintain a minimum Tier
1 Capital leverage ratio of 4%. Southern Michigan Bancorp's Tier 1 Capital
leverage ratio at June 30, 2000 was %. At June 30, 2000, on a pro forma
combined basis after giving effect to the consolidation, Southern Michigan
Bancorp's Tier 1 Capital leverage ratio is expected to be %.

The guidelines also provide that bank holding companies experiencing
internal growth or making acquisitions will be expected to maintain strong
capital positions substantially above the minimum supervisory levels without
significant reliance on intangible assets. Furthermore, the guidelines indicate
that the Federal Reserve will continue to consider a "tangible Tier 1 Capital
leverage ratio" (deducting all intangibles) in evaluating proposals for
expansion or new activities. The Federal Reserve has not advised Southern
Michigan Bancorp of any specific minimum Tier 1 Capital leverage ratio
applicable to it.

Southern Michigan Bank & Trust and Sturgis Bank & Trust Company are subject
to similar capital requirements adopted by the FDIC. At June 30, 2000, each of
Southern Michigan Bank & Trust and Sturgis Bank & Trust Company had a Tier 1
Capital ratio and a Total Capital ratio (computed under the 1992 guidelines) in
excess of the fully phased-in requirements and a Tier 1 Capital to risk based
assets ratio in excess of %. No regulatory agency has advised Southern
Michigan Bank & Trust or Sturgis Bank & Trust Company of any specific applicable
minimum Tier 1 Capital leverage ratio. Failure to meet capital guidelines could
subject an insured bank to a variety of enforcement remedies, including the
termination of deposit insurance by the FDIC and a prohibition on the acceptance
of brokered deposits.

In December 1992, the Federal Reserve approved a final rule altering the
method of computation of Tier 1 Capital of bank holding companies. Subject to
certain exceptions, in calculating Tier 1 Capital under the revised rule, bank
holding companies would be required to deduct all intangible assets other than
readily marketable mortgage servicing assets, nonmortgage servicing assets, and
purchased credit card relationships, each valued at least quarterly at the
lesser of 90% of their fair market value or 100% of their book value, in an
aggregate amount not exceeding 90% of Tier 1 Capital, with a separate sublimit
of 25% of Tier 1 capital for purchased credit card relationships and nonmortgage
servicing assets.

The Federal Deposit Insurance Corporation Improvement Act of 1991 requires
federal bank regulatory agencies biannually to review risk-based capital
standards to ensure that they adequately address interest rate risk,
concentration of credit risk and risks from non-traditional activities. On
December 31, 1992, capital adequacy regulations adopted by the FDIC, the Federal
Reserve and the

73
<PAGE> 80

Comptroller of the Currency that incorporated interest rate risk into the
calculation of risk-based capital and concentration of credit risk and risk from
non-traditional activities into bank capital requirements became effective.

Failure to meet the capital guidelines described above could subject an
insured financial institution to a variety of sanctions, including asset growth
restrictions and termination of deposit insurance by the FDIC.

Southern Michigan Bancorp expects that each of Southern Michigan Bank &
Trust and Sturgis Bank & Trust Company will continue to meet its fully phased-in
capital requirements and its capital requirements after the consolidation.

LIABILITY FOR BANK SUBSIDIARIES

Under Federal Reserve policy, Southern Michigan Bancorp is expected to act
as a source of financial strength to each of its subsidiary banks and to commit
resources to support each of such subsidiaries. This support may be required at
times when, absent such Federal Reserve policy, Southern Michigan Bancorp would
not otherwise be required to provide it. Any capital loans by a bank holding
company to any subsidiary bank are subordinate in right of payment to deposits
and to certain other indebtedness of such subsidiary bank. In the event of a
bank holding company's bankruptcy, any commitment by the bank holding company to
a federal bank regulatory agency to maintain the capital of a subsidiary bank
will be assumed by the bankruptcy trustee and entitled to a priority of payment.

Under FIRREA, a depository institution insured by the FDIC can be held
liable for any loss incurred by, or reasonably expected to be incurred by, the
FDIC after August 9, 1989 in connection with the default of a commonly
controlled FDIC-insured depository institution, or any assistance provided by
the FDIC to any commonly controlled FDIC-insured depository institution "in
danger of default." "Default" is defined generally as the appointment of a
conservator or receiver and "in danger of default" is defined generally as the
existence of certain conditions indicating that a default is likely to occur in
the absence of regulatory assistance. This right of recovery by the FDIC
generally is superior to any claim of the shareholders of the depository
institution that is liable or of any affiliate of such institution. Southern
Michigan Bancorp's subsidiary banks are subject to such provisions of FIRREA and
such right of recovery by the FDIC.

Under Michigan law, if the capital of a Michigan-chartered bank is impaired
by losses or otherwise, the Office of Financial and Insurance Services is
authorized to require payment of the deficiency by assessment upon the bank's
shareholders, pro rata, and to the extent necessary, if any such assessment is
not paid by any shareholder after three months notice, to cause the sale of the
stock of such shareholder to make good the deficiency.

DEPOSIT INSURANCE ASSESSMENTS

The deposits of Southern Michigan Bank & Trust and Sturgis Bank & Trust
Company are currently insured to a maximum of $100,000 per depositor, subject to
certain aggregation rules. The FDIC establishes rates for the payment of
premiums by federally insured banks, such as Southern Michigan Bank & Trust and
Sturgis Bank & Trust Company, for deposit insurance. Separate insurance funds
(BIF and SAIF) are maintained for commercial banks and thrifts, with insurance
premiums from the industry used to offset losses from insurance payouts when
banks and thrifts fail. Due to the high rate of failures in the recent past, the
FDIC has adopted a risk-based deposit insurance premium system for all insured
depository institutions, including Southern Michigan Bank & Trust and Sturgis
Bank & Trust Company, which requires that a depository institution pay to

74
<PAGE> 81

BIF from $.00 to $.27 per $100, or to SAIF from $.00 to $.27 per $100, of
insured deposits depending on its capital levels and risk profile, as determined
by its primary federal regulator on a semiannual basis. Under its risk-based
assessment system, the FDIC may place a member in one of nine assessment risk
categories based on certain capital and supervisory measures. The capital
measures are "well capitalized," "adequately capitalized" and
"undercapitalized." Within each capital group a member may be assigned to one of
three supervisory subgroups: "financially sound," "demonstrated weaknesses" and
"substantial probability of loss."

A financial institution is "well capitalized" if it has a Total Capital to
risk based assets of 10% or greater, a Tier 1 Capital of 6% or greater, and a
Tier 1 leverage ratio of 5% or greater. A financial institution is "adequately
capitalized" if it does not meet the standards for "well capitalized" but has a
Total Capital to risk based assets of 8% or greater, a Tier 1 Capital of 4% or
greater, and a Tier 1 leverage ratio of 4% or greater. A financial institution
is "undercapitalized" if it does not meet the standards for "adequately
capitalized."

A "financially sound" financial institution is one that is financially
sound with only a few minor weaknesses. A financial institution with
"demonstrated weaknesses" is one with weaknesses which, if not corrected, could
result in significant deterioration of the institution and increased risk of
loss to BIF or SAIF. A financial institution raising a "substantial probability
of loss" is one that poses a substantial probability of loss to BIF or SAIF
unless effective corrective action is taken.

The risk-related adjusted assessment schedule adopted by the FDIC with
respect to deposits insured by BIF or SAIF is as follows:

<TABLE>
<CAPTION>
FINANCIALLY DEMONSTRATED SUBSTANTIAL
SOUND WEAKNESSES PROBABILITY OF LOSS
----------- ------------ -------------------
<S> <C> <C> <C>
Well Capitalized................................ 0 3 17
Adequately Capitalized.......................... 3 10 24
Less than Adequately Capitalized................ 10 24 27
</TABLE>

The FDIC's adoption of risk-based insurance assessment schedules did not
result in a significant increase in the insurance assessment costs of Southern
Michigan Bank & Trust or Sturgis Bank & Trust Company.

Since 1997, BIF insured financial institutions have serviced Financing
Corp. ("FICO") bonds, which were funded by SAIF insured financial institutions.
The FICO bonds were issued in the late 1980s in connection with government
efforts to bail out the thrift industry. Since 1997, interest payments for FICO
bonds have been borne by all FDIC insured institutions. FICO bond servicing
currently requires BIF members to pay 2.08 cents for every $100 in insured
deposits, and SAIF members to pay 2.08 cents for each $100 in insured deposits.
The servicing payments have been collected electronically by the FDIC since
January 2, 1997.

DEPOSITOR PREFERENCE STATUTE

Federal legislation has been enacted providing that deposits and certain
claims for administrative expenses and employee compensation against an insured
depository institution would be afforded a priority over other general unsecured
claims against such institution, including federal funds and letters of credit,
in the "liquidation or other resolution" of the institution by any receiver.

75
<PAGE> 82

BROKERED DEPOSITS

Under FDIC regulations, no FDIC-insured depository institution can accept
brokered deposits unless it is well capitalized, or is adequately capitalized
and receives a waiver from the FDIC. In addition, these regulations prohibit any
depository institution that is not well capitalized from paying an interest rate
on deposits in excess of 75 basis points over certain prevailing market rates or
offering "pass through" deposit insurance on certain employee benefit plan
accounts unless it provides certain notice to affected depositors.

REGULATION OF PROPOSED ACQUISITIONS

With certain limited exceptions, the BHCA prohibits bank holding companies,
such as Southern Michigan Bancorp, from acquiring direct or indirect ownership
or control of voting shares or assets of a bank without the prior approval of
the Federal Reserve.

In evaluating an application for its approval of such an acquisition, the
Federal Reserve will consider whether the performance by an affiliate of
Southern Michigan Bancorp of the activity can reasonably be expected to produce
benefits to the public (such as greater convenience, increased competition, or
gains in efficiency) that outweigh possible adverse effects (such as undue
concentration of resources, decreased or unfair competition, conflicts of
interest, or unsound banking practices). The Federal Reserve may apply different
standards to activities proposed to be commenced de novo and activities
commenced by acquisition, in whole or in part, of a going concern. The Federal
Reserve's consideration will also include an evaluation of the financial and
managerial resources of Southern Michigan Bancorp, including its existing
subsidiaries, and of any entity to be acquired, and the effect of the proposed
transaction on those resources. This required regulatory approval is subject to
public notice and comment procedures, and adverse public comments received, or
adverse considerations raised by regulatory agencies, may delay or prevent
completion of such an acquisition.

OTHER LEGISLATION

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

76
<PAGE> 83

to unaffiliated third parties. ATM operators who charge a fee to noncustomers
for use of its ATM must disclose the fee on a sign placed on the ATM and before
the transaction is made as a part of the on-screen display or by a paper notice
issued by the machine.

COMMUNITY DEVELOPMENT ACT. The Riegle Community Development and Regulatory
Improvement Act (the "Community Development Act") was enacted to promote
economic revitalization and community development and increase the protections
afforded to individuals most at risk from abusive lending practices,
particularly high-interest mortgages secured by the borrowers' homes.

The Community Development Act provides a number of initiatives to lessen
the regulatory burden placed upon depository institutions and also affects a
number of the consumer compliance laws by allowing streamlined disclosures for
radio advertising of consumer leases, providing consumers with information
necessary to challenge an "adverse characterization" due to a credit reporting
agency report and by clarifying the disclosure requirements under the Real
Estate Settlement Procedures Act regarding the transfer of serviced mortgaged
loans.

INTERSTATE ACT. The Riegle-Neal Interstate Banking and Branching Efficiency
Act of 1994 (the "Interstate Act") was enacted to facilitate the interstate
expansion and consolidation of banking organizations. It permits (1) bank
holding companies that are adequately capitalized and managed to acquire banks
located in states outside their home states regardless of whether such
acquisitions are authorized under the law of the host state, (2) the interstate
consolidation of banks after June 1, 1997, subject to the right of individual
states to "opt in" or "opt out" of this authority prior to such date, (3) banks
to establish new branches on an interstate basis provided that such action is
specifically authorized by the law of the host state, (4) foreign banks to
establish, with approval of the appropriate regulators in the United States,
branches outside their home states to the same extent that national or state
banks located in such state would be authorized to do so and (5) banks to
receive deposits, renew time deposits, close loans, service loans and receive
payments on loans and other obligations as agent for any bank or thrift
affiliate, whether the affiliate is located in the same or different state.

FDICIA. The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") substantially revised the bank regulatory and funding provisions of
the Federal Deposit Insurance Act and revised several other federal banking
statutes.

FDICIA establishes five capital tiers: "well capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized," and
"critically undercapitalized." A depository institution is well capitalized if
it significantly exceeds the minimum level required by regulation for each
relevant capital measure, adequately capitalized if it meets each such measure,
undercapitalized if it fails to meet any such measure, significantly
undercapitalized if it is significantly below such measure and critically
undercapitalized if it fails to meet any critical capital level set forth in
regulations. The critical capital level is defined as a ratio of tangible equity
to total assets of two percent or less. An institution may be deemed to be in a
capitalization category that is lower than is indicated by its actual capital
position under certain circumstances.

Among other things, FDICIA requires the federal bank regulatory authorities
to take "prompt corrective action" in respect of any depository institution
which does not meet specified minimum capital requirements. The scope and degree
of regulatory intervention is linked to the extent of the shortfall of the
depository institution's capital from required minimum standards. In the case of
a depository institution which is "critically undercapitalized" (a term defined
to include institutions which still have a positive net worth), the federal bank
regulatory authorities are generally required to appoint a conservator or
receiver. FDICIA also requires the holding company of any undercapitalized
depository institution to guarantee, in part, such depository institution's
capital plan in order for such

77
<PAGE> 84

plan to be acceptable. FDICIA also prohibits a depository institution that is
not well-capitalized from accepting brokered deposits and paying deposit
interest rates which significantly exceed the prevailing rate in its own market
or the national rate (as determined by the FDIC) for similar deposits.
Implementing regulations for these provisions of FDICIA have not yet been
adopted by the federal bank regulatory authorities.

FDICIA generally prohibits a depository institution from making any capital
distribution (including payment of a dividend) or paying any management fee to
its holding company if the depository institution would thereafter be
undercapitalized.

MORTGAGE REGULATION

In the origination of mortgage loans, we are subject to various federal
statutes, such as the Equal Credit Opportunity Act, Fair Credit Reporting Act,
Truth in Lending Act, Real Estate Settlement Procedures Act, and Home Mortgage
Disclosure Act, and the regulations promulgated thereunder, which prohibit
discrimination and specify disclosures to be made to borrowers regarding credit
and settlement costs.

As sellers and servicers of mortgage loans, we are participants in the
secondary mortgage market with some or all of the following: private
institutional investors, Federal National Mortgage Association, Government
National Mortgage Association, Federal Home Loan Mortgage Corporation, Veterans'
Administration and Federal Housing Authority. In our dealings with these
agencies, we are subject to various eligibility requirements prescribed by the
agencies, including but not limited to net worth, quality control, bonding,
financial reporting and compliance reporting requirements. The mortgage loans
which we originate are subject to agency-prescribed procedures, including
(without limitation) inspection and appraisal of properties, maximum
loan-to-value ratios, and obtaining credit reports on prospective borrowers. On
some types of loans, the agencies prescribe maximum loan amounts, interest rates
and fees. When selling mortgage loans to FNMA and FHLMC, a seller must represent
and warrant that all such mortgage loans conform to the requirements of FNMA and
FHLMC. If the mortgage loans sold are found to be nonconforming mortgage loans,
FNMA or FHLMC may require the seller to repurchase the nonconforming mortgage
loans. Additionally, FNMA and FHLMC may require a seller/servicer to indemnify
them against all losses arising from the seller/servicer's failure to perform
its contractual obligations under the applicable selling or servicing contract.

COMPARISON OF SHAREHOLDER RIGHTS

GENERAL

The rights of Southern Michigan Bancorp's shareholders are governed by the
Michigan Business Corporation Act and Southern Michigan Bancorp's articles of
incorporation and by-laws. The rights of Sturgis Bank & Trust Company
shareholders' are governed by the Michigan Savings Bank Act and Sturgis Bank &
Trust Company's articles of incorporation and by-laws. When the consolidation is
completed, the rights of Sturgis Bank & Trust Company shareholders who become
shareholders of Southern Michigan Bancorp in the consolidation will be governed
by the Michigan Business Corporation Act and Southern Michigan Bancorp's
articles of incorporation and by-laws.

There are differences between the articles of incorporation and by-laws of
Southern Michigan Bancorp and the articles of incorporation and by-laws of
Sturgis Bank & Trust Company that will affect shareholders' rights. Furthermore,
there are certain differences between the Michigan Business Corporation Act and
the Michigan Savings Bank Act that will affect shareholders' rights.

78
<PAGE> 85

The following discussion describes and summarizes the material differences
between the rights of Southern Michigan Bancorp shareholders and the rights of
Sturgis Bank & Trust Company shareholders. It is qualified in its entirety by
the Michigan Business Corporation Act, the Michigan Savings Bank Act and the
respective articles of incorporation and by-laws of Southern Michigan Bancorp
and Sturgis Bank & Trust Company.

BOARD OF DIRECTORS; VOTING FOR DIRECTORS; REMOVAL OF DIRECTORS

The size of the whole Sturgis Bank & Trust Company Board consists of eight
members and is divided into three classes with the term of office of one of such
classes expiring in each year. At each annual meeting of the shareholders of
Sturgis Bank & Trust Company, nominees to the Board of the class whose term is
expiring are elected to hold office for a term of three years. The bylaws of
Sturgis Bank & Trust Company further provide that each director will at all
times be the beneficial holder of not less than 100 shares of capital stock of
Sturgis Bank & Trust Company unless Sturgis Bank & Trust Company is a wholly
owned subsidiary of a holding company. In order to serve on the board of
directors, a director must have an intimate knowledge of the bank's market area,
primarily the counties in which the bank's offices are located, in order to
serve the needs of the community. No person 75 years of age or older is eligible
for election, reelection, appointment or reappointment as a director of Sturgis
Bank & Trust Company.

In contrast, the size of the whole Southern Michigan Bancorp Board is
determined and fixed from time to time by resolution of eighty percent of the
directors then in office. The Southern Michigan Bancorp Board currently consists
of 11 members, who are divided into three classes with staggered three year
terms. If the consolidation is completed, the Southern Michigan Bancorp Board
will consist of 9 persons with staggered three year terms, with no director of
Southern Michigan Bancorp being eligible to stand for election after the age of
70 years. There is no express requirement that a board member be a shareholder
of Southern Michigan Bancorp. See "Management and Operations After the
Consolidation -- Directors."

Sturgis Bank & Trust Company and Southern Michigan Bancorp have similar
requirements with respect to the removal of directors. Sturgis Bank & Trust
Company's by-laws provide that at a meeting of shareholders called expressly for
that purpose, any director may be removed for cause by a vote of a majority of
shares then entitled to vote at an election for directors. Pursuant to the
Michigan Business Corporation Act, directors may be removed with or without
cause unless the corporation's articles of incorporation provides otherwise.
Article XI of the articles of incorporation for Southern Michigan Bancorp states
that any director may be removed only for cause and only by the affirmative vote
of not less than a majority of the voting power of the then outstanding shares
of capital stock entitled to vote generally in the election of directors, voting
together as a single class, at any regular or special meeting of shareholders.

DIRECTOR NOMINATIONS

Article II, Section 14 of Sturgis Bank & Trust Company's by-laws provides
that no nominations for directors may be made except those made by the
nominating committee of the Board of Directors of Sturgis Bank & Trust Company.
However, nominations for directors may be made by shareholders provided the
nominations are made in writing and delivered to the Secretary of Sturgis Bank &
Trust Company at least five days prior to the annual meeting. In the event that
the nominating committee fails or refuses to act at least 20 days prior to the
annual meeting, nominations for directors may be made at the annual meeting by
any shareholder entitled to vote at that meeting.

Article III, Section 3(1) of Southern Michigan Bancorp's by-laws provides
that only a person who has a history of conducting his or her own personal and
business affairs in a safe and sound

79
<PAGE> 86

manner, in a safe and sound condition, in accordance with applicable laws and
regulations, and without substantial conflicts of interests may be nominated to
serve as a director of Southern Michigan Bancorp. It also provides that the
determination as to a person's eligibility to serve as a director is to be made
by the Board of Directors of Southern Michigan Bancorp in accordance with the
procedures set forth therein. The Board of Directors' determination as to a
person's eligibility is binding and conclusive.

Article III, Section 3(2), of Southern Michigan Bancorp's by-laws provides
that nominations for elections to the Board of Directors may be made by the
Board of Directors or by any shareholder entitled to vote for the election of
directors who gives timely written notice to the Chairman or the Secretary of
Southern Michigan Bancorp. If the nomination relates to an election of directors
involving a written proxy solicitation by the Board of Directors of Southern
Michigan Bancorp, then the shareholder's notice must be delivered or mailed by
December 31 of the year preceding the year in which the proxy solicitation is to
occur . If the nomination does not relate to such an election, then the
shareholder's notice must be received at least 30 days, but no more than 90
days, prior to the anniversary date of the record date for determination of
shareholders entitled to vote in the immediately preceding annual meeting of
shareholders.

Southern Michigan Bancorp's by-laws also provide that the shareholder's
notice must state that the shareholder is, and will be on the record date for
the meeting, a beneficial owner or a holder of record of stock of Southern
Michigan Bancorp entitled to vote at such meeting; that the shareholder has, and
will have on the record date, full voting power with respect to such shares; and
that the shareholder intends to appear in person or by proxy at the meeting to
nominate the person or persons specified in the notice. The shareholder's notice
must also include the name and address of the shareholder who intends to make
the nomination and of each person proposed to be nominated; a description of all
arrangements or understandings between the shareholder and each proposed nominee
and any other persons (naming such persons) pursuant to which the nomination(s)
are to be made by the shareholder; the number and kinds of securities of
Southern Michigan Bancorp held beneficially or of record by each proposed
nominee; and the consent of each proposed nominee to serve as a director if so
elected. In addition, the shareholder's notice must be accompanied by a director
qualification, eligibility and disclosure questionnaire in a form approved by
the Board of Directors and completed under oath by each proposed nominee.

Any shareholder's nomination that does not fully comply with the foregoing
requirements or which contains any information which is false or misleading, is
void and of no effect.

After the consolidation is completed, the by-laws of Southern Michigan
Bancorp shall be amended to provide that the election of officers, nomination of
directors and appointment of board of directors committee members shall require
the approval of 75% of the members of the board of directors.

SHAREHOLDER VOTING REQUIREMENTS

GENERAL. Except as described below, all matters submitted to a vote of the
stockholders of Sturgis Bank & Trust Company or Southern Michigan Bancorp, other
than the election of directors (for which the affirmative vote of a plurality of
the votes cast at an election is required) are determined by a vote of the
holders of shares entitling them to exercise a majority of the voting power of
Sturgis Bank & Trust Company or Southern Michigan Bancorp.

SUPERMAJORITY VOTING PROVISIONS OF STURGIS BANK & TRUST COMPANY CHARTER
DOCUMENTS. Article Seventh of Sturgis Bank & Trust Company's articles of
incorporation provides that no amendment, addition, alteration, change or repeal
of those articles of incorporation may be made unless it is first

80
<PAGE> 87

proposed by the board of directors of Sturgis Bank & Trust Company and
thereafter approved by the shareholders by a majority of the total votes
eligible to be cast at a legal meeting.

SUPERMAJORITY VOTING PROVISIONS OF SOUTHERN MICHIGAN BANCORP CHARTER
DOCUMENTS. Article X of Southern Michigan Bancorp's articles of incorporation
provides that Article IX, which generally relates to certain business
combination transactions with any person who is the beneficial owner of 5% or
more of Southern Michigan Bancorp's voting stock, may not be amended, modified
or repealed without the affirmative vote of not less than two-thirds of the then
outstanding shares of capital stock of Southern Michigan Bancorp entitled to
vote generally in the election of directors, voting together as a single class.

Article XII of Southern Michigan Bancorp's articles of incorporation
provides that neither it nor Article X of those articles of incorporation may be
amended, modified or repealed without the affirmative vote of not less than
two-thirds of the then outstanding shares of capital stock of Southern Michigan
Bancorp entitled to vote generally in the election of directors, voting together
as a single class.

Article XII of Southern Michigan Bancorp's articles of incorporation also
prohibits the adoption of any provision providing for non-unanimous shareholder
action without a meeting unless such provision is approved by the affirmative
vote of the holders of not less than two-thirds of the then outstanding shares
of capital stock entitled to vote generally in the election of directors, voting
together as a single class.

Article XII of Southern Michigan Bancorp's articles of incorporation, and
Article XIII of its by-laws provide that Southern Michigan Bancorp's by-laws may
be altered, amended or repealed by either the affirmative vote of a majority of
the then outstanding shares of capital stock of Southern Michigan Bancorp
entitled to vote generally in the election of directors, voting together as a
single class, or by the affirmative vote of not less than a majority of the
members of the Board of Directors then in office. However, any provision
inconsistent with specified provisions of Southern Michigan Bancorp's by-laws
must be adopted by either the affirmative vote of the holders of not less than
two-thirds of the then outstanding shares of capital stock entitled to vote
generally in the election of directors, voting together as a single class or the
affirmative vote of at least 80% of the directors then in office. The provisions
of Southern Michigan Bancorp's by-laws that are subject to the latter
requirement are Article II, Section 2 and Section 4, which relate to the calling
and noticing of special meetings of shareholders, and Article III, Section 2,
Section 3, Section 6, and Section 11, which relate to the size of the Board of
Directors, the nomination of directors, the calling of special meetings of the
Board of Directors, and the filling of vacancies on the Board of Directors, and
Article XII, which relates to the redemption of control shares, and Article
XIII, which relates to bylaw amendments.

Article IX of Southern Michigan Bancorp's articles of incorporation
provides that any plan of dissolution not recommended by the Board of Directors
must be approved by the affirmative vote of the holders of not less than
two-thirds of the outstanding shares of capital stock entitled to vote in the
election of directors, voting as one class. However, if the Board of Directors
recommends a plan for dissolution to the shareholders, then the provisions of
the Michigan Business Corporation Act will apply.

ANTI-TAKEOVER LAWS AND CHARTER PROVISIONS

Southern Michigan Bancorp is subject to the Michigan "Fair Price" statute
(Chapter 7A of the Michigan Business Corporation Act), which applies to certain
"business combinations" such as consolidations, substantial sales of assets or
securities issuances and liquidation, recapitalization or

81
<PAGE> 88

reorganization plans. Chapter 7A requires, for a business combination with an
"interested shareholder" (generally, the holder of 10% or more of a class of a
corporation's voting stock), an advisory statement from the corporation's board
of directors, the approval of holders of 90% of each class of the corporation's
outstanding voting stock and the approval of two-thirds of the holders of each
such class other than the interested shareholder. The supermajority voting
requirements do not apply where the interested shareholder's offer meets certain
price, form of consideration and procedural requirements designed to make such
offers fair to all shareholders or where the board of directors has approved the
transaction with respect to a particular interested shareholder prior to the
interested shareholder becoming an interested shareholder.

Southern Michigan Bancorp is also subject to the Michigan "Control Share
Acquisition" statute (Chapter 7B of the Michigan Business Corporation Act).
Chapter 7B provides that anyone who acquires "control shares" may vote the
control shares on any matter only if a majority of all shares, and of all
non-"interested shares," entitled to vote and of each class of stock entitled to
vote as a class, approve such voting rights. "Interested shares" are defined
generally as those shares owned by officers of the corporation, employee
directors of the corporation and the entity making the control share
acquisition. Control shares are defined generally as shares that when added to
shares already owned by a person, would give the person voting power in the
election of directors within any of three thresholds: one-fifth, one-third and a
majority. The effect of the statute is to condition the acquisition of voting
control of a Michigan corporation on the approval of a majority of its
pre-existing disinterested shareholders.

Chapter 7B gives a Michigan corporation the right to redeem "control
shares" under limited circumstances so long as the redemption is authorized by
the corporation's articles of incorporation or by-laws before a control share
acquisition has occurred. Article XII of Southern Michigan Bancorp's by-laws
authorizes the redemption of "control shares." Any such redemption by Southern
Michigan Bancorp would occur pursuant to the procedures set forth in Article XII
of its bylaws and at a value that is not less than the highest price paid per
share by the acquiring person.

The Michigan "Fair Price" statute does not apply to the consolidation
because the consolidation will not alter the contract rights of the Southern
Michigan Bancorp common stock. The Michigan "Control Share Acquisition" statute
does not apply to the consolidation because Southern Michigan Bancorp is a party
to the consolidation agreement and the consolidation will be effected in
compliance with Chapter 7 of the Michigan Business Corporation Act.

Article IX of Southern Michigan Bancorp's articles of incorporation
provides that the affirmative vote of the holders of not less than two-thirds of
the then outstanding shares of capital stock of Southern Michigan Bancorp
entitled to vote generally in the election of directors, voting together as a
single class, is required to approve certain mergers or consolidations, certain
sales, leases, transfers, exchanges, mortgages, pledges or other dispositions of
assets, or certain issuances or transfers of voting securities or securities
convertible into voting securities, involving Southern Michigan Bancorp, or a
subsidiary of Southern Michigan Bancorp, and any person who then owns, or at any
time during the preceding 12 months owned, 5% or more of the outstanding shares
of capital stock of Southern Michigan Bancorp entitled to vote in the election
of directors. However, such supermajority voting provision will not apply to any
such transaction with any such person if the Board of Directors of Southern
Michigan Bancorp approves a memorandum of understanding with such other person
setting forth the principal terms of such transaction and such transaction is
substantially consistent therewith. Any such memorandum of understanding must be
approved by a majority of those members of the Board of Directors who were duly
elected and acting members of the Board of Directors prior to the time such
other person became a 5% shareholder. Also, such supermajority voting provision
will not apply to any transaction of which a majority of the outstanding shares
of all classes of stock entitled to vote in elections of directors is owned by
Southern Michigan Bancorp or its subsidiaries.

82
<PAGE> 89

Article IX of Southern Michigan Bancorp's articles of incorporation does
not apply to the consolidation because it does not involve any 5% shareholder
and because the consolidation agreement was unanimously approved by the Board of
Directors of Southern Michigan Bancorp. After the consolidation is completed,
the by-laws of Southern Michigan Bancorp shall be amended to provide that the
approval of 75% of the members of the board of directors will be necessary to
approve any merger, share exchange, sale of substantially all of the assets or
dissolution of Southern Michigan Bancorp or its subsidiaries. The amendment to
the by-laws will also provide that a 75% vote of the members of the board of
directors will be required to issue any stock of Southern Michigan Bancorp and
in connection with any action taken by Southern Michigan Bancorp as a
shareholder of any subsidiary.

Neither the Michigan Savings Bank Act nor the articles of incorporation of
Sturgis Bank & Trust Company contain any similar provisions.

MEETINGS OF SHAREHOLDERS

Sturgis Bank & Trust Company's by-laws provide that a special meeting of
shareholders for any purpose or purposes may be called at any time by the
Chairman of the Board, the President, or by a majority of the Board of
Directors, and must be called by the Chairman of the Board, the President, or
the Secretary upon the written request of the holders of not less than one-tenth
of all of the outstanding capital stock of Sturgis Bank & Trust Company entitled
to vote at the meeting. Such written request must state the purpose or purposes
of the meeting and must be delivered to the home office of Sturgis Bank & Trust
Company addressed to the chairman of the board, the president, or the secretary.

Southern Michigan Bancorp's by-laws provide that a special meeting of
shareholders may be called by the Chairman or the President, or the Board of
Directors, or upon the written request of the holders of not less than
two-thirds of the of the voting power of all of the issued and outstanding
voting shares of Southern Michigan Bancorp entitled to vote generally in the
election of directors. Notwithstanding the foregoing provisions of Southern
Michigan Bancorp's by-laws, the Michigan Business Corporation Act entitles the
holders of not less than ten percent of the shares of Southern Michigan Bancorp
entitled to vote at a meeting to apply to the circuit court of Branch County,
Michigan and, upon good cause shown, such court will order a special meeting of
shareholders to be held.

Article III, Section 4(2), of Southern Michigan Bancorp's by-laws provided
that the only business that can be conducted at any annual meeting of Southern
Michigan Bancorp's shareholders is business that is properly brought before the
meeting. To be properly brought before the meeting such business must be brought
before the meeting pursuant to Southern Michigan Bancorp's notice of meeting, by
or at the direction of the Board of Directors, or by a shareholder.

For business to be properly brought before Southern Michigan Bancorp's
annual meeting by a shareholder, the shareholder must give written notice
thereof to Southern Michigan Bancorp's Secretary at least 30 days, but no more
than 90 days, prior to the anniversary date of the record date for determination
of shareholders entitled to vote in the immediately preceding annual meeting of
shareholders. The shareholder's notice must set forth as to each matter the
shareholder proposes to bring before the meeting: a description of the business
desired to be brought before the meeting, the reasons for conducting such
business at the annual meeting, and any material interest of the shareholders in
such business. It must also state the name and address of the shareholder, as
they appear on the corporation's books, and the class and number of shares of
the corporation that are owned beneficially and of record by such shareholder.
The person presiding at the meeting must, if the facts warrant, determine and
declare to the meeting that business was not properly brought before

83
<PAGE> 90

the meeting in accordance with the foregoing provisions. If the person presiding
at the meeting so determines, then he or she must so declare to the meeting and
such business cannot be transacted.

Article III, Section 4(1) of Southern Michigan Bancorp's by-laws provided
that the only business that can be conducted at any special meeting of Southern
Michigan Bancorp's shareholders is business brought before the meeting pursuant
to the notice of the meeting. Notice of a special meeting of Southern Michigan
Bancorp's shareholders must be given not less than 30 days nor more than 60 days
before the date of such meeting.

DIRECTOR LIABILITY AND INDEMNIFICATION

As permitted by the Michigan Business Corporation Act, Southern Michigan
Bancorp's articles of incorporation provide that a director of will not be
personally liable for monetary damages for breach of the director's fiduciary
duty as a director. Under the Michigan Business Corporation Act, a limitation on
a director's liability such as that contained in Southern Michigan Bancorp's
articles of incorporation does not eliminate or limit the director's liability
for breaches of the duty of loyalty, for acts or omissions not made in good
faith or which involve intentional misconduct or a knowing violation of law, the
unlawful payment of dividends or for any transaction in which the director
derived an improper personal benefit. Although the Michigan Savings Bank Act
permits a similar provision to be included in Sturgis Bank & Trust Company's
articles of incorporation, Sturgis Bank & Trust Company's articles of
incorporation do not contain such a provision; therefore, the directors of
Sturgis Bank & Trust Company are not provided with such protection.

The Michigan Savings Bank Act and the Michigan Business Corporation Act
provide similar rights to indemnity and expense advancement for directors of
corporations. Accordingly, the rights to indemnity and expense advancement
provided to the directors of Sturgis Bank & Trust Company and Southern Michigan
Bancorp are essentially the same.

INSOFAR AS INDEMNIFICATION FOR LIABILITIES ARISING UNDER THE SECURITIES ACT
MAY BE PERMITTED TO DIRECTORS, OFFICERS OR PERSONS CONTROLLING SOUTHERN MICHIGAN
BANCORP PURSUANT TO THE FOREGOING PROVISIONS, SOUTHERN MICHIGAN BANCORP HAS BEEN
INFORMED THAT IN THE OPINION OF THE SEC SUCH INDEMNIFICATION IS AGAINST PUBLIC
POLICY AS EXPRESSED IN THE SECURITIES ACT AND IS THEREFORE UNENFORCEABLE. IN THE
EVENT A CLAIM FOR INDEMNIFICATION AGAINST SUCH LIABILITIES (OTHER THAN THE
PAYMENT BY SOUTHERN MICHIGAN BANCORP OF EXPENSES INCURRED OR PAID BY A DIRECTOR,
OFFICER OR CONTROLLING PERSON OF SOUTHERN MICHIGAN BANCORP IN A SUCCESSFUL
DEFENSE OF ANY ACTION, SUIT OR PROCEEDING) IS ASSERTED BY SUCH DIRECTOR, OFFICER
OR CONTROLLING PERSON IN CONNECTION WITH THE SECURITIES BEING REGISTERED
PURSUANT TO THE REGISTRATION STATEMENT, SOUTHERN MICHIGAN BANCORP WILL, UNLESS
IN THE OPINION OF ITS COUNSEL THE MATTER HAS BEEN SETTLED BY CONTROLLING
PRECEDENT, SUBMIT TO A COURT OF APPROPRIATE JURISDICTION THE QUESTION OF WHETHER
SUCH INDEMNIFICATION IS AGAINST PUBLIC POLICY AS EXPRESSED IN THE SECURITIES ACT
AND WILL BE GOVERNED BY THE FINAL ADJUDICATION OF SUCH ISSUE.

PAYMENT OF DIVIDENDS

Pursuant to the Michigan Business Corporation Act, Southern Michigan
Bancorp may not make distributions to its shareholders if, after giving effect
to the distribution, the corporation would not be able to pay its debts as they
become due in the usual course of business, or the corporation's total assets
would be less than the sum of its total liabilities plus, unless the
corporation's articles of incorporation permit otherwise, the amount that would
be needed, if the corporation were to be dissolved at the time of the
distribution, to satisfy the preferential rights upon dissolution of
shareholders whose preferential rights are superior to those receiving the
distribution.

84
<PAGE> 91

The ability of Sturgis Bank & Trust Company, Southern Michigan Bancorp, and
their subsidiaries, to pay dividends are subject to regulatory restrictions. See
"Regulatory Approvals Required".

CHARTER AMENDMENTS

Under the Michigan Savings Bank Act, a savings bank's articles of
incorporation may be amended by the affirmative vote of a majority of the voting
shares of the savings bank, with the approval of the Michigan Office of
Financial and Insurance Services, Division of Financial Institutions. Under the
Michigan Business Corporation Act, a corporation's articles of incorporation may
be amended by the affirmative vote of a majority of the outstanding stock
entitled to vote thereon, and a majority of the outstanding stock entitled to
vote thereon as a class, subject to such supermajority vote requirements as may
be provided for in the corporation's articles of incorporation.

Except as otherwise provided in Article Seventh of Sturgis Bank & Trust
Company's articles of incorporation, these articles of incorporation may be
amended by the affirmative vote of a majority of the outstanding shares of
Sturgis Bank & Trust Company common stock subject to the approval of the
commissioner of the Division of Financial Institutions. Subject to the
provisions of Articles IX, X, XI and XII its articles of incorporation may be
amended by the affirmative vote of a majority of the outstanding shares of
Southern Michigan Bancorp common stock.

Under the Michigan Business Corporation Act, the shareholders or the board
of directors of the corporation may adopt, amend or repeal the by-laws unless
the articles of incorporation or by-laws of the corporation provide that the
power to adopt new by-laws is reserved exclusively to the shareholders or that
the by-laws or any particular by-law will not be altered or repealed by the
board of directors. Subject to the provisions of Article XII of its articles of
incorporation and Article XIII of its by-laws, Southern Michigan Bancorp's
by-laws may be amended or repealed by a majority vote of the Southern Michigan
Bancorp Board or by Southern Michigan Bancorp's shareholders.

After the consolidation is completed, the By-laws of Southern Michigan
Bancorp shall be amended to state that the Articles of Incorporation and By-laws
of Southern Michigan Bancorp cannot be amended unless such amendment is approved
by a vote of 75% of the members of the board of directors of Southern Michigan
Bancorp.

SHAREHOLDER ACTION WITHOUT A MEETING

Sturgis Bank & Trust Company's by-laws state that any action required to be
taken at meeting of shareholders, or any other action which may be taken at a
meeting of shareholders, may be taken without a meeting if consent in writing,
setting forth the action so taken, is given by all shareholders entitled to vote
with respect to the subject matter.

Although the Michigan Business Corporation Act contains a provision
permitting shareholder action by less than unanimous written consent, it
requires a provision to that effect to be included in a corporation's articles
of incorporation. Because Southern Michigan Bancorp's articles of incorporation
do not contain a provision authorizing shareholder action by less than unanimous
written consent, unanimous written consent is required.

DISSENTERS' RIGHTS OF APPRAISAL

The Michigan Business Corporation Act provides somewhat broader dissenters'
rights of appraisal than those provided under the Michigan Savings Bank Act. The
Michigan Business Corporation Act expressly authorizes shareholders of a
Michigan corporation to exercise dissenters'

85
<PAGE> 92

rights with respect to certain amendments to the articles of incorporation of
such Michigan corporation which adversely affect the rights of the class of
shares held by them, while the Michigan Savings Bank Act does not provide for
dissenters' rights of appraisal for the foregoing situation. The Michigan
Business Corporation Act and the Michigan Savings Bank Act expressly permit
shareholders to exercise dissenters' rights of appraisal in connection with the
sale or exchange of all or substantially all of the property of a Michigan
corporation if the shareholder is entitled to vote thereon.

MERGERS AND CONSOLIDATIONS

The Michigan Business Corporation Act and the Michigan Savings Bank Act
differ in that the Michigan Business Corporation Act only provides for a
majority vote of shareholders in certain mergers and consolidations and the
Michigan Savings Bank Act requires a two-thirds vote of shareholders.

86
<PAGE> 93

SELECTED CONSOLIDATED FINANCIAL DATA OF
STURGIS BANK & TRUST COMPANY(IN THOUSANDS, EXCEPT PER SHARE DATA)

We are providing the following financial information to aid you in your
analysis of the financial aspects of the consolidation. We derived this
information from Sturgis Bank & Trust Company's audited financial statements for
1995 through 1999 and unaudited financial statements for the three months ended
March 31, 1999 and 2000. All information is presented in accordance with
generally accepted accounting principles. The information is only a summary and
you should read it in conjunction with Sturgis Bank & Trust Company's historical
financial statements and related notes contained in this proxy
statement/prospectus and in the annual reports and other information that
Sturgis Bank & Trust Company has filed with the FDIC. See "Index to Financial
Statements of Sturgis Bank & Trust Company." Interim unaudited data for the
three months ended March 31, 1999 and 2000 reflect, in the opinion of management
of Sturgis Bank and Trust, all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of such data. Results for the
three months ended March 31, 2000 are not necessarily indicative of results that
may be expected for any other interim period or for the year as a whole.

<TABLE>
<CAPTION>
AT, OR FOR THE THREE
MONTHS
ENDED, MARCH 31, AT, OR FOR THE YEAR ENDED, DECEMBER 31,
--------------------- ----------------------------------------------------
2000 1999 1999 1998 1997 1996 1995
--------- --------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Interest income............ $ 4,515 $ 4,102 $ 16,963 $ 15,890 $ 14,338 $ 11,989 $ 8,876
Interest expense........... 2,439 2,157 8,673 8,770 7,985 6,554 4,386
-------- -------- -------- -------- -------- -------- --------
Net interest income........ 2,076 1,945 8,290 7,120 6,353 5,435 4,490
Provision for loan
losses................... 38 39 104 174 338 155 115
-------- -------- -------- -------- -------- -------- --------
Net interest income after
provision for loan
losses................... 2,038 1,906 8,186 6,946 6,015 5,280 4,375
Noninterest income......... 694 863 3,022 2,771 1,709 1,149 996
Amortization of
intangibles.............. 147 140 566 386 158 130 69
Other noninterest
expense.................. 1,968 1,982 7,951 6,981 5,151 4,796 3,273
Provision for federal
income taxes............. 199 200 688 635 713 413 603
-------- -------- -------- -------- -------- -------- --------
Net income................. $ 418 $ 447 $ 2,003 $ 1,715 $ 1,702 $ 1,090 $ 1,426
======== ======== ======== ======== ======== ======== ========
PER COMMON SHARE DATA:
Net income -- basic........ $ 0.13 $ 0.14 $ 0.65 $ 0.67 $ 0.71 $ 0.45 $ 0.59
Net income -- diluted...... 0.13 0.14 0.65 0.65 0.69 0.44 0.59
Cash dividends declared.... 0.05 0.04 0.19 0.18 0.17 0.13 0.13
Book value at period-end... 8.27 7.84 8.19 7.74 6.78 6.25 5.93
BALANCE SHEET DATA:
Total assets............... $258,533 $239,234 $251,596 $237,496 $201,310 $180,617 $123,088
Loans...................... 214,526 181,999 207,025 182,798 170,771 157,247 104,080
Allowance for loan
losses................... 751 706 730 687 693 456 357
Deposits................... 175,604 176,222 163,680 172,440 124,825 104,037 82,514
Other borrowings........... 53,978 36,361 59,113 38,662 57,502 59,850 24,667
Total shareholders'
equity................... 25,614 24,274 25,348 23,951 16,332 14,999 14,221
SIGNIFICANT RATIOS:
Return on average assets... 0.67% 0.77% 0.82% 0.78% 0.89% 0.72% 1.30%
Return on average equity... 6.56% 7.53% 8.13% 8.54% 10.87% 7.46% 10.44%
Operating efficiency
ratio.................... 71.05% 70.58% 70.28% 70.58% 63.90% 72.84% 59.67%
</TABLE>

87
<PAGE> 94

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF
STURGIS BANK & TRUST COMPANY

The following discussion provides additional information regarding the
financial condition and the results of operations for Sturgis Bank & Trust
Company for each of the years ended December 31, 1999, 1998 and 1997 and for the
three month periods ended March 31, 2000 and March 31, 1999. This discussion
should be read in conjunction with the consolidated financial statements of
Sturgis Bank & Trust Company, and the notes thereto, which appear elsewhere in
this proxy statement/prospectus.

FORWARD LOOKING STATEMENTS

This report contains statements that constitute forward-looking statements.
These statements appear in several places in this report and include statements
regarding intent, belief, outlook, objectives, efforts, estimates or
expectations of Sturgis Bank & Trust Company, primarily with respect to future
events and the future financial performance of Sturgis Bank & Trust Company. Any
such forward-looking statements are not guarantees of future events or
performance and involve risks and uncertainties, and actual results may differ
materially from those in the forward-looking statement. Factors that could cause
a difference between an ultimate actual outcome and a preceding forward-looking
statement include, but are not limited to, changes in interest rates and
interest rate relationships; demand for products and services; the degree of
competition by traditional and non-traditional competitors; changes in banking
laws and regulations; changes in tax laws; changes in prices, levies, and
assessments; the impact of technological advances; government and regulatory
policy changes; the outcome of any pending and future litigation and
contingencies; trends in consumer behavior and ability to repay loans; and
changes of the world, national and local economies. Sturgis Bank & Trust Company
undertakes no obligation to update, amend or clarify forward-looking statements
as a result of new information, future events, or otherwise.

FINANCIAL CONDITION

ASSETS. Sturgis Bank & Trust's total assets at March 31, 2000 were $258.5
million compared to $239.2 million at March 31, 1999, an increase of $19.3
million or 8.1%. The increase was primarily attributable to a 20% increase in
loans receivable which were $213.7 million at March 31, 2000 compared to $178.0
million at March 31, 1999. Sturgis Bank & Trust's total assets at December 31,
1999 were $251.6 million compared to $237.5 million at December 31, 1998, an
increase of $14.1 million or 6%. The increase was attributable primarily to an
increase in loans. Other short-term investments decreased $8.5 million, or
94.4%, from $9.0 million at December 31, 1998 to $0.5 million at December 31,
1999.

LOANS. Sturgis Bank & Trust's net loans receivable increased to $213.7
million at March 31, 2000 from $178.0 million at March 31, 1999. This increase
was accomplished by funding adjustable rate and shorter-term mortgages, which
were retained as assets, with increases in advances from FHLB. During the first
three months of 2000 and 1999, Sturgis Bank & Trust sold residential
originations of fixed-rate mortgages with terms of 10 years or greater from its
portfolio into the secondary market. The demand for fixed-rate mortgage loans
was lower in 2000 than in 1999 due to higher interest rates during the period.
The proceeds from sales of loans (fixed-rate, residential mortgages) were $1.1
million and $12.3 million for the three months ended March 31, 2000 and 1999,
respectively. Mortgage loans originated for sale ($1.2 million during the three
months ended March 31, 2000 and $12.7 million during the three months ended
March 31, 1999) were primarily funded by secondary mortgage market sales. At
March 31, 2000, outstanding loan

88
<PAGE> 95

commitments were $0.9 million and $10.7 million on fixed and variable-rate
loans, respectively. These loan commitments will be funded by interest-bearing
deposits, maturing assets, and additional FHLB borrowings, if needed. The
decision to sell fixed-rate mortgages with original maturities of 10 years or
greater protects Sturgis Bank & Trust from the interest rate risk inherent in
holding these longer fixed-rate loans and provides a source of liquidity to fund
loan demand.

Sturgis Bank & Trust's net loans increased 15.6% to $206.3 million at
December 31, 1999 from $178.4 million at December 31, 1998. This was
accomplished by funding adjustable rate and shorter-term mortgages, which were
retained as assets, with increases in deposits. During 1999 and 1998, Sturgis
Bank & Trust sold residential originations of 10-year and longer term fixed-rate
mortgages from its portfolio into the secondary market. The demand for
fixed-rate mortgage loans in 1998 was higher due to low interest rates during
the period. The proceeds from sales of loans (all fixed-rate, residential
mortgages) were $23.2 million and $45.0 million for 1999 and 1998, respectively.
The mortgage loans originated for sale ($19.1 million during 1999 and $47.4
million during 1998) were primarily funded by secondary mortgage market sales.
At December 31, 1999, outstanding loan commitments were $0.9 million and $7.3
million on fixed and variable-rate loans, respectively. In addition to the loan
commitments, Sturgis Bank & Trust holds $2.6 million pending disbursements from
short-term, fixed-rate construction loans closed prior to December 31, 1999.
These loan commitments will be funded by interest-bearing deposits, maturing
assets, and additional FHLB borrowings, if needed. The decision to sell
fixed-rate mortgages with original maturities of 10 years or greater protects
Sturgis Bank & Trust from the interest rate risk inherent in holding these
longer fixed-rate loans and provides a source of liquidity to fund loan demand.

Loans serviced for others increased by 2.8%, or $2.6 million, to $94.5
million at March 31, 2000 from $91.9 million at March 31, 1999. Loans serviced
for others increased by 8.8%, or $7.6 million, to $93.5 million at December 31,
1999 from $85.9 million at December 31, 1998. The entire servicing portfolio
consists of loans originated by Sturgis Bank & Trust and sold in the secondary
mortgage market with servicing retained by Sturgis Bank & Trust. Sturgis Bank &
Trust has no purchased mortgage servicing portfolio.

INVESTMENT SECURITIES. Investment securities were $12.2 million at March
31, 2000 compared to $11.8 million at March 31, 1999, an increase of $417,874.
This 3.4% increase was due primarily to an increase in investments in municipal
obligations. Investment securities were $11.6 million at December 31, 1999
compared to $11.8 million at December 31, 1998, a decrease of $184,128 or 2%.

Most of the investment securities are investments in municipal obligations
(St. Joseph County municipalities), U.S. Treasury and U.S. agency securities
(FNMA, FHLMC and FHLB bonds). Investment securities that have matured have not
necessarily been replaced with similar investments, because of Sturgis Bank &
Trust's strong loan demand. Sturgis Bank & Trust has the intent and ability to
hold investment securities to maturity. U.S. agency securities with a carrying
value of $1.2 million are pledged as collateral for Sturgis Bank & Trust's trust
deposits and federal tax payments.

MORTGAGE-BACKED SECURITIES. Mortgage-backed securities were $1.5 million at
March 31, 2000 compared to $1.8 million at March 31, 1999, a decrease of
$367,980 or 20.4%. Mortgage-backed securities were $1.5 million at December 31,
1999 compared to $2.0 million at December 31, 1998, a decrease of $478,137 or
24%. These decrease are due primarily to principal reductions of the portfolio.
There were no mortgage-backed securities purchased during the 12 months ended
March 31, 2000.

OFFICE PROPERTIES AND EQUIPMENT. Sturgis Bank & Trust's office properties
and equipment, net of accumulated depreciation were $7.0 million at March 31,
2000 compared to $7.5 million at

89
<PAGE> 96

March 31, 1999, a decrease of $435,921 or 6%. Sturgis Bank & Trust's office
properties and equipment, net of accumulated depreciation were $7.2 million at
December 31, 1999 compared to $7.6 million at December 31, 1998, a decrease of
$390,732. The primary reasons for the decrease was the depreciation in excess of
purchases.

GOODWILL. Goodwill was $6.1 million at March 31, 2000 compared to $6.2
million at March 31, 1999, a decrease of $97,517 million. Oakleaf Financial
Services, Inc., a wholly-owned subsidiary of Sturgis Bank & Trust, paid goodwill
of $475,000 in the three months ended March 31, 2000 to purchase McKillen
Financial Services, Inc. Sturgis Bank & Trust recorded amortization expense of
$147,283 for the three months ended March 31, 2000 compared to $140,464 for the
three months ended March 31, 1999. Goodwill was $5.8 million at December 31,
1999 compared to $6.3 million at December 31, 1998, a decrease of $515,378. This
decrease is primarily the result of amortization expense. Sturgis Bank & Trust
recorded amortization expense of $565,698 for the year ended December 31, 1999
compared to $385,936 for the year ended December 31, 1998. The primary reason
for the increase in amortization expense is additional amortization related to
the branch acquisitions in September 1998.

DEPOSITS AND BORROWED FUNDS. Deposit accounts were $175.6 million at March
31, 2000 compared to $176.2 million at March 31, 1999, a decrease of $617,588 or
0.4%. Deposits were $163.7 million at December 31, 1999 compared to $172.4
million at December 31, 1998, a decrease of $8.7 million or 5%. These decreases
were due primarily to reductions in the amount in certificates of deposit.

Sturgis Bank & Trust has an available line of credit with the Federal Home
Loan Bank of Indianapolis which provides for advances up to $10.0 million and
matures February 28, 2001. All borrowings from FHLB are collateralized by FHLB
stock, mortgage loans and mortgage-backed securities issued or guaranteed by the
Federal Home Loan Mortgage Corporation, the Federal National Mortgage
Association or the Government National Mortgage Association.

The line of credit was in use $363,094 at March 31, 2000 and was not in use
at March 31, 1999. Long-term advances were $53.6 million at March 31, 2000
compared to $36.4 million at March 31, 1999, an increase of $17.2 million or
47.3%. These borrowings have been used to fund the growth in loans receivable.

Long-term advances were $35.6 million at December 31, 1999 compared to
$38.7 million at December 31, 1998, a decrease of $3.1 million or 8%. This
decrease and the decrease in deposits were funded by short-term advances, which
were $23.5 million at December 31, 1999.

Sturgis Bank & Trust 's certificates of deposit gradually decreased from
$82.5 million at December 31, 1998 to $75.4 million at December 31, 1999.
Sturgis Bank & Trust has been replacing its certificates of deposit with
borrowings from FHLB. Although the rates paid on the borrowed funds is normally
higher than the certificates being replaced, the long-term cost of the funding
is lower. This is because the rates Sturgis Bank & Trust would have needed to
offer to renew the certificates of deposit when they matured would have exceeded
the comparable FHLB borrowing rate throughout the year. Sturgis Bank & Trust
will continue to manage the rates offered on its time deposits and use borrowed
funds when that strategy enhances net interest income.

CAPITAL

Stockholders' equity of Sturgis Bank & Trust was $25.6 million at March 31,
2000 compared to $24.3 million at March 31, 1999, an increase of $1.3 million or
5.5%. This increase was primarily due to an increase in net income, net of
dividends paid. Stockholders' equity represents 9.9% of total assets at March
31, 2000. The stockholders' equity of Sturgis Bank & Trust was $25.3 million at

90
<PAGE> 97

December 31, 1999 compared to $24.0 million at December 31, 1998, an increase of
$1.3 million or 6%. The primary reason for this increase was net income of $2.0
million less dividends paid of $588,024. Stockholders' equity represented 10.07%
of total assets at December 31, 1999.

<TABLE>
<CAPTION>
MARCH 31, 2000 DECEMBER 31, 1999
-------------- -----------------
<S> <C> <C>
Equity to assets......................................... 9.9% 10.1%
Tier I leverage.......................................... 7.7% 8.2%
Risk-based:
Tier I Capital......................................... 12.1% 12.6%
Total Capital.......................................... 12.6% 13.1%
</TABLE>

RESULTS OF OPERATIONS

Sturgis Bank & Trust reported net income of $417,710 or $0.13 per share in
the quarter ended March 31, 2000 compared to net income of $447,078 or $0.14 per
share in the quarter ended March 31, 1999. The primary reason for this decrease
was a reduction in loan sales and recognition of related gains. Sturgis Bank &
Trust reported net income of $2.0 million or $0.65 per basic share for the year
ended December 31, 1999 as compared to net income of $1.7 million in each of the
years ended December 31, 1998 and 1997. The branch acquisitions and secondary
public offering provided cash in the last four months of 1998, which Sturgis
Bank & Trust invested short-term in investments and interest-bearing deposits.
The increase in net income from 1998 to 1999 was primarily due to the deployment
of the cash and investment securities as they matured into loans.

INTEREST INCOME

THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31,
1999. Interest income increased $400,000, or 9.8%, from $4.1 million to $4.5
million. This increase was primarily due to an increase in average loans
outstanding.

1999 COMPARED TO 1998. Interest income increased $1.1 million from $15.9
million to $17.0 million. This increase was primarily due to an increase in
average loans outstanding from $178.5 million in 1998 to $190.1 million in 1999.
The average yield on interest-earning assets decreased from 8.06% in 1998 to
7.94% in 1999, reflecting larger percentage of average interest-earning assets
in investments that resulted from the branch acquisitions and secondary public
offering in the last four months of 1998. Loan demand was funded by maturing
investments throughout 1999.

1998 COMPARED TO 1997. Interest income increased $1.6 million, or 11.2%,
from $14.3 million to $15.9 million. This increase was primarily due to the
increase in average loans outstanding from $164.5 million in 1997 to $178.5
million in 1998. The average yield on loans from 8.24% in 1997 to 8.32% in 1998.
Sturgis Bank & Trust's management used the proceeds from the December 1997 and
September 1998 branch purchases to fund the growth in loans, investment
securities and interest-bearing deposits.

INTEREST EXPENSE

THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31,
1999. Interest expense increased $200,000, from $2.2 million to $2.4 million, as
primarily as a result of a decrease in rates paid on average interest-bearing
liabilities of Sturgis Bank & Trust.

1999 COMPARED TO 1998. Interest expense decreased $96,618, from $8.8
million in 1998 to $8.7 million, in 1999 reflecting a decrease in rates paid on
average interest-bearing liabilities of Sturgis Bank & Trust. The rate paid on
average interest- bearing liabilities decreased from 4.50% in

91
<PAGE> 98

1998 to 4.05% in 1999, due to an increase in the percentage of average total
interest-bearing liabilities represented by deposits. The deposits assumed in
the branch acquisition of 1998 were used to pay down higher-rate FHLB advances.

1998 COMPARED TO 1997. Interest expense increased $785,008, or 10%, from
$8.0 million in 1997 to $8.8 million in 1998. This increase was primarily due to
an increase in average deposits from $112.3 million in 1997 to $140.8 million in
1998. Sturgis Bank & Trust's management used this increase to fund the strong
loan growth during 1998 and purchase investments and interest-bearing deposits.
Deposits of $45.1 million were assumed in the branch acquisitions of September
1998.

NET INTEREST INCOME

THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31,
1999. Net interest income increased $130,595 from $1.9 million to $2.1 million.
This increase was caused primarily by a increases in the average net
interest-earning assets and the interest rate spread. The increase in the
interest rate spread is attributable to the use of proceeds from the
acquisitions in September 1998. These proceeds were used to pay off FHLB
advances and to invest in overnight funds at FHLB, causing the interest rate
spread to increase.

1999 COMPARED TO 1998. Net interest income for the year ended December 31,
1999 was $8.3 million compared to $7.1 million for the year ended December 31,
1998, an increase of $1.2 million or 16%. The increase was caused primarily by
increases in average interest-earning assets from $197.1 million in 1998 to
$213.6 million in 1999, and interest-bearing liabilities from $194.9 million in
1998 to $214.3 million in 1999. Sturgis Bank & Trust's interest rate spread also
increased from 3.56% during 1998 to 3.89% during 1999. The increase in the
spread is primarily due to the lower cost of liabilities related to the branch
acquisitions in September 1998. It is unlikely that the spread will continue to
increase at the same rate in subsequent periods. Sturgis Bank & Trust's net
interest margin increased from 3.61% for the year ended December 31, 1998 to
3.88% for the year ended December 31, 1999, primarily due to the large decrease
in average rate paid on interest-bearing liabilities.

1998 COMPARED TO 1997. Net interest income for the year ended December 31,
1998 was $7.1 million compared to $6.4 million for the year ended December 31,
1997, an increase of $767,449 or 12%. The increase was caused primarily by an
increase in average interest-earning assets from $175.5 million in 1997 to
$197.1 million in 1998, as offset by an increase in interest-bearing liabilities
from $171.8 million in 1997 to $194.9 million in 1998. The increase also
reflected an increase in Sturgis Bank & Trust's interest rate spread from 3.52%
during 1997 to 3.56% during 1998 and a decrease in Sturgis Bank & Trust's net
interest margin from 3.62% for the year ended December 31, 1997 to 3.61% for the
year ended December 31, 1998.

AVERAGE BALANCES, INTEREST RATES AND YIELDS. Net interest income is
affected by the difference ("interest rate spread") between rates of interest
earned on interest-earning assets and rates of interest paid on interest-bearing
liabilities and the relative amounts of interest-bearing liabilities and
interest-earning assets. When the total of interest-earning assets approximates
or exceeds the total of interest-bearing liabilities, any positive interest rate
spread will generate net interest income. Financial institutions have
traditionally used interest rate spreads as a measure of net interest income.
Another indication of an institution's net interest income is its "net yield on
interest-earning assets" or "net interest margin," which is net interest income
divided by average interest-earning assets.

92
<PAGE> 99

The following table presents information regarding the average yields
received on loans and other assets and the rates paid on deposits and borrowings
at the dates indicated. Non-accruing loans have been included in the table as
loans carrying a zero yield.

<TABLE>
<CAPTION>
AVERAGE BALANCES AND INTEREST RATES
YEAR ENDED DECEMBER 31, 1999
------------------------------------------------
AVERAGE OUTSTANDING INTEREST
BALANCE EARNED/PAID YIELD/RATE
------------------- ----------- ----------
<S> <C> <C> <C>
Interest-Earning Assets:
Loans........................................ $190,083,571 $15,591,033 8.20%
Mortgage-backed securities................... 1,715,275 97,324 5.67%
Investment securities (1).................... 15,885,369 964,495 6.07%
Interest-bearing deposits.................... 5,894,198 310,757 5.27%
------------ ----------- -----
Total interest-earning assets............. $213,578,413 $16,963,609 7.94%
============ =========== =====
Interest-Bearing Liabilities:
Deposits..................................... $172,914,335 $ 6,363,972 3.68%
FHLB advances................................ 41,418,668 2,309,307 5.58%
------------ ----------- -----
Total interest bearing liabilities........ $214,333,003 $ 8,673,279 4.05%
============ =========== =====
Net Interest Income............................ $ 8,290,330
===========
Interest rate spread........................... 3.89%
-----
Net interest-earning assets(liabilities)....... $ (754,590)
============
Net interest margin............................ 3.88%
-----
</TABLE>

-------------------------
(1) Yield on investment securities is reported on an actual and not a tax
equivalent basis.

<TABLE>
<CAPTION>
AVERAGE BALANCES AND INTEREST RATES
YEAR ENDED DECEMBER 31, 1998
------------------------------------------------
AVERAGE OUTSTANDING INTEREST
BALANCE EARNED/PAID YIELD/RATE
------------------- ----------- ----------
<S> <C> <C> <C>
Interest-Earning Assets:
Loans........................................ $178,542,716 $14,855,409 8.32%
Mortgage-backed securities................... 2,562,211 149,750 5.84%
Investment securities(1)..................... 9,017,368 477,824 5.17%
Interest-bearing deposits.................... 7,006,019 407,152 6.01%
------------ ----------- -----
Total interest-earning assets............. $197,128,314 $15,890,135 8.06%
============ =========== =====
Interest-Bearing Liabilities:
Deposits..................................... $140,817,089 $ 5,640,755 4.01%
FHLB advances................................ 54,065,114 3,129,142 5.79%
------------ ----------- -----
Total interest bearing liabilities........ $194,882,203 $ 8,769,897 4.50%
============ =========== =====
Net Interest Income............................ $ 7,120,238
===========
Interest rate spread........................... 3.56%
-----
Net interest-earning assets(liabilities)....... $ 2,246,111
============
Net interest margin............................ 3.61%
-----
</TABLE>

-------------------------
(1) Yield on investment securities is reported on an actual and not a tax
equivalent basis.

93
<PAGE> 100

<TABLE>
<CAPTION>
AVERAGE BALANCES AND INTEREST RATES
YEAR ENDED DECEMBER 31, 1997
------------------------------------------------
AVERAGE OUTSTANDING INTEREST
BALANCE EARNED/PAID YIELD/RATE
------------------- ----------- ----------
<S> <C> <C> <C>
Interest-Earning Assets:
Loans........................................ $164,478,823 $13,553,658 8.24%
Mortgage-backed securities................... 3,539,831 220,329 6.22%
Investment securities(1)..................... 5,564,723 408,931 7.35%
Interest-bearing deposits.................... 1,870,280 154,760 8.27%
------------ ----------- ----
Total interest-earning liabilities...... $175,453,657 $14,337,678 8.17%
============ =========== ====
Interest-Bearing Liabilities:
Deposits..................................... $112,306,721 $ 4,589,028 4.09%
FHLB advances................................ 59,534,864 3,395,861 5.70%
------------ ----------- ----
Total interest bearing liabilities...... $171,841,585 $ 7,984,889 4.65%
============ =========== ====
Net Interest Income............................ $ 6,352,789
===========
Interest rate spread........................... 3.52%
----
Net interest-earning assets(liabilities)....... $ 3,612,072
============
Net interest margin............................ 3.62%
----
</TABLE>

-------------------------
(1) Yield on investment securities is reported on an actual and not a tax
equivalent basis

<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------------
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
WEIGHTED AVERAGE YIELD:
Loans..................................................... 8.00% 8.05% 8.20%
Mortgage-backed securities................................ 6.40% 6.97% 6.81%
Investments(1)............................................ 5.87% 5.24% 6.12%
Interest-bearing deposits................................. 4.65% 4.67% 5.70%
All interest-earning assets............................ 7.91% 7.76% 8.14%
WEIGHTED AVERAGE COST:
Deposits.................................................. 3.71% 3.84% 4.00%
Borrowings................................................ 5.04% 5.67% 5.85%
All interest-bearing liabilities....................... 4.06% 4.16% 4.58%
Interest rate spread........................................ 3.85% 3.60% 3.56%
</TABLE>

-------------------------
(1) Yield on investment securities is reported on an actual and not a tax
equivalent basis.

RATE/VOLUME ANALYSIS. The following table sets forth certain information
regarding changes in interest income and interest expense of Sturgis Bank &
Trust for the periods indicated. For each category of interest-earning asset and
interest-bearing liability, information is provided on changes attributable to:
(i) changes in volume (change in volume multiplied by the prior year rate) and

94
<PAGE> 101

(ii) changes in rate (change in rate multiplied by the prior year volume).
Rate/volume variances have been allocated proportionately to the change due to
rate and the change due to volume.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1999 VS 1998
INCREASE (DECREASE) DUE TO:
-------------------------------------
VOLUME RATE TOTAL
---------- --------- ----------
<S> <C> <C> <C>
Interest Income
Loan portfolio...................................... $ 791,820 $ (56,196) $ 735,624
MBS portfolio....................................... (41,425) (11,001) (52,426)
Investment portfolio................................ 642,346 (155,675) 486,671
Other interest-earning assets....................... (25,451) (70,944) (96,395)
---------- --------- ----------
Total interest-earning assets.................. 1,367,290 (293,816) 1,073,474
---------- --------- ----------
Interest Expense:
Deposits............................................ 1,289,947 (566,730) 723,217
FHLB advances....................................... (749,830) (70,005) (819,835)
---------- --------- ----------
Total interest-bearing liabilities............. 540,117 (636,735) (96,618)
---------- --------- ----------
Net Interest Income................................... $ 827,173 $ 342,919 $1,170,092
========== ========= ==========
</TABLE>

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1998 VS 1997
INCREASE (DECREASE) DUE TO:
------------------------------------
VOLUME RATE TOTAL
---------- -------- ----------
<S> <C> <C> <C>
Interest Income
Loan portfolio....................................... $1,194,384 $107,367 $1,301,751
MBS portfolio........................................ (60,192) (10,387) (70,579)
Investment portfolio................................. 108,899 (40,006) 68,893
Other interest-earning assets........................ 305,261 (52,869) 252,392
---------- -------- ----------
Total interest-earning assets................... 1,548,352 4,105 1,552,457
---------- -------- ----------
Interest Expense:
Deposits............................................. 1,135,482 (83,755) 1,051,727
FHLB advances........................................ (336,305) 69,586 (266,719)
---------- -------- ----------
Total interest-bearing liabilities.............. 799,177 (14,169) 785,008
---------- -------- ----------
Net Interest Income.................................... $ 749,175 $ 18,274 $ 767,449
========== ======== ==========
</TABLE>

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 VS 1996
------------------------------------
INCREASE (DECREASE) DUE TO:
------------------------------------
VOLUME RATE TOTAL
---------- -------- ----------
<S> <C> <C> <C>
Interest Income Loan portfolio......................... $2,281,879 $118,860 $2,400,739
MBS portfolio........................................ (82,902) (10,550) (93,452)
Investment portfolio................................. 15,808 (37,565) (21,757)
Other interest-earning assets........................ 22,713 40,544 63,257
---------- -------- ----------
Total interest-earning assets................... 2,237,498 111,289 2,348,787
---------- -------- ----------
</TABLE>

95
<PAGE> 102

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 VS 1996
------------------------------------
INCREASE (DECREASE) DUE TO:
------------------------------------
VOLUME RATE TOTAL
---------- -------- ----------
<S> <C> <C> <C>
Interest Expense:
Deposits............................................. 520,865 (65,094) 455,771
FHLB advances........................................ 1,041,789 (66,876) 974,913
---------- -------- ----------
Total interest-bearing liabilities.............. 1,562,654 (131,970) 1,430,684
---------- -------- ----------
Net Interest Income.................................... $ 674,844 $243,259 $ 918,103
========== ======== ==========
</TABLE>

PROVISION FOR LOAN LOSSES

THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31,
1999. The provision for loan losses was $37,500 in the quarter ended March 31,
2000 and $39,000 in the quarter ended March 31, 1999. The provision for loan
losses was based upon management's assessment of relevant factors, including
types and amounts of non-performing loans, historical and anticipated loss
experience on such types of loans, and current and projected economic
conditions.

1999 COMPARED TO 1998. The provision for loan losses was $104,000 for the
year ended December 31, 1999 and $173,913 for the year ended December 31, 1998,
a decrease of $69,913. The provision for loan losses was based upon management's
assessment of relevant factors, including types and amounts of non-performing
loans, historical and anticipated loss experience on such types of loans, and
current economic conditions.

1998 COMPARED TO 1997. The provision for loan losses was $173,913 for the
year ended December 31, 1998 and $338,314 for the year ended December 31, 1997,
a decrease of $164,401. The provision for loan losses was based upon
management's assessment of relevant factors, including types and amounts of
non-performing loans, historical and anticipated loss experience on such types
of loans, and current economic conditions. In the year ended December 31, 1997,
reflecting its increase in loan volume generally, and its increase in non
mortgage commercial loans in particular, management increased the general
valuation allowance for loans to an amount that met Sturgis Bank & Trust's
internally calculated requirement according Sturgis Bank & Trust's Asset
Classification Policy. Although, Sturgis Bank & Trust has not experienced any
significant losses in its commercial loan portfolio, management recognized that
the increase in non mortgage commercial loans which are somewhat riskier than
single family residential loan, posed an increased exposure to losses and,
consequently, established appropriate general reserves.

The allowance for loan losses as a percentage of total loans has decreased
from 1998 to 1999. This decrease is due to the low historical charge-off losses
and accelerated collection efforts reducing nonperforming loans as a percentage
of total loans. Due to the increasing exposure of Sturgis Bank & Trust to
commercial lending, Sturgis Bank & Trust will modify its reserve analysis
methodology in 2000 to incorporate the higher risks related to commercial
lending.

NONINTEREST INCOME

THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31,
1999. Noninterest income was $693,435 for the three months ended March 31, 2000
compared to $863,630 for the three months ended March 31, 1999, a decrease of
$170,195, or 20%, reflecting a 91.5% decrease in gain on sale of loans. The gain
on sale of loans decrease as a result of loan sales decreasing to $1.1 million
for the three months ended March 31, 2000 from $12.4 million for the

96
<PAGE> 103

three months ended March 31, 1999. The loans that are sold by Sturgis Bank &
Trust Company are generally longer-term fixed rate mortgages, which have been
less attractive to borrowers in the first three months of 2000 due to rate
increases.

1999 COMPARED TO 1998. Noninterest income was $3.0 million in 1999 compared
to $2.8 million in 1998, an increase of $250,711, or 7.2%. Fees and service
charges increased 33.3% to $1.6 million in 1999 from $1.2 million in 1998,
mostly due to the increase in deposit accounts related to the branch
acquisitions of September 1998. Gain on sale of loans decreased to $359,214 in
1999 compared to $643,053 in 1998, due to a decrease in loans sold from $45.0
million in 1998 to $23.2 million in 1999. The decrease in loan sales reflected
lower customer demand for fixed-rate mortgages, which Sturgis Bank & Trust
typically sells. The higher 1998 loan sales volume was due to refinancing and
economic activity, which were exceptionally strong that year. Trust fee income
increased to $405,309 in 1999 compared to $229,903 in 1998 due to the growth in
Sturgis Bank & Trust's Trust Department.

1998 COMPARED TO 1997. Noninterest income was $2.8 million in 1998 compared
to $1.7 million in 1997, an increase of $1.1 million or 64.7%. Gain on sale of
loans increased 79% to $643,053 in 1998 from $359,289 in 1997. This increase is
due to a 246% increase in loans sold from $13.3 million in 1997 to $45.0 million
in 1998. Fees and service charges increased to $1.2 million 1998 compared to
$862,784 in 1997, mostly due to the increase in deposit accounts related to the
branch acquisitions. Trust fee income increase to $229,903 in 1998 compared to
$131,861 in 1997 due to the growth in Sturgis Bank & Trust's Trust Department.

NONINTEREST EXPENSE

THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31,
1999. Noninterest expense was $2.1 million for the three months ended March 31,
2000 compared to $2.1 million for the three months ended March 31, 1999, a
decrease of $7,732. The largest component of non-interest expense is
compensation and related expenses, which was $987,323 for the three months ended
March 31, 2000 and $949,465 for the three months ended March 31, 1999.
Amortization of intangibles was $147,282 for the three months ended March 31,
2000 and $140,464 for the three months ended March 31, 1999.

1999 COMPARED TO 1998. Noninterest expense was $8.5 million in 1999,
compared to $7.4 million in 1998, an increase of $1.1 million or 16%. The
largest component of this increase was compensation, payroll taxes and employee
benefits, which were $3.7 million in 1999 compared to $3.4 million in 1998. This
increase was due to compensation expenses related to the new branches purchased
in September 1998, as well as annual salary adjustments that became effective in
January 1999. Amortization of intangibles increased from $385,936 in 1998 to
$565,698 in 1999. Office occupancy and equipment expense increased from $1.1
million in 1998 to $1.3 million in 1999. The increases in amortization of
intangibles and office occupancy and equipment expenses were due to the branch
acquisitions of September 1998.

1998 COMPARED TO 1997. Noninterest expense was $7.4 million in 1998
compared to $5.3 million in 1997, an increase of $2.1 million or 39%. The
largest component of this increase was compensation and related expenses, which
increased to $3.4 million in 1998 from $2.5 million in 1997. This increase was
due to compensation expenses related to the new branches purchased in December
1997 and September 1998, as well as annual salary adjustments which became
effective January 1998. Amortization of intangibles increased from $157,616 in
1997 to $385,936 in 1998. Office occupancy and equipment expense increased from
$765,759 in 1997 to $1.1 million in 1998. The increases in amortization of
intangibles and office occupancy and equipment expenses were due to the branch
acquisitions of December 1997 and September 1998.

97
<PAGE> 104

The effective federal income tax rates were 25.6% in 1999, 27.0% in 1998
and 29.5% in 1997.

CASH FLOW CHANGES

OPERATING. Cash flows from operating activities are most significantly
affected by net income, loans originated for sale and proceeds from the sale of
loans. Loans originated for sale were $1.2 million and $12.7 million for the
three months ended March 31, 2000 and 1999, respectively. Loans originated for
sale were $19.1 million, $47.4 million, and $13.5 million for the years ended
December 31, 1999, 1998 and 1997, respectively. Proceeds from the sale of loans
were $1.1 million and $12.4 million during the three months ended March 31, 2000
and 1999, respectively. Proceeds from sales of loans were $23.2 million, $45.0
million, and $13.3 million during the years ended December 31, 1999, 1998 and
1997, respectively. Because Sturgis Bank & Trust Company generally has a policy
of selling long-term fixed rate mortgage loans, the volume of loan sales varies
with customer demand for these loans.

INVESTING. Cash flows from investing activities are most significantly
affected by the net increase in loans, changes in the investment portfolio and
acquisitions of branches. Net loans increased by $7.4 million and $325,000
during the three months ended March 31, 2000 and 1999, respectively. Net loans
increased by $28.3 million, $8.8 million, and $13.0 million during the years
ended December 31, 1999, 1998 and 1997, respectively. Investment purchases and
maturities also affect cash flows from investing activities. Sturgis Bank &
Trust Company maintains investments at levels which provide itself with
necessary return and liquidity. Sturgis Bank & Trust Company used $50,320 in the
year ended December 31, 1999 and received cash of $41.3 million for the branch
acquisition in September of 1998. Sturgis Bank & Trust Company received cash of
$14.4 million for the branch acquisition in December of 1997.

FINANCING. Cash flows from financing activities are most effected by
changes in deposits and FHLB advances. Deposits increased $12.0 million and $3.8
million for the three months ended March 31, 1999 and 2000, respectively.
Deposits decreased $8.8 million in the year ended December 31, 1999. Deposits
increased $2.5 million and $3.9 million in the years ended December 31, 1998 and
1997, respectively. Sturgis Bank & Trust Company also uses Federal Home Loan
Bank advances for financing its operating and investing activities. Federal Home
Loan Bank advances increased $20.5 million during the year ended December 31,
1999, due to the strong demand for adjustable rate mortgage loans that year.
Advances decreased $18.8 million and $2.3 million during the years ended
December 31, 1998 and 1997, respectively, due to the use of proceeds form the
branch acquisitions in September of 1998 and December of 1997.

ASSET/LIABILITY MANAGEMENT

The primary component of Sturgis Bank & Trust's earnings is net interest
income. Sturgis Bank & Trust's asset/liability management strategy is to
maximize net interest income over time by reducing the impact of fluctuating
interest rates. This is accomplished by matching the mix and maturities of its
assets and liabilities. At the same time Sturgis Bank & Trust's asset/liability
strategies for managing interest rate risk must also accommodate customer
demands for particular types of deposit and loan products. Sturgis Bank & Trust
uses various asset/liability management techniques in an attempt to maintain a
profitable mix of financial assets and liabilities, provide deposit and loan
products that meet the needs of its market area, and maintain control over
interest rate risk resulting from changes in interest rates.

Strategies employed by Sturgis Bank & Trust to manage the rate sensitivity
of its assets include origination of adjustable rate mortgage and consumer loans
and purchase of adjustable rate and short average life fixed rate investments.
Sturgis Bank & Trust also attempts to reduce the rate sensitivity

98
<PAGE> 105

of its liabilities by emphasizing core deposits, which are less sensitive to
changes in interest rates, attracting longer term certificates of deposits when
the market permits, and using long-term Federal Home Loan Bank advances when
such rates are competitive. Management will continue to monitor the impact of
its borrowing and lending policies on Sturgis Bank & Trust's sensitivity to
interest rate fluctuations.

Net interest income, the primary component of Sturgis Bank & Trust's net
income, is derived from the difference or "spread" between the yield on
interest-earning assets and the cost of interest-bearing liabilities. Sturgis
Bank & Trust has sought to reduce its exposure to changes in interest rates by
matching more closely the effective maturities and repricings of its
interest-sensitive assets and liabilities. At the same time, Sturgis Bank &
Trust's asset/liability management strategies also must accommodate customer
demands for particular types of deposit and loan products.

While much of Sturgis Bank & Trust's asset/liability management efforts (in
the current rising rate environment) involve strategies which increase the rate
sensitivity of its loans and investments, such as the sale of long-term fixed
rate loans, originations of adjustable rate loans and purchases of adjustable
rate mortgage-backed securities or relatively short average life fixed-rate
investments, it also uses certain techniques to reduce the rate sensitivity of
its deposits and borrowed money. Those techniques include attracting longer term
certificates of deposit when the market will permit, emphasizing core deposits
which are less sensitive to changes in interest rates, and borrowing through
long-term FHLB advances. Sturgis Bank & Trust 's asset/liability management
strategy will appropriately change when market rates change.

Sturgis Bank & Trust measures its exposure to interest rate fluctuations
primarily by using a computer modeling system designed for savings institutions
such as Sturgis Bank & Trust. The model uses assumptions which management
believes are reasonable for the analysis. These assumptions include (but are not
limited to) prepayment and decay rates based on nine interest rate scenarios. It
allows Sturgis Bank & Trust to adjust its asset-liability mix based on the
interest rate risk identified. The analysis estimates the changes in the market
value of Sturgis Bank & Trust's equity using interest rate change scenarios
ranging from +4% to -4%, in 1% increments from current market rates. At December
31, 1999, the following table illustrates the interest rate sensitivity of
Sturgis Bank & Trust's equity to changes in market interest rates.

<TABLE>
<CAPTION>
(IN THOUSANDS
OF DOLLARS)
-------------
<S> <C>
Book value of stockholders' equity.......................... $25,348
4% increase in market rates................................. 22,984
3% increase in market rates................................. 24,610
2% increase in market rates................................. 26,544
1% increase in market rates................................. 28,449
No change (current market value of equity).................. 29,736
1% decrease in market rates................................. 30,216
2% decrease in market rates................................. 30,589
3% decrease in market rates................................. 30,385
4% decrease in market rates................................. 29,983
</TABLE>

As the table shows, Sturgis Bank & Trust's book value of equity is less
than estimated market value in most of the scenarios. That indicates that
Sturgis Bank & Trust is able to withstand fluctuations in market interest rates
without posting a significant threat to either Sturgis Bank & Trust's
stockholders' equity or the federal deposit insurance system, and therefore,
Sturgis Bank & Trust can be deliberate in its actions to adjust the
asset-liability mix. Sturgis Bank & Trust would meet the regulatory minimum
capital requirements in all of the interest-rate scenarios.

99
<PAGE> 106

Sturgis Bank & Trust has an Asset-Liability Management Committee (ALCO)
that meets as needed. The purpose of this Committee is to communicate,
coordinate, and monitor asset-liability management procedures. The Committee
establishes and monitors the volume and mix of both assets and funding sources.
The objective is to manage assets and funding sources to produce results
consistent with Sturgis Bank & Trust's liquidity requirements, capital adequacy,
growth, and profitability goals. To accomplish this objective, the ALCO uses
internal budget variance reports, forecasts for changes in interest rates and
consumer deposit activity, as well as forecasts of loan demand in each of
Sturgis Bank & Trust's loan types, investment maturities and new investment
alternatives, and various other internal and external reports.

STATIC GAP ANALYSIS

The management of interest rate sensitivity includes monitoring the
maturities and repricing opportunities of interest-earning assets and
interest-bearing liabilities. The following table summarizes the interest rate
repricing gaps for selected maturity periods as of December 31, 1999:

<TABLE>
<CAPTION>
GREATER GREATER
THAN THAN
1 MONTH 2-3 MONTHS 4-6 MONTHS 7-9 MONTHS 10-12 MONTHS 1-5 YEARS 5 YEARS TOTAL
-------- ---------- ---------- ---------- ------------ --------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Non-loan interest-earning
assets................. $ 4,120 $ 461 $ 1,548 $ 3,600 $ 2,999 $ 4,408 $ 0 $17,136
Loans.................... 17,799 13,356 15,957 13,616 12,198 103,969 30,162 207,057
Total interest-earning
assets................. 21,919 13,817 17,505 17,216 15,197 108,377 30,162 224,193
-------- -------- -------- -------- -------- -------- ------- -------
Savings accounts......... 2,041 4,081 6,122 6,122 6,122 6,133 3,504 34,125
Checking Accounts........ 2,154 4,441 6,661 6,661 6,661 19,519 8,047 54,144
Certificates & Term
IRA's.................. 5,621 7,901 14,444 5,639 6,698 34,591 516 75,410
Certificates & Term
IRA's.................. 23,506 1,992 461 0 204 18,659 14,291 59,113
Total interest-bearing
liabilities............ 33,322 18,415 27,688 18,422 19,685 78,902 26,358 222,792
-------- -------- -------- -------- -------- -------- ------- -------
Interest-bearing assets
less Interest-bearing
liabilities............ (11,403) (4,598) (10,183) (1,206) (4,488) 29,475 3,804 1,401
Asset (liability) gap.... (11,403) (4,598) (10,193) (1,206) (4,488) 29,475 3,804 1,401
Cumulative asset gap..... (11,403) (16,001) (26,184) (27,390) (31,878) (2,403) 1,401
Cumulative gap as a
percentage of
cumulative earning
assets................. -52.0% -44.8% -49.2% -38.9% -37.2% -1.2% -0.6%
</TABLE>

Total interest-earning assets exceeded interest-bearing liabilities by $1.4
million at December 31, 1999. This difference was funded through
non-interest-bearing liabilities and shareholders' equity. The above table shows
that total liabilities maturing or repricing within one year exceed assets
maturing or repricing within one year by $31.9 million. However, the repricing
and cash flows of certain categories of assets and liabilities are subject to
competitive and other influences that are beyond the control of Sturgis Bank &
Trust. As a result, certain assets and liabilities indicated as maturing or
repricing within a stated period may, in fact, mature or reprice in other
periods or at different volumes.

SIMULATION

Sturgis Bank & Trust recognizes the limitations of static gap analysis as a
tool for managing its interest rate risk. Sturgis Bank & Trust also uses a
computer-based earnings simulation model to

100
<PAGE> 107

estimate the effects of various interest rate environments on the balance sheet
structure and net interest income. These simulation techniques involve changes
in interest rate relationships, asset and liability mixes, and prepayment
options inherent in financial instruments, as well as interest rate levels in
order to quantify risk. Sturgis Bank & Trust's sensitivity is estimated by first
forecasting the next twelve months of net interest income under an assumed
environment of constant market interest rates. Next, immediate parallel interest
rate shocks are constructed in the model. The rate shocks reflect changes of
equal magnitude to all market interest forecast under each of the rate shock
scenarios. The resulting change in net interest income is an indication of the
sensitivity change in net earnings to directional changes in market interest
rates. This model is based solely on parallel changes in market rates and does
not reflect the levels of interest rate risk that may arise from other factors
such as changes in the spreads between key market rates or in the shape of the
Treasury yield curve. The net interest income simulation model includes both
on-balance sheet loan, investment, deposit, and debt instruments as well as
off-balance sheet interest rate swaps.

Sturgis Bank & Trust's forecasted net interest income sensitivity is
monitored by the ALCO which has established limits in the interest rate risk
limit policy. Throughout 1999, the forecasted exposure was within Sturgis Bank &
Trust's established policy limits.

NET INTEREST INCOME SENSITIVITY: CHANGE VS. PROJECTED RESULTS UNDER CONSTANT
RATES YEAR-END 1999 12 MONTH PROJECTION

<TABLE>
<S> <C> <C> <C> <C> <C> <C>
ALCO
Rate Shock Amount............................. (2.00)% (1.00)% 0.00% 1.00% 2.00% Policy
Percent change in net interest income vs
constant rates.............................. 4.627 % 2.004 % 0.000% (3.310)% (6.498)% (8.000)%
</TABLE>

EFFECT OF INTEREST RATE FLUCTUATIONS

Sturgis Bank & Trust's consolidated results of operations depend to a large
extent on the level of its net interest income, which is the difference between
interest income earned on its loan and investment portfolios versus the interest
paid on deposits and borrowed funds. If the cost of funds increases faster than
the yield on its interest-earning assets, net interest income will be reduced.
Sturgis Bank & Trust measures its interest rate risk primarily using simulation
analysis.

While Sturgis Bank & Trust uses various tools to monitor interest rate
risk, it is unable to predict future fluctuations in interest rates or the
specific impact thereof. The market value of most of Sturgis Bank & Trust's
financial assets is sensitive to fluctuations in market interest rates.
Fixed-rate investments including mortgage loans and mortgage-backed securities
decline in value as interest rates rise. Adjustable-rate loans and securities
generally have less market value volatility than do fixed-rate products.

LIQUIDITY AND CAPITAL RESOURCES

Sturgis Bank & Trust maintains certain levels of liquid assets (the most
liquid of which are cash and cash equivalents and investment securities) in
order to meet demands from loan commitments, savings withdrawals and other
obligations. Sturgis Bank & Trust manages liquidity by maintaining a portion of
its liquid assets in overnight accounts and by keeping various maturities in its
portfolio of investment securities. The primary sources of liquidity are loan
repayments and sales, maturing investments, deposit accounts, and FHLB
borrowings.

Sturgis Bank & Trust's liquidity ratio (liquid assets to net withdrawable
deposits plus short-term borrowings) was 6.0% at March 31, 2000 and 12.5% at
March 31, 1999. This decrease was the due to

101
<PAGE> 108

the use of proceeds from the 1998 Acquired Branches to fund loans. Sturgis Bank
& Trust's liquidity ratio was 5.95% at December 31, 1999, exceeding the 4%
minimum regulatory liquidity ratio.

EFFECT OF INTEREST RATE FLUCTUATIONS AND INFLATION

ACQUISITIONS

On September 11, 1998, Sturgis Bank & Trust acquired four branch locations
of another financial institution in Centreville, Climax, Covert and South Haven,
Michigan. The assets acquired included $41,334,000 in cash, $65,000 of loans,
$431,000 of office properties and equipment and $7,000 of other assets. Sturgis
Bank & Trust assumed $45,140,000 of deposits and $142,000 of other liabilities
in connection with the branch acquisitions. The $3,445,000 excess of liabilities
assumed over the fair value of assets acquired is being amortized on an
accelerated basis over a 15-year period. These acquisitions have been accounted
for using the purchase method and the operations of the acquired branches have
been included in Sturgis Bank & Trust's consolidated financial statements from
there respective dates.

On December 8, 1997, the Bank acquired two branch locations of another
financial institution in Bronson and Constantine, Michigan. The assets acquired
included $14,439,000 of cash, $71,000 in loans, $263,000 in office properties
and equipment and $1,000 in other assets. Sturgis Bank & Trust also assumed
$16,884,000 in savings accounts and $26,000 in other liabilities. The $2,136,000
excess of liabilities assumed over the fair value of the assets acquired has
been allocated to intangibles and is being amortized on an accelerated basis
over a fifteen-year period.

IMPACT OF YEAR 2000

Sturgis Bank & Trust Company did not experience any significant
malfunctions or errors in its operating or business systems when the date
changed from 1999 to 2000. Based on operations since January 1, 2000, Sturgis
Bank & Trust Company does not expect any significant impact on its one-going
business as a result of the "Year 2000 issues." However, it is possible that the
full impact of the date change, which was of concern due to computer programs
that use two digits instead of four digits to define years, has not been fully
recognized. For example, it is possible that Year 2000 or similar issues, such
as leap year-related problems, may occur with billing, payroll, or financial
closings at month, quarterly or year end. Sturgis Bank & Trust Company believes
that any such problems are likely to be minor and correctable. In addition,
Sturgis Bank & Trust Company could still be negatively impacted if its customers
or suppliers are adversely affected by the Year 2000 or similar issues. Sturgis
Bank & Trust Company currently is not aware of any significant Year 2000 or
similar problems that have arisen for its customers and suppliers.

102
<PAGE> 109

Sturgis Bank & Trust Company expended $500,000 on Year 2000 readiness
efforts from 1997 to 1999. These efforts included replacing some outdated,
noncompliant hardware and noncompliant software, as well as identifying and
remediating Year 2000 problems.

ACCOUNTING AND REGULATORY DEVELOPMENTS

In June 1997, the Financial Accounting Standards Board issued Statement No.
130, "Reporting Comprehensive Income," which establishes standards for reporting
and display of comprehensive income and its components (revenues, expense, gains
and losses) in a full set of financial statements. This statement also requires
that all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. This statement
was adopted by Sturgis Bank & Trust Company effective January 1, 1998. The
adoption of the statement did not have any impact on Sturgis Bank & Trust
Company's consolidated financial statements since Sturgis Bank & Trust Company
did not have any components of comprehensive income that were not already
included in net income.

In June 1997, FASB issued Statement No. 131, "Disclosures about Segments of
an Enterprise and Related Information." This statement requires the reporting of
financial and descriptive information about an enterprise's reportable operating
segments. Because Sturgis Bank & Trust Company's principal business is banking,
and management has not separately organized the business beyond mortgage and
commercial banking, the adoption of this statement did not have any impact on
Sturgis Bank & Trust Company's financial statements at December 31, 1999.

In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement, which is effective for all
fiscal quarters of all years beginning after June 15, 1999, requires that all
derivative instruments be recorded on the balance sheet at their fair value.
Changes in the fair value of derivatives are recorded each period in current
earnings or other comprehensive income, depending on the intended use of the
derivative and its resulting designation. SFAS 133 was adopted by the Sturgis
Bank & Trust Company in 1999, and did not have a material effect on the
consolidated financial position or results or operations.

In September 1999, the Financial Accounting Standards Board (FASB) issued
its proposal on Business Combinations. This proposal has the objective of
requiring one method to account for a business combination, and thus, minimize
confusion with investors and shareholders and bring the U.S. accounting
standards closer in line with international accounting standards.

This proposal eliminates the pooling-of-interests method to account for a
business combination. Under the pooling-of-interests method, combining
enterprises simply add together the book values of their assets.

Under the purchase method (the only method allowable under the proposal),
one company is identified as the acquirer and reports the value of the business
bought at the cost it actually paid. The excess of the purchase price over the
fair value of the purchased entity's net assets is considered goodwill. Under
the new proposal, goodwill will be amortized over not more than 20 years (versus
40 under current guidance). FASB expects the new rules to be effective for
combinations formally announced and detailed by January 1, 2001.

103
<PAGE> 110

BUSINESS AND PROPERTIES OF STURGIS BANK & TRUST COMPANY

OVERVIEW

Sturgis Bank & Trust Company is a Michigan chartered stock savings bank
located in Sturgis, Michigan. Sturgis Bank & Trust Company began operations in
1905 as a state chartered savings and loan association and in 1988 converted
from a state chartered mutual savings bank to a federally chartered stock
savings bank. In December of 1998, Sturgis Bank & Trust Company converted to a
Michigan stock savings bank.

Sturgis Bank & Trust Company's principal business is accepting savings
deposits from the general public and making single family mortgage loans and to
a lesser extent, consumer and commercial loans. Sturgis Bank & Trust Company
established a trust department in 1997 and expanded its commercial loan
department in 1997 and 1998. Sturgis Bank & Trust Company conducts business from
its main office in Sturgis, Michigan and 12 full-service branch offices located
in Bronson, Centreville, Climax, Coldwater, Colon, Covert, South Haven, Sturgis,
Three Rivers and White Pigeon, Michigan. Sturgis Bank & Trust Company also
operates one limited services branch in Sturgis, Michigan.

Sturgis Bank & Trust Company's primary market area is in St. Joseph County,
Michigan, which has a population of approximately 59,000. The two main areas of
population are concentrated in Sturgis, which has a population of approximately
10,100; and Three Rivers, which has a population of approximately 7,500. Other
significant population centers in St. Joseph County include Centreville, Colon,
Constantine, and White Pigeon have populations ranging from approximately 1,200
to approximately 2,500.

St. Joseph County has a stable economy characterized by high employment. It
is a rural county with a large agricultural base and a diverse industrial base.
Some of the larger manufacturers in the area produce truck bodies, infant
formula, drapery hardware, machine tools, plastic products, paper board,
mirrored acrylic, pressure sensitive labels, orthotic devices, automotive
transmissions, and other automotive parts and accessories. There are numerous
tool and die as well as mold shops, both large and small.

LENDING ACTIVITIES

GENERAL. Sturgis Bank & Trust Company primarily concentrates its lending
activities in the origination of conventional residential mortgage loans. At the
present time, the lending activities include three principal areas: conventional
mortgage loans on residential properties, mortgage loans on commercial
properties and consumer loans.

RESIDENTIAL LENDING. In the mortgage lending area, the current activity of
Sturgis Bank & Trust Company is primarily in the conventional loan area. The
types of conventional mortgage loans offered by Sturgis Bank & Trust Company
are:

- one and three-year adjustable rate mortgage loans whose rates and monthly
payments are adjusted based on the movement of a predetermined index.
When these loans become due, they are either repaid, renewed or converted
to another type of mortgage loan. If the borrower chooses to renew or
convert these loans, they may do so at the then current rate and term;

- fixed-rate, fixed-term loans. Longer term loans are written in
anticipation of their resale in the secondary market; and

104
<PAGE> 111

- second mortgage equity loans, written as a line of credit, typically, up
to 90% of value including the first mortgage. Interest rates are floating
and in certain situations Sturgis Bank & Trust Company loans 100% of
value at a slightly higher interest rate.

Sturgis Bank & Trust Company's mortgage loans are offered at competitive
rates on amortization terms of up to 30 years. Sturgis Bank & Trust Company
generally provides escrow accounts for payment of property taxes and insurance
with monthly mortgage payments including the escrow payment.

Mortgage loans are generally made on one-to-four family units, and will be
considered on units of larger size. Most conventional loans made by Sturgis Bank
& Trust Company are for single-family homes.

Conventional mortgage loans are normally offered for up to 95% of the
lesser of appraised value or purchase price. Where a loan is made in excess of
80% of appraised value, the borrower is normally required to obtain private
mortgage insurance coverage. High ratio loans are usually limited to
owner-occupied residences. Sturgis Bank & Trust Company also offers mortgages
through the Farmers Home Administration, Veterans Administration and the Federal
Housing Administration.

It is the general practice of Sturgis Bank & Trust Company to roll over
balloon mortgages as they come due. The mortgage is modified to the interest
rate currently offered by the Company for new mortgages of similar terms.
Sturgis Bank & Trust Company may deny a roll over for any reason, such as a
history of delinquency and/or deterioration of the loan's collateral, or
liquidity needs of Sturgis Bank & Trust Company.

LOAN ORIGINATION AND PROCESSING. Sturgis Bank & Trust Company originates
real estate loans in south central and southwestern Michigan. Mortgage and
consumer loans come from a number of sources, including depositors, current
borrowers, walk-in customers, advertisement, real estate brokers, builders and
direct solicitation of retail and commercial businesses. Commercial loans are
obtained by direct solicitation, referrals, advertisement and walk-in customers.

Sturgis Bank & Trust Company believes it maintains a relatively
conservative posture with regard to the loan amount in relationship to the
appraised value of any particular property. Generally, residential loans are
originated at an amount between 70% and 90% of appraised value. Loans on
multifamily and commercial properties typically have a loan-to-value ratio below
75%.

The residential loans made by Sturgis Bank & Trust Company range from 10 to
30 years and the commercial real estate loans generally range from three to 15
years. All borrowers may refinance or prepay their loans without penalty.
Residential loans usually remain outstanding an average of 10 years based on
historical data of prepayments.

Sturgis Bank & Trust Company's mortgage lending is subject to loan
origination procedures prescribed by the Board of Directors. Real estate
securing loans made by Sturgis Bank & Trust Company are appraised by independent
fee appraisers. Each approved loan application typically requires an appraisal
less than six months old. In connection with loans on new construction, the
appraisal is subject to a re-certification of value at the time of completion. A
detailed loan application is obtained to determine the borrowers financial
ability to repay. The significant items on these applications are verified
through the use of credit reports, financial statements and confirmations.
Depending upon the size and type of loan, the application is reviewed and
approval is determined by either the loan officer, the loan committees, or the
entire Board of Directors by applying the underwriting standards established in
policies approved by the Board of Directors.

Sturgis Bank & Trust Company requires title insurance insuring Sturgis Bank
& Trust Company's lien on the mortgaged real estate. Borrowers must also obtain
hazard insurance coverage

105
<PAGE> 112

prior to closing. When required by federal regulations, flood insurance must
also be obtained. Borrowers may be required to advance funds on a monthly basis
together with each payment of principal and interest to a mortgage loan escrow
account, from which Sturgis Bank & Trust Company makes disbursements for items
such as real estate taxes and private mortgage insurance premiums.

PURCHASE AND SALE OF LOANS. Sturgis Bank & Trust Company's residential loan
strategy is to primarily originate loans that are eligible for sale in the
secondary mortgage market and retain servicing rights to enhance its portfolio.
Sturgis Bank & Trust Company may sell either loans newly originated by it or
loans currently held in its portfolio, when it believes that the sale of these
loans is advantageous.

Recently, Sturgis Bank & Trust Company has increased the level of loans
held in its portfolio for growth purposes, primarily in adjustable rate
residential, short-term fixed rate residential loans of 10 years or less and
commercial real estate loans.

Some individual loans are sold on a non-recourse basis to the Federal Home
Loan Mortgage Corporation at a minimum yield of .25% to the Company as servicing
income, plus an applicable premium. Loan servicing fee income in 1999 was
$239,627 or 7.93% of noninterest income. Loan servicing fee income as a
percentage of net interest income for the years ended December 31, 1999, 1998
and 1997 was 2.89%, 2.99% and 2.30%, respectively.

Sturgis Bank & Trust Company has the authority to purchase and sell
mortgage loans and mortgage participations. From time to time, Sturgis Bank &
Trust Company purchases mortgage-backed securities guaranteed or insured by the
Federal National Mortgage Association, the Federal Home Loan Mortgage
Corporation, or the Government National Mortgage Association. Principal
mortgage-backed securities carry a variable rate feature. At December 31, 1999,
5.8%, or $12.1 million, of Sturgis Bank & Trust Company's net loan portfolio was
serviced by others.

An asset is recorded on the balance sheet for Mortgage Servicing Rights. At
December 31, 1999 and 1998 the balance was $745,890 and $496,548, respectively.

When loans are sold, Sturgis Bank & Trust Company retains responsibility
for servicing the loans. Gains or losses on such sales are recognized at the
time of the sale and are determined by the present value of the difference
between the servicing rate received and a normal servicing spread.

LOAN COMMITMENTS. In making one-to-four-family home mortgage loans, Sturgis
Bank & Trust Company charges the applicant a non-refundable application fee
which is applied to the out of pocket costs including, but not limited to
appraisal and credit report fees if the loan closes. The interest rate on such
loans is normally the prevailing rate at the time the loan application is
approved.

Sturgis Bank & Trust Company also issues individual loan commitments on
existing homes including the refinancing of existing home loans. Commitments on
adjustable rate loans are usually issued at current market rates and fees. On
fixed-rate loans, the rate is set at the borrower's acceptance of the
commitment. The commitment usually extends for 30 days. Loans to be sold in the
secondary market are sold immediately and fees are collected from the borrower
to cover any penalty in case the loan is not closed and cannot be delivered to
the buyer. Certain fixed rate, short-term mortgages (mostly less than 10 years)
are retained in Sturgis Bank & Trust Company's portfolio. Sturgis Bank & Trust
Company monitors the amortization of the loans and advances. Commitments, fees,
rates and other terms of commercial and multifamily residential loans are
individually negotiated.

The proportion of the total value of commitments derived from any
particular category of loans varies from time to time and depends upon market
conditions. As of December 31, 1999, the Company had commitments of $9.9 million
and $0.9 million on variable rate and fixed rate loans,

106
<PAGE> 113

respectively. The source of Funds to meet these commitments is substantially the
sale of mortgage loans in the secondary market and FHLB advances.

ONE-TO-FOUR UNIT FAMILY RESIDENTIAL LENDING. One-to-four family unit
residential lending is the major portion of the Company's lending activity. The
balances of one-to-four family unit residential loans increased from $139.9
million, or 78.41% of net loans receivable, as of December 31, 1998 to $157.7
million, or 76.45% of net loans receivable, as of December 31, 1999.

INCOME-PRODUCING PROPERTY LENDING. As of December 31, 1999, approximately
$20.6 million, or 9.98%, of Sturgis Bank & Trust Company's total real estate
portfolio, net, consisted of real estate loans secured by income-producing
properties. Sturgis Bank & Trust Company's income-producing property loans
include permanent loans secured by apartments and other business properties
primarily within St. Joseph County. Sturgis Bank & Trust Company's largest
outstanding income-producing property loan totaled $3.0 million as of December
31, 1999. The Company has not experienced any substantial losses from its
income-producing property portfolio.

Independent appraisals are normally performed for loans secured by income
producing property. Sturgis Bank & Trust Company currently invests in loans
equal to 75% of the smaller of the appraised value or the purchase price of the
property. Sturgis Bank & Trust Company's Board of Director's underwriting
policies consider the terms of the loan, the credit worthiness and experience of
the borrower, the location and quality of the collateral, the debt service
coverage ratio and the past performance of the project.

Income-producing property loans present a higher level of risk than loans
secured by one-to-four-family residences. This increase in risk is due to
several factors, including the concentration of principal in a limited number of
loans and borrowers, the effects of general economic conditions and the
increased difficulty of evaluating and monitoring these types of loans.

ONE-TO-FOUR UNIT FAMILY RESIDENTIAL CONSTRUCTION LENDING. Sturgis Bank &
Trust Company's construction loans are made to finance construction of
owner-occupied, single-family residences. Construction loans are made to the
homeowner. These construction loans are generally on an interest-only basis with
terms of 6 months or less, and are for the most part concentrated within a 50
mile radius of Sturgis Bank & Trust Company's main office. Loan proceeds are
disbursed in increments as construction progresses. The amount of each
disbursement is based on the construction cost estimate of an inspector who
inspects the project in connection with each disbursement request.

Construction loans, net of $2.6 million of loans in process, aggregated
$5.0 million as of December 31, 1999, representing 2.82% of Sturgis Bank & Trust
Company's net loan portfolio.

CONSUMER LENDING. Sturgis Bank & Trust Company originates consumer loans to
the general public. These loans are generally for personal, family or household
purposes, such as the financing of home improvements and automobiles. Sturgis
Bank & Trust Company also offers consumer loans to its depositors secured by
their savings, passbook or certificate accounts. Sturgis Bank & Trust Company
had $164,713 of these loans as of December 31, 1999. The underwriting standards
employed by Sturgis Bank & Trust Company for consumer loans consider the
applicant's payment history and the financial ability to pay the proposed loan.
The stability of the applicant's monthly income is determined by verification of
gross monthly income from private employment and verifiable secondary income.
Although the applicant's credit worthiness is important, the underwriting
process includes a comparison of the value of the security, if any, in relation
to the proposed loan amount. As of December 31, 1999, Sturgis Bank & Trust
Company had $16.3 million in consumer nonmortgage loans outstanding. Sturgis
Bank & Trust Company's consumer loans represent 7.9% of Sturgis Bank & Trust
Company's net loan portfolio.

107
<PAGE> 114

Sturgis Bank & Trust Company offers overdraft checking account loans with
the limits set on an individual basis depending on the account holder's ability
to repay and credit record.

Auto and personal loans are usually secured by collateral. Most loan
payments are due on a monthly basis. The repayment term on consumer loans made
by Sturgis Bank & Trust Company generally ranges from one to 10 years. Sturgis
Bank & Trust Company previously offered education loans and continues to offer
its consumer loans for educational purposes. Sturgis Bank & Trust Company does
not engage in any indirect lending.

COMMERCIAL LENDING. Commercial loans are available to purchase commercial
real estate, for working capital or to purchase equipment. The amortization
schedules for real estate and equipment purchase loans are matched to the useful
life of the collateral pledged to secure the loan. Pricing for conventional real
estate and equipment loans are generally fixed for a maximum of three to five
years, or have a variable rate that is tied to the prime rate as published in
the Wall Street Journal. Working capital loans are normally secured by accounts
receivable and inventory. Working capital loans are usually priced at a variable
rate that is tied to the prime rate, with a one year maturity. Sturgis Bank &
Trust Company offers business operating lines of credit to assist with
short-term cash flow needs. These short-term loans normally have variable rates
and are tied to the prime rate, and normally mature in one year. As of December
31, 1999, Sturgis Bank & Trust Company had $11.7 million in commercial
nonmortgage loans outstanding. Sturgis Bank & Trust Company's commercial loans
represent 5.7% of Sturgis Bank & Trust Company's net loan portfolio.

ASSET QUALITY AND CREDIT RISK MANAGEMENT

Sturgis Bank & Trust Company's primary lending activity is mortgages on
single-family, owner occupied homes. Sturgis Bank & Trust Company also offers
commercial loans. Most commercial loans are secured by real estate. However, the
borrower's ability to repay the loan is generally dependent on the success of
their business which may fail. Consumer loans are also more risky because they
may not be collateralized or the collateral securing these loans may decrease in
value more rapidly than residential real estate. Sturgis Bank & Trust Company
has adopted a Commercial Lending Policy and a Consumer Loan Policy which attempt
to minimize risk on these loans. Sturgis Bank & Trust Company's policies set
maximum loan authorities, identify employee positions authorized to originate
loans, and establish audit and underwriting standards for each type of loan
offered by Sturgis Bank & Trust Company.

Credit risk refers to the potential for losses on assets due to borrowers'
defaults and the decline in the value of collateral. Sturgis Bank & Trust
Company's Asset Classification and Internal Loan Review Policy requires audits
of loan files to determine adherence to loan policies and procedures, early
identification of problem assets, review of negative results to detect
weaknesses in the Company's policy, and reports to the Board of Directors
regarding the status and quality of assets. The policy also establishes an asset
classification and loan loss reserve system.

Loans are classified as substandard, doubtful, or loss. Specific allowances
for delinquent loans are established ranging from 4% on single-family
residential mortgage loans to 100% on substantially delinquent unsecured loans.
Any unsecured loan is considered a loss when it is delinquent 150 days.

INTEREST RATES AND FEE INCOME

Sturgis Bank & Trust Company earns interest income from its lending
activities. This income is dependent on interest rates, which are effected
primarily by market and general economic conditions and such other factors as
monetary policies of the Federal government, including the Federal Reserve

108
<PAGE> 115

Board, the general supply of money in the economy, legislative tax policies,
governmental budgetary matters and Sturgis Bank & Trust Company's cost of funds.

Sturgis Bank & Trust Company also earns income from fees in the form of
origination fees, late charges, checking account fees and fees for other
miscellaneous services. These sources of income are heavily dependent upon the
volume and type of loans and commitments made and purchased, and on competitive
and economic conditions. Loan origination fees and points collected, net of
direct origination costs, are deferred for financial reporting purposes in
accordance with Statement of Financial Accounting Standards No. 91 "Accounting
for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans
and Initial Direct Costs of Leases."

NONPERFORMING LOANS

GENERAL. Sturgis Bank & Trust Company is required to classify all assets,
make general and specific allowances for possible loan losses, generate internal
loan classifications, create a special mention category, and appraise all real
estate owned.

To analyze the adequacy of its allowance for loan losses, Sturgis Bank &
Trust Company uses a percentage method of analysis that applies a percentage to
delinquent loans of different types for specific loan loss reserves. The
percentages applied are 4% of substandard one to four family mortgages, 8% of
other substandard real estate mortgages, 10% of substandard land contracts, 20%
of delinquent secured installment loans, 25% of delinquent unsecured installment
loans, 100% of unsecured installment loans delinquent five or more months, and
10% of real estate held in judgment and subject to redemption. The reserve
balance is monitored monthly using these percentages. At least annually
management evaluates these percentages to insure that the percentages adequately
provide for probable losses inherent in the portfolio. Management's evaluation
is based on a continuing review of the loan portfolio and includes consideration
of the actual loan loss experience, the present and prospective financial
condition of borrowers, balance of the loan portfolio, and general economic
conditions (especially in Sturgis Bank & Trust Company's market area).

ALLOWANCE FOR LOAN LOSSES. In addition to the specific reserves, Sturgis
Bank & Trust Company maintains general reserves against possible loan losses.
calculated as a percentage of total loans. The following table provides an
analysis of the historical loss experience on loans

<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Balance at the beginning of the period................. $ 686,896 $ 692,787 $ 456,440
Charge-offs:
Real estate - construction........................... -- -- --
Real estate - mortgage............................... (15,000) (123,309) (74,363)
Installment loans.................................... (127,890) (77,831) (65,095)
--------- --------- ---------
Total charge-offs................................. (142,890) (201,140) (139,458)
Recoveries:
Real estate - construction........................... -- -- --
Real estate - mortgage............................... 3,000 16,081 --
Installment loans.................................... 78,994 5,255 37,491
--------- --------- ---------
Total recoveries.................................. 81,994 21,336 37,491
Net charge-offs........................................ (60,896) (179,804) (101,967)
Provision for loan losses.............................. 104,000 173,913 338,314
--------- --------- ---------
Balance at the end of the period....................... $ 730,000 $ 686,896 $ 692,787
========= ========= =========
</TABLE>

109
<PAGE> 116

<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Ratio of net charge-offs during the period to average
loans outstanding during the period.................. 0.03% 0.10% 0.06%
Allowance for loan losses to total loans............... 0.35% 0.39% 0.41%
Nonperforming assets to total assets................... 0.80% 0.88% 0.88%
Allowance for loan losses to nonperforming assets...... 36.50% 32.74% 39.32%
</TABLE>

The following table shows the allocation of the allowance for loan losses
as of the dates indicated by loan type:

<TABLE>
<CAPTION>
DECEMBER 31
------------------------------------------------------
1999 1998
------------------------- -------------------------
PERCENT OF PERCENT OF
LOANS IN EACH LOANS IN EACH
CATEGORY TO CATEGORY TO
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
-------- ------------- -------- -------------
<S> <C> <C> <C> <C>
Real estate construction, net............. $ -- 2.36% $ -- 2.91%
Real estate -- mortgage................... 360,518 84.07% 381,269 88.13%
Other loans............................... 369,482 13.57% 305,627 8.96%
-------- ------- -------- -------
Total allowance for loan losses......... $730,000 100.00% $686,896 100.00%
======== ========
</TABLE>

CLASSIFIED ASSETS. If a mortgage loan borrower fails to make a required
payment on a loan, Sturgis Bank & Trust Company attempts to cure the deficiency
by contacting the borrower. Printed delinquent notices are sent after five days
past due and a second notice after 15 days past due. The borrower is charged a
late fee of 4% of the delinquent mortgage payment amount. Direct contact is made
after a payment is more than 30 days past due, and in many cases in less than 30
days. In most cases, deficiencies are cured promptly. If deficiencies are not
cured within 90 days, or satisfactory arrangements to cure the delinquency are
not made, then Sturgis Bank & Trust Company, at the discretion of its Board of
Directors, will foreclose the mortgage. Periodic inspections are made of the
property to determine the status of the collateral. If foreclosed, the property
will be sold at a public sale, and usually is purchased by Sturgis Bank & Trust
Company subject to redemption rights of the borrower.

As these redemption rights may extend for periods of one to 12 months, an
effort is made to obtain the property much sooner through a deed in lieu of
foreclosure. Property acquired through foreclosure or deed in lieu of
foreclosure is classified as "real estate owned" until it is sold or otherwise
disposed.

Consumer loan borrowers who fail to make payments are contacted to cure the
delinquency and in most cases the delinquency is quickly corrected. Sturgis Bank
& Trust Company recognizes that greater diligence is required in the collection
of a consumer loan than a mortgage, because of the depreciable nature of the
collateral. First payment defaults require immediate personal attention by the
loan officer in order to establish good payment habits or discover early that a
collection problem may exist.

When an installment loan payment is 10 days late, a late charge of 5% of
the payment, up to $5.00 is charged and a notice mailed. Notices are mailed
every 10 days thereafter until the payments are brought up to date. Direct
contact is made before an account reaches 30 days past due.

When a consumer loan reaches 90 days in arrears, the Board of Directors of
Sturgis Bank & Trust Company will review the account to determine if the
possibility of a loss exists and may classify

110
<PAGE> 117

the account as substandard, doubtful, or loss, according to the criteria
contained in Sturgis Bank & Trust Company's Asset Classification Policy and
applicable regulations. Substandard and doubtful classification may require an
allowance to be set up and a loss will be charged off against the allowance for
possible loan losses. Unsecured installment loans will automatically be
classified as a loss when they are 120 days delinquent.

If an account continues to deteriorate to a point that it is 90 days past
due, immediate steps are taken to either collect payments due to date, secure
additional collateral, or repossess existing collateral. Collateral obtained as
a result of loan default is retained by Sturgis Bank & Trust Company as an asset
until sold or disposed of in a different manner.

Based on historical experience Sturgis Bank & Trust Company does not place
mortgage loans in nonaccrual status until the carrying value (loan balance plus
accrued interest less specific valuation allowance) exceeds an estimate of the
market value of the collateral securing the loan.

The following table presents the aggregate amount of troubled loan
categories as of the end of the period indicated:

<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Nonaccrual loans...................................... $ 487,574 $ -- $ --
Past due -- 90 days or greater........................ 1,142,680 1,619,254 1,283,052
Real estate owned..................................... 369,952 478,677 479,061
---------- ---------- ----------
Total nonperforming assets.......................... 2,000,206 2,097,931 1,762,113
Restructured assets................................... 514,746 466,000 680,913
---------- ---------- ----------
Total troubled assets............................... $2,514,952 $2,563,931 $2,443,026
========== ========== ==========
Ratio of troubled assets to total loans............... 1.22% 1.44% 1.44%
========== ========== ==========
Ratio of troubled assets to total assets.............. 1.00% 1.08% 1.21%
========== ========== ==========
</TABLE>

INVESTMENT ACTIVITIES

Sturgis Bank & Trust Company has the authority to invest in various types
of liquid assets, including short-term United States Treasury obligations and
securities of various federal agencies, certificates of deposit at insured
financial institutions, banker's acceptances, and federal funds.

111
<PAGE> 118

The following table sets forth the composition of Sturgis Bank & Trust
Company's investment and mortgage-backed securities at the dates indicated:

<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------------------------------------------------------------------
1999 1998 1997
------------------------ ------------------------ -----------------------
BOOK VALUE % OF TOTAL BOOK VALUE % OF TOTAL BOOK VALUE % OF TOTAL
----------- ---------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Investment securities:
U.S. Treasury and
agency
securities......... $10,549,781 70.96% $10,223,221 67.93% $ 500,448 8.59%
Obligations of states
and political
Subdivisions....... 1,094,045 7.36% 1,604,733 10.66% 2,106,389 36.13%
FHLB stock............ 3,222,800 21.68% 3,222,800 21.41% 3,222,800 55.28%
----------- ------- ----------- ------- ---------- -------
Total investment
securities and
FHLB stock....... $14,866,626 100.00% $15,050,754 100.00% $5,829,637 100.00%
=========== ======= =========== ======= ========== =======
Mortgage-backed
securities
GNMA.................. $ 847,583 55.78% $ 1,056,787 52.90% $1,348,044 44.80%
FNMA.................. 455,453 29.97% 602,701 30.17% 711,180 23.64%
FHLMC................. 188,451 12.40% 299,390 14.99% 889,937 29.58%
----------- ------- ----------- ------- ---------- -------
Subtotal........... 1,491,487 98.15% 1,958,878 98.06% 2,949,161 98.02%
Unamortized premium,
net................ 28,021 1.85% 38,767 1.94% 59,624 1.98%
----------- ------- ----------- ------- ---------- -------
Total mortgage-
backed
securities....... $ 1,519,508 100.00% $ 1,997,645 100.00% $3,008,785 100.00%
=========== ======= =========== ======= ========== =======
</TABLE>

Sturgis Bank & Trust Company may also invest a portion of its assets in
certain commercial paper and corporate debt securities. Sturgis Bank & Trust
Company is also authorized to invest in mutual funds and stocks whose assets
conform to the investments that Sturgis Bank & Trust Company is authorized to
make directly.

SOURCES OF FUNDS

DEPOSIT ACCOUNTS. Savings deposits are an important source of Sturgis Bank
& Trust Company's funds for use in lending and for other general business
purposes. Sturgis Bank & Trust Company currently offers several types of savings
programs including passbook and statement accounts, NOW accounts, Super NOW
accounts, money-market accounts, fixed-rate and fixed-term certificates of
deposit, among others. Sturgis Bank & Trust Company currently changes the
interest rates paid on these types of accounts from time to time. Sturgis Bank &
Trust Company is not limited to a maximum rate of interest it may pay on savings
deposits under federal regulations. Sturgis Bank & Trust Company is also
authorized to accept non-interest bearing checking deposits from businesses or
organizations.

As of December 31, 1999, approximately 54% , or $88.3 million, of Sturgis
Bank & Trust Company's deposits consisted of various savings and demand deposit
accounts from which customers are permitted to withdraw funds at any time
without penalty.

Interest earned on passbook and statement savings accounts is paid from the
date of deposit to the date of withdrawal, simple interest and credited
quarterly. Interest earned on NOW accounts is paid from the date of deposit to
the date of withdrawal, compounded daily and credited monthly. The

112
<PAGE> 119

interest rate on these accounts is established by the Asset Liability Management
Committee of Sturgis Bank & Trust Company.

Sturgis Bank & Trust Company also makes available to its depositors a
number of savings certificates with varying terms and interest rates so as to be
competitive in its market area. These certificates have minimum requirements as
well.

The following table sets forth the change in dollar amount of savings
deposits in the various types of savings programs offered by Sturgis Bank &
Trust Company for the periods indicated:

<TABLE>
<CAPTION>
BALANCE AT
DEC. 31, % OF INCREASE BALANCE AT % OF INCREASE
1999 DEPOSITS (DECREASE) DEC. 31, 1998 DEPOSITS (DECREASE)
------------ -------- ----------- ------------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Passbook savings..... $ 34,125,021 20.85% $(1,866,093) $ 35,991,114 20.87% $11,380,588
NOW accounts......... 50,867,989 31.08% 804,161 50,063,828 29.03% 23,263,130
Money market deposit
and super NOW
accounts........... 3,276,657 2.00% (581,936) 3,858,593 2.24% (672,698)
Certificates of
deposit:
Six-month money
market
certificates.... 5,476,866 3.35% (9,034,005) 14,510,871 8.42% 8,121,763
IRA certificates... 10,946,905 6.68% (695,587) 11,642,492 6.75% 361,280
Jumbo
certificates.... 9,690,632 5.92% (1,627,434) 11,318,066 6.56% 2,124,367
Other
certificates.... 49,295,779 30.12% 4,241,182 45,054,597 26.13% 3,036,511
------------ ------- ----------- ------------ ------- -----------
Total........... $163,679,849 100.00% $(8,759,712) $172,439,561 100.00% $47,614,941
============ ======= =========== ============ ======= ===========
</TABLE>

<TABLE>
<CAPTION>
BALANCE AT % OF INCREASE
DEC. 31, 1997 DEPOSITS (DECREASE)
------------- -------- ------------
<S> <C> <C> <C>
Passbook savings....................................... $ 24,610,526 19.72% $ 3,282,636
NOW accounts........................................... 26,800,698 21.47% 20,006,153
Money market deposit and super NOW accounts............ 4,531,291 3.63% (12,467,678)
Certificates of deposit:
Six-month money market certificates.................. 6,389,108 5.12% (371,466)
IRA certificates..................................... 11,281,212 9.04% 1,180,216
Jumbo certificates................................... 9,193,699 7.36% 2,605,148
Other certificates................................... 42,018,086 33.66% 6,553,021
------------ ------- ------------
Total............................................. $124,824,620 100.00% $ 20,788,030
============ ======= ============
</TABLE>

113
<PAGE> 120

The following table shows the amounts of certificates of deposits accounts
issued by Sturgis Bank & Trust Company at December 31, 1999, interest rates, and
the amount of such certificates of deposit maturing during the periods
indicated.

<TABLE>
<CAPTION>
CERTIFICATES OF DEPOSIT ACCOUNTS WITH BALANCES LESS THAN $100,000
--------------------------------------------------------------------
2.23- 4.01- 6.01- 8.01-
4.00% 6.00% 8.00% 10.00% TOTAL
-------- ------------ ------------ -------- ------------
<S> <C> <C> <C> <C> <C>
Maturing in the 12 months ending:
December 31, 2000.............. $ 0 $29,780,061 $ 5,119,515 $ 310 $34,899,886
December 31, 2001.............. 10,000 9,984,657 3,953,874 25,000 13,973,531
December 31, 2002.............. 0 3,201,143 4,518,490 0 7,719,633
Maturing thereafter.............. 0 4,675,277 3,333,881 45,839 8,054,997
------- ----------- ----------- ------- -----------
Total....................... $10,000 $47,641,138 $16,925,760 $71,149 $64,648,047
======= =========== =========== ======= ===========
</TABLE>

<TABLE>
<CAPTION>
CERTIFICATES OF DEPOSIT ACCOUNTS WITH BALANCES OF $100,000 OR
GREATER
--------------------------------------------------------------
2.23- 4.01- 6.01- 8.01-
4.00% 6.00% 8.00% 10.00% TOTAL
----- ---------- ---------- ------ -----------
<S> <C> <C> <C> <C> <C>
Maturing in the 12 months ending:
December 31, 2000................. $0 $4,409,897 $ 864,168 $0 $ 5,274,065
December 31, 2001................. 0 1,337,864 1,170,343 0 2,508,207
December 31, 2002................. 0 201,990 762,775 0 964,765
Maturing thereafter................. 0 397,567 1,617,531 0 2,015,098
-- ---------- ---------- -- -----------
Total.......................... $0 $6,347,318 $4,414,817 $0 $10,762,135
== ========== ========== == ===========
</TABLE>

BORROWINGS. In addition to savings deposits, Sturgis Bank & Trust Company
derives funds from loan repayments, from advances from the FHLB and other
borrowings. Loan repayments are a relatively stable source of funds, while
savings inflows and outflows are significantly influenced by general interest
rates and money market conditions. Borrowings may be used on a short-term and
long-term basis to compensate for reductions in normal sources of funds, such as
savings inflows at less than projected levels. They may also be used on a
longer-term basis to support expanded activities. Historically, Sturgis Bank &
Trust Company has borrowed primarily from the FHLB.

Outstanding FHLB borrowings and advances at December 31, 1999 totaled $59.1
million compared to $38.7 million at December 31, 1998 and $57.5 million at
December 31, 1997. The weighted average interest rate on FHLB borrowings and
advances outstanding at December 31, 1999, 1998 and 1997 was 5.04% , 5.67% and
5.85% , respectively.

Sturgis Bank & Trust Company obtains advances from the FHLB upon the
security of its mortgage loan portfolio. Such advances are made pursuant to
several different credit programs. Each credit program has its own interest rate
and range of maturities, and the FHLB prescribes acceptable uses to which the
advances pursuant to each program may be put as well as limitations on the size
of such advances. These limitations are based both on a fixed percentage of
assets and the borrower's credit worthiness. The FHLB is required to review its
credit limitations and standards at least once every 6 months. FHLB advances
have from time to time been available to meet seasonal and other withdrawals of
savings accounts and to expand lending. At December 31, 1999, FHLB had
fixed-rate advance offerings of 6.55% for one year and 6.89% for three years.

114
<PAGE> 121

COMPETITION

Sturgis Bank & Trust Company is engaged in a very competitive business. In
addition to competition from other savings banks and commercial banks, Sturgis
Bank & Trust Company faces competition from other types of financial services
organizations. By virtue of recent legislation that broadens the scope of
financial services that financial institutions may offer to consumers, it is
expected that the level of competition will increase. Sturgis Bank & Trust
Company continues to rank as the primary mortgage lender in St. Joseph County,
Michigan.

In St. Joseph County, Michigan, which is Sturgis Bank & Trust Company's
primary market, Sturgis Bank & Trust Company's competitors include eight
commercial banks, one savings bank and four credit unions, some of which have
assets which are substantially larger than Sturgis Bank & Trust Company.

The principal factors of competition in the markets for deposits and loans
are price (interest rates paid and/or fees charged) and customer service.
Sturgis Bank & Trust Company competes for deposits by offering depositors a
variety of checking and savings accounts, time deposits, convenient office
locations and personalized customer services. Sturgis Bank & Trust Company
competes for loans through the efficiency and quality of the services it
provides to borrowers, real estate brokers and home builders. Sturgis Bank &
Trust Company seeks to compete for loans primarily on the basis of customer
service, including prompt underwriting decisions and funding of loans, and by
offering a variety of loan programs as well as competitive interest rates.

TRUST DEPARTMENT

Sturgis Bank & Trust Company has provided full trust services since January
2, 1997. Its trust service includes trust, custodial, and agency accounts to its
customers and the public within Sturgis Bank & Trust Company's market area.

SUBSIDIARIES

Sturgis Bank & Trust Company has three wholly-owned subsidiary service
corporations, Ludington Service Corporation, First Michiana Development
Corporation of Sturgis, and Oakleaf Financial Services, Inc. all of which are
Michigan corporations.

Neither Ludington nor First Michiana have been actively operating within
the past few years; their sole function currently is to hold investments.

First Michiana holds stock in a reinsurance company, title insurance agency
and its largest asset is an equity investment in a limited partnership providing
low-income housing. The total investment in this limited partnership at December
31, 1999 is $260,080. (See Note A of the Notes to Consolidated Financial
Statements) This limited partnership, titled H.O.M.E. Limited Dividend Housing
Association Limited Partnership, is a 70 unit apartment complex in Holland,
Michigan which provides housing for low income senior citizens. The project is
designed to provide investors with low income housing tax credits under Section
42 of the Internal Revenue Code.

Oakleaf sells securities and insurance products provided by a third party
securities firm and an insurance agency. Oakleaf has five full time employee and
one part time employee. As of December 31, 1999, Sturgis Bank & Trust Company
had invested $747,378 in its service corporations.

115
<PAGE> 122

EMPLOYEES

As of December 31, 1999, Sturgis Bank & Trust Company employed 104
employees including 13 part-time employees. Management considers its relations
with its employees to be excellent.

Sturgis Bank & Trust Company provides its full-time employees with
hospitalization and major medical insurance, paid sick leave, life insurance and
short-term disability benefits. Sturgis Bank & Trust Company also has a
non-contributory, defined benefit retirement plan sponsored by Pentegra
(formerly known as the Financial Institutions Retirement Fund). Sturgis Bank &
Trust Company employees are not represented by a collective bargaining group.

SUPERVISION AND REGULATION

Because it is a financial institution, Sturgis Bank & Trust Company is
highly regulated by federal and state authorities. See "Regulatory
Considerations."

PROPERTIES

The following table sets forth certain information regarding Sturgis Bank &
Trust Company's properties as of December 31, 1999. All offices are owned by
Sturgis Bank & Trust Company (except as noted), free and clear of encumbrances
and are full service offices.

<TABLE>
<CAPTION>
APPROXIMATE
ADDRESS OWNED/ SQUARE
LOCATION CITY, STATE, ZIP LEASED FOOTAGE OTHER INFORMATION
-------- -------------------------- ------ ----------- -----------------------------
<S> <C> <C> <C> <C>
Sturgis (Main Office).......... 113-125 East Chicago Road Owned 22,422 Opened in 1905, relocated to
Sturgis, MI 49091 present location in 1974
BRANCH OFFICES
------------
Bronson........................ 863 West Chicago Road Owned 2,400 Opened by First National Bank
Bronson, MI 49032 of Sturgis in 1978 and
acquired in 1997
Centreville.................... 158 West Main Owned 2,196 Acquired from First of
Climax, MI 49034 America Bank, N.A. in 1998
Climax......................... 125 North Main Owned 1,344 Acquired from First of
Climax, MI 49034 America Bank, N.A. in 1998
Coldwater...................... 290 East Chicago Road Owned 1,200 Opened in 1978 by First
Coldwater, MI 49036 Federal Savings & Loan and
acquired in 1996
Colon.......................... 110 South Blackstone Owned 1,180 Opened in 1978, relocated to
Street present location in 1991
Colon, MI 49040
Covert......................... 33800 M 140 Owned 1,580 Acquired from First of
Covert, MI 49013 America Bank, N.A. in 1998
South Haven.................... 304 Broadway Owned 1,100 Acquired from Great Lakes
South Haven, MI 49090 Bankcorp in 1996
South Haven.................... 1121 LaGrange Street Owned 1,970 Acquired from First of
South Haven, MI 49090 America Bank, N.A. in 1998
Sturgis........................ 1001 South Centerville Owned 1,908 Opened in 1975 by First
Road Federal Savings & Loan and
Sturgis, MI 49091 acquired in 1991
Sturgis........................ 1501 East Chicago Road Leased 500 Leased in 1997. Limited
Sturgis, MI 4909 Service Branch
</TABLE>

116
<PAGE> 123

As of December 31, 1999, the net book value of all of Sturgis Bank & Trust
Company's offices, including land, buildings, furniture, fixtures and equipment,
including data processing equipment, was $7.2 million. Each of the properties is
in good condition.

Sturgis Bank & Trust Company has installed automated teller machines at its
recently remodeled its Climax and Coldwater branches and at its leased property
at 1501 East Chicago Road in Sturgis, Michigan. It has also installed a cash
dispenser (a scaled down ATM) at its branch office in South Haven, Michigan.

Sturgis Bank & Trust Company currently leases a building in downtown Three
Rivers, Michigan to a third party. The Constantine, Michigan branch of Sturgis
Bank & Trust Company was closed in November, 1999 and the property is listed for
sale. Further, the Covert, Michigan and South Haven, Michigan branch located at
304 Broadway are scheduled to be closed in November, 2000.

LEGAL PROCEEDINGS

In the normal course of business, Sturgis Bank & Trust Company is
occasionally made a party to actions seeking to recover damages from Sturgis
Bank & Trust Company.

Sturgis Bank & Trust Company is involved in various claims and legal
actions arising in the ordinary course of business. In the opinion of
management, the ultimate disposition of these matters is not expected to have a
material adverse effect on Sturgis Bank & Trust Company's financial condition.

DIRECTORS

Sturgis Bank & Trust Company's articles of incorporation currently provide
that its Board of Directors will consist of not less than 5 directors and not
more than 25 directors, with the actual number of directors being determined
from time to time by the Board of Directors. Currently, the number of directors
is 8.

Sturgis Bank & Trust Company's Board of Directors is divided into three
classes with each class of directors elected to a three year time of office on a
rotating basis. At each annual meeting of shareholders, a class of directors is
elected to succeed the class of directors whose term of office expires at that
meeting.

117
<PAGE> 124

Biographical information concerning the directors of Sturgis Bank & Trust
Company is presented below. The ages listed for the directors are as of December
31, 1999.

<TABLE>
<CAPTION>
CLASS OF TERM OFFICER/
NAME POSITION AGE DIRECTORS ENDING DIRECTOR SINCE
---- ------------------------- --- --------- ------ --------------
<S> <C> <C> <C> <C> <C>
Raymond H. Dresser, Jr....... Director 69 II 2002 1968
Leonard L. Eishen............ Director, President and 63 II 2002 1977
Chief Executive Officer
Eric L. Eishen............... Director 34 III 2000 1999
Lawrence A. Franks........... Director 66 II 2002 1996
Donald L. Frost.............. Director 54 I 2001 1995
James A. Goethals............ Director, Chairman of the 64 III 2000 1972
Board
Gary J. Malloy............... Director 53 III 2000 1994
Philip G. Ward............... Director 64 I 2001 1988
</TABLE>

Raymond H. Dresser, Jr., is a principal stockholder and serves as President
of the law firm of Dresser, Dresser, Gilbert & Haas, P.C., which was founded in
Sturgis, Michigan in 1898. The firm has served as legal counsel to Sturgis Bank
& Trust Company for many years. Mr. Dresser is President and a Director of the
Economic Development Corporation of the City of Sturgis and the Sturgis
Improvement Association. He is active in many community and charitable
organizations. He has served as an Officer and Director of the State Bar of
Michigan and Chairman of the Probate and Estate Planning Council. Mr. Dresser
was awarded the Roberts P. Hudson Award, the highest award from the State Bar of
Michigan. Mr. Dresser received an AB in Economics from Amherst College and Juris
Doctorate from the University of Michigan.

Leonard L. Eishen has been President of Sturgis Bank & Trust Company since
1980 and Chief Executive Officer since 1976. He is past Chairman of the Michigan
League of Savings Institutions. He is a member of the Board of Directors of
Sturgis Bank & Trust Company since 1977 and Vice Chairman of District V since
1998 of the Michigan Chamber of Commerce. He is a past member of the Board of
Directors of the Federal Home Loan Bank of Indianapolis having served as Vice-
Chairman in 1996. He serves on the Board of Directors of America's Community
Bankers. He is past President of the Sturgis Chamber of Commerce, Sturgis United
Fund, Sturgis Rotary Club and past Chairman of the Sturgis Downtown Development
Authority. He is also a Trustee of the Sturgis Foundation and serves on the
Board of Directors of the Sturgis Neighborhood Program and the Sturgis
Improvement Association.

Lawrence A. Franks is President of Burr Oak Tool and Gauge Company, Inc.,
Oak Products, Inc., and Chairman of the Board of Oak Japan. He is the past
president of the Sturgis Historical Society and served as Chairman of the
Sturgis Centennial Committee. He is Vice President of the Sturgis Improvement
Association and the Economic Development Corporation of the City of Sturgis. He
is a Trustee (since 1984) and Chairman of the Board (since 1999) of Tri-State
University, Angola, Indiana. He is a past member of the Board of Directors of
Citizens Bank, Sturgis, Michigan. He is a past President of the Sturgis Kiwanis
Club and former Lieutenant Governor. Mr. Franks received a BS in Mechanical
Engineering from Tri-State University and an Honorary Doctor of Engineering from
Tri-State University in May, 2000.

118
<PAGE> 125

Donald L. Frost is President of LTI Printing, Inc. He serves on the Board
of the Glen Oaks Community College Foundation and served as the Chairman of the
Building Committee for the Doyle Community Center. Mr. Frost received his BA
from Valparaiso University and MBA from Western Michigan University.

Gary J. Malloy is President of Sturgis Machining, Inc. and past President
of Indiana Metalworks Corporation (formerly known as Angola Die Casting
Corporation) in Angola, Indiana. He is a director of the Sturgis Improvement
Association and the Economic Development Corporation of the City of Sturgis
(since 1998).

Philip G. Ward is Past President of Glen Oaks Community College. He is also
a past President of the Michigan Association of Community Colleges. Dr. Ward
received his BA in history from Eastern Michigan University. He received two
master degrees from Eastern Michigan University and a PhD in higher education
administration from Michigan State University.

Eric L. Eishen is the Executive Vice President and Chief Operating Officer
of Sturgis Bank & Trust Company (since April 1999). He has been a full time
employee of the Bank since 1987. He became Vice President of Administration in
1991. He became First Vice President Chief Administration Officer in 1995, then
in 1998, Executive Vice President and Chief Administrative Officer. Mr. Eishen
is past President of the Sturgis Chamber of Commerce, Sturgis United Fund,
Sturgis Kiwanis Club and Junior Achievement. He received his BA in Finance from
Michigan State University. He is the son of Leonard L. Eishen.

BOARD COMMITTEES AND MEETINGS

The Board of Directors of Sturgis Bank & Trust Company conducts its
business through its meetings and through the activities of its committees. The
Board of Directors of Sturgis Bank & Trust Company has four standing committees:

<TABLE>
<CAPTION>
NAME OF COMMITTEE
AND MEMBERS FUNCTION OF THE COMMITTEE MEETINGS IN 1999
----------------- ----------------------------------------------- ----------------
<S> <C> <C>
EXECUTIVE
Goethals, Franks, Dresser, and - Supervises CEO. New in 2000
L. Eishen (non-voting) - Monitors bank performance
- Recommends dividend payment amounts
- Functions as the full board between board
meetings
PLANNING AND BUDGET
L. Eishen, Frost, Ward, E. - Prepares mission statement New in 2000
Eishen - Prepares a planning policy
- Prepares a financial plan
AUDIT
Frost, Goethals, Malloy - Selects Bank's independent accountants. 4
- Reviews major financial accounting and
internal auditing policies
- Meets with auditors regarding annual audit
COMPENSATION
Dresser, Frost, Goethals, Ward - Recommends compensation for officers of the 2
Bank
- Determines wage and scale for all employees
</TABLE>

119
<PAGE> 126

<TABLE>
<CAPTION>
NAME OF COMMITTEE
AND MEMBERS FUNCTION OF THE COMMITTEE MEETINGS IN 1999
----------------- ----------------------------------------------- ----------------
<S> <C> <C>
LOAN
Franks, Frost, Ward - Reviews all commercial loans in excess of 1
loan officer limits
- Recommends to Board regarding loans in excess
of Board's loan policy
NOMINATING
L. Eishen, Frost, Dresser, - Recommends individuals for election to the 1
Franks, Ward Board based upon experience and
qualifications
INVESTMENT AND FUNDS MANAGEMENT
L. Eishen, E. Eishen and - Drafts investment policy and monitoring New for 2000
Goethals - Monitors liquidity, asset/liability
management.
- GAP and interest rate risk
</TABLE>

No incumbent director attended fewer than 75% of the 16 meetings of the
Board of Directors of Sturgis Bank & Trust Company and committees on which such
director served during 1999.

DIRECTOR COMPENSATION

Each outside director of Sturgis Bank & Trust Company currently receives
$6,000 per year. Members of the various committees who are not also employees of
Sturgis Bank & Trust Company receive fees of $175 for each committee meeting
attended. The Chairman of the Board of Directors receives an additional $3,300
per year.

In 1995, the stockholders of Sturgis Bank & Trust Company adopted a stock
option plan that allows all Directors, both employee and non-employee Directors,
to participate. Pursuant to the plan, 7,000 shares of authorized but unissued
shares of common stock of Sturgis Bank & Trust Company are reserved for issuance
to Directors upon exercise of options granted under the plan. Under the plan
each Director is to be granted an annual option to purchase 200 shares of common
stock at an exercise price to be determined as the closing price of the common
stock reported on the OTC Bulletin Board on the day before grant. Each option
for 200 shares is to be granted immediately after each of the four annual
meetings of Stockholders, beginning with the 1995 Annual Meeting, to those
individuals who remain Directors after the respective annual meeting or who are
elected at the respective annual meeting. Pursuant to the plan, all remaining
options (375 shares per Director) were allocated pro rata among the Directors
after the 1999 Annual Meeting at a price of $10.50 per share. In 1995, options
for 1,400 shares were granted under the plan; each director received an option
for 200 shares at an exercise price of $14.50 per share. In 1996, options for
1,400 shares were granted under the plan; each director received an option for
200 shares at an exercise price of $17.25 per share. In 1997, options for 1,600
shares were granted under the plan; each director received an option for 200
shares at an exercise price of $27.25 per share. In 1998, options for 2400
shares were granted under the plan; each director received an option for 300
shares at an exercise price of $31.75 per share. As of June 15, 1998, options to
purchase 1,400 shares at $14.50 per share, 1,400 shares at $17.25 per share,
1,600 shares at $27.25 per share had been exercised under the plan. There remain
7,800 shares subject to purchase and issuance. The plan provides that options
granted to Directors vest on the date of grant.

In 1999, the stockholders of Sturgis Bank & Trust Company approved an
amendment to the plan to adjust for the two-for-one stock split which occurred
on June 15, 1998. The plan amendment changed the exercise price per share for
options granted on April 28, 1998 from $31.75 to $15.88.

120
<PAGE> 127

The number of shares to be issued upon the exercise of currently outstanding
options yet to be granted was changed from 300 to 600 shares.

The general purposes of this plan are to:

- encourage directors to own Sturgis Bank & Trust Company common stock; and

- to provide a means for tying a portion of the compensation paid to
directors for their service on the Board of Directors of Sturgis Bank &
Trust Company to the value of Sturgis Bank & Trust Company common stock,
thus more closely aligning directors' interests with shareholders'
interests.

Although the Board of Directors of Sturgis Bank & Trust Company is the
administrator of this plan, neither it nor any other person or body has any
discretion to select the persons who receive awards under this plan, the times
at which awards are granted, or the terms and conditions of such awards.
Instead, all such matters are determined entirely by the terms of the plan
itself.

DIRECTOR NOMINATIONS

Generally, the nominating committee of the Board of Directors of Sturgis
Bank & Trust Company will not consider nominees recommended by shareholders.
However, nominations for directors may be made by shareholders, provided the
nominations are in writing and delivered to the Secretary of Sturgis Bank &
Trust Company at least five days prior to the date of the annual meeting of
shareholders. Generally, such nominations will be posted in a conspicuous place
in each office of Sturgis Bank & Trust Company. If the nominating committee
fails or refuses to name nominees at least 20 days prior to the annual meeting,
nominations for directors may be made at the annual meeting by any shareholders
entitled to vote at that meeting.

EXECUTIVE OFFICERS

During 1999, Sturgis Bank & Trust Company's executive officers consisted of
the persons named below. Sturgis Bank & Trust Company's executive officers are
elected annually and serve at the pleasure of the Board of Directors of Sturgis
Bank & Trust Company.

Biographical information concerning the executive officers of Sturgis Bank
& Trust Company is presented below. The ages listed for the executive officers
are as of December 31, 1999.

<TABLE>
<CAPTION>
NAME AGE CURRENT POSITION
---- --- -----------------------------------------------------
<S> <C> <C>
Leonard L. Eishen.................... 63 President and Chief Executive Officer
Jack E. Bell......................... 62 Senior Vice President and Chief Operating Officer(1)
Eric L. Eishen....................... 34 Executive Vice President and Chief Operating Officer
Brian P. Hoggatt..................... 33 Vice President, Chief Financial Officer and Treasurer
Ronald W. Scheske.................... 44 Vice President and Commercial Account Specialist
David E. Watters..................... 51 Vice President and Trust Officer
</TABLE>

Brian P. Hoggatt is Vice President, Chief Financial Officer and Treasurer.
He has been a full-time employee with Sturgis Bank & Trust Company since 1988.
He was Controller of Sturgis Bank & Trust Company from 1991 to 1994. He became
Vice President in 1993 and Chef Financial Officer and Treasurer in 1994.

Ronald W. Scheske is Vice President and Commercial Account Specialist. He
joined Sturgis Bank & Trust Company on September 3, 1997. He was Assistant Vice
President in Commercial

121
<PAGE> 128

Business Development at Citizens Bank, Sturgis immediately before joining
Sturgis Bank & Trust Company.

David E. Watters is Vice President and Trust Officer. He joined Sturgis
Bank & Trust Company on October 7, 1996 as Vice President and Trust Officer. He
was Vice President and Trust Officer of Key Bank, National Association, Sturgis
immediately before joining Sturgis Bank & Trust Company.

SUMMARY COMPENSATION TABLE

The following table shows the compensation paid in all capacities by
Sturgis Bank & Trust Company and its subsidiaries during fiscal years 1999, 1998
and 1997 to the Chief Executive Officer of Sturgis Bank & Trust Company and the
only other executive officers of Sturgis Bank & Trust Company whose salary and
bonus exceeded $100,000 in 1999.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION
COMPENSATION ------------
----------------- SECURITIES
SALARY AND UNDERLYING
NAME AND PRINCIPAL POSITION YEAR DIRECTORS FEES($) BONUS($) OPTIONS
--------------------------- ---- ----------------- -------- ------------
<S> <C> <C> <C> <C>
Leonard L. Eishen,.......................... 1999 $176,500 $ 0 375
President and CEO 1998 $161,833 $ 0 16,078
1997 $128,763 $48,000 9,400
</TABLE>

Leonard L. Eishen, the President and Chief Executive Officer of Sturgis
Bank & Trust Company has an employment agreement that provides for a base salary
of $162,500 per annum. That base salary is subject to increases or decreases as
approved by the Board of Directors of Sturgis Bank & Trust Company. The
agreement also provides, among other things, for his participation in an
equitable manner in employee benefits applicable to all employees of Sturgis
Bank & Trust Company. Mr. Eishen may be discharged for cause at any time or upon
the occurrence of certain events. In the event that Mr. Eishen's employment is
terminated following a change of control either by Sturgis Bank & Trust Company
for reasons other than cause or by Mr. Eishen for good reason, Mr. Eishen will
be entitled to receive his base compensation, subject to Section 280(G) of the
Internal Revenue Code, under the contract for an additional three (3) years. If
this would have occurred in 1999, Mr. Eishen would have been entitled to receive
a total of $487,500.

AGGREGATE OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES

No named executive officers of Sturgis Bank & Trust Company exercised
during 1999 any stock options and/or warrants.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

No executive officer of Sturgis Bank & Trust Company served as a member of
the compensation committee (or other board committee performing equivalent
functions or, in the absence of any such committee, the entire board of
directors) of another entity, one of whose executive officers served on the
compensation committee of Sturgis Bank & Trust Company. No executive officer of
Sturgis Bank & Trust Company served as a director of another entity, one of
whose executive officers served on the compensation committee of Sturgis Bank &
Trust Company. No executive officer of Sturgis Bank & Trust Company served as a
member of the compensation committee (or other board

122
<PAGE> 129

committee performing equivalent functions or, in the absence of any such
committee, the entire board of directors) of another entity, one of whose
executive officers served as a director of Sturgis Bank & Trust Company.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Mr. Raymond H. Dresser, Jr., a Director of Sturgis Bank & Trust Company, is
the majority shareholder in Dresser, Dresser, Gilbert & Haas, P.C., which acts
as legal counsel to Sturgis Bank & Trust Company. It was paid $135,730 by
Sturgis Bank & Trust Company in 1999 for legal fees and disbursements, and
$207,709 in 1998 for legal fees and disbursements. Extraordinary legal fees in
1998 arose in connection with branch acquisitions, a secondary stock offering,
and charter conversion planning.

Sturgis Bank & Trust Company has, in the normal course of business, made
loans to certain of its directors and officers and to organizations in which
some of those directors and officers have an interest. In the opinion of
management, all of these loans were made on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with unrelated parties and did not involve more than the
normal risk of collectibility. Sturgis Bank & Trust Company's named executive
officers do not have any loans with any of Sturgis Bank & Trust Company's
subsidiaries.

STURGIS BANK & TRUST COMPANY STOCK OWNERSHIP

The following table shows the number of shares of Sturgis Bank & Trust
Company common stock beneficially owned (as of December 31, 1999) by:

- each person who owns more than 5% of those shares;

- each director of Sturgis Bank & Trust Company;

- each executive officer of Sturgis Bank & Trust Company named in the
Summary Compensation Table; and

- the directors and executive officers of Sturgis Bank & Trust Company as a
group.

123
<PAGE> 130

<TABLE>
<CAPTION>
SHARES WHICH MAY BE PERCENTAGE OF
NAME AND ADDRESS OF SHARES OF STOCK ACQUIRED WITHIN 60 DAYS TOTAL SHARES OF SHARES OF STOCK
BENEFICIAL OWNER OR DIRECTLY OR INDIRECTLY UPON EXERCISE OF STOCK DEEMED AS BEING OUTSTANDING AND
NUMBER IN GROUP OWNED(1) STOCK OPTIONS BENEFICIALLY OWNED DEEMED OUTSTANDING(2)
------------------- ---------------------- ----------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
James A. Goethals...... 21,692 975 22,667 .72%
25580 Waneta Way
Sturgis, MI 49091
Gary J. Malloy......... 21,900 975 22,875 .73%
68604 Crooked Creek
Road
White Pigeon, MI 49099
Phillip G. Ward........ 47,760 975 48,735 1.55%
1000 S. Lakeview
Sturgis, MI 49091
Eric L. Eishen......... 6,302 8,965 15,267 .49%
964 Kruszka
Bronson, MI 49028
Jack E. Bell(4)........ 11,656 3,826 15,482 .49%
28849 Fawn River Road
Sturgis, MI 49091
Ron W. Scheske......... 0 1,426 1,426 .05%
1208 Parkside
Sturgis, MI 49091
David E. Watters....... 1,400 2,693 4,093 .13%
1325 Rishel
Sturgis, MI 49091
Brian P. Hoggatt....... 4,300 4,006 8,306 .27%
223 N. Lakeview
Sturgis, MI 49091
All Directors and
Executive Officers as a
group (12 persons)..... 437,482 39,000 474,482 15.2%
</TABLE>

-------------------------
(1) Includes certain shares owned by spouses and children or as custodian or
trustee, or over which shares the individual effectively exercises sole or
shared voting or investment power.

(2) The 39,000 shares able to be acquired within 60 days upon exercise of stock
options are deemed outstanding at December 31, 1999.

(3) Lawrence A. Franks is the son of Newell A. Franks.

(4) Jack E. Bell retired February, 2000.

124
<PAGE> 131

Persons and groups owning in excess of 5% of Sturgis Bank & Trust Company
common stock are shown in the following table.

<TABLE>
<CAPTION>
PERCENT OF
SHARES OF
SHARES OF NATURE OF COMMON STOCK
COMMON STOCK OWNERSHIP OUTSTANDING
------------ --------- ------------
<S> <C> <C> <C>
Newell A. Franks(1)............................... 187,200 Direct 6.05%
509 N. Lakeview Ave.
Sturgis, Michigan 49091
</TABLE>

-------------------------
(1) Newell A. Franks is the father of director Lawrence A. Franks.

LEGAL MATTERS

The validity of the Southern Michigan Bancorp common stock to be issued in
connection with the consolidation, and certain other legal matters, will be
passed upon by Miller, Canfield, Paddock and Stone, P.L.C., 444 West Michigan
Avenue, Kalamazoo, Michigan 49007-3751. Certain legal matters will be passed
upon for Sturgis Bank & Trust Company by Dresser, Dresser, Gilbert & Haas, P.C.,
112 South Monroe Street, Sturgis Michigan 49091.

EXPERTS

The consolidated financial statements of Southern Michigan Bancorp as of
December 31, 1999 and 1998, and for each of the years in the three year period
ended December 31, 1999, included in Southern Michigan Bancorp's Annual Report
on Form 10-K for the Fiscal Year Ended December 31, 1999 and incorporated by
reference in this proxy statement/prospectus, which are referred to and made a
part of this proxy statement/prospectus and the registration statement, have
been audited by Crowe, Chizek and Company, LLP, independent auditors, as set
forth in their report thereon included therein and incorporated by reference in
this proxy statement/prospectus and the registration statement. All of these
consolidated financial statements are incorporated by reference in this proxy
statement/prospectus and in the registration statement in reliance upon such
reports given upon the authority of such firms as experts in accounting and
auditing.

The consolidated financial statements of Sturgis Bank & Trust Company as of
December 31, 1999, and for the year ended December 31, 1999, included in this
proxy statement/prospectus have been audited by Plante & Moran, LLP, independent
auditors, as set forth in their report thereon included in this proxy
statement/prospectus and the registration statement. All of these consolidated
financial statements have been included in this proxy statement/prospectus and
in the registration statement in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.

The consolidated financial statements of Sturgis Bank & Trust Company and
its subsidiaries as of December 31, 1998, and for each of the years in the
two-year period ended December 31, 1998, included in this proxy
statement/prospectus have been audited by PricewaterhouseCoopers LLP,
independent auditors, as set forth in their report thereon included in this
proxy statement/prospectus and the registration statement. These consolidated
financial statements have been included in this proxy statement/prospectus and
in the registration statement in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.

125
<PAGE> 132

Representatives of Crowe, Chizek and Company LLP, Plante & Moran, LLP and
PricewaterhouseCoopers LLP are expected to be present at the meeting. These
representatives will have an opportunity to make statements if they so desire
and will be available to respond to appropriate questions.

WHERE YOU CAN FIND MORE INFORMATION

Southern Michigan Bancorp files annual, quarterly and special reports, and
other information with the Securities and Exchange Commission. You may read and
copy such information at the following locations of the SEC:

<TABLE>
<S> <C> <C>
Public Reference Room Northeast Regional Office Midwest Regional Office
450 Fifth Street, N.W 7 World Trade Center Citicorp Center
Room 1024 Suite 1300 500 West Madison Street
Washington, D.C. 20549 New York, NY 10048 Suite 1400
Chicago, IL 60661-2511
</TABLE>

You may also obtain copies of such information by mail from the Public
Reference Section of the SEC, at 450 Fifth Street, N.W., Washington, D.C. 20549,
at prescribed rates. Please call the SEC at 1-800-SEC-0330 for information on
the operation of the SEC's Public Reference Room.

The SEC maintains an Internet worldwide web site that contains the reports
and other information that Southern Michigan Bancorp filed electronically with
the SEC. The address of the SEC's web site is "http://www.sec.gov".

Southern Michigan Bancorp filed with the SEC a registration statement on
Form S-4 under the Securities Act of 1933 to register the shares of Southern
Michigan Bancorp common stock to be issued to Sturgis Bank & Trust Company
shareholders in the consolidation. As permitted by the rules and regulations of
the SEC, this proxy statement/prospectus does not contain all the information
set forth in the registration statement and the exhibits thereto. Such
additional information may be inspected and copied as set forth above.

The SEC allows Southern Michigan Bancorp to "incorporate by reference"
information into this proxy statement/prospectus, which means that it can
disclose important information to you by referring you to another document filed
separately with the SEC. The information incorporated by reference is considered
to be part of this document, except for any information superseded by
information contained in this document or in later filed documents incorporated
by reference in this document. This proxy statement/prospectus incorporates by
reference the documents set forth below that we have previously filed with the
SEC. These documents contain important information about our companies and their
finances.

All of the documents filed with the SEC by Southern Michigan Bancorp (File
No. 2-78178) pursuant to the Securities Exchange Act of 1934 since the end of
its fiscal year ended December 31, 1999 are incorporated by reference in this
proxy statement/prospectus. These documents include the following:

- Southern Michigan Bancorp's Annual Report on Form 10-K for the Year Ended
December 31, 1999.

- Southern Michigan Bancorp's Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 2000; and

126
<PAGE> 133

- All other reports filed by Southern Michigan Bancorp pursuant to Section
13(a) or 15(d) of the Securities Exchange Act of 1934 since the end of
the fiscal year covered by Southern Michigan Bancorp's Annual Report on
Form 10-K for the Year Ended December 31, 1999.

Southern Michigan Bancorp is also incorporating by reference additional
documents that it files with the SEC between the date of this proxy
statement/prospectus and the date of the meeting of Sturgis Bank & Trust Company
shareholders. Such incorporation by reference by Southern Michigan Bancorp will
not be deemed to specifically incorporate by reference the information referred
to in Item 402(a)(8) of Regulation S-K.

If you are a Southern Michigan Bancorp shareholder, you may have been sent
some of the documents incorporated by reference. However, you can obtain any of
them through Southern Michigan Bancorp or the SEC. Documents incorporated by
reference are available from Southern Michigan Bancorp without charge, excluding
all exhibits unless it has specifically incorporated by reference an exhibit in
this proxy statement/prospectus. YOU MAY OBTAIN DOCUMENTS INCORPORATED BY
REFERENCE IN THIS PROXY STATEMENT/PROSPECTUS BY WRITING OR TELEPHONING:

Southern Michigan Bancorp, Inc.
51 West Pearl
Coldwater, Michigan 49036
Attention: James T. Grohalski
(517) 279-5500

Southern Michigan Bancorp will provide you, upon your written request, a
copy of its Annual Report on Form 10-K for the Year Ended December 31, 1999,
including the financial statements and the financial schedules, required to be
filed with the SEC under the Exchange Act for its most recent fiscal year. Your
request should be directed to Southern Michigan Bancorp at the address set forth
above.

You should rely only on the information contained or incorporated by
reference in this proxy statement/prospectus. We have not authorized anyone to
provide you with information that is different from what is contained in this
document. You should not assume that the information contained in this document
is accurate as of any date other than the date of this document, and neither the
mailing of this document to shareholders nor the issuance of Southern Michigan
Bancorp common stock in the consolidation will create any implication to the
contrary.

This document constitutes a prospectus of Southern Michigan Bancorp with
respect to the shares of Southern Michigan Bancorp common stock to be issued to
Sturgis Bank & Trust Company shareholders upon completion of the consolidation.
However, this document does not cover any resales of those shares of Southern
Michigan Bancorp common stock. No one is authorized to make use of this document
in connection with any such resale.

This document does not constitute an offer or solicitation by anyone in any
state in which such offer or solicitation is not authorized or in which the
person making such offer or solicitation is not qualified to do so or to any
person to whom it is unlawful to make such an offer or solicitation.

Southern Michigan Bancorp supplied all information contained or
incorporated by reference in this document relating to Southern Michigan Bancorp
and its subsidiaries and Sturgis Bank & Trust Company supplied all such
information relating to Sturgis Bank & Trust Company and its subsidiaries.

127
<PAGE> 134

INDEX TO FINANCIAL STATEMENTS OF
STURGIS BANK & TRUST COMPANY

<TABLE>
<S> <C>
Condensed Consolidated Statements of Financial Condition at
March 31, 2000 (unaudited) and December 31, 1999.......... FS-1
Condensed Consolidated Statements of Income for the Three
Months Ended
March 31, 2000 and 1999 (unaudited)....................... FS-2
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended
March 31, 2000 and 1999 (unaudited)....................... FS-3
Notes to Condensed Consolidated Financial Statements........ FS-4
Independent Auditors' Reports............................... FS-11
Consolidated Balance Sheets at December 31, 1999 and 1998... FS-13
Consolidated Statements of Income for the Years Ended
December 31, 1999, 1998 and 1997.......................... FS-14
Consolidated Statements of Changes in Equity for the Years
ended December 31, 1999, 1998 and 1997.................... FS-15
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999, 1998 and 1997.......................... FS-16
Notes to Consolidated Financial Statements.................. FS-17
</TABLE>
<PAGE> 135

STURGIS BANK & TRUST COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash and interest-bearing deposits in other depository
institutions........................................... $ 10,159,830 $ 11,390,392
Other short-term investments.............................. 545,369 458,888
Securities held-to-maturity............................... 12,240,186 11,643,826
Mortgage-backed securities................................ 1,456,516 1,519,508
Loans held for sale....................................... 70,000 30,000
Loans, net................................................ 213,706,192 206,265,022
Real estate owned......................................... 178,577 369,952
Federal Home Loan Bank stock.............................. 3,325,800 3,222,800
Accrued interest receivable............................... 1,719,185 1,645,369
Investment in limited partnership......................... 255,580 260,080
Premises and equipment, net............................... 7,044,039 7,204,569
Goodwill, net of accumulated amortization................. 6,124,980 5,797,262
Originated mortgage servicing rights...................... 743,787 745,890
Other assets.............................................. 963,110 1,042,761
------------ ------------
Total assets......................................... $258,533,151 $251,596,319
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:.............................................. $175,604,240 $163,679,849
Federal Home Loan Bank advances........................ 53,978,469 59,113,390
Advances from borrowers for taxes and insurance........ 268,607 92,377
Deferred federal income taxes.......................... 250,000 250,000
Accrued interest payable............................... 989,788 952,533
Other liabilities...................................... 1,828,427 2,160,563
------------ ------------
Total liabilities.................................... 232,919,531 226,248,712
Commitments and contingencies
Stockholders' equity:
Common stock........................................... 3,095,486 3,094,886
Additional paid-in capital............................. 10,412,080 10,409,632
Retained earnings...................................... 12,106,054 11,843,089
------------ ------------
Total stockholders' equity........................... 25,613,620 25,347,607
------------ ------------
Total liabilities and stockholders' equity........... $258,533,151 $251,596,319
============ ============
</TABLE>

See accompanying notes to condensed consolidated financial statements.

FS-1
<PAGE> 136

STURGIS BANK & TRUST COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------
2000 1999
---------- ----------
(UNAUDITED)
<S> <C> <C>
Interest income............................................. $4,514,703 $4,101,813
Interest expense............................................ 2,439,146 2,156,851
---------- ----------
Net interest income....................................... 2,075,557 1,944,962
Provision for loan losses................................... 37,500 39,000
---------- ----------
Net interest income after provision for loan losses....... 2,038,057 1,905,962
Other income................................................ 693,435 863,630
Other expenses.............................................. 2,114,782 2,122,514
---------- ----------
Income before provision for federal income tax............ 616,710 647,078
Provision for federal income tax............................ 199,000 200,000
---------- ----------
Net income................................................ $ 417,710 $ 447,078
========== ==========
Basic earnings per share.................................... $ 0.13 $ 0.14
========== ==========
Diluted earnings per share.................................. $ 0.13 $ 0.14
========== ==========
Dividends declared per share................................ $ 0.05 $ 0.04
========== ==========
</TABLE>

See accompanying notes to condensed consolidated financial statements.

FS-2
<PAGE> 137

STURGIS BANK & TRUST COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------------
2000 1999
------------ ------------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net Income................................................ $ 417,710 $ 447,078
Adjustments to reconcile net income to net cash provided
by
(used in) operating activities:
Depreciation........................................... 176,412 173,684
Amortization........................................... 147,282 140,464
Provision for loan losses.............................. 37,500 39,000
Premiums and discounts on investment mortgage backed
securities........................................... 5,016 (57,816)
Gain on sale of loans.................................. (12,385) (147,423)
Proceeds from sale of loans held for sale.............. 1,112,732 12,352,236
Loans originated for sale.............................. (1,152,732) (12,656,966)
Equity in loss of limited partnership.................. 4,500 4,500
Changes in assets and liabilities:
Decrease in accrued interest and other assets........ (22,707) (512,575)
Decrease in accrued interest and other liabilities... (294,882) (451,638)
------------ ------------
Net cash provided by (used in) operating
activities........................................ 418,446 (669,456)
Cash flows from investing activities:
Proceeds from maturities of securities held to maturity... 100,000 --
Purchase of investment securities......................... (700,000) --
Principal reductions of mortgage-backed securities........ 61,618 167,599
(Purchase) proceeds of other securities................... (86,481) 7,557,295
Net (increase) decrease in loans.......................... (7,429,896) 325,487
Purchase of premises and equipment........................ (15,882) (58,343)
Purchase of FHLB stock.................................... (103,000) --
Intangibles acquired by Oakleaf Financial Services........ (475,000) --
Other..................................................... 185,629 (130,247)
------------ ------------
Net cash (used in) provided by investing
activities........................................ (8,463,012) 7,861,791
Cash flows from financing activities:
Net increase in deposits.................................. 11,924,391 3,782,267
Repayment of FHLB advances................................ (25,134,921) (2,300,409)
Proceeds from FHLB advances............................... 20,000,000 --
Increase in advances for taxes and insurance.............. 176,230 414,962
Proceeds from sale of common stock........................ 3,048 --
Cash dividends............................................ (154,744) (123,791)
------------ ------------
Net cash provided by financing activities............ 6,814,004 1,773,029
------------ ------------
(Decrease) increase in cash and cash equivalents..... (1,230,562) 8,965,364
Cash and cash equivalents:
Beginning of period....................................... 11,390,392 12,665,264
------------ ------------
End of period............................................. $ 10,159,830 $ 21,630,628
============ ============
</TABLE>

See accompanying notes to condensed consolidated financial statements.

FS-3
<PAGE> 138

STURGIS BANK & TRUST COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

A. ORGANIZATION AND ACCOUNTING POLICIES

The following is a summary of the significant accounting policies followed
in the preparation of the consolidated financial statements of Sturgis Bank &
Trust Company and subsidiaries (individually and collectively referred to as the
"Bank").

BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements of
Sturgis Bank & Trust Company and its subsidiaries have been prepared in
accordance with generally accepted accounting principles for interim financial
information. Additionally, these financial statements have been prepared in
accordance with the instructions to Form 10-Q and Article 10 of Regulations S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included. The
interim financial information statements presented herein should be read in
conjunction with the financial statements included in the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1999. Operating results for
the three months ended March 31, 2000 should not be considered indicative of the
results for any future quarters or the year ending December 31, 2000.

ORGANIZATION

Effective March 1, 1999 the Bank converted from its federal savings bank
charter to a Michigan savings bank. The Bank, as a state-chartered stock savings
bank and as a member of the Federal Home Loan Bank System ("FHLB"), is required
to maintain an investment in the capital stock of the FHLB.

Deposit accounts are insured by the Federal Deposit Insurance Corporation
("FDIC") within certain limitations. A premium is required by the FDIC for the
insurance of such accounts.

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of the Bank and
its wholly-owned subsidiaries. All significant intercompany accounts and
transactions are eliminated in consolidation.

USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of income and expenses during the reporting
period. Actual results could differ from those estimates.

The allowance for loan losses is a material estimate that is particularly
susceptible to change in the near term. While management uses available
information to recognize losses on loans, future additions to the allowance or
write-downs may be necessary based on changes in economic conditions.

FS-4
<PAGE> 139
STURGIS BANK & TRUST COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

A. ORGANIZATION AND ACCOUNTING POLICIES (CONTINUED)
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the allowance for loan losses. Such
agencies could require the Bank to recognize additions to the allowance or
write-downs based on their judgment of information available to them at the time
of their examination.

SECURITIES

The Bank's securities are all classified as held-to-maturity and carried at
amortized cost. Amortization of premiums and accretion of discounts are
determined by a method that approximates the interest method.

LOANS

Substantially all of the Bank's loan activity is with customers located in
south-central lower Michigan with a major concentration in single-family
residential lending.

Generally, loans are collateralized by real estate. The loans are expected
to be repaid from cash flow or proceeds from the sale of selected assets of the
borrower. The Bank's policy for requiring collateral is dependent upon
management's credit evaluation of the borrower.

Interest on loans is accrued and credited to income based upon the
principal amount outstanding. The accrual of interest income is generally
discontinued when a loan becomes 90 days past due as to principal or interest or
when, in the opinion of management, full collection of principal or interest is
unlikely. When a loan is in non-accrual status, interest income is recognized
only to the extent of cash received and when the full collection of principal is
not in doubt. Management may elect to continue the accrual of interest when the
estimated fair value of collateral is sufficient to cover the principal balance
and accrued interest.

Loan origination fees and certain direct loan origination costs are
deferred and the net amount amortized as an adjustment to the related loan's
yield using a method the result of which approximates a level yield. The Bank is
generally amortizing these amounts over the contractual life of the related
loans. Amortization of deferred amounts is suspended when a loan becomes non-
accrual.

LOANS HELD FOR SALE

The Bank sells a portion of its mortgage loan production into the secondary
market. Loans held for sale are carried at the lower of cost or market until
sold. Whenever loan cost exceeds market value on a net aggregate basis, a
valuation allowance is recorded.

ALLOWANCE FOR LOAN LOSSES

The allowance for loan losses is an estimate used by management in the
preparation of the Bank's consolidated financial statements. The allowance is
maintained at a level considered by management to be adequate to provide for
probable loan losses inherent in the portfolio. Management's evaluation is based
on a continuing review of the loan portfolio and includes consideration of the
actual loan loss experience, the present and prospective financial condition of
the

FS-5
<PAGE> 140
STURGIS BANK & TRUST COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

A. ORGANIZATION AND ACCOUNTING POLICIES (CONTINUED)
borrowers, balance of the loan portfolio and general economic conditions. An
economic slow-down in the Bank's geographic area could adversely effect the
ability of borrowers to make scheduled monthly payments and the duration of such
an economic slow-down would increase the possibility of credit losses for the
Bank.

OFFICE PROPERTIES AND EQUIPMENT

Office properties and equipment are carried at cost less accumulated
depreciation. Depreciation is computed primarily using the straight-line method
based on the estimated useful lives of the applicable assets.

REAL ESTATE OWNED

Real estate owned is composed of properties acquired through foreclosure
proceedings or by acceptance of a deed in lieu of foreclosure. At the time these
properties are foreclosed, they are recorded at the lower of cost or fair value
less selling costs through a direct charge against the allowance for loan
losses. Fair value is generally determined by recent appraisals. Losses in value
subsequent to foreclosure are recorded as a charge against income. Gains and
losses from the sales of real estate owned are recorded in income when realized.
At March 31, 2000, real estate owned consisted of properties acquired through
foreclosure totaling $178,577. At December 31, 1999, real estate owned consisted
of properties acquired through foreclosure totaling $369,952.

INVESTMENT IN LIMITED PARTNERSHIP

The Bank maintains an investment in a Michigan limited partnership, which
is structured to generate low income housing tax credits. The investment is
accounted for using the equity method whereby the Bank annually records its
proportionate share of partnership losses as an adjustment to the carrying value
of the investment.

INTANGIBLE ASSETS

Goodwill is being amortized using straight-line and accelerated methods
over periods ranging from seven to fifteen years. Core deposit intangibles are
being amortized using the straight-line method over seven years. On an ongoing
basis, management assesses the recoverability of the intangible assets. If an
assessment of the intangible asset indicates that its recoverability is
impaired, a charge to expense is recorded for the amount of the impairment.

MORTGAGE SERVICING RIGHTS

Originated mortgage servicing rights are capitalized and amortized using a
method which approximates the effective yield method. The Bank assesses its
capitalized servicing rights for impairment based on their current fair value.
There was no valuation allowance associated with capitalized servicing rights at
March 31, 2000 or December 31, 1999.

FS-6
<PAGE> 141
STURGIS BANK & TRUST COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

A. ORGANIZATION AND ACCOUNTING POLICIES (CONTINUED)
FEDERAL INCOME TAXES

The Bank and its subsidiaries file a consolidated federal income tax
return.

Deferred federal income taxes are determined using the liability method.
The Bank has not provided deferred federal income taxes for that portion of its
tax bad debt reserve that arose in tax years beginning before January 1, 1988
because it is expected that the requirements of Section 593, as amended by the
Act, will be met in the foreseeable future. If the requirements of Section 593
are not met, the potential federal income tax liability for which no deferred
federal income taxes have been provided is approximately $312,000 as of March
31, 2000.

STATEMENTS OF CASH FLOWS

For the purposes of the consolidated statements of cash flows, the Bank
considers all highly liquid investments purchased with an original maturity of
three months or less to be cash equivalents.

<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------
2000 1999
---------- ----------
<S> <C> <C>
Supplemental cash flow information:
Cash paid during the periods for:
Interest............................................... $2,401,891 $2,152,395
Income taxes (including Michigan Single Business
tax).................................................. 5,000 286,101
Noncash investing and financing activities:
Loans transferred to real estate owned.................... 64,778 143,676
Tax benefit of stock options exercised.................... 439 --
</TABLE>

EARNINGS PER SHARE

Basic earnings per share are computed by dividing net income by the
weighted average number of shares of common stock outstanding. Accordingly, for
the three month periods ended March 31, 2000 the weighted average number of
common shares used in the computation of basic earnings per share were
3,094,893. The weighted average number of common shares for the same period in
1999 were 3,094,779.

Diluted earnings per share are computed by dividing net income by the
weighted average number of shares of common stock outstanding plus the dilutive
effect of outstanding stock options. For the three months ended March 31, 2000,
the weighted average number of common shares used in the computation of diluted
earnings per share was 3,098,037. The weighted average number of common shares
for the same period in 1999 was 3,123,827.

FS-7
<PAGE> 142
STURGIS BANK & TRUST COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE B: LOANS RECEIVABLE, NET

Loans consist of the following:

<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
------------ ------------
(UNAUDITED)
<S> <C> <C>
Single and multi-family residential loans................... $159,119,602 $155,122,227
Commercial.................................................. 35,626,792 31,111,740
Consumer and installment loans.............................. 16,231,668 16,123,170
Construction -- Residential................................. 5,197,507 7,336,647
Construction -- Commercial.................................. 165,000 265,000
Other....................................................... 265,576 164,713
------------ ------------
216,606,145 210,123,497
------------ ------------
Less:
Allowance for loan losses................................. 751,234 730,000
Unearned interest......................................... 40,681 42,674
Undisbursed portion of loans in process................... 1,791,360 2,732,760
Deferred loan fees........................................ 316,678 353,041
------------ ------------
Loans receivable, net.................................. $213,706,191 $206,265,022
============ ============
</TABLE>

NOTE C: DEPOSITS

Deposits consist of the following:

<TABLE>
<CAPTION>
MARCH 31, 2000
(UNAUDITED) DECEMBER 31, 1999
----------------------- -----------------------
AMOUNT PERCENT AMOUNT PERCENT
------------ ------- ------------ -------
<S> <C> <C> <C> <C>
Passbook and statement savings.............. $ 35,441,283 20.18% $ 34,125,021 20.85%
Negotiable orders of withdrawal............. 55,503,554 31.61% 54,144,646 33.08%
Certificates of deposit..................... 84,659,403 48.21% 75,410,182 46.07%
------------ ------ ------------ ------
Total deposits....................... $175,604,240 100.00% $163,679,849 100.00%
============ ====== ============ ======
</TABLE>

NOTE D: ADVANCES FROM FEDERAL HOME LOAN BANK.

Advances from the Federal Home Loan Bank of Indianapolis ("FHLB") are
collateralized by FHLB stock, all mortgage loans and mortgage-backed securities
issued or guaranteed by the Federal Home Loan Mortgage Corporation, the Federal
National Mortgage Association or the Government National Mortgage Association.

Short-term advances consisted of $363,094 at March 31, 2000 at a variable
interest rate (6.39% at March 31, 2000.) The short-term advances at March 3,
2000 are on a line of credit from the FHLB which provides for advances up to
$10,000,000 and expires in February of 2001. Advances outstanding under the line
of credit bear interest at a rate of approximately 50 basis points over the rate
paid by the FHLB on their time deposits. Short-term advances consisted of $23.5
million at December 31, 1999.

FS-8
<PAGE> 143
STURGIS BANK & TRUST COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE D: ADVANCES FROM FEDERAL HOME LOAN BANK. (CONCLUDED)
The Bank had approximately $53.6 million and $35.6 million in long-term
advances from FHLB at March 31, 2000 and December 31, 2000, respectively.
Interest rates range from 5.70% to 7.34% with maturities from April 2001 to
February 2008.

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, AMOUNT
------------------------------------------------ -----------
<S> <C>
2000..................................... $ 665,854
2001..................................... 4,772,658
2002..................................... 15,167,374
2003..................................... 13,667,466
2004..................................... 3,428,740
2005 and thereafter............................. 15,903,283
-----------
Total.............................. $53,615,375
===========
</TABLE>

NOTE E: RETAINED EARNINGS.

In connection with the insurance of savings accounts by the Savings
Association Insurance Fund (the "SAIF"), the Bank is required to accumulate and
maintain a general reserve, which is available only to absorb losses. The Bank
may be required periodically to appropriate to its general reserve certain
amounts based on computations prescribed by the insurance regulations. Any
required appropriations have been met and are not charged against income. For
financial reporting purposes, this reserve is considered to be appropriated
retained earnings.

NOTE F: CASH DIVIDENDS AND COMMON STOCK SPLIT

The Bank paid a cash dividend of $.05 per share on its issued and
outstanding common stock on March 15, 2000 to shareholders of record as of
February 15, 2000. Total dividends paid on March 15, 2000 were $154,744.

NOTE G: PURCHASE OF MCKILLEN FINANCIAL SERVICES

In January 2000, SFB Agency, Inc., now Oakleaf Financial Services, Inc.,
purchased the assets and accounts of McKillen Financial Services. Oakleaf
Financial Services is a wholly-owned subsidiary of the Bank. Oakleaf Financial
Services, Inc. paid $475,000 to McKillen Financial Services for its assets and
accounts.

NOTE H: EMPLOYEE BENEFIT PLANS

In January 1998, the Bank established a Defined Contribution Plan and
Trust/401(k). The plan, which is a defined contribution plan, permits eligible
employees to contribute a percentage of their compensation with the Bank
contributing 25% of the employee's pre-tax contribution, not to exceed 10% of
the employee's total compensation, as defined in the agreement. The plan also
permits the Bank to make discretionary contributions.

FS-9
<PAGE> 144
STURGIS BANK & TRUST COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE I: MERGER WITH SOUTHERN MICHIGAN BANCORP, INC.

On February 15, 2000 the Bank entered into a definitive agreement to merge
with Southern Michigan Bancorp, Inc.

Southern Michigan Bancorp, Inc. is currently the holding company for
Southern Michigan Bank & Trust. At December 31, 1999, Southern Michigan Bancorp,
Inc. had consolidated assets of approximately $275,825,000 and total
stockholders' equity of approximately $24,568,000. Southern Michigan Bank &
Trust operates 13 banking offices in Branch, Calhoun and Hillsdale Counties,
Michigan.

The transaction will involve Sturgis Bank & Trust Company and Subsidiaries
becoming subsidiaries of Southern Michigan Bancorp, Inc. Under the terms of the
agreement Sturgis Bank & Trust Company shareholders will receive .398 shares of
Southern Michigan Bancorp common stock for each Sturgis Bank & Trust Company
share they hold. As part of the transaction, Southern Michigan Bancorp will
adopt a new name, yet to be determined for the two-bank holding company. The
Banks will continue to serve their communities as stand alone banks. The
transaction is expected to be completed in the fourth quarter of the 2000
calendar year, following receipt of all regulatory and shareholder approvals.

FS-10
<PAGE> 145

<TABLE>
<S> <C> <C>
PLANTE & MORAN, LLP Certified Public Accountants
Suite 700 Management Consultants
107 West Michigan Avenue (616) 385-1858
Kalamazoo, Michigan 49007 FAX (616) 385-2936
</TABLE>

--------------------------------------------------------------------------------

INDEPENDENT AUDITOR'S REPORT

To the Board of Directors
Sturgis Bank & Trust Co. and Subsidiaries
Sturgis, Michigan

We have audited the accompanying consolidated balance sheet of Sturgis Bank
& Trust Co. and subsidiaries (collectively, the "Bank") as of December 31, 1999
and the related consolidated statements of income, changes in equity and cash
flows for the year then ended. These consolidated financial statements are the
responsibility of the Bank's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Sturgis Bank & Trust Co. and subsidiaries as of December 31, 1999 and the
consolidated results of their operations and their cash flows for the year then
ended in conformity with generally accepted accounting principles.

Plante & Moran, LLP

February 15, 2000

FS-11
<PAGE> 146

PRICEWATERHOUSECOOPERS

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of
Sturgis Bank & Trust Company:

In our opinion, the consolidated balance sheet as of December 31, 1998 and
the related consolidated statements of income, of changes in equity and of cash
flows for each of the two years in the period ended December 31, 1998 present
fairly, in all material respects, the financial position, results of operations
and cash flows of Sturgis Bank & Trust Company and its subsidiaries at December
31, 1998 and for each of the two years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Bank's management; our responsibility
is to express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above. We have not
audited the consolidated financial statements of Sturgis Bank & Trust Company
for any period subsequent to December 31, 1998.

/s/PricewaterhouseCoopers LLP

South Bend, Indiana
January 22, 1999

FS-12
<PAGE> 147

STURGIS BANK & TRUST CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Cash and interest-bearing deposits in other depository
institutions.............................................. $ 11,390,392 $ 12,665,264
Other short-term investments................................ 458,888 9,046,026
Securities held-to-maturity (Note 2)........................ 11,643,826 11,827,954
Mortgage-backed securities (Note 2)......................... 1,519,508 1,997,645
Loans held for sale (Note 3)................................ 30,000 3,738,770
Loans, net (Note 4)......................................... 206,265,022 178,371,852
Real estate owned........................................... 369,952 197,644
Federal Home Loan Bank stock................................ 3,222,800 3,222,800
Accrued interest receivable................................. 1,645,369 1,217,428
Investment in limited partnership........................... 260,080 278,080
Premises and equipment, net (Note 5)........................ 7,204,569 7,595,301
Goodwill, net of accumulated amortization (Note 13)......... 5,797,262 6,312,640
Originated mortgage servicing rights........................ 745,890 496,548
Other assets................................................ 1,042,761 528,351
------------ ------------
Total assets...................................... $251,596,319 $237,496,303
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits (Note 6)
Interest bearing....................................... $155,480,502 $164,416,489
Noninterest bearing.................................... 8,199,347 8,023,072
Federal Home Loan Bank advances (Note 7).................. 59,113,390 38,661,629
Advances from borrowers for taxes and insurance........... 92,377 237,935
Deferred federal income taxes (Note 8).................... 250,000 56,000
Accrued interest payable.................................. 952,533 981,095
Other liabilities......................................... 2,160,563 1,169,263
------------ ------------
Total liabilities................................. 226,248,712 213,545,483
------------ ------------
EQUITY
Common stock -- $1 par value:
Authorized -- 4,000,000 shares
Issued and outstanding -- 3,094,886 and 3,094,779
shares at December 31, 1999 and 1998, respectively... 3,094,886 3,094,779
Additional paid-in capital................................ 10,409,632 10,428,377
Retained earnings......................................... 11,843,089 10,427,664
------------ ------------
Total stockholders' equity........................ 25,347,607 23,950,820
------------ ------------
Total liabilities and stockholders' equity........ $251,596,319 $237,496,303
============ ============
</TABLE>

See Notes to Consolidated Financial Statements.

FS-13
<PAGE> 148

STURGIS BANK & TRUST CO. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
INTEREST INCOME
Loans............................................ $15,591,033 $14,855,409 $13,553,658
Mortgage-backed securities....................... 97,324 149,750 220,329
Investments...................................... 964,495 477,824 408,931
Interest-bearing deposits........................ 310,757 407,152 154,760
----------- ----------- -----------
Total interest income....................... 16,963,609 15,890,135 14,337,678
----------- ----------- -----------
INTEREST EXPENSE
Deposits......................................... 6,363,972 5,640,755 4,589,028
FHLB advances.................................... 2,309,307 3,129,142 3,395,861
----------- ----------- -----------
Total interest expense...................... 8,673,279 8,769,897 7,984,889
----------- ----------- -----------
NET INTEREST INCOME -- Before provision for loan
losses........................................... 8,290,330 7,120,238 6,352,789
PROVISION FOR LOAN LOSSES (Note 4)................. 104,000 173,913 338,314
----------- ----------- -----------
NET INTEREST INCOME................................ 8,186,330 6,946,325 6,014,475
----------- ----------- -----------
NONINTEREST INCOME
Service charges and other fees................... 1,574,321 1,218,102 862,784
Commission income................................ 363,138 321,742 213,086
Mortgage banking activities...................... 608,557 937,060 476,830
Trust fee income................................. 405,309 229,903 131,861
Other income..................................... 70,314 64,121 24,109
----------- ----------- -----------
Total noninterest income.................... 3,021,639 2,770,928 1,708,670
----------- ----------- -----------
NONINTEREST EXPENSES
Compensation, payroll taxes and employee benefits
(Note 9)...................................... 3,730,898 3,391,003 2,534,065
Office occupancy and equipment................... 1,333,996 1,103,476 765,759
Deposit insurance premiums....................... 102,151 76,773 70,514
Deposit account expenses......................... 473,613 405,852 233,555
Service bureau expense........................... 577,528 573,053 344,851
Professional services............................ 371,135 259,380 138,776
Amortization of intangibles...................... 565,698 385,936 157,616
Other............................................ 1,361,501 1,171,881 1,063,094
----------- ----------- -----------
Total noninterest expenses.................. 8,516,520 7,367,354 5,308,230
----------- ----------- -----------
INCOME -- Before federal income tax expense........ 2,691,449 2,349,899 2,414,915
FEDERAL INCOME TAX EXPENSE (Note 8)................ 688,000 635,000 713,000
----------- ----------- -----------
NET INCOME......................................... $ 2,003,449 $ 1,714,899 $ 1,701,915
=========== =========== ===========
BASIC EARNINGS PER SHARE........................... $ 0.65 $ 0.67 $ 0.71
=========== =========== ===========
DILUTED EARNINGS PER SHARE......................... $ 0.65 $ 0.65 $ 0.69
=========== =========== ===========
</TABLE>

See Notes to Consolidated Financial Statements

FS-14
<PAGE> 149

STURGIS BANK & TRUST CO. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS TOTAL
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
BALANCE -- January 1, 1997............. $ 799,484 $ 6,293,185 $ 7,905,913 $14,998,582
Exercise of stock options (Note 10).... 5,080 43,237 -- 48,317
Three-for-two common stock split ($92
paid in cash in lieu of fractional
shares).............................. 399,737 (399,737) (92) (92)
Net income for the year ended December
31, 1997............................. -- -- 1,701,915 1,701,915
Cash dividends ($.174 per share)....... -- -- (416,539) (416,539)
---------- ----------- ----------- -----------
BALANCE -- December 31, 1997........... 1,204,301 5,936,685 9,191,197 16,332,183
Exercise of stock options (Note 10).... 27,587 318,157 -- 345,744
Two-for-one common stock split......... 1,230,391 (1,230,391) -- --
Net income for the year ended December
31, 1998............................. -- -- 1,714,899 1,714,899
Proceeds from sale of common stock, net
of expenses (Note 10)................ 632,500 5,403,926 -- 6,036,426
Cash dividends ($.18 per share)........ -- -- (478,432) (478,432)
---------- ----------- ----------- -----------
BALANCE -- December 31, 1998........... 3,094,779 10,428,377 10,427,664 23,950,820
Exercise of stock options (Note 10).... 107 555 -- 662
Net income for the year ended December
31, 1999............................. -- -- 2,003,449 2,003,449
Expenses from the sale of common stock
(Note 10)............................ -- (19,300) -- (19,300)
Cash dividends ($.19 per share)........ -- -- (588,024) (588,024)
---------- ----------- ----------- -----------
BALANCE -- December 31, 1999........... $3,094,886 $10,409,632 $11,843,089 $25,347,607
========== =========== =========== ===========
</TABLE>

See Notes to Consolidated Financial Statements.

FS-15
<PAGE> 150

STURGIS BANK & TRUST CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income............................................ $ 2,003,449 $ 1,714,899 $ 1,701,915
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation..................................... 702,413 501,930 331,826
Amortization of intangibles...................... 565,698 385,936 157,616
Provision for loan losses........................ 104,000 173,913 338,314
Deferred income tax expense (benefit)............ 194,000 155,000 (67,000)
Premiums and discounts on investment and mortgage
backed securities.............................. 34,873 4,740 6,397
Gain on sale of loans............................ (359,213) (643,053) (359,289)
Proceeds from the sale of loans held for sale.... 23,217,127 45,026,130 13,270,585
Loans originated for sale........................ (19,149,144) (47,444,037) (13,457,411)
Equity in loss of limited partnership............ 18,000 17,883 42,000
Changes in assets and liabilities:
Increase in accrued interest and other
assets....................................... (1,082,968) (257,275) (272,847)
(Decrease) increase in accrued interest and
other liabilities............................ 962,738 (372,510) 792,736
------------ ------------ ------------
Net cash provided by (used in) operating
activities.............................. 7,210,973 (736,444) 2,484,842
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of securities
held-to-maturity.................................... 3,205,000 1,495,000 905,000
Purchases of securities held-to-maturity.............. (3,045,000) (10,700,000) (1,375,000)
Principal reductions of mortgage-backed securities.... 467,392 990,283 1,257,388
Proceeds (purchase) of other securities............... 8,587,138 (8,795,217) (238,707)
Net increase in loans................................. (28,278,203) (8,798,877) (13,008,858)
Purchases of premises and equipment................... (311,681) (1,249,412) (2,279,039)
Proceeds from the sale of premises and equipment...... -- -- 5,677
Cash (refunded) received in acquisitions of
branches............................................ (50,320) 41,333,785 14,439,443
------------ ------------ ------------
Net cash (used in) provided by investing
activities.............................. (19,425,674) 14,275,562 (294,096)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand and savings account deposits... (1,643,868) (11,169,461) (6,062,497)
Net (increase) decrease in certificates of deposit.... (7,115,844) 13,643,922 9,966,918
Repayment of FHLB advances............................ (3,054,268) (53,240,370) (46,248,267)
Proceeds from FHLB advances........................... 23,506,029 34,400,000 43,900,000
increase (decrease) in advances for taxes and
insurance........................................... (145,558) (32,203) 100,045
(Expenses) proceeds from sale of common stock (Note
10)................................................. (19,300) 6,036,426 --
Dividends paid........................................ (588,024) (478,432) (416,539)
Exercise of stock options............................. 662 345,744 48,225
------------ ------------ ------------
Net cash provided by (used in) financing
activities.............................. 10,939,829 (10,494,374) 1,287,885
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.... (1,274,872) 3,044,744 3,478,631
CASH AND CASH EQUIVALENTS -- Beginning of year.......... 12,665,264 9,620,520 6,141,889
------------ ------------ ------------
CASH AND CASH EQUIVALENTS -- End of year................ $ 11,390,392 $ 12,665,264 $ 9,620,520
============ ============ ============
</TABLE>

See Notes to Consolidated Financial Statements.

FS-16
<PAGE> 151

STURGIS BANK & TRUST CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999

NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accounting and reporting policies of Sturgis Bank & Trust Co. and
subsidiaries (collectively, the "Bank") conform to generally accepted accounting
principles. Management is required to make estimates and assumptions that affect
the amounts reported in the consolidated financial statements and accompanying
notes. Actual results could differ from these estimates and assumptions.

PRINCIPLES OF CONSOLIDATION -- The consolidated financial statements
include the accounts of Sturgis Bank & Trust Co. and its wholly owned
subsidiaries, SFB Agency, Ludington Service Corporation, and First Michiana
Development Corporation of Sturgis. All significant intercompany transactions
and balances have been eliminated in consolidation.

NATURE OF OPERATIONS -- Effective March 1, 1999, the Bank converted from
its federal savings bank charter to a Michigan savings bank. The Bank, a
state-chartered stock savings bank and member of the Federal Home Loan Bank
System ("FHLB"), is required to maintain an investment in the capital stock of
the FHLB. The Bank operates predominately in the south-central portion of
Michigan's lower peninsula. The Bank's primary services include accepting
deposits, making commercial and mortgage loans, engaging in mortgage banking
activities, and providing investment brokerage advisory services.

The Bank's loan portfolio is concentrated in residential first-mortgage
loans. The Bank is not dependent upon any single industry or customer for its
banking opportunities.

SECURITIES -- Securities are classified as held to maturity when management
has the intent and ability to hold them to maturity. Held-to-maturity securities
are reported at amortized cost. Amortization of premiums and accretion of
discounts are determined by a method which approximates the effective interest
method.

LOAN INTEREST AND FEE INCOME -- Loans are generally reported at the
principal amount outstanding, net of unearned income. Nonrefundable loan
origination fees and certain direct loan origination costs are deferred and
included in interest income over the term of the related loan as a yield
adjustment.

Interest on loans is accrued and credited to income based on the principal
amount outstanding. The accrual of interest on loans is discontinued when, in
the opinion of management, there is an indication that the borrower may be
unable to meet payments as they become due. Upon such discontinuance, all unpaid
interest accrued is reversed. Interest accruals are generally resumed when all
delinquent principal and/or interest has been brought current or the loan
becomes both well-secured and in the process of collection.

ALLOWANCE FOR POSSIBLE LOAN LOSSES -- The allowance for possible loan
losses is maintained at a level considered by management to be adequate to
absorb losses inherent in existing loans and loan commitments. The adequacy of
the allowance is based on evaluations that take into consideration such factors
as prior loss experience, changes in the nature and volume of the portfolio,
overall portfolio quality, loan concentrations, specific impaired or problem
loans and commitments, and current economic conditions that may affect the
borrower's ability to pay.

FS-17
<PAGE> 152
STURGIS BANK & TRUST CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FEDERAL HOME LOAN BANK STOCK -- The Bank's minimum investment in the stock
of the Federal Home Loan Bank of Indianapolis (FHLB) is an amount equal to at
least one percent of the unpaid principal balances of the Bank's residential
mortgage loans or 0.3 percent of its total assets, whichever is greater.
Purchases and sales of stock are made directly with the FHLB at par value.

INVESTMENT IN LIMITED PARTNERSHIP -- The Bank has an investment in a
Michigan limited partnership which is structured to generate low income housing
tax credits. The investment is accounted for using the equity method whereby the
Bank annually records its proportionate share of partnership losses as an
adjustment to the carrying value of the investment.

PREMISES AND EQUIPMENT -- Premises and equipment are carried at cost, less
accumulated depreciation. Depreciation is computed on the straight-line basis
over the estimated useful lives of the related assets.

REAL ESTATE OWNED -- Real estate owned includes properties acquired through
foreclosure or deed in lieu of foreclosure. Real estate owned is recorded at the
lower of its cost, the amount of the loan balance plus unpaid accrued interest
at foreclosure, or the current estimated fair value. Any write-down of the loan
balance to estimated fair value when the property is foreclosed is charged to
the allowance for loan losses. Subsequent market write-downs, operating expenses
and gains or losses on disposition of real estate owned are charged or credited
to other operating income.

INCOME TAXES -- Deferred tax assets and liabilities are recognized for
temporary differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. Valuation allowances are established, when necessary,
to reduce deferred tax assets to the amount expected to be realized.

The Bank has qualified under provisions of the Internal Revenue Code which
permit it to deduct from taxable income a provision for bad debts in excess of
such provision charged to income in the consolidated financial statements.
Accordingly, retained earnings at December 31, 1999, and 1998 includes
approximately $918,000 for which no provision for federal income taxes has been
made. Unrecognized deferred taxes on this amount is approximately $312,000. If,
in the future, this portion of retained earnings is used for any purpose other
than to absorb bad debt losses, federal income taxes would be imposed at the
then applicable rates.

MORTGAGE SERVICING RIGHTS -- Capitalized originated mortgage servicing
rights (OMSR's) represent the allocated value of the right to service loans that
is retained when loans are sold. The fair value of the OMSR's is determined
using the present value of estimated expected future cash flows assuming a
market discount rate and certain forecasted prepayment rates based on industry
experience. The OMSR's are amortized in proportion to and over the period of
estimated net servicing income. OMSR's are periodically evaluated for impairment
by stratifying the rights based on

FS-18
<PAGE> 153
STURGIS BANK & TRUST CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
certain risk characteristics and comparing the fair value of the strata to their
carrying amounts. The reconciliation of OMSR's for the years ended December 31,
1999, 1998, and 1997 are as follows:

<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
BALANCE -- Beginning of year.............................. $496,548 $202,541 $ 85,000
Originated mortgage servicing rights...................... 301,823 382,722 112,800
Amortization.............................................. (52,481) (88,715) 4,741
-------- -------- --------
BALANCE -- End of year.................................... $745,890 $496,548 $202,541
======== ======== ========
</TABLE>

GOODWILL -- Goodwill is being amortized using accelerated methods over
fifteen years. On an ongoing basis, management assesses the recoverability of
the goodwill. If an assessment of the goodwill indicates that its recoverability
is impaired, a charge to expense is recorded for the amount of the impairment.

EARNINGS PER SHARE -- Basic earnings per share is computed by dividing net
income by the weighted average number of shares of common stock outstanding
which were 3,094,854, 2,565,069, and 2,403,360 for the years ended December 31,
1999, 1998, and 1997, respectively. Diluted earnings per share is computed by
dividing net income by the weighted average number of shares of common stock
outstanding plus the dilutive effect of outstanding stock options. The weighted
average number of shares, increased for the dilutive effect of stock options,
used in the computation of diluted earnings per share were 3,099,503, 2,643,970,
and 2,459,448 for the years ended December 31, 1999, 1998, and 1997. All
earnings per share amounts have been given retroactive recognition for common
stock splits.

STATEMENT OF CASH FLOWS -- For purposes of reporting cash flows, the Bank
considers cash and cash equivalents to include cash and amounts due from
depository institutions, trust demand, notes and federal funds sold. Generally,
federal funds are sold for one-day periods.

RECENT ACCOUNTING PRONOUNCEMENTS -- In June 1998 Statement of Financial
Account Standards No. 133 "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133") was issued. SFAS 133 requires all derivative
instruments to be recorded on the balance sheet at estimated fair value. Changes
in the fair value of derivative instruments are to be recorded each period
either in current earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedge transaction and, if it is, on the
type of hedge transaction. SFAS 133 was adopted by the Bank in 1999, and did not
have a material effect on the consolidated financial position or results of
operations.

FS-19
<PAGE> 154
STURGIS BANK & TRUST CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SUPPLEMENTAL CASH FLOW INFORMATION

<TABLE>
<CAPTION>
1999 1998 1997
---------- ------------ ------------
<S> <C> <C> <C>
Cash paid for
Interest..................................... $8,701,841 $ 8,652,385 $ 7,905,382
Income taxes (including Michigan Single
Business tax).............................. 948,656 927,927 674,093
Noncash investing and financing activities:
Assets acquired (liabilities assumed) in branch
acquisitions (Note 13):
Loans........................................ -- 65,426 70,815
Office properties and equipment.............. -- 430,597 262,561
Other assets................................. -- 7,247 1,477
Savings accounts............................. -- (45,140,480) (16,883,609)
Other liabilities............................ -- (142,167) (26,245)
Loans transferred to real estate owned.......... 755,000 542,005 558,636
Tax benefit of stock options exercised.......... 197 246,344 30,305
Common shares exchanged in exercise of stock
options...................................... -- 105,890 26,928
</TABLE>

RECLASSIFICATIONS -- Certain amounts in the prior years' consolidated
financial statements have been reclassified to conform to the current year's
presentation. The reclassifications had no effect on December 31, 1998 and 1997
net income.

NOTE 2 -- SECURITIES

The amortized cost and estimated market value of held-to-maturity
securities are as follows at December 31, 1999 and 1998:

<TABLE>
<CAPTION>
1999
------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
U.S. Treasury and agency securities....... $10,549,781 $ -- $(126,746) $10,423,035
Obligations of states and political
subdivisions............................ 1,094,045 -- (4,575) 1,089,470
Mortgage-backed securities................ $ 1,519,508 $5,441 $ (11,350) $ 1,513,599
----------- ------ --------- -----------
Total investment securities............... $13,163,334 $5,441 $(142,671) $13,026,104
=========== ====== ========= ===========
</TABLE>

<TABLE>
<CAPTION>
1998
------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
U.S. Treasury and agency securities....... $10,223,221 $ 5,722 $(22,943) $10,206,000
Obligations of states and political
subdivisions............................ 1,604,733 37,267 -- 1,642,000
Mortgage-backed securities................ $ 1,997,645 $11,456 $(22,801) $ 1,986,300
----------- ------- -------- -----------
Total investment securities............... $13,825,599 $54,445 $(45,744) $13,834,300
=========== ======= ======== ===========
</TABLE>

FS-20
<PAGE> 155
STURGIS BANK & TRUST CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 2 -- SECURITIES (CONTINUED)
The amortized cost and estimated market value of investment securities to
be held-to-maturity at December 31, 1999, by contractual maturity (except for
mortgage-backed securities), are shown below. Expected maturities will differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.

<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
----------- -----------
<S> <C> <C>
Due in one year or less..................................... $ 7,237,934 $ 7,179,156
Due after one year through five years....................... 4,405,892 4,333,349
----------- -----------
11,643,826 11,512,505
1,519,508 1,513,599
----------- -----------
Total................................................ $13,163,334 $13,026,104
=========== ===========
</TABLE>

NOTE 3 -- MORTGAGE BANKING ACTIVITIES

The Bank sells a portion of its mortgage loan production into the secondary
market. Loans held for sale are accounted for at the lower of cost or market on
an aggregate basis. Loans held for sale are as follows:

<TABLE>
<CAPTION>
1999 1998
------- ----------
<S> <C> <C>
Loans held for sale......................................... $30,000 $3,738,770
Allowance for lower of cost or market adjustment............ -- --
------- ----------
Total................................................ $30,000 $3,738,770
======= ==========
</TABLE>

Loans serviced for others were approximately $93.5 million and $85.9
million at December 31, 1999 and 1998, respectively.

NOTE 4 -- LOANS

Balances of loans at December 31 are as follows:

<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Single and multi-family residential....................... $155,122,227 $138,182,294
Commercial................................................ 31,111,740 21,119,095
Consumer and installment.................................. 16,123,170 15,757,691
Construction -- Residential............................... 7,336,647 6,516,393
Construction -- Commercial................................ 265,000 754,500
Other..................................................... 164,713 199,663
------------ ------------
Total loans.......................................... $210,123,497 $182,529,636
============ ============
</TABLE>

FS-21
<PAGE> 156
STURGIS BANK & TRUST CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 4 -- LOANS (CONTINUED)

<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Less:
Allowance for loan losses................................. 730,000 686,896
Unearned interest......................................... 42,674 53,847
Undisbursed portion of loans in process................... 2,732,760 2,770,482
Deferred loan origination and other fees.................. 353,041 646,559
------------ ------------
Net loans.............................................. $206,265,022 $178,371,852
============ ============
</TABLE>

Activity in the allowance for loan losses was as follows:

<TABLE>
<CAPTION>
1999 1998 1997
-------- --------- ---------
<S> <C> <C> <C>
BALANCE -- Beginning of year............................ $686,896 $ 692,787 $ 456,440
Provision for loan losses............................... 104,000 173,913 338,314
Net charge-offs......................................... (60,896) (179,804) (101,967)
-------- --------- ---------
BALANCE -- End of year.................................. $730,000 $ 686,896 $ 692,787
======== ========= =========
</TABLE>

NOTE 5 -- PREMISES AND EQUIPMENT

Premises and equipment were as follows at December 31:

<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Land........................................................ $ 811,494 $ 749,240
Land improvements........................................... 36,732 34,587
Office buildings............................................ 5,640,387 5,572,805
Furniture, fixtures and equipment........................... 3,650,009 3,489,274
----------- -----------
Total premises and equipment......................... 10,138,622 9,845,906
Less accumulated depreciation............................... (2,934,053) (2,250,605)
----------- -----------
Net carrying amount.................................. $ 7,204,569 $ 7,595,301
=========== ===========
</TABLE>

NOTE 6 -- DEPOSITS

Deposit balances at December 31 are summarized as follows:

<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Passbook and savings deposits............................... $ 34,125,021 $ 35,991,114
NOW accounts................................................ 45,945,299 45,899,349
Time:
$100,000 and over......................................... 10,762,135 12,551,333
Under $100,000............................................ 64,648,047 69,974,693
------------ ------------
Total interest-bearing............................... $155,480,502 $164,416,489
============ ============
</TABLE>

FS-22
<PAGE> 157
STURGIS BANK & TRUST CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 6 -- DEPOSITS (CONTINUED)
At December 31, 1999, scheduled annual maturities of certificates of
deposit were as follows:

<TABLE>
<CAPTION>
$100,000 UNDER
AND OVER $100,000
------------ -----------
<S> <C> <C>
2000........................................................ $ 5,274,065 $34,899,886
2001........................................................ 2,508,207 13,973,531
2002........................................................ 964,765 7,719,633
2003........................................................ 1,913,091 5,942,926
2004 and thereafter......................................... 102,007 2,112,071
----------- -----------
Total................................................ $10,762,135 $64,648,047
=========== ===========
</TABLE>

NOTE 7 -- FEDERAL HOME LOAN BANK ADVANCES

Advances from the Federal Home Loan Bank of Indianapolis ("FHLB") are
collateralized by FHLB stock and all mortgage loans and mortgage-backed
securities issued or guaranteed by the Federal Home Loan Mortgage Corporation,
the Federal National Mortgage Association or the Government National Mortgage
Association. Short-term advances consisted of approximately $23,500,000 at
December 31, 1999 at a variable interest rate (4.05% at December 31, 1999) with
an average balance for the year of approximately $4,340,000 and average interest
rate of 5.47%.

Included in the short-term advances is an available line of credit with the
FHLB which provides for advances of up to $5,000,000 and expires in February
2000. Advances outstanding under the line of credit bear interest at a rate of
approximately 50 basis points over the rate paid by the FHLB on their time
deposits (5.13% at December 31, 1999). The outstanding balance on the line of
credit is approximately $1,600,000 at December 31, 1999.

The Bank had approximately $35,600,000 and $38,700,000 in long-term
advances from FHLB at December 31, 1999 and 1998, respectively. Interest rates
range from 5.31 % to 7.18% with maturities ranging from April 2001 to February
2008.

Annual payments of FHLB long-term advances for each of the next five years
are as follows:

<TABLE>
<S> <C>
2000............................................ $26,163,869
2001............................................ 2,852,330
2002............................................ 2,909,343
2003............................................ 11,393,094
2004............................................ 1,504,124
2005 and thereafter............................. 14,290,630
-----------
Total.................................... $59,113,390
===========
</TABLE>

The advances are subject to prepayment penalties subject to the provisions
and conditions of the credit policy of the Federal Home Loan Bank.

FS-23
<PAGE> 158
STURGIS BANK & TRUST CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 8 -- FEDERAL INCOME TAXES

Sturgis Bank & Trust Co. and subsidiaries file a consolidated federal
income tax return. The following is a summary of the provision for income taxes
for the three years ended December 31, 1999.

<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Current tax expense....................................... $494,000 $480,000 $780,000
Deferred tax (benefit) expense............................ 194,000 155,000 (67,000)
-------- -------- --------
Total income tax expense............................. $688,000 $635,000 $713,000
======== ======== ========
</TABLE>

A reconciliation of the difference between total federal income tax expense
and the amount computed by applying the statutory tax rates to income before
income tapes is as follows:

<TABLE>
<CAPTION>
1999 1998 1997
--------- -------- --------
<S> <C> <C> <C>
Amount computed at statutory rates....................... $ 915,100 $799,000 $821,100
Dividends received deduction............................. (10,150) (9,400) (6,100)
Tax-exempt interest income............................... (40,300) (29,600) (28,400)
Gain on sale of real estate.............................. -- (14,600) (200)
Amortization of goodwill................................. -- 4,200 8,300
Low income housing tax credits........................... (75,000) (75,000) (75,000)
Other, net............................................... (101,650) (39,600) (6,700)
--------- -------- --------
Total............................................... $ 688,000 $635,000 $713,000
========= ======== ========
</TABLE>

The details of the net deferred tax asset (liability) are as follows:

<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Deferred tax assets:
Investments............................................... $ 34,800 $ 34,800
Allowance for loan losses................................. 188,000 161,300
Amortization.............................................. 80,500 44,900
Other..................................................... 11,300 34,800
--------- ---------
Total deferred tax assets............................ 314,600 275,800
Deferred loan fees........................................ (211,500) (100,700)
Mortgage servicing rights................................. (253,600) (168,800)
Depreciation.............................................. (97,800) (62,300)
Other..................................................... (1,700) --
--------- ---------
Total deferred tax liabilities....................... (564,600) (331,800)
Valuation allowance......................................... -- --
--------- ---------
Net deferred tax liability.................................. $(250,000) $ (56,000)
========= =========
</TABLE>

NOTE 9 -- RETIREMENT BENEFITS

The Bank is a participant in the multi-employer Financial Institutions
Retirement Fund (FIRF or the Plan), which covers substantially all of its
officers and employees. The defined benefit plan, for

FS-24
<PAGE> 159
STURGIS BANK & TRUST CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 9 -- RETIREMENT BENEFITS (CONTINUED)
all full-time employees with one year of service, provides benefits based on
basic compensation and years of service. The Bank's contributions are determined
by FIRF and generally represent the normal cost of the Plan. Specific Plan
assets and accumulated benefit information for the Bank's portion of the Fund
are not available. Under the Employee Retirement Income Security Act (ERISA), a
contributor to a multi-employer pension plan may be liable in the event of
complete or partial withdrawal for the benefit payments guaranteed under ERISA.
The Bank has no present intention to withdraw from the Fund. The expense of the
Plan allocated to the Bank for the years ended December 31, 1999, 1998, and 1997
amounted to $130,523, $68,293 and $36,666, respectively.

NOTE 10 -- COMMON STOCK AND OPTIONS

In October 1998, the Bank sold 632,500 shares of its common stock in a
secondary public offering. Proceeds from the sale, net of costs associated with
the offering, totaled approximately $6 million. Included in the Consolidated
Statement of Changes in Equity for the year ended December 31, 1999 is an
adjustment for $19,300 of offering costs incurred in this secondary public
offering.

Effective May 1998, two of the Bank's three stock options plans, formerly
referred to as the "Director Plan" and the "Employee Plan", expired. The
remaining stock option plan, referred to as the "New Director Plan", which
expired on December 31, 1999, provided for the granting of options to the Bank's
directors at exercise prices of not less than 90% of the fair market value of
the Bank's common stock at the date of grant. Options granted expire ten years
and one day following the date of grant unless an individual ceases to be a
director prior to that time for reasons other than death or disability, in which
case the options expire thirty days after cessation of director status. If
cessation of director status results from death or disability, the options
expire ninety days after cessation of director status.

Options granted under the former Director Plan expire under the same terms
as the New Director Plan. Options granted under the former Employee Plan expire
five years after the date of grant, unless employment is terminated prior to
that time for reasons other than death or disability, in which case the options
expire 30 days after termination or employment. If employment with the Bank is
terminated by reason of death or disability, the options expire ninety days
after termination of employment. One-third of the granted shares are exercisable
after one year, two-thirds after two years and one hundred percent after three
years.

FS-25
<PAGE> 160
STURGIS BANK & TRUST CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 10 -- COMMON STOCK AND OPTIONS (CONTINUED)
The following is a summary of the activity with respect to the Bank's stock
option plans for the years ended December 31, 1999, 1998, and 1997:

<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
NUMBER OF EXERCISE PRICE
SHARES PER SHARE
--------- --------------
<S> <C> <C>
Outstanding -- January 1, 1997.............................. $ 74,896 $ 3.05
Granted................................................... 32,250 9.01
Cancelled................................................. (328) 7.53
Exercised................................................. (12,608) 3.57
-------- ------
Outstanding -- December 31, 1997............................ 94,210 5.43
Granted................................................... 109,278 14.36
Cancelled................................................. (751) 9.00
Exercised................................................. (60,677) 3.38
-------- ------
Outstanding -- December 31, 1998............................ 142,060 12.87
Granted................................................... 3,000 10.00
Cancelled................................................. (7,503) 13.08
Exercised................................................. (107) 4.35
-------- ------
Outstanding -- December 31, 1999............................ 137,450 $12.81
======== ======
</TABLE>

At December 31, 1999, 1998, and 1997, options exercisable under the Bank's
stock options plans totaled 63,478, 15,671, and 63,880 shares, respectively, and
had weighted-average exercise prices per share of $11.77, $3.95, and $2.92,
respectively. For options outstanding at December 31, 1999, the exercise price
per share ranged from $4.35 to $14.29 and the weighted-average remaining
contractual life of the options was 40.5 months.

The fair value of each option grant is estimated on the date of grant using
the Black-Scholes Option-Pricing Model with the following weighted average
assumptions used for option grants during 1999, 1998, and 1997:

Risk free interest rate -- 5.67% to 6.50%
Volatility rate -- 28.03% to 29.49%
Expected life 4 to 6 years -- Employee Plan
Expected dividends -- 1.33% to 1.65%
Expected life 6 to 7 years -- Director and New Director Plans

Pro forma net income and earnings per share, reported as if compensation
expense had been recognized under the fair value provisions of Statement of
Financial Accounting Standards No. 123, "Accounting For Stock-Based
Compensation," for the Bank's stock option plans were as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Pro forma net income.................................. $1,764,320 $1,574,629 $1,678,574
Pro forma earnings per share:
Basic............................................... 0.57 0.61 0.70
Diluted............................................. 0.57 0.60 0.68
</TABLE>

FS-26
<PAGE> 161
STURGIS BANK & TRUST CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 11 -- REGULATORY MATTERS

The Bank is subject to regulatory capital requirements administered by
federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory and discretionary actions by regulators that could
have a direct material effect on the Bank's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Bank must meet specific capital guidelines that involve quantitative
measures of the Bank's assets, liabilities, and certain off-balance-sheet items
as calculated under regulatory accounting practices.

Quantitative measure established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios, which are shown in the
table below.

As of December 31, 1999, the most recent notification from the Federal
Deposit Insurance Corporation categorized the Bank as well-capitalized under the
regulatory framework. To be categorized as well-capitalized, minimum capital
amounts and ratios must be maintained as shown in the following table.
Management believes that no conditions or events since that notification have
changed the Bank's capital category.

<TABLE>
<CAPTION>
FOR CAPITAL TO BE WELL-
ACTUAL ADEQUACY PURPOSES CAPITALIZED
---------------- -------------------- --------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1999
Total capital (to risk-weighted
assets)............................ $20,206 13.1% $12,340 > 8.0% $15,424 > 10.0%
- -
Tier I capital (to risk-weighted
assets)............................ $19,476 12.6% $ 6,183 > 4.0% $ 9,274 > 6.0%
- -
Tier I capital (to adjusted
assets)............................ $19,476 8.2% $ 9,500 > 4.0% $11,876 > 5.0%
- -
Tangible capital (to tangible
assets)............................ $19,476 7.9% $ 7,396 > 3.0% N/A N/A
-
1998
Total capital (to risk-weighted
assets)............................ $17,919 13.5% $10,640 > 8.0% $13,301 > 10.0%
- -
Tier I capital (to risk-weighted
assets)............................ $17,589 13.2% $ 5,320 > 4.0% $ 7,980 > 6.0%
- -
Tier I capital (to adjusted
assets)............................ $17,589 7.6% $ 9,245 > 4.0% $11,557 > 5.0%
- -
Tangible capital (to tangible
assets)............................ $17,589 7.6% $ 6,934 > 3.0% N/A N/A
-
</TABLE>

NOTE 12 -- FINANCIAL INSTRUMENTS

FAIR VALUE OF FINANCIAL INSTRUMENTS -- The carrying amounts and estimated
fair value of the Bank's financial instruments are presented below. Certain
assets, the most significant being premises and equipment, do not meet the
definition of a financial instrument and are excluded from this disclosure.
Similarly, mortgage servicing rights, deposit base, and other customer
relationship intangibles are not considered financial instruments and are not
discussed below. Accordingly, this fair value information is not intended to,
and does not, represent Sturgis Bank & Trust Co. and subsidiaries underlying
value. Many of the assets and liabilities subject to the disclosure requirements
are not actively traded, requiring fair values to be estimated by management.
These estimates necessarily involve the use of judgment about a wide variety of
factors, including, but not limited to,

FS-27
<PAGE> 162
STURGIS BANK & TRUST CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 12 -- FINANCIAL INSTRUMENTS (CONTINUED)
relevancy of market prices of comparable instruments, expected future cash flows
and appropriate discount rates.

<TABLE>
<CAPTION>
1999 1998
---------------------- ----------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Financial assets: (000's)
Cash and cash equivalents..................... $ 11,849 $ 11,849 $ 21,711 $ 21,711
Investment securities......................... 11,644 11,513 11,828 11,848
Mortgage-backed securities.................... 1,520 1,514 1,998 1,986
Loans held for sale........................... 30 31 3,739 3,778
Loans in portfolio............................ 206,265 204,735 178,372 179,778
Accrued interest receivable................... 1,645 1,645 1,217 1,217
FHLB stock.................................... 3,223 3,223 3,223 3,223
Financial liabilities: (000's)
Deposits...................................... 163,680 157,077 172,440 170,452
Accrued interest payable...................... 953 953 981 981
FHLB advances................................. 59,113 57,425 38,662 39,604
</TABLE>

The terms and short-term nature of certain assets and liabilities result in
their carrying amount approximating fair value. These include cash and due from
banks, interest-bearing deposits in banks, Federal Home Loan Bank stock, and
accrued interest receivable and payable. The following methods and assumptions
were used by the Bank to estimate the fair value of the remaining classes of
financial instruments:

Mortgages held for sale are valued at the lower of aggregate cost or
market value primarily as determined using quoted market prices.

Securities are valued based on quoted market prices, where available. If
quoted market prices are not available, fair values are based on quoted market
prices of comparable instruments.

For variable rate loans that reprice frequently, fair values are based on
carrying amounts, as adjusted for estimated credit losses. The fair values for
other loans are estimated using discounted cash flow analyses and employ
interest rates currently being offered for loans with similar terms to borrowers
of similar credit quality.

The fair value of demand deposits, savings accounts, and money market
deposits are, by definition, equal to the amount payable on demand. The fair
values of fixed-rate time deposits are estimated by discounting cash flows using
interest rates currently being offered on certificates with similar maturities.

The carrying amount of short-term FHLB advances is a reasonable estimate of
their fair value due to their variable interest rates and short-term maturities.
The estimated fair value of long-term FHLB advances is determined by discounting
the future cash flows of outstanding advances using rates currently available on
advances from the FHLB with similar characteristics.

FS-28
<PAGE> 163
STURGIS BANK & TRUST CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 12 -- FINANCIAL INSTRUMENTS (CONTINUED)
The fair value of loan commitments and standby letters of credit, valued on
the basis of fees currently charged for commitments for similar loan terms to
new borrowers with similar credit profiles, is not considered material.

OFF-BALANCE-SHEET RISK -- The Bank is party to financial instruments with
off-balance-sheet risk in the normal course of business to meet the financing
needs of its customers and to reduce its own exposure to fluctuations in
interest rates. These financial instruments include commitments to extend
credit. These instruments involve, to varying degrees, elements of credit and
interest rate risk that are not recognized in the consolidated balance sheet.

Commitments to extend credit are agreements to lend to a customer as long
as there are no violations of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Fees from issuing these commitments to extend
credit are recognized over the period to maturity. Since a portion of the
commitments is expected to expire without being drawn upon, the total
commitments do not necessarily represent future cash requirements. The Bank
evaluates each customer's creditworthiness on a case-by-case basis. The amount
of collateral obtained upon extension of credit is based on management's credit
evaluation of the customer.

Exposure to credit loss in the event of nonperformance by the other party
to the financial instrument for commitments to extend credit and financial
guarantees written is represented by the contractual amount of those items. The
Bank generally requires collateral to support such financial instruments in
excess of the contractual amount of those instruments.

A summary of the notional or contractual amounts of financial instruments
with off-balance-sheet risk at year-end follows (in thousands):

<TABLE>
<CAPTION>
1999 1998
------ ------
<S> <C> <C>
Commitments to sell loans................................... $ 30 $3,778
Commitments to originate loans or to refinance existing
loans:
Fixed rate............................................. 897 2,750
Adjustable rate........................................ 9,931 9,171
</TABLE>

NOTE 13 -- ACQUISITIONS

On September 11, 1998, the Bank acquired four branch locations of another
financial institution in Centreville, Climax, Covert, and South Haven, Michigan.
The assets acquired included $41,333,785 in cash, $65,426 of loans, $430,597 of
office properties and equipment and $7,247 of other assets. The Bank assumed
$45,140,480 of deposits and $142,167 of other liabilities in connection with the
branch acquisitions. The $3,445,592 excess of liabilities assumed over the fair
value of assets acquired has been allocated to goodwill and is being amortized
over a fifteen year period.

On December 8, 1997, the Bank acquired two branch locations of another
financial institution in Bronson and Constantine, Michigan. The assets acquired
included $14,439,443 of cash, $70,815 in loans, $262,561 in office properties
and equipment and $1,477 in other assets. The Bank also assumed $16,883,609 in
savings accounts and $26,245 in other liabilities. The $2,135,558 excess of
liabilities

FS-29
<PAGE> 164
STURGIS BANK & TRUST CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 13 -- ACQUISITIONS (CONTINUED)
assumed over the fair value of the assets acquired has been allocated to
goodwill and is being amortized on an accelerated basis over a fifteen year
period.

These acquisitions have been accounted for using the purchase method and
the operations of the acquired branches have been included in the Bank's
consolidated financial statements from their respective acquisition dates.

NOTE 14 -- SUBSEQUENT EVENT

On February 15, 2000 the Bank entered into a definitive agreement to merge
with Southern Michigan Bancorp, Inc.

The transaction will involve Sturgis Bank & Trust Co. and Subsidiaries
becoming subsidiaries of Southern Michigan Bancorp. Under the terms of the
agreement Sturgis Bank & Trust Co. shareholders will receive .398 shares of
Southern Michigan Bancorp common stock for each Sturgis Bank & Trust Co. share
they hold. As part of the transaction, Southern Michigan Bancorp will adopt a
new name, yet to be determined for the two-bank holding company. The Banks will
continue to serve their communities as stand alone banks. The transaction is
expected to be completed by the middle of the 2000 calendar year, following the
receipt of all regulatory and shareholder approvals.

FS-30
<PAGE> 165

ANNEX A

SOUTHERN MICHIGAN BANCORP
ANNUAL REPORT ON FORM 10-K FOR THE
YEAR ENDED DECEMBER 31, 1999
(WITHOUT EXHIBITS)
<PAGE> 166

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

------------------------

FORM 10-K
------------------------

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999

[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO

------------------------

COMMISSION FILE NUMBER 2-78178

SOUTHERN MICHIGAN BANCORP, INC.
(Exact name of registrant as specified in its charter)
------------------------

<TABLE>
<S> <C>
MICHIGAN 38-2407501
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)

51 WEST PEARL STREET 49036
COLDWATER, MICHIGAN (Zip Code)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
</TABLE>

<TABLE>
<S> <C>
Registrant's telephone number, including area (517) 279-5500
code:
Securities Registered under Section 12(b) of None
the Act:
Securities Registered under Section 12(g) of None
the Act:
</TABLE>

------------------------

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

Indicate by check mark if disclosures of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. Yes X

The aggregate market value of the registrant's common stock, par value
$2.50 per share (based on the average of the bid and ask prices) held by
non-affiliates of the registrant as of March 1, 2000 was $36,039,382. For
purposes of this computation, all executive officers, directors and 5%
shareholders of the registrant have been assumed to be affiliates. Certain of
such persons may disclaim that they are affiliates of the registrant.

The number of shares outstanding of the registrant's common stock as of
March 1, 2000 was 1,958,498 shares.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE> 167

PART I

ITEM 1. BUSINESS

OVERVIEW

The registrant, Southern Michigan Bancorp, Inc. (the "Company"), is a
registered bank holding company incorporated under the laws of the State of
Michigan, headquartered in Coldwater, Michigan. The Company was formed in 1982
for the purpose of acquiring all of the outstanding shares of Southern Michigan
National Bank, which it did in November 1982. In December 1992, Southern
Michigan National Bank converted its charter to that of a Michigan state banking
corporation and changed its name to, Southern Michigan Bank & Trust (the
"Bank"), with its main office located at 51 West Pearl Street, Coldwater,
Michigan 49036. The Bank operates twelve (12) branch offices in the primarily
rural areas of Branch, Hillsdale, and Calhoun counties in southwestern Michigan.
In addition to the operations of the Bank described below, the Company owns and
leases certain real estate to the Bank and third parties (see Item 2. Properties
below); and SMB&T Financial Services, Inc., a subsidiary of the Bank, has been
established to provide insurance and investment services, which services are
currently limited to the sale of certain insurance products to the Bank. None of
such activities are significant to the operations of the Company.

In February 2000, the Company and Sturgis Bank & Trust Company ("Sturgis")
entered into an Agreement and Plan of Consolidation pursuant to which Sturgis
will become a wholly-owned subsidiary of the Company. Sturgis shareholders will
receive .398 shares of the Company's common stock for each share of Sturgis'
common stock. The transaction is subject to normal regulatory approvals and the
approval of the shareholders of Sturgis. The transaction is expected to close in
the second half of 2000. Sturgis and the Bank will continue to operate as
stand-alone banks.

BANKING SERVICES

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

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

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

COMPETITION

The banking business in the Bank's market area is highly competitive. The
Bank competes with other banks, savings and loan associations, credit unions and
finance companies. Banks and other financial institutions from surrounding areas
maintain branches within the Bank's service area and offer additional
competition. The Bank is also faced with increasing competition from
non-depository financial intermediaries, such as large retailers, investment
banks and securities brokerage firms.
A-3
<PAGE> 168

SUPERVISION AND REGULATION

GENERAL

Bank holding companies and banks are highly regulated by both state and
federal agencies. As a bank holding company, the Company is subject to
supervision and regulation by the Federal Reserve Board ("FRB") pursuant to the
Bank Holding Company Act of 1956, as amended (the "BHCA"). The BHCA restricts
the product range of a bank holding company by circumscribing the types of
businesses it may own or acquire. The BHCA limits a bank holding company to
owning and managing banks or companies engaged in activities determined by the
FRB to be closely related to banking as to be a proper incident thereto. The
BHCA requires a bank holding company to obtain the prior approval of the FRB
before acquiring a nonbanking company, or substantially all of the assets of a
bank or a bank holding company, or direct or indirect ownership or control of
more than five percent of the voting shares of a bank or a bank holding company.

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

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

DIVIDEND RESTRICTIONS

The Company's principal source of income consists of dividends paid by the
Bank on its common stock (all of which is owned by the Company). Michigan law
restricts the Bank's ability to pay dividends to its shareholder. Under the
Michigan Banking Code of 1969, as amended (the "1969 Code") and the Michigan
Banking Code of 1999 (which became effective March 1, 2000 and repealed the 1969
Code), no dividend may be declared by the Bank in an amount greater than net
income then on hand after deducting losses and bad debts. After payment of a
dividend, the Bank must have a surplus amounting to not less than 20% of its
capital. In addition, if the surplus of the Bank is less than the amount of its
capital, before a dividend may be declared, the Bank must transfer to surplus
not less than 10% of the net income of the Bank for the preceding 6 months in
the case of quarterly or semiannual dividends or not less than 10% of its net
profits for the preceding two consecutive 6 month periods in the case of annual
dividends. Dividends cannot be paid from the Bank's capital or surplus. Based on
the Bank's balance sheet as of December 31, 1999, the Bank could pay a dividend
to the Company in the amount of $3,752,000 without prior regulatory approval.

The payment of dividends by the Company and the Bank is also affected by
various regulatory requirements and policies, such as the requirement to
maintain adequate capital above regulatory guidelines. The "prompt corrective
action" provisions of the Federal Deposit Insurance Corporation Improvement Act
of 1991 ("FDICIA") impose further restrictions on the payment of dividends by
insured banks which fail to meet specified capital levels and, in some cases,
their parent bank holding companies. FDICIA generally prohibits a depository
institution from making any capital distribution (including payment of a
dividend) or paying any management fee to its holding company if the depository
institution would thereafter be undercapitalized (see "Capital Requirements").
These regulations and restrictions may limit the Company's ability to obtain
funds from the Bank for the

A-4
<PAGE> 169

Company's cash needs, including funds for acquisitions, payments of dividends
and interest, and the payment of operating expenses.

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

FEDERAL REGULATION

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

GRAMM-LEACH-BLILEY

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

RIEGLE-NEAL

Prior to September 29, 1995, the BHCA prohibited a bank holding company
from acquiring shares of any bank located outside the state in which the
operations of the bank holding company's banking subsidiaries were primarily
conducted unless the acquisition was specifically authorized by

A-5
<PAGE> 170

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

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

FDICIA

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

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

FIRREA

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

TRANSACTIONS WITH AFFILIATES AND INSIDERS

The Bank and the Company are affiliates of each other and, as such, are
subject to certain federal restrictions with respect to loans and extensions of
credit to the Company and other Company affiliates, investments in the Company's
and its affiliates' securities, acceptance of such securities as collateral for
loans to any borrowers, and leases, services and other agreements between the
Bank and the Company. Additionally, regulations allow a bank to extend credit to
the bank's and its affiliates' executive officers, directors and principal
shareholders or their related interests, only if the loan is

A-6
<PAGE> 171

made on substantially the same terms, including interest rates and collateral,
as those prevailing at the time for comparable transactions with non-insiders,
and if credit underwriting standards are followed that are no less stringent
than those applicable to comparable transactions with non-insiders. Moreover,
loans to insiders must not involve more than the normal risk of repayment or
present other unfavorable features and must in certain circumstances be approved
in advance by a majority of the entire board of directors of the Bank. The
aggregate amount that can be lent to all insiders is limited to the Bank's
unimpaired capital and surplus.

DEPOSIT INSURANCE

Deposits held by the Bank are insured, to the extent permitted by law, by
the Bank Insurance Fund ("BIF") administered by the FDIC. As required under
FDICIA, the FDIC has established a system of risk-based deposit insurance
premiums. Under this system each insured institution's assessment is based on
the probability that the BIF will incur a loss related to that institution, the
likely amount of the loss, and the revenue needs of the BIF.

Under the risk-based assessment system, a depository institution pays an
assessment of between 0 cents and 27 cents per $100 of insured deposits based on
its capital level and risk classification. To arrive at a risk based assessment
for an insured institution, the FDIC places it in one of nine risk categories
using a two step analysis based first on capital ratios and then on other
relevant supervisory information. The Bank has been given the designation of
well managed and well capitalized. As a result of such classification, the Bank
pays the lowest assessment rate possible to the FDIC. In 1997, the Bank began
making payments to the FDIC for certain Financing Corporation ("FICO") Bonds
that had been previously issued. Any significant changes in the deposit
insurance assessment rate or FICO bond servicing imposed by the FDIC could have
a material effect on the earnings of the Company.

CAPITAL REQUIREMENTS

The FRB has imposed risk-based capital guidelines applicable to the
Company. These guidelines require that bank holding companies maintain capital
commensurate with both on and off balance sheet credit and other risks of their
operations. Under the guidelines, a bank holding company must have a minimum
ratio of total capital to risk-weighted assets ("Total Capital") of 8.0 percent.
At least half of Total Capital must be composed of common shareholder's equity,
qualifying perpetual preferred stock and minority interest in equity accounts of
consolidated subsidiaries, less goodwill and certain other intangible assets
("Tier I Capital"). At December 31, 1999, the Company's Total Capital to
risk-weighted assets was 12.0 percent, which is above the regulatory minimum
requirements.

In addition to risk-based capital requirements, the FRB has also imposed
leverage capital ratio requirements. The leverage ratio requirements establish a
minimum required ratio of Tier I Capital to total assets less goodwill of 3
percent for the bank holding companies having the highest regulatory rating. All
other bank holding companies are required to maintain a minimum Tier I capital
yielding a leverage ratio of 4 percent to 5 percent, depending on the particular
circumstances and risk profile of the institution. The Company's Tier I Capital
leverage ratio at December 31, 1999 was 8.4 percent.

The Bank is also subject to risk-weighted capital standards and leverage
measures which are similar, but in some cases not identical, to the requirements
applicable to bank holding companies. At December 31, 1999, the Bank met all
applicable capital requirements.

A-7
<PAGE> 172

MONETARY POLICY AND ECONOMIC CONDITIONS

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

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

EMPLOYEES

As of December 31, 1999, 141 persons were employed by the Bank; 123 were
full time employees and 18 were part time employees.

SELECTED STATISTICAL INFORMATION

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

I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY; INTEREST RATES
AND INTEREST DIFFERENTIAL

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

<TABLE>
1999 1998 1997
--------------------------- --------------------------- ---------------------------
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
-------- -------- ----- -------- -------- ----- -------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest earning assets:
Loans(A)(B)(C)....................... $178,906 $16,606 9.3% $160,666 $15,816 $ 9.8% $158,193 $15,593 9.9%
Taxable investment securities(D)..... 35,784 2,235 6.2 32,449 2,305 7.1 33,538 2,189 6.5
Tax-exempt investment securities
(A)................................ 22,716 1,715 7.6 22,342 1,657 7.4 16,864 1,253 7.4
Federal funds sold................... 2,154 107 5.0 4,782 266 5.6 1,357 74 5.5
-------- ------- ---- -------- ------- ----- -------- ------- ----
Total interest earning assets.... 239,560 20,663 8.6 220,239 20,044 9.1 209,952 19,109 9.1
Non-interest earning assets:
Cash and due from banks............ 12,679 15,591 10,442
Other assets....................... 18,028 16,415 14,871
Less allowance for loan loss......... (2,161) (1,955) (1,866)
-------- -------- --------
Total assets................... $268,106 $250,290 $233,399
======== ======== ========
</TABLE>

A-8
<PAGE> 173

I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY; INTEREST RATES
AND INTEREST DIFFERENTIAL (CONTINUED)

<TABLE>
<CAPTION>
1999 1998 1997
---------------------------- ---------------------------- ----------------------------
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
-------- -------- ------ -------- -------- ------ -------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest bearing liabilities:
Demand deposits.................... $ 77,664 $ 2,482 3.2% $ 74,154 $ 2,440 3.3% $ 63,856 $ 2,163 3.4%
Savings deposits................... 45,722 1,496 3.3 44,356 1,509 3.4 43,505 1,485 3.4
Time deposits...................... 73,553 3,760 5.1 68,177 3,673 5.4 67,993 3,612 5.3
Federal funds purchased............ 2,044 97 4.7 -- -- -- 784 42 5.4
Other borrowings................... 9,716 600 6.2 6,146 410 6.7 1,404 141 10.0
-------- ------- -------- ------- -------- -------
Total interest bearing
liabilities.................. 208,699 8,435 4.0 192,833 8,032 4.2 177,542 7,443 4.2
Non-interest bearing liabilities:
Demand deposits.................... 32,982 30,570 30,004
Other.............................. 1,261 1,124 1,355
Common stock subject to repurchase
obligation....................... 5,009 5,464 4,227
Shareholders' equity............. 20,155 20,299 20,271
-------- -------- --------
Total liabilities and
shareholders' equity......... $268,106 $250,290 $233,399
======== ======== ========
Net interest earnings............ $12,228 $12,012 $11,666
======= ======= =======
Net yield on interest earning
assets............................. 5.1% 5.5% 5.6%
==== ===== ====
</TABLE>

-------------------------
(A) Includes tax equivalent adjustment of interest (assuming a 34% tax rate) for
securities and loans of $583,000 and $29,000, respectively for 1999;
$563,000 and $35,000, respectively for 1998; and $392,000 and $48,000
respectively for 1997.

(B) Average balance includes average nonaccrual loan balances of $593,000 in
1999; $815,000 in 1998; and $500,000 in 1997.

(D) Average balance includes average unrealized gain (loss) of $(104,000) in
1999; $128,000 in 1998; and $(13,000) in 1997 on available for sale
securities. The yield was calculated without regard to this average
unrealized gain (loss).

(Dollars in Thousands)

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

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

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

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

A-9
<PAGE> 174

I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY; INTEREST RATES
AND INTEREST DIFFERENTIAL (CONTINUED)
Interest on non-taxable securities has been adjusted to a fully tax
equivalent basis using a statutory tax rate of 34% in 1999, 1998 and 1997.

<TABLE>
<CAPTION>
1999 COMPARED TO 1998 1998 COMPARED TO 1997
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
--------------------------- --------------------------
VOLUME RATE NET VOLUME RATE NET
------- ------- ----- ------- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Interest income on:
Loans..................................... $1,727 $ (937) $ 790 $243 $(20) $223
Taxable investment securities............. 224 (294) (70) (73) 189 116
Tax-exempt investment securities.......... 28 30 58 406 (2) 404
Federal funds sold........................ (133) (26) (159) 190 2 192
------- ------- ----- ---- ---- ----
Total interest earning assets........... $1,846 $(1,227) $ 619 $766 $169 $935
======= ======= ===== ==== ==== ====
Interest expense on:
Demand deposits........................... $ 113 $ (71) $ 42 $340 $(63) $277
Savings deposits.......................... 46 (59) (13) 29 (5) 24
Time deposits............................. 281 (194) 87 10 51 61
Federal funds purchased................... 97 -- 97 (42) -- (42)
Other borrowings.......................... 222 (32) 190 331 (62) 269
------- ------- ----- ---- ---- ----
Total interest bearing liabilities...... $ 759 $ (356) $ 403 $668 $(79) $589
======= ======= ===== ==== ==== ====
Net interest income....................... $1,087 $ (871) $ 216 $ 98 $248 $346
======= ======= ===== ==== ==== ====
</TABLE>

II. INVESTMENT PORTFOLIO

(Dollars in Thousands)

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

<TABLE>
<CAPTION>
1999 1998 1997
------------------- ------------------- -------------------
FAIR AMORTIZED FAIR AMORTIZED FAIR AMORTIZED
VALUE COST VALUE COST VALUE COST
------- --------- ------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury and other U.S.
Government agencies and
corporations................... $15,541 $15,885 $ 9,087 $ 9,087 $ 6,262 $ 6,262
States and political
subdivisions................... 28,411 28,529 37,903 37,006 20,885 20,560
Corporate securities............. 6,172 6,203 15,942 15,902 15,590 15,564
Other securities................. 4,105 4,201 5,899 5,899 2,688 2,688
------- ------- ------- ------- ------- -------
Total investment securities...... $54,229 $54,818 $68,831 $67,894 $45,425 $45,074
======= ======= ======= ======= ======= =======
</TABLE>

A-10
<PAGE> 175

II. INVESTMENT PORTFOLIO (CONTINUED)
The following table sets forth the amortized cost of securities by maturity
(or anticipated call date, if earlier) and weighted average yield for each range
of maturities at December 31, 1999:

<TABLE>
<CAPTION>
MATURING
-----------------------------------------------------------------------
WITHIN ONE YEAR 1 TO 5 YEARS 5 TO 10 YEARS AFTER 10 YEARS
---------------- --------------- -------------- --------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
------- ----- ------- ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury and other U.S.
Government agencies and
corporations.................. $ 5,031 5.64% $10,854 5.53% $ -- --% $ -- --%
States and political
subdivisions(1)............... 9,197 5.19 16,183 5.57 3,109 5.85 40 6.10
Corporate securities............ 2,850 6.26 3,353 6.56
Other securities................ 654 5.64 2,155 5.36 469 5.73 923 8.63
------- ------- ------ ----
Total(1)........................ $17,732 5.45% $32,545 5.63% $3,578 5.83% $963 8.63%
======= ==== ======= ==== ====== ==== ==== ====
</TABLE>

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

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

Except as indicated and for U.S. Treasury and other U.S. Government
agencies, total securities of any state (including all its political
subdivisions) were less than 10% of shareholders' equity. At year-end 1999 and
1998, the amortized cost of securities issued by the state of Michigan and all
its political subdivisions totaled $13,114,000 and $19,883,000 with an estimated
market value of $13,132,000 and $20,729,000, respectively.

III. LOAN PORTFOLIO

(Dollars in Thousands)

Types of Loans

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

<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Commercial, financial, and
agricultural......................... $ 96,758 $ 82,533 $ 74,819 $ 72,108 $ 51,940
Real estate mortgage(1)................ 63,423 51,567 50,057 47,561 41,293
Installment............................ 33,190 29,203 33,865 33,009 30,004
-------- -------- -------- -------- --------
Total loans.......................... $193,371 $163,303 $158,741 $152,678 $123,237
======== ======== ======== ======== ========
</TABLE>

-------------------------
(1) Includes loans held for sale

A-11
<PAGE> 176

III. LOAN PORTFOLIO (CONTINUED)
MATURITIES AND SENSITIVITIES OF LOANS TO CHANGES IN INTEREST RATES

The following table sets forth the maturities of the loan portfolio at
December 31, 1999. Also provided are the amounts due after one year classified
according to interest rate sensitivity.

<TABLE>
<CAPTION>
WITHIN 1 1 TO 5 AFTER 5
YEAR (A) YEARS YEARS TOTAL
-------- ------- ------- --------
<S> <C> <C> <C> <C>
Commercial, financial, and agricultural............ $34,461 $38,999 $23,298 $ 96,758
Real estate mortgages.............................. 6,431 1,935 55,057 63,423
Installment........................................ 1,816 18,096 13,278 33,190
------- ------- ------- --------
Total......................................... $42,708 $59,030 $91,633 $193,371
======= ======= ======= ========
Loans maturing after one year with:
Fixed interest rates............................. $44,786 $23,127
Variable interest rates.......................... 14,244 68,506
------- -------
Total......................................... $59,030 $91,633
======= =======
</TABLE>

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

NON-PERFORMING LOANS

Non performing loans include impaired loans, nonaccrual and accruing loans
past due 90 days or more. The following table sets forth the aggregate amount of
non-performing loans in each of the following categories:

<TABLE>
<CAPTION>
DECEMBER 31
----------------------------------------
1999 1998 1997 1996 1995
---- ------ ------ ---- ----
<S> <C> <C> <C> <C> <C>
Non accrual loans:
Commercial, financial and agricultural............. $306 $ 343 $1,026 $448 $380
Real estate mortgage............................... 23 -- -- -- 24
Installment........................................ -- -- 61 2 40
---- ------ ------ ---- ----
329 343 1,087 450 444
Loans contractually past due 90 days or more:
Commercial, financial, and agricultural............ 432 807 1,067 82 353
Real estate mortgage............................... 134 161 630 129 56
Installment........................................ 34 120 966 165 4
---- ------ ------ ---- ----
600 1,088 2,663 376 413
---- ------ ------ ---- ----
Total........................................... $929 $1,431 $3,750 $826 $857
==== ====== ====== ==== ====
Percent of total loans outstanding................... .48% .88% 2.36% .54% .70%
==== ====== ====== ==== ====
</TABLE>

The accrual of interest income generally is discontinued when a loan
becomes over 90 days past due as to principal or interest. When interest
accruals are discontinued, interest credited to income in the current year and
accrued interest from the prior year is reversed. Management may elect to
continue the accrual of interest when: (1) the estimated net realizable value of
collateral is sufficient to cover the principal balance and accrued interest
and; (2) the loan is in the process of collection.

A-12
<PAGE> 177

III. LOAN PORTFOLIO (CONTINUED)
Interest of $9,000 and $19,000 was realized on nonaccrual loans during 1999
and 1998, respectively. Under original terms for these loans, interest income
which would have been recorded approximates $50,000 and $91,000 in 1999 and
1998, respectively. There are no loan commitments outstanding to extend credits
to these customers.

POTENTIAL PROBLEM LOANS

At December 31, 1999, the Company had approximately $2,683,000 in
commercial, financial, agricultural loans for which payments are presently
current, but the borrowers are experiencing certain financial and/or operational
difficulties. These loans are subject to frequent management review and their
classification is reviewed on a monthly basis.

All loans classified for regulatory purposes as loss, doubtful,
substandard, or special mention have been included in the above disclosures.

IV. SUMMARY OF LOAN LOSS EXPERIENCE

(Dollars in Thousands)

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

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance at beginning of year........... $ 2,026 $ 1,863 $ 1,814 $ 1,609 $ 1,498
Charge offs:
Commercial, financial and
agricultural...................... (505) (227) (122) (13) (87)
Installment.......................... (492) (352) (386) (157) (124)
Real estate.......................... (53) -- -- -- --
-------- -------- -------- -------- --------
(1,050) (579) (508) (170) (211)
Recoveries:
Commercial, financial and
agricultural...................... 171 41 31 43 43
Installment.......................... 132 101 66 62 54
Real estate.......................... 1 -- -- 3 3
-------- -------- -------- -------- --------
304 142 97 108 100
-------- -------- -------- -------- --------
Net charge offs...................... (746) (437) (411) (62) (111)
Provision for loan losses.............. 852 600 460 267 222
-------- -------- -------- -------- --------
Balance at end of year............... $ 2,132 $ 2,026 $ 1,863 $ 1,814 $ 1,609
======== ======== ======== ======== ========
Average loans outstanding.............. $178,906 $160,666 $158,193 $137,273 $123,684
======== ======== ======== ======== ========
Ratio of net charge offs to average
loans outstanding.................... .42% .27% .26% .05% .09%
======== ======== ======== ======== ========
</TABLE>

ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES

The Securities and Exchange Commission's guide to the presentation of
statistical information provides for a break down of the allowance for loan
losses into major loan categories. The Company allocates the allowance among the
various categories through an analysis of the loan portfolio composition, prior
loan loss experience, evaluation of those loans identified as being probable
problems in collection, results of examination by regulatory agencies and
current economic conditions.

A-13
<PAGE> 178

IV. SUMMARY OF LOAN LOSS EXPERIENCE (CONTINUED)
The entire allowance is available to absorb any losses without regard to the
category or categories in which the charged off loans are classified.

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

The following table sets forth the allocation of the allowance for loan
losses at December 31:
<TABLE>
<CAPTION>
1999 1998 1997 1996
---------------------- ---------------------- ---------------------- ----------------------
PERCENT OF PERCENT OF PERCENT OF PERCENT OF
LOANS IN LOANS IN LOANS IN LOANS IN
EACH EACH EACH EACH
CATEGORY CATEGORY CATEGORY CATEGORY
OF TOTAL OF TOTAL OF TOTAL OF TOTAL
ALLOWANCE LOANS ALLOWANCE LOANS ALLOWANCE LOANS ALLOWANCE LOANS
--------- ---------- --------- ---------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial, financial
and agricultural... $ 924 50.0% $ 777 50.5% $ 628 47.1% $ 351 47.2%
Real estate
mortgage........... 127 32.8 103 31.6 98 31.0 95 31.2
Installment.......... 601 17.2 521 17.9 321 21.9 177 21.6
Unallocated.......... 480 -- 625 -- 816 -- 1,191 --
------ ----- ------ ----- ------ ----- ------ -----
$2,132 100.0% $2,026 100.0% $1,863 100.0% $1,814 100.0%
====== ===== ====== ===== ====== ===== ====== =====

<CAPTION>
1995
----------------------
PERCENT OF
LOANS IN
EACH
CATEGORY
OF TOTAL
ALLOWANCE LOANS
--------- ----------
<S> <C> <C>
Commercial, financial
and agricultural... $ 313 42.1%
Real estate
mortgage........... 83 33.5
Installment.......... 157 24.4
Unallocated.......... 1,056 --
------ -----
$1,609 100.0%
====== =====
</TABLE>

The allowance for loan losses is maintained at a level which, in
management's opinion, is adequate to absorb loan losses in the portfolio. In
assessing the adequacy of the allowance, management reviews the characteristics
of the loan portfolio in order to determine overall quality and risk profiles.
Some factors considered by management in determining the level at which the
allowance is maintained include a continuing evaluation of those loans
identified as being subject to possible problems in collection, results of
examination by regulatory agencies, current economic conditions, and historical
loan loss experience.

The 1996 provision increased from 1995 levels to provide for loan growth.
The 1997 provision was increased to provide for loan growth and the increase in
charge-offs and delinquencies. Several customers, including a large commercial
borrower, declared bankruptcy during 1997 resulting in increased charge-offs.
The 1999 and 1998 provisions increased to provide for higher charge-offs and
delinquencies, primarily as a result of increased customer bankruptcies. Net
commercial loan charge-offs totaled $334,000 in 1999; $267,000 of this was
attributable to three commercial borrowers that discontinued business operations
during 1999.

A-14
<PAGE> 179

V. DEPOSITS

(Dollars in Thousands)

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

<TABLE>
<CAPTION>
1999 1998 1997
---------------- ---------------- ----------------
AMOUNT RATE AMOUNT RATE AMOUNT RATE
------ ---- ------ ---- ------ ----
<S> <C> <C> <C> <C> <C> <C>
Non interest bearing demand deposits..... $ 32,982 $ 30,570 $ 30,004
Interest bearing demand deposits......... 77,664 3.2% 74,154 3.3% 63,856 3.4%
Savings deposits......................... 45,722 3.3 44,356 3.4 43,505 3.4
Time deposits............................ 73,553 5.1 68,177 5.4 67,993 5.3
-------- -------- --------
$229,921 $217,257 $205,358
======== ======== ========
</TABLE>

The following table sets forth as of December 31, 1999, the aggregate
amount of outstanding deposits (certificates of deposit) of $100,000 or more by
maturity (in thousands of dollars):

<TABLE>
<S> <C>
Three months or less........................................ $ 8,858
Over three months through six months...................... 5,686
Over six months through twelve months..................... 3,850
Over twelve months........................................ 4,719
-------
$23,113
=======
</TABLE>

VI. RETURN ON EQUITY AND ASSETS

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

<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Return on average assets.................................... 1.23% 1.42% 1.30%
Return on average equity (1)................................ 16.37 17.48 14.96
Dividend payout ratio (2)................................... 41.61 35.56 36.58
Average equity to average assets (1)........................ 7.52 8.11 8.69
</TABLE>

-------------------------
(1) Average equity used in the above table excludes common stock subject to
repurchase obligation but includes average unrealized appreciation or
depreciation on securities available for sale.

(2) Dividends declared divided by net income.

ITEM 2. PROPERTIES

The Bank's main office is located at 51 West Pearl Street, Coldwater,
Michigan and is owned by the Bank. This facility, which opened in 1955 and
expanded in 1976, consists of a one story structure comprising 27,945 square
feet. Parking is available for approximately 125 cars and 9 teller windows are
available to serve the Bank's customers. The Bank owns eleven branch offices,
two of which are in Coldwater, two in Union City, Michigan, one in Kinderhook,
Michigan, one in Tekonsha, Michigan, one in Hillsdale, Michigan, one in Camden,
Michigan, one in Athens, Michigan, one in North Adams, Michigan and one in
Pennfield Township (Battle Creek), Michigan. The Bank also leases 1,700 square
feet from a third party for use in its Battle Creek Loan Production Office. In
addition, the Company owns a 15,000 square foot building in Battle Creek,
Michigan and a 14,000 square foot building in Coldwater, Michigan. 6,000 square
feet of the Battle Creek building is leased

A-15
<PAGE> 180

to the Bank for use by one of its Battle Creek branches. 3,500 square feet is
leased to a local college, 2,300 square feet is leased as office space to local
businesses and the remaining space is presently unoccupied. 7,446 square feet of
the Coldwater building is leased to the Bank for use as a Consumer Loan center,
3,420 square feet is leased to a local title office, 762 square feet is leased
to a local insurance company and 394 square feet is leased to community
nonprofit organizations. The Bank's branch offices range in size from 465 square
feet to 6,000 square feet, with nine of the branch offices having drive-in
facilities and seven of the branches having automated teller machines.

All of the Company's and the Bank's facilities are maintained in good
condition and are adequately insured. Management of Company believes the present
facilities are adequate to meet both current and future needs.

ITEM 3. LEGAL PROCEEDINGS

The Bank is frequently engaged in litigation, both as plaintiff and
defendant, which is incident to its business. In certain proceedings, claims or
counterclaims may be asserted against the Bank. Based on the facts known to it
to date, management of the Company does not currently anticipate that the
ultimate liability, if any, arising out of any such litigation will have a
material effect on the consolidated financial statements of the Company.

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

None.

PART II

ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Company's common stock is regularly quoted on the OTC Bulletin Board
(OTCBB). The bid prices described below are quotations reflecting inter-dealer
prices, without retail markup, markdown or commissions, and may not necessarily
represent actual transactions. There were 469 shareholders of record at February
29, 2000.

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

<TABLE>
<CAPTION>
1999 1998
-------------------------------- --------------------------------
BID PRICE CASH BID PRICE CASH
------------------- DIVIDENDS ------------------- DIVIDENDS
HIGH BID LOW BID DECLARED HIGH BID LOW BID DECLARED
-------- ------- --------- -------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Quarter Ended
March 31......................... $33.08 $27.00 $.16 $37.80 $30.60 $.13
June 30.......................... 32.40 27.23 .17 46.13 37.13 .13
September 30..................... 29.70 26.10 .17 40.50 37.13 .15
December 31...................... 30.60 27.23 .18 37.80 29.48 .19
</TABLE>

There are restrictions that currently limit the Company's ability to pay
cash dividends. Information regarding dividend payment restrictions is described
in Note L to the consolidated financial statements for the year ended December
31, 1999.

A-16
<PAGE> 181

All market price per share amounts have been adjusted for a 10% stock
dividend declared in 1999.

ITEM 6. SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Total interest income.................. $ 20,051 $ 19,446 $ 18,669 $ 16,787 $ 15,476
Net interest income.................... 11,616 11,414 11,226 10,183 9,096
Provision for loan losses.............. 852 600 460 267 222
Net income............................. 3,300 3,549 3,032 3,058 2,615
Per share data:
Basic and diluted earnings per
share............................. 1.64 1.70 1.44 1.46 1.27
Cash dividends....................... .68 .60 .52 .48 .45
Balance sheet data:
Other borrowings..................... 15,000 5,000 3,000 -- --
Capital note......................... -- -- -- -- 1,000
Common stock subject to repurchase... 3,990 6,029 4,899 3,555 2,232
Equity............................... 19,990 19,345 20,590 19,616 18,497
Total assets.................... 275,825 266,851 238,531 235,562 209,977
Return on average assets............... 1.23% 1.42% 1.30% 1.45% 1.31%
Return on average equity............... 16.37% 17.48% 14.96% 16.09% 14.64%
</TABLE>

All per share amounts have been adjusted for a 10% stock dividend declared
in 1999, a 1997 stock split effected in the form of a 100% stock dividend and a
2 for 1 stock split in 1995.

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

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

FINANCIAL CONDITION

The Company functions as a financial intermediary and, as such, its
financial condition should be examined in terms of trends in its sources and
uses of funds.

The Company uses its funds primarily to support its lending activities.
Loans increased by 18.4% in 1999 and 2.9% in 1998. The loan growth occurred in
all loan categories and is the result of continued good economic conditions
within the Company's market area. Commercial loans increased 17.2% as local
businesses expanded to meet the growth demands of the region. Consumer loans
increased 13.7% as the Bank competitively priced its boat and recreational
vehicle loans and offered dealer incentives to obtain such loans. Real estate
mortgage loans increased 23.0% as the Bank engaged in a home equity loan
promotion and offered an attractive short-term fixed rate mortgage loan product.

Gains recognized on the sale of real estate mortgage loans to the secondary
market decreased in 1999 from $1,085,000 in 1998 to $758,000. The secondary
market loan activity declined in 1999 as mortgage rates increased and the
refinancing activity of 1998 declined. Loans held for sale at

A-17
<PAGE> 182

December 31, 1999 were $991,000. The real estate portfolio largely consists of
residential mortgages within the local area with a low risk of loss.

The loan growth in 1998 occurred in commercial loans, which increased by
10.3% as local businesses expanded and took advantage of lower interest rates.
Consumer loans declined in 1998 as a result of competition from both financial
and non-financial companies which offer borrowers other low cost financing
options. The real estate portfolio increased primarily due to the offering of
competitive home equity products.

Loan commitments, consisting of unused credit card and home equity lines,
available amounts on revolving lines of credit and other approved loans which
have not been funded, were $37,949,000 and $31,175,000 at December 31, 1999 and
1998, respectively. Most of these commitments are priced at a variable interest
rate thus minimizing the Bank's risk in a changing interest rate environment.

There were no significant concentrations in any loan category as to
borrower or industry. However, substantially all loans are granted to customers
primarily in Southern Michigan.

Another significant component of cash flow is the securities portfolio.
Total securities decreased by 20.1% in 1999 and increased by 50.6% in 1998. The
funds received from maturing securities were used to fund the 1999 loan growth
since the Bank was not able to fund this growth with deposits. The 1998 increase
is the result of a significant increase in deposits.

The available-for-sale portfolio had net unrealized losses of $589,000 in
1999 and gains of $394,000 in 1998. During 1999, the Company adopted Statement
of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities" and transferred the entire portfolio of held
to maturity securities to available for sale. The transfer was done so that the
securities would be available to sell should the Company's liquidity needs
require it. None of these securities were sold during 1999. There is no
concentration of securities in the portfolio which would constitute an unusual
risk except at year-end 1999 and 1998, the amortized cost of securities issued
by the state of Michigan and all its political subdivisions totaled $13,114,000
and $19,883,000 with an estimated market value of $13,132,000 and $20,729,000,
respectively.

Deposits traditionally represent the Company's principal source of funds.
Total deposits remained stable in 1999 and increased 12.7% in 1998. The Bank was
not able to increase its deposit base in 1999 because of increased competition
within the Bank's market area. Local competitors have offered premium rates for
deposits and the Bank has chosen not to match such rates. Also contributing to
the lack of deposit growth was an increase in customer cash withdrawals late in
the year in preparation for the Year 2000 rollover. The 1998 increase in
deposits is the result of a complete overhaul of the Bank's personal checking
accounts which allowed the Bank to increase the number of deposit accounts. The
Bank experienced an increase not only in demand deposit accounts, but in other
deposit accounts as well as customers opened secondary accounts to supplement
their new checking accounts.

Attracting and keeping traditional deposit relationships will continue to
be a challenge to the Bank, particularly with the increased competition from
nondeposit products. As an alternate funding source, the Bank obtains putable
advances from the Federal Home Loan Bank (FHLB) of Indianapolis. The advances
are secured by a blanket collateral agreement with the FHLB giving the FHLB an
unperfected security interest in the Bank's one-to-four family whole mortgage
loans, U.S. Treasury and Government agencies and highly rated private
mortgage-backed securities. FHLB advances can be a less expensive way to obtain
longer term funds than paying a premium for long term deposits.

A-18
<PAGE> 183

Premises and equipment decreased by 4.7% in 1999 and increased by 25.9% in
1998. The 1999 decrease was due to a lack of significant additions and increased
depreciation because of the high level of additions in 1998. The Bank opened a
new branch office in Hillsdale in October 1998 at an approximate cost of
$2,000,000. The Bank made this significant investment because of the growth
potential in Hillsdale. In 2000, the Bank will spend approximately $2,300,000 to
renovate the Coldwater main office and the Beckley Road office.

On February 15, 2000, the Company announced that it had agreed to merge
with Sturgis Bank & Trust Company of Sturgis, Michigan ("Sturgis"). The
transaction is anticipated to be a tax-free exchange. It is subject to
regulatory approvals and approval by the shareholders of Sturgis, and is
anticipated to be effective the second half of 2000. The exchange ratio is .398
shares of the Company's common stock for one share of Sturgis' common stock.

CAPITAL RESOURCES

The Company maintains a strong capital base to take advantage of business
opportunities while ensuring that it has resources to absorb the risks inherent
in the business.

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

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

Regulatory agencies have determined that the capital component created by
the adoption of FASB Statement 115 should not be included in Tier 1 capital. As
such, the net unrealized appreciation or depreciation on available-for-sale
securities is not included in the ratios listed in Note O to the financial
statements. The ratios include the common stock subject to repurchase obligation
in the Company's employee stock ownership plan (ESOP) and the unearned ESOP
shares. As seen in Note O, the Company exceeds the well capitalized
requirements.

In addition to these regulatory requirements, a certain level of capital
growth must be achieved to maintain appropriate levels of equity to total
assets. During 1999 and 1998, total average assets grew 7.1% and 7.2%. At the
same time, average equity (including common stock held by the ESOP) decreased
2.3% in 1999 and increased 5.2% in 1998. Equity grew at lower levels than assets
in both 1999 and 1998 because of the repurchase and retirement of common stock
shares (82,442 shares in 1999 and 51,079 in 1998). Future growth opportunities
will focus on maintaining the existing customer base and growing within selected
other markets identified as providing significant growth potential.

A-19
<PAGE> 184

LIQUIDITY AND INTEREST RATE SENSITIVITY

The primary functions of asset/liability management are to assure adequate
liquidity and maintain an appropriate balance between interest-earning assets
and interest-bearing liabilities. Liquidity management involves the ability to
meet the cash flow requirements of customers who may be either depositors
wanting to withdraw funds or borrowers needing assurance that sufficient funds
will be available to meet their credit needs. Interest rate sensitivity
management seeks to avoid fluctuating net interest margins and enhance
consistent growth of net interest income through periods of changing interest
rates.

Maturing loans and investment securities are the principal sources of asset
liquidity. Securities maturing or callable within 1 year were $17,732,000 at
December 31, 1999 representing 32.7% of the amortized cost of the investment
securities portfolio, a decrease from the 43.4% level of 1998. Loans maturing
within 1 year were $42,708,000 at December 31, 1999 representing 22.1% of the
loan portfolio, a slight decrease from the 23.2% level of 1998.

Financial institutions are subject to prepayment risk in falling rate
environments. Prepayments of assets carrying higher rates reduce the Company's
interest income and overall asset yields. Certain portions of an institution's
liabilities may be short-term or due on demand, while most of its assets may be
invested in long-term loans or investments. Accordingly, the Company seeks to
have in place sources of cash to meet short-term demands. These funds can be
obtained by increasing deposits, borrowing, or selling assets. Also, Federal
Home Loan Bank advances and short-term borrowings provide additional sources of
liquidity for the Company.

During the year ended December 31, 1999, there was a net decrease in cash
and cash equivalents of $4,182,000. The major sources of cash in 1999 were loan
sales and maturing securities. The major uses of cash in 1999 were loan growth
and loans originated for sale.

During the year ended December 31, 1998, there was a net decrease in cash
and cash equivalents. of $620,000. The major sources of cash in 1998 were loan
sales and the increase in deposits. The major uses of cash in 1998 were the
purchase of investment securities and loans originated for sale.

During the year ended December 31, 1997, there was a net increase in cash
and cash equivalents of $3,328,000. The major sources of cash in 1997 were loan
sales and maturing securities. The major uses of cash in 1997 were loan growth
and loans originated for sale.

Federal law places restrictions on extensions of credit from banks to their
parent holding company and, with certain exceptions, to other affiliates, on
investments in stock or other securities thereof, and on taking of such
securities as collateral for loans. State law also places restrictions on the
payment of dividends by the Bank to the Company. Note L to the Consolidated
Financial Statements discusses these dividend limitations.

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

A-20
<PAGE> 185

the prime rate or a comparable index differ considerably from long-term
investment securities and fixed-rate loans. Similarly, certificates of deposit
and money market investment accounts are much more interest sensitive than
passbook savings accounts. The shorter term interest rate sensitivities are key
to measuring the interest sensitivity gap, or excess interest-earning assets
over interest-bearing liabilities. In addition to reviewing the interest
sensitivity gap, the Company also analyzes projected changes in market interest
rates and the resulting effect on net interest income.

The following table shows the interest sensitivity gaps for five different
time intervals as of December 31, 1999:

<TABLE>
<CAPTION>
0-30 31-90 91-365 1-5 OVER 5
DAYS DAYS DAYS YEARS YEARS
------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C>
Interest-earning assets................... $54,348 $ 6,439 $56,815 $108,904 $21,749
Interest-bearing liabilities.............. 53,968 84,526 42,013 25,260 10,000
------- -------- ------- -------- -------
Interest sensitivity gap.................. $ 380 $(78,087) $14,802 $ 83,644 $11,749
======= ======== ======= ======== =======
</TABLE>

The primary interest sensitive assets in the one year repricing range are
commercial loans and adjustable rate mortgage loans. The primary interest
sensitive liabilities in the one year repricing range are money market
investment accounts, certificates of deposit and interest bearing checking
accounts. This analysis indicates that growth in rate sensitive liabilities has
outpaced the growth in rate sensitive assets in the one year range. This has
occurred primarily as a result of the inclusion of interest bearing checking
accounts and savings accounts in a repricing period of one year or less as these
accounts have become rate sensitive as interest rates have fluctuated. The
long-term interest sensitivity gap indicates that the Company's net interest
margin would improve with an increase in interest rates and decline with further
declines in interest rates. Trying to minimize the interest sensitivity gap is a
continual challenge in a changing rate environment and one of the objectives of
the Company's asset/liability strategy.

RESULTS OF OPERATIONS

Net interest income is an effective measurement of how well management has
balanced the Company's interest rate sensitive assets and liabilities. Net
interest income increased by 1.8% in 1999, 1.7% in 1998 and 10.2% in 1997. The
1999 increase is due to the reinvestment of funds held in the investment
securities portfolio into the higher yielding loan portfolio, partially offset
by increased interest expense as a result of increased FHLB advances. The 1998
increase is due to the reinvestment of funds held in overnight federal funds
accounts into higher yielding investment securities. The 1997 net interest
income increased as a result of the reinvestment of funds received from maturing
investment securities into the higher yielding loan portfolio, along with the
stability of the Company's cost of funds.

The uncertain economic environment and potential fluctuations in interest
rates are expected to continue to impact the Company and the industry in 2000.
Depending on these interest rate fluctuations, there may be continued market
pressure to raise deposit rates in 2000 and to lower loan rates. The Company
monitors deposit rates on a weekly basis and adjusts deposit rates as the market
dictates. Loan rates are subject to change as the national prime rate changes
and are also influenced by competitor's rates. An increase in deposit rates
occurring at the same time as loan rate decreases would cause the Company's net
interest income to decline.

The provision for loan losses is based on an analysis of the required
additions to the allowance for loan losses. The allowance for loan losses is
maintained at a level believed adequate by management to absorb potential losses
in the loan portfolio. Some factors considered by management

A-21
<PAGE> 186

in determining the level at which the allowance is maintained include specific
credit reviews, past loan loss experience, current economic conditions and
trends, results of examinations by regulatory agencies and the volume, growth
and composition of the loan portfolio.

The provision for loan losses was $852,000 in 1999, $600,000 in 1998 and
$460,000 in 1997. The 1999 provision increase occurred to provide for loan
growth and increased charge-offs, primarily as a result of increased customer
bankruptcies. Net commercial loan charge-offs totaled $334,000 in 1999; $267,000
of this was attributable to three commercial borrowers that discontinued
business operations during 1999. The 1998 provision was increased to provide for
increased charge-offs and delinquencies, primarily as a result of increased
customer bankruptcies. The 1997 provision was increased to provide for loan
growth and the increase in charge-offs and delinquencies. Several customers,
including a large commercial borrower, declared bankruptcy during 1997 resulting
in increased charge-offs. It is anticipated that the Company will continue to
experience higher than normal losses in 2000. The provision will be adjusted
quarterly, if necessary, to reflect actual charge-off experience and any known
future losses.

Non-interest income, excluding security gains and losses, decreased by 5.4%
in 1999 and increased by 30.2% in 1998 and 15.2% in 1997. The 1999 decrease is
due primarily to a decline in gains recognized on the sale of real estate
mortgage loans to the secondary market. In order to reduce the risk associated
with changing interest rates, the Bank regularly sells fixed rate real estate
mortgage loans on the secondary market. The Bank recognizes a profit at the time
of the sale and receives a fee in order to service the loans. As fixed rate
mortgage rates increased in 1999, the number of new loans and refinancing
activities declined.

The 1998 increase is due to increased service charge income, increased
gains recognized on the sale of secondary market real estate mortgage loans and
increased income from the Bank's automatic teller machines (ATMs). The Bank
increased its deposit base by 12.7% in 1998 and generated additional service
charges as a result of the growth. During this period of relatively low interest
rates, the Bank generated large volumes of fixed rate mortgage loans which were
sold to the secondary market. During 1998, the Bank began assessing a fee to
noncustomers who use the Bank's ATMs and thus increased fees generated.

The 1997 increase is due to increased service charges on deposit accounts
as a result of the additional deposits purchased in connection with the
acquisition of two branches late in 1996, increased gains recognized on the sale
of secondary market real estate mortgage loans in 1997 due to an increase in
activity, increased fees from the sale of nondepository investment products in
1997 due to an increase in activity and unrecognized losses on real estate
mortgage loans held for sale recorded in 1996. These increases were partially
offset by a decline in trust income due to a decline in trust assets and a
decline in earnings on Bank owned life insurance policies due to an increase in
premium payments.

Security gains of $5,000 were recognized in 1997. No sales occurred in 1999
or 1998.

Non-interest expense increased by 2.2% in 1999, 1.8% in 1998 and 16.0% in
1997. In 1999, salaries and benefit expenditures increased as additional loan
department employees were added to assist with the increased loan volume.
Occupancy and equipment costs were higher in 1999 as a result of the addition of
the new Hillsdale branch and its equipment additions, increasing maintenance on
the Bank's older properties and technological upgrades to the Bank's mainframe
and personal computers. Professional and outside services were higher in 1999 as
a result of increased usage of consultants for general bank consulting purposes.
Advertising and marketing expenses were down for 1999 as a result of higher
expenses paid to promote the Bank's new checking product in 1998.

A-22
<PAGE> 187

The primary expense categories that increased in 1998 were occupancy and
equipment and professional and outside services. Occupancy and equipment costs
increased as a result of the opening of the new Hillsdale branch and continued
upgrades to the Bank's technology base. Professional and outside services
increased as a result of increased usage of consultants for general bank
consulting purposes.

The 1997 increase was due to additional personnel costs, occupancy and
equipment costs, advertising and marketing expenditures, training costs and
intangible asset amortization as a result of the acquisition of two branches
late in 1996. Trust department expenses also increased in 1997 as professional
consultants and new trust administrators were added in order to increase the
trust department's market share. Equipment costs increased in 1997 as the
Company invested in significant technological upgrades.

Income tax expense was $1,005,000 in 1999, $1,185,000 in 1998 and
$1,085,000 in 1997. Tax-exempt income continues to have a major impact on the
Company's tax expense. The lower coupon rate on municipal instruments is offset
by the nontaxable feature of the income earned on such instruments. This
resulted in a lower effective tax rate and reduced federal income tax expense by
approximately $358,000 in 1999, $350,000 in 1998 and $254,000 in 1997.

Results of operations can be measured by various ratio analyses. Two widely
recognized performance indicators are the return on equity and the return on
assets. The Company's return on average equity was 16.4% in 1999, 17.5% in 1998
and 15.0% in 1997. The return on average assets was 1.2% in 1999, 1.4% in 1998
and 1.3% in 1997.

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

Management believes the most significant impact on financial results is the
Company's ability to react to changes in interest rates. As discussed
previously, management is attempting to maintain an essentially balanced
position between interest sensitive assets and liabilities in order to protect
against wide interest rate fluctuations.

YEAR 2000

The Company had a successful Year 2000 rollover. The Company has not
experienced any significant Year 2000 problems as a result of the rollover, and
is not aware of any customers that have experienced material Year 2000 problems.
This success can be attributed to the fact that the Company began addressing
Year 2000 issues in mid 1997. The Company followed a plan to identify all
critical business processes and established a priority schedule for assessment
of each process. As the Company worked through its Year 2000 plan, any hardware,
software, equipment or vendor provided services that were identified as not Year
2000 compliant were either upgraded or retired. While no Year 2000 problems have
been identified to date, monitoring will continue for most of 2000 to assure
that all Year 2000 issues have been addressed.

NONPERFORMING ASSETS

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

A-23
<PAGE> 188

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

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

<TABLE>
<CAPTION>
DECEMBER 31
------------------------
1999 1998 1997
---- ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Nonaccrual loans:
Commercial, financial and agricultural.................... $306 $ 343 $1,026
Real estate mortgage...................................... 23 -- --
Installment............................................... -- -- 61
---- ------ ------
329 343 1,087
Loans contractually past due 90 days or more:
Commercial, financial and agricultural.................... 432 807 1,067
Real estate mortgage...................................... 134 161 630
Installment............................................... 34 120 966
---- ------ ------
600 1,088 2,663
---- ------ ------
Total nonperforming loans................................... 929 1,431 3,750
Other real estate owned..................................... 4 166 103
---- ------ ------
Total nonperforming assets.................................. $933 $1,597 $3,853
---- ------ ------
Nonperforming loans to year-end loans....................... .48% .88% 2.36%
==== ====== ======
Nonperforming assets to year-end loans and other real estate
owned..................................................... .48% .98% 2.43%
==== ====== ======
</TABLE>

Nonperforming loans are subject to continuous monitoring by management and
are specifically reserved for in the allowance for loan losses where
appropriate.

At December 31, 1999, the Company had approximately $2,683,000 in
commercial, financial and agricultural loans for which payments are presently
current but the borrowers are experiencing certain financial and/or operational
difficulties. These loans are subject to frequent management review and their
classification is reviewed on a monthly basis.

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

REGULATORY MATTERS

Representatives of the Financial Institutions Bureau, a division of the
Department of Commerce of the State of Michigan, completed an examination at the
Company's subsidiary bank using financial information as of May 24, 1999. The
purpose of the examination was to determine the safety and soundness of the
Bank.

A-24
<PAGE> 189

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

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

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company's primary market risk exposure is interest rate risk and to a
lesser extent liquidity risk. See Liquidity and Interest Rate Sensitivity,
above. Business is transacted in U.S. dollars with no foreign exchange rate risk
or any direct exposure to changes in commodity prices.

The following tables provide information about the Company's financial
instruments that are sensitive to changes in interest rates as of December 31,
1999 and 1998. The Company had no derivative financial instruments, or trading
portfolio, at either date. The expected maturity date values for loans
receivable, mortgage-backed securities and investment securities were calculated
without adjusting the instrument's contractual maturity date for expectations of
prepayments. Expected maturity date values for interest-bearing core deposits
were not based upon estimates of the period over which the deposits would be
outstanding, but rather the opportunity for repricing. Similarly, with respect
to its variable rate instruments, the Company believes that repricing dates, as
opposed to expected maturity dates may be more relevant in analyzing the value
of such instruments and are reported as such in the following table. Company
borrowings are also reported based on conversion or repricing dates.

<TABLE>
<CAPTION>
1999 PRINCIPAL AMOUNT MATURING IN:
----------------------------------------------------------------------- FAIR VALUE
2000 2001 2002 2003 2004 THEREAFTER TOTAL 12/31/99
-------- ------ ------- ------- ------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Rate sensitive assets:
Fixed interest rate
loans............... $11,510 $5,997 $10,769 $11,439 $16,581 $23,127 $ 79,423 $ 78,477
Average interest
rate.............. 8.98 9.01 9.03 9.52 9.72 9.31 9.12
Variable interest rate
loans............... 84,171 5,636 4,514 6,928 10,934 1,765 113,948 113,948
Average interest
rate.............. 8.65 8.92 8.89 9.03 8.90 9.17 8.75
Fixed interest rate
securities.......... 9,638 7,985 11,546 11,217 2,902 10,941 54,229 54,229
Average interest
rate.............. 5.45 5.57 5.64 5.87 5.44 5.32 5.60
Other interest bearing
assets.............. 655 655 655
Average interest
rate.............. 5.14% 5.14%
</TABLE>

A-25
<PAGE> 190

<TABLE>
<CAPTION>
1999 PRINCIPAL AMOUNT MATURING IN:
----------------------------------------------------------------------- FAIR VALUE
2000 2001 2002 2003 2004 THEREAFTER TOTAL 12/31/99
-------- ------ ------- ------- ------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Rate sensitive
liabilities
Interest bearing demand
deposits............ 82,498 82,498 82,498
Average interest
rate.............. 3.19 3.19
Passbook savings....... 30,793 30,793 30,793
Average interest
rate.............. 2.40 2.40
Time deposits.......... 57,453 8,044 5,765 574 29 71,865 71,959
Average interest
rate.............. 5.11 5.65 5.55 5.15 5.14 5.23
Other deposits......... 6,482 2,792 1,265 234 4,250 15,023 14,911
Average interest
rate.............. 4.87 5.25 5.29 5.30 5.31 5.11
Fixed interest rate
borrowings.......... 13,588 2,000 15,588 15,588
Average interest
rate.............. 5.32 5.77 5.38
</TABLE>

<TABLE>
<CAPTION>
1998 PRINCIPAL AMOUNT MATURING IN:
----------------------------------------------------------------------- FAIR VALUE
1999 2000 2001 2002 2003 THEREAFTER TOTAL 12/31/99
-------- ------ ------- ------- ------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Rate sensitive assets:
Fixed interest rate
loans.............. $ 9,887 $6,679 $ 8,478 $10,259 $11,483 $11,582 $ 58,368 $ 58,653
Average interest
rate............. 10.81 9.98 10.25 10.50 9.79 9.01 10.02
Variable interest rate
loans.............. 77,513 5,190 4,157 6,380 10,069 1,626 104,935 104,935
Average interest
rate............. 8.75 8.63 8.65 8.79 9.00 8.72 8.70
Fixed interest rate
securities......... 21,933 11,304 7,962 5,327 2,971 18,397 67,894 68,831
Average interest
rate............. 4.71 4.62 4.59 4.64 4.58 4.71 4.60
Other interest bearing
assets................ 6,610 6,610 6,610
Average interest
rate............. 4.84% 4.84%
Rate sensitive
liabilities
Interest bearing
demand deposits.... 79,255 79,255 79,255
Average interest
rate............. 3.05 3.05
Passbook savings...... 31,797 31,797 31,797
Average interest
rate............. 2.30 2.30
Time deposits......... 54,704 10,774 5,164 1,797 72,439 72,899
Average interest
rate............. 5.11 4.83 4.74 4.81 5.00
Other deposits........ 6,461 2,825 1,282 235 4,289 15,092 16,209
Average interest
rate............. 4.35 5.81 5.72 5.65 5.60 5.40
Fixed interest rate
borrowings......... 3,588 2,000 5,588 5,588
Average interest
rate............. 5.47 5.47 5.47
</TABLE>

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information required by this Item is set forth in the Section entitled
"Quantitative and Qualitative Disclosures about Market Risk" included under Item
7 of this report and is incorporated herein by reference.

A-26
<PAGE> 191

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

See consolidated financial statements of the Company which are included in
Item 14., Exhibits, Financial Statement Schedules and Reports on Form 8-K, and
begin on page FS-1.

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

None

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

The following table lists the names of the directors and their ages as of
February 29, 2000, their principal occupations and the year in which each became
a director. Mr. Grohalski is the only executive officer of the Company.

<TABLE>
<CAPTION>
YEAR FIRST BECAME A
PRINCIPAL OCCUPATION(S) FOR DIRECTOR OF THE
NAME OF DIRECTOR AGE PAST 5 YEARS(1) COMPANY
-------------------------------- --- -------------------------------- -------------------
<S> <C> <C> <C>
James P. Briskey................ 66 Owner -- Pittsford Grain 1982
Incorporated (grain elevator
operator)
H. Kenneth Cole................. 51 Treasurer -- Hillsdale College 1998
William E. Galliers............. 57 Co-Owner and Chief Executive 1993
Officer -- G & W Display
Fixtures, Inc. (manufacturer of
display fixtures)
James T. Grohalski.............. 59 President and Chief Executive 1982
Officer of the Company and the
Bank since December 31, 1998;
Executive Vice President and
Chief Financial Officer of the
Company and President of the
Bank from January 1, 1984 until
December 31, 1998; Mr. Grohalski
joined the Bank in 1967.
Nolan E. Hooker................. 48 Owner -- Hooker Oil Co. 1991
(distributor of heating oil)
Gregory J. Hull................. 51 Farmer 1955
Thomas E. Kolassa............... 52 Owner -- The Planning Group 1995
(insurance)
James J. Morrison............... 52 Owner -- Morrison & Associates 1991
(insurance)
Jane L. Randall................. 78 Owner -- Dally Tire Co. (tire 1982
distributor)
</TABLE>

A-27
<PAGE> 192

ITEM 11. EXECUTIVE COMPENSATION

The following table sets forth compensation paid by the Company and the
Bank with respect to the fiscal year ended December 31, 1999 to the Company's
Chief Executive Officer. Mr. Grohalski is the only executive officer of the
Company.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-------------------
ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY ($)(1) COMPENSATION ($)(2)
--------------------------- ---- ------------- -------------------
<S> <C> <C> <C>
James T. Grohalski................................
President and Chief............................... 1999 $140,570 $7,344
Executive Officer of the.......................... 1998 $133,813 $7,400
Company and the Bank.............................. 1997 $135,225 $7,202
</TABLE>

-------------------------
(1) The amounts shown include amounts deferred under the 401(k) provisions of
the ESOP and the Bank's Executives' Deferred Compensation Plan.

(2) The amounts shown include the following for 1999: (i) employer contributions
to accounts in the ESOP and the Deferred Compensation Plan of $4,000 and
$3,000 respectively for Mr. Grohalski; and (ii) $344 constituting the value
of insurance premiums paid by the Bank for term life insurance for Mr.
Grohalski's benefit.

Retirement Benefits

Officers of the Company participate in the Southern Michigan Bank & Trust
Retirement Plan (the "Retirement Plan") which has been adopted by the Bank.
Under the terms of the Retirement Plan, a normal monthly retirement benefit is
provided to covered employees who attain the age of 65. It provides for a normal
retirement benefit after 30 years of credited service equal to 35% of a
participant's actual monthly compensation based on the participant's highest
consecutive five year average compensation (see column captioned
"Remuneration"). For participants with less than 30 years credited service,
reduced benefits are available in an amount equal to the normal retirement
benefit reduced by 1/30 for each year of service less than 30. Participants are
100% vested after five years of credited service, and are subject to forfeiture
upon termination of employment with credited service less than five years. The
following table represents estimated normal annual benefits payable

A-28
<PAGE> 193

on a straight-life annuity basis upon retirement at age 65 and are not subject
to deduction for social security benefits:

PENSION PLAN TABLE

<TABLE>
<CAPTION>
YEARS OF SERVICE
-----------------------------
REMUNERATION 25 30 35
------------ ------- ------- -------
<S> <C> <C> <C>
$110,000.................................................... $32,100 $38,500 $38,500
$120,000.................................................... $35,000 $42,000 $42,000
$130,000.................................................... $37,900 $45,500 $45,500
$140,000.................................................... $40,800 $49,000 $49,000
$150,000.................................................... $43,750 $52,500 $52,500
</TABLE>

James T. Grohalski has 32 years of credited service and $132,500 current
covered remuneration.

The Bank also has in effect supplemental retirement arrangements in the
form of Executive Employee Salary Continuation Agreements with Messrs. Grohalski
and Towns under which a specified annual benefit, in addition to that provided
under the Retirement Plan, is payable to the participant upon retirement at age
65. The participant is entitled to a reduced benefit if his retirement occurs
between the ages of 62 and 65. No benefit is payable if the participant
voluntarily terminates his employment or is discharged for cause prior to the
age of 62. However, the specified benefit is payable beginning at age 65, if the
participant's employment is terminated after a "change in control" of the
Company, and in connection with such change, his title, responsibility or
compensation is significantly lessened or the status of his employment is
changed without his consent. The specified annual benefit, when added to the
benefit under the Retirement Plan, is intended to be approximately equal to the
benefit the participant would have received under the Retirement Plan but for a
plan amendment which changed the Retirement Plan's benefit formula to comply
with changes in pension laws and which substantially reduced the participants'
benefits. For James T. Grohalski, the specified benefit payable upon retirement
at age 65 under the supplemental retirement arrangement is $22,060 per year for
15 years. The Board of Directors may increase the benefit by not more than 2%
per year prior to retirement.

The Bank also has an Executives' Deferred Compensation Plan (the "Deferred
Compensation Plan") for directors and certain officers. Under the Deferred
Compensation Plan, participants elect to defer a portion of their compensation
(in the case of directors, their fees) on a pretax basis. Upon retirement at or
after age 65, the participant or his or her designated beneficiary is entitled
to a benefit equal to the amount of the participant's deferrals to the Deferred
Compensation Plan plus earnings on such deferrals at a specified rate of
interest compounded annually, payable in equal monthly amounts for not less than
180 months. Upon the participant's termination of employment or retirement
before age 65, the benefit payable to the participant at age 65 is determined by
multiplying the amount deferred under the Deferred Compensation Plan by the
ratio of the number of months for which the participant made deferrals to the
number of months from the time the participant began making deferrals to the
participant's reaching age 65. The amounts shown in the summary compensation
table above include amounts deferred as contributions under the Deferred
Compensation Plan.

A-29
<PAGE> 194

COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION

Executive Compensation Policies.

The Company's executive compensation policies are designed to support the
corporate objective of maximizing the long-term value of the Company to its
shareholders and employees. To achieve this objective, the Compensation
Committee believes it is important to provide competitive levels of compensation
to attract and retain the most qualified executives, to recognize individuals
who exceed expectations and to link closely overall corporate performance and
executive pay.

The Company has established two primary components of the Company's
executive compensation plan. The two components are: (a) base compensation; and
(b) stock-based performance compensation through stock option grants, subject to
the shareholders' approval of the Southern Michigan Bancorp, Inc. 2000 Stock
Option Plan described below.

Base Compensation.

The Compensation Committee annually reviews base salaries of executive
officers. Factors which influence decisions made by the Compensation Committee
regarding base salaries are levels of responsibility and potential for future
responsibilities, salary levels offered by competitors and overall performance
of the Company. The Compensation Committee's practice in establishing salary
levels is based in part upon overall Company performance and is not based upon
any specific objectives or policies, but reflects the subjective judgment of the
Compensation Committee. However, specific annual performance goals are
established for each executive officer. Based on the Compensation Committee's
comparison of the Company's overall compensation levels as a percent of revenues
and net income to comparable companies in the industry, the Compensation
Committee believes its overall compensation levels are in the middle of the
range.

Stock Option Grants.

Executive compensation to reward past performance and to motivate future
performance will also be provided through stock options granted under the
Southern Michigan Bancorp, Inc. 2000 Stock Option Plan if approved by the
shareholders. The purpose of the plan is to encourage executive officers to
maintain a long-term stock ownership position in the Company in order that their
interests are aligned with those of the Company's shareholders. The Board of
Directors, in its discretion, has the authority to determine participants in the
plan, the number of shares to be granted and the option price and term.
Consideration for stock option awards are evaluated on a subjective basis and
granted to participants until an ownership position exists which is consistent
with the participant's current responsibilities.

Chief Executive Officer Compensation.

The Compensation Committee established Mr. Grohalski's base salary based
primarily on a subjective evaluation of the Company's prior year's financial
results, past salary levels and compensation paid to other chief executive
officers in the Company's industry. Based on the Compensation Committee's
comparison of the Company's overall compensation level for Mr. Grohalski as a
percent of revenue and net income to comparable companies in the industry, the
Compensation Committee believes his overall compensation level is in the middle
of the range.

RESPECTFULLY SUBMITTED BY THE MEMBERS OF THE COMPENSATION COMMITTEE, James J.
Morrison, H. Kenneth Cole and James P. Briskey.

A-30
<PAGE> 195

DIRECTOR COMPENSATION

Currently, each director of the Company whose principal occupation is not
with the Company or the Bank receives an annual fee of $6,200 which will be
indexed for inflation in 2000. In addition, outside directors are compensated
$150 for each committee meeting attended and participate in a bonus program
based upon the achievement of growth and profitability goals. No bonus was paid
to outside directors for 1999. Subject to approval by the shareholders as
described below, the directors will be eligible to receive stock options under
the Southern Michigan Bancorp, Inc. 2000 Stock Option Plan.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth, as of February 29, 2000, the names and
addresses of all beneficial owners of 5% or more of the Common Stock showing the
amount and nature of such beneficial ownership:

<TABLE>
<CAPTION>
AMOUNT & NATURE
NAME & ADDRESS OF OF BENEFICIAL PERCENT OF
TITLE OF CLASS BENEFICIAL OWNER OWNERSHIP(1) CLASS
------------------------------ ------------------------------ --------------- ----------
<S> <C> <C> <C>
Common Stock.................. Southern Michigan Bank & Trust 169,500(a) 8.65%
51 West Pearl Street
Coldwater, MI 49036
Common Stock.................. Harvey B. Randall 146,075(b) 7.46%
8391 Old U.S. 27 South
Marshall, MI 49068
</TABLE>

-------------------------
(1) Based upon information furnished to the Company by the beneficial owners
named above. The nature of beneficial ownership for shares shown is sole
voting and investment power, except as set forth below. Shares have been
rounded to the nearest whole share.

(a) Shares are held by the Trust Department of Southern Michigan Bank &
Trust (the "Bank") in various fiduciary capacities. 16,270 of such
shares are voted by the Bank with no investment power.

(b) Includes 146,022 shares held by Mr. Randall as trustee.

A-31
<PAGE> 196

The following table sets forth, as of February 29, 2000, the total number
of shares of the Common Stock beneficially owned, and the percent of such shares
so owned, by each director and by all directors and executive officers of the
Company as a group.

<TABLE>
<CAPTION>
NAME OF BENEFICIAL OWNER OR AMOUNT AND NATURE OF PERCENT
NUMBER OF PERSONS IN GROUP BENEFICIAL OWNERSHIP(1) TOTAL OF CLASS
--------------------------- ----------------------- ------ --------
<S> <C> <C> <C>
James P. Briskey................................... 10,648 21,296 1.09
10,648(a)
H. Kenneth Cole.................................... 169 169 (2)
William E. Galliers................................ 2,260(a) 2,260 (2)
James T. Grohalski(3).............................. 21,868(b) 21,868 1.12
Nolan E. Hooker.................................... 950(a) 950 (2)
Gregory J. Hull.................................... 1,099(a) 1,099 (2)
Thomas E. Kolassa.................................. 1,527(a) 1,527 (2)
James J. Morrison.................................. 346 2,904 (2)
2,558(a)
Jane L. Randall.................................... 5,774(c) 5,774 (2)
Freeman E. Riddle.................................. 4,554 7,000 (2)
2,446(a)
Jerry L. Towns(4).................................. 126(a) 7,048 (2)
6,922(d)
All directors and executive officers as a group (11
persons)......................................... 71,895 71,895 3.67%
</TABLE>

-------------------------
(1) Based upon information furnished to the Company by the individual named and
the members of the designated group. The nature of beneficial ownership for
shares shown is sole voting and investment power except as set forth below.
Shares have been rounded to the nearest whole share.

(a) Shared voting and investment power.

(b) Includes 19,385 shares held by the Bank's Employee Stock Ownership Plan
(the "ESOP") as to which Mr. Grohalski has voting power only.

(d) Shares are voted by the Bank as IRA custodian unless otherwise directed
by Mr. Towns.

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

(3) Mr. Grohalski is the only executive officer of the Company.

(4) Mr. Towns served on the Board of Directors since 1982 and is retiring as a
director effective April 17, 2000. Mr. Towns' three year term as a director
expires as of the 2000 Annual Meeting.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Directors and officers of the Company and their associates were customers
of, and had transactions with the Bank in the ordinary course of business during
1999. All loans and commitments included in such transactions were made in the
ordinary course of business on substantially the same terms, including interest
rates and collateral, as those prevailing at the time for comparable
transactions with other persons and did not involve more than the normal risk of
collectibility or present other unfavorable features.

A-32
<PAGE> 197

PART IV

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

(a)(1) The following consolidated financial statements of the Company are
filed as a part of this report and are included herewith beginning
on page FS-1:

- Report of Crowe, Chizek and Company LLP, independent auditors

- Consolidated Balance Sheets -- December 31, 1999 and 1998

- Consolidated Statements of Changes in Shareholders' Equity -- Years
ended December 31, 1999, 1998 and 1997

- Consolidated Statements of Income -- Years ended December 31, 1999,
1998 and 1997

- Consolidated Statements of Cash Flows -- Years ended December 31,
1999, 1998 and 1997

- Notes to Consolidated Financial Statements -- December 31, 1999

(a)(2) Not applicable.

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

<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ------------------------------------------------------------
<S> <C>
Exhibit 2 Agreement and Plan of Consolidation dated February 15, 2000
by and between the Company and Sturgis Bank & Trust Company,
a Michigan savings bank.
Exhibit 3(i) Articles of Incorporation incorporated by reference to
Exhibit 3 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1991 and Exhibit 3 to Form S-3D
filed April 30, 1998.
Exhibit 3(ii) Amended and Restated By-Laws are incorporated by reference
to Exhibit 3 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1997.
Exhibit 4 Instruments Defining the Rights of Security Holders of the
Company are the Articles of Incorporation and By-Laws (see
Exhibits 3(i) and (ii) above).
Exhibit 9 Not applicable.
Exhibit 10(a) Material Contracts -- Executive Compensation Plans and
Arrangements: (1) Master Agreements for Directors' Deferred
Income Plan; (2) Composite form of Executive Employee Salary
Continuation Agreement, as amended; and (3) Master
Agreements for Executives' Deferred Compensation Plan, as
amended, are incorporated by reference to Exhibit 10 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1994.
Exhibit 10(b) Southern Michigan Bancorp, Inc. 2000 Stock Option Plan.
Exhibit 11 Not applicable.
Exhibit 12 Not applicable.
Exhibit 13 Not applicable.
Exhibit 16 Not applicable.
Exhibit 18 Not applicable.
Exhibit 19 Not applicable.
Exhibit 21 Subsidiaries of the Company.
Exhibit 22 Not applicable.
Exhibit 23 Consent of Independent Auditors.
Exhibit 27 Financial Data Schedule.
</TABLE>

A-33
<PAGE> 198

(b) No reports on Form 8-K were filed in the last Quarter of the period
covered by this report.

(d) Financial Statement Schedules -- Omitted due to inapplicability or
because required information is shown in the Financial Statements and
Notes thereto.

SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION
15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO
SECTION 12 OF THE ACT

(a) On March 24, 2000, the Company delivered to the Commission via EDGAR
its proxy statement dated March 24, 2000 which was prepared for its 2000 Annual
Meeting of Shareholders and, which proxy statement included, in Appendix B, the
information required in its 2000 Annual Report.

A-34
<PAGE> 199

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Southern Michigan Bancorp, INC.
Dated: March 20, 2000
By: /s/ JAMES T. GROHALSKI
------------------------------------
James T. Grohalski
Its: President and Chief Executive
Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
and in the capacities and on the dates indicated.

<TABLE>
<S> <C>
/s/ JAMES P. BRISKEY /s/ THOMAS E. KOLASSA
------------------------------------------ ------------------------------------------
James P. Briskey, Director Thomas E. Kolassa, Director

/s/ H. KENNETH COLE /s/ JAMES J. MORRISON
------------------------------------------ ------------------------------------------
H. Kenneth Cole, Director James J. Morrison, Director

/s/ WILLIAM E. GALLIERS /s/ JANE L. RANDALL
------------------------------------------ ------------------------------------------
William E. Galliers, Director Jane L. Randall, Director

/s/ JAMES T. GROHALSKI /s/ FREEMAN E. RIDDLE
------------------------------------------ ------------------------------------------
James T. Grohalski, President, Chief Freeman E. Riddle, Director
Executive Officer and Director
(Principal Financial & Accounting Officer)

/s/ NOLAN E. HOOKER /s/ JERRY L. TOWNS
------------------------------------------ ------------------------------------------
Nolan E. Hooker, Director Jerry L. Towns, Director

/s/ GREGORY J. HULL Dated: March 20, 2000
------------------------------------------
Gregory J. Hull, Director
</TABLE>

A-35
<PAGE> 200

REPORT OF INDEPENDENT AUDITORS

[CROWE CHIZEK LOGO]

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

We have audited the accompanying consolidated balance sheets of Southern
Michigan Bancorp, Inc. as of December 31, 1999 and 1998 and the related
consolidated statements of income, shareholders' equity and cash flows for each
of the three years in the period ended December 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Southern
Michigan Bancorp, Inc. as of December 31, 1999 and 1998 and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1999 in conformity with generally accepted accounting principles.

As disclosed in Note C, on July 1, 1999 the Company changed its method of
accounting for derivative instruments and hedging activities to comply with new
accounting guidance.

Crowe, Chizek and Company LLP

South Bend, Indiana
February 11, 2000
<PAGE> 201

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT NUMBER OF SHARES)

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1999 1998
-------- --------
<S> <C> <C>
ASSETS
Cash........................................................ $ 4,217 $ 3,021
Due from banks.............................................. 7,829 13,207
-------- --------
Cash and cash equivalents.............................. 12,046 16,228
Federal funds sold.......................................... 4,000
Securities available for sale............................... 54,229 36,138
Securities held to maturity (fair value $32,693 -- 1998).... 31,756
Loans, net of allowance for loan losses $2,132 -- 1999
($2,026 -- 1998).......................................... 191,239 161,277
Premises and equipment...................................... 6,705 7,036
Accrued interest receivable................................. 2,442 2,418
Net cash surrender value of life insurance.................. 5,251 5,026
Other assets................................................ 3,913 2,972
-------- --------
Total Assets........................................... $275,825 $266,851
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Non-interest bearing................................... $ 33,124 $ 34,778
Interest bearing....................................... 200,179 198,583
-------- --------
Total deposits.................................... 233,303 233,361
Accrued expenses and other liabilities.................... 3,542 3,116
Other borrowings.......................................... 15,000 5,000
-------- --------
Total Liabilities...................................... 251,845 241,477
Common stock subject to repurchase obligation in Employee
Stock Ownership Plan, shares outstanding -- 130,502 in
1999 (150,727 in 1998).................................... 3,990 6,029
Shareholders' equity
Preferred stock, 100,000 shares authorized; none issued
or outstanding Common stock, $2.50 par value:
Authorized -- 4,000,000 shares
Issued -- 1,969,259 shares in 1999 (1,872,677 in
1998)
Outstanding -- 1,838,757 shares in 1999 (1,721,950
in 1998)....................................... 4,597 4,305
Additional paid-in capital............................. 8,421 3,863
Retained earnings...................................... 7,949 11,505
Accumulated other comprehensive income (loss), net of
tax $200 -- 1999, $(134) -- 1998...................... (389) 260
Unearned Employee Stock Ownership Plan shares.......... (588) (588)
-------- --------
Total Shareholders' Equity........................ 19,990 19,345
-------- --------
Total Liabilities and Shareholders' Equity............. $275,825 $266,851
======== ========
</TABLE>

See accompanying notes to consolidated financial statements.

FS-2
<PAGE> 202

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT NUMBER OF SHARES AND PER SHARE DATA)

<TABLE>
<CAPTION>
ACCUMULATED
OTHER
COMPREHENSIVE
ADDITIONAL INCOME, UNEARNED
COMMON PAID-IN RETAINED (LOSS) ESOP
STOCK CAPITAL EARNINGS NET OF TAX SHARES TOTAL
------ ---------- -------- ------------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997........ $2,174 $ 2,734 $14,687 $ 21 $ $19,616
Net income for 1997............... 3,032 3,032
Cash dividends declared -- $.52
per share....................... (1,109) (1,109)
Common stock issued under dividend
reinvestment plan (9,879
shares)......................... 25 365 390
100% stock dividend issued
(956,695 shares)................ 2,392 (2,392)
Change in common stock subject to
repurchase...................... (159) (1,185) (1,344)
Net change in unrealized gain on
available for sale securities,
net of tax...................... 5 5
------ ------- ------- ----- ----- -------
Balance at December 31, 1997...... 4,432 1,914 14,218 26 20,590
Net income for 1998............... 3,549 3,549
Cash dividends declared -- $.60
per share....................... (1,262) (1,262)
Common stock issued under dividend
reinvestment plan (6,835
shares)......................... 18 233 251
Common stock repurchased and
retired (51,079 shares)......... (128) (2,171) (2,299)
Transfer from retained earnings to
additional paid-in capital...... 5,000 (5,000)
Change in common stock subject to
repurchase...................... (17) (1,113) (1,130)
Purchase of shares by ESOP
(14,000 shares)................. (588) (588)
Net change in unrealized gain on
available for sale securities,
net of tax...................... 234 234
------ ------- ------- ----- ----- -------
Balance at December 31, 1998...... 4,305 3,863 11,505 260 (588) 19,345
Net income for 1999............... 3,300 3,300
Cash dividends declared -- $.68
per share....................... (1,373) (1,373)
10% stock dividend issued (179,024
shares)......................... 447 5,036 (5,483)
Common stock repurchased and
retired (82,442 shares)......... (206) (2,466) (2,672)
Change in common stock subject to
repurchase...................... 51 1,988 2,039
Net change in unrealized gain
(loss) on available for sale
securities, net of tax.......... (649) (649)
------ ------- ------- ----- ----- -------
Balance at December 31, 1999...... $4,597 $ 8,421 $ 7,949 $(389) $(588) $19,990
====== ======= ======= ===== ===== =======
</TABLE>

See accompanying notes to consolidated financial statements.

FS-3
<PAGE> 203

CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Interest income:
Loans, including fees..................................... $16,577 $15,781 $15,545
Securities:
Taxable.............................................. 2,235 2,305 2,189
Tax-exempt........................................... 1,132 1,094 861
------- ------- -------
3,367 3,399 3,050
Other..................................................... 107 266 74
------- ------- -------
Total interest income................................ 20,051 19,446 18,669
Interest expense:
Deposits.................................................. 7,738 7,622 7,260
Other..................................................... 697 410 183
------- ------- -------
Total interest expense............................... 8,435 8,032 7,443
------- ------- -------
Net Interest Income......................................... 11,616 11,414 11,226
Provision for loan losses................................... 852 600 460
------- ------- -------
Net Interest Income after Provision for Loan Losses......... 10,764 10,814 10,766
Non-interest income:
Service charges on deposit accounts....................... 1,064 978 835
Trust fees................................................ 486 500 528
Securities gains.......................................... 5
Net gains on loan sales................................... 758 1,085 550
Earnings on life insurance assets......................... 208 220 181
Other..................................................... 509 413 360
------- ------- -------
3,025 3,196 2,459
Non-interest expense:
Salaries and employee benefits............................ 4,569 4,528 4,508
Occupancy................................................. 854 781 697
Equipment................................................. 979 872 762
Printing, postage and supplies............................ 385 466 419
Advertising and marketing................................. 287 417 444
Professional and outside services......................... 428 326 242
Other..................................................... 1,982 1,886 2,036
------- ------- -------
9,484 9,276 9,108
------- ------- -------
Income before income taxes.................................. 4,305 4,734 4,117
Federal income taxes........................................ 1,005 1,185 1,085
------- ------- -------
Net Income.................................................. 3,300 3,549 3,032
Other comprehensive income:
Unrealized gains (losses) on securities arising during the
year................................................... (1,599) 355 13
Net cumulative effect of adopting new accounting
principle.............................................. 616
Reclassification adjustment for accumulated (gains) losses
included in net income................................. (5)
Tax effect................................................ 334 (121) (3)
------- ------- -------
Other comprehensive income (loss)......................... (649) 234 5
------- ------- -------
Comprehensive Income........................................ $ 2,651 $ 3,783 $ 3,037
======= ======= =======
Basic and Diluted Earnings Per Common Share................. $ 1.64 $ 1.70 $ 1.44
======= ======= =======
</TABLE>

See accompanying notes to consolidated financial statements.

FS-4
<PAGE> 204

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Operating Activities
Net income........................................... $ 3,300 $ 3,549 $ 3,032
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses....................... 852 600 460
Depreciation.................................... 711 599 527
Net amortization of investment securities....... 206 182 138
Net realized gain on sales of investment
securities................................... (5)
Loans originated for sale....................... (27,348) (34,550) (17,175)
Proceeds on loans sold.......................... 27,773 35,167 17,489
Net gains on loan sales......................... (758) (1,085) (550)
Net change in:
Accrued interest receivable..................... (24) (342) (161)
Other assets.................................... (607) 60 124
Accrued expenses and other liabilities.......... 481 (459) 160
-------- -------- --------
Net cash from operating activities.............. 4,586 3,721 4,039
Investing Activities
Net (increase) decrease in federal funds sold........ 4,000 500 (4,500)
Activity in available-for-sale securities:
Sales........................................... 255
Maturities and calls............................ 19,238 9,522 12,187
Purchases....................................... (19,387) (32,808) (1,167)
Activity in held-to-maturity securities:
Maturities and calls............................ 12,625 6,852 4,355
Purchases....................................... (6,213) (4,230)
Increase in net cash surrender value of life
insurance.......................................... (225) (612) (432)
Loan originations and payments, net.................. (30,481) (4,531) (6,230)
Additions to premises and equipment.................. (380) (2,047) (888)
-------- -------- --------
Net cash from investing activities.............. (14,610) (29,337) (650)
Financing Activities
Net change in deposits............................... (58) 26,296 (2,402)
Proceeds from other borrowings....................... 10,000 2,000 3,000
Common stock issued.................................. 251 390
Cash dividends paid.................................. (1,428) (1,252) (1,049)
Repurchase of common stock........................... (2,672) (2,299)
-------- -------- --------
Net cash from financing activities.............. 5,842 24,996 (61)
-------- -------- --------
Net change in cash and cash equivalents................... (4,182) (620) 3,328
Beginning cash and cash equivalents....................... 16,228 16,848 13,520
-------- -------- --------
Ending cash and cash equivalents.......................... $ 12,046 $ 16,228 $ 16,848
======== ======== ========
Transfers of securities from held to maturity to available
for sale................................................ $ 19,747 $ -- $ --
</TABLE>

See accompanying notes to consolidated financial statements.

FS-5
<PAGE> 205

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE A - NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES

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

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

USE OF ESTIMATES: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities and disclosure of contingent liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Estimates that are more susceptible to change in the near term include the
allowance for loan losses, deferred income tax provisions, fair values of
certain securities and other financial instruments and the actuarial present
value of pension benefit obligations, net periodic pension expense and prepaid
pension costs.

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

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

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

Interest income is not reported when full loan repayment is in doubt,
typically when payments are past due over 90 days, unless the loan is both well
secured and in the process of collection. Payments received on such loans are
reported as principal reductions.

FS-6
<PAGE> 206
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE A - NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ALLOWANCE FOR LOAN LOSSES: The allowance for loan losses is a valuation
allowance for probable credit losses, increased by the provision for loan losses
and decreased by charge-offs less recoveries. Estimating the risk of loss and
the amount of loss on any loans is necessarily subjective. Accordingly,
management estimates the allowance balance required based on past loan loss
experience, known and inherent risks in the portfolio, information about
specific borrower situations and estimated collateral values, economic
conditions, and other factors. Allocations of the allowance may be made for
specific loans, but the entire allowance is available for any loan that, in
management's judgment, should be charged-off. A problem loan is charged-off by
management as a loss when deemed uncollectible, although collection efforts
continue and future recoveries may occur.

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

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

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

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

GOODWILL AND CORE DEPOSIT INTANGIBLES: Goodwill is the excess of purchase
price over identified net assets in business acquisitions. Goodwill is amortized
on the straight-line method over 15 years. Identified intangibles represent the
value of depositor relationships purchased and are amortized on accelerated
methods over 10 years. Goodwill and identified intangibles are assessed for
impairment based on estimated undiscounted cash flows, and written down if
necessary. Goodwill was $745,000 and $807,000 and core deposit intangibles were
$376,000 and $464,000 at December 31, 1999 and 1998, respectively. These
balances are included in other assets.

OTHER REAL ESTATE: Other real estate was $161,000 and $166,000 at December
31, 1999 and 1998 and is included in other assets. Other real estate is
comprised of properties acquired through a foreclosure proceeding or acceptance
of a deed in lieu of foreclosure. These properties are initially recorded at
fair value at the date of foreclosure, establishing a new cost basis by a charge
to the allowance for loan losses. After foreclosure, valuations are periodically
performed by management and real estate is carried at the lower of cost or fair
value less estimated cost of disposal.

FS-7
<PAGE> 207
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE A - NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES: Income tax expense is the total of the current year income
tax due or refundable and the change in deferred tax assets and liabilities.
Deferred tax assets and liabilities are the expected future tax amounts for the
temporary differences between carrying amounts and tax bases of assets and
liabilities, computed using enacted tax rates. A valuation allowance, if needed,
reduces deferred tax assets to the amount expected to be realized.

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

CASH FLOW INFORMATION: For purposes of the consolidated statements of cash
flows, the Company considers cash and due from banks as cash and cash
equivalents. The Company reports net cash flows for customer loan and deposit
transactions.

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

FAIR VALUES OF FINANCIAL INSTRUMENTS: Fair values of financial instruments
are estimated using relevant market information and other assumptions. Fair
value estimates involve uncertainties and matters of significant judgment
regarding interest rates, credit risk, prepayments and other factors, especially
in the absence of broad markets for particular items. Changes in assumptions or
in market conditions could significantly affect such estimates.

CONCENTRATIONS OF CREDIT RISK: The Company grants commercial, real estate
and installment loans to customers mainly in Southern Michigan. Commercial loans
include loans collateralized by commercial real estate, business assets and
agricultural loans collateralized by crops and farm equipment. Commercial,
financial and agricultural loans make up approximately 50% of the loan portfolio
and the loans are expected to be repaid from cash flow from operations of
businesses. Residential mortgage loans make up approximately 33% of the loan
portfolio and are collateralized by mortgages on residential real estate.
Consumer loan loans make up approximately 17% of the loan portfolio and are
primarily collateralized by consumer assets.

FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK: The Company, in the
normal course of business, makes commitments to extend credit which are not
reflected in the consolidated financial statements.

LOSS CONTINGENCIES: Loss contingencies, including claims and legal actions
arising in the ordinary course of business, are recorded as liabilities when the
likelihood of loss is probable and an amount or range of loss can be reasonably
estimated. Management does not believe there are such matters that will have a
material effect on the consolidated financial statements at December 31, 1999
and 1998.

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

FS-8
<PAGE> 208
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE B -- BASIC AND DILUTED EARNINGS PER COMMON SHARE

A reconciliation of the numerators and denominators of the computations of
basic and diluted earnings per common share for the years ended December 31,
1999, 1998 and 1997 is presented below:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Basic Earnings Per Common Share
Net income (in thousands)........................... $ 3,300 $ 3,549 $ 3,032
========== ========== ==========
Weighted average common shares outstanding.......... 2,027,015 2,084,821 2,101,494
Less: Unallocated ESOP shares....................... (15,400) (2,566) --
---------- ---------- ----------
Weighted average common shares outstanding for basic
earnings per common share........................ 2,011,615 2,082,255 2,101,494
========== ========== ==========
Basic earnings per common share..................... $ 1.64 $ 1.70 $ 1.44
========== ========== ==========
Diluted Earnings Per Common Share
Net income (in thousands)........................... $ 3,300 $ 3,549 $ 3,032
========== ========== ==========
Weighted average common and dilutive potential
common shares outstanding........................ 2,011,615 2,082,255 2,101,494
========== ========== ==========
Diluted earnings per common share................... $ 1.64 $ 1.70 $ 1.44
========== ========== ==========
</TABLE>

NOTE C -- SECURITIES

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

<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- -------
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE, 1999
U.S. Treasury and Government agencies........... $15,885 $ $(344) $15,541
States and political subdivisions............... 28,529 106 (224) 28,411
Corporate securities............................ 6,203 1 (32) 6,172
Mortgage-backed securities...................... 3,278 (96) 3,182
------- ---- ----- -------
Total debt securities........................... 53,895 107 (696) 53,306
Equity securities............................... 923 923
------- ---- ----- -------
Total........................................... $54,818 $107 $(696) $54,229
======= ==== ===== =======

There were no securities held to maturity as of December 31, 1999.
</TABLE>

FS-9
<PAGE> 209
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE C -- SECURITIES (CONTINUED)

<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- -------
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE, 1998
U.S. Treasury and Government agencies........... $ 9,019 $ 68 $ $ 9,087
States and political subdivisions............... 20,236 315 (5) 20,546
Corporate securities............................ 1,302 8 1,310
Mortgage-backed securities...................... 2,677 8 2,685
------- ---- ----- -------
Total debt securities........................... 33,234 399 (5) 33,628
Equity securities............................... 2,510 2,510
------- ---- ----- -------
Total........................................... $35,744 $399 $ (5) $36,138
======= ==== ===== =======

HELD TO MATURITY, 1998
States and political subdivisions............... $16,460 $897 $ $17,357
Corporate securities............................ 14,592 49 (9) 14,632
------- ---- ----- -------
Total debt securities........................... 31,052 946 (9) 31,989
Equity securities............................... 704 704
------- ---- ----- -------
Total........................................... $31,756 $946 $ (9) $32,693
======= ==== ===== =======
</TABLE>

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

<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Proceeds.................................................... $0 $0 $255
Gross gains................................................. 0 0 5
Gross losses................................................ 0 0 0
</TABLE>

Contractual maturities of debt securities at year-end 1999 were as follows
(in thousands). Securities not due at a single maturity date, primarily
mortgage-backed securities, are shown separately. Expected maturities may differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.

<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
--------- -------
<S> <C> <C>
Due in one year or less..................................... $ 8,994 $ 8,991
Due from one to five years.................................. 31,906 31,571
Due from five to ten years.................................. 7,057 6,863
Due after ten years......................................... 2,660 2,699
Mortgage-backed securities.................................. 3,278 3,182
------- -------
$53,895 $53,306
======= =======
</TABLE>

Investment securities with an amortized cost of $2,911,000 and $3,303,000
were pledged as collateral for public deposits and for other purposes in 1999
and 1998.

Except as indicated, total securities of any state (including all its
political subdivisions) were less than 10% of shareholders' equity. At year-end
1999 and 1998, the amortized cost of securities issued by the state of Michigan
and all its political subdivisions totaled $13,114,000 and $19,883,000 with an
estimated market value of $13,132,000 and $20,729,000, respectively.

FS-10
<PAGE> 210
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE C -- SECURITIES (CONTINUED)
As of July 1, 1999, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging
Activities." Under SFAS No. 133, all derivative instruments are recorded at
their fair values. If derivative instruments are designated as hedges of fair
values, both the change in the fair value of the hedge and the hedged item are
included in current earnings. Fair value adjustments related to cash flow hedges
are recorded in other comprehensive income and reclassified to earnings when the
hedged transactions are reflected in earnings. Ineffective portions of hedges
are reflected in income currently. The Company does not have any derivative
instruments nor does the Company have any hedging activities. As permitted by
SFAS No. 133, the Company transferred securities with an amortized cost of
$19,131,000 and a fair value of $19,747,000 from the held to maturity portfolio
to the available for sale portfolio. None of these securities were sold during
1999.

NOTE D -- LOANS

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

<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Commercial............................................. $ 96,758 $ 82,533
Consumer............................................... 33,190 29,203
Real estate mortgage................................... 62,432 50,909
Loans held for sale, net of valuation allowance of $-0- in
1999 and 1998............................................. 991 658
193,371 163,303
Less allowance for loan losses......................... (2,132) (2,026)
-------- --------
Loans, net............................................. $191,239 $161,277
======== ========
</TABLE>

Certain directors and executive officers of the Company and the Bank,
including their associates and companies in which they are principal owners,
were loan customers of the Bank. The following is a summary of loans (in
thousands) exceeding $60,000 in the aggregate to these individuals and their
associates.

<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Balance at January 1................................... $ 3,923 $ 3,722
New loans.............................................. 6,222 7,767
Repayments............................................. (5,487) (7,624)
Other changes, net..................................... (156) 58
------- -------
Balance at December 31................................. $ 4,502 $ 3,923
======= =======
</TABLE>

The unpaid principal balance of mortgage loans serviced for others, which
are not included on the consolidated balance sheet, was $69,880,000 and
$51,462,000 at December 31, 1999 and 1998, respectively. Related escrow deposit
balances were approximately $11,000 and $2,000 at December 31, 1999 and 1998,
respectively.

FS-11
<PAGE> 211
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE D -- LOANS (CONTINUED)
Activity for capitalized mortgage servicing rights was as follows (in
thousands):

<TABLE>
<CAPTION>
1999 1998
----- -----
<S> <C> <C>
Balance at January 1................................... $ 595 $ 327
Additions.............................................. 377 468
Amortized to expense................................... (176) (200)
----- -----
Balance at December 31................................. $ 796 $ 595
===== =====
</TABLE>

No valuation allowance for capitalized mortgage servicing rights was
necessary at December 31, 1999 or 1998.

NOTE E -- ALLOWANCES FOR LOAN LOSSES

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

<TABLE>
<CAPTION>
1999 1998 1997
------- ------ ------
<S> <C> <C> <C>
Balance at January 1................................... $ 2,026 $1,863 $1,814
Provision for loan losses.............................. 852 600 460
Loans charged off...................................... (1,050) (579) (508)
Recoveries............................................. 304 142 97
------- ------ ------
Net charge-offs........................................ (746) (437) (411)
------- ------ ------
Balance at December 31................................. $ 2,132 $2,026 $1,863
======= ====== ======
</TABLE>

<TABLE>
<CAPTION>
1999 1998
------ ------
<S> <C> <C>
Information regarding impaired loans follows:
Year end loans with allowance for loan losses
allocated............................................. $1,543 $1,259
Year end loans with no allowance for loan losses
allocated............................................. 700 0
------ ------
Total impaired loans................................... $2,243 $1,259
====== ======
Amount of allowance allocated to these loans........... $ 275 $ 367
Average balance of impaired loans during the year...... $2,415 $1,566
Cash basis interest income recognized during the
year.................................................. $ 191 $ 73
Interest income recognized during the year............. $ 200 $ 102
</TABLE>

FS-12
<PAGE> 212
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE F -- PREMISES AND EQUIPMENT

Premises and equipment consist of (in thousands):

<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Land................................................... $ 786 $ 786
Buildings and improvements............................. 7,685 7,625
Equipment.............................................. 3,442 3,157
------- -------
11,913 11,568
Less accumulated depreciation.......................... (5,208) (4,532)
------- -------
Totals................................................. $ 6,705 $ 7,036
======= =======
</TABLE>

Depreciation and amortization expense charged to operations was
approximately $711,000, $599,000 and $527,000 in 1999, 1998 and 1997,
respectively.

NOTE G -- DEPOSITS

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

<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Non-interest bearing checking............................... $ 33,124 $ 34,778
Interest bearing checking................................... 38,927 37,055
Passbook savings............................................ 30,793 31,797
Money market accounts....................................... 43,571 42,200
Time deposits............................................... 71,865 72,439
Individual retirement accounts and other deposits........... 15,023 15,092
-------- --------
Totals...................................................... $233,303 $233,361
======== ========
</TABLE>

The carrying amount of time deposits over $100,000 was $23,113,000 and
$21,058,000 at December 31, 1999 and 1998, respectively. Interest expense on
time deposits over $100,000 was $1,198,000, $1,084,000 and $1,025,000 at
December 31, 1999, 1998 and 1997, respectively.

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

<TABLE>
<S> <C>
2000........................................................ $57,453
2001........................................................ 8,044
2002........................................................ 5,765
2003........................................................ 574
2004........................................................ 29
-------
Totals...................................................... $71,865
=======
</TABLE>

Related party deposits were $2,061,000 and $1,374,000 at December 31, 1999
and 1998, respectively.

Cash paid for interest was $8,397,000, $8,054,000 and $7,464,000 for the
years ended December 31, 1999, 1998 and 1997, respectively.

FS-13
<PAGE> 213
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE H -- OTHER BORROWINGS

Other borrowings represents putable advances obtained by the Bank from the
Federal Home Loan Bank (FHLB) of Indianapolis. The advances have fixed interest
rates ranging from 5.31% to 5.71% until the stated call date ranging from
February 22, 2000 to June 29, 2009. On the stated call date, the FHLB will have
the option to convert the advances to a periodic adjustable rate and will
continue to have this option quarterly thereafter. The advances may not be
prepaid by the Bank prior to the FHLB exercising its option to convert the
advances to an adjustable rate. The advances are secured by a blanket collateral
agreement with the FHLB which gives the FHLB an unperfected security interest in
the Bank's one-to-four family mortgage loans, U.S. Treasury and Government
agencies, and highly rated private mortgage-backed securities.

At year-end 1999, scheduled principal reductions on these advances were as
follows for the years ending December 31 (in thousands):

<TABLE>
<S> <C>
2000........................................................ $ --
2001........................................................ --
2002........................................................ 3,000
2003........................................................ 2,000
2004........................................................ --
Thereafter.................................................. 10,000
-------
Total FHLB advances......................................... $15,000
=======
</TABLE>

NOTE I -- INCOME TAXES

Income tax expense consists of:

<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Current................................................ $1,021 $1,226 $1,066
Deferred............................................... (16) (41) 19
------ ------ ------
Totals................................................. $1,005 $1,185 $1,085
====== ====== ======
</TABLE>

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

<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Statutory rates............................................. $1,464 $1,610 $1,400
Tax-exempt interest income.................................. (358) (350) (254)
Increase in net cash surrender value of life insurance
policies.................................................. (77) (82) (65)
Other items, net............................................ (24) 7 4
------ ------ ------
Totals...................................................... $1,005 $1,185 $1,085
====== ====== ======
</TABLE>

FS-14
<PAGE> 214
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE I -- INCOME TAXES (CONTINUED)
Year end deferred tax assets and liabilities consist of (in thousands):

<TABLE>
<CAPTION>
1999 1998
------ ------
<S> <C> <C>
Deferred tax assets:
Net unrealized depreciation on available-for-sale
securities................................................ $ 200 $
Allowance for loan losses................................... 497 461
Deferred compensation liability............................. 502 470
Pension liability........................................... 99 65
Other....................................................... 185 175
------ ------
Totals...................................................... 1,483 1,171
Deferred tax liabilities:
Net unrealized appreciation on available-for-sale
securities................................................ 134
Mortgage servicing rights................................... 271 202
Other....................................................... 41 14
------ ------
Totals...................................................... 312 350
------ ------
Net deferred tax asset...................................... $1,171 $ 821
====== ======
</TABLE>

The Company made income tax payments of $1,160,000 in 1999, $1,165,000 in
1998 and $1,130,000 in 1997. An allowance against the net deferred tax asset was
not considered necessary at December 31, 1999 or 1998.

NOTE J -- RETIREMENT PLANS

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

FS-15
<PAGE> 215
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE J -- RETIREMENT PLANS (CONTINUED)
Information about the pension plan was as follows (in thousands):

<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Change in benefit obligation:
Beginning benefit obligation.............................. $(2,326) $(1,715)
Service cost.............................................. (133) (140)
Interest cost............................................. (134) (115)
Actuarial (gain) loss..................................... 511 (435)
Benefits paid............................................. 667 79
------- -------
Ending benefit obligation................................. (1,415) (2,326)
Change in plan assets, at fair value:
Beginning plan assets..................................... 2,266 1,856
Actual return............................................. 144 335
Employer contribution..................................... 29 154
Benefits paid............................................. (667) (79)
------- -------
Ending plan assets........................................ 1,772 2,266
------- -------
Funded status............................................... 357 (60)
Unrecognized net actuarial gain............................. (650) (185)
Unrecognized transition obligation.......................... 13 17
Unrecognized prior service cost............................. 37 49
------- -------
Accrued pension cost........................................ $ (243) $ (179)
======= =======
</TABLE>

The components of pension expense and related actuarial assumptions were as
follows:

<TABLE>
<CAPTION>
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Service cost................................................ $ 133 $ 140 $ 130
Interest cost............................................... 134 115 113
Actual return on plan assets................................ (153) (345) (330)
Net amortization and deferral............................... 16 188 205
----- ----- -----
Net......................................................... $ 130 $ 98 $ 118
===== ===== =====
Discount rate on benefit obligation......................... 7.0% 7.0% 7.0%
Long-term expected rate of return on plan assets............ 8.0% 8.0% 8.0%
Rate of compensation increase............................... 3.0% 3.0% 3.5%
</TABLE>

The Company has an employee stock ownership plan (ESOP) for substantially
all full-time employees. The Board of Directors determines the Company's
contribution level annually. Assets of the plan are held in trust by the Bank
and administrative costs of the plan are borne by the plan sponsor. Costs
charged to operations for contributions to the plan totaled $78,000, $90,000 and
$66,000 in 1999, 1998 and 1997. During 1999, the Company amended its ESOP plan
to adopt 401(k) provisions allowing for employee salary deferrals to purchase
either Company stock or mutual funds. Company matching is provided in Company
stock. Substantially all employees have converted their ESOP accounts to the
amended plan.

During 1998, the ESOP borrowed $588,000 to purchase 14,000 shares of
company stock which are currently held as unallocated ESOP shares.

FS-16
<PAGE> 216
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE J -- RETIREMENT PLANS (CONTINUED)
Shares held by the ESOP at year-end are as follows:

<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Allocated shares............................................ 130,502 150,727
Unallocated shares.......................................... 15,400 14,000
------- -------
Total ESOP shares........................................... 145,902 164,727
======= =======
</TABLE>

The fair value of the allocated shares held by the ESOP is approximately
$3,990,000 and $6,029,000 at December 31, 1999 and 1998, respectively. Upon
distribution of shares to a participant, the participant has the right to
require the Company to purchase shares at their fair value in accordance with
terms and conditions of the plan. As such these shares are not classified in
shareholders' equity as permanent equity.

As an incentive to retain key members of management and directors, the Bank
has a deferred compensation plan whereby participants defer a portion of current
compensation. Benefits are based on salary and length of service and are vested
as service is provided from the date of participation through age 65. A
liability is recorded on a present value basis and discounted at current
interest rates. This liability may change depending upon changes in long-term
interest rates. Deferred compensation expense was $218,000, $229,000 and
$206,000 in 1999, 1998 and 1997. The liability for vested benefits was
$1,476,000 and $1,382,000 at December 31, 1999 and 1998, respectively.

NOTE K -- COMMITMENTS

There are various commitments which arise in the normal course of business,
such as commitments under commercial letters of credit, standby letters of
credit and commitments to extend credit. Generally accepted accounting
principles recognize these transactions as contingent liabilities and
accordingly, they are not reflected in the accompanying financial statements.
These arrangements have credit risk essentially the same as that involved in
extending loans to customers and are subject to the Bank's normal credit
policies. Collateral generally consists of receivables, inventory and equipment
and is obtained based on management's credit assessment of the customer.

At December 31, 1999 and 1998, respectively, the Bank had commitments under
commercial letters of credit, used to facilitate customers' trade transactions,
of $414,000 and $133,000.

Under standby letter of credit agreements, the Bank agrees to honor certain
commitments in the event that its customers are unable to do so. At December 31,
1999 and 1998, respectively, commitments under outstanding standby letters of
credit were $626,000 and $385,000.

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

<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Fixed rate.................................................. $ 4,570 $ 1,616
Variable rate............................................... 33,379 29,559
------- -------
Totals...................................................... $37,949 $31,175
======= =======
</TABLE>

The fixed rate commitments have stated interest rates ranging from 8.5% to
17.0%. The terms of the above commitments range from 1 to 60 months.

FS-17
<PAGE> 217
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

At December 31, 1999, the Bank had line of credit agreements with the
Federal Home Loan Bank, Bank One and Fifth Third Bank for $3,000,000, $5,000,000
and $750,000 respectively. The balances on all three of these lines was $0 at
December 31, 1999.

NOTE L -- RESTRICTIONS ON TRANSFERS FROM SUBSIDIARY

Banking laws and regulations restrict the amount the Bank may transfer to
the Company in the form of cash dividends, loans and advances. In 2000, the Bank
is permitted to pay the Company an amount equal to $3,752,000 plus the Bank's
2000 net income, as dividends without prior regulatory approval.

NOTE M -- SOUTHERN MICHIGAN BANCORP, INC. (PARENT COMPANY ONLY) FINANCIAL
INFORMATION

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

BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1999 1998
------- -------
<S> <C> <C>
ASSETS
Cash........................................................ $ 97 $ 16
Securities available for sale............................... 3,273 3,170
Securities held to maturity................................. 250
Investment in subsidiary.................................... 19,107 20,422
Premises and equipment...................................... 1,196 1,231
Other....................................................... 704 700
------- -------
Total Assets................................................ $24,377 $25,789
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Dividends payable........................................... $ 340 $ 393
Other liabilities........................................... 57 22
Common stock subject to repurchase obligation in ESOP....... 3,990 6,029
Shareholders' equity........................................ 19,990 19,345
------- -------
Total Liabilities and Shareholders' Equity.................. $24,377 $25,789
======= =======
</TABLE>

FS-18
<PAGE> 218
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE M -- SOUTHERN MICHIGAN BANCORP, INC. (PARENT COMPANY ONLY) FINANCIAL
INFORMATION (CONTINUED)
STATEMENTS OF INCOME

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Dividends from Bank......................................... $3,718 $3,620 $1,109
Interest income............................................. 154 167 137
Other income................................................ 269 226 206
Other expenses.............................................. (98) (33) (49)
------ ------ ------
4,043 3,980 1,403
Federal income tax expense.................................. (35) (85) (68)
------ ------ ------
4008 3,895 1,335
Equity in undistributed/(excess) distributed net income of
subsidiary................................................ (708) (346) 1,697
------ ------ ------
Net Income.................................................. 3,300 3,549 3,032
------ ------ ------
Net change in unrealized gains (losses) on securities
available for sale........................................ (649) 234 5
------ ------ ------
Other comprehensive income.................................. (649) 234 5
------ ------ ------
Comprehensive income........................................ $2,651 $3,783 $3,037
====== ====== ======
</TABLE>

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1999 1998 1997
------ ------ --------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income.................................................. $3,300 $3,549 $ 3,032
Adjustments to reconcile net income to net cash provided by
operating activities:
Equity in (undistributed)/excess distributed net income of
subsidiary............................................. 708 346 (1,697)
Depreciation.............................................. 35 31 31
Net amortization of investment securities................. 25 16 13
Other..................................................... 54 (253) (146)
------ ------ --------
Net cash from operating activities.......................... 4,122 3,689 1,233
INVESTING ACTIVITIES
Activity in available for sale investment securities:
Maturities and calls...................................... 776 1,977 734
Purchases................................................. (717) (2,059) (1,248)
Activity in held to maturity investment securities:
Maturities and calls...................................... (250)
Additions to premises and equipment......................... (60) (62)
------ ------ --------
Net cash from investing activities.......................... 59 (392) (576)
</TABLE>

FS-19
<PAGE> 219
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE M -- SOUTHERN MICHIGAN BANCORP, INC. (PARENT COMPANY ONLY) FINANCIAL
INFORMATION (CONTINUED)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1999 1998 1997
------ ------ --------
<S> <C> <C> <C>
FINANCING ACTIVITIES
Common stock issued......................................... 251 390
Cash dividends paid......................................... (1,428) (1,252) (1,049)
Repurchase of common stock.................................. (2,672) (2,299)
------ ------ --------
Net cash from financing activities.......................... (4,100) (3,300) (659)
------ ------ --------
Net change in cash and cash equivalents..................... 81 (3) (2)
Beginning cash and cash equivalents......................... 16 19 21
------ ------ --------
Ending cash and cash equivalents............................ $ 97 $ 16 $ 19
====== ====== ========
Transfers of securities held to maturity to securities
available for sale........................................ $ 250
</TABLE>

NOTE N -- FAIR VALUE INFORMATION

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

CASH AND CASH EQUIVALENTS AND FEDERAL FUNDS SOLD: The carrying amounts
reported in the balance sheet for cash and due from banks approximate those
assets' fair values.

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

LOANS: For variable-rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on carrying
values. The fair values for other loans are estimated using discounted cash
flows analyses, using interest rates currently being offered for loans with
similar terms to borrowers of similar credit quality.

OFF-BALANCE-SHEET INSTRUMENTS: Fair values for the Bank's letters of
credit are based on fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and
the counterparties' credit standing. It is not practicable to estimate the
fair value of lending commitments because of the wide variety of the
instruments.

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

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

FS-20
<PAGE> 220
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE N -- FAIR VALUE INFORMATION (CONTINUED)
While these estimates of fair value are based on management's judgment of
the most appropriate factors, there is no assurance that if the Company had
disposed of such items at December 31, 1999 and 1998, the estimated fair values
would have been achieved. Market values may differ depending on various
circumstances not taken into consideration in this methodology. The estimated
fair values at December 31, 1999 and 1998 should not necessarily be considered
to apply at subsequent dates.

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

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

<TABLE>
<CAPTION>
1999 1998
---------------------- ----------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents................... $ 12,046 $ 12,046 $ 16,228 $ 16,228
Federal funds sold.......................... 4,000 4,000
Securities available for sale............... 54,229 54,229 36,138 36,138
Securities held to maturity................. 31,756 32,693
Loans....................................... 193,371 192,425 163,303 163,588
Financial liabilities:
Deposits.................................... $(233,303) $(233,285) $(233,361) $(234,938)
Other borrowings............................ (15,000) (15,000) (5,000) (5,000)
Unrecognized financial instruments:
Commercial letters of credit................ $ (8) $ (8)
Standby letters of credit................... (13) (3)
</TABLE>

NOTE O -- REGULATORY MATTERS

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

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

FS-21
<PAGE> 221
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE O -- REGULATORY MATTERS (CONTINUED)
At year end, actual capital levels (in thousands) and minimum required
levels were:

<TABLE>
<CAPTION>
MINIMUM REQUIRED
TO BE WELL
MINIMUM REQUIRED CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION REGULATIONS
------------------ ------------------ ------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
1999
Total capital (to risk weighted
assets)
Consolidated..................... $25,300 12.0% $16,869 8.0% $21,086 10.0%
Bank............................. $20,425 9.8% $16,673 8.0% $20,842 10.0%
Tier 1 capital (to risk weighted
assets)
Consolidated..................... $23,168 11.0% $ 8,435 4.0% $12,652 6.0%
Bank............................. $18,293 8.8% $ 8,337 4.0% $12,505 6.0%
Tier 1 capital (to average assets)
Consolidated..................... $23,168 8.4% $11,037 4.0% $13,797 5.0%
Bank............................. $18,293 6.7% $10,917 4.0% $13,646 5.0%
1998
Total capital (to risk weighted
assets)
Consolidated..................... $25,808 13.4% $15,439 8.0% $19,298 10.0%
Bank............................. $20,541 10.8% $15,238 8.0% $19,048 10.0%
Tier 1 capital (to risk weighted
assets)
Consolidated..................... $23,782 12.3% $ 7,719 4.0% $11,579 6.0%
Bank............................. $18,515 9.7% $ 7,619 4.0% $11,428 6.0%
Tier 1 capital (to average assets)
Consolidated..................... $23,782 9.2% $10,363 4.0% $12,954 5.0%
Bank............................. $18,515 7.5% $ 9,845 4.0% $12,306 5.0%
</TABLE>

The Company and Bank, at year end 1999 and 1998, were categorized as well
capitalized.

NOTE P -- MERGER AGREEMENT (EVENT SUBSEQUENT TO DATE OF AUDITOR'S REPORT)

FS-22
<PAGE> 222
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Total interest income.................. $ 20,051 $ 19,446 $ 18,669 $ 16,787 $ 15,476
Net interest income.................... 11,616 11,414 11,226 10,183 9,096
Provision for loan losses.............. 852 600 460 267 222
Net income............................. 3,300 3,549 3,032 3,058 2,615
Per share data:
Basic and diluted earnings per
share............................. 1.64 1.70 1.44 1.46 1.27
Cash dividends....................... .68 .60 .52 .48 .45
Balance sheet data:
Other borrowings..................... 15,000 5,000 3,000 -- --
Capital note......................... -- -- -- -- 1,000
Common stock subject to repurchase... 3,990 6,029 4,899 3,555 2,232
Equity............................... 19,990 19,345 20,590 19,616 18,497
Total assets.................... 275,825 266,851 238,531 235,562 209,977
Return on average assets............... 1.23% 1.42% 1.30% 1.45% 1.31%
Return on average equity............... 16.37% 17.48% 14.96% 16.09% 14.64%
</TABLE>

All per share amounts have been adjusted for a 10% stock dividend declared
in 1999, a 1997 stock split effected in the form of a 100% stock dividend and a
2 for 1 stock split in 1995.

COMMON STOCK MARKET PRICES AND DIVIDENDS

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

<TABLE>
<CAPTION>
1999 1998
-------------------------------- --------------------------------
BID PRICE CASH BID PRICE CASH
------------------- DIVIDENDS ------------------- DIVIDENDS
QUARTER ENDED HIGH BID LOW BID DECLARED HIGH BID LOW BID DECLARED
------------- -------- ------- --------- -------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
March 31......................... $33.08 $27.00 $.16 $37.80 $30.60 $.13
June 30.......................... 32.40 27.23 .17 46.13 37.13 .13
September 30..................... 29.70 26.10 .17 40.50 37.13 .15
December 31...................... 30.60 27.23 .18 37.80 29.48 .19
</TABLE>

All market price per share amounts have been adjusted for a 10% stock
dividend declared in 1999.

FS-23
<PAGE> 223

ANNEX B

SOUTHERN MICHIGAN BANCORP
QUARTERLY REPORT ON FORM 10-Q FOR THE
QUARTER ENDED MARCH 31, 2000
<PAGE> 224

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarter ended MARCH 31, 2000 Commission file number 2-78178

SOUTHERN MICHIGAN BANCORP, INC.
(Exact name of registrant as specified in its charter)

<TABLE>
<S> <C> <C>
MICHIGAN 38-2407501
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)

51 WEST PEARL STREET, COLDWATER, MICHIGAN 49036
(Address of principal executive offices) (Zip Code)
</TABLE>

Registrant's telephone number, including area code -- (517) 279-5500

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

Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:

COMMON STOCK, $2.50 PAR VALUE -- 1,942,245 SHARES AT APRIL 30, 2000
(INCLUDING SHARES HELD BY ESOP)
<PAGE> 225

CONDENSED CONSOLIDATED BALANCE SHEETS

SOUTHERN MICHIGAN BANCORP, INC AND SUBSIDIARY

<TABLE>
<CAPTION>
MARCH 31 DECEMBER 31
2000 1999
----------- -----------
(UNAUDITED) (A)
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash and due from banks................................... $ 13,138 $ 12,046
Investment securities available for sale.................. 53,192 54,229
Loans, net of allowance for loan losses of $2,149
(1999 -- $2,132)....................................... 198,910 191,239
Premises and equipment.................................... 6,755 6,705
Other assets.............................................. 11,404 11,606
-------- --------
TOTAL ASSETS...................................... $283,399 $275,825
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-interest bearing................................... $ 34,645 $ 33,124
Interest bearing....................................... 196,881 200,179
-------- --------
231,526 233,303
Federal funds purchased................................... 9,740
Accounts payable and other liabilities.................... 3,250 3,542
Other long-term borrowings................................ 15,000 15,000
-------- --------
TOTAL LIABILITIES................................. 259,516 251,845
Common stock subject to repurchase obligation in ESOP..... 2,214 3,990
Shareholders' equity:
Preferred stock, 100,000 shares authorized
Common stock, $2.50 par value:
Authorized -- 4,000,000 shares
Issued -- 1,958,498 shares (1999 -- 1,969,259)
Outstanding -- 1,837,161 shares (1999 -- 1,838,757).... 4,593 4,597
Capital surplus........................................ 9,866 8,421
Retained earnings...................................... 8,337 7,949
Net unrealized depreciation on available for sale
securities, net of tax of $278 (1999 -- $201)......... (539) (389)
Unearned Employee Stock Ownership Plan shares.......... (588) (588)
-------- --------
TOTAL SHAREHOLDERS' EQUITY........................ 21,669 19,990
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................. $283,399 $275,825
======== ========
</TABLE>

-------------------------
(A) The balance sheet at December 31, 1999 has been derived from the audited
consolidated financial statements at that date.

See notes to condensed consolidated financial statements.

B-1
<PAGE> 226

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

SOUTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARY

<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
----------------------
2000 1999
------- -------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)

<S> <C> <C>
Interest income:
Loans, including fees..................................... $4,649 $3,765
Investment securities:
Taxable................................................ 544 633
Tax exempt............................................. 239 336
Other..................................................... 2 25
------ ------
Total interest income................................ 5,434 4,759
Interest expense:
Deposits.................................................. 2,034 1,919
Other..................................................... 312 118
------ ------
Total interest expense............................... 2,346 2,037
------ ------
NET INTEREST INCOME............................... 3,088 2,722
Provision for loan losses................................... 150 150
------ ------
NET INTEREST INCOME AFTER PROVISION FOR LOAN
LOSSES.............................................. 2,938 2,572
Non-interest income:
Service charges on deposit accounts....................... 264 245
Trust department.......................................... 134 115
Security gains............................................ 1 0
Gain on sales of loans.................................... 101 142
Earnings on life insurance policies....................... 45 39
Other..................................................... 149 123
------ ------
694 664
------ ------
3,632 3,236
Non-interest expenses:
Salaries and benefits..................................... 1,260 1,086
Occupancy................................................. 218 213
Equipment................................................. 257 226
Other..................................................... 871 719
------ ------
2,606 2,244
------ ------
INCOME BEFORE INCOME TAXES.................................. 1,026 992
Federal income taxes........................................ 269 211
------ ------
NET INCOME.................................................. 757 781
Other comprehensive income, net of tax:
Change in unrealized gains on securities.................. (150) (193)
------ ------
COMPREHENSIVE INCOME........................................ $ 607 $ 588
====== ======
Basic and Diluted Earnings Per Share........................ $ 0.39 $ 0.38
====== ======
Dividends Declared Per Share................................ $ 0.19 $ 0.16
====== ======
</TABLE>

-------------------------
See notes to condensed consolidated financial statements.

B-2
<PAGE> 227

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

SOUTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARY

<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
--------------------
2000 1999
------- -------
(IN THOUSANDS)

<S> <C> <C>
OPERATING ACTIVITIES
Net income................................................ 757 781
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses.............................. 150 150
Provision for depreciation............................. 166 149
Net change in:
Other assets......................................... 279 (635)
Accrued expenses and other liabilities............... (323) 450
------- -------
Net cash provided by operating activities............ 1,029 895

INVESTING ACTIVITIES
Proceeds from maturity of investment securities........... 2,810 10,949
Purchases of investment securities........................ (2,000) (7,513)
Decrease in federal funds sold............................ 0 1,000
Net increase in loans..................................... (7,821) (2,967)
Net increase in premises and equipment.................... (216) (75)
------- -------
Net cash provided by (used in) investing
activities.......................................... (7,227) 1,394

FINANCING ACTIVITIES
Net decrease in deposits.................................. (1,777) (3,730)
Increase in federal funds purchased....................... 9,740 0
Common stock repurchased and retired...................... (332) (545)
Cash dividends............................................ (341) (393)
------- -------
Net cash provided by (used in) financing
activities.......................................... 7,290 (4,668)
------- -------
Increase (decrease) in cash and cash equivalents............ 1,092 (2,379)
Cash and cash equivalents at beginning of period............ 12,046 16,228
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD........... 13,138 13,849
======= =======
</TABLE>

-------------------------
See notes to condensed consolidated financial statements.

B-3
<PAGE> 228

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SOUTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARY
MARCH 31, 2000

NOTE A -- BASIS OF PRESENTATION

The accompanying year-end balance sheet data was derived from audited
consolidated financial statements, but does not include all disclosures required
by generally accepted accounting principles.

The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions for Form 10-Q and Rule
10-01 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's annual report on Form
10-K for the year ended December 31, 1999.

Basic earnings per common share is net income divided by the weighted
average number of common shares outstanding during the period. ESOP shares are
considered outstanding for this calculation unless unearned. Diluted earnings
per common share includes the dilutive effect of additional potential common
shares issuable under stock options. Earnings and dividends per share are
restated for all stock splits and dividends through the date of issue of the
financial statements. The weighted average common shares outstanding for the
quarters ended March 31, 2000 and 1999 were 1,946,047 and 2,035,994
respectively.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

FINANCIAL CONDITION

Total deposits declined by less than 1% during the first quarter of 2000.
The Company has traditionally experienced a decline in deposits in the first
quarter of the year.

Loans have increased by 4.0% in the first three months of 2000. The loan
growth has occurred in the commercial and real estate mortgage portfolios. The
commercial growth is due to borrowers' seasonal demands and continued economic
expansion within the Company's market area. The real estate mortgage increase is
due to the offering of a competitive in-house fixed rate product. There were no
loans held for sale as of March 31, 2000.

Investment securities decreased by 1.9% during the first quarter of 2000.
Funds received from maturing securities were used to support the increase in
loans.

In 2000, the Bank will spend approximately $2,300,000 to renovate the
Coldwater main office and the Beckley Road office.

On February 15, 2000, the Company announced that it had agreed to merge
with Sturgis Bank & Trust Company of Sturgis, Michigan ("Sturgis"). The
transaction is anticipated to be a tax-free exchange. It is subject to
regulatory approvals and the approval by shareholders of Sturgis, and is
anticipated to be effective the second half of 2000. The exchange ratio is .398
shares of the Company's common stock for one share of Sturgis' common stock.

B-4
<PAGE> 229

CAPITAL RESOURCES

The Federal Reserve Board (FRB) has adopted risk-based capital guidelines
applicable to the Company. These guidelines require that bank holding companies
maintain capital commensurate with both on and off balance sheet credit risks of
their operations. Under the guidelines, a bank holding company must have a
minimum ratio of total capital to risk-weighted assets of 8.0 percent. In
addition, a bank holding company must maintain a minimum ratio of Tier 1 capital
equal to 4.0 percent of risk-weighted assets. Tier 1 capital includes common
shareholders' equity, qualifying perpetual preferred stock and minority interest
in equity accounts of consolidated subsidiaries less goodwill.

As a supplement to the risk-based capital requirements, the FRB has also
adopted leverage capital ratio requirements. The leverage ratio requirements
establish a minimum ratio of Tier 1 capital to total assets less goodwill of 3
percent for the most highly rated bank holding companies. All other bank holding
companies are required to maintain additional Tier 1 capital yielding a leverage
ratio of 4 percent to 5 percent, depending on the particular circumstances and
risk profile of the institution.

The following table summarizes the Company's capital ratios as of March 31,
2000:

<TABLE>
<S> <C>
Tier 1 risk-based capital ratio...................... 10.68%
Total risk-based capital ratio....................... 11.66%
Leverage ratio....................................... 8.43%
</TABLE>

The above table indicates that the Company's capital ratios are above the
regulatory minimum requirements.

RESULTS OF OPERATIONS

NET INTEREST INCOME

Net interest income increased by $366,000 for the three month period ended
March 31, 2000 compared to the same period in 1999. This increase is the result
of increases in both loan volume and rates.

PROVISION FOR LOAN LOSSES

The provision for loan losses is based on an analysis of outstanding loans.
In assessing the adequacy of the allowance, management reviews the
characteristics of the loan portfolio in order to determine the overall quality
and risk profile. Some factors considered by management in determining the level
at which the allowance is maintained include a continuing evaluation of those
loans identified as being subject to possible problems in collection, results of
examinations by regulatory agencies, current economic conditions and historical
loan loss experience.

The first quarter 2000 provision for loan losses remained at 1999 levels.
The 2000 provision was set to provide for growth and potential losses from
specifically identified loans. The allowance for loan losses is being maintained
at a level, which in management's opinion, is adequate to absorb possible loan
losses in the loan portfolio as of March 31, 2000.

NON-INTEREST INCOME

Non-interest income, which includes service charges on deposit accounts,
trust fee income, security gains and losses and other miscellaneous charges and
fees, increased by $30,000 during the

B-5
<PAGE> 230

first quarter of 2000 compared to the same period in 1999. A decline in gains
recognized on the sale of real estate mortgage loans to the secondary market was
offset by increases in deposit account service charges and trust fees.

NON-INTEREST EXPENSE

Non-interest expenses increased by $362,000 for the three month period
ended March 31, 2000 compared to the same period in 1999. Salaries and benefits
increased as additional loan department employees were added to assist with the
increased loan volume. Equipment expenses increased as depreciation and service
contracts on recent equipment purchases increased. Other expenses increased
primarily as a result of increased usage of consultants for general bank
consulting purposes.

YEAR 2000

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

The Company measures the impact of changes in interest rates on net
interest income through a comprehensive analysis of the Bank's interest rate
sensitive assets and liabilities. Interest rate sensitivity varies with
different types of interest-earning assets and interest-bearing liabilities.
Overnight federal funds and mutual funds on which rates change daily and loans
which are tied to the prime rate or a comparable index differ considerably from
long-term investment securities and fixed-rate loans. Similarly, certificates of
deposit and money market investment accounts are much more interest sensitive
than passbook savings accounts. The shorter term interest rate sensitivities are
key to measuring the interest sensitivity gap, or excess interest-earning assets
over interest-bearing liabilities. In addition to reviewing the interest
sensitivity gap, the Company also analyzes projected changes in market interest
rates and the resulting effect on net interest income.

Liquidity management involves the ability to meet the cash flow
requirements of customers who may be either depositors wanting to withdraw funds
or borrowers needing assurance that sufficient funds will be available to meet
their credit needs. Certain portions of the Bank's liabilities may be short-term
or due on demand, while most of its assets may be invested in long-term loans or
investments. Accordingly, the Company seeks to have in place sources of cash to
meet short-term demands. These funds can be obtained by increasing deposits,
borrowing or selling assets. Also,

B-6
<PAGE> 231

Federal Home Loan Bank advances and short-term borrowings provide additional
sources of liquidity for the Company.

There have been no significant changes in the distribution of the Company's
financial instruments that are sensitive to changes in interest rates during the
first quarter of 2000.

PART II -- OTHER INFORMATION

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

None.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

a. Listing of Exhibits: Financial Data Schedule

b. Form 8-K was filed during the first quarter of 2000 announcing the
termination of the Company's Stock Repurchase Program.

B-7
<PAGE> 232

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Southern Michigan Bancorp, Inc.
--------------------------------------
(Registrant)

<TABLE>
<S> <C>
May 12, 2000 /s/ JAMES T. GROHALSKI
--------------- --------------------------------------------------------
James T. Grohalski, President and Chief Executive
Date Officer (Principal Financial and Accounting Officer)
</TABLE>

B-8
<PAGE> 233

ANNEX C
CERTAIN PROVISIONS OF THE
MICHIGAN SAVINGS BANK ACT, AS AMENDED
REGARDING DISSENTERS' RIGHTS

487.3706. DEFINITIONS; NEW BANKS; CONSOLIDATION; EXISTING BANK SHAREHOLDERS,
FAIR VALUE OF SHARES; TERMINATION OF RIGHTS; APPRAISAL; DISPOSAL OF
SHARES; RETENTION OF PRINCIPAL OFFICE

* * *

(2) Notwithstanding any other section of this act:

* * *

(b) A shareholder of the existing bank or existing association who votes
against the consolidation, or who has given notice in writing to that bank or
association at or prior to the meeting called for the purpose of considering the
agreement of consolidation that he or she dissents from the consolidation, is
entitled to receive in cash from the consolidated organization the fair value of
all shares held by him or her, if and when the consolidation is consummated,
upon written request made to the consolidated organization at any time within 30
days after the date of consummation of the consolidation, accompanied by the
surrender of his or her stock certificates. Upon the filing of the written
request and the surrender of stock certificates, the shareholder shall cease to
have any of the rights of a shareholder except the right to be paid the fair
value of his or her shares. The request having been made, shall not be withdrawn
except with the written consent of the consolidated organization. The fair value
of the shares shall be determined, as of the date on which the meeting of
shareholders of the existing bank or existing association was held adopting the
agreement of consolidation, by a qualified and independent appraiser selected by
the commissioner upon written application filed by a dissenting shareholder
entitled to receive the fair value of his or her shares, or by the consolidated
organization. The appraiser selected shall file a written report of his or her
appraisal with the commissioner, who in turn shall forward copies to all
interested parties. The valuation determined by the appraiser is final and
binding on all parties as to the fair value of the shares. The consolidated
organization shall pay to each dissenting shareholder entitled the fair value of
his or her shares within 30 days following the receipt of the written report of
the appraiser. The fees and expenses of the appraisal, which shall be approved
by the commissioner, shall be paid by the consolidated organization. The
agreement of consolidation shall provide the manner of disposing of the shares
of the existing bank or existing association surrendered by the dissenting
shareholders.
<PAGE> 234

ANNEX D

OPINION OF RAYMOND JAMES & ASSOCIATES, INC.

February 14, 2000

Board of Directors
Sturgis Bank & Trust Company
125 East Chicago Road
Sturgis, MI 49091-0600

Members of the Board:

You have requested our opinion as to the fairness, from a financial point
of view, to the shareholders of the outstanding common stock, par value $1.00
(the "Common Stock") of Sturgis Bank & Trust Company (the "Company") of the
Exchange Ratio (as defined below) provided for pursuant to the Consolidation
Agreement dated as of February 14, 2000 (the "Agreement"), by and between the
Company and Southern Michigan Bancorp, Inc. ("Southern"). Pursuant to the terms
of the Agreement, the Company will be merged with and into Southern (the
"Transaction") and each outstanding share of the Company's Common Stock will be
converted into 0.398 shares of common stock, par value $2.50 per share, of
Southern (the "Exchange Ratio").

In connection with our review of the proposed Transaction and the
preparation of our opinion herein, we have reviewed and taken into account such
accepted financial and investment banking procedures and considerations as we
have deemed relevant, including, among other things:

1. the financial terms and conditions as stated in the Agreement;

2. the unaudited financial statements of the Company and Southern as of and
for the year ended December 31, 1999 furnished to Raymond James by the
respective senior managements of the Company and Southern;

3. certain publicly available information for the Company and Southern,
including each of the Annual Reports of the Company and Southern filed
on Form 10-K for each of the years ended December 31, 1996, 1997, and
1998, and each of the Quarterly Reports of the Company and Southern
filed on Form 10-Q for each of the quarters ended March 31, 1999, June
30, 1999, and September 30, 1999;

4. certain internal financial analyses, financial forecasts, reports and
other information concerning the Company and Southern prepared by the
respective managements of the Company and Southern;

5. discussions we have had with certain members of the respective
managements of the Company and Southern concerning the historical and
current business operations, financial conditions and prospects of the
Company and Southern and such other matters we deemed relevant;

6. the reported price and trading histories of the shares of the common
stock of the Company and Southern as compared to the reported price and
trading histories of certain publicly traded companies we deemed
relevant;

7. the respective financial conditions of the Company and Southern as
compared to the financial conditions of certain other companies we
deemed relevant;
<PAGE> 235

8. certain financial terms of the Transaction as compared to the financial
terms of selected other business combinations we deemed relevant; and

9. such other information, financial studies, analyses and investigations
and such other factors that we deemed relevant for the purposes of this
opinion.

In arriving at this opinion, Raymond James did not attribute any particular
weight to any analysis or factor considered by it, but rather made qualitative
judgments as to the significance and relevance of each analysis and factor.
Accordingly, Raymond James believes that its analyses must be considered as a
whole and that selecting portions of its analyses, without considering all
analyses, would create an incomplete view of the process underlying this
opinion.

We have assumed and relied upon the accuracy and completeness of all
information supplied or otherwise made available to us by the Company, Southern
or any other party and have not attempted to verify independently any of such
information. We have not made or obtained an independent appraisal of the assets
or liabilities (contingent or otherwise) of the Company or Southern. With
respect to financial forecasts, potential cost savings and other information and
data provided to or otherwise reviewed by or discussed with us, we have assumed
that such forecasts and other information and data have been reasonably prepared
in good faith on bases reflecting the best currently available estimates and
judgments of the respective managements of the Company and Southern, and we have
relied upon each party to advise us promptly if any information previously
provided became inaccurate or was required to be updated during the period of
our review. You have informed us, and we have assumed, that the Transaction will
receive pooling-of-interests accounting treatment and will qualify as a tax free
reorganization under generally accepted accounting principles. With your
consent, we have assumed, without independent verification, that the aggregate
allowance for credit losses for the Company and Southern are adequate to cover
such losses.

Our opinion is based upon market, economic, financial and other
circumstances and conditions existing and disclosed to us on the date hereof and
any material change in such circumstances and conditions would require a
reevaluation of this opinion, which we are under no obligation to undertake.

We express no opinion as to the underlying business decision to effect the
Transaction, the structure or tax consequences of the Agreement or the
availability or advisability of any alternatives to the Transaction. We did not
structure the Transaction or negotiate the final terms of the Transaction. This
letter does not express any opinion as to the likely trading range of Southern
common stock following the Transaction, which may vary depending on numerous
factors that generally impact the price of securities or on the financial
condition of Southern at that time. Our opinion is limited to the fairness, from
a financial point of view, of the Exchange Ratio to the shareholders of the
Company. We express no opinion with respect to any other reasons, legal,
business, or otherwise, that may support the decision of the Board of Directors
to approve or consummate the Transaction.

Raymond James & Associates, Inc. ("Raymond James") is actively engaged in
the investment banking business and regularly undertakes the valuation of
investment securities in connection with public offerings, private placements,
business combinations and similar transactions. Raymond James has been engaged
to render financial advisory services to the Company in connection with the
proposed Transaction and will receive a fee for such services, which fee is
contingent upon the value and consummation of the Transaction. Raymond James
will also receive a fee upon the delivery of this opinion. In addition, the
Company has agreed to indemnify us against certain liabilities arising out of
our engagement.

D-2
<PAGE> 236

In the ordinary course of our business, Raymond James may trade in the
securities of the Company and/or Southern for our own account or for the
accounts of our customers and, accordingly, may at any time hold a long or short
position in such securities.

It is understood that this letter is for the information of the Board of
Directors of the Company in evaluating the proposed Transaction and does not
constitute a recommendation to any shareholder of the Company regarding how said
shareholder should vote on the proposed Transaction. This opinion is not to be
quoted or referred to, in whole or in part, without our prior written consent,
which will not be unreasonably withheld. We have consented to the inclusion of
this letter in its entirety in the joint proxy statement/prospectus to be filed
by the Company and Southern with the Securities and Exchange Commission in
connection with the Transaction.

Based upon and subject to the foregoing, it is our opinion that, as of the
date hereof, the Exchange Ratio is fair, from a financial point of view, to the
holders of the Company's outstanding Common Stock.
Very truly yours,

Raymond James & Associates, Inc.

D-3
<PAGE> 237

ANNEX E
OPINION OF AUSTIN ASSOCIATES, INC.

February 14, 2000

CONFIDENTIAL
Board of Directors
Southern Michigan Bancorp, Inc.
51 W. Pearl Street
Coldwater, MI 49036-1995

Members of the Board:

You have requested our opinion as to the fairness, from a financial point
of view, to Southern Michigan Bancorp, Inc. ("SOMC") and its shareholders of the
terms of the Agreement and Plan of Consolidation to be dated as of February 15,
2000 ("Agreement") between SOMC and Sturgis Bank & Trust Company ("STUR"). The
Agreement provides for the merger of STUR with a newly formed interim subsidiary
savings bank of SOMC (the "Merger").

The financial terms of the Agreement provide for each outstanding share of
STUR common stock to be converted into shares of SOMC common stock. Each STUR
common share will receive .398 shares of SOMC common stock (the "Exchange
Ratio") for each STUR share currently held.

In carrying out our engagement, we have reviewed and analyzed material
bearing upon the financial and operating condition of SOMC and STUR, including
but not limited to the following: (i) the Agreement; (ii) the audited financial
statements of SOMC and STUR for the periods ending December 31, 1995 through
1998; (iii) unaudited and internal financial statements of SOMC and STUR for the
12-month period ending December 31, 1999; (iv) certain other publicly available
information regarding SOMC and STUR; (v) publicly available information
regarding the performance of certain other companies whose business activities
were believed by Austin Associates to be generally comparable to those of SOMC
and STUR; (vi) the financial terms, to the extent publicly available, of certain
comparable transactions; and (vii) such other analysis and information as we
deemed relevant.

In our review and analysis, we relied upon and assumed the accuracy and
completeness of the financial and other information provided to us or publicly
available, and have not attempted to verify the same. We have made no
independent verification as to the status of individual loans made by STUR or
SOMC, and have instead relied upon representations and information concerning
loans of SOMC and STUR, in the aggregate. Our opinion is contingent upon the
receipt of the STUR and SOMC Disclosure Schedules to be provided within two
weeks of signing the Agreement. In rendering our opinion, we have assumed that
the transaction will be a tax-free reorganization. In addition, we have assumed
in the course of obtaining the necessary regulatory approvals for the
transaction, no condition will be imposed that will have a material adverse
effect on the contemplated benefits of the transaction to SOMC and its
shareholders.

Based upon our analysis and subject to the qualifications described herein,
we believe that as of the date of this letter, the terms of the Agreement,
including the Exchange Ratio, are fair, from a financial point of view, to SOMC
and its shareholders.

For our services in rendering this opinion, SOMC will pay us a fee and
indemnify us against certain liabilities.
AUSTIN ASSOCIATES, INC.
<PAGE> 238

ANNEX F
AGREEMENT AND PLAN OF CONSOLIDATION
DATED FEBRUARY 15, 2000
BY AND BETWEEN
SOUTHERN MICHIGAN BANCORP
AND
STURGIS BANK & TRUST COMPANY

AGREEMENT AND PLAN OF CONSOLIDATION

This Agreement and Plan of Consolidation ("Agreement") is dated as of
February 15, 2000 by and between STURGIS BANK & TRUST COMPANY, a Michigan
savings bank ("Sturgis") and SOUTHERN MICHIGAN BANCORP, INC., a Michigan
corporation ("Bancorp").

RECITALS

WHEREAS, neither of the Board of Directors of Sturgis nor Bancorp seeks to
sell their respective entities at this time, but the Boards desire to enter into
a transaction structured as a strict consolidation of equals.

WHEREAS, Sturgis, with principal offices in Sturgis, Michigan, as of the
date hereof has Four Million (4,000,000) authorized shares of common stock, par
value $1.00 per share ("Sturgis Common Stock"), of which 3,094,866 shares are
outstanding.

WHEREAS, Bancorp, with its principal offices in Coldwater, Michigan owns,
among other things, one hundred percent (100%) of the issued and outstanding
capital stock of SOUTHERN MICHIGAN BANK & TRUST, a Michigan banking corporation
("Southern"). As of the date hereof, Bancorp has 4,000,000 authorized shares of
common stock, par value $2.50 per share ("Bancorp Common Stock"), of which
1,963,818 shares are outstanding.

WHEREAS, promptly after execution of this Agreement, Bancorp will organize
Newbank, a Michigan savings bank ("Newbank"), which will be a wholly owned
subsidiary of Bancorp.

WHEREAS, the parties desire to consolidate Newbank in a reorganization
qualifying as a tax free reorganization under Section 368 of the Internal
Revenue Code with and into Sturgis (the "Consolidation"). As a result of the
Consolidation, Bancorp will own one hundred percent (100%) of the capital stock
of Sturgis and Southern with Sturgis and Southern each retaining their separate
identities as chartered financial institutions.

WHEREAS, Sturgis and Bancorp will select a new corporate name for Bancorp.

WHEREAS, the parties desire to make certain representations, warranties and
agreements in connection with the Consolidation and also to prescribe certain
conditions to the Consolidation.

WHEREAS, the Boards of Directors of Sturgis and Bancorp (at meetings duly
called and held) have determined that this Agreement and the transactions
contemplated hereby are in the best interests of Sturgis and Bancorp,
respectively, and their respective shareholders and have approved this
Agreement.
<PAGE> 239

NOW, THEREFORE, in consideration of the premises and representations,
warranties, covenants and agreements hereinafter set forth, the parties hereby
agree as follows:

ARTICLE ONE
THE CONSOLIDATION AND RELATED MATTERS

1.1 FORMATION OF NEWBANK. Promptly after execution of this Agreement,
Bancorp shall organize Newbank as a savings bank organized under the laws of the
State of Michigan with its principal office at 125 E. Chicago Road, Sturgis,
Michigan.

1.2 MICHIGAN BANK CONSOLIDATION. At the Effective Time (as defined below),
Newbank shall be consolidated with and into Sturgis which shall be the surviving
corporation (hereinafter sometimes referred to as the "Surviving Corporation")
in accordance with the Michigan Savings Bank Act, as amended (the "MSBA").

1.3 EFFECTIVE TIME. As soon as practicable after each of the conditions set
forth in ARTICLE FOUR hereof has been satisfied or waived, Sturgis and Newbank
will file, or cause to be filed, a Consolidation Agreement with the Commissioner
of the Financial Institutions Bureau (the "Commissioner") and any other
applicable filings or notices required by any State or federal governmental
authority for the Consolidation. The Consolidation Agreement shall be in the
form required by and executed in accordance with the provisions of the MSBA. The
Consolidation shall become effective at the time the Consolidation Agreement is
filed with the Commissioner ("Effective Time") which shall be immediately
following the Closing as defined in SECTION 1.15 hereof and on the same day as
the Closing if practicable or at such other date and time as may be agreed to by
the parties and specified in the Consolidation Agreement in accordance with
applicable law.

1.4 CONVERSION OF SHARES. At the Effective Time, by virtue of the
Consolidation and without any action on the part of Sturgis or Newbank or the
holder of shares of Sturgis or Newbank common stock:

(a) Each share outstanding of Sturgis Common Stock issued and
outstanding at the Effective Time, subject to clause (b) of this SECTION
1.4 and SECTION 1.7 hereof and other than shares held by the Dissenting
Shareholders (as defined below), shall cease to be outstanding, shall cease
to exist and shall be converted into and represent solely .398 shares of
Bancorp Common Stock (the "Conversion Number") and shall no longer be a
share of Sturgis Common Stock.

(b) Any shares of Sturgis Common Sock which are owned or held by any
party hereto or any of their respective subsidiary(s) defined in SECTION
2.1 hereof (other than in a fiduciary capacity) at the Effective Time shall
cease to exist, the certificates for such shares shall as promptly as
practicable be cancelled, such shares shall not be converted into or
represent any shares of Bancorp Common Stock and no shares of Bancorp
Common Stock shall be issued or exchanged therefor.

(c) Each share of Newbank common stock which is issued and outstanding
immediately before the Effective Time shall be converted into and become
one share of the Surviving Corporation immediately after the Effective
Time.

(d) The holders of certificates representing shares of Sturgis Common
Stock shall cease to have any rights as shareholders of Sturgis as of the
Effective Time, except such rights, if any, as they may have pursuant to
Michigan law.

F-2
<PAGE> 240

(e) Any issued and outstanding shares of Sturgis Common Stock held by
Dissenting Shareholders shall not be converted as described in this SECTION
1.4, but from and after the Effective Time shall represent only the right
to receive such value as may be determined to be due to such Dissenting
Shareholders pursuant to the MSBA. The "Dissenting Shareholders" shall mean
any holder of Sturgis Common Stock who votes against the Consolidation at
the Sturgis Shareholders Meeting or who gives notice in writing to Sturgis
at or prior to the Sturgis Shareholders Meeting that such holder dissents
from the Consolidation where such holder, within thirty (30) days after the
Effective Time, and in compliance with the MSBA, delivers a written request
to Sturgis demanding the fair value of the shares of Sturgis Common Stock
held by such holder accompanied by the surrender of such holder's stock
certificates.

1.5 SURVIVING CORPORATION IN THE CONSOLIDATION.

(a) The name of the Surviving Corporation in the Consolidation shall be
"STURGIS BANK & TRUST COMPANY." At the Effective Time, the headquarters and
principal executive offices of Sturgis immediately prior to the Effective Time
shall become the headquarters and principal executive offices of the Surviving
Corporation.

(b) At the Effective Time, the Articles of Incorporation of Sturgis
immediately prior to the Effective Time shall become the Articles of
Incorporation of the Surviving Corporation until amended as provided therein.

(c) At the Effective Time, the Bylaws of Sturgis immediately prior to the
Effective Time shall become the Bylaws of the Surviving Corporation until
amended as provided therein and in the Articles of Incorporation of the
Surviving Corporation.

(d) At the Effective Time, the directors and executive officers of Sturgis
immediately prior to the Effective Time shall become the directors and executive
officers of Sturgis, as the Surviving Corporation, except as provided in SECTION
5.2 below until such directors or officers are replaced or additional directors
or officers are elected or appointed in accordance with the provisions of the
Articles of Incorporation and Bylaws of Sturgis, as the Surviving Corporation.

(e) From and after the Effective Time, the Consolidation shall have the
effect set forth in this Agreement and under the MSBA, including without
limitation all the following:

(i) The Surviving Corporation shall possess all of the rights,
interests, privileges, powers and franchises and is subject to all the
restrictions, disabilities, liabilities and duties of each of Sturgis and
Newbank. The title to all property, real, personal and mixed is transferred
to the Surviving Corporation and shall not revert or be in any way impaired
by reason of the Consolidation.

(ii) The Surviving Corporation shall hold and enjoy the same and all
rights of property, franchises and interests including appointments,
designations and nominations and all other rights and interests in any
fiduciary capacity, in the same manner and to the same extent as those
rights and interests were held or enjoyed by each of Sturgis and Newbank at
the time of the Consolidation.

1.6 AUTHORIZATION FOR ISSUANCE OF COMMON STOCK; EXCHANGE OF CERTIFICATES.

(a) Prior to the Closing, Bancorp shall reserve for issuance a sufficient
number of shares of Bancorp Common Stock for the purpose of issuing such shares
to Sturgis' shareholders in accordance with this ARTICLE ONE. At or prior to the
Effective Time, Bancorp shall supply, or shall cause to be supplied, to
Registrar and Transfer Company (the "Exchange Agent") in trust for the benefit
of the holders of the Sturgis Common Stock, for exchange in accordance with this
SECTION 1.6 through the

F-3
<PAGE> 241

Exchange Agent: (i) certificates evidencing the Bancorp Common Stock issuable
pursuant to SECTION 1.4(A) in exchange for outstanding Sturgis Common Stock and
(ii) cash in an aggregate amount sufficient to pay for fractional shares
pursuant to SECTION 1.7 (the shares and cash so deposited, together with any
dividends or distributions with respect to Bancorp Common Stock held by the
Exchange Agent payable after the Effective Time which shall also be deposited
with the Exchange Agent, being hereinafter referred to collectively as the
"Exchange Fund"). Any interest, dividends or other income earned on the
investment of cash (not including the Bancorp Common Stock) held in the Exchange
Fund shall be for the account of and payable to Bancorp.

(b) After the Effective Time, holders of certificates theretofore
representing outstanding shares of Sturgis Common Stock (other than as provided
in SECTION 1.4(B) above and SECTION 1.4(E) above), upon surrender of such
certificates (together with the signed and completed transmittal form referred
to below and such other customary documents as may be required pursuant to such
instructions) to the Exchange Agent, shall be entitled to receive certificates
for the number of whole shares of Bancorp Common Stock into which shares of
Sturgis Common Stock theretofore evidenced by the certificate so surrendered
shall have been converted as provided in SECTION 1.4 hereof and cash payments in
lieu of fractional shares, if any, as provided in SECTION 1.7 hereof. As soon as
practicable after the Effective Time, the Exchange Agent will send a notice and
transmittal form to each Sturgis shareholder of record at the Effective Time
advising such shareholder: (i) of the effectiveness of the Consolidation and the
procedure for surrendering to the Exchange Agent outstanding certificates
formerly representing Sturgis Common Stock in exchange for new certificates of
Bancorp Common Stock; and (ii) if applicable, of such shareholder's right under
the MSBA to dissent within thirty (30) days of the Effective Time. Upon
surrender, each certificate representing Sturgis Common Stock shall be
cancelled.

(c) Until surrendered as provided in this SECTION 1.6, all outstanding
certificates of a holder which, before the Effective Time, represented Sturgis
Common Stock (other than those representing shares cancelled at the Effective
Time pursuant to SECTION 1.4(B) hereof) will be deemed for all corporate
purposes (except certificates of the Dissenting Shareholders) to represent the
number of whole shares of Bancorp Common Stock in which the shares of Sturgis
Common Stock formerly represented thereby were converted and the right to
receive cash in lieu of a fractional share interest. However, until such
outstanding certificates formerly representing Sturgis Common Stock are so
surrendered, no dividend or distribution payable to holders of record of Bancorp
Common Stock shall be paid to any holder of such outstanding certificates, but
upon surrender of such outstanding certificates by such holder there shall be
paid to such holder the amount of any dividends or distributions, without
interest, theretofore paid with respect to any such whole shares of Bancorp
Common Stock, but not paid to such holder, and which dividends or distributions
had a record date occurring on or after the Effective Time and the amount of any
cash, without interest, payable to such holder in lieu of a fractional share
interest pursuant to SECTION 1.7 hereof. After the Effective Time, there shall
be no further registration of transfers on the records of Sturgis of outstanding
certificates formerly representing shares of Sturgis Common Stock and, if a
certificate formerly representing such share is presented to Bancorp or Sturgis,
it shall be forwarded to the Exchange Agent for cancellation and exchange as
herein provided. Six months after the Effective Time, the Exchange Agent shall
return to Bancorp any certificates for Sturgis Common Stock and cash remaining
in the possession of the Exchange Agent (together with any dividends and
distributions in respect thereof) and thereafter shareholders of Sturgis shall
look exclusively to Bancorp for shares of Bancorp Common Stock and cash to which
they are entitled hereunder. Notwithstanding the foregoing, none of Sturgis,
Bancorp, the Exchange Agent or any other person shall be liable to any former
holder of shares of Sturgis Common Stock for any amount delivered in good faith
to a public official pursuant to applicable abandoned property, escheat or
similar law.

F-4
<PAGE> 242

(d) All shares of Bancorp Common Stock issued or paid upon the conversion
of Sturgis Common Stock in accordance with the above terms and conditions shall
be deemed to have been issued or paid in full satisfaction of all rights
pertaining to such Sturgis Common Stock.

(e) If any new certificate for Bancorp Common Stock is to be issued in a
name other than that in which the certificate surrendered and exchanged thereof
is registered, it shall be a condition of the issuance therefore that the
certificate surrendered in exchange shall be properly endorsed and otherwise in
proper form for transfer and that the person requesting such transfer pay to the
Exchange Agent any transfer or other taxes required by reason of the issuance of
a new certificate representing shares of Bancorp Common Stock in any name other
than that of the registered holder of the certificate surrendered, or establish
to the satisfaction of the Exchange Agent that such tax has been paid or is not
payable.

(f) In the event any certificate representing Sturgis Common Stock shall
have been lost, stolen or destroyed, the Exchange Agent shall issue in exchange
for such lost, stolen or destroyed certificate, upon the making of an affidavit
of that fact by the holder thereof, such shares of Bancorp Common Stock as may
be required pursuant hereto; provided, however, that Bancorp or the Exchange
Agent may, in its discretion and as a condition precedent to the issuance or
payment thereof, require the owner of such lost, stolen, or destroyed
certificate to deliver a bond in the sum as it may direct as indemnity against
any claim that may be made against Sturgis, Bancorp, the Exchange Agent or any
other person with respect to the certificate alleged to have been lost, stolen
or destroyed.

(g) Bancorp or the Exchange Agent shall be entitled to deduct and withhold
from the consideration paid in exchange for Sturgis Common Stock such amounts as
Bancorp or the Exchange Agent is required to deduct and withhold with respect to
the making of such payment under the Internal Revenue Code or any provision of
state, local or foreign tax law. To the extent that amounts are so withheld by
Bancorp or the Exchange Agent, such withheld amounts shall be treated for all
purposes of this Agreement as having been paid.

1.7 NO FRACTIONAL SHARES. Notwithstanding any term or provision hereof, no
fractional shares of Bancorp Common Stock, or any other evidence of ownership
thereof, will be issued upon the conversion of or in exchange for any shares of
Sturgis Common Stock; no dividend or distribution with respect to Bancorp shall
be payable on or with respect to any fractional share interest; and no such
fractional share interest shall entitle the owner thereof to vote or to any
other rights of a shareholder of Bancorp. In lieu of such fractional share
interest, any holder of Sturgis Common Stock who would otherwise be entitled to
a fractional share of Bancorp will, upon surrender of this certificate or
certificates representing Sturgis Common Stock outstanding immediately before
the Effective Time, be paid the applicable cash value of such fractional share
interest, which shall be equal to the product of the fraction of the share to
which such holder would otherwise be entitled and the closing price of Bancorp
Common Stock on the trading day immediately prior to the date of the Effective
Time. For purposes of determining such fractional share interest, such shares of
Sturgis Common Stock owned by a Sturgis shareholder shall be combined so as to
calculate the maximum number of whole shares of Bancorp issuable to such Sturgis
shareholder.

1.8 DISSENTER'S RIGHTS. Bancorp and Sturgis agree to comply in all respects
with the provisions of the MSBA whereby shareholders of Sturgis have the right
to dissent from the Consolidation and demand payment in cash for shares of
Sturgis Common Stock. As provided in SECTION 1.4(E) above, shares held by a
Dissenting Shareholder shall not be converted into Bancorp Common Stock and cash
in lieu of fractional shares.

1.9 ANTI-DILUTION. The consideration received with respect to each share of
Sturgis Common Stock shall be adjusted to reflect fully the effect of any stock
split, reverse split, stock dividend

F-5
<PAGE> 243

(including any dividend or distribution of securities convertible into Bancorp
Common Stock or Sturgis Common Stock), reorganization, recapitalization or other
like change with respect to Bancorp Common Shares or Sturgis Common Stock, as
appropriate, occurring after the date hereof and prior to the Effective Time.
Notwithstanding the foregoing, no adjustment shall be made pursuant to this
provision for any stock option plan adopted by Bancorp and approved by its
shareholders at an annual or special meeting.

1.10 SHAREHOLDERS' MEETING. Sturgis shall, at the earliest practicable
date, hold a meeting of shareholders (the "Sturgis Shareholders Meeting") to
submit this Agreement for adoption by its shareholders. The affirmative vote of
two-thirds of the issued and outstanding shares of Sturgis Common Stock entitled
to vote shall be required for such adoption. With respect to the Sturgis
Shareholders Meeting, Sturgis shall comply with all notice and other
requirements of the MSBA.

1.11 STURGIS STOCK OPTIONS.

(a) Section 1.11 of Sturgis' Disclosure Schedule sets forth a list of each
stock option outstanding on the date of this Agreement (collectively, the
"Sturgis Stock Options") to purchase Sturgis Common Stock heretofore granted
pursuant to the Sturgis Stock Option Plan dated April 28, 1989 and the Sturgis
Director's Option Plan dated April 28, 1989 (collectively the "Sturgis Option
Plans"). Section 1.11 of Sturgis' Disclosure Schedule sets forth with respect to
each Sturgis Option Plan the option exercise price, the number of shares subject
to the option, the dates of grant, vesting, exercisability and expiration of the
option and that the option is either a qualified or a non-qualified stock
option. Without the prior written consent of Bancorp, no additional stock
options shall, after the date of this Agreement, be granted under the Sturgis
Option Plans.

(b) At the Effective Time, each Sturgis Stock Option which is outstanding
and unexercised immediately prior thereto shall cease to represent a right to
acquire shares of Sturgis Common Stock and shall be converted automatically into
an option to purchase the shares of Bancorp Common Stock in amount and at an
exercise price (and subject to the terms of the Bancorp Option Plan) determined
as provided below: (i) the number of shares of Bancorp Common Stock to be
subject to the new options shall be equal to the product of the number of shares
of Sturgis Common Stock subject to the original Sturgis Stock Option and the
Conversion Number, provided that any fractional shares of Bancorp Common Stock
resulting from such multiplication shall be rounded down to the nearest whole
share, and (ii) the exercise price per share of Bancorp Common Stock under the
new option shall be equal to the exercise price per share of Sturgis Common
Stock under the original Sturgis Option Plan divided by the Conversion Number,
provided that such exercised price shall be rounded down to the nearest whole
cent.

(c) At the 2000 annual meeting of shareholders of Bancorp, the holders of
Bancorp Common Stock shall vote on approval of a Stock Option Plan whereby
qualified and non-qualified stock options may be issued in amounts sufficient to
convert the options on Section 1.11 of Sturgis' Disclosure Schedule pursuant to
this SECTION 1.11.

1.12 REGISTRATION STATEMENT; PROSPECTUS.

(a) For the purposes (i) of registering with the Securities and Exchange
Commission ("SEC") and with applicable state securities authorities the Bancorp
Common Stock to be issued to holders of Sturgis Common Stock in connection with
the Consolidation, and (ii) of holding the Sturgis Shareholders Meeting, the
parties shall cooperate in the preparation of an appropriate registration
statement (such registration statement together with all and any amendments and
supplements hereinafter referred to as the "Registration Statement"), including
the prospectus and proxy statement satisfying all applicable requirements of
applicable state laws, and of the Securities Act of

F-6
<PAGE> 244

1933 (the "Securities Act"), the Securities Exchange Act of 1934 (the "Exchange
Act"), and the rules and regulations thereunder.

(b) Sturgis shall furnish such information concerning Sturgis and its
subsidiaries as is necessary in order to cause the prospectus and proxy
statement, insofar as it relates to such entities, to comply with SECTION
1.12(A) hereof. Sturgis agrees promptly to advise Bancorp if at any time before
the Sturgis Shareholders Meeting any information provided by Sturgis in the
prospectus and proxy statement (through incorporation by reference or otherwise)
becomes incorrect or incomplete in any material respect and to provide Bancorp
with the information needed to correct such inaccuracy or omission. Sturgis
shall furnish Bancorp with such supplemental information as necessary in order
to cause such prospectus and such proxy statement, insofar as it relates to
Sturgis and its subsidiaries, to comply with SECTION 1.12(A).

(c) Bancorp shall furnish Sturgis with such information concerning Bancorp
and its subsidiaries as is necessary in order to cause the prospectus and proxy
statement, insofar as it relates to such entities, to comply with SECTION
1.12(A) hereof. Bancorp agrees promptly to advise Sturgis if at any time before
the Sturgis Shareholders Meeting (through incorporation by reference or
otherwise) becomes incorrect or incomplete in any material respect to provide
Sturgis with the information needed to correct such inaccuracy or omission.
Bancorp shall furnish Sturgis with such supplemental information as may be
necessary in order to cause the prospectus and proxy statement, insofar as it
relates to Bancorp and its subsidiaries, to comply with SECTION 1.12(A).

(d) Bancorp shall promptly file the Registration Statement with the SEC and
applicable state securities agencies. Sturgis and Bancorp shall use all
reasonable efforts to cause the Registration Statement to become effective under
the Securities Act and applicable state security laws at the earliest
practicable date. Sturgis authorizes Bancorp to utilize in the Registration
Statement the information concerning Sturgis and its subsidiaries incorporated
by reference in, and provided to Bancorp for the purpose of inclusion in, the
prospectus and proxy statement. Bancorp shall advise Sturgis promptly when the
Registration Statement has become effective and of any supplements or amendments
thereto and Bancorp shall furnish Sturgis with copies of all such documents.
Before the Effective Time or the termination of this Agreement, each party shall
consult with the other with respect to any material that might constitute a
"Prospectus" relating to the Consolidation within the meaning in the Securities
Act.

(e) The parties intend that the Consolidation shall qualify for "pooling of
interest" accounting treatment under Accounting Principles Board Opinion No. 16
and SEC Accounting Series Releases 130 and 135, as amended, and each of the
parties shall use its best efforts and take all actions reasonably necessary to
cause the Consolidation to qualify for such accounting treatment; provided,
however, if the parties mutually determine that the "pooling of interest"
accounting treatment desired by the parties is not available or is not
practicable (for any reason, including but not limited to, the exercise of
dissenters rights by holders of Sturgis Common Stock), the following provisions
shall become effective and supercede any other provision or provisions in this
Agreement to the contrary:

(i) The parties shall cause the Consolidation to be treated as a
"purchase" for accounting purposes and not as a "pooling of interest", and
each of the parties shall use its best efforts and take all actions
reasonably requested to obtain approval of and close the Consolidation
under "purchase" accounting treatment.

(ii) The parties shall, in compliance with the terms of SECTIONS
1.12(A)-(D) above, revise and resubmit the Registration Statement to the
SEC as soon as practicable with the Consolidation treated as a "purchase"
for accounting purposes and not as a "pooling of interest".

F-7
<PAGE> 245

(iii) The condition to closing set forth in SECTION 4.1(G) shall be
deemed waived without any further action on behalf of either party and all
other provisions in this Agreement requiring the Consolidation to be
treated as a "pooling of interest" for accounting purposes shall be revised
to require the Consolidation to be treated as a "purchase" for accounting
purposes.

(iv) If Sturgis has held a Sturgis Shareholders Meeting whereat the
shareholders voted on the Consolidation with the understanding that the
Consolidation would qualify for "pooling of interest" treatment, Sturgis
shall hold a second Sturgis Shareholders Meeting in compliance with SECTION
1.10 above whereat the shareholders will vote on the Consolidation with the
understanding that the Consolidation would be treated as a "purchase" for
accounting purposes.

(v) The condition to closing set forth in SECTION 4.1(K) shall be
amended to read in entirety as follows: "Dissenter Rights. The holders of
not more than 770,000 shares of Sturgis Common Stock shall have taken one
or both of the following actions: (i) given notice in writing to Sturgis at
or prior to the Sturgis Shareholders Meeting that such holder dissents from
the Consolidation, or (ii) voted against the Consolidation at the Sturgis
Shareholders Meeting."

1.13 COOPERATION AND REGULATORY APPROVALS. The parties, and their
respective affiliates and subsidiaries, shall cooperate in the preparation and
submission by them, as promptly as reasonably practical, of such applications,
petitions, and other filings as they may reasonably deem necessary or desirable
to any bank regulatory authority, the Department of Justice, SEC, Secretary of
State of Michigan, other regulatory or governmental authorities, holders of the
voting shares of common stock of Sturgis and any other persons for the purpose
of obtaining any approvals or consents necessary to consummate the transactions
contemplated hereby. Each party shall have the right to review and comment on
such applications, petitions and filings in advance and shall furnish to the
other copies thereof promptly prior to submission thereof. Any such materials
must be acceptable to both Sturgis and Bancorp prior to submission to any
regulatory or governmental entity or authority or transmission to shareholders
or other third parties, except to the extent that Sturgis or Bancorp is legally
required to proceed prior to obtaining the acceptance of the other party hereto.
Each party agrees to consult with the other with respect to obtaining all
necessary consents and approvals, and each will keep the other apprised of the
status of matters relating to such approvals and consents and the consummation
of the transactions contemplated hereby. At the date hereof, no party is aware
of any reason that any regulatory approval required to be obtained by it would
not be obtained or would be obtained subject to conditions that would have a
result in a material adverse effect on this Agreement or the transactions
contemplated herein.

1.14 BANCORP NAME. Prior to the Closing and pursuant to the Michigan
Business Corporation Act, as amended, Bancorp shall adopt an assumed name which
is reasonably agreeable to Bancorp and Sturgis. It is the intent of the parties
that at the 2001 annual meeting of the shareholders of Bancorp, the shareholders
of Bancorp shall be entitled to vote to amend the Articles of Incorporation of
Bancorp to change Bancorp's legal corporate name to such assumed name.

1.15 CLOSING. If (i) this Agreement has been duly approved by the
shareholders of Sturgis, (ii) an assumed name for Bancorp has been adopted
pursuant to SECTION 1.14, and (iii) all conditions of this Agreement have been
satisfied in all material respects or waived, a closing (the "Closing") shall
take place as promptly as practicable thereafter at the offices of Dresser,
Dresser, Gilbert & Haas, P.C., Sturgis, Michigan, or at such other place as the
parties agree, at which time the parties will exchange certificates, letters and
other documents as required hereby and will make the filings described in
SECTION 1.3 hereof. Such Closing will take place within thirty (30) days after
the satisfaction or waiver of all conditions and/or obligations precedent to
Closing contained in ARTICLE FOUR of this Agreement or at such other time as the
parties agree. The parties shall use their best efforts to cause this Closing to
occur on or before December 31, 2000.

F-8
<PAGE> 246

1.16 TAX CONSEQUENCES; ACCOUNTING TREATMENT. It is intended that (i) the
Consolidation shall constitute a reorganization within the meaning of Section
368 of the Internal Revenue Code, (ii) this Agreement constitutes a "plan of
reorganization" for purposes of Section 368 of the Internal Revenue Code, and
(iii) as provided in SECTION 1.12(E) above, if available, the Consolidation
shall qualify for "pooling of interest" accounting treatment under Accounting
Principles Board Opinion No. 16 and SEC Accounting Series Releases 130 and 135,
as amended.

ARTICLE TWO
REPRESENTATIONS AND WARRANTIES

Sturgis (with respect to itself and with respect to each of its
Subsidiaries individually) represents and warrants to Bancorp, and Bancorp (with
respect to itself and with respect to each of its Subsidiaries individually)
represents and warrants to Sturgis, except as disclosed in the Disclosure
Schedule delivered by each party to the other pursuant to SECTION 2.29 hereof
(which Disclosure Schedule shall be prepared separately by each party and
include exceptions for such party and its Subsidiaries), as follows:

2.1 ORGANIZATION. It is an entity duly organized, validly existing and in
good standing under the laws of the jurisdiction of its incorporation or
organization as set forth in Section 2.1 of its Disclosure Schedule. Section 2.1
of its Disclosure Schedule lists each "subsidiary" (the term "subsidiary" when
used with respect to any party means any entity (including without limitation
any corporation, partnership, joint venture or other organization, whether
incorporated or unincorporated) which is consolidated with such party for
financial reporting purposes) (individually a "Subsidiary" and collectively the
"Subsidiaries"). It has all requisite power and authority and, to the extent
required by applicable law, is licensed to own, lease and operate its properties
and conduct its businesses as now being conducted. It has delivered or made
available to the other party true, complete and correct copies of its Articles
of Incorporation, Bylaws and other organizational documents, as in effect on the
date of this Agreement. To the extent it is a depositary institution, all
eligible accounts thereof are insured by the Federal Deposit Insurance
Corporation ("FDIC"). It has full power and authority (including all licenses,
franchises, permits and governmental authorizations which are legally required)
to engage in all material respects in the business and activities now conducted
by it.

2.2 CAPITALIZATION. Its authorized capital stock and the number of issued
and outstanding shares of its capital stock as of the date hereof are accurately
set forth in the Recitals of this Agreement. All outstanding shares of its
common stock are duly authorized, validly issued, fully paid, nonassessable and
free of preemptive rights. Except (i) as set forth in Section 2.2 of its
Disclosure Schedule or (ii) with respect to the Sturgis Option Plans as set
forth in Section 1.11 of its Disclosure Schedule, as of the date of this
Agreement, there are no options, convertible securities or warrants or other
rights to purchase or acquire any of its capital stock from it and no oral or
written agreement, contract, arrangement, understanding, plan or instrument of
any kind to which it is subject with respect to the issuance, voting or sale of
issued or unissued shares of its capital stock. A true and complete copy of each
plan and agreement pursuant to which such options, convertible securities,
warrants or other rights have been granted or issued, as in effect as of the
date of this Agreement, is included in Section 2.2 of its Disclosure Schedule.

2.3 OWNERSHIP OF SUBSIDIARIES. All outstanding shares or ownership
interests of its Subsidiaries are validly issued, fully paid, nonassessable and
owned beneficially and of record by it or one of its Subsidiaries free and clear
of any lien, claim, charge, restriction, rights of third parties, or encumbrance
(collectively "Encumbrance"), except as set forth in Section 2.3 of its
Disclosure Schedule. There are no options, convertible securities, warrants or
other rights (preemptive or

F-9
<PAGE> 247

otherwise) to purchase or acquire any capital stock or ownership interests of
any of its Subsidiaries and no contracts to which it or any of its Subsidiaries
is subject with respect to the issuance, voting or sale of issued or unissued
shares of the capital stock or ownership interests of any of its Subsidiaries.
It does not own more than 2% of the capital stock or other equity securities
(including securities convertible or exchangeable into such securities) of or
more than 2% of the aggregate profit participations in any entity other than a
Subsidiary or as otherwise set forth in Section 2.3 of its Disclosure Schedule.

2.4 FINANCIAL STATEMENTS AND REPORTS. No registration statement, offering
circular, proxy statement, schedule or report filed by it or any of its
Subsidiaries under various securities and financial institution laws and
regulations ("Regulatory Reports"), on the date of its effectiveness in the case
of registration statements, or on the date of filing in the case of reports or
schedules, or on the date of mailing in the case of proxy statements, contain
any untrue statement of material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein, in light of
the circumstances in which they were made, not misleading. For the past three
years, it has timely filed all Regulatory Reports required to be filed by it
under various securities and financial institution laws and regulations except
to the extent that any failure to do so, in the aggregate, would not have a
material effect; and all such documents, as finally amended, complied in all
material respects with applicable requirements of law and, as of the respective
date or the date as amended, did not contain any untrue statements of material
fact or omit to state a material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances under which they
were made, not misleading. Except to the extent stated therein, all financial
statements and schedules included in the Regulatory Reports (or to be included
in Regulatory Reports) to be filed after the date hereof (i) were or will be
(with respect to financial statements in respect of periods ending after
December 31, 1999), prepared in accordance with its books and records, and (ii)
present (and in the case of financial statements and respective periods ending
after December 31, 1999, will present) fairly the consolidated financial
position and the consolidated results of operations or income, changes in
shareholders' equity and cash flows of it as of the dates and for the periods
indicated in accordance with generally accepted accounting principles applied on
a consistent basis with prior periods. Its audited financial statements after
December 31, 1998 and for all periods thereafter up to the Closing reflect or
will reflect, as the case may be, all liabilities (whether accrued, absolute,
contingent, unliquidated or otherwise, whether due or to become due and
regardless of when asserted) as of such date required to be reflected in such
financial statements in accordance with generally accepted accounting principles
and contain or will contain, as the case may be, adequate reserves for losses on
loans and properties acquired in settlement of loans, taxes and all other
material accrued liabilities and for all reasonably anticipated material losses,
if any, as of such date in accordance with generally accepted accounting
principles. Except as disclosed in its financial statements at December 31,
1999, there exists no set of circumstances that could reasonably be expected to
result in any liability or obligation, taken as a whole, material to it and its
Subsidiaries except for transactions effected or actions occurring or taken
after December 31, 1999 (i) in the ordinary course of business, (ii) as
permitted by this Agreement, or (iii) as disclosed in its Regulatory Reports
filed after December 31, 1999 and before the date of this Agreement. A true and
complete copy of such December 31, 1999 financial statements have been delivered
by it. The books and records of it have been, and are being, maintained in all
material respects in accordance with generally accepted accounting principles
and any other applicable legal and accounting requirements.

F-10
<PAGE> 248

2.5 ABSENCE OF CHANGES.

(a) Since December 31, 1999, there has been no material adverse change
affecting it and there is no occurrence, event or development of any nature
existing or, to its best knowledge, threatened which may reasonably be expected
to have a material adverse effect upon it.

(b) Except as set forth in Section 2.5 of its Disclosure Schedule or in its
Regulatory Reports filed after December 31, 1999 and before the date of this
Agreement, since December 31, 1999, it has owned and operated its assets,
properties and businesses in the ordinary course and consistent with past
practice.

2.6 PROSPECTUS AND PROXY STATEMENT. At the time the prospectus and proxy
statements are mailed to its shareholders for the solicitation of proxies for
the approvals referred to in SECTION 1.10 hereof and at all times after such
mailing up to and including the time that such approvals, such prospectus and
proxy statement (including any supplements thereto), with respect to all
information set forth therein relating to it and its shareholders, its common
stock, this Agreement, the Consolidation and other transactions contemplated
hereby, will:

(a) Comply in all material respects with applicable provisions of the
Securities Act, the Exchange Act and the rules and regulations under such
Acts; and

(b) Not contain any untrue statement of material fact or omit to state
any material fact required to be stated therein or necessary in order to
make the statements contained therein, in light of the circumstances under
which it is made, not misleading.

2.7 BROKER'S OR FINDER'S FEES. It has not incurred or will not incur any
liability for brokerage, finders', agents' or investment bankers' fees or
commissions in connection with this Agreement or the transactions contemplated
hereby, except for fees payable to Raymond James Financial, Inc. by Sturgis
pursuant to an engagement agreement which has been fully disclosed to Bancorp
and fees payable to Austin Associates, Inc. by Bancorp pursuant to an engagement
letter which has been fully disclosed to Sturgis.

2.8 LITIGATION AND OTHER PROCEEDINGS. Except as set forth in Section 2.8 of
its Disclosure Schedule, there is no litigation, action, suit, investigation or
proceeding pending or, to the best of its knowledge, overtly threatened, against
or affecting it or involving any of its properties or assets, at law or in
equity before any federal, state, municipal, local or other governmental
authority which individually or in the aggregate involve: (i) a claim for
damages or other monetary relief being one percent (1%) or more of its combined
capital stock, surplus and undivided profits, including reserves, or (ii)
matters which, if resolved adversely to the interest of it, would presently, or
in the future, materially and adversely effect the operations of it or its
ability to perform under this Agreement, and to the best of its knowledge, no
one has asserted and no one has reasonable or valid grounds on which it
reasonably can be expected that anyone will assert any such claims, litigation,
suits, actions and/or proceedings against it based upon the wrongful action or
inaction of it or its officers, directors or employees.

2.9 COMPLIANCE WITH LAW. Except as set forth in Section 2.9 of its
Disclosure Schedule:

(a) It is in compliance in all material respects with all laws,
regulations, ordinances, rules, judgments, orders or decrees applicable to its
operation or business, including without limitation the Equal Credit Opportunity
Act, The Fair Housing Act, The Community Reinvestment Act, The Homeowners'
Disclosure Act, and all other applicable fair lending laws or other laws
relating to discrimination. It has received no notice from any federal, state,
local government or governmental or regulatory agency or body of any material
violation of, and does not know of any material violations of this SECTION
2.9(A).

F-11
<PAGE> 249

(b) It has all permits, licenses, certificates of authority, franchises,
orders and approvals of, and have made all filings, applications and
registrations with, all federal, state, local government or governmental or
regulatory agency or body that are required in order to permit it to carry on
its business as it is presently being conducted.

(c) It has not received since January 1, 1997 notification or communication
from any government or governmental or regulatory agency or body or the staff
thereof: (i) asserting that it is not in compliance with any of the statutes,
regulations or ordinances that any such government or governmental or regulatory
agency or body administers or enforces, (ii) threatening to revoke any license,
franchise, permit or application, or (iii) threatening or contemplating any
enforcement action by or supervisory or any other written agreement with a state
or federal banking regulator or any revocation or limitation of, or action which
would have the effect of revoking or limiting, FDIC deposit insurance.

2.10 CORPORATE ACTIONS. Its Board of Directors (at a meeting duly called
and held) has by the requisite vote (i) determined that the Consolidation is
advisable and in the best interests of it and its shareholders, (ii) duly
approve the Consolidation and this Agreement and authorized its officers to
execute and deliver this Agreement and to take all action necessary to
consummate the Consolidation and the other transactions contemplated hereby, and
(iii) in the case of Sturgis, authorized and directed the submission for
shareholders' approval of adoption of this Agreement. In the case of Bancorp, it
is not required to submit this Agreement to its shareholders for approval.

2.11 AUTHORITY. Except as set forth in Section 2.11 of its Disclosure
Schedule, neither the execution and delivery of and performance of its
obligations under this Agreement by it nor the consummation of the Consolidation
will violate any of the provisions of, or constitute a breach of default, under
or give any person the right to terminate or accelerate payment or performance
under (i) its Articles of Incorporation or Bylaws, (ii) any regulatory restraint
on the acquisition of it or control thereof, (iii) any law, rule, ordinance or
regulation or judgment, order, decree, award or governmental permit or license
to which it is subject, or (iv) any agreement, lease, contract, note, mortgage,
indenture, arrangement or other obligation or instrument ("Contract") to which
it is a party or is subject or by which its properties or assets is bound and
which provides for payment by, on behalf of, or to it in excess of $50,000.00 in
the aggregate over the term of such Contract. It acknowledges that the
consummation of the Consolidation and the other transactions contemplated hereby
is subject to shareholder approval in the case of Sturgis and to various
governmental or regulatory approvals. It has all requisite corporate power and
authority to enter into this Agreement and to perform its obligations hereunder
and thereunder, subject, to the approval or adoption of this Agreement by its
shareholders where required under applicable law. Other than the receipt of
Governmental Approvals (as defined in SECTION 4.1(C) hereof), the approval or
adoption of this Agreement by its shareholders if required by applicable law,
and except as set forth in Section 2.11 of its Disclosure Schedule with respect
to any Contract, no consents or approvals are required on its behalf in
connection with the consummation of the transactions contemplated by this
Agreement. This Agreement has been duly executed and delivered on behalf of it
and assuming due authorization, execution and delivery by every other party to
this Agreement, constitutes the valid and binding obligation of it, enforceable
against it in accordance with its terms, except as enforceability may be limited
by applicable laws relating to bankruptcy, insolvency, or creditors' rights
generally and general principles of equity.

F-12
<PAGE> 250

2.12 EMPLOYMENT ARRANGEMENTS.

(a) Except as set forth in Section 2.12 of its Disclosure Schedule:

(i) All employees of it are employees-at-will, may be terminated at
any time for any lawful reason or for no reason and have no entitlement to
employment by virtue of any oral or written contract, employer policy or
otherwise;

(ii) There are no agreements, plans or other arrangements with respect
to employment, severance or other benefits with any current or former
directors, officers or employees of it which may not be terminated without
penalty or expense on thirty (30) days' or less notice to any such person;

(iii) No Payments and benefits to current or former directors,
officers and employees of it resulting from the transactions contemplated
hereby or the termination of such persons' service or employment within two
years after completion of the Consolidation will cause the imposition of
excise taxes under Section 4999 of the Internal Revenue Code or the
disallowance of a deduction to it pursuant to Section 162, 280G or any
other Section of the Internal Revenue Code; and

(iv) Neither the execution and delivery of this Agreement, nor the
consummation of the transactions contemplated hereby will (A) constitute a
stated "Triggering Event" under any "Employee Plans" (as defined in SECTION
2.13(A) hereof) or "Benefit Arrangements" (as defined in SECTION 2.13(A)
hereof) of it that will result in any material payment (including, without
limitation, severance, unemployment compensation, golden parachute or
otherwise) becoming due to any director, officer, stockholder or employee
of it, (B) materially increase any benefits otherwise payable under any
Employee Plans or Benefit Arrangements of it, or (C) result in any
acceleration of the time of payment or vesting of any such benefits to any
material extent.

(b) It is not a party to any collective bargaining agreement or labor union
contract. To the best of its knowledge, (i) no grievance procedure, arbitration
proceeding or other labor controversy is pending against it under any collective
bargaining agreement that would result in a material liability, (ii) it has
complied in all material respects with all laws relating to the employment of
labor, including, without limitation, provisions thereof relating to wages,
hours, equal employment, safety, collective bargaining and the payment of social
security and similar taxes and it is not liable for any arrears of wages or any
taxes or penalties for failure to comply with any of the foregoing, except, in
each case, any of the foregoing which, individually or in the aggregate would
not have a material adverse effect on it, and (iii) there is no unfair labor
practice or similar complaint against it pending before the National Labor
Relations Board or similar authority or strike, dispute, slow down, work
stoppage or lockout pending or threatened against it or any complaint pending
before the Equal Employment Opportunity Commission or any comparable federal,
state or local fair employment practices agency and none has existed during the
past three years that was not dismissed without liability on the part of it.

2.13 EMPLOYEE BENEFITS. It maintains only the employee benefit plans
("Employee Plans") set forth in Section 2.13 of its Disclosure Schedule (true
and correct copies of which have been delivered to the other party). None of the
Employee Plans of it is and it has not participated in, or contributed to, a
"Multi-Employee Plan" as defined in Section 3(37) of the Employment Retirement
Income Security Act of 1974 ("ERISA") or a "Multiple Employer Plan" as covered
in Section 413(c) of the Internal Revenue Code or any plan which is subject to
Title IV of ERISA or Section 412 of the Internal Revenue Code. It has not
incurred nor does it reasonably expect to incur any liability to the Pension
Benefit Guaranty Corporation except for required premium payments which, to the
extent due and payable, have been paid. The Employee Plans intended to be
qualified under Section 401(a)

F-13
<PAGE> 251

and 401k of the Internal Revenue Code are qualified, and it is not aware of any
fact which would adversely effect the qualified status of such plans. The
Internal Revenue Service has issued a current favorable determination letter
with respect to the qualified status of the Employee Plans and has not taken any
action to revoke such letter. Except as set forth in Section 2.13 of the
Disclosure Schedule: (a) it does not provide health, medical, death or survivor
benefits to any former employee, retiree or beneficiary thereof or (b) it does
not maintain any form of current (exclusive of base salary and base wages) or
deferred compensation, bonus, stock option, stock appreciation right, benefit,
severance pay, retirement, employee stock ownership, incentive, group or
individual health insurance, welfare or similar plan or arrangement for the
benefit of any single, or class of Directors, officers or employees (whether
active or retired) (collectively "Benefit Arrangements"). There are no
restrictions on the rights of it to amend or terminate any Employee Plans or
Benefit Arrangements without incurring any liability thereunder.

Except as disclosed in Section 2.13 of its Disclosure Schedule: (a) all
Employee Plans and Benefit Plans which are in effect were in effect for
substantially all of calendar year 1999 and there has been no material amendment
thereof, (other than amendments required to comply with applicable law) or
increase of the cost thereof or benefits payable thereunder on or after January
1, 2000, (b) to its best knowledge, with respect to all Employee Plans and
Benefit Arrangements, it is in substantial compliance with the requirements
prescribed by any and all statutes, governmental or court orders or rules or
regulations currently in effect, including but not limited to ERISA and the
Internal Revenue Code, applicable to such Employee Plans or Benefit
Arrangements, (c) it has performed all obligations required to be performed by
it under the Employee Plans (including, but not limited to, the making of all
contributions) and is not in default under and has no knowledge of any default
by any other party to the Employee Plans, (d) to its best knowledge, neither it
nor any party in interest, within the meaning of Section 4975 of the Internal
Revenue Code or Section 3(14) of ERISA, has engaged in any prohibited
transaction, as this term is defined in Section 4975 of the Internal Revenue
Code or Section 406 of ERISA, that could subject the Employee Plans to any tax
or penalty, (e) there are no actions or claims pending (other than routine
claims for benefits) or, to its best knowledge, threatened against the Employee
Plans, (f) no proceeding has been initiated to terminate the Employee Plans, and
(g) to its best knowledge, no condition exists that could constitute grounds for
the termination of any Employee Plan under ERISA; no "Prohibitive Transaction"
as defined in ERISA and the Internal Revenue Code, has occurred with respect to
any Employee Plan.

2.14 INFORMATION FURNISHED. No statement contained in any schedule,
certificate or other document furnished (whether before, on or after the date of
this Agreement) or to be furnished in writing by or on behalf pursuant to this
Agreement contains or will contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary in
order to make the statement contained therein, in light of the circumstances
under which it is made, not misleading.

2.15 PROPERTY AND ASSETS. It is the sole and absolute owner of the assets
(real and personal, tangible and intangible) reflected in the financial
statements at December 31, 1999 referred to in SECTION 2.4 hereof or acquired
subsequent thereto (other than assets which are under Leases in accordance with
generally accepted accounting principles and assets which have been disposed of
since the date of such financial statements in the ordinary course of business).
It has good and marketable title to all such assets free and clear of any and
all Encumbrances, except for (a) the Encumbrances, if any, listed in Section
2.15 of its Disclosure Schedule, (b) in each case for any assets the failure to
have good and marketable title or the existence of such Encumbrance which,
individually or in the aggregate, would not have a material adverse effect on
it, and (c) in the case of real property: (i) such items are shown in such
financial statements or the notes thereto, (ii) liens for

F-14
<PAGE> 252

current real estate taxes not yet delinquent, (iii) easements, restrictions of
record and title exceptions that are not material to the value or use of such
property, (iv) property sold or otherwise transferred in the ordinary course of
business since the date of such financial statements, and (v) as otherwise
specifically indicated in its Regulatory Reports filed after December 31, 1999
and before the date of this Agreement. No one has any written or oral agreement,
option, understanding, or commitment, or any right or privilege capable of
becoming an agreement for the purchase from it of any of the material assets
owned or leased by it. It enjoys peaceful and undisturbed possession under all
material leases for the use of real property or personal property under which
they are lessee; all of such leases are valid and binding and in full force and
effect, and it is not in default in material respect under any such lease. No
default will arise under any material real property, material personal property
lease or material intellectual property license by reason of the consummation of
the Consolidation without the lessor's or licensor's consent except as set forth
in Section 2.15 of its Disclosure Schedule. Except as set forth in Section 2.15
of its Disclosure Schedule: (a) there has been no material physical loss, damage
or destruction, whether or not covered by insurance, affecting any of the real
properties or material personal property of it since December 31, 1999, and (b)
all fixed assets material to its business and currently used by it are, in all
material respects, in good operating condition and repair.

2.16 AGREEMENTS AND INSTRUMENTS. Except as set forth in its Regulatory
Reports filed after December 31, 1999 and before the date of this Agreement or
in Section 2.16 of its Disclosure Schedule, it is not a party to (a) any
material agreement or commitment not made in the ordinary course of business,
(b) any agreement, indenture or other instrument relating to the borrowing of
money by it, (c) any agreements to make any loans or for the provision, purchase
or sale of goods, services or property between it and any Director or officer of
it, (d) any agreements with or concerning any labor or employee organization to
which it is a party, (e) any agreements between it and any five percent (5%) or
more stockholder of it, and (f) any agreements, directives, orders or similar
arrangements between or involving it, any state or regulatory authority.

2.17 MATERIAL CONTRACT DEFAULTS. It is not in default under any respect
under any contract, agreement, commitment, arrangement, lease, insurance policy
other instrument to which it is a party or by which its assets, business or
operation may be bound or affected or under which its assets, business or
operations receive benefits, which default is reasonably expected to have,
either individually or in the aggregate, a material adverse effect on it, and
there has not occurred any event that, with the lapse of time or the giving of
notice or both, would constitute such a default.

2.18 TAX MATTERS.

(a) It has duly and properly filed all federal, state and other tax returns
and reports required to be filed and has timely made payments on all taxes
showing thereon to be due and payable, whether disputed or not; the current
status of audits of such returns and reports by the Internal Revenue Service and
other applicable tax authorities is as set forth in Section 2.18 of its
Disclosure Schedule; and, except as set forth in Section 2.18 of the Disclosure
Schedule, there is no agreement by it for the extension of time for the
assessment or payment of any taxes payable. Except as set forth in Section 2.18
of the Disclosure Schedule, neither the Internal Revenue Service nor any other
taxing authority is now asserting or, to its best knowledge, is threatening to
assert any deficiency or claim for additional taxes (or interest thereon or
penalties in connection therewith) nor is it aware of any basis for any such
assertion or claim. It has complied in all material respects with applicable
Internal Revenue Service backup withholding requirements. It has complied with
all applicable state law tax collection and reporting requirements.

(b) Adequate provision for any unpaid federal, state or local taxes due or
to become due for all periods through and including December 31, 1999 has been
made and is reflected in its December 31,

F-15
<PAGE> 253

1999 financial statements referred to in SECTION 2.4 hereof and has been or will
be made with respect to periods ending after December 31, 1999.

2.19 ENVIRONMENTAL MATTERS.

(a) Except as set forth in Section 2.19 of its Disclosure Schedule and to
its knowledge, it does not own, lease or otherwise control any property affected
by toxic waste, radon gas or other hazardous conditions or constructed in part
with the use of asbestos which requires removal or encapsulation. It has no
knowledge of, and has not received written notice from any governmental or
regulatory body of, any past, present or future conditions, activities,
practices or incidents which may interfere with or prevent compliance or
continued compliance with hazardous substance or other environmental laws or
regulations, orders, decrees, judgments or injunctions, issued, entered,
promulgated or approved thereunder or which may give rise to any common law or
legal liability or otherwise form the basis of any claim, action, suit,
proceeding, hearing, investigation or remediation activity based on or related
to the manufacture, processing, distribution, treatment, storage, disposal,
transport or handling, discharge, release, generation or threatened release into
the environment, of any pollutant, contaminant, chemical or industrial, toxic or
hazardous substance or waste. There is no civil, criminal or administrative
claim, action, suit, proceeding, hearing or investigation pending or, to its
knowledge, threatened against it relating in any way to such hazardous substance
laws or any regulation, order, decree, judgment or injunction issued, entered,
promulgated or approved thereunder. To its knowledge, there is no reasonable
basis for any such claim, action, suit, proceeding, hearing, investigation or
remediation activity that would impose any material liability or that could
reasonably be expected to have a material adverse effect on it.

(b) None of its "Loan Portfolio Properties, Trust Properties and Other
Properties" as defined in this SECTION 2.19(B) is in violation of or has any
liability absolute or contingent under any environmental laws or regulations,
except any such violations or liabilities which, individually or in the
aggregate would not have a material adverse effect on it. There are no actions,
suits, demands, notices, claims, investigations or proceedings threatened or
relating to any of its Loan Portfolio Properties, Trust Properties and Other
Properties including, without limitation, any notices, demand letters or
requests for information (from any federal or state environmental agency
relating to any such liability under or violation of any environmental laws or
regulation), which would impose liability upon it pursuant to any environmental
law or regulation, except such as would not, individually or in the aggregate
have a material adverse effect on it. "Loan Portfolio Properties, Trust
Properties and Other Properties" means, any real property, interest in real
property, improvements, appurtenances, rights and personal property attendant
thereto, which is owned, leased as a landlord or tenant, licensed as a licensor
or licensee, managed or operated or upon which is held a mortgage, deed to
secure debt or other security interest by it whether directly, as an agent, as a
trustee or other fiduciary or otherwise.

2.20 LOAN PORTFOLIO AND PORTFOLIO MANAGEMENT.

(a) All evidences of indebtedness reflected as assets on its financial
statement at December 31, 1999 referred to in SECTION 2.4 hereof, or originated
or acquired since such date, are (except with respect to those assets which are
no longer assets of it) binding obligations except as enforcement may be limited
by bankruptcy, insolvency, or other similar laws affecting the enforcement of
creditors' rights generally and except as to the availability of equitable
remedies, including specific performance, which are subject to the discretion of
the court before which a proceeding is brought, and the payment of no material
amount thereof (individually or in the aggregate with other evidences of
indebtedness) is subject to any defenses or offsets which have been threatened
or asserted against it. All such indebtedness which is secured by an interest in
real property is secured by a valid and perfected mortgage lien having the
priorities specified in the loan documents. All such indebtedness

F-16
<PAGE> 254

which is secured by an interest in personal property is secured by a valid and
perfected security interest having the priorities specified in the loan
agreement, except in each case in which individually or in the aggregate, the
failure to have such a security interest would not have a material adverse
effect on it. All loans originated, directly or indirectly or purchased by it at
the time entered into and at times owned by it in compliance with all material
respects with all applicable laws and regulations (including, without
limitation, all consumer protection laws and regulations). It administers loans
and investment portfolios in accordance with all applicable laws and regulations
and the terms of all applicable instruments. The records of it regarding all
loans outstanding on its books are accurate in all material respects.

(b) Section 2.20 of its Disclosure Schedule sets forth a list, of aggregate
amount of loans, extensions of credit and other assets of it that have been
adversely designated, criticized or classified by it as of January 31, 2000,
separated by category or classifications or criticism (the "Asset
Classification"); and no amounts of loans, extensions of credit or other assets
that have been adversely designated, classified or criticized as of the date
hereof by any representative of any representative of any governmental or
regulatory authority as "Special Mention" "Substandard," "Doubtful," "Loss", or
words of similar import are excluded from amounts disclosed in the Asset
Classification other than amounts of loans, extensions of credit or other assets
that were charged off by it or before the date hereof.

2.21 REAL ESTATE LOANS; INVESTMENTS.

(a) Except for properties acquired in settlement of loans, there are no
facts, circumstances or contingencies known to it which exist and would require
a material reduction under generally accepted accounting principles of the
present carrying value of any of the real estate investments, joint ventures,
construction loans or other investments or other loans of it.

(b) It has good and marketable title to all securities held by it free and
clear of any Encumbrance, except to the extent such securities are pledged in
the ordinary course of business consistent with prudent banking practices to
secure obligations of it. Such securities are valued on its books in accordance
with generally accepted accounting principles. No material investment is subject
to any restrictions, contractual, statutory or other that would materially
impair the ability of it to dispose freely of any such investment at any time,
except restrictions on the public distribution or transfer of any such
investments under the Securities Act and the regulations thereunder or state
securities laws and pledges for security interest given to secure public funds
on deposit.

2.22 DERIVATIVE CONTRACTS. It is not a party to, nor has it agreed to enter
into, an exchange-traded or over-the-counter-swap, forward, future, option, cap,
floor or collar financial contract or other contract not included in its
financial statement as of December 31, 1999 which is a derivative contract
(including various combination thereof) (each, a "Derivative Contract"), except
for those Derivative Contracts set forth in Section 2.22 of its Disclosure
Schedule including a list, as applicable, of any of its assets pledged as
security for a Derivative Contract.

2.23 INTELLECTUAL PROPERTY.

(a) It owns or has the right to use pursuant to license, sub-license,
agreement or permission, all intellectual property necessary for the operation
of its businesses presently conducted and as presently proposed to be conducted.
The term "Intellectual Property" means all trademarks, service marks, logos,
trade names and corporate names and registrations and applications for
registration thereof, copyrights and registrations and applications for
registration thereof, computer software, data and documentation, trade secrets
and confidential business information (including financial, marketing and
business data, pricing and cost information, business and marketing plans, and
customer and supplier

F-17
<PAGE> 255

lists and information), other proprietary rights, and copies of tangible
embodiments thereof (in whatever form or medium).

(b) To the best of its knowledge, it has not interfered with, infringed
upon, misappropriated or otherwise come into conflict with any intellectual
property rights of third parties and it has not received any charge, compliant,
claim or notice alleging any such infringement, interference, misappropriation
or violation. To its knowledge, no third party has interfered with, infringed
upon, misappropriated or otherwise come into conflict with intellectual property
rights of it.

(c) Each item of intellectual property that any third party owns and that
it uses pursuant to license, sublicense, agreement or permission (i) the
license, sublicense, agreement or permission covering the item is legal, valid,
binding, enforceable and in full force and effect, (ii) the license, sublicense,
agreement or permission will continue to be legal, valid, binding and
enforceable and in full force and effect on identical terms on or after the
Closing, (iii) no party to the license, sublicense, agreement or permission is
in breach or default and no event of default has occurred which with notice or
lapse of time, or both, would constitute a breach or default or permit
termination, modification or acceleration thereunder, (iv) no party to the
license, sublicense, agreement or permission has repudiated any provision
thereof, and (v) it has not granted any sublicense or similar right with respect
to the license, sublicense, agreement or permission.

2.24 NO INVESTMENT COMPANY. It is not an "Investment Company" or a company
"controlled by" an "Investment Company" within the meaning of the Investment
Company Act of 1940, as amended.

2.25 TAX TREATMENT; POOLING OF INTEREST. It knows of no reason why the
Consolidation will fail to qualify as a reorganization under Section 368 of the
Internal Revenue Code. Except as set forth in Section 2.25 of its Disclosure
Schedule, all share repurchase programs previously authorized by its Board of
Directors, except to the extent that it is advised by the SEC that such
purchases would not adversely affect the ability of the parties to account for
the Consolidation as a "pooling of interest" for accounting purposes, have been
revoked by resolution duly adopted on or prior to the date hereof.

2.26 YEAR 2000 WARRANTY. Except as set forth in Section 2.26 of its
Disclosure Schedule, the computer systems and software programs of it (including
equipment and devices which are computer controlled or include imbedded
microprocessors) are Year 2000 Compliant (as defined below); provided, however,
that it makes no representations or warranties as to whether the computer
systems or software programs of any supplier, vender, customer or other third
party are Year 2000 Compliant and this SECTION 2.26 shall not apply if a
computer system or software program of any supplier, vender, customer or other
third party directly or indirectly causes its computer systems or software
programs to be non-year 2000 Compliant. The term "Year 2000 Compliant", with
respect to a computer system or software program, means that such computer
system or program, as applicable: (i) is capable of recognizing, processing,
managing, representing, interpreting, and manipulating correctly date related
data for dates earlier and later than January 1, 2000, (ii) has the ability to
provide date recognition for any data element without limitation, (iii) has the
ability to recognize all "leap years" including February 29, 2000.

2.27 INSIDER TRADING. It has reviewed its stock transfer records since July
26, 1999 and has questioned its directors and executive officers concerning
known stock transfers since that date. Based upon that investigation, it has
not, and to its knowledge (a) no director or officer of it, (b) no person
related to any such director or officer by blood or marriage and residing in the
same household, and (c) no person knowingly provided material nonpublic
information by any one or more of these persons; has purchased or sold, or
caused to be purchased or sold, any shares of it during any period

F-18
<PAGE> 256

when it was in possession of material nonpublic information or in violation of
any applicable provisions of the Exchange Act.

2.28 INSURANCE. It maintains insurance in full force and effect on its
assets, properties, premises, operations, and personnel in such amounts and
against such risks and losses as are customary and adequate for comparable
entities engaged in the same business and industry. There is no unsatisfied
claim of $25,000.00 or more under such insurance as to which the insurance
carrier has denied liability. During the last five years, no insurance company
has cancelled or refused to renew a policy of insurance covering its assets,
properties, premises, operations, or personnel. It has given adequate and timely
notice to each carrier, and has complied with all policy provisions, with
respect to any known claim for which a defense and/or indemnification may be
available to it.

2.29 EXCEPTIONS TO REPRESENTATIONS AND WARRANTIES.

(a) Within fourteen (14) days of the date hereof, Bancorp shall deliver to
Sturgis and Sturgis shall deliver to Bancorp each party's respective Disclosure
Schedule setting forth exceptions to its and its Subsidiaries' representations
and warranties in this ARTICLE TWO, provided that each exception set forth in a
Disclosure Schedule shall be deemed disclosed for purposes of all
representations and warranties if such exception is contained in a section of
the Disclosure Schedule corresponding to a Section in ARTICLE TWO and provided
further that no such exception is required to be set forth in a Disclosure
Schedule if its absence would not result in the related representation or
warranty being deemed untrue or incorrect under the standard established by
SECTION 2.29(B).

(b) If the Disclosure Schedule of either party reveals the existence of any
fact, circumstance or event, individually or taken together with all other
facts, circumstances or events, which would constitute a material adverse effect
or material adverse change (as defined in SECTION 2.29(C)), then either party,
in writing, may terminate this Agreement within five (5) business days after
receipt of such Disclosure Schedule and (i) this Agreement shall become void and
have no effect except the provisions of SECTIONS 2.7, 3.6, 8.2 AND 8.12 shall
survive; and (ii) each party shall bear and pay all costs and expenses incurred
by it in connection with this Agreement and the transactions contemplated
herein.

(c) None of the representations or warranties of Bancorp or Sturgis
contained in ARTICLE TWO shall be deemed untrue or incorrect, and no party shall
be deemed to have breached its representations or warranties contained herein,
as a consequence of the existence of any fact, circumstance or event if such
fact, circumstance or event, individually or taken together with all other
facts, circumstances or events, would not have a material adverse effect or
material adverse change on such party. As used in this Agreement, the term
"material adverse effect" or "material adverse change" means an effect or change
which (i) is materially adverse to the financial condition of a party and its
respective Subsidiaries taken as a whole, (ii) significantly and adversely
affects the ability of Bancorp or Sturgis to consummate the transactions
contemplated hereby or to perform its material obligations hereunder or (iii)
enables any person to prevent the consummation of the transactions contemplated
hereby, provided however that any effect or change resulting from (A) actions or
omissions of Bancorp or Sturgis contemplated by this Agreement or taken with the
prior consent of the other party in contemplation of the transactions provided
for herein, or (B) circumstances affecting the financial institutions industry
generally (including changes in laws or regulations, accounting principles or
general levels of interest rates) which do not adversely affect a party and its
Subsidiaries, taken as a whole, in a manner significantly different than the
other party hereto, shall be deemed not to be or have a material adverse effect
or result in a material adverse change.

F-19
<PAGE> 257

ARTICLE THREE
COVENANTS

3.1 INVESTIGATION; ACCESS AND COPIES. Between the date of this Agreement
and the Effective Time, each party agrees to give the other party and its
respective representatives and agents full access (to the extent lawful) to all
of the premises, books, records and employees of it and its Subsidiaries at all
reasonable times and to furnish and cause its Subsidiaries to furnish to the
other party and its respective agents or representatives access to and true and
complete copies of such financial and operating data, all documents with respect
to matters to which reference is made in ARTICLE TWO of this Agreement or any
list, schedule or certificate delivered or to be delivered in connection
herewith and such other documents, records or information with respect to the
businesses and properties of it as the other party or its respective agents or
representatives shall from time to time reasonably request; provided however,
that any such inspection: (a) shall be conducted in such manner as not to
interfere unreasonably with the operation of the business of the entity
inspected, and (b) shall not affect any of the representations and warranties
hereunder. Each party will give prompt written notice to the other party of any
event or development which (i) had it existed or been known on the date of this
Agreement, would have been required to be disclosed under this Agreement, (ii)
would cause any of its representations and warranties contained herein to be
inaccurate or otherwise materially misleading, or (iii) materially relates to
the satisfaction of the conditions set forth in ARTICLE FOUR of this Agreement.
Notwithstanding anything to the contrary herein, no party hereto shall be
required to provide access to or to disclose information where such access or
disclosure would have jeopardized the attorney-client privilege of the entity in
possession or control of such information or contravene any law, rule,
regulation, order, judgment, decree, fiduciary duty or binding agreement entered
into prior to the date of this Agreement or, in the event of any litigation or
threatened litigation between the parties or the terms of this Agreement, where
access to information may be adverse to the interest of such party. To the
extent reasonably practical, the parties hereto will make appropriate substitute
disclosure arrangements where the restrictions of the preceding sentence apply.

3.2 CONDUCT OF BUSINESS. Between the date of this Agreement and the
Effective Time or the termination of this Agreement, each party agrees, on
behalf of itself and its respective Subsidiaries, except insofar as the
President of Sturgis or the President of Bancorp shall otherwise consent in
writing (which consent shall not be unreasonably withheld):

(a) That it and its Subsidiaries shall (i) except as contemplated in
this Agreement conduct their businesses only in the ordinary course
consistent with past practices, (ii) maintain their books and records in
accordance with past practices, and (iii) use all reasonable efforts to
preserve intact their business organization and assets, to maintain their
rights, franchises and existing relations with customers, suppliers,
employees and business associates and take no action that would (A)
adversely affect the ability of any of them to obtain any Governmental
Approvals (as defined in SECTION 4.1(C) hereof) or which would reasonably
be expected to hinder or delay receipt of Governmental Approvals or (B)
adversely affect its ability to perform its obligations under this
Agreement;

(b) That, except as expressly permitted in this SECTION 3.2(B), it and
its Subsidiaries shall not: (i) declare, set aside or pay any dividend or
make any other distribution with respect to its capital stock, except for
dividends in accordance with past practice, (ii) reacquire or buy any of
its outstanding shares, (iii) issue or sell any shares of capital stock of
it except shares of it issued pursuant to exercise of stock options
previously issued and identified in SCHEDULE 1.11, (iv) effect any stock
split, stock dividend, reverse stock split or other reclassification or
recapitalization of its common stocks, or (v) issue any options or other
rights to purchase its capital stock.

F-20
<PAGE> 258

Notwithstanding the foregoing, Bancorp may adopt a stock option plan after
the date of this Agreement and prior to the Effective Date as contemplated
by SECTION 1.11(C) above.

(c) That, except as expressly permitted in this SECTION 3.2(C), it and
its Subsidiaries shall not: (i) sell, dispose of or pledge any significant
assets of it other than in the ordinary course of business consistent with
past practices or to borrow funds consistent with the provisions
hereinafter contained, (ii) merge or consolidate it into another entity or
acquire any other entity or except in accordance with its written business
plan in effect on the date hereof, acquire any significant assets, (iii)
sell or pledge or agree to sell or pledge or permit any lien to exist on
any stock of any of its Subsidiaries owned by it, (iv) change the Articles
of Incorporation or, charter, Bylaws or other governing instruments of it,
except as contemplated by this Agreement, (v) engage in any lending
activities other than in the ordinary course of business consistent with
past practices, (vi) form any new Subsidiary (except as contemplated by
this Agreement with respect to Newbank and Sturgis and Southern each
creating their own limited liability company for single business tax
purposes) or cause or permit a material change in the activities presently
conducted by any Subsidiary or make any additional investment in
Subsidiaries in excess of $50,000.00, (vii) engage in any off balance sheet
interest rate swap agreement, except to hedge interest rate risk on
certificates of deposit or mortgage servicing rights, or to hedge interest
rate risk and/or credit risk on commitments to extend consumer credit
secured by residential mortgage loans, (viii) engage in any material
activity not contemplated by its written business plan in effect on the
date hereof, (ix) purchase any equity securities other than Federal Home
Loan Bank Stock or incur or assume any indebtedness except in the ordinary
course of business, (x) authorize capital expenditures other than in the
ordinary course of business, (xi) implement or adopt any change in its
accounting principles, practices, or methods other than as may be required
by generally accepted accounting principles, or (xii) make any change to or
take any action to amend, modify or terminate its Contracts. The
limitations contained in this SECTION 3.2 shall also be deemed to
constitute limitations as to the making of any commitment with respect to
any matters set forth in this SECTION 3.2.

(d) That, except as expressly permitted in this SECTION 3.2(C), it and
its Subsidiaries shall not: (i) grant any general increase in compensation
or benefits to its employees or officers or pay any bonus to its employees
or officers except in accordance with policies in effect on the date
hereof, (ii) enter into, extend, renew, modify, amend or otherwise change
any employment or severance agreement with any of its directors, officers
or employees (except as provided in SECTION 4.1(I) below), (iii) grant any
increase in fees or other increases in compensation or benefits to any of
its present or former directors in such capacity, and (iv) establish or
sponsor any new Employee Plan or Benefit Arrangement or effect any material
change in its Employee Plans or Benefit Arrangements (unless such change is
contemplated by this Agreement or is required by applicable law or, in the
opinion of its counsel, is necessary to maintain continued qualification of
tax-qualified plan that provides for retirement benefits).

3.3 NO SOLICITATION. Each party agrees on behalf of itself and each of its
Subsidiaries that it will not authorize or permit any director, officer,
employee, investment banker, financial consultant, attorney, accountant or other
representative of it, directly or indirectly to initiate contact with any person
or entity in an effort to solicit, initiate or encourage any "Take Over
Proposal" (as defined in this SECTION 3.3). Except as the fiduciary duties of
its Board of Directors may otherwise require (as determined in good faith after
consultation with its legal counsel), each party agrees that it will not
authorize or permit any officer, director, employee, investment banker,
financial consultant, attorney, accountant or other representative of it,
directly or indirectly: (i) to cooperate with, or furnish or cause to be
furnished any non-public information concerning its business, properties or
assets, to any person or entity in connection with any Take Over Proposal, (ii)
to negotiate any Take Over Proposal

F-21
<PAGE> 259

with any person or entity, or (iii) to enter into any agreement, letter of
intent or agreement in principle as to any Take Over Proposal. Each party agrees
that it shall promptly give notice to the other upon becoming aware of any Take
Over Proposal, such notice to contain, at a minimum, the identity of the person
submitting the Take Over Proposal, a copy of any written inquiry or other
communication, the terms of any Take Over Proposal, any information requested or
discussion sought to be initiated and the status of any request, negotiations or
expression of interest. As used in this Agreement "Take Over Proposal" shall
mean any proposal other than as contemplated by this Agreement for a
consolidation or other business combination involving either party or for the
acquisition of a ten percent or a greater equity interest in either party or any
of their respective Subsidiaries or for the acquisition of a substantial portion
of the assets of either party or any of their respective Subsidiaries.

3.4 SHAREHOLDER APPROVAL. Sturgis shall call the meeting(s) of its
shareholders for the purpose of voting upon this Agreement and related matters,
as referred to in SECTION 1.10 and, if necessary, SECTION 1.12(E)(IV) hereof, as
soon as practicable. In connection with the Sturgis Shareholders Meeting, the
Board of Directors shall recommend approval of this Agreement and any other
matters requiring shareholder action relating to the transactions contemplated
herein unless as a result of an unsolicited Take Over Proposal received by a
party after the date hereof, the Board of Directors of Sturgis determines in
good faith after consultation with its legal counsel and investment banking firm
that to do so would constitute a breach of the fiduciary duties of such Board of
Directors to the shareholders of Sturgis. Sturgis shall use its best effort to
solicit from its shareholders proxies in favor of approval, and to take all
other action necessary or helpful to secure a vote of the holders of the
outstanding shares of its common stock in favor of this Agreement, except as the
fiduciary duties of the Board of Directors may otherwise require.

3.5 COMPLIANCE WITH ACCOUNTING AND SECURITIES RULES.

(a) After execution of this Agreement, (i) Sturgis shall use its best
efforts to cause to be delivered to Bancorp from each person who may be deemed
to be an "affiliate" of Sturgis within the meaning of Rule 145 of the Securities
Act, a written letter agreement as of a date prior to the date of the Sturgis
Shareholders Meeting in form reasonably satisfactory to Bancorp, regarding
restrictions on resale of shares of Bancorp Common Stock, to ensure compliance
with applicable restrictions imposed under the federal securities laws and,
prior to the Effective Time, Sturgis shall use its best efforts to secure such
written letter agreement from persons who become an affiliate of it subsequent
to the date hereof, and (ii) neither party shall take any action which would
prevent the Consolidation and the other transactions contemplated hereby from
qualifying as a reorganization within the meaning of Section 368 of the Internal
Revenue Code, or, except as provided in SECTION 1.12(E) above, which would
disqualify the Consolidation as a "pooling of interests" for accounting
purposes.

(b) Because the Consolidation is intended to qualify for pooling of
interests accounting treatment, the shares of Bancorp Common Stock received by
Sturgis affiliates in the Consolidation shall not be transferable until such
time as financial results covering at least 30 days of post-Consolidation
operations have been published, and the certificates representing such shares
will bear an appropriate restrictive legend. Bancorp shall use its best efforts
to publish as promptly as reasonably practical but in no event later than
forty-five (45) days after the end of the first full month after the Effective
Time in which there are at least thirty (30) days of post-consolidation combined
operations (which month may be the month in which the Effective Time occurs),
combined net interest income and net income figures as contemplated by and in
accordance with the terms of SEC Accounting Series Release No. 135. In the event
the Consolidation is to be treated as a "purchase" pursuant to SECTION 1.12(E)
above, this SECTION 3.5(B) shall be null and void.

F-22
<PAGE> 260

3.6 PUBLICITY. Between the date of this Agreement and the Effective Time,
neither party nor any of its Subsidiaries shall, without the prior approval of
the other party (which approval shall not be unreasonably withheld) issue or
make, or permit any of its directors, employees, officers or agents to issue or
make, any press release, disclosure or statement to the press or third party
with respect to the Consolidation or the other transactions contemplated hereby,
except as required by applicable law or applicable rules of the National
Association of Security Dealers, Inc. The parties shall cooperate when issuing
or making any press release, disclosure statement with respect to the
Consolidation or any other transactions contemplated hereby.

3.7 COOPERATION. Between the date of this Agreement and the Effective Time,
the parties and their respective Subsidiaries shall, in conformance with
provisions of this Agreement, use their best efforts, and take all actions
necessary or appropriate to consummate the Consolidation and the other
transactions contemplated hereby at the earliest practicable date.

3.8 ADDITIONAL FINANCIAL STATEMENTS AND REPORTS. As soon as reasonably
practical after they become publicly available, each party shall furnish to the
other its statements of financial condition, statements of operation or
statements of income, statements of cash flow and statements of changes in
shareholders' equity at all dates and for all periods before the Closing. Such
financial statements will be prepared in conformity with generally accepted
accounting principles applied on a consistent basis and fairly present the
financial condition, results of operation and cash flow of the respective
parties (subject, in the case of unaudited financial statements to (a) normal
year-end audit adjustments, (b) any other adjustments described therein, and (c)
the absence of notes which, if presented, would not differ materially from those
included in the most recent audited financial statements), and all such
financial statements will be prepared in conformity with the requirements of
Form 10-Q or 10-K under the Exchange Act. As soon as reasonably practical after
they are filed, each party shall, to the extent permitted under applicable law,
furnish to the other its Regulatory Reports.

3.9 STOCK EXCHANGE LISTING. After the Closing, Bancorp agrees to use all
commercially reasonable efforts to cause Bancorp Common Stock to be listed in
the NASDAQ National Market.

3.10 EMPLOYEE BENEFITS AND AGREEMENTS. The Employee Plans shall not be
terminated by reason of the Consolidation, but shall continue thereafter as
plans of Sturgis and Bancorp until such time as the Employee Plans are
integrated, subject to the terms and conditions specified in such plans and to
such changes therein as may be necessary to reflect the consummation of the
Consolidation.

3.11 SECTION 3.11 has been intentionally omitted.

3.12 FORBEARANCES. During the period from the date of this Agreement to the
Effective Time, except as set forth in its Disclosure Schedule and, except as
expressly contemplated or permitted by this Agreement neither party shall,
without the prior written consent of the other party: (a) take any action that
would prevent or impede the Consolidation from qualifying (i) for "pooling of
interest" accounting treatment or (ii) as a reorganization within the meaning of
Section 368 of the Internal Revenue Code.

3.13 LEGAL CONDITIONS TO CONSOLIDATION. Each party shall, and shall cause
its Subsidiaries to, use their best efforts (a) to take, or cause to be taken,
all actions necessary, proper or advisable to comply promptly with all legal
requirements which may be imposed on such party with respect to the
Consolidation and, subject to the conditions set forth in ARTICLE FOUR hereof,
to consummate the transactions contemplated by this Agreement and (b) to obtain
(and to cooperate with the other party to obtain) any consent, authorization,
order or approval of, or any exemption by, any governmental entity or authority
and any other third party which is required to be obtained by it or

F-23
<PAGE> 261

any of its Subsidiaries in connection with the Consolidation and the other
transactions contemplated by this Agreement.

3.14 COMPLIANCE. Each party shall comply, and shall cause each of its
Subsidiaries to comply, in all material respects with all laws, regulations,
agreements, court orders, and administrative orders applicable to the conduct of
its business unless the application of such laws, regulations, or orders is
being contested in good faith and the other party has been notified of such
contest.

3.15 MAINTENANCE. Each party will use all reasonable efforts to maintain
its and its Subsidiaries' property and assets in their present state of repair,
order and condition, reasonable wear and tear and damage by fire or other
casualty excepted.

3.16 PRESERVATION OF GOODWILL. Each party will use all reasonable efforts
to preserve its and its Subsidiaries' business organizations intact, to keep
available the services of its and its Subsidiaries' present officers and
employees, and to preserve the goodwill of its and its Subsidiaries' customers
and others having business relations with it or its Subsidiaries.

3.17 INSURANCE POLICIES. Each party shall use all reasonable efforts to
maintain and keep in full force and effect insurance coverage, so long as such
insurance is reasonably available, on its and its Subsidiaries' assets,
properties, premises, operations, and personnel in such amounts against such
risk and loss as are presently in force.

3.18 CHARGE-OFFS. Each party shall maintain its and its Subsidiaries'
reserve for loan and lease losses in a manner in conformity with its prior
practice and applicable industry, regulatory and accounting standards.

3.19 DATA PROCESSING CONTRACTS. Each party shall maintain all material data
processing contracts of it and its Subsidiaries.

ARTICLE FOUR
CONDITIONS OF CONSOLIDATION

4.1 GENERAL CONDITIONS. The obligations of each party to effect the
Consolidation shall be subject to the satisfaction (or written waiver by such
party, to the extent such condition is waivable) of the following conditions
before the Effective Time:

(a) SHAREHOLDER APPROVAL. The holders of the outstanding shares of
Sturgis Common Stock shall have approved or adopted this Agreement as
specified in SECTION 1.10 and SECTION 1.12(E)(IV) hereof or as otherwise
required by applicable law.

(b) NO PROCEEDINGS. No order shall have been entered and remain in
force restraining or prohibiting the Consolidation and any legal,
administrative, arbitration, investigatory or other proceedings by any
governmental or judicial or other authority. No statute, rule, regulation,
order, injunction or decree shall have been enacted, entered, promulgated
or enforced by any governmental or regulatory authority which prohibits,
materially restricts or makes illegal the consummation of the
Consolidation.

(c) GOVERNMENTAL APPROVALS. To the extent required by applicable law
or regulation, all approvals of or filings with any governmental or
regulatory authority (collectively "Governmental Approvals") shall have
been obtained or made, and any waiting period shall have expired in
connection with the consummation of the Consolidation; provided, however,
that none of the proceedings shall be deemed obtained or made if it shall
be conditioned or restricted in a manner

F-24
<PAGE> 262

that would have or result in a material adverse effect on the parties
hereto. All other statutory or regulatory requirements for the valid
consummation of the Consolidation shall have been satisfied.

(d) REGISTRATION STATEMENT. The Registration Statement shall have been
declared effective and shall not be subject to a stop order of the SEC (and
no proceedings for that purpose shall have been initiated or threatened by
the SEC) and, if the offer and sale is subject to the securities laws of
any state, shall not be subject to a stop order of any state's securities
authority.

(e) FEDERAL TAX OPINION. Each party shall have received an opinion of
its independent accountants, dated as of the Effective Time, to the effect
that for federal income tax purposes (i) the Consolidation will qualify as
a reorganization under Section 368 of the Internal Revenue Code, (ii) no
gain or loss will be recognized by Sturgis or Bancorp by reason of the
Consolidation, (iii) no gain or loss will be recognized by any shareholder
of Sturgis upon the exchange of Sturgis Common Stock solely for Bancorp
Common Stock in the Consolidation, (iv) the basis of the Bancorp Common
Stock received by each shareholder of Sturgis who exchanges Sturgis Common
Stock for Bancorp Common Stock in the Consolidation will be the same as the
basis of Sturgis Common Stock surrendered and exchanged therefor (subject
to any adjustments required as a result of receipt of cash in lieu of a
fractional share), (v) the holding period of the Bancorp Common Stock
received by a shareholder of Sturgis in the Consolidation will include the
holding period of the Sturgis Common Stock surrendered in exchange
therefor, provided that such shares of Sturgis Common Stock were held as a
capital asset by such shareholders at the Effective Time, and (vi) cash
received by a Sturgis shareholder in lieu of a fractional share interest of
Bancorp Common Stock as part of the Consolidation will be treated as having
been received as a distribution in full payment in exchange for the
fractional share interest which such shareholder would otherwise be
entitled to receive and will qualify as capital gain or loss (assuming the
Sturgis stock was a capital asset in such shareholders' hands at the
Effective Time).

(f) THIRD PARTY CONSENTS. All consents or approvals of all persons
(other than Governmental Approvals referred to in SECTION 4.1(C) hereof)
required for the execution, delivery and performance of this Agreement and
the consummation of the Consolidation shall have been obtained and shall be
in full force and effect unless the failure to obtain such consent or
approval is not reasonably likely to have, individually or in the aggregate
a material adverse effect on the parties or transaction hereto.

(g) POOLING OF INTEREST. Each party shall have received a letter,
effective as of the Effective Time, from its independent accountants
addressed to it to the effect that the Consolidation will qualify for
"pooling of interest" accounting treatment.

(h) FAIRNESS OPINION. Each party shall have received its written
fairness opinion from its financial consultant.

(i) EMPLOYMENT AGREEMENTS. Bancorp shall have entered into Employment
Agreements in form and substance reasonably acceptable to Bancorp and
Sturgis with: (i) Leonard L. Eishen, (ii) James T. Grohalski and (iii) such
other individuals, if any, as shall be mutually agreed upon by Bancorp and
Sturgis.

(j) STOCK OPTION PLAN. The holders of the outstanding shares of
Bancorp Common Stock shall have approved a Stock Option Plan at the 2000
annual meeting of Bancorp's shareholders whereby Bancorp shall be
authorized to issue qualified and non-qualified stock options in sufficient
amounts to convert the options for Sturgis Common Stock specified in
SCHEDULE 1.11 to options for Bancorp Common Stock as provided in SECTION
1.11 above.

F-25
<PAGE> 263

(k) DISSENTER RIGHTS. The independent accounting firms regularly
retained by Bancorp and Sturgis shall have mutually determined that the
Consolidation would qualify as a "pooling of interest" for accounting
purposes if all the holders of Potentially Dissenting Shares (as defined
below) perfect their dissenters' rights under MSBA. As used herein,
"Potentially Dissenting Shares" shall mean all shares held by any holder of
Sturgis Common Stock where such holder shall have taken one or both of the
following actions: (i) given notice in writing to Sturgis at or prior to
the Sturgis Shareholders Meeting that such holder dissents from the
Consolidation, or (ii) voted against the Consolidation at the Sturgis
Shareholders Meeting.

(1) BANCORP NAME. Bancorp shall have adopted an assumed name by the
procedure specified in SECTION 1.14 hereof.

4.2 CONDITIONS TO OBLIGATIONS OF STURGIS. The obligations of Sturgis to
effect the Consolidation and the other transactions contemplated hereby shall be
subject to the satisfaction or written waiver of Sturgis of the following
conditions before the Effective Time:

(a) NO MATERIAL ADVERSE EFFECT. Between the date of this Agreement and
the Closing, Bancorp shall not have been affected by any event or change
which has had or caused a material adverse effect or material adverse
change on it.

(b) REPRESENTATIONS, WARRANTIES AND CONDITIONS. The representations
and warranties of Bancorp (i) shall be true and correct as of the date
hereof and at the Effective Time with the same effect as though made at the
Effective Time (or on the date when made in the case of any representation
or warranty which specifically relates to an earlier date) except where the
failure to be true and correct would not have, or would not reasonably be
expected to have, a material adverse effect on Bancorp, (ii) Bancorp and
its Subsidiaries shall have performed all obligations and complied with
each covenant, in all material respects, and satisfied all conditions under
this Agreement on its part to be satisfied at or before the Effective Time,
and (iii) Bancorp shall have delivered to Sturgis a certificate, dated the
Effective Time and signed by its chief executive officer and chief
financial officer, certifying as to the satisfaction of clauses (i) and
(ii) hereof.

(c) NO LITIGATION. Neither Bancorp nor any Bancorp Subsidiary shall be
subject to any pending litigation which, if determined adversely to Bancorp
or to any Bancorp Subsidiary, would have a material adverse effect on
Bancorp.

(d) AUDITED FINANCIALS. Bancorp shall have delivered to Sturgis
audited consolidated financial statements at and for the year ended
December 31, 1999, including an unqualified opinion of Bancorp's
independent auditors related thereto.

(e) OTHER CERTIFICATES. Bancorp shall have delivered to Sturgis such
other certificates and instruments as Sturgis and its counsel may
reasonably request. The form and substance of all certificates, instruments
and other documentation delivered to Sturgis under this Agreement shall be
reasonably satisfactory to Sturgis and its counsel.

(f) OPINION OF LEGAL COUNSEL. Bancorp shall have delivered to Sturgis
an opinion of Miller, Canfield, Paddock & Stone, P.L.C., counsel for
Bancorp, dated as of the date of the Closing and in form reasonably
satisfactory to counsel for Sturgis.

F-26
<PAGE> 264

4.3 CONDITIONS TO OBLIGATIONS OF BANCORP. The obligations of Bancorp to
effect the Consolidation and the other transactions contemplated hereby shall be
subject to the satisfaction or written waiver by Bancorp of the following
additional conditions before the Effective Time:

(a) NO MATERIAL ADVERSE EFFECT. Between the date of this Agreement and
Closing, Sturgis shall have not been affected by any event or change which
has had or caused a material adverse effect or material adverse change on
Sturgis.

(b) REPRESENTATIONS, WARRANTIES AND CONDITIONS. The representations
and warranties of Sturgis shall (i) be true and correct as of the date
hereof and at the Effective Time with the same effect as though made at the
Effective Time (or on the date when made in the case of any representation
or warranty which specifically relates to an earlier date) except where the
failure to be true and correct would not have, or would not reasonably be
expected to have, a material adverse effect on Sturgis, (ii) Sturgis and
its Subsidiaries shall have performed all obligations and complied with
each covenant, in all material respects and satisfied all conditions under
this Agreement on its part to be satisfied at or before the Effective Time,
and (iii) Sturgis shall have delivered to Bancorp a certificate, dated the
Effective Time and signed by its President and chief financial officer,
certifying as to the satisfaction of clauses (i) and (ii) hereof.

(c) NO LITIGATION. Neither Sturgis nor any Sturgis Subsidiary shall be
subject to any pending litigation which, if determined adversely to Sturgis
or to any Sturgis Subsidiary, would have a material adverse effect on
Sturgis.

(d) AUDITED FINANCIALS. Sturgis shall have delivered to Bancorp
audited financial statements at and for the year ended December 31, 1999,
including an unqualified opinion of Sturgis' independent auditors related
thereto.

(e) OTHER CERTIFICATES. Sturgis shall have delivered to Bancorp such
other certificates and instruments as Bancorp and its counsel may
reasonably request. The form and substance of all certificates, instruments
and other documentation delivered to Bancorp under this Agreement shall be
reasonably satisfactory to Bancorp and its counsel.

(f) OPINION OF LEGAL COUNSEL. Sturgis shall have delivered to Bancorp
an opinion of Dresser, Dresser, Gilbert & Haas, P.C., counsel for Sturgis,
dated as of the date of Closing and in form reasonably satisfactory to
counsel for Bancorp.

ARTICLE FIVE

CORPORATE GOVERNANCE

5.1 STURGIS AND SOUTHERN OFFICERS AND EMPLOYEES. After the Effective Time,
Sturgis as the Surviving Corporation and Southern shall continue to have the
same officers and employees as immediately before the Effective Time subject to
the discretion of the continuing Board of Directors of Sturgis and Southern.

5.2 STURGIS AND SOUTHERN BOARD OF DIRECTORS. The present Boards of
Directors of Sturgis and Southern shall continue to serve as the Board of
Directors of Sturgis and Southern after the Consolidation except that Sturgis
shall cause James T. Grohalski to be added to the Board of Directors of Sturgis
and Bancorp shall cause Leonard L. Eishen to be added to the Board of Directors
of Southern. The Bylaws of Sturgis and Southern shall be amended as necessary to
accommodate such additions.

F-27
<PAGE> 265

5.3 BANCORP BOARD OF DIRECTORS. Bancorp shall cause all of the Directors of
Bancorp except James T. Grohalski or another Director designated by the Board of
Directors of Bancorp (the "Designated Director") to resign as of the Effective
Time. Immediately after the Effective Time, the Designated Director, as the sole
remaining Director of Bancorp, shall elect the individuals identified in Section
5.3 of each party's Disclosure Schedule to the Board of Directors of Bancorp for
the terms indicated: (i) two (2) individuals designated by Bancorp and one (1)
individual designated by Sturgis for a one (1) year term, (ii) two (2)
individuals designated by Bancorp and one (1) individual designated by Sturgis
for a two (2) year term, and (iii) two (2) individuals designated by Sturgis and
one (1) individual designated by Bancorp for a three (3) year term; provided
that the Designated Director shall continue to serve the balance of his or her
elected term and shall, for purposes of the foregoing, be deemed an individual
designated by Bancorp for that particular term.

5.4 BANCORP OFFICERS AND COMMITTEES. Bancorp shall cause all of the
officers of Bancorp to resign as of the Effective Time. It is the intention of
the parties that immediately after the Board of Directors of Bancorp is formed
under SECTION 5.3 above, the Board of Directors will take action to elect:
Leonard L. Eishen as President and Chief Executive Officer ("CEO") of Bancorp;
James T. Grohalski as Vice-Chairman, Chief Operating Officer and Chief Financial
Officer of Bancorp; James Morrison as Chairman of Bancorp; James Goethals as
Vice Chairman of Bancorp; and all members of all committees of the Bancorp Board
of Directors with equal representation from both the Sturgis and Bancorp
designated board members. It is intended by the parties that at age sixty-five
(65) years, Leonard L. Eishen will be succeeded by James T. Grohalski as
President and CEO of Bancorp and Leonard L. Eishen will become Chairman of the
Board of Directors of Bancorp.

5.5 BYLAWS. At the Effective Time, the Bylaws of Bancorp shall be amended
and restated to provide as follows (the "Amended and Restated Bylaws"):

(a) The Board of Directors of Bancorp shall have nine (9) members with
staggered three (3) year terms and no Director may stand for election after
age seventy (70) years.

(b) Bancorp shall not take any of the following actions unless such
action is authorized by a vote of seventy five percent (75%) of the members
of the Board of Directors of Bancorp:

(i) amendments to Bancorp's Articles of Incorporation or the
Amended and Restated Bylaws;

(ii) approval of any merger, share exchange or dissolution
involving Bancorp or any of its subsidiaries;

(iii) sale or transfer of substantially all of the corporate assets
of Bancorp or any of its subsidiaries;

(iv) issuance and/or sale of any stock of Bancorp including the
establishment of the consideration to be accepted by Bancorp for the
sale of any shares of its stock;

(v) acquisition by Bancorp of another business or operation by way
of merger, share exchange, purchase of stock, purchase of assets or
otherwise wherein the consideration paid or delivered exceeds either 10%
of the book value of assets of Bancorp and its subsidiaries or 10% of
the fair market value of outstanding capital stock of Bancorp, as
applicable;

(vi) any action taken by Bancorp as a shareholder of any subsidiary
including, without limitation, Sturgis and Southern; and

(vii) election of officers, nomination of directors and appointment
of Board of Directors committee members.

F-28
<PAGE> 266

ARTICLE SIX

TERMINATION OF OBLIGATIONS

6.1 TERMINATION OF AGREEMENT AND ABANDONMENT OF CONSOLIDATION. This
Agreement may be terminated at any time before the Effective Time, whether
before or after approval thereof by the shareholders of Sturgis or Bancorp, as
provided below:

(a) MUTUAL CONSENT. By mutual consent of the parties as evidenced by
their written agreement.

(b) CLOSING DELAY. At the election of either party, as evidenced by
written notice, if the Closing shall not have occurred on or before
December 31, 2000, or such later date as shall have been agreed to in
writing by the parties, provided, however, that the right to terminate
under this SECTION 6.1(B) shall not be available to any party whose failure
to perform an obligation hereunder has been the cause of, or has resulted
in, the failure of the Closing to occur on or before such date.

(c) CONDITIONS TO STURGIS' PERFORMANCE NOT MET. By Sturgis (provided
it has not breached this Agreement to any material extent) upon delivery of
written notice of termination to Bancorp if any event occurs (through no
fault of Sturgis) which renders impossible the satisfaction in any material
respect one or more of the conditions to the obligations of Sturgis to
effect the Consolidation set forth in SECTIONS 4.1 and 4.2 hereof and
non-compliance is not waived in writing by Sturgis.

(d) CONDITIONS TO BANCORP'S PERFORMANCE NOT MET. By Bancorp (provided
it has not breached this Agreement to any material extent) upon delivery of
written notice of termination to Sturgis if any event occurs (through no
fault of Bancorp) which renders impossible the satisfaction in any material
respect one or more of the conditions to the obligations of Bancorp to
effect the Consolidation set forth in SECTIONS 4.1and 4.3 hereof and
non-compliance is not waived in writing by Bancorp.

(e) BREACH. By either Sturgis or Bancorp if there has been a material
breach of the other party's representations and warranties (as contemplated
in this Agreement), covenants or agreements set forth in this Agreement of
which written notice has been given to such breaching party and which has
not been fully cured or cannot be fully cured within the earlier of (i)
thirty (30) days after receipt of such notice or (ii) five (5) days prior
to the Closing and which breach would, in the reasonable opinion of the
non-breaching party, individually or in the aggregate, have, or be
reasonably likely to have, a material adverse effect on the non-breaching
party.

(f) STURGIS ELECTION. By Sturgis if the Board of Directors of Bancorp
shall have authorized Bancorp to enter into any agreement, letter of intent
or agreement in principle with the intent to pursue or effect a Take Over
Proposal.

(g) BANCORP ELECTION. By Bancorp if: (i) the Board of Directors of
Sturgis shall not have publicly recommended in the prospectus and proxy
statement that its shareholders approve and adopt this Agreement or shall
have withdrawn, modified or changed in any manner adverse to Bancorp its
approval or recommendation of this Agreement, or (ii) the Board of
Directors of Sturgis shall have authorized Sturgis to enter into any
agreement, letter of intent or agreement in principle with the intent to
pursue or effect a Take Over Proposal.

F-29
<PAGE> 267

6.2 TERMINATION; LACK OF SURVIVAL OF REPRESENTATIONS AND WARRANTIES. In the
event of termination of this Agreement pursuant to SECTION 6.1 hereof:

(a) This Agreement shall become void and have no effect, except (i)
the provisions of SECTIONS 2.7, 3.6, 8.2 and 8.12 shall survive; (ii) a
termination pursuant to SECTION 6.1(E) hereof shall not relieve the
breaching party from any liability for any uncured intentional breach of a
representation, warranty, covenant or agreement giving rise to such
termination and the party whose representations and warranties were
incorrect or who breached such covenant or agreement shall be liable to the
other party for all costs and expenses of the other party in connection
with the preparation, negotiation, execution and performance of this
Agreement (including reasonable legal and accounting fees), in addition to
all rights and remedies to which such non-breaching party may otherwise be
entitled; (iii) in the event of a termination pursuant to SECTION 6.1(F) by
Sturgis, Bancorp shall pay Sturgis Five Hundred Thousand and 00/100 Dollars
($500,000.00) as a break-up fee plus all costs, fees and expenses incurred
by Sturgis in connection with the preparation, negotiation, execution and
performance of this Agreement (including reasonable legal and accounting
fees) which shall be the sole and exclusive remedy of Sturgis in connection
with such termination of this Agreement; and (iv) in the event of a
termination pursuant to SECTION 6.1(G) by Bancorp, Sturgis shall pay
Bancorp Five Hundred Thousand and 00/100 Dollars ($500,00.00) as a break-up
fee plus all costs, fees and expenses incurred by Bancorp in connection
with the preparation, negotiation, execution and performance of this
Agreement (including reasonable legal and accounting fees) which shall be
the sole and exclusive remedy of Bancorp in connection with such
termination of this Agreement.

(b) The representations, warranties and agreements set forth in this
Agreement shall not survive the Effective Time and shall be terminated and
extinguished at the Effective Time, and from and after the Effective Time,
no party shall have any liability to the other on account of any breach or
failure of any of those representations, warranties, covenants and
agreements, provided, however that the foregoing clause (i) shall not apply
to agreements of the parties which by their terms are intended to be
performed after the Effective Time and (ii) shall not relieve any party or
person for liability for fraud or intentional misrepresentation.

(c) At any time prior to the Effective Time, the parties hereto, by
action taken or authorized by their respective Board of Directors, may, to
the extent legally allowed, (i) extend the time for the performance of any
of the obligations or other acts of the other parties hereto, (ii) waive
any inaccuracies in the representations and warranties contained herein or
in any document delivered pursuant hereto, and (iii) waive compliance with
any of the agreements or conditions contained herein; provided, however,
that after any approval of the transactions contemplated by Sturgis'
shareholders, there may not be, without further approval of such
shareholders, any extension or waiver or this Agreement or any portion
hereof which reduces the amount or changes the form of consideration to be
delivered to the holders of Sturgis Common Stock. Any agreement on the part
of a party hereto to any such extension or waiver shall be valid only if
set forth in a written instrument signed on behalf of such party, but such
extension or waiver or failure to insist on strict compliance with an
obligation, covenant, agreement or condition shall not operate as a waiver
of, or a estoppel with respect to, any subsequent waiver or extension.

6.3 PAYMENT OF EXPENSES. Except as otherwise provided herein, each party
shall bear and pay all costs and expenses incurred by it in connection with the
transactions contemplated hereby; provided, however, that the costs and expenses
of printing and mailing the Proxy Statement/ Prospectus, and all filing and
other fees paid to the SEC in connection with the Consolidation, shall be borne
equally by Sturgis and Bancorp.

F-30
<PAGE> 268

ARTICLE SEVEN

OTHER AGREEMENTS

7.1 ADDITIONAL AGREEMENTS.

(a) If at any time after the Effective Time any further action is necessary
or desirable to carry out the purposes of this Agreement, the proper officers
and directors of each party to this Agreement and their respective Subsidiaries
shall take all necessary action as may be reasonably requested by, and at the
sole expense of, Bancorp.

(b) Except as provided in SECTION 1.12(E) above, each party shall use all
commercially reasonable efforts to cause to be delivered to the other the
independent accountants letter, dated as of the Closing, stating that accounting
for the Consolidation is as a "pooling of interest" under opinion 16 of the
Accounting Principles Board and applicable SEC rules and regulations.

7.2 ADVICE OF CHANGES. Each party shall promptly advise the other party of
any change or event having a material adverse effect on it or which it believes
would or would reasonably be likely to cause or constitute a material breach of
any of its representations, warranties or covenants contained herein.

ARTICLE EIGHT

GENERAL

8.1 AMENDMENTS. Subject to applicable law, this Agreement may be amended,
whether before or after any shareholder approval hereof, by an agreement in
writing executed in the same manner as this Agreement and authorized or ratified
by the Boards of Directors of the parties hereto, provided that after the
approval of this Agreement by the shareholders of Sturgis, no such amendment may
change the amount or form of the consideration to be delivered hereunder without
such shareholders' approval. This Agreement may not be amended except by a
written instrument executed on behalf of each of the parties.

8.2 CONFIDENTIALITY. All information disclosed by any party to any other
party, whether prior or subsequent to the date of this Agreement, including
without limitation, any information obtained pursuant to SECTION 3.1 hereof,
shall be kept confidential by such other party and shall not be used by such
other party otherwise than herein contemplated, all in accordance with the terms
of the Confidentiality Agreement between the parties dated September 9, 1999
(the "Confidentiality Agreement"). In the event of the termination of this
Agreement, each party shall upon request use all reasonable efforts to promptly
return to the other party all documents (and reproductions thereof) received
from such other party (and, in the case of reproductions, all such reproduction)
that include information subject to the confidentiality requirements set forth
above.

8.3 GOVERNING LAW. This Agreement and the legal relations between the
parties shall be governed by and construed in accordance with the laws of the
State of Michigan except to the extent certain matters may be governed by
federal law.

F-31
<PAGE> 269

8.4 NOTICES. All notice and other communication required or permitted
hereunder shall be in writing and shall be deemed given if mailed by registered
or certified mail (postage prepaid and return receipt requested) addressed as
follows:

<TABLE>
<S> <C>
If to Sturgis: Sturgis Bank & Trust Company
P.O. Box 600
Sturgis, Michigan 49091
Attn: Leonard L. Eishen
Fax: (616) 651-5512

With a copy to: Dresser, Dresser, Gilbert & Haas, P.C.
112 South Monroe Street
Sturgis, Michigan 49091
Attn: John R. Dresser, Esq.
Fax: (616) 651-2361

If to Bancorp: Southern Michigan Bancorp, Inc.
51 West Pearl
Coldwater, Michigan 49036
Attn: James T. Grohalski
Fax: (517) 278-8469

With a copy to: Miller, Canfield, Paddock & Stone, P.L.C.
444 West Michigan Avenue
Kalamazoo, Michigan 49007-3714
Attn: John R. Cook, Esq.
Fax: (616) 382-0244
</TABLE>

(or such other address as shall be furnished in writing by either party to the
other), and any such notice or communication shall be deemed to have been given
two business days after the date of such mailing (except that the notice of
change of address shall not be deemed to have been given until received by the
addressee). Notices may also be sent by facsimile transmission, hand delivery or
overnight courier and in such event shall be deemed to have been given as of the
date received by the addressee.

8.5 NO ASSIGNMENT. This Agreement may not be assigned by any party hereto,
by operation of law or otherwise, except as contemplated hereby.

8.6 HEADINGS. The description of the Articles and Sections of this
Agreement are inserted for convenience only and are not a part of this
Agreement.

8.7 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each
party and delivered to each other party.

8.8 CONSTRUCTION AND INTERPRETATION. It is expressly acknowledged and
agreed that all parties have been represented by counsel and have participated
in the negotiation and drafting of this Agreement, and there shall be no
presumption against any party on the ground that such party was responsible for
preparing this Agreement or any part of it. Each of the Exhibits and Schedules
referred to in, and/or attached to this Agreement, are an integral part of this
Agreement and are incorporated in this Agreement by reference. In the event of a
conflict between the terms of this Agreement and any Exhibit, Schedule or other
attachment hereto, the terms of this Agreement shall control, unless prohibited
by applicable law. No provision of this Agreement shall be construed to require
either party or their Subsidiaries to take any action which would violate any
applicable law,

F-32
<PAGE> 270

rule or regulation. Except as the context otherwise requires, all references
herein to any state or federal regulatory agency shall also be deemed to refer
to any predecessor or successor agency, and all references to state and federal
statutes or regulations shall be deemed to refer to any successor statute or
regulation. Whenever this Agreement refers to a number of days, such number
shall refer to calendar days unless business days are specified. Whenever in
this Agreement "or" is used, it is used in the inclusive sense of "and/or"
unless otherwise specified.

8.9 ENTIRE AGREEMENT. This Agreement, together with the Schedules, lists,
Exhibits and certificates referred to herein or required to be delivered
hereunder, and any amendment hereafter executed and delivered in accordance with
SECTION 8.1 hereof, constitutes the entire agreement of the parties and
supersedes any prior written or oral agreement or understanding among any
parties pertaining to the Consolidation, except that the Confidentiality
Agreement shall remain in full force and effect as contemplated in SECTION
8.2hereof.

8.10 SEVERABILITY. Whenever possible, each provision of this Agreement
shall be interpreted in such manner as to be effective and valid under
applicable law, but if such provision in this Agreement is held to be prohibited
by or invalid under applicable law, then such provision will be ineffective only
to the extent of such prohibition or invalidity, without invalidating the
remainder of such provision or the remaining provisions of this Agreement.

8.11 NO THIRD PARTY BENEFICIARIES. Nothing in this Agreement shall entitle
any person (other than the parties hereto and their respective successors and
assigns) permitted hereby, to any claim, cause of action, remedy or right of any
kind.

8.12 NO EMPLOYMENT SOLICITATION. If this Agreement is terminated, the
parties hereto agree that for a period of twelve (12) months subsequent to such
termination (i) none of the parties shall, without first obtaining the prior
written consent of the other, directly or indirectly, solicit the employment of
any current Director, officer or employee of the other party or any Subsidiary
of such other party and (ii) none of the parties shall actively solicit business
relationships with clients of the other party or any Subsidiary of such other
party solely as the result of review of the information contemplated in SECTION
8.2 hereof. This provision shall supercede in entirety the second sentence of
Section 6 of the Confidentiality Agreement.

8.13 CONSENT TO JURISDICTION. Each of the parties consent to the exclusive
personal jurisdiction and venue of the courts, state and federal, for St. Joseph
County, State of Michigan, for the purposes of any suit, action or other
proceeding arising out of this Agreement or the transactions contemplated
hereby.

8.14 FURTHER ASSURANCES. At the request of any party to this Agreement,
the other party shall execute, acknowledge and deliver such other documents
and/or instruments as may be reasonably required by the requesting party to
carry out the purposes of this Agreement. In the event any party to this
Agreement shall be involved in litigation, threatened litigation or government
inquiries with respect to a matter covered by this Agreement, every other party
to this Agreement shall also make available to such party, at reasonable times
and subject to reasonable requirements of its own businesses, such of its
personnel as may have information relevant to such matters, provided that such
party shall reimburse the providing party for its reasonable costs for employee
time incurred in connection therewith if more than one business day is required.
Following the Closing, the parties will cooperate with each other in connection
with tax audits and in the defense of any legal proceedings.

8.15 REMEDIES. Unless expressly made the exclusive remedy by the terms of
this Agreement, all remedies provided for in this Agreement are cumulative and
shall be in addition to any and all other rights and remedies provided by law
and by any other agreement between the parties.

F-33
<PAGE> 271

IN WITNESS WHEREOF, each party has caused this Agreement to be executed on
its behalf by its duly authorized officers as of the date first set forth above.

Sturgis Bank & Trust Company
/s/ Leonard L. Eishen
-----------------------------------------
By: Leonard L. Eishen
Title: President and Chief Executive
Officer
SOUTHERN MICHIGAN BANCORP, INC.
/s/ James T. Grohalski
-----------------------------------------
By: James T. Grohalski
Title: President and Chief Executive
Officer

F-34
<PAGE> 272
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

The Michigan Business Corporation Act, as amended ("MBCA"), provides
that a Michigan corporation, such as Southern Michigan Bancorp, Inc. (the
"registrant"), may indemnify a director, officer, employee or agent of the
corporation (an "Indemnitee") against the Indemnitee's expenses and judgments,
fines and amounts paid in settlement actually and reasonably incurred in
connection with any threatened, pending or completed action, suit or proceeding
(other than an action by or in the right of the corporation) involving the
Indemnitee by reason of the fact that the Indemnitee is or was a director,
officer, employee or agent of the corporation, if the Indemnitee acted in good
faith and in a manner the Indemnitee reasonably believed to be in or not opposed
to the best interest of the corporation and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his or her conduct was
unlawful. The MBCA also provides that in derivative actions, a corporation may
indemnify a director, officer, employee or agent of the corporation against
expenses actually and reasonably incurred by the Indemnitee to the extent that
the Indemnitee is successful on the merits or otherwise in any such action, suit
or proceeding or in the defense of any claim, issue or matter therein. Under the
MBCA, no indemnification shall be made with respect to any claim, issue or
matter as to which an Indemnitee shall have been adjudged to be liable to the
corporation unless and only to the extent that the court shall determine upon
application that, despite the adjudication of liability but in view of all of
the circumstances of the case, the Indemnitee is fairly and reasonably entitled
to indemnity for such expenses which the court shall deem proper. The MBCA also
generally permits the advancement of reasonable expenses and empowers the
corporation to purchase and maintain directors' and officers' insurance.

Article V of the By-laws of the registrant contains provisions
authorizing indemnification of directors, officers, employees and agents of the
registrant and authorizes the registrant to purchase directors' and officers'
insurance.

Section 209 of the MBCA provides that the articles of incorporation of
a corporation may contain a provision eliminating or limiting the personal
liability of a director to the corporation or its shareholders for monetary
damages for breach of fiduciary duty as a director, provided that such provision
shall not eliminate or limit the liability of a director (i) for any breach of
the director's duty of loyalty to the corporation or its shareholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or
knowing violation of law, (iii) under Section 551(1) of the MBCA (relating to
liability for unauthorized acquisitions or redemptions of, or dividends on,
capital stock and loans to a director, officer, or employee of the corporation
or of a subsidiary of the corporation), (iv) for any transaction from which the
director derived an improper personal benefit or (v) for an act or omission
occurring prior to the date such a provision becomes effective. Article VIII of
the registrant's Articles of Incorporation include such a provision.

Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the provisions described in this Item 20 or
otherwise, the registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent,

<PAGE> 273

submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act of 1933 and will be governed by the final adjudication of such issue.

ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

(a) Exhibits. The following exhibits are filed as part of the
registration statement on Form S-4:

Item 601
Regulation S-K
Exhibit Reference
Number Exhibit Description
----------------- -------------------

(2)(a)/(10)(a) Agreement and Plan of Consolidation dated as of
February 15, 2000 by and between the registrant and
Sturgis Bank & Trust Company, a Michigan savings
bank (incorporated by reference to Exhibit 2 of the
registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1999 as filed with
the Securities and Exchange Commission (File no.
2-78178)).

A conformed copy of this Agreement, without
exhibits, is attached to the proxy
statement/prospectus as Annex F.

(3)(a)/(4)(a) Articles of Incorporation of the registrant
(incorporated by reference to Exhibit (3) of
the registrant's Annual Report on Form 10-K
for the year ended December 31, 1991 as
filed with the Securities and Exchange
Commission (file no. 2-78178)).

(3)(b)/(4)(b) By-laws of the registrant (incorporated by
reference to Exhibit (3) of the registrant's
Annual Report on Form 10-K for the year
ended December 31, 1997 as filed with the
Securities and Exchange Commission (file no.
2-78178)).

(5) Opinion and consent of Miller, Canfield, Paddock
and Stone, P.L.C.**

(8)(a) Opinion and consent of Crowe, Chizek and Company,
LLP **

(8)(b) Opinion and consent of Plante & Moran, LLP**

(10)(b) Master Agreements for Directors' Deferred Income
Plan (incorporated by reference to Exhibit 10 of
the registrant's Annual Report on Form 10-K for the
year ended December 31, 1994 as filed with the
Securities and Exchange Commission (file no.
2-78178)).

(10)(c) Composite form of Executive Employee Salary
Continuation Agreement, as amended
(incorporated by reference to Exhibit 10 of
the registrant's Annual Report on Form 10-K
for the year ended December 31, 1994 as
filed with the Securities and Exchange
Commission (file no. 2-78178)).

(10)(d) Master Agreement for Executives' Deferred
Compensation Plan, as amended (incorporated by
reference to Exhibit 10 of the registrant's Annual
Report on Form 10-K for the year ended December 31,
1994 as filed with the Securities and Exchange
Commission (file no. 2-78178)).

(11) No statement is required to be filed because
the computations can be clearly determined
from the materials contained in the
registration statement.

<PAGE> 274
Item 601
Regulation S-K
Exhibit Reference
Number Exhibit Description
----------------- -------------------

(12) No statement is required to be filed because
the computations can be clearly determined
from the materials contained in the
registration statement.

(21) List of subsidiaries of the registrant
(incorporated by reference to Exhibit 21 of the
registrant's Annual Report on Form 10-K for the
year ended December 31, 1997 as filed with the
Securities and Exchange Commission (file no.
2-78178)).

(23)(a) Consent of Miller, Canfield, Paddock and Stone,
P.L.C. (included in Exhibit 5).**

(23)(b) Consent of Crowe, Chizek and Company, LLP (included
in Exhibit 8(a)).**

(23)(c) Consent of Plante & Moran, LLP (included in Exhibit
8(b)).**

(23)(d) Consent of Crowe, Chizek and Company, LLP,
independent certified public accountants.*

(23)(e) Consent of Plante & Moran, LLP, independent
certified public accountants.*

(23)(f) Consent of PricewaterhouseCoopers LLP, independent
certified public accountants.*

(24) Powers of Attorney (contained in signature pages of
the initial filing of this registration statement).

(27) Financial Data Schedule of the registrant.*

(99)(a) Form of Proxy for Sturgis Bank & Trust Company.**

(99)(b) Opinion of Raymond James & Associates, Inc., which
is set forth in full as Annex D to the Prospectus
which is part of this Registration Statement.

(99)(c) Opinion of Austin Associates, Inc., which is set
forth in full as Annex E to the Prospectus which is
part of this Registration Statement.

(99)(d) Consent of Raymond James & Associates, Inc.**

(99)(e) Consent of Austin Associates, Inc.*

(99)(f) Consents of persons named as directors and
executive officers of the registrant.**
------------------------

* Filed herewith.
** To be filed by amendment.

(b) Financial Statement Schedules. The financial statement schedules
are omitted because of the absence of the conditions under which they are
required or because the required information is included in the financial
statements, or the notes thereto, that are a part of this registration
statement.

<PAGE> 275

ITEM 22. UNDERTAKINGS.

The undersigned registrant hereby undertakes:

(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:

(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933, as amended;

(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high and of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in
the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement.

(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement;

provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if the
registration statement is on Form S-3, Form S-8 or Form F-3, and the information
required to be included in a post-effective amendment by those paragraphs is
contained in periodic reports filed with or furnished to the Commission by the
registrant pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934, as amended, that are incorporated by reference in the registration
statement.

(2) That, for the purpose of determining any liability under the
Securities Act of 1933, as amended, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.

(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.

The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, as amended, each
filing of the registrant's annual report pursuant to Section 13(a) or 15(d) of
the Securities Exchange Act of 1934, as amended (and, where applicable, each
filing of an employee benefit plan's annual report pursuant to Section 15(d) of
the Securities Exchange Act of 1934, as amended), that is incorporated by
reference in the registration statement shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.

The undersigned registrant hereby undertakes to deliver or cause to be
delivered with the prospectus, to each person to whom the prospectus is sent or
given, the latest annual report to security holders that is incorporated by
reference in the prospectus and furnished pursuant to and meeting the
requirements of Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of
1934, as amended; and,

<PAGE> 276

where interim financial information required to be presented by Article 3 of
Regulation S-X is not set forth in the prospectus, to deliver, or cause to be
delivered to each person to whom the prospectus is sent or given, the latest
quarterly report that is specifically incorporated by reference in the
prospectus to provide such interim financial information.

(1) The undersigned registrant hereby undertakes as follows: that
prior to any public reoffering of the securities registered hereunder through
use of a prospectus which is a part of this registration statement, by any
person or party who is deemed to be an underwriter within the meaning of Rule
145(c), the issuer undertakes that such reoffering prospectus will contain the
information called for by the applicable registration form with respect to
reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other items of the applicable form.

(2) The registrant undertakes that every prospectus: (i) that is
filed pursuant to paragraph (1) immediately preceding, or (ii) that purports to
meet the requirements of Section 10(a)(3) of the Securities Act of 1933, as
amended, and is used in connection with an offering of securities subject to
Rule 415, will be filed as a part of an amendment to the registration statement
and will not be used until such amendment is effective, and that, for purposes
of determining any liability under the Securities Act of 1933, as amended, each
such post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.

Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended, may be permitted to directors, officers and controlling
persons of the registrant pursuant to the provisions described in Item 20 of
this registration statement or otherwise, the registrant has been advised that
in the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act of 1933, as amended,
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act of 1933, as amended, and will be
governed by the final adjudication of such issue.

The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.

The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11, or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.

<PAGE> 277

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, as amended,
the registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Coldwater,
State of Michigan, on the 29th day of June, 2000.

SOUTHERN MICHIGAN BANCORP, INC.,
a Michigan corporation

By /s/ James T. Grohalski
---------------------------------------------------
Name: James T. Grohalski
Title: President and Chief Executive Officer

Pursuant to the requirements of the Securities Act of 1933, as amended,
this registration statement has been signed by the following persons in the
capacities and on the dates indicated.

By signing below, each of the undersigned does hereby severally
constitute and appoint James J. Morrison and James T. Grohalski, and each of
them, his true and lawful attorneys and agents, with full power of substitution
and resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments (both pre-effective amendments and
post-effective amendments) to this Registration Statement and to file the same,
with all exhibits thereto and all other documents in connection therewith, with
the Securities and Exchange Commission, granting unto said attorneys and agents,
and each and every one of them, full power and authority to do and perform each
and every act and things requisite or necessary to be done, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys and agents, and each of them, or his or her
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

Signature Title Date

Principal Executive Officer,
Principal Financial Officer
and Principal Accounting Officer:
President, Chief Executive
Officer and Secretary
(Principal Executive
Officer, Principal
Financial Officer and
Principal Accounting
/s/ James T. Grohalski Officer) June 29, 2000
---------------------------------
James T. Grohalski

<PAGE> 278

Pursuant to the requirements of the Securities Act of 1933, as amended,
this registration statement has been signed by the following persons in the
capacities and on the dates indicated.

By signing below, each of the undersigned does hereby severally
constitute and appoint James J. Morrison and James T. Grohalski, and each of
them, his true and lawful attorneys and agents, with full power of substitution
and resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments (both pre-effective and
post-effective amendments) to this Registration Statement and to file the same,
with all exhibits thereto and all other documents in connection therewith, with
the Securities and Exchange Commission, granting unto said attorneys and agents,
and each and every one of them, full power and authority to do and perform each
and every act and things requisite or necessary to be done, as fully to all
intents and purposes as the undersigned might or could do in person, hereby
ratifying and confirming all that said attorneys and agents, and each of them,
or their substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.

Signature Title Date
--------- ----- ----

/s/ James T. Grohalski Director, President,
----------------------------- Chief Executive Officer June 29, 2000
James T. Grohalski and Secretary

/s/ James J. Morrison
----------------------------- Director and Chairman June 29, 2000
James J. Morrison

/s/ James Briskey Director June 29, 2000
-----------------------------
James Briskey

/s/ H. Kenneth Cole Director June 29, 2000
-----------------------------
H. Kenneth Cole

/s/ William E. Galliers Director June 29, 2000
-----------------------------
William E. Galliers

/s/ Nolan E. Hooker Director June 29, 2000
-----------------------------
Nolan E. Hooker

/s/ Gregory J. Hull Director June 29, 2000
-----------------------------
Gregory J. Hull

/s/ Thomas E. Kolassa Director June 29, 2000
-----------------------------
Thomas E. Kolassa

/s/ Jane L. Randall Director June 29, 2000
-----------------------------
Jane L. Randall

/s/ Freeman E. Riddle Director June 29, 2000
-----------------------------
Freeman E. Riddle

<PAGE> 279

INDEX OF EXHIBITS

EXHIBIT
NUMBER EXHIBIT DESCRIPTION

(23)(d) Consent of Crowe, Chizek and Company, LLP, independent
certified public accountants.*
(23)(e) Consent of Plante & Moran, LLP, independent certified public
accountants.*
(23)(f) Consent of PricewaterhouseCoopers LLP, independent certified
public accountants.*
(27) Financial Data Schedule of the registrant.*
(99)(e) Consent of Austin Associates, Inc.*

* Filed herewith