Press Release

SOUTHERN MICHIGAN BANCORP, INC. ANNOUNCES THIRD QUARTER EARNINGS

October 31, 2008

Coldwater, Michigan, October 31, 2008:  Southern Michigan Bancorp, Inc. (OTCBB: SOMC.OB) announced net income of $1,571,000 or $0.69 per diluted share, for the nine months ended September 30, 2008. This compares to $3,129,000, or $1.76 per diluted share, for the nine months ended September 30, 2007.  Southern’s net income for the three months ended September 30, 2008, was $21,000, or $0.01 per diluted share, compared to $1,082,000, or $0.61 per diluted share, for the same three month period a year ago. 

John H. Castle, Chairman & Chief Executive Officer, stated, “Over the last 90 days, we have witnessed unprecedented stress in the financial and credit markets as reflected by recent legislation enacted by Congress and ongoing reports by the media.  Southern has avoided many of the issues affecting the broader market, such as sub-prime loans, mortgage-backed securities and investments in Fannie Mae and Freddie Mac stock.  However, Southern is not immune to the impact of these trying times, as delinquent and non-accrual loans have increased in both the  commercial and consumer portfolios.”  Castle continued, “While it is impossible to project the magnitude or duration of the issues that presently have stalled the economy, we believe that our conservative credit culture and high lending standards have positioned us to weather the current credit cycle.”

Non-performing loans totaled $10,449,000 at September 30, 2008, or 3.1% of total loans.  This was an increase of $1,131,000 from June 30, 2008.  The third quarter increase in non-performing loans resulted primarily from loans being placed on non-accrual status during the period.  

The allowance for loan losses grew to $6,987,000, or 2.07% of total loans, at September 30, 2008, from $5,608,000, or 1.66% of total loans at the prior quarter end and $5,156,000 or 1.53%, at year end 2007.  In the third quarter of 2008, provision for loan losses was $1,580,000 compared to $800,000 last quarter and $145,000 in the third quarter of 2007.  On a year-to-date basis, Southern’s provision for loan losses totaled $2,730,000 versus $345,000 a year ago.  Over half of the 2008 increase in the provision for loan losses relates to a single large commercial credit in the automotive industry.  The provision for loan losses resulted from management’s quarterly evaluation of the loan portfolio using a methodology that estimates the amount of credit losses probable within the loan portfolio based on a number of factors, including loss & delinquency trends, current economic conditions, loan grades and concentrations.  The Company and its subsidiary banks continue to be “well capitalized” under regulatory capital requirements.

Southern’s 4.43% net interest margin for the nine month period ending September 30, 2008 remained strong when compared to peers and was relatively flat compared to the June 30, 2008 six month period of 4.41%.  However, Southern’s net interest margin declined from the 4.86% reported for the nine month period ending September 30, 2007.  The decline is attributable to the declining rate environment as well as the reversal of interest related to loans placed on non-accrual status. 

Financial results for 2008 were influenced by the acquisition of FNB Financial on December 1, 2007. In accordance with the purchase method of accounting, FNB’s results of operations were included in Southern’s consolidated statements of income from the date of acquisition. As a result of the merger, Southern recorded additional net loans of $76.8 million, securities of $40.2 million and additional deposits of $118.6 million at the time of the acquisition.

Southern Michigan Bancorp, Inc. is a two bank holding company.  Its subsidiary banks are Southern Michigan Bank & Trust and FNB Financial.  Its 19 offices throughout southern Michigan provide a broad range of consumer, business and wealth management services throughout the region.  For more information, please visit our website, www.smb-t.com.

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This press release contains forward-looking statements that are based on management’s beliefs, assumptions, current expectations, estimates and projections about the financial services industry, the economy, and Southern Michigan Bancorp, Inc. Forward-looking statements are identifiable by words or phrases such as “believe” or “continue” and other similar words or expressions.  Accounting estimates, such as the provision and allowance for loan losses, are inherently forward-looking.  There can be no assurance that future loan losses will be limited to the amounts estimated.  The future effect of changes in the financial and credit markets and the national and regional economy on the banking industry, generally, and Southern Michigan Bancorp, Inc., specifically, are also inherently uncertain.  Additional information about factors that may adversely affect the matters addressed in forward-looking statements are contained in Southern’s reports filed with the Securities and Exchange Commission.  Other risk factors exist and new risk factors may emerge at any time.  Investors should not place undue reliance on forward-looking statements as predictions of future results.  Southern undertakes no obligation to update or revise any forward-looking statements to reflect developments or information obtained after the date of this press release.

SOUTHERN MICHIGAN BANCORP, INC.
UNAUDITED INTERIM FINANCIAL STATEMENTS

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

	September 30, 2008			December 31, 2007
ASSETS
Cash and cash equivalents	$	9,968		$	14,470
Federal funds sold		18,077			6,449
Securities available for sale		65,242			77,515
Loans held for sale, net of valuation of -0- in 2008 and 2007		854			624
Loans, net of allowance for loan losses of  $6,987 - 2008 ($5,156 – 2007)		330,249			330,822
Premises and equipment, net		13,187			13,335
Accrued interest receivable		2,765			3,387
Net cash surrender value of life insurance		9,418			10,015
Goodwill		13,422			13,422
Other intangible assets		2,810			3,091
Other assets		6,922			7,048
TOTAL ASSETS	$	472,914		$	480,178
LIABILITIES
Deposits :
Non-interest bearing	$	52,119		$	57,027
Interest bearing		348,617			342,142
Total deposits		400,736			399,169
Securities sold under agreements to repurchase and overnight borrowings		3,734			9,776
Accrued expenses and other liabilities		4,339			5,077
Other borrowings		12,770			14,753
Subordinated debentures		5,155			5,155
Total liabilities		426,734			433,930
Common stock subject to repurchase obligation in   Employee Stock Ownership Plan, 98,357 shares outstanding in 2008   (92,203 in 2007)		1,298			2,029
SHAREHOLDERS’ EQUITY
Preferred stock, 100,000 shares authorized; none issued or outstanding		-			-
Common stock, $2.50 par value:
Authorized - 4,000,000 shares
Issued - 2,312,507 shares in 2008 (2,307,924 shares in 2007)
Outstanding (other than ESOP shares) - 2,214,150 shares in 2008           (2,215,721 shares in 2007)		5,535			5,539
Additional paid-in capital		17,990			17,087
Retained earnings		21,813			21,629
Accumulated other comprehensive income, net		284			122
Unearned restricted stock compensation		(122	)		(55
Unearned Employee Stock Ownership Plan shares		(618	)		(103
Total shareholders’ equity		44,882			44,219
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	472,914		$	480,178

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

	Three Months Ended September 30,						Nine Months Ended September 30,
	2008			2007			2008			2007
Interest income:
Loans, including fees	$	5,587		$	5,105		$	17,301		$	15,157
Federal funds sold		116			133			339			456
Securities:
Taxable		455			502			1,590			1,113
Tax-exempt		233			155			716			461
Total interest income		6,391			5,895			19,946			17,187
Interest expense:
Deposits		1,615			2,022			5,453			5,726
Other		253			190			909			559
Total interest expense		1,868			2,212			6,362			6,285
Net Interest Income		4,523			3,683			13,584			10,902
Provision for loan losses		1,580			145			2,730			345
Net interest income after provision for loan losses		2,943			3,538			10,854			10,557
Non-interest income:
Service charges on deposit accounts		726			512			2,076			1,406
Trust fees		297			197			844			556
Net gains on security calls and sales		-			2			15			2
Net gains on loan sales		81			96			295			317
Earnings on life insurance assets		84			64			256			201
Gain on life insurance proceeds		-			-			390			-
Income and fees from automated teller machines		166			86			475			245
Other		201			123			670			302
Total non-interest income		1,555			1,080			5,021			3,029
Non-interest expense:
Salaries and employee benefits		2,715			1,884			7,977			5,624
Occupancy, net		273			251			1,048			699
Equipment		307			193			927			567
Printing, postage and supplies		169			81			489			262
Telecommunication expenses		87			47			283			150
Professional and outside services		324			201			1,096			506
Software maintenance		82			64			304			176
Amortization of other intangibles		94			-			281			-
Other		658			429			1,974			1,332
Total non-interest expense		4,709			3,150			14,379			9,316
INCOME BEFORE INCOME TAXES		(211	)		1,468			1,496			4,270
Federal income taxes		(232	)		386			(75	)		1,141
NET INCOME	$	21		$	1,082		$	1,571		$	3,129
Basic Earnings Per Common Share	$	.01		$	.61		$	.69		$	1.77
Diluted Earnings Per Common Share	$	.01		$	.61		$	.69		$	1.76
Dividends Declared Per Common Share	$	.20		$	.20		$	.60		$	.60

 

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