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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 June 30, 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 - 1,941,060 shares at July 31, 2000 (including
shares held by ESOP)
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CONDENSED CONSOLIDATED BALANCE SHEETS
SOUTHERN MICHIGAN BANCORP, INC AND SUBSIDIARY
June 30 December 31
2000 1999
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(Unaudited) (A)
(In thousands)
ASSETS
Cash and due from banks $ 13,914 $ 12,046
Investment securities available-for-sale 50,996 54,229
Loans, net 211,708 191,239
Premises and equipment 6,773 6,705
Other assets 12,338 11,606
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TOTAL ASSETS $ 295,729 $ 275,825
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LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 35,909 $ 33,124
Interest bearing 197,166 200,179
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233,075 233,303
Federal funds purchased 10,060
Accounts payable and other liabilities 3,562 3,542
Other long-term borrowings 25,000 15,000
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TOTAL LIABILITIES 271,697 251,845
Common stock subject to repurchase obligation in ESOP 1,923 3,990
Shareholders' equity:
Preferred stock, 100,000 shares authorized
Common stock, $2.50 par value:
Authorized--4,000,000 shares
Issued--1,941,662 shares (1999-1,969,259)
Outstanding--1,834,823 shares (1999-1,838,757) 4,587 4,597
Capital surplus 9,642 8,421
Retained earnings 8,908 7,949
Net unrealized depreciation on available-for-sale
securities net of tax of $226 (1999--$200) (440) (389)
Unearned Employee Stock Ownership Plan shares (588) (588)
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TOTAL SHAREHOLDERS' EQUITY 22,109 19,990
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 295,729 $ 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 Six Months Ended
June 30 June 30
2000 1999 2000 1999
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(In thousands, except per share amounts)
Interest income:
Loans, including fees $ 4,998 $ 3,961 $ 9,647 $ 7,726
Investment securities:
Taxable 465 557 1,009 1,190
Tax exempt 234 287 473 623
Other 0 16 2 41
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Total interest income 5,697 4,821 11,131 9,580
Interest expense:
Deposits 2,123 1,875 4,157 3,794
Other 399 140 711 258
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Total interest expense 2,522 2,015 4,868 4,052
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NET INTEREST INCOME 3,175 2,806 6,263 5,528
Provision for loan losses 150 186 300 336
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NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 3,025 2,620 5,963 5,192
Non-interest income:
Service charges on deposit accounts 285 263 549 508
Trust department 123 225 257 340
Security gains (losses) (4) (3)
Secondary market gains 149 233 250 375
Earnings on life insurance policies 51 62 96 101
Other 162 135 311 258
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766 918 1,460 1,582
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3,791 3,538 7,423 6,774
Non-interest expenses:
Salaries and benefits 1,206 1,079 2,466 2,165
Occupancy 193 194 411 407
Equipment 244 241 501 467
Other 903 763 1,774 1,482
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2,546 2,277 5,152 4,521
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INCOME BEFORE INCOME TAXES 1,245 1,261 2,271 2,253
Federal income taxes 344 292 613 503
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NET INCOME 901 969 1,658 1,750
Other comprehensive income, net of tax:
Change in unrealized gains on securities 99 (299) (51) (492)
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COMPREHENSIVE INCOME $ 1,000 $ 670 $ 1,607 $ 1,258
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Basic and Diluted Earnings Per Share $ 0.47 $ 0.48 $ 0.86 $ 0.85
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Dividends Declared Per Share $ 0.17 $ 0.17 $ 0.36 $ 0.33
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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
Six Months Ended
June 30
2000 1999
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(In thousands)
OPERATING ACTIVITIES
Net income $ 1,658 $ 1,750
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 300 336
Provision for depreciation 336 323
Increase in other assets (707) (263)
Increase in accounts payable and other liabilities 31 338
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Net cash provided by operating activities 1,618 2,484
INVESTING ACTIVITIES
Proceeds from maturity of investment securities 6,307 23,183
Purchases of investment securities (3,150) (9,063)
Decrease in federal funds sold 0 4,000
Net increase in loans (20,769) (19,924)
Net increase in premises and equipment (404) (166)
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Net cash used in investing activities (18,016) (1,970)
FINANCING ACTIVITIES
Net decrease in deposits (228) (13,558)
Increase in federal funds purchased 10,060 8,000
Increase in other borrowings 10,000 0
Common stock repurchased and retired (853) (832)
Cash dividends (713) (727)
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Net cash provided by (used in) financing activities 18,266 (7,117)
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Increase (decrease) in cash and cash equivalents 1,868 (6,603)
Cash and cash equivalents at beginning of period 12,046 16,228
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 13,914 $ 9,625
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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
June 30, 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
three and six month periods ended June 30, 2000 were 1,930,722 and 1,937,711,
respectively. The weighted average common shares outstanding for the three and
six month periods ended June 30, 1999 were 2,039,552 and 2,045,848,
respectively.
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ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
FINANCIAL CONDITION
Total deposits have declined by less than 1% during the first six months of
2000. Because of the lack of deposit growth, the Company added $10,000,000 to
its long-term borrowings to fund loan growth.
Net loans have increased by 10.7% in the first six 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
has occurred in adjustable rate mortgages as a result of customers being
reluctant to commit to long-term fixed rate mortgages in a rising rate
environment. At June 30, 2000 the Company had $280,000 in loans held for sale.
Investment securities decreased by 6.0% during the first six months 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. The Company expects to
incur costs of approximately $278,000 directly related to the merger in 2000.
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.
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As a supplement to the risk-based capital requirements, the FRB has also adopted
leverage capital ratio requirements. The leverage ratio requirements establish a
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 June 30, 2000:
Tier 1 risk-based capital ratio 10.20%
Total risk-based capital ratio 11.16
Leverage ratio 8.09
The above table indicates that the Company's capital ratios are above the
regulatory minimum requirements.
The Company repurchased and retired 27,531 shares of outstanding common stock
from ESOP participants in the first six months of 2000.
RESULTS OF OPERATIONS
Net Interest Income
Net interest income increased by $369,000 and $735,000 for the three and six
month periods ended June 30, 2000 compared to the same periods in 1999. This
increase is due to loan growth and higher interest 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 provision for loan losses decreased by $36,000 for the three and six month
periods ended June 30, 2000 compared to the same periods in 1999. The 1999
provision was higher to provide for increased charge-offs and delinquencies,
primarily as a result of increased customer bankruptcies. The loan portfolio has
experienced significant growth in recent years and management is closely
monitoring portfolio performance particularly in light of recent interest rate
increases.
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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 June 30, 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,
decreased by $152,000 and $122,000 for the three and six month periods ended
June 30, 2000 compared to the same periods in 1999. This decrease is due
primarily to a decline in gains recognized on the sale of real estate mortgage
loans to the secondary market and a decline in collected trust fees. These
declines are partially offset by increases in service charge income, ATM income
and brokerage commissions.
Non-interest Expense
Non-interest expenses increased by $269,000 and $631,000 for the three and six
month periods ended June 30, 2000 compared to the same periods in 1999. Salaries
and benefits increased as additional loan department employees were added to
assist with the increased loan volume. Legal and professional fees increased in
connection with the impending merger with Sturgis Bank & Trust. The Company has
also seen an increase in federal income taxes as its nontaxable municipal
securities income has declined. As the nontaxable municipal securities matured,
the funds were reinvested in loans.
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
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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 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 six months of 2000.
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PART II - OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Shareholders of Southern Michigan Bancorp, Inc. was held
on April 17, 2000 at Southern Michigan Bank & Trust. The following items were
approved by the shareholders at the Annual Meeting:
a. Election of Gregory J. Hull, Freeman E. Riddle and Thomas E. Kolassa as
directors.
b. Adoption of the Southern Michigan Bancorp, Inc. 2000 Stock Option Plan.
c. Ratification of the selection of Crowe, Chizek and Company LLP as
Independent Auditors for 2000.
ITEM 6. Exhibits and Reports on Form 8-K
a. Listing of Exhibits: Financial Data Schedule
b. There were no reports filed on Form 8-K during the second quarter of 2000.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Southern Michigan Bancorp, Inc.
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(Registrant)
AUGUST 7, 2000 /s/ 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
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27 Financial Data Schedule