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 September 30, 2001 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
incorporation or organization) Identification 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.
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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 - 1,936,531 shares at October 31, 2001 (including
shares held by ESOP)
CONDENSED CONSOLIDATED BALANCE SHEETS
SOUTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARY
September 30, December 31,
2001 2000
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(Unaudited) (A)
(In thousands)
ASSETS
Cash and due from banks $ 27,375 $ 18,489
Securities available for sale 58,838 51,475
Loans, net of allowance for loan losses of $1,835 (2000 - $2,096) 202,962 212,309
Premises and equipment 8,109 7,619
Other assets 12,294 13,747
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TOTAL ASSETS $ 309,578 $ 303,639
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LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 41,015 $ 37,677
Interest bearing 214,668 207,753
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255,683 245,430
Federal funds purchased - 4,000
Accounts payable and other liabilities 3,341 3,520
Other long-term borrowings 23,000 25,000
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282,024 277,950
Common stock subject to repurchase obligation in ESOP 1,734 1,478
Shareholders' equity:
Preferred stock, 100,000 shares authorized
Common stock, $2.50 par value:
Authorized--4,000,000 shares
Issued--1,937,061 shares (2000 - 1,940,502)
Outstanding--1,824,421 shares (2000 -1,831,064) 4,561 4,578
Capital surplus 9,764 10,072
Retained earnings 11,143 9,964
Accumulated other comprehensive income 940 185
Unearned Employee Stock Ownership Plan shares (588) (588)
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25,820 24,211
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 309,578 $ 303,639
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(A) The balance sheet at December 31, 2000 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 AND COMPREHENSIVE INCOME (UNAUDITED)
SOUTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARY
Three Months Ended Nine Months Ended
September 30, September 30,
2001 2000 2001 2000
(In thousands, except per share amounts)
Interest income:
Loans, including fees $ 4,611 $ 5,215 $ 14,213 $ 14,862
Securities:
Taxable 617 637 1,829 1,646
Tax - exempt 221 229 617 702
Other - 5 36 7
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Total interest income 5,449 6,086 16,695 17,217
Interest expense:
Deposits 1,915 2,342 6,399 6,499
Other 425 604 1,309 1,315
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Total interest expense 2,340 2,946 7,708 7,814
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NET INTEREST INCOME 3,109 3,140 8,987 9,403
Provision for loan losses 225 150 825 450
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NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 2,884 2,990 8,162 8,953
Non-interest income:
Service charges on deposit accounts 260 275 783 824
Trust fees 150 131 421 388
Gains on sales of securities, net 1 (4) 34 (7)
Gains on sales of loans, net 255 127 749 377
Earnings on life insurance policies 60 52 167 148
Other (22) 138 248 449
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704 719 2,402 2,179
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3,588 3,709 10,564 11,132
Non-interest expenses:
Salaries and benefits 1,294 1,243 3,854 3,709
Occupancy 209 195 628 606
Equipment 304 218 875 719
Other 824 956 2,475 2,730
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2,631 2,612 7,832 7,764
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INCOME BEFORE INCOME TAXES 957 1,097 2,732 3,368
Federal income taxes 235 316 680 929
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NET INCOME 722 781 2,052 2,439
Other comprehensive income, net of tax:
Change in unrealized gains on securities 294 503 755 452
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COMPREHENSIVE INCOME $ 1,016 $ 1,284 $ 2,807 $ 2,891
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Basic and Diluted Earnings Per Share 0.37 0.40 1.07 1.26
Dividends Declared Per Share 0.15 0.17 0.45 0.53
See notes to condensed consolidated financial statements.
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SOUTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARY
Nine Months Ended
September 30,
2001 2000
(In thousands)
OPERATING ACTIVITIES
Net income $ 2,052 $ 2,439
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 825 450
Provision for depreciation 669 507
Net (increase) decrease in other assets 1,064 (1,538)
Increase(decrease) in accounts payable and other liabilities (431) 88
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Net cash provided by operating activities 4,179 1,946
INVESTING ACTIVITIES
Proceeds from sales of securities 2,125 --
Proceeds from maturities of securities 11,951 10,222
Net realized gain on sales of investment securities (34) --
Purchases of securities (20,261) (7,150)
Net (increase) decrease in loans 8,522 (23,478)
Net increase in premises and equipment (1,159) (1,016)
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Net cash used in investing activities 1,144 (21,422)
FINANCING ACTIVITIES
Net increase in deposits 10,253 13,710
Increase (decrease) in federal funds purchased (4,000) 1,000
Increase (decrease) in other borrowings (2,000) 10,000
Common stock repurchased and retired (69) (875)
Cash dividends (621) (1,042)
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Net cash provided by (used in) financing activities 3,563 22,793
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Increase in cash and cash equivalents 8,886 3,317
Cash and cash equivalents at beginning of period 18,489 12,046
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 27,375 $ 15,363
See notes to condensed consolidated financial statements.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SOUTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARY
September 30, 2001
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, 2000.
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. On April 17, 2001, 10,191 options to purchase shares of
stock were granted by the Board of Directors under the 2000 Stock Option plan.
The basic and diluted weighted average common shares outstanding for the three
and nine month periods ended September 30, 2001 were:
3 months ended 9 months ended
September 30, 2001 September 30, 2001
basic 1,923,331 1,924,501
diluted 1,923,400 1,924,602
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The basic and diluted weighted average common shares outstanding for the three
and nine month periods ended September 30, 2000 were 1,925,615 and 1,934,017,
respectively.
In 2001, new accounting guidance was issued that will, beginning in 2002, revise
the accounting for goodwill and intangible assets. Intangible assets with
indefinite lives and goodwill will no longer be amortized, but will periodically
be reviewed for impairment and written down if impaired. Additional disclosures
about intangible assets and goodwill may be required. An initial goodwill
impairment test is required during the first six months of 2002. The Company has
not yet completed an analysis of its intangibles under the new guidance and
cannot assess the impact on the financial statements at this time.
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
FINANCIAL CONDITION
Net loans have decreased by 4.4% in the first nine months of 2001. The decrease
has occurred in the real estate mortgage and consumer portfolios. Customers took
advantage of the 350 basis point drop in the prime interest rate since the
beginning of the year to refinance their adjustable rate loans or their higher
rate fixed rate loans. These longer term fixed rate loans were subsequently sold
on the secondary market. At September 30, 2001 the Company had $705,000 in loans
held for sale.
Deposits increased 4.2% during the first nine months of 2001. Non - interest
bearing deposits increased 8.9% for the nine month period.
The decrease in the loan portfolio combined with the increase in deposits,
generated excess cash which allowed the Company to reduce the long term
borrowings and federal funds purchased during the first nine months of 2001. The
Company also purchased additional securities with the excess cash.
There were no significant fixed asset commitments as of September 30, 2001.
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.
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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
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 September 30,
2001:
Tier 1 risk-based capital ratio 11.42%
Total risk-based capital ratio 12.23
Leverage ratio 8.47
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 decreased by $31,000 and $416,000 for the three and nine
month periods ended September 30, 2001 compared to the same periods in 2000.
This decrease is the result of a decrease in the Company's margin due to a
higher cost of funds (primarily higher rate CD's and FHLB borrowings) and eight
reductions, totaling 350 basis points, in the national prime rate during the
first nine months of 2001.
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.
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The provision for loan losses for the first nine months of 2001 was $375,000
higher than the same period of 2000. The increase is partially the result of one
commercial loan charge off of $673,000 for which $526,000 had previously been
allocated in the allowance for loan loss. The provision has also been impacted
by current economic conditions and the impact of the conditions on individual
loans. The allowance for loan losses is being maintained at a level which, in
management's opinion, is adequate to absorb probable loan losses in the loan
portfolio as of September 30, 2001.
Non-interest Income
Non-interest income, which includes service charges on deposit accounts, gain on
sale of loans, trust fee income, security gains and losses and other
miscellaneous charges and fees, decreased by $15,000 and increased $223,000 for
the three and nine month periods ended September 30, 2001 compared to the same
periods in 2000. The year to date increase is due primarily to gains recognized
on the sale of real estate mortgage loans to the secondary market. In order to
reduce the risk associated with changing interest rates, the Company regularly
sells fixed rate real estate mortgage loans on the secondary market. The Company
recognizes a profit at the time of sale. During a period of relatively low
interest rates, the Company has generated relatively large volumes of fixed rate
mortgage loans.
Non-interest Expense
Non-interest expenses increased by $19,000 and $68,000 for the three and nine
month periods ended September 30, 2001 compared to the same periods in 2000.
This increase is due primarily to a loss incurred on a repossessed mortgage
property that was sold at a loss of $52,000 and increased depreciation due to
new equipment placed in service in the second quarter of 2001.
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.
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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 nine months of 2001.
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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. There were no reports filed on Form 8-K during the third quarter of 2001.
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)
November 12, 2001 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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