ITEM 1. BUSINESS
Overview
The registrant, Southern Michigan Bancorp, Inc. (the "Company"), is a registered bank holding company incorporated under the laws of the State of Michigan, headquartered in Coldwater, Michigan. The Company was formed in 1982 for the purpose of acquiring all of the outstanding shares of Southern Michigan National Bank, which it did in November 1982. In December 1992, Southern Michigan National Bank converted its charter to that of a Michigan state banking corporation and changed its name to, Southern Michigan Bank & Trust (the "Bank"), with its main office located at 51 West Pearl Street, Coldwater, Michigan 49036. The Bank operates eleven (11) branch offices in the primarily rural areas of Branch, Hillsdale, and Calhoun counties in southwestern Michigan. In addition to the operations of the Bank described below, the Company owns and leases certain real estate to the Bank and third parties (see Item 2.
ITEM 2. PROPERTIES
The Bank's main office is located at 51 West Pearl Street, Coldwater, Michigan and is owned by the Bank. This facility, which opened in 1955 and expanded in 1976, consists of a one story structure comprising 27,945 square feet. Parking is available for approximately 125 cars and 6 teller windows are available to serve the Bank's customers. The Bank owns ten branch offices, two of which are in Coldwater, two in Union City, Michigan, one in Tekonsha, Michigan, one in Hillsdale, Michigan, one in Camden, Michigan, one in Athens, Michigan, one in North Adams, Michigan and one in Pennfield Township (Battle Creek), Michigan. In addition, the Company owns a 15,000 square foot building in Battle Creek, Michigan and a 14,000 square foot building in Coldwater, Michigan. 6,000 square feet of the Battle Creek building is leased to the Bank for use by one of its Battle Creek branches. 3,500 square feet is leased to a local college, 2,300 square feet is leased as office space to local businesses and the remaining space is presently unoccupied. 7,446 square feet of the Coldwater building is leased to the Bank for use as a Consumer Loan center, 3,420 square feet is leased to a local title office, 394 square feet is leased to community nonprofit organizations and the remaining space is presently unoccupied. The Bank's branch offices range in size from 465 square feet to 6,000 square feet, with nine of the branch offices having drive-in facilities and seven of the branches having automated teller machines.
All of the Company's and the Bank's facilities are maintained in good condition and are adequately insured. Management of Company believes the present facilities are adequate to meet both current and future needs.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Bank is frequently engaged in litigation, both as plaintiff and defendant, which is incident to its business. In certain proceedings, claims or counterclaims may be asserted against the Bank. Based on the facts known to it to date, management of the Company does not currently anticipate that the ultimate liability, if any, arising out of any such litigation will have a material effect on the consolidated financial statements of the Company, except as disclosed in Note A of the Notes to Consolidated Financial Statements described in Item 14 below.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is regularly quoted on the OTC Bulletin Board (OTCBB). The bid prices described below are quotations reflecting inter-dealer prices, without retail markup, markdown or commissions, and may not necessarily represent actual transactions. There were 554 shareholders of record at March 1, 2002.
The following table sets forth the range of high and low bid information and dividends declared for the Company's two most recent fiscal years:
There are restrictions that currently limit the Company's ability to pay cash dividends. Information regarding dividend payment restrictions is described in Note M to the consolidated financial statements for the year ended December 31, 2001.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
All per share amounts have been adjusted for a 10% stock dividend declared in 1999 and a 1997 stock split effected in the form of a 100% stock dividend.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion provides information about the Company's financial condition which supplements the Consolidated Financial Statements. The analysis should be read in conjunction with such financial statements.
FINANCIAL CONDITION
The Company functions as a financial intermediary and, as such, its financial condition should be examined in terms of trends in its sources and uses of funds.
The Company uses its funds primarily to support its lending activities. Loans decreased by .9% in 2001 and increased by 10.9% in 2000. The 2001 decline occurred in the real estate mortgage and installment loan categories. Commercial loans increased 16.1% as the Bank focused attention on this area of lending and actively called on current and potential customers. Installment loans decreased 29.6% as the Bank chose not to compete with manufacturers offering 0% new car loans and the Bank placed less emphasis on indirect lending. Real estate mortgage loans decreased 16.7% as the Bank increased sales of loans in the secondary market. With interest rates declining, a number of real estate mortgage loans were refinanced and sold in the secondary market. This reduced the number and amount of loans that the Bank retained.
Gains recognized on the sale of real estate mortgage loans to the secondary market increased in 2001 from $533,000 in 2000 to $1,161,000. The secondary market loan activity increased in 2001 as mortgage rates decreased. Fixed rate loans which represent all of the loans sold on the secondary market became very attractive. Loans held for sale at December 31, 2001 were $1,863,000. The real estate portfolio largely consists of residential mortgages within the local area with a low risk of loss.
The loan growth in 2000 occurred in the commercial and real estate loan categories. Commercial loans increased by 16.5% as local businesses expanded and the Bank focused on this area. Installment loans decreased 5.4% as the Bank chose to focus on its commercial and residential real estate lending and placed less emphasis on indirect lending. Real estate mortgage loans increased 10.9% as the Bank funded larger real estate loans, construction loans and other loans that did not conform to secondary market guidelines.
Loan commitments, consisting of unused credit card and home equity lines, available amounts on revolving lines of credit and other approved loans which have not been funded, were $47,450,000 and $38,056,000 at December 31, 2001 and 2000, respectively. Most of these commitments are priced at a variable interest rate thus minimizing the Bank's risk in a changing interest rate environment.
There were no significant concentrations in any loan category as to borrower or industry. Substantially all loans are granted to customers located in the Bank's service area, which is primarily southern Michigan.
Another significant component of cash flow is the securities portfolio. Total securities increased by 19.5% in 2001 and decreased by 5.1% in 2000. The funds received from maturing securities were reinvested in the portfolio in 2001 and used to partially fund the 2000 loan growth.
The securities available for sale portfolio had net unrealized gains of $605,000 and $280,000 at December 31, 2001 and 2000, respectively. There is no concentration of securities in the portfolio which would constitute an unusual risk except at year-end 2001 and 2000, the amortized cost of securities issued by the State of Michigan and all its political subdivisions totaled $10,455,000 and $11,079,000 with an estimated market value of $10,563,000 and $11,511,000, respectively.
Deposits traditionally represent the Company's principal source of funds. Total deposits increased 6.4% in 2001 and 5.2% in 2000. In 2001, the Bank experienced a substantial increase in deposits, however this was not unexpected. Because of the erratic financial markets the Bank did see a higher increase in our money market accounts than was expected. This was due to customers leaving the financial markets and placing their funds in accounts that paid slightly more interest than savings accounts, but were not restricted as to withdrawals. In 2000, the Bank chose to increase the rates offered on certificates of deposit (CDs) in order to attract deposits. The largest increases in CDs were the over $100,000 category and the 24 - 36 month term CDs. Growth also occurred in other categories of deposits as lenders were encouraged to bring deposits in with their loan relationships. Business checking and money market accounts increased by $10,952,000 in 2000. Attracting and keeping traditional deposit relationships will continue to be a challenge to the Bank, particularly with the increased competition from nondeposit products. As an alternate funding source, the Bank obtains putable advances from the Federal Home Loan Bank (FHLB). The advances are secured by a blanket collateral agreement with the FHLB giving the FHLB an unperfected security interest in the Bank's one-to-four family mortgage loans. FHLB advances may be a less expensive way to obtain longer term funds than paying a premium for long term deposits. Accordingly, the Company borrowed $10 million in 2000.
Premises and equipment increased by 3.3% and 13.6% in 2001 and 2000, respectively. In 2001, the Bank upgraded its hardware and software to better serve its customers in the ever changing technological area. In 2000, the Bank spent approximately $1,459,000 to renovate the Coldwater main office and the Beckley Road office.
CAPITAL RESOURCES
The Company maintains a strong capital base to take advantage of business opportunities while ensuring that it has resources to absorb the risk inherent in the business.
The FRB has imposed 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 percent. In addition, a bank holding company must maintain a minimum ratio of Tier 1 capital equal to 4 percent of risk-weighted assets. Tier 1 capital includes common shareholders' equity, qualifying perpetual preferred stock and minority interests 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 are intended to ensure that adequate capital is maintained against risk other than credit risk. The leverage ratio requirements establish a minimum ratio of Tier 1 capital to total assets of 3 percent for the most highly rated bank holding companies and banks that do not anticipate and are not experiencing significant growth. All other bank holding companies are required to maintain a ratio of Tier 1 capital to assets of 4 to 5 percent, depending on the particular circumstances and risk profile of the institution.
Regulatory agencies have determined that the capital component created by the adoption of FASB Statement 115 should not be included in Tier 1 capital. As such, the net unrealized appreciation or depreciation on available for sale securities is not included in the ratios listed in Note P to the financial statements. The ratios include the common stock subject to repurchase obligation in the Company's employee stock ownership plan (ESOP). As seen in Note P, the Company exceeds the well capitalized requirements at December 31, 2001.
In addition to these regulatory requirements, a certain level of capital growth must be achieved to maintain appropriate levels of equity to total assets. During 2001 and 2000, total average assets grew 5.2% and 8.2%. At the same time, average equity (including common stock held by the ESOP) increased 10.7% in 2001 and decreased .5% in 2000. Current year growth is an indication that the Company has retained adequate capital to support its asset growth and has the ability to continue growing. Future growth opportunities will focus on maintaining the existing customer base and growing within selected other markets identified as providing significant growth potential.
LIQUIDITY AND INTEREST RATE SENSITIVITY
The primary functions of asset/liability management are to assure adequate liquidity and maintain an appropriate balance between interest-earning assets and interest-bearing liabilities. 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. Interest rate sensitivity management seeks to avoid fluctuating net interest margins and enhance consistent growth of net interest income through periods of changing interest rates.
Maturing loans and investment securities are the principal sources of asset liquidity. Securities maturing or callable within 1 year were $22,170,000 at December 31, 2001 representing 36.0% of the market value of the investment securities portfolio, an increase from the 26.1% level of 2000. Loans maturing within 1 year were $50,505,000 at December 31, 2001 representing 23.8% of the gross loan portfolio, an increase from the 21.6% level of 2000.
Financial institutions are subject to prepayment risk in falling rate environments. Prepayments of assets carrying higher rates reduce the Company's interest income and overall asset yields. Certain portions of an institution's liabilities may be short-term or due on demand, while most of it 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.
During the year ended December 31, 2001, there was a net increase in cash and cash equivalents of $4,943,000. The major sources of cash in 2001 were increases in deposits, maturing securities, loan sales and sales of securities. The major uses of cash in 2001 were security purchases and loans originated for sale.
During the year ended December 31, 2000, there was a net increase in cash and cash equivalents of $6,443,000. The major sources of cash in 2000 were increase in deposits, maturing securities, loan sales and additional borrowings from the Federal Home Loan Bank. The major uses of cash in 2000 were loan growth and loans originated for sale.
During the year ended December 31, 1999, there was a net decrease in cash and cash equivalents of $4,182,000. The major sources of cash in 1999 were loan sales and maturing securities. The major uses of cash in 1999 were loan growth and loans originated for sale.
Federal law places restrictions on extensions of credit from banks to their parent holding company and, with certain exceptions, to other affiliates, on investments in stock or other securities thereof, and on taking of such securities as collateral for loans. State law also places restrictions on the payment of dividends by the Bank to the Company. Note M to the Consolidated Financial Statements discusses these dividend limitations.
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.
The following table shows the interest sensitivity gaps for five different time intervals as of December 31, 2001:
The primary interest sensitive assets in the one year repricing range are commercial loans and adjustable rate mortgage loans. The primary interest sensitive liabilities in the one year repricing range are money market investment accounts, certificates of deposit and interest bearing checking accounts. This analysis indicates that growth in rate sensitive liabilities has outpaced the growth in rate sensitive assets in the one year range. This has occurred primarily as a result of the inclusion of interest bearing checking accounts and savings accounts in a repricing period of one year or less as these accounts have become rate sensitive as interest rates have
fluctuated. The long-term interest sensitivity gap indicates that the Company's net interest margin would improve with an increase in interest rates and decline with further declines in interest rates. Trying to minimize the interest sensitivity gap is a continual challenge in a changing rate environment and one of the objectives of the Company's asset/liability strategy.
RESULTS OF OPERATIONS
Net interest income is an effective measurement of how well management has balanced the Company's interest rate sensitive assets and liabilities. Net interest income decreased by 3.7% in 2001 and increased by 8.0% in 2000 and 1.8% in 1999. The 2001 decrease is largely due to the eleven decreases in prime rate throughout the year. The 2000 increase is due to the increase in the commercial and real estate mortgage loan portfolio and the increases to prime rate throughout the year. These increases were partially offset by the increased interest paid for money market and CD deposits and increased interest paid for Federal Home Loan Bank borrowings. The 1999 increase is due to the reinvestment of funds held in the investment securities portfolio into the higher yielding loan portfolio, partially offset by increased interest expense as a result of increased FHLB advances.
The uncertain economic environment and potential fluctuations in interest rates are expected to continue to impact the Company and the industry in 2002. The Company monitors deposit rates on a weekly basis and adjusts deposit rates as the market dictates. Loan rates are subject to change as the national prime rate changes and are also influenced by competitors' rates. An increase in deposit rates occurring at the same time as loan rate decreases would cause the Company's net interest income to decline.
The provision for loan losses is based on an analysis of the required additions to the allowance for loan losses. The allowance for loan losses is maintained at a level believed adequate by management to absorb probable losses in the loan portfolio. Some factors considered by management in determining the level at which the allowance is maintained include specific credit reviews, past loan loss experience, current economic conditions and trends, results of examinations by regulatory agencies and the volume, growth and composition of the loan portfolio.
The provision for loan losses was $1,250,000 in 2001, $700,000 in 2000 and $852,000 in 1999. The increase in the 2001 provision occurred to provide for increased charge offs, which included one loan totaling $673,000 during the first quarter. Also contributing to the increase was increased impaired loans and higher delinquency rates. The 2000 provision was set at a level considered necessary to cover expected loan losses. The 1999 provision increase occurred to provide for loan growth and increased charge-offs, primarily as a result of increased customer bankruptcies. In 2001, net commercial loan charge-offs totaled $918,000. As mentioned above, $673,000 was related to one borrower. Net commercial loan charge-offs totaled $417,000 in 2000. This was primarily attributable to three commercial customers. Two of these customers had been provided for in 1999. Net commercial loan charge-offs totaled $334,000 in 1999; $267,000 of this was attributable to three commercial borrowers that discontinued business operations during 1999. It is not anticipated that the Company will continue to experience higher than normal losses in 2002. The provision will be adjusted quarterly, if necessary, to reflect actual charge-off experience and any known future losses.
Non-interest income, excluding security gains and losses, increased 15.6% in 2001, remained constant in 2000 and decreased by 5.4% in 1999. In order to reduce the risk associated with changing interest rates, the Bank regularly sells fixed rate real estate mortgage loans on the secondary market. The Bank recognizes a profit at the time of the sale. In 2001 gains recognized on the sale of real estate mortgage loans to the secondary market increased $628,000 or 117.8% from 2000. This increase was due to low mortgage rates that made refinancing and new home purchases very attractive. In addition, security gains increased $532,000 during 2001.
In 2000, trust fees, service charges on loans and earnings on life insurance assets increased but were offset by a decrease in the gains recognized on the sale of real estate mortgage loans to the secondary market. The Bank increased its deposit base by 5.2% and generated additional service charges as a result of the growth. Trust fees increased due to a new fee schedule put in place January 1, 2000.
Security gains of $529,000 were recognized in 2001. Security losses of $3,000 were recognized on sales of securities in 2000. No gains or losses occurred in 1999.
Non-interest expense increased by 8.9% in 2001, 8.8% in 2000 and 2.2% in 1999. In 2001, salaries and benefit expenditures increased as additional employees were added in Battle Creek to assist with the commercial and mortgage volumes projected in this region. In addition, over $100,000 more in commissions were paid to mortgage loan originators based on loan volumes generated for the year. Other non interest expenses increased $562,000. $190,000 was charged to earnings to write down impaired assets from cost to market value. In addition, $220,000 was charged to earnings relating to a potential liability arising out of litigation. In February of 2002, the Company resolved the litigation which will not result in any material additional losses to the Company.
In 2000, the largest increase came in the professional and outside services category. The Company spent $456,000 in legal and accounting fees in an attempt to merge with Sturgis Bank & Trust. The merger was called off in October of 2000 after Sturgis Bank and Trust did not obtain a fairness opinion from their investment advisors. In 2000, salaries and benefit expenditures increased as a cost of living increase of 2.6% was given to all employees at the beginning of the year. In addition, the loan department employees hired during 1999 were employees for the entire year of 2000 adding to the increase.
Income tax expense was $875,000 in 2001, $1,179,000 in 2000 and $1,005,000 in 1999. Tax-exempt income continues to have a major impact on the Company's tax expense. The benefit offsetting lower coupon rates on municipal instruments is the nontaxable feature of the income earned on such instruments. This resulted in a lower effective tax rate and reduced federal income tax expense by approximately $267,000 in 2001, $290,000 in 2000 and $360,000 in 1999.
Results of operations can be measured by various ratio analyses. Two widely recognized performance indicators are the return on equity and the return on assets. The Company's return on equity was 10.47% in 2001, 15.13% in 2000 and 16.37% in 1999. The return on average assets was .90% in 2001, 1.16% in 2000 and 1.23% in 1999.
The majority of assets and liabilities of a financial institution are monetary in nature and therefore differ greatly from most commercial and industrial companies that have significant investments in fixed assets or inventories. However, inflation does have an important impact on the growth of total assets in the banking industry and the resulting need to increase equity capital at higher than normal rates in order to maintain an appropriate equity-to-assets ratio. Another significant effect of inflation is on other expenses, which tend to rise during periods of general inflation.
Management believes the most significant impact on financial results is the Company's ability to react to changes in interest rates. As discussed previously, management is attempting to maintain an essentially balanced position between interest sensitive assets and liabilities in order to protect against wide interest rate fluctuations.
NONPERFORMING ASSETS
Nonperforming assets include nonaccrual loans, accruing loans past due 90 days or more, and other real estate which includes foreclosures, deeds in lieu of foreclosure and real estate in redemption.
A loan generally is classified as nonaccrual when full collectibility of principal or interest is doubtful or a loan becomes 90 days past due as to principal or interest, unless management determines that the estimated net realizable value of the collateral is sufficient to cover the principal balance and accrued interest. When interest accruals are discontinued, unpaid interest credited to income in the current year is reversed, and unpaid interest accrued in prior years is charged to the allowance for loan losses. Nonperforming loans are returned to
performing status when the loan is brought current and has performed in accordance with contract terms for a period of time.
The following table sets forth the aggregate amount of nonperforming loans in each of the following categories:
Nonperforming loans increased in 2001 with the largest increase coming in commercial, financial and agricultural loans contractually past due 90 days or more. In 2001, nonaccrual loans were made up of several commercial and agricultural loans where the borrower experienced severe financial difficulties and therefore became delinquent. Nonperforming loans are subject to continuous monitoring by management and are specifically reserved for in the allowance for loan losses where appropriate. At December 31, 2001 and 2000, the Company had loans of $2,097,000 and $815,000, which were considered impaired, but performing.
At December 31, 2001, the Company had approximately $3,644,000 in commercial, financial and agricultural loans for which payments are presently current but the borrowers are experiencing certain financial and/or operational difficulties. These loans are subject to frequent management review and their classification is reviewed on a monthly basis.
In management's evaluation of the loan portfolio risks, any significant future increases in nonperforming loans is dependent to a large extent on the economic environment. In a deteriorating or uncertain economy, management applies more conservative assumptions when assessing the future prospects of borrowers and when estimating collateral values. This may result in a higher number of loans being classified as nonperforming.
REGULATORY MATTERS
Representatives of the Office of Financial and Insurance Services (OFIS) completed an examination at the Company's subsidiary bank using financial information as of December 31, 2000. The purpose of the examination was to determine the safety and soundness of the bank.
Examination procedures require individual judgments about a borrower's ability to repay loans, sufficiency of collateral values and the effects of changing economic circumstances. These procedures are similar to those employed by the Company in determining the adequacy of the allowance for loan losses and in classifying loans. Judgments made by regulatory examiners may differ from those made by management. The Company's level and classification of identified potential problem loans was not revised significantly as a result of this regulatory examination process.
Management and the Board of Directors evaluate existing practices and procedures on an ongoing basis. In addition, regulators often make recommendations during the course of their examination that relate to the operations of the Company and the Bank. As a matter of practice, management and the Board of Directors consider such recommendations promptly.
NEW ACCOUNTING PRONOUNCEMENTS
In 2001, a new accounting standard was issued that will, beginning in 2002, revise the accounting for goodwill and intangible assets. Identifiable intangible assets with finite useful lives will be amortized under the new standard, whereas goodwill, both amounts previously recorded and future amounts purchased, will cease being amortized starting in 2002. Annual impairment testing will be 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 issued by the Financial Accounting Standards Board (FASB) will require the amortization of the core deposit intangibles and the goodwill 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 goodwill resulting from branch acquisitions.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary market risk exposure is interest rate risk and liquidity risk. See Liquidity and Interest Rate Sensitivity, above. Business is transacted in U.S. dollars with no foreign exchange rate risk or any exposure to changes in commodity prices.
The following tables provide information about the Company's financial instruments that are sensitive to changes in interest rates as of December 31, 2001 and 2000. The Company had no derivative financial instruments, or trading portfolio, at either date. The expected maturity date values for loans receivable, mortgage-backed securities and investment securities were calculated without adjusting the instrument's contractual maturity date for expectations of prepayments. Expected maturity date values for interest-bearing core deposits were not based upon estimates of the period over which the deposits would be outstanding, but rather the opportunity for repricing. Similarly, with respect to its variable rate instruments, the Company believes that repricing dates, as opposed to expected maturity dates may be more relevant in analyzing the value of such instruments and are reported as such in the following table. Company borrowings are also reported based on conversion or repricing dates.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this Item is set forth in the Section entitled "Quantitative and Qualitative Disclosures about Market Risk" included under Item 7 of this report and is incorporated herein by reference.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See consolidated financial statements of the Company which are included in Item 14., Exhibits, Financial Statement Schedules and Reports on Form 8-K, and begin on page FS-1.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
None. PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The following table lists the names of the directors and their ages as of February 28, 2002, their principal occupations and the year in which each became a director.
(1) Mr. Grohalski and Jaylen Johnson are the only executive officers of the Company. Mr. Johnson, age 49, is Executive Vice-President, Chief Operating Officer, and Secretary of the Company and has held such positions since December, 2000. Mr. Johnson was a senior vice president of the Company from 1998 to 2000 and was a Vice President and cashier of the Bank from 1991 to 1998. Mr. Johnson joined the Bank in 1975. The executive officers are elected annually and serve at the pleasure of the Board of Directors.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The following table shows the total compensation received by the Company's Chief Executive Officer for the last three fiscal years. No executive officer of the Company, other than the Chief Executive Officer, received total annual salary and bonus in excess of $100,000 during the last fiscal year.
SUMMARY COMPENSATION TABLE
(1) The amounts shown include amounts deferred under the 401(k) provisions of the ESOP and the Bank's Executives' Deferred Compensation Plan.
(2) The amounts shown include the following for 2001: (i) employer contributions to accounts in the ESOP and the Deferred Compensation Plan (as defined herein) of $4,200 and $3,000 respectively for Mr. Grohalski; and (ii) $489 constituting the value of insurance premiums paid by the Bank for term life insurance for Mr. Grohalski's benefit.
Option Grant Table. The following table provides information regarding stock options granted in fiscal year 2001 to the Chief Executive Officer of the Company.
OPTION GRANTS IN LAST FISCAL YEAR
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(1) The options granted to Mr. Grohalski will become exercisable on April 17, 2003. In the event the Company shall dispose of substantially all of its assets, dissolve, or consolidate or merge with any other corporation, then, the Board of Directors shall have the power to amend all outstanding options to permit the exercise of all such options prior to the effectiveness of any such transaction and to terminate such options as of such effectiveness. The option exercise price is not adjustable over the 10-year term of the options except due to stock splits and similar occurrences affecting all outstanding stock.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values. The following table provides information on the value of options held by the Chief Executive Officer of the Company at December 31, 2001. There were no options exercised by an officer during the fiscal year ended December 31, 2001.
Retirement Benefits
Officers of the Company participate in the Southern Michigan Bank & Trust Retirement Plan (the "Retirement Plan"), which has been adopted by the Bank. Under the terms of the Retirement Plan, a normal monthly retirement benefit is provided to covered employees who attain the age of 65. It provides for a normal retirement benefit after 30 years of credited service equal to 35% of a participant's actual monthly compensation based on the participant's highest consecutive five year average compensation (see column captioned "Remuneration"). For participants with less than 30 years credited service, reduced benefits are available in an amount equal to the normal retirement benefit reduced by 1/30 for each year of service less than 30. Participants are 100% vested after five years of credited service, and are subject to forfeiture upon termination of employment with credited service less than five years. The following table represents estimated normal annual benefits payable on a straight-life annuity basis upon retirement at age 65 and are not subject to deduction for social security benefits:
PENSION PLAN TABLE
James T. Grohalski has 34 years of credited service and $146,900 current covered remuneration. The Bank also has in effect a supplemental retirement arrangement in the form of an Executive Employee Salary Continuation Agreement with Mr. Grohalski under which a specified annual benefit, in addition to that provided under the Retirement Plan, is payable to the participant upon retirement at age 65. The participant is entitled to a reduced benefit if his retirement occurs between the ages of 62 and 65. No benefit is payable if the participant voluntarily terminates his employment or is discharged for cause prior to the age of 62. However, the specified benefit is payable beginning at age 65, if the participant's employment is terminated after a "change in control" of the Company, and in connection with such change, his title, responsibility or compensation is significantly lessened or the status of his employment is changed without his consent. The specified annual benefit, when added to the benefit under the Retirement Plan, is intended to be approximately equal to the benefit the participant would have received under the Retirement Plan but for a plan amendment which changed the Retirement Plan's benefit formula to comply with changes in pension laws and which substantially reduced the participants' benefits. For James T. Grohalski, the specified benefit payable upon retirement at age 65 under the supplemental retirement arrangement is $22,060 per year for 15 years. The Board of Directors may increase the benefit by not more than 2% per year prior to retirement.
The Bank also has an Executives' Deferred Compensation Plan (the "Deferred Compensation Plan") for directors and certain officers. Under the Deferred Compensation Plan, participants elect to defer a portion of their compensation (in the case of directors, their fees) on a pretax basis. Upon retirement at or after age 65, the participant or his or her designated beneficiary is entitled to a benefit equal to the amount of the participant's deferrals to the Deferred Compensation Plan plus earnings on such deferrals at a specified rate of interest compounded annually, payable in equal monthly amounts for not less than 180 months. Upon the participant's termination of employment or retirement before age 65, the benefit payable to the participant at age 65 is determined by multiplying the amount deferred under the Deferred Compensation Plan by the ratio of the number of months for which the participant made deferrals to the number of months from the time the participant began making deferrals to the participant's reaching age 65. The amounts shown in the summary compensation table above include amounts deferred as contributions under the Deferred Compensation Plan.
The Company and the Bank have executed an Employment Agreement with Mr. Grohalski whereby Mr. Grohalski will serve as the President and Chief Executive Officer of the Company and the Bank (the "Employment Agreement"). The term of the Employment Agreement is for one year and it may be renewed by mutual agreement of the Company, the Bank and Mr. Grohalski. Pursuant to the Employment Agreement, commencing January 1, 2002, Mr. Grohalski's annual salary will be $167,000 plus such additional or special compensation based upon his performance as the Company's Board of Directors, in its discretion, may from time to time determine. Under the Employment Agreement, in the event that Mr. Grohalski is terminated for any reason other than for cause, or in the event of Mr. Grohalski's "voluntary termination for good reason," then, in addition to receiving the compensation and benefits under the Employment Agreement, upon the expiration of the term of the Employment Agreement, Mr. Grohalski will be entitled to monthly installments equal to 1/12th of his annual salary, commencing thirty days after expiration of the term of the Employment Agreement, until the earlier of his death, the age of 65, or the date he receives twelve monthly installments.
Under the Employment Agreement, the term "voluntary termination for good reason" means voluntary termination of employment by Mr. Grohalski after any of the following actions without Mr. Grohalski's express written consent: (1) the assignment of duties of a nonexecutive nature or for which Mr. Grohalski is not reasonably equipped by his skills and experience; (2) without reasonable justification, a reduction in the salary, or a material reduction in the amount of paid vacations or in the fringe benefits and perquisites, of Mr. Grohalski; (3) the relocation of Mr. Grohalski's principal business office or principal place of residence to a place that is more than sixty miles from Coldwater, Michigan or the assignment of duties to Mr. Grohalski that would reasonably require such relocation; (4) the assignment of duties to Mr. Grohalski which would reasonably require him to spend more than ninety working days away from Coldwater, Michigan during any consecutive twelve month period; (5) the failure to provide office facilities, secretarial services, and other administrative services to Mr. Grohalski which are substantially equivalent to the facilities and services provided to him on the date the Employment Agreement was executed; or (6) the termination of incentive and benefit plans or arrangements provided to Mr. Grohalski under the Employment Agreement, or a material reduction in the aggregate value of Mr. Grohalski's incentive compensation and benefits below their aggregate value as of the date of the Employment Agreement.
The Employment Agreement also provides that in the event of a "termination for cause," Mr. Grohalski will not be entitled to receive compensation or other benefits for any period after such termination. The term "termination for cause" means the termination of employment based on: (1) conviction of any criminal violation involving dishonesty, fraud or breach of trust; (2) the willful engagement in any misconduct in the performance of Mr. Grohalski's duties that materially injures the Company or its subsidiaries; (3) the performance of any act which, if known to the customers, clients or shareholders of the Company or any of its subsidiaries, would materially and adversely impact the business of the Company or any of its subsidiaries; (4) the willful and substantial nonperformance of Mr. Grohalski's duties if such nonperformance continues for more than ten days after written notice of such nonperformance and of the Company's intention to terminate his employment; (5) the willful violation of the noncompetition and nondisclosure obligations contained in the Employment Agreement; (6) the suspension and/or temporary prohibition, or the removal and/or permanent prohibition, from participating in the conduct of the affairs of the Company or any of its affiliates by a notice, order, ruling or
other finding of any state or federal agency (including, but not limited to, any Federal Reserve Bank, the FDIC, or Michigan's Office of Financial and Insurance Services); or (7) any determination or action by any federal or state regulatory agency that the Company's Board of Directors determines to reflect adversely on the Company and to be related to Mr. Grohalski's duties under the Employment Agreement.
The Employment Agreement also provides for a severance payment equal to two year's salary in accordance with Section 280G of the Internal Revenue Code in the event of a termination of employment without cause or a voluntary termination with good reason within three years after a change in control that occurs during the term of the Employment Agreement. In the event that it is in the best interests of the Company and Mr. Grohalski, then Mr. Grohalski shall have the right to elect to have the severance payment paid in installments, with the first installment being equal to one year's salary and the balance being paid in installments in accordance with Section 280G of the Internal Revenue Code.
For purposes of the Employment Agreement, the term "change in control" means: (1) the acquisition by any entity, person, or group of beneficial ownership of more than 50% of the outstanding capital stock of the Company entitled to vote in an election of directors; (2) the commencement by any entity, person, or group (other than the Company or a subsidiary of the Company) of a tender offer or an exchange offer for more than 25% of the outstanding voting stock of the Company entitled to vote in an election of directors; (3) the merger of the Company with another entity that results in the holders of the outstanding voting stock entitled to vote for the election of directors of the Company immediately prior to such merger holding less than 50% of the voting stock entitled to vote for the election of directors of the surviving or resulting corporation; (4) the transfer of substantially all of the assets of the Company other than to an entity of which the Company owns at least 80% of the voting stock entitled to vote for the election of directors; or (5) the election to the Board of Directors of the Company, without the recommendation or approval of the incumbent Board of Directors, of the lesser of three directors or directors constituting a majority of the number of directors then in office.
The Employment Agreement also provides that during the term thereof, and for a period of one year following the termination of employment, Mr. Grohalski will not: (1) within a geographic radius of 75 miles from Coldwater, Michigan, engage in, or work for, manage, operate, control or participate in the ownership, management, operation or control of, or be connected with, or have any financial interest in, any individual, partnership, firm, corporation or institution engaged in the same or similar activities to those now or hereafter carried on by the Company or the Bank; (2) interfere with the relationship of the Company or the Bank and any of their employees, agents or representatives; or (3) directly or indirectly divert or attempt to divert from the Company or the Bank any business in which the Company or the Bank has been actively engaged during the term of the Employment Agreement, nor interfere with the relationships of the Company or the Bank with their dealers, distributors, sources of supply or customers. Finally, the Employment Agreement prohibits Mr. Grohalski, during the term of the Employment Agreement and at any time thereafter, from disclosing any confidential information of the Company or the Bank.
Compensation Committee Report on Executive Compensation
Executive Compensation Policies.
The Company's executive compensation policies are designed to support the corporate objective of maximizing the long-term value of the Company to its shareholders and employees. To achieve this objective, the Compensation Committee believes it is important to provide competitive levels of compensation to attract and retain the most qualified executives, to recognize individuals who exceed expectations and to link closely overall corporate performance and executive pay.
The Company has established two primary components of the Company's executive compensation plan. The two components are: (a) base compensation; and (b) stock-based performance compensation through stock option grants.
Base Compensation.
The Compensation Committee annually reviews base salaries of executive officers. Factors which influence decisions made by the Compensation Committee regarding base salaries are levels of responsibility and potential for future responsibilities, salary levels offered by competitors and overall performance of the Company. The Compensation Committee's practice in establishing salary levels is based in part upon overall Company performance and is not based upon any specific objectives or policies, but reflects the subjective judgment of the Compensation Committee. However, specific annual performance goals are established for each executive officer. Based on the Compensation Committee's comparison of the Company's overall compensation levels as a percent of revenues and net income to comparable companies in the industry, the Compensation Committee believes its overall compensation levels are in the middle of the range.
Stock Option Grants.
Executive compensation to reward past performance and to motivate future performance will also be provided through stock options granted under the Southern Michigan Bancorp, Inc. 2000 Stock Option Plan. The purpose of the plan is to encourage executive officers to maintain a long-term stock ownership position in the Company in order that their interests are aligned with those of the Company's shareholders. The Board of Directors, in its discretion, has the authority to determine participants in the plan, the number of shares to be granted and the option price and term. Consideration for stock option awards are evaluated on a subjective basis and granted to participants until an ownership position exists which is consistent with the participant's current responsibilities. 10,191 options were granted in April 2001.
Chief Executive Officer Compensation.
The Compensation Committee established Mr. Grohalski's base salary based primarily on a subjective evaluation of the Company's prior year's financial results, past salary levels and compensation paid to other chief executive officers in the Company's industry. Based on the Compensation Committee's comparison of the Company's overall compensation level for Mr. Grohalski as a percent of revenue and net income to comparable companies in the industry, the Compensation Committee believes his overall compensation level is in the middle of the range.
RESPECTFULLY SUBMITTED BY THE MEMBERS OF THE COMPENSATION COMMITTEE, James J. Morrison, H. Kenneth Cole and James P. Briskey.
Director Compensation
Currently, each director of the Company whose principal occupation is not with the Company or the Bank receives an annual fee of $6,709 which will be indexed for inflation in 2002. In addition, outside directors are compensated $150 for each committee meeting attended which will also be indexed for inflation in 2002. Outside directors also participate in a bonus program based upon the achievement of growth and profitability goals. There were no bonus payments for 2001. The directors are eligible to receive stock options under the Southern Michigan Bancorp, Inc. 2000 Stock Option Plan. In 2001, 300 options were granted to each director with an exercise price of $15.32. These options have a two year vesting, and are therefore not exercisable until April of 2003.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of February 15, 2002, the names and addresses of all beneficial owners of 5% or more of the Common Stock showing the amount and nature of such beneficial ownership:
(1) Based upon information furnished to the Company by the beneficial owners named above. The nature of beneficial ownership for shares shown is sole voting and investment power, except as set forth below. Shares have been rounded to the nearest whole share.
(a) Shares are held by the Trust Department of Southern Michigan Bank & Trust in various fiduciary capacities. (b) Includes 146,022 shares held by Mr. Randall as trustee.
The following table sets forth, as of February 15, 2002, the total number of shares of the Common Stock beneficially owned, and the percent of such shares so owned, by each director and by all directors and executive officers of the Company as a group.
(1) Based upon information furnished to the Company by the individual named and the members of the designated group. The nature of beneficial ownership for shares shown is sole voting and investment power except as set forth below. Shares have been rounded to the nearest whole share.
(a) Shared voting and investment power.
(b) Includes 11,746 shares held by the Bank's Employee Stock Ownership Plan (the "ESOP") as to which Mr. Grohalski has voting power only.
(c) Shares indicated are held as trustee.
(2) Less than one percent (1%).
(3) Mr. Grohalski is an executive officer of the Company.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Directors and officers of the Company and their associates were customers of, and had transactions with the Bank in the ordinary course of business during 2001. All loans and commitments included in such transactions were made in the ordinary course of business on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons and did not involve more than the normal risk of collectibility or present other unfavorable features.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) The following consolidated financial statements of the Company are filed as a part of this report and are included herewith beginning on page FS-1:
- Report of Crowe, Chizek and Company LLP, independent auditors
- Consolidated Balance Sheets - December 31, 2001 and
- Consolidated Statements of Changes in Shareholders' Equity - Years ended December 31, 2001, 2000 and 1999
- Consolidated Statements of Income - Years ended December 31, 2001, 2000 and 1999
- Consolidated Statements of Cash Flows - Years ended December 31, 2001, 2000 and 1999
- Notes to Consolidated Financial Statements - December 31, 2001
(a)(2) Not applicable.
(a)(3) Exhibits (Numbered in accordance with Item 601 of Regulation S-K).
Exhibit No. Description of Exhibit
Exhibit 2 Not applicable.
Exhibit 3(i) Articles of Incorporation incorporated by reference to Exhibit 3 to the Company's Annual Report on Form 10-K for the year ended December 31, 1991 and Exhibit 3 to Form S-3D filed April 30, 1998.
Exhibit 3(ii) Amended and Restated By-Laws are incorporated by reference to Exhibit 3 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997.
Exhibit 4 Instruments Defining the Rights of Security Holders of the Company are the Articles of Incorporation and By-Laws (see Exhibits 3(i) and (ii) above).
Exhibit 9 Not applicable.
Exhibit 10(a) Material Contracts - Executive Compensation Plans and Arrangements: (1) Master Agreements for Directors' Deferred Income Plan; (2) Composite form of Executive Employee Salary Continuation Agreement, as amended; and (3) Master Agreements for Executives' Deferred Compensation Plan, as amended, are incorporated by reference to Exhibit 10 to the Company's Annual Report on Form 10-K for the year ended December 31, 1994.
Exhibit 10(b) Southern Michigan Bancorp, Inc. 2000 Stock Option Plan is incorporated by reference to Exhibit 10(b) to the Company's Annual Report on Form 10-K for the year ended December 31, 1999.
Exhibit 10(c) Employment Agreement dated January 1, 2002 by and between the Bank and the Company and James T. Grohalski.
Exhibit 11 Not applicable.
Exhibit 12 Not applicable.
Exhibit 13 Not applicable.
Exhibit 16 Not applicable.
Exhibit 18 Not applicable.
Exhibit 21 Subsidiaries of the Company.
Exhibit 22 Not applicable.
Exhibit 23 Consent of Independent Auditors.
Exhibit 24 Not applicable.
Exhibit 27 Not applicable.
(b) No reports were filed on Form 8-K in the last quarter of the period covered by this report.
(c) Exhibits - See Item 14(a)(3) above.
(d) Financial Statement Schedules - Omitted due to inapplicability or because required information is shown in the Financial Statements and Notes thereto.
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT
The Company will furnish to the Security Holders of the Company an annual report and proxy materials for its 2002 annual meeting of its shareholders subsequent to the filing of this Form 10-K.
(The remainder of this page is intentionally blank. The next page is FS-1).
SOUTHERN MICHIGAN BANCORP, INC. REPORT OF INDEPENDENT AUDITORS
[CROWE, CHIZEK AND COMPANY LLP LOGO]
Shareholders and Board of Directors Southern Michigan Bancorp, Inc. Coldwater, Michigan
We have audited the accompanying consolidated balance sheets of Southern Michigan Bancorp, Inc. as of December 31, 2001 and 2000 and the related consolidated statements of income and comprehensive income, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Southern Michigan Bancorp, Inc. as of December 31, 2001 and 2000 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America.
As disclosed in Note C, on July 1, 1999 the Company changed its method of accounting for derivative instruments and hedging activities to comply with new accounting guidance.
Crowe, Chizek and Company LLP South Bend, Indiana February 8, 2002
FS-1
SOUTHERN MICHIGAN BANCORP, INC. CONSOLIDATED BALANCE SHEETS (In thousands, except number of shares)
See accompanying notes to consolidated financial statements.
FS-2
SOUTHERN MICHIGAN BANCORP, INC. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (In thousands, except number of shares and per share data)
See accompanying notes to consolidated financial statements.
FS-3
SOUTHERN MICHIGAN BANCORP, INC. CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (In thousands, except per share data)
See accompanying notes to consolidated financial statements.
FS-4
SOUTHERN MICHIGAN BANCORP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
See accompanying notes to consolidated financial statements.
FS-5
SOUTHERN MICHIGAN BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS AND INDUSTRY SEGMENTS: Southern Michigan Bancorp, Inc. is a bank holding company. The Company's business is concentrated in the banking industry segment. The business of commercial and retail banking accounts for more than 90% of its revenues, operating income and assets. While the Company's chief decision makers monitor the revenue stream of various company products and services, operations are managed and financial performance is evaluated on a company-wide basis. Accordingly, all of the Company's banking operations are considered by management to be aggregated into one operating segment. The Bank offers individuals, businesses, institutions and government agencies a full range of commercial banking services primarily in the southern Michigan communities in which the Bank is located and in areas immediately surrounding these communities. The Bank grants commercial and consumer loans to customers. The majority of loans are secured by business assets, commercial real estate, and consumer assets. There are no foreign loans. SMB Mortgage Company was established in August 2000 as a wholly-owned subsidiary of the Bank. All residential real estate loans are transacted through this subsidiary. The majority of loans are secured by residential real estate.
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the accounts of Southern Michigan Bancorp, Inc. (the Company) and its wholly owned subsidiary, Southern Michigan Bank & Trust (the Bank), after elimination of significant intercompany balances and transactions.
USE OF ESTIMATES: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Estimates that are more susceptible to change in the near term include the allowance for loan losses, deferred income tax provisions, fair values of certain securities and other financial instruments and the actuarial present value of pension benefit obligations, net periodic pension expense and accrued pension costs.
SECURITIES: Management determines the appropriate classification of securities at the time of purchase. If management has the intent and the Company has the ability at the time of purchase to hold securities until maturity, they are classified as held to maturity and carried at amortized historical cost. Securities to be held for indefinite periods of time and not intended to be held to maturity are classified as available for sale and carried at fair value, with unrealized gains and losses reported in other comprehensive income and shareholders' equity, net of tax. Securities classified as available for sale include securities that management intends to use as part of its asset/liability management strategy and that may be sold in response to changes in interest rates, prepayment risk, and other factors.
Premiums and discounts on securities are recognized in interest income using the level yield method over the estimated life of the security. Gains and losses on the sale of available for sale securities are determined using the specific identification method. Securities are written down to fair value when a decline in fair value is not temporary.
LOANS HELD FOR SALE: Loans held for sale are reported at the lower of cost or market value in the aggregate. Net unrealized losses are recorded in a valuation allowance by charges to income.
LOANS: Loans are reported at the principal balance outstanding, net of unearned interest, deferred loan fees and costs, and an allowance for loan losses. Interest income is reported on the interest method and includes amortization of net deferred loan fees and costs over the loan term.
Interest income is not reported when full loan repayment is in doubt, typically when payments are past due over 90 days, unless the loan is both well secured and in the process of collection. Payments received on such loans are reported as principal reductions.
FS-6
SOUTHERN MICHIGAN BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE A - NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ALLOWANCE FOR LOAN LOSSES: The allowance for loan losses is a valuation allowance for probable incurred credit losses, increased by the provision for loan losses and decreased by charge-offs less recoveries. Estimating the risk of loss and the amount of loss on any loans is necessarily subjective. Accordingly, management estimates the allowance balance based on past loan loss experience, nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management's judgment, should be charged-off. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed.
Loan impairment is reported when full payment under the loan terms is not expected. Impairment is evaluated in total for smaller-balance loans of similar nature such as residential mortgage and consumer loans and on an individual loan basis for other loans. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan's existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Loans are evaluated for impairment when payments are delayed, typically 90 days or more, or when it is probable that all principal and interest amounts will not be collected according to the original terms of the loan.
PREMISES AND EQUIPMENT: Premises and equipment are stated at cost, less accumulated depreciation. Depreciation is computed principally using accelerated methods over their estimated useful lives. These assets are reviewed for impairment when events indicate their carrying amount may not be recoverable from future undiscounted cash flows. Maintenance, repairs and minor alterations are charged to current operations as expenditures occur. Major improvements are capitalized. Land is carried at cost.
SERVICING RIGHTS: Servicing rights represent both purchased rights and the allocated value of servicing rights retained on loans sold. Servicing rights are expensed in proportion to, and over the period of, estimated net servicing revenues.
Impairment is evaluated based on the fair value of the rights, using groupings of the underlying loans as to interest rates and then, secondarily, as to geographic and prepayment characteristics. Any impairment of a grouping is reported as a valuation allowance.
GOODWILL AND CORE DEPOSIT INTANGIBLES: Goodwill is the excess of purchase price over identified net assets in business acquisitions. Goodwill is currently amortized on the straight-line method over 15 years. Identified intangibles represent the value of depositor relationships purchased and are amortized on accelerated methods over 10 years. Goodwill and identified intangibles are assessed for impairment based on estimated undiscounted cash flows, and written down if necessary. Goodwill was $620,000 and $682,000 and core deposit intangibles were $189,000 and $320,000 at December 31, 2001 and 2000, respectively. These balances are included in other assets.
OTHER REAL ESTATE: Other real estate was $1,406,000 and $1,415,000 at December 31, 2001 and 2000 and is included in other assets. Other real estate is comprised of properties acquired through a foreclosure proceeding or acceptance of a deed in lieu of foreclosure. These properties are initially recorded at the lower of cost or fair value at the date of foreclosure, establishing a new cost basis. After foreclosure, valuations are periodically performed by management and real estate is carried at the lower of cost or fair value less estimated cost of disposal. Expenses, gains and losses on disposition, and changes in the valuation allowance are reported in other expense.
STOCK COMPENSATION: Employee compensation expense under stock option plans is reported if options are granted below market price at grant date. Pro forma disclosures of net income and earnings per share are shown using the fair value method of SFAS No. 123 to measure expense for options granted after 1994, using an option pricing model to estimate fair value.
FS-7
SOUTHERN MICHIGAN BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE A - NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES: Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized.
EARNINGS AND DIVIDENDS PER COMMON SHARE: Basic earnings per common share is based on 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 reflects the dilutive effect of any additional potential common shares. Earnings and dividends per share are restated for all stock splits and stock dividends through the date of issue of the financial statements.
CASH FLOW INFORMATION: For purposes of the consolidated statements of cash flows, the Company considers cash and due from banks as cash and cash equivalents. The Company reports net cash flows for customer loan and deposit transactions.
COMPREHENSIVE INCOME: Comprehensive income consists of net income and other comprehensive income. Other comprehensive income includes the net change in unrealized gains and losses on securities available for sale, net of tax, which is also recognized as a separate component of shareholders' equity.
FAIR VALUES OF FINANCIAL INSTRUMENTS: Fair values of financial instruments are estimated using relevant market information and other assumptions. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect such estimates. The fair value estimates of existing on-and off- balance sheet financial instruments does not include the value of anticipated future business or values of assets and liabilities not considered financial instruments.
CONCENTRATIONS OF CREDIT RISK: The Company grants commercial, real estate and installment loans to customers mainly in Southern Michigan. Commercial loans include loans collateralized by commercial real estate, business assets and agricultural loans collateralized by crops and farm equipment. Commercial, financial and agricultural loans make up approximately 62% of the loan portfolio and the loans are expected to be repaid from cash flow from operations of businesses. Residential mortgage loans make up approximately 28% of the loan portfolio and are collateralized by mortgages on residential real estate. Consumer loans make up approximately 10% of the loan portfolio and are primarily collateralized by consumer assets.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK: Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and standby letters of credit issued to meet customer needs. The face amount for these items represents the exposure to loss before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded.
NEW ACCOUNTING PRONOUNCEMENT: A new accounting standard requires all business combinations to be recorded using the purchase method of accounting for any transaction initiated after June 30, 2001. Under the purchase method, all identifiable tangible and intangible assets and liabilities of the acquired company must be recorded at fair value at date of acquisition, and the excess of cost over fair value of net assets acquired is recorded as goodwill. Identifiable intangible assets must be separate from goodwill. Identifiable intangible assets with finite useful lives will be amortized under the new standard, whereas goodwill, both amounts previously recorded and future amounts purchased, will cease being amortized starting in 2002. Annual impairment testing will be 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 issued by the Financial Accounting Standards Board (FASB) will require the amortization of the core deposit intangibles and the goodwill 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 goodwill resulting from branch acquisitions.
FS-8
SOUTHERN MICHIGAN BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE A - NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LOSS CONTINGENCIES: Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management charged $220,000 against earnings in 2001 representing the Company's estimate as of December 31, 2001 of the potential liability arising out of litigation involving the Bank's trust department. In February of 2002, the Company resolved the litigation which will not result in any additional material losses to the Company.
RECLASSIFICATIONS: Some items in the prior year consolidated financial statements have been reclassified to conform with the current year presentation.
NOTE B - BASIC AND DILUTED EARNINGS PER COMMON SHARE
A reconciliation of the numerators and denominators of basic and diluted earnings per common share for the years ended is presented below:
FS-9
SOUTHERN MICHIGAN BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE C - SECURITIES
Year end investment securities were as follows (in thousands):
Included above are $4,033,000 in floating rate securities that are putable on a weekly basis.
There were no securities held to maturity as of December 31, 2001 or 2000.
Sales of available for sale securities were (in thousands):
Contractual maturities of debt securities at year-end 2001 were as follows (in thousands). Securities not due at a single maturity date, primarily mortgage-backed securities, are shown separately. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Securities with a carrying value of $ 0 and $20,407,000 as of December 31, 2001 and 2000, respectively, were pledged to secure FHLB borrowings. Securities with a carrying value of $13,047,000 and $2,355,000 were pledged as collateral for public deposits and for other purposes in 2001 and 2000.
FS-10
SOUTHERN MICHIGAN BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE C - SECURITIES (CONTINUED)
Except as indicated, total securities of any state (including all its political subdivisions) were less than 10% of shareholders' equity. At year-end 2001 and 2000, the amortized cost of securities issued by the state of Michigan and all its political subdivisions totaled $10,455,000 and $11,079,000 with an estimated market value of $10,563,000 and $11,511,000, respectively.
As of July 1, 1999, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities." Under SFAS No. 133, all derivative instruments are recorded at their fair values. If derivative instruments are designated as hedges of fair values, both the change in the fair value of the hedge and the hedged item are included in current earnings. Fair value adjustments related to cash flow hedges are recorded in other comprehensive income and reclassified to earnings when the hedged transactions are reflected in earnings. Ineffective portions of hedges are reflected in income currently. The Company does not have any derivative instruments nor does the Company have any hedging activities. As permitted by SFAS No. 133, the Company transferred securities with an amortized cost of $19,131,000 and a fair value of $19,747,000 from the held to maturity portfolio to the available for sale portfolio. None of these securities were sold during 1999.
NOTE D - LOANS
Loans at year-end were as follows (in thousands):
Certain directors and executive officers of the Company and the Bank, including their associates and companies in which they are principal owners, were loan customers of the Bank. The following is a summary of loans (in thousands) exceeding $60,000 in the aggregate to these individuals and their associates.
The unpaid principal balance of mortgage loans serviced for others, which are not included on the consolidated balance sheet, was $46,690,000 and $72,920,000 at December 31, 2001 and 2000, respectively.
Activity for capitalized mortgage servicing rights was as follows (in thousands):
No valuation allowance for capitalized mortgage servicing rights was necessary at December 31, 2001, 2000 or 1999.
FS-11
SOUTHERN MICHIGAN BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE E - ALLOWANCES FOR LOAN LOSSES
Changes in the allowance for loan losses for the years ended December 31 were as follows (in thousands):
NOTE F - PREMISES AND EQUIPMENT
Premises and equipment consist of (in thousands):
Depreciation and amortization expense charged to operations was approximately $900,000, $741,000 and $711,000 in 2001, 2000 and 1999, respectively.
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SOUTHERN MICHIGAN BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE G - DEPOSITS
The carrying amount of domestic deposits at year-end follows (in thousands):
The carrying amount of time deposits over $100,000 was $26,027,000 and $29,512,000 at December 31, 2001 and 2000, respectively. Interest expense on time deposits over $100,000 was $1,737,000, $1,482,000 and $1,263,000 for the years ended December 31, 2001, 2000 and 1999, respectively.
At year-end, scheduled maturities of time deposits were as follows for the years ending December 31 (in thousands):
Related party deposits were $2,047,000 and $1,934,000 at December 31, 2001 and 2000, respectively.
NOTE H - OTHER BORROWINGS
Other borrowings represents advances obtained by the Bank from the Federal Home Loan Bank (FHLB) of Indianapolis. $23,000,000 of the advances have fixed interest rates ranging from 5.71% to 6.89% until the stated call dates ranging from February 20, 2001 to July 5, 2005. On the stated call dates, the FHLB will have the option to convert the advances to a periodic adjustable rate and will continue to have this option quarterly thereafter. The advances may not be prepaid by the Bank prior to the FHLB exercising its option to convert the advances to an adjustable rate. The remaining $1,000,000 FHLB advance is at a fixed rate of 4.57% with principal payments beginning in December of 2003 and continuing through December of 2013. The advances are secured by a blanket collateral agreement with the FHLB which gives the FHLB an unperfected security interest in the Bank's one-to-four family mortgage loans. Eligible FHLB collateral at December 31, 2001 and 2000 was approximately $43,000,000 and $73,000,000.
At year-end 2001, scheduled principal reductions on these advances were as follows for the years ending December 31 (in thousands):
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SOUTHERN MICHIGAN BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE I - INCOME TAXES
Income tax expense consists of:
Income tax expense calculated at the statutory federal income tax rate of 34% differs from actual income tax expense as follows (in thousands):
Year-end deferred tax assets and liabilities consist of (in thousands):
The Company made income tax payments of $1,102,000 in 2001, $965,000 in 2000 and $1,160,000 in 1999. An allowance against the net deferred tax asset was not considered necessary at December 31, 2001 or 2000.
NOTE J - BENEFIT PLANS
The defined benefit pension plan covers substantially all full-time employees. The benefits are based on years of service and the employee's average highest compensation during five consecutive years of employment. The funding policy is to contribute annually an amount sufficient to meet the minimum funding requirements set forth in the Employee Retirement Income Security Act of 1974, plus additional amounts as may be appropriate from time to time. Contributions are intended to provide not only for benefits attributed to service to date but also for those expected to be earned in the future. Assets held by the plan primarily include corporate and foreign bonds and common equity securities.
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SOUTHERN MICHIGAN BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE J - BENEFIT PLANS (CONTINUED)
Information about the pension plan was as follows (in thousands):
The components of pension expense and related actuarial assumptions were as follows:
The Company has an employee stock ownership plan (ESOP) for substantially all full-time employees. The Board of Directors determines the Company's contribution level annually. Assets of the plan are held in trust by the Bank and administrative costs of the plan are borne by the plan sponsor. Costs charged to operations for contributions to the plan totaled $91,000, $73,000 and $78,000 in 2001, 2000 and 1999. During 2000, the Company amended its ESOP plan to adopt 401(k) provisions allowing for employee salary deferrals to purchase mutual funds. Company matching is provided in Company stock. Substantially all employees have converted their ESOP accounts to the amended plan.
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SOUTHERN MICHIGAN BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE J - BENEFIT PLANS (CONTINUED)
Shares held by the ESOP at year-end are as follows:
The fair value of the allocated shares held by the ESOP is approximately $1,523,000 and $1,478,000 at December 31, 2001 and 2000, respectively. Upon distribution of shares to a participant, the participant has the right to require the Company to purchase shares at their fair value in accordance with terms and conditions of the plan. As such these shares are not classified in shareholders' equity as permanent equity.
As an incentive to retain key members of management and directors, the Bank has a deferred compensation plan whereby participants defer a portion of current compensation. Benefits are based on salary and length of service and are vested as service is provided from the date of participation through age 65. A liability is recorded on a present value basis and discounted at current interest rates. This liability may change depending upon changes in long-term interest rates. Deferred compensation expense was $204,000, $216,000 and $218,000 in 2001, 2000 and 1999. The liability for vested benefits was $1,548,000 and $1,467,000 at December 31, 2001 and 2000, respectively.
NOTE K - STOCK OPTIONS
On April 17, 2000, the Company approved a Stock Option Plan to advance the interests of the Company and its shareholders by affording to directors, officers and other employees of the Company an opportunity to acquire or increase their proprietary interest in the Company using stock options. Option shares authorized under the plan total 110,000. Options are to be granted with an exercise period of 10 years or less, an exercise price of not less than the fair market value of the stock on the date the options are granted and a vesting period as determined by the Board of Directors. The plan will terminate on the earliest of: (i) March 20, 2010; (ii) when all shares have been issued through exercise of options granted under this Plan; or (iii) at any earlier time that the Board of Directors may determine. A total of 10,191 options were granted in 2001.
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SOUTHERN MICHIGAN BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE K - STOCK OPTIONS (CONTINUED)
A summary of the activity in the plan is as follows for the year ended December 31, 2001.
Options outstanding at year-end 2001 were as follows.
Had compensation cost for stock options been measured using FASB Statement No. 123, net income and earnings per share would have been the pro forma amounts indicated below for the year ended December 31, 2001.
The pro forma effects are computed using option pricing models, using the following weighted-average assumptions as of grant date.
FS-17
SOUTHERN MICHIGAN BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE L - COMMITMENTS
There are various commitments which arise in the normal course of business, such as commitments under commercial letters of credit, standby letters of credit and commitments to extend credit. Accounting principles generally accepted in the United States of America recognize these transactions as contingent liabilities and accordingly, they are not reflected in the accompanying financial statements. These arrangements have credit risk essentially the same as that involved in extending loans to customers and are subject to the Bank's normal credit policies. Collateral generally consists of receivables, inventory and equipment and is obtained based on management's credit assessment of the customer.
At December 31, 2001 and 2000, respectively, the Bank had commitments under commercial letters of credit, used to facilitate customers' trade transactions, of $0 and $147,000.
Under standby letter of credit agreements, the Bank agrees to honor certain commitments in the event that its customers are unable to do so. At December 31, 2001 and 2000, respectively, commitments under outstanding standby letters of credit were $183,000 and $480,000.
Loan commitments outstanding to extend credit are detailed below (in thousands):
The fixed rate commitments have stated interest rates ranging from 4.75% to 10.00%. The terms of the above commitments range from 1 to 60 months.
Management does not anticipate any losses as a result of the above related transactions; however, the above amount represents the maximum exposure to credit loss for loan commitments and commercial and standby letters of credit.
At December 31, 2001, the Company had line of credit agreements with LaSalle Bank and Fifth Third Bank for $4,000,000 and $750,000, respectively. The balances on these lines were $0 at December 31, 2001. The line of credit at LaSalle Bank is secured by Bank stock.
At December 31, 2001, the Bank had line of credit agreements with Fifth Third Bank, Bank One and Federal Home Loan Bank for $5,500,000, $7,000,000 and $4,000,000, respectively. The balances on these lines were $0 at December 31, 2001.
NOTE M - RESTRICTIONS ON TRANSFERS FROM SUBSIDIARY
Banking laws and regulations restrict the amount the Bank may transfer to the Company in the form of cash dividends, loans and advances. At December 31, 2001, approximately $7,015,000 of the subsidiaries' retained earnings is available for transfer in the form of dividends without prior regulatory approval.
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SOUTHERN MICHIGAN BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE N - SOUTHERN MICHIGAN BANCORP, INC. (PARENT COMPANY ONLY) FINANCIAL INFORMATION
Condensed financial statements of Southern Michigan Bancorp, Inc. follow (in thousands):
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SOUTHERN MICHIGAN BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE N - SOUTHERN MICHIGAN BANCORP, INC. (PARENT COMPANY ONLY) FINANCIAL INFORMATION (CONTINUED)
NOTE O - FAIR VALUE INFORMATION
The following methods and assumptions were used by the Company in estimating fair values for financial instruments:
CASH AND CASH EQUIVALENTS AND FEDERAL FUNDS SOLD: The carrying amounts reported in the balance sheet for cash and due from banks approximate those assets' fair values.
SECURITIES: Fair values for investment securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. The fair value of restricted equity securities approximates amortized cost.
LOANS: For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. The fair values for other loans are estimated using discounted cash flows analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality.
OFF-BALANCE-SHEET INSTRUMENTS: The estimated fair value of off balance sheet instruments is based on current fees or costs that would be charged to enter or terminate the arrangements. The estimated fair value is not considered to be significant for this presentation.
FS-20
SOUTHERN MICHIGAN BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE O - FAIR VALUE INFORMATION (CONTINUED)
DEPOSITS: The fair values disclosed for demand deposits (e.g., interest and non-interest checking, passbook savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of expected monthly maturities on time deposits.
OTHER BORROWINGS: The fair value of other borrowings is estimated using discounted cash flows analysis based on the Bank's current incremental borrowing rate for similar types of borrowing arrangements.
While these estimates of fair value are based on management's judgment of the most appropriate factors, there is no assurance that if the Company had disposed of such items at December 31, 2001 and 2000, the estimated fair values would have been achieved. Market values may differ depending on various circumstances not taken into consideration in this methodology. The estimated fair values at December 31, 2001 and 2000 should not necessarily be considered to apply at subsequent dates.
In addition, other assets and liabilities that are not defined as financial instruments are not included in the following disclosures, such as property and equipment. Also, non-financial instruments typically not recognized in financial statements may have value but are not included in the following disclosures. These include, among other items, the estimated earnings power of core deposit accounts, the trained work force, customer goodwill and similar items.
The estimated fair values of the Company's financial instruments at year end are as follows (in thousands):
NOTE P - REGULATORY MATTERS
The Company and Bank are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and prompt corrective action regulations involve quantitative measures of assets, liabilities and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weightings and other factors, and the regulators can lower classifications in certain cases. Failure to meet various capital requirements can initiate regulatory action that could have a direct material effect on the consolidated financial statements.
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SOUTHERN MICHIGAN BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE P - REGULATORY MATTERS (CONTINUED)
The prompt corrective action regulations provide five classifications, including well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and plans for capital restoration are required.
At year end, actual capital levels (in thousands) and minimum required levels were:
Both the Company and the Bank, at year-end 2001 and 2000, was categorized as well capitalized.
NOTE Q - QUARTERLY FINANCIAL DATA (UNAUDITED)
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SOUTHERN MICHIGAN BANCORP, INC.
Dated: March 11, 2002 By: /s/ James T. Grohalski ------------------------------------- James T. Grohalski Its: President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated.
/s/ James P. Briskey /s/ Thomas E. Kolassa - ------------------------------------- ------------------------------------- James P. Briskey, Director Thomas E. Kolassa, Director
/s/ H. Kenneth Cole /s/ James J. Morrison - ------------------------------------- ------------------------------------- H. Kenneth Cole, Director James J. Morrison, Director
/s/ William E. Galliers /s/ Jane L. Randall - ------------------------------------- ------------------------------------- William E. Galliers, Director Jane L. Randall, Director
/s/ James T. Grohalski - ------------------------------------- James T. Grohalski, President, Chief Executive Officer and Director (Principal Financial & Accounting Officer)
/s/ Nolan E. Hooker /s/ Gregory J. Hull - ------------------------------------- ------------------------------------- Nolan E. Hooker, Director Gregory J. Hull, Director
/s/ Marcia Albright Dated: March 11, 2001 - ------------------------------------- Marcia Albright, Director
S-1
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
Annual Report on Form 10-K For the Year Ended December 31, 2001
Index to Exhibits Exhibits
SOUTHERN MICHIGAN BANCORP, INC. (A Michigan corporation) 51 West Pearl Street Coldwater, Michigan 49036
INDEX TO EXHIBITS
Exhibit No. Description of Exhibit
Exhibit 2 Not applicable.
Exhibit 3(i) Articles of Incorporation incorporated by reference to Exhibit 3 to the Company's Annual Report on Form 10-K for the year ended December 31, 1991 and Exhibit 3 to Form S-3D filed April 30, 1998.
Exhibit 3(ii) Amended and Restated By-Laws are incorporated by reference to Exhibit 3 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997.
Exhibit 4 Instruments Defining the Rights of Security Holders of the Company are the Articles of Incorporation and By-Laws (see Exhibits 3(i) and (ii) above).
Exhibit 9 Not applicable.
Exhibit 10(a) Material Contracts - Executive Compensation Plans and Arrangements: (1) Master Agreements for Directors' Deferred Income Plan; (2) Composite form of Executive Employee Salary Continuation Agreement, as amended; and (3) Master Agreements for Executives' Deferred Compensation Plan, as amended, are incorporated by reference to Exhibit 10 to the Company's Annual Report on Form 10-K for the year ended December 31, 1994.
Exhibit 10(b) Southern Michigan Bancorp, Inc. 2000 Stock Option Plan is incorporated by reference to Exhibit 10(b) to the Company's Annual Report on Form 10-K for the year ended December 31, 1999.
Exhibit 10(c) Employment Agreement dated January 1, 2002 by and between the Bank and the Company and James T. Grohalski.
Exhibit 11 Not applicable.
Exhibit 12 Not applicable.
Exhibit 13 Not applicable.
Exhibit 16 Not applicable.
Exhibit 18 Not applicable.
Exhibit 21 Subsidiaries of the Company.
Exhibit 22 Not applicable.
Exhibit 23 Consent of Independent Auditors.
Exhibit 24 Not applicable.
Exhibit 27 Not applicable.