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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 September 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 - 1,940,660 shares at October 31, 2000 (including
shares held by ESOP)
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CONDENSED CONSOLIDATED BALANCE SHEETS
SOUTHERN MICHIGAN BANCORP, INC AND SUBSIDIARY
<TABLE>
<CAPTION>
September 30 December 31
2000 1999
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(Unaudited) (A)
(In thousands)
<S> <C> <C>
ASSETS
Cash and due from banks $ 15,363 $ 12,046
Investment securities available-for-sale 51,842 54,229
Loans, net 214,267 191,239
Premises and equipment 7,214 6,705
Other assets 12,911 11,606
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TOTAL ASSETS $301,597 $275,825
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LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 37,672 $ 33,124
Interest bearing 209,341 200,179
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247,013 233,303
Federal funds purchased 1,000
Accounts payable and other liabilities 3,621 3,542
Other long-term borrowings 25,000 15,000
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TOTAL LIABILITIES 276,634 251,845
Common stock subject to repurchase obligation in ESOP 1,674 3,990
Shareholders' equity:
Preferred stock, 100,000 shares authorized
Common stock, $2.50 par value:
Authorized--4,000,000 shares
Issued--1,940,660 shares (1999-1,969,259)
Outstanding--1,832,670 shares (1999-1,838,757) 4,582 4,597
Capital surplus 9,874 8,421
Retained earnings 9,358 7,949
Net unrealized appreciation (depreciation) on available-for-sale
securities, net of tax of ($32) (1999--$200) 63 (389)
Unearned Employee Stock Ownership Plan shares (588) (588)
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TOTAL SHAREHOLDERS' EQUITY 23,289 19,990
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $301,597 $275,825
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</TABLE>
(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
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
2000 1999 2000 1999
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(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Interest income:
Loans, including fees $5,215 $4,358 $14,862 $12,084
Investment securities:
Taxable 637 516 1,646 1,706
Tax exempt 229 255 702 878
Other 5 0 7 41
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Total interest income 6,086 5,129 17,217 14,709
Interest expense:
Deposits 2,342 1,918 6,499 5,712
Other 604 204 1,315 462
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Total interest expense 2,946 2,122 7,814 6,174
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NET INTEREST INCOME 3,140 3,007 9,403 8,535
Provision for loan losses 150 258 450 594
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NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 2,990 2,749 8,953 7,941
Non-interest income:
Service charges on deposit accounts 275 269 824 777
Trust department 131 19 388 359
Security gains (losses) (4) 0 (7) 0
Secondary market gains 127 182 377 557
Earnings on life insurance 52 49 148 150
Other 138 128 449 386
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719 647 2,179 2,229
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3,709 3,396 11,132 10,170
Non-interest expenses:
Salaries and benefits 1,243 1,184 3,709 3,349
Occupancy 195 222 606 629
Equipment 218 239 719 706
Other 956 799 2,730 2,281
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2,612 2,444 7,764 6,965
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INCOME BEFORE INCOME TAXES 1,097 952 3,368 3,205
Federal income taxes 316 214 929 717
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NET INCOME 781 738 2,439 2,488
Other comprehensive income, net of tax:
Change in unrealized gains on securities 503 45 452 (447)
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COMPREHENSIVE INCOME $1,284 $ 783 $ 2,891 $ 2,041
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Basic and Diluted Earnings Per Share $ 0.40 $ 0.37 $ 1.26 $ 1.23
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Dividends Declared Per Share $ 0.17 $ 0.17 $ 0.53 $ 0.50
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</TABLE>
See notes to condensed consolidated financial statements.
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SOUTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARY
<TABLE>
<CAPTION>
Nine Months Ended
September 30
2000 1999
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(In thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 2,439 $ 2,488
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 450 594
Provision for depreciation 507 501
Increase in other assets (1,538) (932)
Increase in accounts payable and other liabilities 88 363
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Net cash provided by operating activities 1,946 3,014
INVESTING ACTIVITIES
Proceeds from maturity of investment securities 10,222 27,078
Purchases of investment securities (7,150) (13,988)
(Increase) decrease in federal funds sold 0 4,000
Net increase in loans (23,478) (25,494)
Net increase in premises and equipment (1,016) (257)
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Net cash used in investing activities (21,422) (8,661)
FINANCING ACTIVITIES
Net increase (decrease) in deposits 13,710 (4,421)
Increase in federal funds purchased 1,000
Increase in other borrowings 10,000 10,000
Common stock repurchased and retired (875) (1,304)
Cash dividends (1,042) (1,079)
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Net cash provided by financing activities 22,793 3,196
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Increase (decrease) in cash and cash equivalents 3,317 (2,451)
Cash and cash equivalents at beginning of period 12,046 16,228
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 15,363 $ 13,777
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</TABLE>
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, 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.
NOTE B -- EARNINGS PER SHARE
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 nine months ended September 30, 2000 were 1,925,615 and 1,934,017,
respectively. The weighted average common shares outstanding for the three and
nine months ended September 30, 1999 were 2,009,160 and 2,023,242, respectively.
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ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
FINANCIAL CONDITION
Total deposits have increased by 5.9% during the first nine months of 2000. The
increase is expected to be temporary since it is due to money coming into short
term money market accounts.
Net loans have increased by 12.0% in the first nine months of 2000. The loan
growth has occurred in the commercial and real estate mortgage portfolios. The
commercial growth is due to economic growth in the Company's market area and
increased efforts to competitively price loans. The real estate mortgage
increase is the result of the rising rate environment. Customers have been
reluctant to commit to long term fixed rate mortgages that the Company sells to
the secondary market, instead they have opted for adjustable rate loans that the
Company keeps in house. There were no loans held for sale as of September 30,
2000.
Investment securities decreased by 4.4% during the first nine 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 October 4, 2000 the Board of Directors of Sturgis Bank & Trust Company
announced the termination of its merger agreement with the Company. Sturgis
terminated the Agreement because it was unable to obtain a Fairness Opinion from
its financial advisor. The receipt of a Fairness Opinion was a necessary
condition to the closing of the transaction. A fairness opinion is a
professional judgment offered for a fee by a financial advisor on the fairness
of the consideration being offered in a merger or consolidation. The Company has
incurred costs of approximately $335,000 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 September 30,
2000:
<TABLE>
<S> <C>
Tier 1 risk-based capital ratio 10.32%
Total risk-based capital ratio 11.15
Leverage ratio 8.06
</TABLE>
The above table indicates that the Company's capital ratios are above the
regulatory minimum requirements.
The Company has repurchased and retired 28,533 shares of outstanding common
stock from ESOP participants during the first nine months of 2000.
RESULTS OF OPERATIONS
Net Interest Income
Net interest income increased by $133,000 and $868,000 for the three and nine
month periods ended September 30, 2000 compared to the same periods in 1999. The
increases are due to increased loan volume 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.
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The provision for loan losses decreased by $108,000 and $144,000 for the three
and nine month periods ended September 30, 2000 compared to the same periods in
1999. The provision was higher in 1999 due to a large commercial borrower
experiencing financial difficulties. 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.
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, 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,
increased by $72,000 for the three month period and decreased by $50,000 for the
nine month period ended September 30, 2000 compared to the same periods in 1999.
The increase in the third quarter is due to an increase in collected trust fees.
The nine month decrease is due primarily to a decline in gains recognized on the
sale of real estate mortgage loans to the secondary market. As fixed rate
mortgage rates have increased, the number of new loans and refinancing
activities have declined.
Non-interest Expense
Non-interest expenses increased by $168,000 and $799,000 for the three and nine
month periods ended September 30, 2000 compared to the same periods in 1999.
Salaries and benefits expenditures increased in the third quarter of the year as
additional loan department employees were added throughout the year to assist
with the increased loan volume. Legal and professional fees increased as a
result of increased usage of consultants for general purposes and the merger
consideration. The Company has also seen an increase in federal income taxes as
its non taxable municipal securities income has declined. As the non taxable
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.
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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
third 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. There were no reports on Form 8-K filed in the third 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)
NOVEMBER 10, 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
<TABLE>
<CAPTION>
Exhibit No. Description
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<S> <C>
27 Financial Data Schedule
</TABLE>
