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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, 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 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 - 1,940,469 shares at April 30, 2001 (including
shares held by ESOP)
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CONDENSED CONSOLIDATED BALANCE SHEETS
SOUTHERN MICHIGAN BANCORP, INC AND SUBSIDIARY
March 31 December 31
2001 2000
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(Unaudited) (A)
(In thousands)
ASSETS
Cash and due from banks $ 20,013 $ 18,489
Securities available for sale 54,340 51,475
Loans, net of allowance for loan losses of $1,523 (2000 - $2,096) 206,146 212,309
Federal funds loaned 500 -
Premises and equipment 8,503 7,619
Other assets 12,583 13,747
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TOTAL ASSETS $ 302,085 $ 303,639
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LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 35,995 $ 37,677
Interest bearing 213,485 207,753
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249,480 245,430
Federal funds purchased - 4,000
Accounts payable and other liabilities 3,088 3,520
Other long-term borrowings 23,000 25,000
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TOTAL LIABILITIES 275,568 277,950
Common stock subject to repurchase obligation in ESOP 1,732 1,478
Shareholders' equity:
Preferred stock, 100,000 shares authorized
Common stock, $2.50 par value:
Authorized--4,000,000 shares
Issued--1,940,469 shares (2000 - 1,940,502)
Outstanding--1,828,728 shares (2000 - 1,831,064) 4,572 4,578
Capital surplus 9,823 10,072
Retained earnings 10,348 9,964
Net unrealized appreciation on available for sale securities 630 185
Unearned Employee Stock Ownership Plan shares (588) (588)
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TOTAL SHAREHOLDERS' EQUITY 24,785 24,211
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 302,085 $ 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 (UNAUDITED)
SOUTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARY
Three Months Ended
March 31
2001 2000
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(In thousands, except
per share amounts)
Interest income:
Loans, including fees $ 4,933 $ 4,649
Securities:
Taxable 569 544
Tax exempt 202 239
Other 34 2
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Total interest income 5,738 5,434
Interest expense:
Deposits 2,309 2,034
Other 455 312
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Total interest expense 2,764 2,346
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NET INTEREST INCOME 2,974 3,088
Provision for loan losses 375 150
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NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 2,599 2,938
Non-interest income:
Service charges on deposit accounts 260 264
Trust fees 143 134
Gain on sales of securities 6 1
Gain on sales of loans 204 101
Earnings on life insurance policies 53 45
Other 196 149
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862 694
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3,461 3,632
Non-interest expense:
Salaries and benefits 1,303 1,260
Occupancy 220 218
Equipment 263 257
Other 777 871
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2,563 2,606
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INCOME BEFORE INCOME TAXES 898 1,026
Federal income taxes 224 269
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NET INCOME 674 757
Other comprehensive income/(loss), net of tax: 445 (150)
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COMPREHENSIVE INCOME $ 1,119 $ 607
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Basic and Diluted Earnings Per Share 0.35 0.39
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Dividends Declared Per Share 0.15 0.19
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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
2001 2000
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(In thousands)
OPERATING ACTIVITIES
Net income $ 674 $ 757
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 375 150
Provision for depreciation 178 166
Net realized gain on sales of securities (6)
Net change in:
Other assets 934 279
Accrued expenses and other liabilities (392) (323)
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Net cash provided by operating activities 1,763 1,029
INVESTING ACTIVITIES
Proceeds from sales of securities 2,125 --
Proceeds from maturity of securities 5,732 2,810
Purchases of securities (10,041) (2,000)
Increase in federal funds sold (500) --
Net (increase) decrease in loans 5,788 (7,821)
Net increase in premises and equipment (1,062) (216)
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Net cash provided by (used in) investing activities 2,042 (7,227)
FINANCING ACTIVITIES
Net increase (decrease) in deposits 4,050 (1,777)
Increase (decrease) in federal funds purchased (4,000) 9,740
Decrease in long term borrowings (2,000)
Common stock repurchased and retired (1) (332)
Cash dividends (330) (341)
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Net cash provided by (used in) financing activities (2,281) 7,290
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Increase in cash and cash equivalents 1,524 1,092
Cash and cash equivalents at beginning of period 18,489 12,046
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 20,013 $ 13,138
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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, 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. The weighted average common shares outstanding for the
quarters ended March 31, 2001 and 2000 were 1,925,094 and 1,946,047
respectively.
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ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
FINANCIAL CONDITION
Total deposits increased by 1.7% during the first quarter of 2001. The Company
has traditionally experienced a decline in deposits in the first quarter of the
year, however, with the stock market decline, the Company has experienced an
influx of money into the certificate of deposit portfolio.
Loans have decreased by 2.9% in the first three months of 2001. The decrease has
occurred in the consumer and real estate mortgage portfolios. The largest
decrease occurred in the real estate mortgage portfolio. Due to lower interest
rates, many existing customers have rewritten their adjustable rate loans into
fixed rate loans which were then sold to the secondary market. There were
$228,000 in loans held for sale as of March 31, 2001.
Investment securities increased by 5.6% during the first quarter of 2001. Funds
received from increased deposits were used to purchase additional securities.
There were no significant fixed asset commitments as of March 31, 2001.
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.
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
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.
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The following table summarizes the Company's capital ratios as of March 31,
2001:
Tier 1 risk-based capital ratio 11.12%
Total risk-based capital ratio 11.80%
Leverage ratio 8.31%
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 declined by $114,000 for the three month period ended March
31, 2001 compared to the same period in 2000. This decrease is the result of a
slight decrease in the Company's margin due to competitive pressures on loan
rates and higher costs associated with cost of funds, such as interest bearing
deposits and FHLB borrowings.
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 2001 provision for loan losses was $225,000 higher than 2000
levels. The increase was the result of the charge-off of one commercial loan of
$673,000 for which $526,000 had previously been reserved in the allowance for
loan loss. 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 March 31, 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, increased by $168,000 during the first quarter
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of 2001 compared to the same period in 2000. The increase was primarily due 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 large volumes of fixed
rate mortgage loans.
Non-interest Expense
Non-interest expenses decreased by $43,000 for the three month period ended
March 31, 2001 compared to the same period in 2000, reflecting management's
continued efforts toward improving operating efficiencies.
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 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.
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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 2001.
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. Form 8-K was filed during the first quarter of 2001 announcing the
Registrant's adoption of a Stock Repurchase Program.
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)
MAY 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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