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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended March 31, 2000 Commission file number 2-78178
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Southern Michigan Bancorp, Inc.
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(Exact name of registrant as specified in its charter)
Michigan 38-2407501
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(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
51 West Pearl Street, Coldwater, Michigan 49036
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code -- (517) 279-5500
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Indicate by check mark whether registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No.
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Common Stock, $2.50 Par Value - 1,942,245 shares at April 30, 2000 (including
shares held by ESOP)
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CONDENSED CONSOLIDATED BALANCE SHEETS
SOUTHERN MICHIGAN BANCORP, INC AND SUBSIDIARY
March 31 December 31
2000 1999
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(Unaudited) (A)
(In thousands)
ASSETS
Cash and due from banks $ 13,138 $ 12,046
Investment securities available for sale 53,192 54,229
Loans, net of allowance for loan losses of $2,149 (1999 - $2,132) 198,910 191,239
Premises and equipment 6,755 6,705
Other assets 11,404 11,606
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TOTAL ASSETS $283,399 $275,825
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LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 34,645 $ 33,124
Interest bearing 196,881 200,179
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231,526 233,303
Federal funds purchased 9,740
Accounts payable and other liabilities 3,250 3,542
Other long-term borrowings 15,000 15,000
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TOTAL LIABILITIES 259,516 251,845
Common stock subject to repurchase obligation in ESOP 2,214 3,990
Shareholders' equity:
Preferred stock, 100,000 shares authorized
Common stock, $2.50 par value:
Authorized--4,000,000 shares
Issued--1,958,498 shares (1999 - 1,969,259)
Outstanding--1,837,161 shares (1999-1,838,757) 4,593 4,597
Capital surplus 9,866 8,421
Retained earnings 8,337 7,949
Net unrealized depreciation on available for sale securities,
net of tax of $278 (1999--$201) (539) (389)
Unearned Employee Stock Ownership Plan shares (588) (588)
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TOTAL SHAREHOLDERS' EQUITY 21,669 19,990
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $283,399 $275,825
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(A) The balance sheet at December 31, 1999 has been derived from the audited
consolidated financial statements at that date.
See notes to condensed consolidated financial statements.
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CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
SOUTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARY
Three Months Ended
March 31
2000 1999
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(In thousands, except
per share amounts)
Interest income:
Loans, including fees $4,649 $3,765
Investment securities:
Taxable 544 633
Tax exempt 239 336
Other 2 25
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Total interest income 5,434 4,759
Interest expense:
Deposits 2,034 1,919
Other 312 118
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Total interest expense 2,346 2,037
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NET INTEREST INCOME 3,088 2,722
Provision for loan losses 150 150
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NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 2,938 2,572
Non-interest income:
Service charges on deposit accounts 264 245
Trust department 134 115
Security gains 1 0
Gain on sales of loans 101 142
Earnings on life insurance policies 45 39
Other 149 123
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694 664
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3,632 3,236
Non-interest expenses:
Salaries and benefits 1,260 1,086
Occupancy 218 213
Equipment 257 226
Other 871 719
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2,606 2,244
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INCOME BEFORE INCOME TAXES 1,026 992
Federal income taxes 269 211
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NET INCOME 757 781
Other comprehensive income, net of tax:
Change in unrealized gains on securities (150) (193)
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COMPREHENSIVE INCOME $ 607 $ 588
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Basic and Diluted Earnings Per Share $ 0.39 $ 0.38
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Dividends Declared Per Share $ 0.19 $ 0.16
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See notes to condensed consolidated financial statements.
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SOUTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARY
Three Months Ended
March 31
2000 1999
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(In thousands)
OPERATING ACTIVITIES
Net income $ 757 $ 781
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 150 150
Provision for depreciation 166 149
Net change in:
Other assets 279 (635)
Accrued expenses and other liabilities (323) 450
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Net cash provided by operating activities 1,029 895
INVESTING ACTIVITIES
Proceeds from maturity of investment securities 2,810 10,949
Purchases of investment securities (2,000) (7,513)
Decrease in federal funds sold 0 1,000
Net increase in loans (7,821) (2,967)
Net increase in premises and equipment (216) (75)
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Net cash provided by (used in) investing activities (7,227) 1,394
FINANCING ACTIVITIES
Net decrease in deposits (1,777) (3,730)
Increase in federal funds purchased 9,740 0
Common stock repurchased and retired (332) (545)
Cash dividends (341) (393)
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Net cash provided by (used in) financing activities 7,290 (4,668)
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Increase (decrease) in cash and cash equivalents 1,092 (2,379)
Cash and cash equivalents at beginning of period 12,046 16,228
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $13,138 $13,849
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See notes to condensed consolidated financial statements.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SOUTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARY
March 31, 2000
NOTE A -- BASIS OF PRESENTATION
The accompanying year-end balance sheet data was derived from audited
consolidated financial statements, but does not include all disclosures required
by generally accepted accounting principles.
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions for Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's annual report on Form
10-K for the year ended December 31, 1999.
Basic earnings per common share is net income divided by the weighted average
number of common shares outstanding during the period. ESOP shares are
considered outstanding for this calculation unless unearned. Diluted earnings
per common share includes the dilutive effect of additional potential common
shares issuable under stock options. Earnings and dividends per share are
restated for all stock splits and dividends through the date of issue of the
financial statements. The weighted average common shares outstanding for the
quarters ended March 31, 2000 and 1999 were 1,946,047 and 2,035,994
respectively.
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ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
FINANCIAL CONDITION
Total deposits declined by less than 1% during the first quarter of 2000. The
Company has traditionally experienced a decline in deposits in the first quarter
of the year.
Loans have increased by 4.0% in the first three months of 2000. The loan growth
has occurred in the commercial and real estate mortgage portfolios. The
commercial growth is due to borrowers' seasonal demands and continued economic
expansion within the Company's market area. The real estate mortgage increase is
due to the offering of a competitive in-house fixed rate product. There were no
loans held for sale as of March 31, 2000.
Investment securities decreased by 1.9% during the first quarter of 2000. Funds
received from maturing securities were used to support the increase in loans.
In 2000, the Bank will spend approximately $2,300,000 to renovate the Coldwater
main office and the Beckley Road office.
On February 15, 2000, the Company announced that it had agreed to merge with
Sturgis Bank & Trust Company of Sturgis, Michigan ("Sturgis"). The transaction
is anticipated to be a tax-free exchange. It is subject to regulatory approvals
and the approval by shareholders of Sturgis, and is anticipated to be effective
the second half of 2000. The exchange ratio is .398 shares of the Company's
common stock for one share of Sturgis' common stock.
CAPITAL RESOURCES
The Federal Reserve Board (FRB) has adopted risk-based capital guidelines
applicable to the Company. These guidelines require that bank holding companies
maintain capital commensurate with both on and off balance sheet credit risks of
their operations. Under the guidelines, a bank holding company must have a
minimum ratio of total capital to risk-weighted assets of 8.0 percent. In
addition, a bank holding company must maintain a minimum ratio of Tier 1 capital
equal to 4.0 percent of risk-weighted assets. Tier 1 capital includes common
shareholders' equity, qualifying perpetual preferred stock and minority interest
in equity accounts of consolidated subsidiaries less goodwill.
As a supplement to the risk-based capital requirements, the FRB has also adopted
leverage capital ratio requirements. The leverage ratio requirements establish a
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minimum ratio of Tier 1 capital to total assets less goodwill of 3 percent for
the most highly rated bank holding companies. All other bank holding companies
are required to maintain additional Tier 1 capital yielding a leverage ratio of
4 percent to 5 percent, depending on the particular circumstances and risk
profile of the institution.
The following table summarizes the Company's capital ratios as of March 31,
2000:
Tier 1 risk-based capital ratio 10.68%
Total risk-based capital ratio 11.66%
Leverage ratio 8.43%
The above table indicates that the Company's capital ratios are above the
regulatory minimum requirements.
RESULTS OF OPERATIONS
Net Interest Income
Net interest income increased by $366,000 for the three month period ended March
31, 2000 compared to the same period in 1999. This increase is the result of
increases in both loan volume and rates.
Provision for Loan Losses
The provision for loan losses is based on an analysis of outstanding loans. In
assessing the adequacy of the allowance, management reviews the characteristics
of the loan portfolio in order to determine the overall quality and risk
profile. Some factors considered by management in determining the level at which
the allowance is maintained include a continuing evaluation of those loans
identified as being subject to possible problems in collection, results of
examinations by regulatory agencies, current economic conditions and historical
loan loss experience.
The first quarter 2000 provision for loan losses remained at 1999 levels. The
2000 provision was set to provide for growth and potential losses from
specifically identified loans. The allowance for loan losses is being maintained
at a level, which in management's opinion, is adequate to absorb possible loan
losses in the loan portfolio as of March 31, 2000.
Non-interest Income
Non-interest income, which includes service charges on deposit accounts, trust
fee income, security gains and losses and other miscellaneous charges and fees,
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increased by $30,000 during the first quarter of 2000 compared to the same
period in 1999. A decline in gains recognized on the sale of real estate
mortgage loans to the secondary market was offset by increases in deposit
account service charges and trust fees.
Non-interest Expense
Non-interest expenses increased by $362,000 for the three month period ended
March 31, 2000 compared to the same period in 1999. Salaries and benefits
increased as additional loan department employees were added to assist with the
increased loan volume. Equipment expenses increased as depreciation and service
contracts on recent equipment purchases increased. Other expenses increased
primarily as a result of increased usage of consultants for general bank
consulting purposes.
Year 2000
The Company had a successful Year 2000 rollover. The Company has not experienced
any significant Year 2000 problems as a result of the rollover, and is not aware
of any customers that have experienced material Year 2000 problems. This success
can be attributed to the fact that the Company began addressing Year 2000 issues
in mid 1997. The Company followed a plan to identify all critical business
processes and established a priority schedule for assessment of each process. As
the Company worked through its Year 2000 plan, any hardware, software, equipment
or vendor provided services that were identified as not Year 2000 compliant were
either upgraded or retired. While no Year 2000 problems have been identified to
date, monitoring will continue for most of 2000 to assure that all Year 2000
issues have been addressed.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary market risk exposure is interest rate risk and to a lesser
extent liquidity risk. Interest rate risk arises when the maturity or repricing
characteristics of assets differ significantly from the maturity or the
repricing characteristics of liabilities. Accepting this risk can be an
important source of profitability and shareholder value, however, excessive
levels of interest rate risk could pose a significant threat to the Company's
earnings and capital base. Accordingly, effective risk management that maintains
interest rate risk at prudent levels is essential to the Company's safety and
soundness.
The Company measures the impact of changes in interest rates on net interest
income through a comprehensive analysis of the Bank's interest rate sensitive
assets and liabilities. Interest rate sensitivity varies with different types of
interest-earning assets
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and interest-bearing liabilities. Overnight federal funds and mutual funds on
which rates change daily and loans which are tied to the prime rate or a
comparable index differ considerably from long-term investment securities and
fixed-rate loans. Similarly, certificates of deposit and money market investment
accounts are much more interest sensitive than passbook savings accounts. The
shorter term interest rate sensitivities are key to measuring the interest
sensitivity gap, or excess interest-earning assets over interest-bearing
liabilities. In addition to reviewing the interest sensitivity gap, the Company
also analyzes projected changes in market interest rates and the resulting
effect on net interest income.
Liquidity management involves the ability to meet the cash flow requirements of
customers who may be either depositors wanting to withdraw funds or borrowers
needing assurance that sufficient funds will be available to meet their credit
needs. Certain portions of the Bank's liabilities may be short-term or due on
demand, while most of its assets may be invested in long-term loans or
investments. Accordingly, the Company seeks to have in place sources of cash to
meet short-term demands. These funds can be obtained by increasing deposits,
borrowing or selling assets. Also, Federal Home Loan Bank advances and
short-term borrowings provide additional sources of liquidity for the Company.
There have been no significant changes in the distribution of the Company's
financial instruments that are sensitive to changes in interest rates during the
first quarter of 2000.
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PART II - OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders
None.
ITEM 6. Exhibits and Reports on Form 8-K
a. Listing of Exhibits: Financial Data Schedule
b. Form 8-K was filed during the first quarter of 2000 announcing the
termination of the Company's Stock Repurchase Program.
SIGNATURES
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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.
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(Registrant)
MAY 12, 2000 JAMES T. GROHALSKI
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Date James T. Grohalski, President
and Chief Executive Officer
(Principal Financial and
Accounting Officer)
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EXHIBIT INDEX
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Exhibit No. Description
Exhibit 27 Financial Data Schedule