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, 2002 Commission file number 2-78178
-------------- -------
Southern Michigan Bancorp, Inc.
-------------------------------
(Exact name of registrant as specified in its charter)
Michigan 38-2407501
-------------------------------- -------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
51 West Pearl Street, Coldwater, Michigan 49036
----------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code -- (517) 279-5500
-------------
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 - 1,867,005 shares at April 30, 2002 (including
shares held by ESOP)
PART 1 - FINANCIAL INFORMATION
ITEM 1. Financial Statements.
CONDENSED CONSOLIDATED BALANCE SHEETS
SOUTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARY
March 31 December 31
2002 2001
--------------------------------------
(Unaudited) (A)
(In thousands, except share and per
share data)
ASSETS
Cash and due from banks $ 15,051 $ 23,432
Securities available for sale 53,366 61,531
Loans, net of allowance for loan losses of $2,146 (2001 - $2,065) 220,797 210,470
Premises and equipment 7,700 7,868
Other assets 13,924 13,795
--------------------------------------
TOTAL ASSETS $ 310,838 $ 317,096
======================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 43,166 $ 40,515
Interest bearing 206,366 220,568
--------------------------------------
249,532 261,083
Federal funds purchased 5,750 -
Accounts payable and other liabilities 4,340 4,943
Other long-term borrowings 24,820 24,000
--------------------------------------
284,442 290,026
Common stock subject to repurchase obligation in ESOP 1,568 1,523
Shareholders' equity:
Preferred stock, 100,000 shares authorized
Common stock, $2.50 par value:
Authorized--4,000,000 shares
Issued--1,867,273 shares (2001 - 1,920,651)
Outstanding--1,770,453 shares (2001 -1,822,102) 4,427 4,555
Capital surplus 8,895 9,652
Retained earnings 11,792 11,528
Accumulated other comprehensive income, net of tax 302 400
Unearned Employee Stock Ownership Plan shares (588) (588)
--------------------------------------
TOTAL SHAREHOLDERS' EQUITY 24,828 25,547
--------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 310,838 $ 317,096
======================================
(A) The balance sheet at December 31, 2001 has been derived from the audited
consolidated financial statements at that date.
See notes to condensed consolidated financial statements.
-2-
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED)
SOUTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARY
Three Months Ended
March 31
2002 2001
----------------------------------------
(In thousands, except per share amounts)
Interest income:
Loans, including fees $ 4,044 $ 4,933
Securities:
Taxable 438 569
Tax exempt 252 202
Other - 34
--------------------------------------
Total interest income 4,734 5,738
Interest expense:
Deposits 1,220 2,309
Other 433 455
--------------------------------------
Total interest expense 1,653 2,764
--------------------------------------
NET INTEREST INCOME 3,081 2,974
Provision for loan losses 275 375
--------------------------------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 2,806 2,599
Non-interest income:
Service charges on deposit accounts 263 260
Trust fees 148 143
Gain on sales of securities 4 6
Gain on sales of loans 252 204
Earnings on life insurance policies 51 53
Other 120 196
--------------------------------------
838 862
--------------------------------------
Non-interest expense:
Salaries and benefits 1,475 1,303
Occupancy 210 220
Equipment 356 263
Professional and outside services 195 99
Advertising and marketing 34 49
Other 670 629
--------------------------------------
2,940 2,563
--------------------------------------
INCOME BEFORE INCOME TAXES 704 898
Federal income taxes 141 224
--------------------------------------
NET INCOME 563 674
Other comprehensive income/(loss), net of tax: (98) 445
--------------------------------------
COMPREHENSIVE INCOME $ 465 $ 1,119
======================================
Basic and Diluted Earnings Per Share 0.30 0.35
======================================
Dividends Declared Per Share 0.16 0.15
======================================
See notes to condensed consolidated financial statements.
-3-
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SOUTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARY
Three Months Ended
March 31
2002 2001
--------------------------------------
(In thousands)
OPERATING ACTIVITIES
Net income $ 563 $ 674
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 275 375
Provision for depreciation 224 178
Amortization of intangible assets 26 30
Net realized gain on sales of securities (4) (6)
Net change in:
Loans held for sale 887 796
Other assets (104) 904
Accrued expenses and other liabilities (595) (392)
--------------------------------------
Net cash provided by operating activities 1,272 2,559
INVESTING ACTIVITIES
Proceeds from sales of securities 254 2,125
Proceeds from maturities of securities 11,016 5,732
Purchases of securities (3,250) (10,041)
Increase in federal funds sold - (500)
Net (increase) decrease in loans (11,489) 4,992
Net increase in premises and equipment (56) (1,062)
--------------------------------------
Net cash provided by (used in) investing activities (3,525) 1,246
FINANCING ACTIVITIES
Net increase (decrease) in deposits (11,551) 4,050
Increase (decrease) in federal funds purchased 5,750 (4,000)
Increase (decrease) in long-term borrowings 820 (2,000)
Common stock repurchased and retired (840) (1)
Cash dividends (307) (330)
--------------------------------------
Net cash used in financing activities (6,128) (2,281)
--------------------------------------
Increase (decrease) in cash and cash equivalents (8,381) 1,524
Cash and cash equivalents at beginning of period 23,432 18,489
--------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 15,051 $ 20,013
======================================
See notes to condensed consolidated financial statements.
-4-
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SOUTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARY
March 31, 2002
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, 2001.
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 basic and diluted weighted average common shares outstanding for the three
month period ended March 31, 2002 and 2001 were:
2002 2001
---- ----
Basic 1,891,397 1,925,094
Diluted 1,891,702 1,925,094
-5-
NOTE B - NEW ACCOUNTING PRONOUNCEMENTS
On January 1, 2002, the Company adopted a new accounting standard which
addresses accounting for goodwill and intangible assets arising from business
combinations. Identifiable intangible assets must be separated from goodwill.
Identifiable intangible assets with finite useful lives are amortized under the
new standard, whereas unidentified intangible assets resulting from business
combinations, both amounts previously recorded and future amounts purchased,
cease being amortized. Annual impairment testing is required for goodwill with
impairment being recorded if the carrying amount of goodwill exceeds its implied
fair value. The Company's current intangible assets resulted from branch
acquisitions. Current interpretations by the Financial Accounting Standards
Board (FASB) requires the continued amortization of the core deposit intangibles
and the unidentified intangibles resulting from branch acquisitions. However,
the FASB is reconsidering their interpretation and it is possible that in the
future there may no longer be a requirement to amortize the unidentified
intangibles resulting from branch acquisitions. Adoption of this standard on
January 1, 2002 did not have a material effect on the Company's financial
statements.
Intangible assets subject to amortization are as follows:
March 31, 2002 December 31, 2001
-------------- -----------------
Gross Accumulated Gross Accumulated
Description Amount Amortization Amount Amortization
----------- ------ ------------ ------ ------------
Core deposit intangibles $ 559,000 $ 381,000 $ 559,000 $370,000
Unidentified intangibles 938,000 333,000 938,000 318,000
---------- ---------- ---------- --------
Total $1,497,000 $ 714,000 $1,497,000 $688,000
Amortization expense for the first quarter of 2002 and 2001 was $26,000 and
$30,000. Estimated annual amortization expense for the next five years is:
2002 $102,000
2003 102,000
2004 102,000
2005 102,000
2006 96,000
Statement of Financial Accounting Standards (SFAS)- In August 2001, the
Financial Accounting Standards Board issued SFAS No. 143, "Accounting for Asset
Retirement Obligations" which will be adopted by the Company on January 1, 2003.
The new accounting standard addresses accounting for obligations associated with
the retirement of tangible, long-lived assets and requires a liability to be
recognized for the fair value of any such obligations. Adoption of this standard
on January 1, 2003 is not expected to have a material effect on the Company's
consolidated financial position or results of operations.
-6-
On January 1, 2002, the Company adopted SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." This new accounting standard
establishes more restrictive requirements for the classification of assets as
"held for sale" and also expands the types of dispositions that are to be
accounted for as discontinued operations. Adoption of this standard on January
1, 2002 did not have a material effect on the Company's consolidated financial
position or results of operations.
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
FINANCIAL CONDITION
Investment securities decreased by 13.3% during the first quarter of 2002. Funds
received from maturing investment securities were used to fund additional loans.
Net loans have increased by 4.9% in the first three months of 2002. The increase
has occurred primarily in the commercial loan portfolio. Mortgage loans have
increased slightly while installment loans continue to decline. There were
$976,000 in loans held for sale as of March 31, 2002.
In assessing the adequacy of the allowance for loan losses, 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 allowance for loan losses is being
maintained at a level, which in management's opinion, is adequate to absorb
probable incurred loan losses in the loan portfolio as of March 31, 2002.
The allowance for loan losses was $2,146,000 or .97% of gross loans at March 31,
2002. As of December 31, 2001, the allowance for loan losses was $2,065,000 or
..98% of gross loans. As of March 31, 2002, non-performing loans (defined as
loans on non-accrual status or 90 days or more past due) have decreased $72,000
or 2.7% from year end.
There were no significant fixed asset commitments as of March 31, 2002.
-7-
Total deposits decreased by 4.4% during the first quarter of 2002. The Company
has traditionally experienced a decline in deposits in the first quarter of the
year. To provide a source of funding for loan growth the Company borrowed $5.8
million of federal funds purchased at March 31, 2002.
During the first quarter of 2002, the Company repurchased approximately $840,000
worth of stock and retired it. This resulted in total capital decreasing from
December 31, 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. 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 intangible assets.
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 intangible assets 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,
2002:
Tier 1 risk-based capital ratio 10.60%
Total risk-based capital ratio 11.50%
Leverage ratio 8.09%
The above table indicates that the Company's capital ratios are above the
regulatory minimum requirements.
-8-
RESULTS OF OPERATIONS
Net Interest Income
Net interest income increased by $107,000 for the three month period ended March
31, 2002 compared to the same period in 2001. Higher priced deposits matured
during the last part of 2001 reducing interest costs which in turn increased the
net interest margin.
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 2002 provision for loan losses was $100,000 lower than the
first quarter 2001 levels. A higher provision for loan losses was recorded in
the first quarter of 2001 as the result of partially replenishing the allowance
for loan losses for $948,000 in net charge-offs recorded during the first
quarter of 2001.
Non-interest Expense
Non-interest expenses increased by $377,000 for the three month period ended
March 31, 2002 compared to the same period in 2001. During the quarter salaries
and employee benefits expense increased $172,000 compared to the same period in
2001. After the first quarter of 2001, the Company hired additional staff in
Battle Creek to focus on this targeted market. The Company also hired additional
mortgage originators who are paid commissions for work generated. The
commissions for 2002 have exceeded the prior year first quarter commissions by
over $50,000. The cost of employee benefits increased in 2002 as health
insurance costs have dramatically increased. In addition to salaries and
employee benefits increasing, the Company saw an increase in legal and other
fees related to the resolution of a lawsuit, as well as an increase in equipment
service contracts expense during the quarter.
-9-
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.
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 2002.
-10-
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings.
None.
ITEM 2. Changes in Securities and Use of Proceeds.
None.
ITEM 3. Defaults Upon Senior Securities.
None.
ITEM 4. Submission of Matters to a Vote of Security Holders.
None.
ITEM 5. Other Information.
None
ITEM 6. Exhibits and Reports on Form 8-K.
None.
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.
------------------------------
(Registrant)
MAY 9, 2002 JAMES T. GROHALSKI
----------- ----------------------------------
Date James T. Grohalski, President
and Chief Executive Officer
(Principal Financial and
Accounting Officer)
-11-