10-Q 1 k62298e10-q.txt FORM 10-Q 1 ------------------- 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 -------------- ------- 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 - 1,940,469 shares at April 30, 2001 (including shares held by ESOP) 2 CONDENSED CONSOLIDATED BALANCE SHEETS SOUTHERN MICHIGAN BANCORP, INC AND SUBSIDIARY
March 31 December 31 2001 2000 ----------------------------------- (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 ----------------------------------- TOTAL ASSETS $ 302,085 $ 303,639 =================================== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Non-interest bearing $ 35,995 $ 37,677 Interest bearing 213,485 207,753 ----------------------------------- 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 ----------------------------------- 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) ----------------------------------- TOTAL SHAREHOLDERS' EQUITY 24,785 24,211 ----------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 302,085 $ 303,639 ===================================
(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. -2- 3 CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) SOUTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARY
Three Months Ended March 31 2001 2000 -------------------------------------- (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 -------------------------------------- Total interest income 5,738 5,434 Interest expense: Deposits 2,309 2,034 Other 455 312 -------------------------------------- Total interest expense 2,764 2,346 -------------------------------------- NET INTEREST INCOME 2,974 3,088 Provision for loan losses 375 150 -------------------------------------- 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 -------------------------------------- 862 694 -------------------------------------- 3,461 3,632 Non-interest expense: Salaries and benefits 1,303 1,260 Occupancy 220 218 Equipment 263 257 Other 777 871 -------------------------------------- 2,563 2,606 -------------------------------------- INCOME BEFORE INCOME TAXES 898 1,026 Federal income taxes 224 269 -------------------------------------- NET INCOME 674 757 Other comprehensive income/(loss), net of tax: 445 (150) -------------------------------------- COMPREHENSIVE INCOME $ 1,119 $ 607 ====================================== Basic and Diluted Earnings Per Share 0.35 0.39 ====================================== Dividends Declared Per Share 0.15 0.19 ======================================
See notes to condensed consolidated financial statements. -3- 4 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) SOUTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARY
Three Months Ended March 31 2001 2000 ----------------------------- (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) ----------------------------- 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) ----------------------------- 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) ----------------------------- Net cash provided by (used in) financing activities (2,281) 7,290 ----------------------------- Increase in cash and cash equivalents 1,524 1,092 Cash and cash equivalents at beginning of period 18,489 12,046 ----------------------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 20,013 $ 13,138 =============================
See notes to condensed consolidated financial statements. -4- 5 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. -5- 6 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. -6- 7 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 -7- 8 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. -8- 9 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. ------------------------------- (Registrant) MAY 12, 2001 JAMES T. GROHALSKI -------------------------------------------------------------------------------- Date James T. Grohalski, President and Chief Executive Officer (Principal Financial and Accounting Officer) -9-