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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement.
[ ] CONFIDENTIAL, FOR USE OF THE COMMISSION ONLY (AS PERMITTED BY
RULE 14a-6(e)(2)).
[X] Definitive Proxy Statement.
[ ] Definitive Additional Materials.
[ ] Soliciting Material Pursuant to Section 240.14a-12
SOUTHERN MICHIGAN BANCORP, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
1) Title of each class of securities to which transaction applies:
- --------------------------------------------------------------------------------
2) Aggregate number of securities to which transaction applies:
- --------------------------------------------------------------------------------
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
- --------------------------------------------------------------------------------
4) Proposed maximum aggregate value of transaction:
- --------------------------------------------------------------------------------
5) Total fee paid:
- --------------------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
- --------------------------------------------------------------------------------
2) Form, Schedule or Registration Statement No.:
- --------------------------------------------------------------------------------
3) Filing Party:
- --------------------------------------------------------------------------------
4) Date Filed:
- --------------------------------------------------------------------------------
PERSONS WHO POTENTIALLY ARE TO RESPOND TO THE COLLECTION OF INFORMATION
CONTAINED IN THIS FORM ARE NOT REQUIRED TO RESPOND UNLESS THE FORM DISPLAYS A
CURRENTLY VALID OMB CONTROL NUMBER.
SEC 1913 (02-02)
SOUTHERN MICHIGAN BANCORP, INC.
51 West Pearl Street
Coldwater, Michigan 49036
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To Our Shareholders:
The Annual Meeting of Shareholders of Southern Michigan Bancorp, Inc.
will be held on Monday, April 21, 2003 at the Dearth Community Center, at the
Fairgrounds, in Coldwater, Michigan at 4:00 p.m. for the purpose of considering
and voting on the following matters:
(1) Election of three (3) directors to serve for a three year
period ending with the annual meeting of shareholders
following the year ended December 31, 2005.
(2) Ratification of the selection of Crowe, Chizek and Company LLP
as Independent Auditors for 2003.
(3) Transact such other business as may properly come before the
meeting or any adjournments thereof.
Shareholders of record at the close of business on February 28, 2003
are entitled to notice of and to vote at the Annual Meeting.
It is important that your shares be represented at the meeting. We urge
you to sign and return the enclosed proxy as promptly as possible, whether or
not you plan to attend the meeting in person. If you do attend the meeting, you
may revoke your proxy and vote in person.
By Order of the Board of Directors
/s/ John H. Castle
---------------------------------------
John H. Castle
Chairman
Date: March 10, 2003
SOUTHERN MICHIGAN BANCORP, INC.
51 West Pearl Street
Coldwater, Michigan 49036
PROXY STATEMENT
GENERAL INFORMATION
This Proxy Statement is furnished in connection with the solicitation
of proxies on behalf of the Board of Directors of Southern Michigan Bancorp,
Inc., a Michigan corporation (the "Company"), to be voted at the Annual Meeting
of Shareholders of the Company to be held on Monday, April 21, 2003 at 4:00 p.m.
at the Dearth Community Center, located at the Fairgrounds, in Coldwater,
Michigan (the "Annual Meeting"), or any adjournment thereof, for the purposes
set forth in the accompanying Notice of Annual Meeting of Shareholders.
The costs of soliciting proxies will be paid by the Company. Proxies
may be solicited by mail, in person or by telephone by directors, officers and
regular employees of the Company. These persons will not be specially
compensated for soliciting proxies. The Company will request brokerage houses
and other custodians, nominees and fiduciaries to forward materials to
beneficial owners of shares of the Company held of record by such persons and
will reimburse them for their reasonable charges and out-of-pocket expenses in
connection therewith. This Proxy Statement and accompanying proxy card were
first sent or given to shareholders on March 10, 2003.
As of February 28, 2003, the record date for the Annual Meeting, there
were 1,849,430 shares of common stock of the Company, par value $2.50 per share
(the "Common Stock"), issued and outstanding. Each outstanding share is entitled
to one (1) vote on each matter submitted to a vote at the Annual Meeting. The
transaction of business at the Annual Meeting requires the presence of a quorum,
which will be established by the presence or representation at the Annual
Meeting of shares of the Company entitled to cast a majority of the votes at the
meeting. Directors will be elected by a plurality of the votes cast, whether in
person or by proxy, by holders of the Common Stock entitled to vote at the
Annual Meeting (see "Proposal (1) - Election of Directors"). The affirmative
vote of a majority of the outstanding shares entitled to vote at the Annual
Meeting is necessary to approve Proposal (2). Shares as to which authority is
withheld in the election of directors, abstentions and broker non-votes will be
counted for purposes of determining the presence of a quorum. Since they are not
votes cast, shares as to which authority is withheld will have no effect on the
election of directors. Abstentions and broker non-votes will have the same
effect as votes against Proposal (2).
Proxies are revocable by the delivery of written notice of revocation
to the Secretary of the Company at any time before the proxy is exercised. The
signing of a proxy does not preclude a shareholder from attending the Annual
Meeting and voting in person. All proxies returned before the Annual Meeting
will be voted in accordance with the instructions contained therein. If the
proxy is not marked with the shareholder's instructions as to voting, the shares
to which the proxy relates will be voted for the nominees for director named in
this Proxy
1
Statement, for Proposal (2) and in the discretion of the proxies on any other
business as may properly come before the Annual Meeting. All shareholders are
encouraged to mark, date and sign the enclosed proxy card and return it to
Registrar and Transfer Company, the transfer agent for the Company's stock.
Principal Shareholders
The following table sets forth, as of February 14, 2003, 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:
NAME AND ADDRESS OF AMOUNT AND NATURE OF PERCENT OF
TITLE OF CLASS BENEFICIAL OWNER BENEFICIALOWNERSHIP(1) CLASS
--------------------------------------------------------------------------------------------------------------
Common Stock Southern Michigan Bank & Trust 105,164(a) 5.7%
51 West Pearl Street
Coldwater, MI 49036
Common Stock Harvey B. Randall 146,181(b) 7.9%
8391 Old U.S. 27 South
Marshall, MI 49068
(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) Southern Michigan Bank & Trust, a wholly owned
subsidiary of the Company (the "Bank") holds the
shares described above in various fiduciary
capacities. As a matter of internal policy, the Bank
does not exercise any power to dispose or direct the
disposition of such shares and requires authority
from its customers prior to any disposition. Certain
customers on whose behalf the Bank holds the
securities have the sole right to receive and the
power to direct the receipt of dividends from, or
proceeds from the sale, of such shares. No single
customer has an interest that relates to 5% or more
of such shares. The Bank is also the trustee of an
ESOP/401-K Plan for its employees which holds 101,781
shares of the Company's stock. Except for 10,115
unallocated shares which were included in the table
above, the Bank holds no power to vote or direct the
disposition of such shares and the Bank disclaims
beneficial ownership of such shares.
(b) Includes 146,122 shares held by Mr. Randall as
trustee.
PROPOSAL (1) - ELECTION OF DIRECTORS
The Company's Board of Directors is currently composed of ten directors
who are divided into three classes. One class is elected each year for a three
year term. Three directors are proposed to be elected at the Annual Meeting to
serve for a three year term ending with the annual meeting of shareholders
following the year ended December 31, 2005. All of the nominees are currently
serving as directors. If any of the nominees are unable or unwilling to serve as
a director, it is intended that the proxies will be voted for the election of
the person nominated by the Board of Directors in substitution. The Company has
no reason to believe that any nominee of the Board of Directors will be unable
to serve as a director if elected.
2
The following table lists the names of the nominees and the other
current directors and their ages as of February 28, 2003, their principal
occupations and the year in which each became a director.
YEAR FIRST BECAME
PRINCIPAL OCCUPATION(S) FOR A DIRECTOR OF THE
NAME OF DIRECTOR AGE PAST 5 YEARS(1) COMPANY
---------------------------------------------------------------------------------------------------------------
Nominees of the Board of Directors for Election at the Annual Meeting:
Gregory J. Hull 54 Farmer 1995
Freeman E. Riddle 70 Owner - Spoor & Parlin, Inc. (farm 1982
equipment)
Thomas E. Kolassa 55 Partner - Burnham Insurance Group 1995
Directors Whose Terms Continue until the 2004 Annual Meeting:
H. Kenneth Cole 54 Treasurer - Hillsdale College 1998
William E. Galliers 60 Co-Owner and Chief Executive Officer - G & 1993
W Display Fixtures, Inc. (manufacturer of
display fixtures)
Kurt G. Miller (1) 47 President of the Company and the Bank 2002
since July 2002; VP Commercial Loans -
Sturgis Bank & Trust 2000 - 2002;
Investment Representative - Edward Jones
1999-2000; Senior VP - Century Bank and
Trust 1996 - 1999
Directors Whose Terms Continue until the 2005 Annual Meeting:
James P. Briskey 69 Owner - Pittsford Grain Incorporated 1982
(grain elevator operator)
John H. Castle (1) 45 Chairman of the Board of the Company and 2002
the Bank; Chief Executive Officer of the
Company and the Bank from July 2002;
Senior VP & Senior Trust Officer Century
Bank & Trust 1991-2002
Nolan E. Hooker 51 Owner - Hooker Oil Co.; Co-Owner - Best 1991
American Car Washes
Marcia S. Albright 38 VP of Engineering - Tekonsha Towing 2002
Systems, Inc.
(1) Messrs. Castle and Miller along with Jaylen Johnson and Danice
Chartrand are the only executive officers of the Company. Mr. Johnson,
age 50, is Executive Vice-President, Chief Operating Officer, and
Secretary of the Company and has held such positions since December,
2000. Mr. Johnson was a senior vice president of the Company from 1998
to 2000 and was a Vice President and cashier of the Bank from 1991 to
1998. Mr. Johnson joined the Bank in 1975. Mrs. Chartrand, age 36, is
Chief Financial Officer of the Company and has held such position since
January 1, 2003. Mrs. Chartrand was Controller of the Company from 1999
to 2002. Mrs. Chartrand was controller of HTC Global Services from 1996
- 1999. The executive officers are elected annually and serve at the
pleasure of the Board of Directors.
3
The following table sets forth, as of February 14, 2003, 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.
NAME OF BENEFICIAL OWNER OR AMOUNT AND NATURE OF TOTAL PERCENT OF
NUMBER OF PERSONS IN GROUP BENEFICIAL OWNERSHIP(1) CLASS
------------------------------------------- ----------------------------------- ---------------- --------------
Marcia S. Albright 155 (a) 155 (2)
James P. Briskey 14,178 28,357 1.53%
14,179 (a)
John H. Castle 5,000 (3) 5,162 (2)
162 (b)
H. Kenneth Cole 396 396 (2)
William E. Galliers 4,312 (a) 4,312 (2)
Nolan E. Hooker 1,606 (a) 1,758 (2)
152
Gregory J. Hull 1,903 (a) 1,903 (2)
Thomas E. Kolassa 2,337 (a) 2,337 (2)
Kurt G. Miller 1,812 (3) 1,812 (2)
Freeman E. Riddle 4,854 7,300 (2)
2,446 (a)
All directors and executive 58,843 58,843 3.18%
officers as a group (12 persons)
(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) Shares indicated are held as custodian.
(2) Less than one percent (1%).
(3) Messrs. Castle and Miller are executive officers of the
Company.
4
Change in Control of Registrant
The Company is not aware of any arrangements which may result in a
change in control of the Company.
Meetings, Committees and Compensation of the Board of Directors
The Board of Directors of the Company held twelve (12) meetings during
2002. Except for director Morrison, all directors attended at least 75 percent
(75%) of the aggregate of the total number of meetings of the Board of Directors
and the total number of meetings held by all standing committees of the Board on
which they serve.
The Company's Board of Directors has an Audit Committee which held five
(5) meetings during 2002. During 2002, the committee was comprised of Messrs.
Cole, Hull, Hooker and Mrs. Albright. The Audit Committee determines whether
adequate internal controls are being maintained. It meets with the Company's
independent auditors to review internal controls, procedures of the Company and
the Bank, the scope of internal audits, the financial position of the Company
and external audits of the Company.
The Company's Board of Directors has a Compensation Committee which
held two (2) meetings during 2002. The Committee is comprised of Messrs. Cole,
Briskey and Hooker. The Compensation Committee is responsible for setting and
administering the policies which govern annual compensation and incentive
programs. In addition, from time to time, it reviews all executive compensation
and benefit programs available to executive officers of the Company and to all
officers and staff of the Bank. In this respect, the Committee makes
recommendations to the Board of Directors with respect to the Compensation of
the Chief Executive Officer, as well as reviewing and approving the Chief
Executive Officer's recommendations for other officers of the Company.
The Company's Board of Directors has an Executive Committee which held
two (2) meetings during 2002. The Committee is comprised of Messrs. Briskey,
Castle, Cole, Galliers and Hull. The Executive Committee reviews major policy
changes, evaluates the performance of the Chief Executive Officer and reviews
any merger or expansion plans. The Executive Committee also reviews any
executive officer promotions and acts as the nominating committee for future
members of the Board of Directors.
The Executive Committee, acting as the nominating committee, will
consider nominees recommended by shareholders of the Company. The Company's
Bylaws establish a procedure with regard to nominations, other than by or at the
direction of the Board of Directors of the Company, of candidates for election
as directors (the "Notice Procedure"). The Notice Procedure provides that only
such persons who are nominated by the Board of Directors or by a shareholder who
has given timely written notice to the Secretary of the Company prior to the
meeting at which directors are to be elected will be eligible for election, as
the case may be, at the Annual Meeting. To timely nominate an individual under
the Notice Procedure, a shareholder must deliver notice to the Secretary of the
Company not less than thirty (30) days,
5
but no more than ninety (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. To be timely for consideration at the
Annual Meeting, notice of shareholder proposals and/or shareholder nominations
must have been received by January 29, 2003. The Secretary has not received any
such notice. Nominees proposed by a shareholder for which written proxy
solicitation by the Board of Directors is sought shall be made in writing and
shall be delivered to the Chairman or the Secretary of the Company by December
31 of the year preceding the year in which the nomination is proposed. Under the
Notice Procedure, notice to the Company from a shareholder who proposes to
nominate a person at an annual meeting for election as a director must contain
such nominee's name, occupation, age, business and residential address and
beneficial ownership interest in the Company, together with evidence of such
person's willingness to serve as a director if elected. Such notice must also be
accompanied by a completed Director Qualification, Eligibility and Disclosure
Questionnaire and evidence that the proposed nominee is eligible to serve as a
director, all as required by, and in accordance with the Company's Bylaws.
Currently, each director of the Company whose principal occupation is
not with the Company or the Bank receives an annual fee of $6,709 which will be
indexed for inflation in 2003. In addition, outside directors are compensated
$153 for each committee meeting attended which will also be indexed for
inflation in 2003. Outside directors also participate in a bonus program based
upon the achievement of growth and profitability goals. There were no bonus
payments for 2002. The directors are eligible to receive stock options under the
Southern Michigan Bancorp, Inc. 2000 Stock Option Plan. In 2002 no stock options
were granted.
Audit Committee Report, Charter, and Independence
Audit Committee Report.
The Audit Committee reports as follows with respect to the Company's
audited financial statements for the year ended December 31, 2002 (the
"Consolidated Financial Statements"): (i) the Audit Committee has reviewed and
discussed the Consolidated Financial Statements with the Company's management;
(ii) the Audit Committee has discussed with its independent auditors (Crowe,
Chizek and Company LLP) the matters required to be discussed by Statement on
Auditing Standards 61, as modified or supplemented, which include, among other
items, matters related to the conduct of the audit of the Consolidated Financial
Statements; (iii) the Audit Committee has received written disclosures and the
letter from the independent auditors required by Independence Standards Board
Standard No. 1 (which relates to the auditor's independence from the Company and
its related entities), as modified or supplemented, and has discussed with the
auditors their independence from the Company; and (iv) based on the review and
discussions referred to above, the Audit Committee recommended to the Board of
Directors that the Consolidated Financial Statements be included in the
Company's Annual Report on Form 10-K for the year ended December 31, 2002 for
filing with the Securities and Exchange Commission.
RESPECTFULLY SUBMITTED BY THE MEMBERS OF THE AUDIT COMMITTEE:
Marcia Albright, H. Kenneth Cole, Nolan E. Hooker & Gregory J. Hull.
6
Audit Committee Charter.
The Board of Directors has adopted a written charter for the Audit
Committee, a copy of which is attached hereto as Annex A. The Board of Directors
reviews and approves changes to the Audit Committee Charter annually.
Independence of Audit Committee Members.
During 2002, the Company's Audit Committee was comprised of Messrs.
Cole, Hull, Hooker and Mrs. Albright. Each of these members meets the
requirements for independence as defined in Rule 4200(a)(15) of the National
Association of Securities Dealers' listing standards.
Executive Compensation
The following table shows the total compensation received by the
Company's Chief Executive Officers for the last three fiscal years. No executive
officer of the Company, other than the Chief Executive Officers listed below,
received total annual salary and bonus in excess of $100,000 during the last
fiscal year.
SUMMARY COMPENSATION TABLE
LONG TERM
ANNUAL COMPENSATION COMPENSATION
------------------- ------------
NAME AND SECURITIES
PRINCIPAL OTHER ANNUAL UNDERLYING ALL OTHER
POSITION YEAR SALARY (1) BONUS COMPENSATION OPTIONS COMPENSATION
-------- ---- ---------- ----- ------------ ------- ------------
James T. Grohalski 2002 $167,000 $0 $0 0 $ 31,286(2)
Chief Financial Officer; 2001 $163,000 $0 $0 2,440 $ 28,713
President and Chief Executive 2000 $161,665 $0 $0 0 $ 7,844
Officer of the Company and the
Bank (through June 2002)
John H. Castle 2002 $75,000 $0 $0 0 $ 145(3)
Chief Executive Officer of the
Company and the Bank (July 2002 -
December)
(1) The amounts shown include amounts deferred under the 401(k) provisions
of the ESOP and the Bank's executives' deferred compensation
agreements.
(2) The amounts shown include the following for 2002 for Mr. Grohalski: (i)
$15,311 above market rate interest paid in deferred compensation plan;
(ii) $8,499 above market rate interest paid in supplemental retirement
plan; (iii) employer contributions to accounts in the ESOP and the
Deferred Compensation Plan (as defined herein) of $4,200 and $3,000
respectively; and (iv) $276 constituting the value of insurance
premiums paid by the Bank for term life insurance for Mr. Grohalski's
benefit.
(3) Represents the value of insurance premiums paid by the Bank for term
life insurance for Mr. Castle's benefit.
Option Grant Table. There were no options granted in fiscal year 2002.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End
Option Values. The following table provides information on the value of options
held by the Chief Executive
7
Officer of the Company at December 31, 2002. There were no options exercised by
an officer during the fiscal year ended December 31, 2002.
NUMBER OF SECURITIES
SHARES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
ACQUIRED VALUE REALIZED OPTIONS AT IN-THE-MONEY OPTIONS AT
ON EXERCISE (#) ($) DECEMBER 31, 2002 (#) DECEMBER 31, 2002 ($)
--------------- -------------- --------------------- ---------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
James T. Grohalski -0- $0 -0- 2,440 $0 $248.00
John H. Castle -0- $0 -0- -0- $0 $0
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 on a
straight-life annuity basis upon retirement at age 65 and are not subject to
deduction for social security benefits:
PENSION PLAN TABLE
YEARS OF SERVICE
-------------------------------------------------------------
REMUNERATION 25 30 35
- -------------------------- ----------------- --------------------- ---------------------
$130,000 $37,900 $45,500 $45,500
$140,000 $40,800 $49,000 $49,000
$150,000 $43,750 $52,500 $52,500
$160,000 $46,650 $56,000 $56,000
John H. Castle is not eligible for benefits under the pension plan as
he has not completed one full year with the Bank. James T. Grohalski has 35
years of credited service and $153,200 current covered remuneration. The Bank
also had in effect a supplemental retirement arrangement in the form of an
Executive Employee Salary Continuation Agreement with Mr. Grohalski 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. 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
8
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. On December 31, 2002 Mr.
Grohalski retired at age 62. The benefit to which he is entitled is $17,341 per
year for 15 years.
The Bank and Mr. Castle executed a deferred compensation agreement.
Under the agreement, Mr. Castle elects to defer a portion of his compensation on
a pretax basis. Upon retirement at or after age 62, Mr. Castle or his designated
beneficiary is entitled to a benefit equal to the amount of his deferrals plus
earnings on such deferrals at a specified rate of interest compounded annually,
payable in 180 equal monthly amounts. Upon termination of Mr. Castle's
employment with the Bank prior to age 62 (for reasons other than Mr. Castle's
death or disability), Mr. Castle is entitled to the amount of his deferrals plus
earnings on such deferrals as of the date of termination, payable in a lump sum
within 90 days after Mr. Castle's date of termination. Upon termination of Mr.
Castle's employment prior to age 62 as a result of Mr. Castle's disability, Mr.
Castle is entitled to a benefit in an amount equal to what his deferrals plus
earnings on such deferrals would have been if Mr. Castle's termination date was
at age 65, payable in 180 equal monthly amounts. Upon Mr. Castle's death during
the period of Mr. Castle's employment with the Bank, Mr. Castle's beneficiaries
are entitled to the greater of (i) the amount of Mr. Castle's deferrals plus
earnings on such deferrals or (ii) a benefit equal to $4,165.08 per month for
180 months. The Bank has purchased insurance to fund the death benefit payable
to Mr. Castle under the agreement. The amounts shown in the summary compensation
table above include amounts deferred by Mr. Castle as contributions under the
agreement.
The Bank and Mr. Grohalski executed a deferred compensation agreement.
Under the agreement, Mr. Grohalski elected to defer a portion of his
compensation on a pretax basis payable upon retirement. The amounts shown in the
summary compensation table above include amounts deferred by Mr. Grohalski as
contributions under the agreement. Mr. Grohalski retired on December 31, 2002.
Employment Agreements.
The Company and the Bank executed an employment agreement with Mr.
Grohalski whereby Mr. Grohalski served as the President and Chief Executive
Officer of the Company and the Bank. The agreement was for a term of one year
and was renewable by mutual agreement of the Company, the Bank and Mr.
Grohalski. Mr. Grohalski retired on December 31, 2002 and his employment
agreement terminated on such date. For the fiscal year ending on December 31,
2002, Mr. Grohalski's annual salary was $167,000, plus such additional or
special compensation based upon his performance as the Company's Board of
Directors, in its discretion, may from time to time determine. The agreement
also provided that during the term thereof, and for a period of one year
following the termination of employment, Mr. Grohalski would not compete in the
financial services industry within a geographic radius of 75 miles from
Coldwater, Michigan. Mr. Grohalski retired on December 31, 2002.
The Company executed an employment agreement with Mr. Castle whereby
Mr. Castle will serve as the Chief Executive Officer of the Company and the Bank
that will expire on
9
December 31, 2004. Commencing June 2, 2002, Mr. Castle's annual salary will be
$150,000 plus such additional or special compensation based upon his
performance, pursuant to the terms of a bonus plan to be adopted by the Company.
If Mr. Castle is terminated as a result of Mr. Castle's death or disability or
by the Company for cause prior to a change in control, Mr. Castle will receive
his compensation through the date of his death, disability or termination. In
the event Mr. Castle's employment is terminated by the Company without cause
prior to a change in control he will be entitled to receive his compensation
until the later of December 31, 2004 or one year after such termination date. In
the event that following a change in control, Mr. Castle's employment is
terminated by him for good reason or by the Company without cause, he will be
entitled to 2.99 times his compensation. In the event any payments under the
agreement to Mr. Castle result in an "Excess Parachute Payment" under Section
280G under the Internal Revenue Code, then such amount shall be reduced so that
such amount will not trigger the excise tax imposed under Section 4999 of the
Internal Revenue Code. The agreement also provides that during the term thereof,
and for a period of one year following the termination of employment (unless
such termination occurs in connection with a change in control), Mr. Castle will
not compete in the financial services industry within Branch county and
surrounding counties.
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.
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.
10
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. 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. No options were granted in 2002.
Chief Executive Officer Compensation.
The Compensation Committee established Mr. Castle's and 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.
Castle and Mr. Grohalski as a percent of revenue and net income to comparable
companies in the industry, the Compensation Committee believes their overall
compensation level is in the middle of the range.
RESPECTFULLY SUBMITTED BY THE MEMBERS OF THE COMPENSATION COMMITTEE:
James P. Briskey, H. Kenneth Cole and Nolan E. Hooker.
Compensation Committee Interlocks and Insider Participation
The Compensation Committee of the Board of Directors during the last
fiscal year consisted of James P. Briskey, H. Kenneth Cole, James J. Morrison,
Thomas E. Kolassa and Nolan E. Hooker. Messrs. Briskey, Cole, Morrison, Kolassa
and Hooker were not at any time during fiscal year 2002, or at any other time,
an officer or employee of the Company. During fiscal year 2002, no member of the
Compensation Committee was an executive officer of another entity on whose
compensation committee or board of directors an executive officer of the Company
served.
Transactions with Directors and Officers
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 2002. 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.
11
PROPOSAL (2) - RATIFICATION OF INDEPENDENT AUDITORS
The firm of Crowe, Chizek and Company LLP conducted an independent
audit of the consolidated financial statements of the Company for the year ended
December 31, 2002. Upon the recommendation of the Audit Committee, the Board of
Directors has selected Crowe, Chizek and Company LLP to act as the Company's
independent auditors for 2003.
This selection is being submitted to shareholders for ratification.
While such ratification is not required, the Company believes it is an important
corporate decision in which shareholders should participate. If the selection is
not ratified, the Board of Directors may, nevertheless, choose to retain Crowe,
Chizek and Company LLP as auditors for 2003.
Audit Fees. The aggregate fees billed by Crowe, Chizek and Company LLP
for professional services rendered for the audit (including fees relating to
annual report on Form 10-K and quarterly reports on Form 10-Q) of the Company's
financial statements for the year ended December 31, 2002 were $40,500.
Financial Information Systems Design and Implementation. Crowe, Chizek
and Company LLP did not provide any professional services described in Paragraph
(c)(4)(ii) of Rule 2-01 of Regulation S-X (relating to financial information
systems design and implementation) for the year ended December 31, 2002.
All Other Fees. The aggregate fees billed for services rendered by
Crowe, Chizek and Company LLP, other than services included above under the
captions "Audit Fees" and "Financial Information Systems Design and
Implementation" for the year ended December 31, 2002, were as follows:
AUDIT RELATED SERVICES:
- Consulting services related to taxes: $618.
- Consulting services related to allowance for loan losses
methodology, accounting treatment for viatical insurance
investments, accounting for trust conflict of interest
judgement and assistance with disclosure in quarterly press
releases: $4,875.
NON-AUDIT SERVICES:
- Outsourced internal audit services: $46,337.
- Preparation of state and federal tax returns: $3,950.
- Sarbanes-Oxley Act consulting: $14,767.
- Services related to web-site maintenance and support: $5,000.
- Services related to marketing and support services: $5,000.
The Audit Committee of the Company believes the services provided by
Crowe, Chizek and Company LLP in exchange for the fees set forth above and under
the caption "Audit Related Services" and "Non-Audit Related Services" are
compatible with maintaining Crowe, Chizek and Company LLP's independence. All of
the hours expended on Crowe, Chizek and Company
12
LLP's engagement to audit the Company's financial statements for the year ended
December 31, 2002 were performed by full-time permanent employees of Crowe,
Chizek and Company LLP.
A representative of Crowe, Chizek and Company LLP is expected to be
present at the Annual Meeting to respond to appropriate questions from
shareholders and to make any comments deemed appropriate. THE BOARD OF DIRECTORS
RECOMMENDS THAT SHAREHOLDERS VOTE FOR RATIFICATION OF THE SELECTION OF CROWE,
CHIZEK AND COMPANY LLP AS INDEPENDENT AUDITORS FOR 2003.
STOCK PERFORMANCE GRAPH
The chart below shows the yearly percentage change in the Company's
cumulative total shareholder return on its Common Stock. This is compared in the
chart to similar changes in the NASDAQ Market Index, as well as the SNL Midwest
OTC-BB and Pink Sheet banks. All prices are adjusted for stock splits and stock
dividends and assume reinvestment of dividends. The chart assumes $100 invested
on December 31, 1997, in the Company's Common Stock, the NASDAQ Market Index, as
well as the SNL Midwest OTC-BB and Pink Sheet banks. The comparisons in this
table are required by the Securities and Exchange Commission and, therefore, are
not intended to forecast or be necessarily indicative of the actual future
return on the Common Stock.
- ----------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1997 1998 1999 2000 2001 2002
---- ---- ---- ---- ---- ----
- ----------------------------------------------------------------------------------------------------------------
Southern Michigan Bancorp, Inc. $100.00 $119.57 $ 93.17 $ 47.39 $ 56.41 $ 58.66
- ----------------------------------------------------------------------------------------------------------------
NASDAQ $100.00 $140.99 $261.48 $157.42 $124.89 $ 86.33
- ----------------------------------------------------------------------------------------------------------------
SNL Midwest OTC-BB and Pink Sheets $100.00 $122.77 $106.17 $ 87.51 $ 80.71 $103.52
- ----------------------------------------------------------------------------------------------------------------
DISCLOSURE OF DELINQUENT FILERS
Based solely upon a review of Forms 3 and 4 and amendments thereto
furnished to the Company during the last fiscal year and Form 5 and amendments
thereto (together with written representations from reporting persons that no
Form 5 was required) furnished to the Company with respect to the last fiscal
year, except as noted below, the Company is not aware of any person who, at any
time during the last fiscal year, was a director, officer, or beneficial owner
of more than 10% of the Company's Common Stock, that failed to file on a timely
basis reports required by Section 16(a) of the Securities Exchange Act of 1934,
as amended, during the most recent fiscal year or prior years. Freeman E.
Riddle, a director of the Company, did not timely report 300 shares held
directly by him on his Form 3 filed with the Securities and Exchange Commission
on April 22, 2002. Mr. Riddle subsequently amended such Form 3.
OTHER MATTERS
The Board of Directors had not received notice by January 25, 2003 and
does not know of any other matters which may come before the meeting. However,
if any other matters are properly presented to the meeting, it is the intention
of the holders of the proxies to vote, or otherwise to act, in accordance with
their judgment on such matters.
13
2004 SHAREHOLDER PROPOSALS
In order for shareholder proposals for the 2004 Annual Meeting of
Shareholders to be eligible for inclusion in the Company's proxy statement, they
must be received by the Company at its principal office, 51 West Pearl Street,
Coldwater, Michigan 49036, on or before November 11, 2003. To be considered for
presentation at the 2004 Annual Meeting of Shareholders, a shareholder proposal
not included in the Company's proxy statement must be received by the Company on
or before January 29, 2004 and not earlier than November 30, 2003. Any such
notice shall set forth a description of the business the shareholder proposes to
be brought before the annual meeting and shall comply with the requirements of
the Company's Bylaws. The proxy for the 2004 Annual Meeting of Shareholders may
confer discretionary authority to the proxy holders for that meeting with
respect to voting on any shareholder proposal received by the Secretary of the
Company after January 24, 2004, which is eligible for consideration at the
meeting.
The Company files an Annual Report on Form 10-K with the Securities and
Exchange Commission. The 2002 Annual Report filed on Form 10-K will be available
upon written request after March 31, 2003. To request a copy of the Form 10-K,
address the request to Southern Michigan Bancorp, Inc., 51 West Pearl Street,
Coldwater, Michigan 49036, Attention: Jaylen T. Johnson, Secretary.
By Order of the Board of Directors,
/s/Jaylen T. Johnson
------------------------------------
Jaylen T. Johnson
Secretary
14
ANNEX A
AUDIT COMMITTEE CHARTER
SOUTHERN MICHIGAN BANCORP, INC.
PURPOSES OF THE AUDIT COMMITTEE
The purposes of the Audit Committee are to assist the Board of Directors:
I. In its oversight of the Corporation's accounting and financial
reporting principles and policies and internal accounting and
disclosure controls and procedures;
II. In its oversight and supervision of the Corporation's internal audit
function;
III. In its oversight of the certification of the Corporation's quarterly
and annual financial statements and disclosures and assessment of
internal disclosure controls by the Corporation's Chief Executive
Officer (CEO) and Chief Financial Officer (CFO);
IV. In its oversight of the Corporation's consolidated financial statements
and the independent external audit thereof, including the appointing,
compensating, overseeing (including resolving any disagreements between
management and the independent external auditor regarding financial
reporting), and evaluating and, where deemed appropriate, replacing the
registered independent external auditors (or nominating the registered
independent external auditors to be proposed for shareholder approval
in any proxy statement); and
V. In evaluating the independence of the external auditors.
The function of the Audit Committee is oversight. The management of the
Corporation is responsible for the preparation, presentation and integrity of
the Corporation's consolidated financial statements. Management is responsible
for maintaining appropriate accounting and financial reporting principles and
policies and internal accounting and disclosure controls and procedures designed
to assure compliance with accounting standards and applicable laws and
regulations.
The independent auditors are responsible for planning and carrying out a proper
audit of the Corporation's annual consolidated financial statements, reviews of
the Corporation's quarterly consolidated financial statements prior to the
filing of each quarterly report on Form 10-Q, and other procedures.
A-1
In fulfilling their responsibilities hereunder, it is recognized that members of
the Audit Committee are not full-time employees of the Corporation and are not,
and do not represent themselves to be, accountants or auditors by profession or
experts in the fields of accounting or auditing including in respect of external
auditor independence. As such, it is not the duty or responsibility of the Audit
Committee or its members to conduct "field work" or other types of auditing or
accounting reviews or procedures or to set auditor independence standards, and
each member of the Audit Committee shall be entitled to rely on:
a. The integrity of those persons and organizations within and
outside the Corporation from which it receives information,
b. The accuracy of the financial and other information provided
to the Audit Committee by such persons or organizations absent
actual knowledge to the contrary (which shall be promptly
reported to the Board of Directors), and
c. Representations made by management as to any information
technology, internal audit and other non-audit services
provided by the independent external auditors to the
Corporation.
The independent external auditors for the Corporation are ultimately accountable
to the Board of Directors as assisted by the Audit Committee. The Board of
Directors, with the assistance of the Audit Committee, has the ultimate
authority and responsibility to select, evaluate and, nominate the independent
external auditors to be proposed for shareholder approval in the proxy
statement. The Audit Committee shall pre-approve all audit and permissible
non-audit services proposed to be provided by the Corporation's external
auditors in compliance with section 202 of the "Sarbanes-Oxley Act of 2002" and
applicable SEC rules and regulations. The independent external auditors shall
submit to the Corporation annually a formal written statement delineating all
relationships between the independent external auditors and the Corporation
("Statement as to Independence"), addressing each non-audit service provided to
the Corporation. The Audit Committee shall be responsible for considering
whether any services provided by the external auditor would cause the external
auditor to not be independent of the Corporation.
COMPOSITION OF THE AUDIT COMMITTEE
The Audit Committee shall be comprised of at least three independent members of
the Board of Directors, each of whom shall meet the independence and experience
requirements of Section 10A of Securities Exchange Act of 1934, as amended and
applicable rules and regulations of the SEC. The Audit Committee members shall
have no relationship to the Corporation, or to the executive officers of the
Corporation or its subsidiaries or affiliates, that may interfere with the
exercise of their independence from management and the Corporation, and shall
not be compensated for any consulting, advisory or other services performed for
the Corporation other than compensation received for Board of Directors and
committee fees, and shall not be an affiliate of the Corporation or any of its
subsidiaries, as defined by the Securities and Exchange Commission ("SEC") or
NASDAQ, and shall otherwise satisfy the applicable membership requirements under
the rules of the SEC or NASDAQ, as such requirements are interpreted by
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the Corporation's Board of Directors in its business judgment. Individuals
previously not meeting all independence requirements to serve on the Audit
Committee, must meet all independence requirements for at least three (3) years
prior to being eligible to serve on the Audit Committee.
Each member of the Audit Committee must be able to read and understand
fundamental financial statements, including the Corporation's consolidated
balance sheet, income statement, and cash flow statement. Additionally, the
Corporation will continue to have, at least one member of the Audit Committee
that has past employment experience in finance or accounting, requisite
professional certification in accounting, or any other comparable experience or
background which results in the individual's financial sophistication, including
being or having been a chief executive officer, chief financial officer or other
senior officer with financial oversight responsibilities.
While not an absolute requirement, the Corporation will seek to have at least
one member of the Audit Committee who is considered to be an "audit committee
financial expert" by virtue of their education and/or experience as defined by
applicable SEC rules.
Members of the Audit Committee shall be appointed annually by majority vote of
the Board of Directors and shall serve until the next annual meeting of the
Board of Directors or until their successors shall be duly qualified and
appointed.
MEETINGS OF THE AUDIT COMMITTEE
The Audit Committee shall meet four times annually, or more frequently if
circumstances dictate, to discuss with management the annual audited financial
statements and quarterly financial results and the required certifications of
the CEO and CFO. At least annually, the Audit Committee should meet separately
with the internal auditor and the independent external auditor, without any
members of management being present, to discuss any matters that the Audit
Committee or any of these persons or firms believes should be discussed
privately.
The Audit Committee may request any officer or employee of the Corporation, or
the Corporation's independent counsel, or independent external auditors to
attend a meeting of the Audit Committee or to meet with any members of or
consultants to, the Audit Committee.
Members of the Audit Committee may participate in a meeting of the Audit
Committee by means of conference call or similar communications equipment by
means of which all persons participating in the meeting can hear each other.
Minutes of each meeting will be prepared with copies to be provided to members
of the Audit Committee and made available to management, the independent
external auditors, internal auditors and regulatory examiners.
The chairperson of the Audit Committee will make a report to the Board of
Directors on the results of each meeting of the Audit Committee.
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RESPONSIBILITIES OF THE AUDIT COMMITTEE
I. OVERSEEING FINANCIAL REPORTING AND DISCLOSURES:
a. Reading of Financial Statements and Disclosures. The Audit
Committee shall read all financial statements and related
disclosures included in the Corporation's periodic and annual
filings with the SEC, and consider whether the financial
statements and related disclosures accurately and
appropriately reflect their knowledge of the financial
condition of the Corporation and its results of operations.
b. Accuracy of Financial Reports. The Audit Committee shall
require management to make all material correcting adjustments
to the Corporation's quarterly and annual consolidated
financial statements to be filed with the SEC, that are
identified by the independent external auditor as being
required by generally accepted accounting principles ("GAAP")
or the rules of the SEC.
c. Disclosure of Off-Balance-Sheet Transactions. On a quarterly
basis, the Audit Committee shall inquire of management as to
whether they have complied with the SEC's disclosure
requirements regarding the Corporation's requirement to
disclose, in quarterly and annual SEC filings, all material
off-balance-sheet transactions, arrangements, obligations
(including contingent obligations) and other relationships of
the Corporation with unconsolidated entities or other persons,
that have a material current or future effect on financial
condition, changes in financial condition, results of
operations, liquidity, capital resources, or significant
components of revenues or expenses.
d. Disclosure of Pro Forma Financial Information. On at least a
quarterly basis, the Audit Committee shall inquire of
management as to whether they have complied with the SEC's pro
forma information disclosure requirements regarding the
Corporation's requirement to only disclose in SEC filings, or
in any public disclosures or press or other release, pro forma
financial information that does not contain an untrue
statement of a material fact or omit to state a material fact
necessary in order to make the pro forma financial
information, in light of the circumstances under which it is
presented, not misleading; and to reconcile the pro forma
financial information with the financial condition and results
of operations of the Corporation under GAAP.
e. Disclosure of Transactions Involving Management and Principal
Stockholders. The Audit Committee shall determine that
management has put in place procedures to report to the SEC,
within two (2) business days, changes in Corporation
stockholdings by directors, officers, and more than 10%
stockholders of the Corporation, including stock purchases and
sales and stock issued due to exercises of stock options.
Also, the Audit Committee shall determine that management has
put in place procedures to report to the SEC, within ten (10)
business days, for any new directors, officers or 10%
stockholders of the Corporation, their stockholdings in the
Corporation.
A-4
f. Management Certification of Financial Statements and
Disclosures, and Assessment of Internal Controls. The Audit
Committee shall ensure that the Corporation has established
adequate procedures to ensure that quarterly and annual
financial statements and disclosures, required to be reported
to the SEC, are accurate and complete. This will include
reviewing and approving the process to be followed by
management to comply with quarterly and annual CEO and CFO
certifications required by the SEC. The Audit Committee shall
be responsible for discussing the results of the quarterly and
annual CEO and CFO certification process with management to
consider whether the Corporation has appropriately fulfilled
its quarterly and annual SEC reporting requirements. In
reviewing and considering the quarterly and annual
certifications of the CEO and CFO, the Audit Committee shall
also obtain, review and consider any applicable reports issued
by the internal auditor or the independent external auditor.
g. Disclosure of Code of Business Conduct and Ethics. The Audit
Committee shall determine that the Corporation has complied
with applicable requirements of the SEC to disclose, in the
Corporation's Form 10-K, whether or not, and if not, the
reason therefore, the Corporation has established a Code of
Ethics for senior financial officers (CFO and controllers).
Also, the Audit Committee shall inquire of management to
determine that changes in or waivers of the Code of Ethics are
approved by the Audit Committee, and reported promptly to the
SEC by the Corporation on a Form 8-K.
h. Disclosure of Audit Committee "Financial Expert." The Audit
Committee shall determine whether the Corporation has complied
with applicable requirements of the SEC to disclose, in the
Corporation's Form 10-K or annual proxy statement, whether or
not, and if not, the reason therefore, the Corporation has at
least one member on the Audit Committee who is an "audit
committee financial expert" as defined by applicable SEC rules
and regulations.
i. Disclosure of Audit Committee Approval of Permissible
Non-Audit Services. The Audit Committee shall determine that
the Corporation has complied with applicable requirements of
the SEC to disclose, in the Corporation's Form 10-K and annual
proxy statement, the approval by the Audit Committee of all
permissible non-audit services to be performed by the
Corporation's independent external auditor.
j. Real Time Issuer Disclosures. The Audit Committee shall
determine that the Corporation has implemented procedures to
comply with applicable requirements of the SEC to report to
the SEC real time (prompt) disclosures of any material changes
in the Corporation's financial condition or results of
operations.
II. APPROVAL OF EXPENSES OF EXECUTIVE MANAGEMENT:
All expenses of personnel defined as executive management for purposes of
complying with applicable banking regulations, shall be reported to and approved
by the Audit Committee on a quarterly basis.
A-5
III. INDEPENDENT EXTERNAL AUDITOR:
The Audit Committee shall have the sole authority to appoint or replace the
Corporation's independent external auditor. The Audit Committee should also
pre-approve the compensation of the external auditor, and evaluate the external
auditor's independence. The Audit Committee shall also pre-approve all
permissible non-audit services and fees to be provided by the Corporation's
independent external auditor. The pre-approval of audit and non-audit services
and fees of the independent external auditor may be documented by a member of
the Audit Committee signing annual or periodic engagement letters that define in
general terms the type of services to be provided and the range of fees that are
considered acceptable for such services, or as otherwise documented in the
minutes of the Audit Committee meetings. The actual compensation paid to the
independent external auditor, for all such pre-approved services and fees, are
to be reported to the Audit Committee by management on at least a quarterly
basis.
IV. INTERNAL AUDIT, LOAN REVIEW AND EXTERNAL AUDIT PLANS:
The Audit Committee should review the annual internal audit, loan review and
independent external audit plans, including the degree of coordination of the
respective plans.
The Audit Committee should inquire of the internal auditor and independent
external auditor as to the extent to which the planned audit scope can be relied
upon to detect material misstatements in the consolidated financial statements
and other public disclosures, weaknesses in internal accounting and disclosure
controls, and fraud. Additionally, the Audit Committee should inquire regarding
the audit plans of the internal auditor and independent external auditor
regarding electronic data processing and controls to ensure that such plans
address the related impact on financial risk and internal controls.
The Audit Committee should require the loan review officer or outsourced service
provider to ensure that the annual loan review plan addresses asset quality and
the adequacy of the allowance for loan losses.
V. AUDIT RESULTS:
The Audit Committee should review with management the results of the independent
external auditor's quarterly financial statement reviews, and review with
management and the independent external auditor the results of the annual
financial statement audit. The Audit Committee should also review with
management and the independent external auditor their assessment of the quality
of the Corporation's accounting principles, including the identification of and
disclosure within the Corporation's periodic SEC filings, the Corporation's
critical accounting policies, the adequacy of internal accounting and disclosure
controls and the resolution of identified significant deficiencies or material
weaknesses and reportable conditions in internal accounting and disclosure
controls. The Audit Committee should also review internal audit and loan review
reports for evaluation of the Corporation's internal controls, asset quality,
the adequacy of the allowance for loan losses, and compliance with laws and
regulations and other audit reports deemed significant by the Committee. Based
on this review, the Audit Committee shall make its recommendation to the Board
of Directors as to the inclusion of the audited consolidated financial
statements in the Corporation's annual report on Form 10-K.
A-6
VI. ANNUAL PROXY STATEMENT DISCLOSURE:
The Audit Committee should report audit activities to the Board of Directors and
issue an annual report to be included in the Corporation's proxy statement
(including appropriate oversight conclusions) for submission to the
shareholders. In addition, the Audit Committee should re-approve the Audit
Committee Charter, annually, with a copy of the charter filed with the SEC every
three (3) years, and after any amendments. The Audit Committee will report to
management for inclusion in the their annual report in the Corporation's Form
10-K, whether a member has been defined by the Board of Directors, as an "audit
committee financial expert" and that expert's name. Management may opt to
include this information in the Corporation's annual proxy statement (as long as
the proxy statement is filed within 120 days of the Corporation's fiscal year
end) and reference this information in the Corporation's annual report on Form
10-K.
VII. INDEPENDENT EXTERNAL AUDITOR COMMUNICATION WITH THE AUDIT COMMITTEE:
It is the independent external auditor's responsibility, as required by
generally accepted auditing standards, to make certain communications to the
Audit Committee on at least an annual basis. Such matters include the
independent external auditor's responsibility under generally accepted auditing
standards, matters pertaining to the external auditor's independence, selection
of or changes in significant accounting principles, management's judgments and
significant accounting estimates, significant audit adjustments posted or
uncorrected, the external auditors responsibility and consideration of other
information that accompanies the audited consolidated financial statements, any
disagreements with management, any difficulties encountered during the audit,
any consequential illegal acts or irregularities, any major issues discussed
with management prior to retention of the external auditors as auditors of the
Corporation for the current fiscal year, or instances of management consultation
with other accountants regarding significant accounting or auditing matters, and
any management advisory services and fees provided by the independent external
auditor.
VIII. COMMUNICATION OF CONCERNS OF THE AUDIT COMMITTEE WITH THE INDEPENDENT
EXTERNAL AUDITOR:
The Audit Committee shall be responsible for informing the independent external
auditor of any serious concerns regarding the accuracy and integrity of the
Corporation's financial reporting, any serious concerns regarding the honesty
and integrity of the Corporation's management, and any serious concerns
regarding the adequacy of the Corporation's internal accounting and disclosure
controls. In fulfilling these responsibilities, the Audit Committee is aware
that it is illegal for an officer or director of the Corporation to mislead or
lie to the independent external auditor.
IX. INTERNAL AUDIT AND LOAN REVIEW SUPERVISION:
The Audit Committee should also review the appointment and replacement of the
senior internal auditing and loan review executives or outsourced internal audit
and loan review service provider. At least annually, the Audit Committee should
evaluate the effectiveness of the
A-7
internal audit and loan review functions and consider the need to make changes
to ensure that the internal audit and loan review objectives are being met.
The Audit Committee should review and approve the annual internal audit and loan
review plans, monitor the completion of these plans, and approve any changes to
the annual plans. The Audit Committee should review the periodic reports of
internal audit and loan review activities, including the opinion of the internal
audit director or outsourced service provider regarding the adequacy of the
Corporation's internal accounting and disclosure control structure. The Audit
Committee should meet with the internal audit and loan review directors or
outsourced service providers to discuss the status of completion of the annual
internal audit and loan review plans and the periodic internal audit and loan
review reports and to consider the need for further audit follow-up and
investigation.
X. FRAUD REPORTING AND HANDLING OF COMPLAINTS:
The Audit Committee shall have the responsibility for establishing procedures
for:
a. The receipt, retention, and treatment of complaints received
by the Corporation regarding accounting, internal accounting
controls, or auditing matters; and
b. The confidential, anonymous submission by employees of the
Corporation of concerns regarding questionable accounting or
auditing matters. The Audit Committee shall also establish
procedures to ensure that no retaliation will be allowed to
occur against anyone who reports potential fraud or a
complaint in good faith.
XI. NEW ACCOUNTING PRONOUNCEMENTS:
Changes in accounting standards that have a material effect on the consolidated
financial statements and new or changing regulations which will affect
compliance issues or the approach taken towards evaluating the internal control
structure, should be explained to the Audit Committee by financial management,
the internal auditor or the independent external auditor.
XII. REVIEW OF LEGAL MATTERS:
The Audit Committee should meet with the Corporation's outside legal counsel,
when appropriate, to discuss legal matters that have a significant impact on the
Corporation's consolidated financial statements. An assessment of the
Corporation's legal liability should be reviewed for any pending or threatened
litigation, including establishment of any appropriate reserves or financial
disclosures until the matter is adjudicated. The Audit Committee may retain
legal counsel at its discretion without prior permission of the Board of
Directors or its management at the expense of the Corporation.
XIII. AREAS REQUIRING SPECIAL ATTENTION:
The Audit Committee shall have the authority to obtain detailed reports from
management, the independent external auditor, or the internal auditor related to
significant matters affecting the
A-8
financial reporting process, internal controls, or other similar areas of
special interest or concern to the Audit Committee.
AUTHORITY TO HIRE INDEPENDENT ADVISORS
The Audit Committee shall have the authority, without the permission of the
Board of Directors, to engage its own accountants, legal counsel or other
advisors, from time to time, for special audits, reviews and other procedures as
it determines necessary to carry out its duties.
FUNDING
The Corporation shall provide the Audit Committee with appropriate funding, as
determined by the Audit Committee, in its capacity as a committee of the Board
of Directors, for payment of compensation -
A) To the registered independent external auditor employed by the
Corporation for the purpose of rendering or issuing an audit report;
and
B) To any advisors employed by the Audit Committee.
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<Table>
[X] PLEASE MARK VOTES REVOCABLE PROXY
AS IN THIS EXAMPLE SOUTHERN MICHIGAN BANCORP, INC.
WITH- FOR ALL
PROXY FOR ANNUAL MEETING FOR HOLD EXCEPT
SOUTHERN MICHIGAN BANCORP, INC. 1. Election as Directors of all [ ] [ ] [ ]
nominees listed below (except as
The undersigned does hereby appoint marked to the contrary below):
Jaylen T. Johnson and Danice Chartrand,
or either one of them, proxy with full GREGORY HULL FREEMAN RIDDLE THOMAS KOLASSA
power of substitution, in the name,
place and stead of the undersigned, to
vote all of the Common Shares of Southern INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR ANY
Michigan Bancorp, Inc., held by the INDIVIDUAL NOMINEE, MARK "FOR ALL EXCEPT" AND WRITE
undersigned on February 28, 2003 at the THAT NOMINEE'S NAME IN THE SPACE PROVIDED BELOW.
Annual Meeting of Shareholders to be
held at The Dearth Community Center,
located at the Branch County Fairgrounds __________________________________________________
in Coldwater, Michigan, on April 21, 2003
at 4:00 p.m., and at any adjournment FOR AGAINST ABSTAIN
or adjournments thereof with all the powers 2. Ratification of the selection of [ ] [ ] [ ]
the undersigned would possess if personally Crowe, Chizek and Company LLP as
present. The undersigned revokes all Independent Auditors for 2003.
proxies heretofore given to vote at such
meeting and any adjournment or
adjournments thereof. The Board of Directors recommends shareholders vote "FOR" the
THE BOARD OF DIRECTORS RECOMMENDS A nominees listed in Proposal (1) and "FOR" Proposal (2). IF NO
VOTE FOR ALL NOMINEES AND FOR PROPOSAL SPECIFIC VOTE IS GIVEN, THE PROXY WILL BE VOTED "FOR" ALL
2. NOMINEES AND "FOR" PROPOSAL (2). IF ANY OTHER BUSINESS IS
PROPERLY PRESENTED AT THE MEETING, THIS PROXY SHALL BE VOTED IN
THE DISCRETION OF THE PROXIES. All shares represented by properly
executed proxies will be voted as directed. THIS PROXY IS
SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS and may be revoked
before its exercise by either written notice or notice in person
at the meeting or by a subsequently dated proxy. The undersigned
hereby acknowledges receipt of a Notice of Annual Meeting and
Proxy Statement, each dated March 10, 2003, for the Annual
Meeting of Shareholders of the Company called for April 21, 2003.
Please be sure to sign and date ____________________
this Proxy in the box below. Date NOTE: Please sign your name(s) exactly as printed on your stock
__________________________________________________________ certificates to authorize the voting of your shares as indicated
above. Persons signing as Executors, Administrators, Trustees,
etc. should so indicate. If shares are held jointly, each holder
____Stockholder sign above_____Co-holder (if any) sign above__ should sign. If executed by a corporation, a duly authorized
officer should sign.
</Table>
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/\ DETACH ABOVE CARD, SIGN, DATE AND MAIL IN POSTAGE PAID ENVELOPE PROVIDED. /\
SOUTHERN MICHIGAN BANCORP, INC.
________________________________________________________________________________
PLEASE ACT PROMPTLY
SIGN, DATE & MAIL YOUR PROXY CARD TODAY
________________________________________________________________________________
IF YOUR ADDRESS HAS CHANGED, PLEASE CORRECT THE ADDRESS IN THE SPACE PROVIDED
BELOW AND RETURN THIS PORTION WITH THE PROXY IN THE ENVELOPE PROVIDED.
________________________________________
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