703699--3/28/2008--SOUTHERN_MICHIGAN_BANCORP

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{stock, price, share}

{loan, real, estate}

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{financial, litigation, operation}

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{cost, regulation, environmental}

Risks Associated with Southern Common Stock There is not an active public trading market for Southern common stock. Southern's ability to pay dividends is limited and Southern may be unable to pay future dividends. Southern may issue additional shares of its common stock in the future, which would dilute a shareholder's ownership of Southern common stock if the shareholder did not, or was not permitted to, invest in the additional issuances. Southern may issue debt and equity securities that are senior to Southern common stock as to distributions and in liquidation, which could negatively affect the value of Southern common stock. Unless a shareholder obtains prior consent from Southern, the shareholder will not be permitted to transfer to another party the shareholder's shares of Southern common stock if the party who would receive the shares would own of record fewer than 100 shares of Southern common stock. Risks Related to Southern's Business The integration of FNB Financial Corporation into Southern may be more difficult, costly, or time-consuming than we expect. If Southern's allowance for loan losses is not sufficient to cover actual loan losses, Southern's earnings could decrease. Losses on loans acquired as a result of the merger could result in a decrease in Southern's earnings. Southern's loan portfolio includes a substantial percentage of commercial and industrial loans, which may be subject to greater risks than those related to residential loans. Prepayments of loans may negatively impact Southern's business. Changes in interest rates may negatively affect Southern's earnings and the value of its assets. Loss of Southern's Chief Executive Officer or other executive officers could adversely affect its business. Southern's continued growth may require it to raise additional capital in the future, but that capital might not be available on acceptable terms when it is needed. Southern's business is subject to the success of the local economies where it operates. Southern's recent operating results may not be indicative of its future operating results. Competition from competing financial institutions and other financial service providers may adversely affect Southern's profitability. Compliance with the Securities Exchange Act of 1934 may adversely effect Southern's earnings. Southern is subject to extensive regulation that could limit or restrict its activities. Future claims could be made against Southern or Southern Michigan Bank related to their relationship with Alanar, Inc. and its affiliates. If Southern is required to write down goodwill, its financial condition and results of operations would be negatively affected. Environmental liability associated with commercial lending could result in losses. Attractive acquisition opportunities may not be available to Southern in the future, which may negatively impact Southern's ability to grow its business and effectively compete in existing and new markets. Southern may face risks with respect to future expansion and acquisitions or mergers, which include substantial acquisition costs, an inability to effectively integrate an acquired business into Southern's operations, lower than anticipated profit levels, and economic dilution to shareholders.

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703699--3/28/2008--SOUTHERN_MICHIGAN_BANCORP_INC