10-Q

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

FORM 10-Q

(Mark One)

[X]	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended September 30, 2007
[  ]	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ____________ to ____________

Commission File Number:  000-49772

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

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

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

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

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.

Large accelerated filer Accelerated filer Non-accelerated filer   X   

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

The number of shares outstanding of the Registrant's Common Stock, $2.50 par value, as of November 16, 2007, was 1,771,988 shares.

Forward-Looking Statements

          This report contains forward-looking statements that are based on management's beliefs, assumptions, current expectations, estimates and projections about the financial services industry, the economy, and Southern Michigan Bancorp, Inc. Forward-looking statements are identifiable by words or phrases such as "outlook," or "strategy"; that an event or trend "may," "should," "will," or "is likely" to occur or "continue" or "is scheduled" or "on track" or that Southern Michigan Bancorp, Inc. or its management "anticipates", "believes," "estimates," "plans," "forecasts," "intends," "predicts," "projects," or "expects" a particular result, or is "confident" or "optimistic" that an event will occur, and variations of such words and similar expressions. All of the information concerning interest rate sensitivity in Part I, Item 3 is forward-looking. Management's determination of the provision and allowance for loan losses involves judgments that are inherently forward-looking. T hese statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions ("risk factors") that are difficult to predict with regard to timing, extent, likelihood and degree of occurrence. Therefore, actual results and outcomes may materially differ from what may be expressed or forecasted in such forward-looking statements. Southern Michigan Bancorp, Inc. undertakes no obligation to update, amend or clarify forward-looking statements, whether as a result of new information, future events or otherwise.

          Risk factors include, but are not limited to, the risk factors described in the section entitled "Risk Factors" in Southern Michigan Bancorp, Inc.'s Amendment No. 2 to Form S-4 Registration Statement, filed with the Securities and Exchange Commission on September 28, 2007; the timing and level of asset growth; changes in banking laws and regulations; changes in tax laws; changes in prices, levies and assessments; the impact of technological advances and issues; governmental and regulatory policy changes; opportunities for acquisitions and the effective completion of acquisitions and integration of acquired entities; the possibility that anticipated cost savings and revenue enhancements from acquisitions, restructurings, reorganizations and bank consolidations may not be realized at amounts projected, at all or within expected time frames; the local and global effects of the ongoing war on terrorism and other military actions, including actions in Iraq; and current u ncertainties and fluctuations in the financial markets and stocks of financial services providers due to concerns about credit availability and concerns about the Michigan economy in particular. These and other factors are representative of the risk factors that may emerge and could cause a difference between an ultimate actual outcome and a preceding forward-looking statement.

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Part I.  Financial Information

Item 1. Financial Statements

SOUTHERN MICHIGAN BANCORP, INC.
CONSOLIDATED BALANCE SHEETS (Unaudited)
(In thousands, except share data)

	September 30, 2007			December 31, 2006
ASSETS
Cash and cash equivalents	$	9,343		$	9,369
Federal funds sold		7,248			10,429
Securities available for sale		57,516			36,796
Loans held for sale, net of valuation allowance of $0 in 2007		776			-
Loans, net of allowance for loan losses of $3,394 (2006 - $3,302)		249,527			249,523
Premises and equipment, net		10,347			8,665
Accrued interest receivable		2,711			2,506
Net cash surrender value of life insurance		7,636			7,502
Goodwill		620			620
Other assets		5,185			4,481
TOTAL ASSETS	$	350,909		$	329,891
LIABILITIES
Deposits:
Non-interest bearing	$	40,640		$	42,281
Interest bearing		253,156			240,228
Total deposits		293,796			282,509
Accrued expenses and other liabilities		4,849			4,440
Securities sold under agreements to repurchase		8,409			184
Other borrowings		5,795			6,973
Subordinated debentures		5,155			5,155
Total liabilities		318,004			299,261
Common stock subject to repurchase obligation in Employee
Stock Ownership Plan, shares outstanding - 92,274 in 2007
(89,122 in 2006)		2,215			2,148
SHAREHOLDERS' EQUITY
Preferred stock, 100,000 shares authorized; none issued or outstanding		-			-
Common stock, $2.50 par value per share:
Authorized--4,000,000 shares
Issued--1,771,988 shares (2006 - 1,769,248)
Outstanding (other than ESOP shares)--1,679,714 shares                   (2006 - 1,680,126)		4,199			4,200
Additional paid-in capital		5,504			5,446
Retained earnings		21,087			19,021
Accumulated other comprehensive income/(loss), net		61			(42	)
Unearned Employee Stock Ownership Plan shares		(103	)		(143	)
Unearned restricted stock compensation		(58	)		-
Total shareholders' equity		30,690			28,482
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	350,909		$	329,891

See accompanying notes to consolidated financial statements.

3

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

	Three Months Ended September 30,						Nine Months Ended September 30,
	2007			2006			2007			2006
Interest income:
Loans, including fees	$	5,105		$	5,039		$	15,157		$	14,419
Federal funds sold		133			87			456			299
Securities:
Taxable		502			304			1,113			753
Tax-exempt		155			133			461			415
Total interest income		5,895			5,563			17,187			15,886
Interest expense:
Deposits		2,022			1,637			5,726			4,352
Other		190			230			559			665
Total interest expense		2,212			1,867			6,285			5,017
Net Interest Income		3,683			3,696			10,902			10,869
Provision for loan losses		145			200			345			250
Net interest income after provision for loan losses		3,538			3,496			10,557			10,619
Non-interest income:
Service charges on deposit accounts		512			506			1,406			1,371
Trust fees		197			173			556			521
Net gains on loan sales		96			154			317			459
Earnings on life insurance assets		64			63			201			177
Income and fees from automated teller machines		86			70			245			186
Other		125			84			304			200
Total non-interest income		1,080			1,050			3,029			2,914
Non-interest expense:
Salaries and employee benefits		1,884			1,760			5,624			5,076
Occupancy, net		251			217			699			611
Equipment		193			173			567			547
Printing, postage and supplies		81			90			262			287
Professional and outside services		201			120			506			781
Other		540			763			1,658			2,147
Total non-interest expense		3,150			3,123			9,316			9,449
INCOME BEFORE INCOME TAXES		1,468			1,423			4,270			4,084
Federal income taxes		386			394			1,141			1,112
NET INCOME		1,082			1,029			3,129			2,972
Other comprehensive income:
Net unrealized gains on securities		230			211			156			67
Tax effect		(78	)		(72	)		(53	)		(23	)
Other comprehensive income		152			139			103			44
COMPREHENSIVE INCOME	$	1,234		$	1,168		$	3,232		$	3,016
Basic Earnings Per Common Share	$	0.61		$	0.58		$	1.77		$	1.68
Diluted Earnings Per Common Share	$	0.61		$	0.58		$	1.77		$	1.68
Dividends Declared Per Common Share	$	0.20		$	0.20		$	0.60		$	0.58

See accompanying notes to consolidated financial statements.

4

SOUTHERN MICHIGAN BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Unaudited)
(In thousands, except number of shares and per share data)
For nine months ended September 30, 2007 and 2006

	Common Stock			Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss), Net			Unearned ESOP Shares			Unearned Restricted Stock Compensation			Total
Balance at January 1, 2006	$	4,025		$	3,974		$	18,419		$	(124	)	$	(184	)	$	-		$	26,110
Net income								2,972												2,972
Cash dividends declared - $.58 per share								(1,028	)											(1,028	)
Issuance of shares for 5% stock dividend,
net of fractional shares (84,355 shares)		211			1,813			(2,026	)											(2	)
Common stock repurchased and   retired (6,480 shares)		(16	)		(137	)														(153	)
Change in common stock subject
to repurchase		(23	)		(175	)														(198	)
Stock options exercised (1,155 shares)		2			18															20
Net change in obligation under ESOP														41						41
Net change in unrealized gain on
available for sale securities, net of tax											44									44
Balance at September 30, 2006	$	4,199		$	5,493		$	18,337		$	(80	)	$	(143	)	$	-		$	27,806
Balance at January 1, 2007	$	4,200		$	5,446		$	19,021		$	(42	)	$	(143	)	$	-		$	28,482
Net income								3,129												3,129
Cash dividends declared - $.60 per share								(1,063	)											(1,063	)
Change in common stock subject
to repurchase		(8	)		(59	)														(67	)
Issuance of restricted stock (2,740 shares)		7			60												(67	)		-
Vesting of restricted shares																	9			9
Stock option expense					57															57
Net change in obligation under ESOP														40						40
Net change in unrealized gain on
available for sale securities, net of tax											103									103
Balance at September 30, 2007	$	4,199		$	5,504		$	21,087		$	61		$	(103	)	$	(58	)	$	30,690

See accompanying notes to consolidated financial statements.

5

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

	Nine Months Ended September 30,
	2007			2006
Operating Activities
Net income	$	3,129		$	2,972
Adjustments to reconcile net income to net cash
from operating activities:
Provision for loan losses		345			250
Depreciation		554			501
Net accretion of investment securities		(72	)		(108	)
Loans originated for sale		(13,914	)		(19,814	)
Proceeds on loans sold		13,455			20,047
Net gains on loan sales		(317	)		(459	)
Net change in unearned ESOP shares		40			41
Stock option expense		57			20
Earned stock compensation		9			-
Amortization of other intangible assets		-			18
Net change in
Accrued interest receivable		(205	)		(293	)
Cash surrender value		(201	)		(177	)
Other assets		758			1,640
Accrued expenses and other liabilities		409			743
Net cash from operating activities		4,047			5,381
Investing Activities
Activity in available for sale securities:
Proceeds from maturities and calls		11,217			9,927
Purchases		(31,710	)		(13,198	)
Net change in federal funds sold		3,181			1,375
Loan originations and payments, net		(1,863	)		(12,145	)
Proceeds from life insurance		67			-
Additions to premises and equipment		(2,236	)		(1,086	)
Net cash used in investing activities		(21,344	)		(15,127	)
Financing Activities
Net change in deposits		11,287			7,665
Net change in securities sold under agreements to repurchase		8,409			291
Proceeds from other borrowings		292			-
Repayments of other borrowings		(1,654	)		(1,030	)
Cash dividends paid		(1,063	)		(1,028	)
Repurchase of common stock		-			(153	)
Cash paid in lieu of fractional shares for 5% stock dividend		-			(2	)
Net cash from financing activities		17,271			5,743
Net change in cash and cash equivalents		(26	)		(4,003	)
Beginning cash and cash equivalents		9,369			10,498
Ending cash and cash equivalents	$	9,343		$	6,495
Cash paid for interest	$	6,263		$	4,982
Cash paid for income taxes		855			1,000
Transfers from loans to foreclosed assets		1,514			444

See accompanying notes to consolidated financial statements.

6

SOUTHERN MICHIGAN BANCORP, INC.
NOTES TO INTERIM FINANCIAL STATEMENTS

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation
The consolidated financial statements include the accounts of Southern Michigan Bancorp, Inc. ("Southern") and its wholly-owned subsidiary, Southern Michigan Bank & Trust (the "Bank"), and the Bank's wholly-owned subsidiary SMB Mortgage Company. All significant inter-company transactions and balances have been eliminated in consolidation.

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Operating results for the nine months ended September 30, 2007 are not necessarily indicative of the results that may be expected for the year ending December 31, 2007.

The accompanying consolidated financial statements should be read in conjunction with the consolidated financial statements and footnotes of Southern for December 31, 2006 included in Southern's Amendment No. 2 to Form S-4 Registration Statement, filed with the Securities and Exchange Commission on September 28, 2007.

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

NOTE B - NEW ACCOUNTING PRONOUNCEMENTS

In September 2006, the Financial Accounting Standards Board ("FASB") issued SFAS No. 158 (FAS 158) "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans," that requires companies to recognize the funded status of their defined benefit pension and postretirement plans as an asset or liability on the balance sheet rather than being disclosed in the notes to the financial statements. The over-funded or under-funded status (asset or liability) would be measured as the difference between the fair value of the plan assets and the projected benefit obligation for pensions and the accumulated postretirement benefit obligation for other post-retirement benefits. The requirement to recognize the funded status in the balance sheet was effective for fiscal years ending after December 15, 2006 for public entities and years ending after June 15, 2007 for non-public entities. Southern will adopt the balance sheet recognition requirement for its year ending December 31, 2007. The adoption of F AS 158 in the 2006 financial statements would have reduced accumulated other comprehensive income by $22,000.

In February 2007, the FASB issued FASB Statement No. 159 (FAS 159), "The Fair Value Option for Financial Assets and Financial Liabilities." Southern will be adopting FAS 159 as of January 1, 2008. Early adoption was allowed, effective January 1, 2007, if the election was made by April 30, 2007. FAS 159 permits, but does not require, entities to measure selected financial assets and liabilities at fair value. Changes in fair value are recorded through the income statement in subsequent periods. The statement provides for a one time opportunity to transfer existing assets and liabilities to fair value at the point of adoption with a cumulative effect adjustment recorded against equity. After adoption, the election to report assets and liabilities at fair value must be made at the point of their inception. Southern has elected not to early adopt FAS 159 and has not yet determined the impact FAS 159 may have on its consolidated financial statements upon adoption.

NOTE C - EARNINGS PER SHARE

Basic earnings per common share is net income divided by the weighted average number of common shares outstanding during the period. ESOP shares are considered outstanding for this calculation unless unearned. Diluted earnings per common share includes the dilutive effect of additional potential common shares issuable under stock options. Earnings and dividends per common share are restated for all stock splits and dividends through the date of issue of the financial statements.

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A reconciliation of the numerators and denominators of basic and diluted earnings per share for the three- and nine-month periods ended September 30, 2007 and 2006 is as follows (dollars in thousands, except per share data):

	Three Months Ended September 30, 2007		Three Months Ended September 30, 2006		Nine Months Ended September 30, 2007		Nine Months Ended September 30, 2006
Basic earnings per share:
Net income	$	1,082	$	1,029	$	3,129	$	2,972
Weighted average common
shares outstanding		1,771,988		1,769,354		1,771,714		1,771,971
Less unallocated ESOP shares		5,182		6,771		5,420		7,009
Weighted average common shares
outstanding for basic earnings per share		1,766,806		1,762,583		1,766,294		1,764,962
Basic earnings per share	$	0.61	$	0.58	$	1.77	$	1.68
Diluted earnings per share:
Net income	$	1,082	$	1,029	$	3,129	$	2,972
Weighted average common shares
outstanding for basic earnings per share		1,766,806		1,762,583		1,766,294		1,764,962
Add: Dilutive effect of assumed
exercise of stock options		5,276		6,498		6,009		5,946
Weighted average common and
dilutive potential common
shares outstanding		1,772,082		1,769,081		1,772,303		1,770,908
Diluted earnings per share	$	0.61	$	0.58	$	1.77	$	1.68

Stock option awards outstanding that were anti-dilutive and therefore not included in the computation of earnings per share were as follows: 130,425 and 28,560 for the three months ended September 30, 2007 and 2006, respectively, and 130,425 and 28,560 for the nine months ended September 30, 2007 and 2006, respectively.

NOTE D - STOCK OPTIONS

Shareholders of Southern approved a stock option plan in April 2000 and a stock incentive plan in June 2005. The plans were authorized to issue up to 115,500 and 157,500 shares, respectively. As of September 30, 2007, there were 45,841 shares available for future issuance under the 2000 plan and 20,502 shares available for future issuance under the 2005 plan.

8

A summary of stock option activity in the plans is as follows for the nine months ended September 30, 2007:

	Shares		Weighted Average Price
Outstanding at beginning of year	95,663		$ 22.17
Granted	103,110		24.09
Exercised	-		-
Forfeited	(1,665	)	23.90
Outstanding at September 30, 2007	197,108		23.16
Options exercisable at September 30, 2007	94,298		22.15

In January 2007, 2,740 shares of restricted stock were issued to employees and directors. The shares vest 20% per year over five years.

For the nine months ended September 30, 2007, compensation expense of $57,000 was recorded with respect to options granted in January and April 2007. Such expense was computed in accordance with Statement of Financial Accounting Standards No. 123R, "Share-Based Payment."

NOTE E - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE

Securities sold under agreements to repurchase (repurchase agreements) have original maturities of less than one year. Repurchase agreements are treated as financings and the obligations to repurchase securities sold are reflected as liabilities. Securities involved with the agreements are recorded as assets of the Bank and are held in safekeeping by correspondent banks. Repurchase agreements are offered principally to certain large deposit customers as deposit equivalent investments.

NOTE F - MERGER WITH FNB FINANCIAL CORPORATION

On April 18, 2007, Southern and FNB Financial Corporation ("FNB") jointly announced that they had executed a definitive merger agreement. FNB is a bank holding company headquartered in Three Rivers, Michigan, with 8 offices located within St. Joseph and Cass Counties in Michigan. The merger is expected to be completed during the fourth quarter of 2007.

If the merger is completed, FNB will be merged with and into Southern. The surviving corporation will be Southern. The surviving corporation will own The First National Bank of Three Rivers and the Bank and all of the other assets of FNB and Southern. Subject to certain possible adjustments as provided in the plan of merger, FNB shareholders will receive either (1) 1.87 shares of Southern common stock, (2) $45.35 in cash, or (3) a combination of both for each share of FNB common stock. The approximate value of the total merger consideration to be paid by Southern is $26,000,000 (consisting of approximately $13,000,000 in cash and 536,073 shares of Southern common stock). Completion of the merger is subject to certain conditions, including, among others, that the shareholders of FNB approve the plan of merger, that necessary regulatory approvals be obtained, that no proceeding seeking to prevent the merger be pending or threatened, and that Southern and FNB obtain various ancillary certifica tes, opinions and agreements. At any time before the effective time of the merger, the boards of directors of Southern and FNB may, by mutual consent, abandon the merger. In addition, for certain specified reasons the board of directors of either Southern or FNB may abandon the merger.

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

          The following discussion provides information about the financial condition and results of operations of Southern, which supplements Southern's consolidated financial statements. The discussion should be read in conjunction with the financial statements included in this filing.

          Results of Operations

          Net income increased 5.2% or $53,000 in the third quarter of 2007 compared to the same period in 2006. For the nine-month period ended September 30, 2007 net income increased $157,000, or 5.3% over the same period in 2006. The year-to-date increase resulted from higher net interest income, non-interest income and lower non-interest expense partially offset by an increase in the provision for loan losses. The quarterly increase resulted from higher non-interest income and reduced provision for loan losses, offset by slightly lower net interest income, and higher non-interest expense during the third quarter compared to the same quarter in 2006.

          The return on average assets was 1.24% for the first nine months of 2007, which equaled the return for the same period a year ago. The return on average shareholders' equity was 13.97% for the first nine months of 2007, compared to 14.54% for the comparable 2006 period.

          Net Interest Income

          The following tables provide information regarding interest income and expense for the nine-month periods ended September 30, 2007 and 2006, respectively. Table 1 shows the year-to-date daily average balances for interest earning assets and interest bearing liabilities, interest earned or paid, and the annualized effective rate, for the nine-month periods ended September 30, 2007 and 2006. Table 2 shows the effect on interest income and expense of changes in volume and interest rates.

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Table 1 - Average Balances and Tax Equivalent Interest Rates

(Dollars in Thousands):

	2007							2006
	Average Balance			Interest		Yield/ Rate		Average Balance			Interest		Yield/ Rate
ASSETS
Interest earning assets:
Loans(1)(2)(3)	$	251,940		$	15,200	8.0	%	$	246,502		$	14,433	7.8	%
Federal funds sold		10,988			456	5.5			7,732			299	5.2
Taxable investment securities(4)		28,744			1,113	5.2			23,123			753	4.3
Tax-exempt investment    securities(1)		15,318			698	6.1			14,432			629	5.8
Total interest earning assets		306,990			17,467	7.6			291,789			16,114	7.4
Non-interest earning assets:
Cash and due from banks		8,963							9,184
Other assets		24,491							22,632
Less allowance for loan losses		(3,352	)						(3,138	)
Total assets	$	337,092						$	320,467
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest bearing liabilities:
Demand deposits	$	117,090			2,304	2.6	%	$	102,308			1,567	2.0	%
Savings deposits		29,141			105	0.5			29,636			84	0.4
Time deposits		102,763			3,317	4.3			95,983			2,701	3.8
Securities sold under agreements to    repurchase and federal funds    purchased		420			12	3.8			406			7	2.3
Other borrowings		5,820			243	5.6			11,181			362	4.3
Subordinated debentures		5,155			304	7.9			5,155			296	7.7
Total interest bearing liabilities		260,389			6,285	3.2			244,669			5,017	2.7
Non-interest bearing liabilities:
Demand deposits		40,517							42,277
Other		4,147							4,255
Common stock subject to    repurchase obligation		2,182							2,010
Shareholders' equity		29,857							27,256
Total liabilities and shareholders'    equity	$	337,092						$	320,467
Net interest income				$	11,182						$	11,097
Interest rate spread						4.4	%						4.7	%
Net yield on interest earning assets						4.9	%						5.1	%

(1)	Includes tax equivalent adjustment of interest (assuming a 34% tax rate) for securities and loans of $237,000 and $43,000, respectively, for 2007 and $214,000 and $14,000, respectively, for 2006.
(2)	Average balance includes average nonaccrual loan balances of $3,377,000 in 2007 and $2,780,000 in 2006.
(3)	Interest income includes loan fees of $262,000 in 2007 and $320,000 in 2006.
(4)	Average balance includes average unrealized loss of ($28,000) in 2007 and ($230,000) in 2006 on available for sale securities. The yield was calculated without regard to this average unrealized loss.

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Table 2 - Changes in Tax-Equivalent Net Interest Income

(Dollars in Thousands):

	Nine Months Ended September 30, 2007 Over 2006 Increase (Decrease) Due To
Interest income on:	Volume			Rate			Net
Loans	$	322		$	445		$	767
Federal funds sold		134			23			157
Taxable investment securities		203			157			360
Tax-exempt investment securities		40			29			69
Total interest earning assets	$	699		$	654		$	1,353
Interest expense on:
Demand deposits	$	248		$	489		$	737
Savings deposits		(1	)		22			21
Time deposits		200			416			616
Securities sold under agreements    to repurchase & federal funds    purchased		- -			5			5
Other borrowings		(205	)		86			(119	)
Subordinated debentures		-			8			8
Total interest bearing liabilities	$	242		$	1,026		$	1,268
Net interest income	$	457		$	(372	)	$	85

          As shown in Tables 1 and 2, tax-equivalent net interest income increased $85,000 in the first nine months of 2007 compared to the same period in 2006. A $5,438,000 increase in the average balances of loans and a 100 basis point increase in the prime rate that occurred from December 2005 through June 2006 increased interest income on loans by $767,000 for the nine months ended September 30, 2007, compared to the same period in 2006.

          Higher rates paid on NOW and money market accounts, along with an increase in average balances of $14,782,000, increased the demand deposit interest expense in the first nine months of 2007 by $737,000, compared to the same period in 2006. In addition, an increase in both the volume and rates paid on certificates of deposit caused an increase of $616,000 in time deposit interest expense for the first nine months of 2007 compared to the same period in 2006.

          The presentation of net interest income on a tax equivalent basis is not in accordance with generally accepted accounting principles ("GAAP"), but is customary in the banking industry. This non-GAAP measure ensures comparability of net interest income arising from both taxable and tax-exempt loans and investment securities. The adjustments to determine net interest income on a tax equivalent basis were $280,000 and $228,000 for the nine months ended September 30, 2007 and 2006, respectively. These adjustments were computed using a 34% federal income tax rate.

          Provision for Loan Losses

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

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          The provision for loan losses was $95,000 higher in the first nine months of 2007 compared to 2006 due to higher average commercial loan balances, higher net charge-offs and continued concerns over the Michigan economy. The allowance was 1.34% of total loans at September 30, 2007 compared to 1.31% at December 31, 2006.

          Charge-offs and recoveries for respective loan categories for the nine months ended September 30, 2007 and 2006 were as follows:

(Dollars in Thousands)

	2007				2006
	Charge-offs		Recoveries		Charge-offs		Recoveries
Commercial	$	158	$	62	$	107	$	26
Residential real estate		73		-		26		-
Consumer		163		79		59		37
Total	$	394	$	141	$	192	$	63

          Net charge-offs in the first nine months of 2007 were $253,000, or 0.13% of loans on an annualized basis. Net charge-offs in the first nine months of 2006 were $129,000, or 0.07% of loans on an annualized basis. Increases in consumer charge-offs occurred in 2007 due to increases in overdrawn checking and savings accounts that are charged off against the allowance for loan losses.

          Non-interest income

          Total non-interest income increased $30,000 or 2.9% in the third quarter of 2007 compared to the same period in 2006. Non-sufficient fund fees increased $11,000 and gain on sales of other real estate owned ("OREO") increased $37,000 for the third quarter of 2007 compared to 2006. Offsetting the increases was a reduction in the net gains on loan sales. Loans originated for sale declined $2 million, or 28.5% for the three-month period ended September 30, 2007 compared to the same period in 2006.

          Year-to-date total non-interest income for 2007 increased $115,000 or 3.9% over 2006. Non-sufficient fund fees increased $64,000 and gain on sales of OREO increased $53,000 for the nine-month period ended September 30, 2007 compared to the same period in 2006. Offsetting the increases was a year-to-date reduction in the net gains on loan sales. Loans originated for sale declined $5.9 million, or 29.8% in the first nine-month period of 2007, compared to the same period of 2006.

          Non-interest expense

          Total non-interest expense increased less than 1% for the three-month period ended September 30, 2007 compared to the same period in 2006. Salaries and benefits were $124,000 higher in the third quarter due to an increase in full time equivalent employees, annual salary adjustments, increased health insurance costs and an accrual for employee profit sharing. Additional employees were hired toward the end of 2006 to staff the new Marshall branch, which opened in February 2007. Occupancy increases are also attributable to the Marshall branch opening as higher depreciation, utilities, property taxes and maintenance costs are being recorded. Offsetting the increases was a decrease in pension expense due to the partial freezing of the plan in December 2006.

          Professional and outside services increased $81,000 or 67.5% during the third quarter of 2007 compared to the same period in 2006. Consulting services were used for implementation of new technology during the third quarter.

          Other non-interest expense decreased $223,000 or 29.2% during the third quarter of 2007 compared to the same period in 2006. A repossessed asset associated with a prior year failed commercial loan was written down and then sold at a loss during the third quarter of 2006.

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          For the nine-month period ended September 30, 2007, non-interest expense decreased $133,000, or 1.4% from the comparable period in 2006. Salary and employee benefits and occupancy expense both increased for the same reasons discussed above.

          In addition, other non-interest expense decreased $489,000 or 22.8% during the first nine months of 2007 compared to the same period in 2006. Losses from the repossessed asset discussed above and a loss relating to customer check fraud was recorded during the nine-month period ended September 30, 2006.

          Professional and outside services decreased $275,000 or 35.2% during the nine months ended September 30, 2007 compared to the same period in 2006. In 2006, legal fees were incurred relating to the Bank serving as indenture trustee for bondholders in the Alanar matter, which is discussed in Southern's Amendment No. 2 to Form S-4 Registration Statement filed with the Commission on September 28, 2007. During the fourth quarter of 2006, the Bank was removed as indenture trustee resulting in lower legal fees during 2007. In addition, during 2006, marketing consultants were utilized to enhance current deposit offerings.

          Federal income taxes

          The provision for federal income taxes for the three months ended September 30, 2007 and 2006 resulted in an effective tax rate of 26.2% and 27.7%, respectively. For the nine months ended September 30, 2007 and 2006, the provision for federal income taxes resulted in an effective tax rate of 26.7% and 27.2%, respectively. The changes in such rate primarily result from changes in tax exempt interest and other income.

          Financial Condition

          Total assets increased $21 million, or 6.4%, as of September 30, 2007 compared to December 31, 2006. The securities available for sale portfolio increased $20.7 million during the nine-month period ended September 30, 2007 as excess funds were invested.

          Premises and equipment increased $1.7 million, or 19.4%, as of September 30, 2007 compared to December 31, 2006. Final work was completed on the Marshall Branch, which opened in February 2007. In addition, property adjacent to the main office was acquired during the third quarter of 2007 to provide for continued expansion.

          Deposits increased 4%, or $11.3 million, from December 31, 2006 to September 30, 2007 primarily in money market accounts. In addition, securities sold under agreements to repurchase were offered to a large deposit customer, with balances at September 30, 2007 increasing $8.4 million. Both increases were due to normal fluctuations in customer cash flows.

          Total shareholders' equity increased $2.2 million from the year ended December 31, 2006. The increase is primarily attributable to the current year's net income, offset by dividends declared to shareholders.

          The following table summarizes Southern's capital ratios as of September 30, 2007 and December 31, 2006:

	September 30, 2007		December 31, 2006		Regulatory Minimums
Total risk-based capital ratio	14.8	%	14.1	%	8.0	%
Tier I capital ratio	13.5	%	12.9	%	4.0	%
Leverage ratio	10.9	%	10.8	%	4.0	%

          Contingent and Contractual Obligations

          At September 30, 2007, the Bank had no commitments under commercial letters of credit. The Bank had commitments under performance letter of credit agreements of $320,000 at September 30, 2007. Under standby letter of credit agreements, the Bank agrees to honor certain commitments in the event that its customers fail to do so. At September 30, 2007, commitments under outstanding standby letters of credit were $1,210,000. Loan commitments outstanding to extend credit totaled $47,098,000 at September 30, 2007.

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          Management does not anticipate any losses as a result of the above transactions; however, the above amounts represent the maximum exposure to credit loss for loan commitments and commercial, performance and standby letters of credit.

          Liquidity

          Liquidity management involves the ability to meet the cash flow requirements of customers who may be either depositors wanting to withdraw funds or borrowers needing assurance that sufficient funds will be available to meet their credit needs. The Bank maintains certain levels of liquid assets (the most liquid of which are cash and cash equivalents, federal funds sold and investment securities) in order to meet these demands. Maturing loans and investment securities are the principal sources of asset liquidity.

          The Bank maintains correspondent accounts with a number of other banks for various purposes. In addition, cash sufficient to meet the operating needs of its branches is maintained at its lowest practical levels. At times, the Bank is a participant in the federal funds market. Federal funds are generally borrowed or sold for one-day periods. The Bank has available credit arrangements enabling it to purchase up to $22,000,000 in federal funds should the need arise.

          Southern's principal source of funds to pay cash dividends is the earnings and dividends paid by the Bank. Southern also has a loan commitment from LaSalle Bank N.A. to lend Southern up to $10,000,000 to fund the acquisition of FNB and for general working capital purposes.

          Impact of Inflation and Changing Prices

          The majority of assets and liabilities of a financial institution are monetary in nature and therefore differ greatly from most commercial and industrial companies that have significant investments in fixed assets or inventories. However, inflation does have an important impact on the growth of total assets in the banking industry and the resulting need to increase equity capital at higher than normal rates in order to maintain an appropriate equity-to-assets ratio. Another significant effect of inflation is on other expenses, which tend to rise during periods of general inflation.

          Management believes the most significant impact on financial results is Southern's ability to react to changes in interest rates as discussed below.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

          Net interest income is the largest component of Southern's earnings. Net interest income is the difference between the yield on interest earning assets and the cost of interest bearing liabilities. 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.

          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 Southern's earnings and capital base. Accordingly, effective risk management that maintains interest rate risk at prudent levels is essential to Southern's safety and soundness.

          A number of tools are used to monitor and manage interest rate risk, including income simulation and market value of equity analyses. The income simulation model is used to estimate the effect that specific interest rate changes would have on net interest income assuming 1-3% up and down ramped changes to interest rates. Assumptions in the simulation are based on management's best estimates, and are inherently uncertain. As a result, the models cannot predict precisely the impact of higher or lower interest rates on net interest income. Based on the results of the simulation model as of September 30, 2007, the Bank would expect a maximum potential reduction in net interest income of 6.1% if market rates increased or decreased under a 300 basis point ramp over one year.

          The market value of equity analysis estimates the change in the market value of the Bank's equity using interest rate change scenarios from +3% to -3% in 1% increments. The following table illustrates the percent change in the Bank's equity based on changes in market interest rates:

	change in market value of equity
3% increase in market rates	-7.12	%
2% increase in market rates	-4.98	%
1% increase in market rates	-2.35	%
No change	0.00	%
1% decrease in market rates	1.71	%
2% decrease in market rates	3.13	%
3% decrease in market rates	4.84	%

The results of both simulations at September 30, 2007 are within the guidelines set and approved by Southern's Board of Directors.

Management does not believe that there has been a material change in the nature or categories of the primary market risk exposures, or the particular markets that present the primary risk of loss to the Bank. As of the date of this report, management does not know of or expect there to be any material change in the general nature of its primary market risk exposure in the near term. The methods by which the Bank manages its primary market risk exposures, as described above, have not changed materially since the end of 2006. As of the date of this report, management does not expect to make material changes in those methods in the near term. The Bank may change those methods in the future to adapt to changes in circumstances or to implement new techniques.

The Bank's market risk exposure is mainly comprised of its vulnerability to interest rate risk. Prevailing interest rates and interest rate relationships are primarily determined by market factors that are beyond the Bank's control. All information provided in response to this item consists of forward-looking statements. Reference is made to the section captioned "Forward-Looking Statements" for a discussion of the limitations on Southern's responsibility for such statements. In this discussion, "near term" means a period of one year following the date of the most recent balance sheet contained in this report.

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Item 4T. Controls and Procedures

          An evaluation was performed under the supervision and with the participation of Southern's management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of Southern's disclosure controls and procedures as of September 30, 2007. Based on and as of the time of that evaluation, Southern's management, including the Chief Executive Officer and Chief Financial Officer, concluded that Southern's disclosure controls and procedures were effective as of the end of the period covered by this report.

          There was no change in Southern's internal control over financial reporting that occurred during the three months ended September 30, 2007 that has materially affected, or that is reasonably likely to materially affect, Southern's internal control over financial reporting.

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Part II.  Other Information

Item 1A. Risk Factors

          Information concerning risk factors is contained in the section entitled "Risk Factors" in Southern Michigan Bancorp, Inc.'s Amendment No. 2 to Form S-4 Registration Statement, filed with the Securities and Exchange Commission on September 28, 2007. As of the date of this report, Southern does not believe that there has been a material change in the nature or categories of Southern's risk factors, as compared to the information disclosed in Southern's Registration Statement.

Item 6. Exhibits

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

Exhibit Number	Document
2	Agreement and Plan of Merger between Southern Michigan Bancorp, Inc. and FNB Financial Corporation, dated April 17, 2007. Previously filed as Exhibit 2 to Southern Michigan Bancorp, Inc.'s Amendment No. 2 to Form S-4 Registration Statement with the Commission on September 28, 2007. Incorporated herein by reference.
3.1	Articles of Incorporation of Southern Michigan Bancorp, Inc., as amended. Previously filed as Exhibit 3.1 to Southern Michigan Bancorp, Inc.'s Amendment No. 2 to Form S-4 Registration Statement with the Commission on September 28, 2007. Incorporated herein by reference.
3.2	Amended and Restated Bylaws of Southern Michigan Bancorp, Inc., as amended. Previously filed as Exhibit 3.2 to Southern Michigan Bancorp, Inc.'s Amendment No. 2 to Form S-4 Registration Statement with the Commission on September 28, 2007. Incorporated herein by reference.
4.1	Selected provisions of Articles of Incorporation of Southern Michigan Bancorp, Inc., as amended. Previously filed as Exhibit 4.1 to Southern Michigan Bancorp, Inc.'s Amendment No. 2 to Form S-4 Registration Statement with the Commission on September 28, 2007. Incorporated herein by reference.
4.2	Selected provisions of Amended and Restated Bylaws of Southern Michigan Bancorp, Inc., as amended. Previously filed as Exhibit 4.2 to Southern Michigan Bancorp, Inc.'s Amendment No. 2 to Form S-4 Registration Statement with the Commission on September 28, 2007. Incorporated herein by reference.
31.1	Certification of Chairman of the Board and Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Senior Vice President, Chief Financial Officer, Secretary and Treasurer under Section 302 of the Sarbanes-Oxley Act of 2002.
32	Certification pursuant to 18 U.S.C. § 1350.

18

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	SOUTHERN MICHIGAN BANCORP, INC.
Date:  November 26, 2007	By: /s/ John H. Castle
	John H. Castle       Chairman of the Board and Chief Executive Officer       (Principal Executive Officer)
Date:  November 26, 2007	By: /s/ Danice L. Chartrand
	Danice L. Chartrand       Senior Vice President, Chief Financial       Officer, Secretary and Treasurer       (Principal Financial and Accounting Officer)

19

Exhibit Index

Exhibit Number	Document
2	Agreement and Plan of Merger between Southern Michigan Bancorp, Inc. and FNB Financial Corporation, dated April 17, 2007. Previously filed as Exhibit 2 to Southern Michigan Bancorp, Inc.'s Amendment No. 2 to Form S-4 Registration Statement with the Commission on September 28, 2007. Incorporated herein by reference.
3.1	Articles of Incorporation of Southern Michigan Bancorp, Inc., as amended. Previously filed as Exhibit 3.1 to Southern Michigan Bancorp, Inc.'s Amendment No. 2 to Form S-4 Registration Statement with the Commission on September 28, 2007. Incorporated herein by reference.
3.2	Amended and Restated Bylaws of Southern Michigan Bancorp, Inc., as amended. Previously filed as Exhibit 3.2 to Southern Michigan Bancorp, Inc.'s Amendment No. 2 to Form S-4 Registration Statement with the Commission on September 28, 2007. Incorporated herein by reference.
4.1	Selected provisions of Articles of Incorporation of Southern Michigan Bancorp, Inc., as amended. Previously filed as Exhibit 4.1 to Southern Michigan Bancorp, Inc.'s Amendment No. 2 to Form S-4 Registration Statement with the Commission on September 28, 2007. Incorporated herein by reference.
4.2	Selected provisions of Amended and Restated Bylaws of Southern Michigan Bancorp, Inc., as amended. Previously filed as Exhibit 4.2 to Southern Michigan Bancorp, Inc.'s Amendment No. 2 to Form S-4 Registration Statement with the Commission on September 28, 2007. Incorporated herein by reference.
31.1	Certification of Chairman of the Board and Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Senior Vice President, Chief Financial Officer, Secretary and Treasurer under Section 302 of the Sarbanes-Oxley Act of 2002.
32	Certification pursuant to 18 U.S.C. § 1350.

EX-31.1

Exhibit 31.1

Certification

I, John H. Castle, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Southern Michigan Bancorp, Inc. for the fiscal quarter ended September 30, 2007;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)	Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c)	Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date:  November 26, 2007
	/s/ John H. Castle
	John H. Castle Chairman of the Board and Chief Executive Officer Southern Michigan Bancorp, Inc.

EX-31.2

Exhibit 31.2

Certification

I, Danice L. Chartrand, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Southern Michigan Bancorp, Inc. for the fiscal quarter ended September 30, 2007;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)	Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c)	Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: November 26, 2007
	/s/ Danice L. Chartrand
	Danice L. Chartrand Senior Vice President, Chief Financial Officer, Secretary and Treasurer Southern Michigan Bancorp, Inc.

EX-32

Exhibit 32

Certification

Pursuant to 18 U.S.C. § 1350, each of the undersigned hereby certifies in his or her capacity as an officer of Southern Michigan Bancorp, Inc. (the "Company") that the Quarterly Report of the Company on Form 10-Q for the quarter ended September 30, 2007 fully complies with the requirements of Section 15(d) of the Securities Exchange Act of 1934, as amended, and that the information contained in such report fairly presents, in all material respects, the financial condition of the Company at the end of such period and the results of operations of the Company for such period.

Dated:  November 26, 2007	/s/ John H. Castle
	John H. Castle Chairman of the Board and Chief Executive Officer
Dated:  November 26, 2007	/s/ Danice L. Chartrand
	Danice L. Chartrand Senior Vice President, Chief Financial Officer, Secretary and Treasurer

A signed original of this written statement required by Section 906 has been provided to Southern Michigan Bancorp, Inc. and will be retained by Southern Michigan Bancorp, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.