N
OTES
T
O
C
ONSOLIDATED
F
INANCIAL
S
TATEMENTS
N
OTE
A N
ATURE
OF
O
PERATIONS
AND
S
IGNIFICANT
A
CCOUNTING
P
OLICIES
Nature of Operations and Industry Segments:
Southern Michigan Bancorp, Inc.
(the Company) is a Michigan corporation and registered bank holding company under the Bank Holding Company Act of 1956. The Companys business is concentrated in a single operating segment: commercial banking. The Companys wholly-owned
subsidiary bank, Southern Michigan Bank & Trust (the Bank), offers individuals, businesses, institutions and government agencies a full range of commercial banking services primarily in the southwest Michigan communities in which the Bank
is located and in areas immediately surrounding these communities. The Bank makes commercial and consumer loans to customers. The majority of loans are secured by business assets, commercial and residential real estate, and consumer assets. There
are no foreign loans.
Principles of Consolidation:
The consolidated financial statements include the accounts of the Company
and the Bank after elimination of significant inter-company balances and transactions. The Bank owns FNB Financial Services, which conducts a brokerage business. During 2004, the Company formed a special purpose trust, Southern Michigan Bancorp
Capital Trust I for the sole purpose of issuing trust preferred securities. Under generally accepted accounting principles, the trust is not consolidated into the financial statements of the Company.
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 tax assets, fair values of
securities and other financial instruments and pension and post retirement benefit obligations.
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 or loss, 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 and reflected as a loss when a decline in fair value is not temporary. In estimating other than
temporary losses, management considers: (1) the length of time and extent that fair value has been less than cost, (2) the financial condition and near term prospects of the issuer, and (3) the fact that the Company has the intention
and the ability to hold the security to maturity.
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. Past due status is based on the contractual terms of the loan. All interest accrued but not received for these loans is reversed against interest income. Payments received on such loans are reported as
principal reductions until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest contractually due are brought current and future payments are reasonably assured.
47
S
OUTHERN
M
ICHIGAN
B
ANCORP
, I
NC
.
N
OTES
T
O
C
ONSOLIDATED
F
INANCIAL
S
TATEMENTS
(
CONTINUED
)
N
OTE
A N
ATURE
OF
O
PERATIONS
AND
S
IGNIFICANT
A
CCOUNTING
P
OLICIES
(
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 net of recoveries. Estimating the risk of loss and the amount of loss on any loan is necessarily subjective. 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, information in regulatory examination
reports, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in managements judgment, should be charged-off. Loan losses are charged against the allowance
when management believes the uncollectibility of a loan balance is confirmed. The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired.
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 determined to be 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 loans effective interest 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, in the judgment of management, that all principal and interest amounts will not be collected according to the original terms of the loan.
Consumer loans are typically charged-off no later than 120 days past due. Real estate mortgage loans in the process of collection are charged-off on or before they become 365 days past due. Commercial
loans are charged-off promptly upon the determination that all or a portion of any loan balance is uncollectible. In all cases, loans are placed on nonaccrual status or charged-off at an earlier date if collection of principal or interest is
considered doubtful.
Under certain circumstances, the Bank may provide borrowers relief through loan restructurings. A restructuring of debt
constitutes a troubled debt restructuring (TDR) if the Bank, for economic or legal reasons related to the borrowers financial difficulties, grants a concession to the borrower that it would not otherwise consider. Concessions may include
reduction of interest rates, extension of maturity dates, forgiveness of principal or interest due, or acceptance of other assets in full or partial satisfaction of the debt. TDR loans typically present an elevated level of credit risk as the
borrowers are not able to perform according to the original contractual terms. Loans that are reported as TDRs are considered impaired and measured for impairment, as previously described. TDR loans that have performed as agreed under the
restructured terms for a period of 12 months or longer may cease to be reported as a TDR loan. However, the loan continues to be individually evaluated for impairment.
Premises and Equipment:
Premises and equipment are stated at cost, less accumulated
depreciation. Depreciation is computed principally using straight line or accelerated methods over their estimated useful lives. The estimated useful lives are 10 to 40 years for buildings and improvements and 3 to 10 years for furniture and
equipment. 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.
Mortgage Servicing Rights:
Mortgage servicing rights, included in other assets, represent
the allocated value of mortgage servicing rights retained on loans sold. Mortgage 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.
48
S
OUTHERN
M
ICHIGAN
B
ANCORP
, I
NC
.
N
OTES
T
O
C
ONSOLIDATED
F
INANCIAL
S
TATEMENTS
(
CONTINUED
)
N
OTE
A N
ATURE
OF
O
PERATIONS
AND
S
IGNIFICANT
A
CCOUNTING
P
OLICIES
(
CONTINUED
)
Transfers of Financial Assets:
Transfers of financial assets are accounted
for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Bank, (2) the transferee obtains the right (free of conditions
that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Bank does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.
The transfer of a participating interest in a financial asset must have all of the following characteristics: (1) from the date of
transfer, it must represent a proportionate ownership interest in the financial asset, (2) from the date of transfer, all cash flows received, except cash flows allocated as compensation for servicing or other services performed, must be
divided proportionately among participating interest holders in the amount equal to their share ownership, (3) the rights of each participating interest holder must have the same priority, and (4) no party has the right to pledge or change
the entire financial asset unless all participating interest holders agree to do so.
Company Owned Life Insurance:
The Company has purchased life insurance policies on
certain key executives. Company owned life insurance is recorded at its net cash surrender value, or the amount that can be realized.
Goodwill and Other Intangible Assets:
Goodwill results from business acquisitions and
represents the excess of the purchase price over the fair value of acquired tangible assets and liabilities and identifiable intangible assets. Goodwill is assessed at least annually for impairment and any such impairment is recognized in the period
identified. Impairment exists when a reporting units carrying value of goodwill exceeds its fair value, which is determined through a two-step impairment test. Step 1 includes the determination of the carrying value of the single reporting
unit, including the existing goodwill and intangible assets, and estimating the fair value of the reporting unit. If the carrying amount of a reporting unit exceeds its fair value, a second step to the impairment test is required.
The Companys most recent annual impairment analysis as of November 30, 2012, indicated that the Step 2 analysis was not required.
Intangible assets with definite useful lives are amortized over their estimated useful lives to their estimated residual values. Goodwill is the only
intangible asset with an indefinite life on the Companys balance sheet. Other intangible assets consist of core deposit intangible assets arising from past acquisitions. They are initially measured at fair value and then amortized on an
accelerated method over their estimated useful lives, which is 10 years.
Other Real Estate Owned:
Other real estate owned was $1,633,000 and $1,530,000 at
December 31, 2012 and 2011, respectively, and is included in other assets. Other real estate owned is comprised of properties acquired through a foreclosure proceeding or acceptance of a deed in lieu of foreclosure. These properties are
initially recorded at fair value less estimated cost to sell at the date of foreclosure, establishing a new cost basis. After foreclosure, valuations are periodically performed by management and other real estate owned is carried at the lower of
carrying amount or fair value less estimated cost to sell. Expenses, gains and losses on disposition, and reductions in carrying value are reported as non-interest expense.
Stock Based Compensation:
The Company has adopted the requirements of share-based
payment transactions, using the modified prospective transition method. Under this method, the Company recognizes compensation cost for stock based compensation for all new or modified grants.
See Note M regarding the various assumptions used in computing the compensation expense.
Advertising Costs:
Advertising costs are expensed as incurred.
49
S
OUTHERN
M
ICHIGAN
B
ANCORP
, I
NC
.
N
OTES
T
O
C
ONSOLIDATED
F
INANCIAL
S
TATEMENTS
(
CONTINUED
)
N
OTE
A N
ATURE
OF
O
PERATIONS
AND
S
IGNIFICANT
A
CCOUNTING
P
OLICIES
(
CONTINUED
)
Income Taxes:
The income tax provision 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. Benefits from tax positions taken or expected to be taken in a tax return are not recognized if the likelihood that the tax position would be
sustained upon examination by a taxing authority is considered to be 50% or less. Any interest and penalties resulting from the filing of the income tax returns is included in the provision for income taxes.
Cash Flow Definition:
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 and short term borrowings with a maturity of 90 days or less.
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 issuable under stock options. Earnings and dividends per share are restated for all stock splits and stock dividends through the date of issuance of the financial statements.
Comprehensive Income:
Comprehensive income consists of net income and other comprehensive
income or loss. Other comprehensive income or loss includes the net change in unrealized gains and losses on securities available for sale and the changes in the funded status of the pension plan, each net of tax, which are also recognized as a
separate component of shareholders equity.
Employee Stock Ownership Plan (ESOP):
The cost of shares issued to the ESOP but
not yet allocated to participants is shown as a reduction to shareholders equity. Compensation expense is based on the market price of shares as they are committed to be released to participants accounts. Dividends on allocated ESOP
shares reduce retained earnings; dividends on unearned ESOP shares reduce debt and accrued interest.
Fair Values of Financial Instruments:
Fair values of financial instruments are
estimated using relevant market information and other assumptions, as more fully disclosed in Note S. 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.
Concentrations of Credit Risk:
The Company grants commercial, real estate and installment
loans to customers mainly in southwest Michigan. Commercial loans include loans collateralized by commercial real estate, business assets and agricultural loans collateralized by crops and farm equipment. Commercial loans make up approximately 74%
of the loan portfolio at December 31, 2012 (71% at December 31, 2011) and such loans are expected to be repaid from cash flow from operations of businesses. Residential mortgage loans make up approximately 24% of the loan portfolio at
December 31, 2012 (27% at December 31, 2011) and are collateralized by mortgages on residential real estate. Consumer loans make up approximately 2% of the loan portfolio at December 31, 2012 (2% at December 31, 2011) and are
primarily collateralized by consumer assets.
Operating Segments:
While the chief decision-makers monitor the revenue streams of the
various products and services, operations are managed and financial performance is evaluated on a Company wide basis. Operating segments are aggregated into one as operating results for all segments are similar. Accordingly, all of the financial
service operations are considered by management to be aggregated in one reportable operating segment: commercial banking.
50
S
OUTHERN
M
ICHIGAN
B
ANCORP
, I
NC
.
N
OTES
T
O
C
ONSOLIDATED
F
INANCIAL
S
TATEMENTS
(
CONTINUED
)
N
OTE
A N
ATURE
OF
O
PERATIONS
AND
S
IGNIFICANT
A
CCOUNTING
P
OLICIES
(
CONTINUED
)
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. Commitments may include interest rates determined prior to funding the loan (rate lock commitments). Rate lock commitments on loans intended to be sold are considered to
be derivatives. Such commitments were not material at December 31, 2012 and 2011.
Cash Balances:
The Company maintains deposits with other correspondent banks. Certain
of these deposits may exceed FDIC insured limits.
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 does not believe there are any such matters outstanding as of
December 31, 2012 that will have a material future adverse effect on the consolidated financial statements.
Subsequent Events:
Management evaluated subsequent events through the date the consolidated
financial statements were issued. Events or transactions occurring after December 31, 2012, but prior to when the consolidated financial statements were issued, that provided additional evidence about conditions that existed at
December 31, 2012, have been recognized in the consolidated financial statements for the year ended December 31, 2012. Events or transactions that provided evidence about conditions that did not exist at December 31, 2012, but arose
before the consolidated financial statements were issued, have not been recognized in the consolidated financial statements for the year ended December 31, 2012.
Reclassifications:
Certain items in the 2011 and 2010 consolidated
financial statements have been reclassified to conform to the current year presentation.
Adoption of New Accounting Standards:
. In May 2011, the Financial Accounting
Standards Board (FASB) issued ASU No. 2011-04
Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.
The amendments in ASU 2011-04 generally represent clarifications of Topic 820, but also
include some instances where a particular principle or requirement for measuring fair value or disclosing information about fair value measurements has changed. ASU 2011-04 results in common principles and requirements for measuring fair value and
for disclosing information about fair value measurements in accordance with U.S. GAAP and IFRSs. The amendments in ASU 2011-04 are to be applied prospectively. ASU 2011-04 was adopted effective January 1, 2012, but did not have any impact on
the Companys consolidated financial position or results of operations.
In June 2011, FASB issued ASU No. 2011-05
Amendments to
Topic 220, Comprehensive Income.
Under the amendments in ASU 2011-05, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single
continuous statement of comprehensive income or in two separate but consecutive statements. Either option requires the entity to present each component of net income along with total net income, each component of other comprehensive income along
with a total for other comprehensive income, and a total amount for comprehensive income. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders equity. The
amendments in ASU 2011-05 do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income.
The Company adopted ASU 2011-05 for the first quarter of 2012 and elected to present the components of other comprehensive income in a separate statement. The adoption of ASU 2011-05 did not have any
impact on the Companys consolidated financial condition or results of operations.
51
S
OUTHERN
M
ICHIGAN
B
ANCORP
, I
NC
.
N
OTES
T
O
C
ONSOLIDATED
F
INANCIAL
S
TATEMENTS
(
CONTINUED
)
N
OTE
A N
ATURE
OF
O
PERATIONS
AND
S
IGNIFICANT
A
CCOUNTING
P
OLICIES
(
CONTINUED
)
In September 2011, FASB issued ASU 2011-08,
Intangibles Goodwill and Other (Topic 350) Testing
Goodwill for Impairment
. The amendments in ASU 2011-08 give the entity the option of first assessing qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that
the fair value of a reporting unit is less than its carrying amount. If, after the assessment, the entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the
two-step impairment test is unnecessary. The amendments in ASU 2011-08 are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The Company elected to continue to have an
independent valuation performed as of November 30, 2012 to assess goodwill impairment. As a result, ASU 2011-08 had no impact on the Companys 2012 consolidated financial statements.
In December 2011, FASB issued ASU 2011-11,
Disclosures about Offsetting Assets and Liabilities
, amending ASC Topic 210 requiring an entity to
disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effects of those arrangements on its financial position. ASU 2011-11 is effective for annual and interim periods beginning
on or after January 1, 2013. The Company has not yet determined what, if any, financial statement impact the adoption of ASU 2011-11 will have.
In July 2012, the FASB amended existing guidance relating to testing indefinite-lived intangible assets for impairment. The amendment permits an assessment of qualitative factors to determine whether the
existence of events and circumstances indicates that it is more likely than not that the indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, it is concluded that it is not more likely than not
that the indefinite-lived intangible asset is impaired, then no further action is required. However, after the same assessment, if it is concluded that it is more like than not that the indefinite-lived intangible asset is impaired, then a
quantitative impairment test should be performed whereby the fair value of the indefinite-lived intangible asset is compared to the carrying amount. The amendments in this guidance are effective for annual and interim impairment tests performed for
fiscal years beginning after September 15, 2012. While early adoption is permitted, the Company expects to adopt this guidance in 2013 and has not yet determined what, if any, impact the adoption will have on its consolidated financial
statements.
52
S
OUTHERN
M
ICHIGAN
B
ANCORP
, I
NC
.
N
OTES
T
O
C
ONSOLIDATED
F
INANCIAL
S
TATEMENTS
(
CONTINUED
)
N
OTE
B B
ASIC
AND
D
ILUTED
E
ARNINGS
P
ER
C
OMMON
S
HARE
A reconciliation of the numerators and denominators of basic and diluted
earnings per common share for the years ended December 31, 2012, 2011 and 2010 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Basic Earnings Per Common Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (in thousands)
|
|
$
|
4,350
|
|
|
$
|
3,402
|
|
|
$
|
3,098
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
2,374,831
|
|
|
|
2,350,180
|
|
|
|
2,339,490
|
|
|
|
|
|
Less: Unallocated ESOP shares
|
|
|
(11,839
|
)
|
|
|
(20,733
|
)
|
|
|
(27,851
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding for basic earnings per common share
|
|
|
2,362,992
|
|
|
|
2,329,447
|
|
|
|
2,311,639
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share
|
|
$
|
1.84
|
|
|
$
|
1.46
|
|
|
$
|
1.34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings Per Common Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (in thousands)
|
|
$
|
4,350
|
|
|
$
|
3,402
|
|
|
$
|
3,098
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding for basic earnings per common share
|
|
|
2,362,992
|
|
|
|
2,329,447
|
|
|
|
2,311,639
|
|
|
|
|
|
Add: Dilutive effects of assumed exercises of stock options
|
|
|
6,298
|
|
|
|
4,378
|
|
|
|
3,636
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average shares and dilutive potential of common shares outstanding
|
|
|
2,369,290
|
|
|
|
2,333,825
|
|
|
|
2,315,275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share
|
|
$
|
1.84
|
|
|
$
|
1.46
|
|
|
$
|
1.34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options for 185,426, 199,961 and 196,394 shares of common stock were not considered in computing diluted earnings per share for
2012, 2011 and 2010, respectively, because they were anti-dilutive.
53
S
OUTHERN
M
ICHIGAN
B
ANCORP
, I
NC
.
N
OTES
T
O
C
ONSOLIDATED
F
INANCIAL
S
TATEMENTS
(
CONTINUED
)
N
OTE
C - S
ECURITIES
Year end investment securities were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for Sale, December 31, 2012
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair
Value
|
|
Federal agencies
|
|
$
|
15,985
|
|
|
$
|
45
|
|
|
$
|
|
|
|
$
|
16,030
|
|
U.S. government sponsored entities and agencies
|
|
|
7,848
|
|
|
|
54
|
|
|
|
|
|
|
|
7,902
|
|
States and political subdivisions
|
|
|
33,889
|
|
|
|
1,112
|
|
|
|
(23
|
)
|
|
|
34,978
|
|
Mortgage-backed securities
|
|
|
5,589
|
|
|
|
26
|
|
|
|
|
|
|
|
5,615
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
63,311
|
|
|
$
|
1,237
|
|
|
$
|
(23
|
)
|
|
$
|
64,525
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for Sale, December 31, 2011
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair
Value
|
|
Federal agencies
|
|
$
|
28,303
|
|
|
$
|
132
|
|
|
$
|
|
|
|
$
|
28,435
|
|
U.S. government sponsored entities and agencies
|
|
|
22,855
|
|
|
|
101
|
|
|
|
|
|
|
|
22,956
|
|
States and political subdivisions
|
|
|
32,324
|
|
|
|
1,124
|
|
|
|
(3
|
)
|
|
|
33,445
|
|
Asset-backed securities
|
|
|
2,487
|
|
|
|
|
|
|
|
(11
|
)
|
|
|
2,476
|
|
Mortgage-backed securities
|
|
|
3,007
|
|
|
|
25
|
|
|
|
|
|
|
|
3,032
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
88,976
|
|
|
$
|
1,382
|
|
|
$
|
(14
|
)
|
|
$
|
90,344
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities with unrealized losses at
December 31, 2012 and 2011 that have not been recognized in income are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
Continued Unrealized
Loss
for
Less than 12 Months
|
|
|
Continued Unrealized
Loss
for
12 Months or More
|
|
|
Total
|
|
Description of Securities
|
|
Fair
Value
|
|
|
Unrealized
Loss
|
|
|
Fair
Value
|
|
|
Unrealized
Loss
|
|
|
Fair
Value
|
|
|
Unrealized
Loss
|
|
States and political subdivisions
|
|
$
|
3,492
|
|
|
$
|
(23
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
3,492
|
|
|
$
|
(23
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily impaired
|
|
$
|
3,492
|
|
|
$
|
(23
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
3,492
|
|
|
$
|
(23
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
Continued Unrealized
Loss
for
Less than 12 Months
|
|
|
Continued Unrealized
Loss for
12
Months or More
|
|
|
Total
|
|
Description of Securities
|
|
Fair
Value
|
|
|
Unrealized
Loss
|
|
|
Fair
Value
|
|
|
Unrealized
Loss
|
|
|
Fair
Value
|
|
|
Unrealized
Loss
|
|
States and political subdivisions
|
|
$
|
1,005
|
|
|
$
|
(3
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,005
|
|
|
$
|
(3
|
)
|
Mortgage-backed securities
|
|
|
|
|
|
|
|
|
|
|
2,487
|
|
|
|
(11
|
)
|
|
|
2,487
|
|
|
|
(11
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily impaired
|
|
$
|
1,005
|
|
|
$
|
(3
|
)
|
|
$
|
2,487
|
|
|
$
|
(11
|
)
|
|
$
|
3,492
|
|
|
$
|
(14
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Bank had 13 securities in an unrealized loss position at December 31, 2012, all for a period of less than 12 months.
Unrealized losses have not been recognized into income as management believes the issuers are of sound credit quality, management has no intent to sell the securities, the Company has the ability to hold the securities to maturity and the decline in
fair value is largely due to changes in market interest rates. The fair value is expected to recover as the bonds approach their maturity date.
54
S
OUTHERN
M
ICHIGAN
B
ANCORP
, I
NC
.
N
OTES
T
O
C
ONSOLIDATED
F
INANCIAL
S
TATEMENTS
(
CONTINUED
)
N
OTE
C S
ECURITIES
(
CONTINUED
)
The proceeds from sales of securities and the associated gains are listed below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Proceeds
|
|
$
|
|
|
|
$
|
|
|
|
$
|
7,445
|
|
Gross gains
|
|
|
|
|
|
|
|
|
|
|
206
|
|
The tax provision related to gross realized gains was $70,000 for 2010.
Gains on calls of securities were $3,000, $29,000 and $1,000 for 2012, 2011 and 2010, respectively.
The amortized cost and fair value of the investment securities portfolio are shown by contractual maturity.
Contractual maturities of debt securities at year-end 2012 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Amortized
Cost
|
|
|
Fair
Value
|
|
Due in one year or less
|
|
$
|
25,735
|
|
|
$
|
25,871
|
|
Due from one to five years
|
|
|
16,162
|
|
|
|
16,604
|
|
Due from five to ten years
|
|
|
11,316
|
|
|
|
11,721
|
|
Due after ten years
|
|
|
4,509
|
|
|
|
4,714
|
|
Mortgage-backed securities
|
|
|
5,589
|
|
|
|
5,615
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
63,311
|
|
|
$
|
64,525
|
|
|
|
|
|
|
|
|
|
|
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 $28,234,000 and $32,089,000, respectively, were pledged as collateral for repurchase accounts and for other purposes at year-end 2012 and 2011.
At December 31, 2012 and 2011, the fair value of securities issued by the State of Michigan and all its political subdivisions totaled $28,443,000
and $26,314,000, respectively. No other securities of any single issuer were greater than 10% of shareholders equity.
Investments in
the Federal Home Loan Bank of Indianapolis stock totaled $1,701,000 at December 31, 2012 and 2011 and are included in other assets because such investments are considered restricted. Such investments are recorded at cost and evaluated for
impairment.
At December 31, 2012, the Company had no investment in securities of issuers outside of the United States.
N
OTE
D L
OANS
A
ND
A
LLOWANCE
F
OR
L
OAN
L
OSSES
Loans at year-end were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
Commercial
|
|
$
|
82,543
|
|
|
$
|
70,056
|
|
Real estate - commercial
|
|
|
172,764
|
|
|
|
150,829
|
|
Real estate - construction
|
|
|
16,802
|
|
|
|
12,479
|
|
Consumer
|
|
|
8,349
|
|
|
|
8,167
|
|
Real estate mortgage
|
|
|
89,147
|
|
|
|
91,273
|
|
|
|
|
|
|
|
|
|
|
|
|
|
369,605
|
|
|
|
332,804
|
|
Less allowance for loan losses
|
|
|
(5,455
|
)
|
|
|
(5,412
|
)
|
|
|
|
|
|
|
|
|
|
Loans, net
|
|
$
|
364,150
|
|
|
$
|
327,392
|
|
|
|
|
|
|
|
|
|
|
55
S
OUTHERN
M
ICHIGAN
B
ANCORP
, I
NC
.
N
OTES
T
O
C
ONSOLIDATED
F
INANCIAL
S
TATEMENTS
(
CONTINUED
)
N
OTE
D L
OANS
A
ND
A
LLOWANCE
F
OR
L
OAN
L
OSSES
(
CONTINUED
)
Credit Risk Elements:
Construction loans are underwritten utilizing independent appraisals, sensitivity analysis of absorption, vacancy and lease rates and financial analysis of the developers and property owners. Construction
loans are generally based upon estimates of costs and value associated with completion of the project. Construction loans often involve the disbursement of funds with repayment substantially dependent on the success of the ultimate project. These
loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, general economic conditions and the availability of
long-term financing. The Bank typically requires guarantees on these loans. The Banks construction loans are secured primarily by properties located in its primary market area.
The Bank originates 1 4 family real estate and consumer loans utilizing credit reports to supplement the underwriting process. The Banks manual underwriting standards for 1 4
family loans are generally in accordance with Federal Home Loan Mortgage Corporation and loan policy manual underwriting guidelines. Properties securing 1 4 family real estate loans are appraised by fee appraisers, which are independent of
the loan origination function and have been approved by management. The loan-to-value ratios normally do not exceed 80% without credit enhancements such as mortgage insurance. The Bank will lend up to 100% of the lesser of the appraised value or
purchase price for conventional 1 4 family real estate loans, provided private mortgage insurance is obtained. The underwriting standards for consumer loans include a determination of the applicants payment history on other debts and an
assessment of their ability to meet existing obligations and payments on the proposed loan. To monitor and manage loan risk, policies and procedures are developed and modified, as needed by management. This activity, coupled with smaller loan
amounts that are spread across many individual borrowers, minimizes risk. Additionally, market conditions are reviewed by management on a regular basis. The Banks 1 4 family real estate loans are secured primarily by properties located
in its primary market area.
Commercial and agricultural real estate loans are subject to underwriting standards and processes similar to
commercial and agricultural operating loans, in addition to those unique to real estate loans. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial and agricultural real estate lending
typically involves higher loan principal amounts and the repayment of these loans is generally dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Loan to value is
generally 75% of the lower of the cost or value of the assets. Appraisals on properties securing these loans are generally performed by fee appraisers approved by the Commercial Loan Committee. Because payments on commercial and agricultural real
estate loans are often dependent on the successful operation or management of the properties, repayment of such loans may be subject to adverse conditions in the real estate market or the economy. Management monitors and evaluates commercial and
agricultural real estate loans based on collateral and risk rating criteria. The Bank typically requires guarantees on these loans. The Banks commercial and agricultural real estate loans are secured primarily by properties located in its
primary market area.
Commercial and agricultural operating loans are underwritten based on the Banks examination of current and
projected cash flows to determine the ability of the borrower to repay their obligations as agreed. This underwriting includes the evaluation of cash flows of the borrower, underlying collateral, if applicable, and the borrowers ability to
manage its business activities. The cash flows of borrowers and the collateral securing these loans may fluctuate in value after the initial evaluation. A first priority lien on the general assets of the business normally secures these types of
loans. Loan to value limits vary and are dependent upon the nature and type of the underlying collateral and the financial strength of the borrower. Crop and hail insurance is required for most agricultural borrowers. Loans are generally guaranteed
by the principal(s). The Banks commercial and agricultural operating lending is principally in its primary market area.
56
S
OUTHERN
M
ICHIGAN
B
ANCORP
, I
NC
.
N
OTES
T
O
C
ONSOLIDATED
F
INANCIAL
S
TATEMENTS
(
CONTINUED
)
N
OTE
D L
OANS
A
ND
A
LLOWANCE
FOR
L
OAN
L
OSSES
(
CONTINUED
)
The Bank has an internal credit analyst who reviews and validates credit risk on a periodic basis, as
well as an internal loan review performed throughout the year. Results of the credit analyst are presented to management. Internal loan reviews are presented to management and the Audit Committee. The credit analysis and loan review processes
complement and reinforce the risk identification and assessment decisions made by lenders and credit personnel, as well as the Banks policies and procedures.
At December 31, 2012 and 2011, certain directors and executive officers of the Company, including their associates and companies in which they are principal owners, were indebted to the Bank.
The following is a summary of activity of loans (in thousands) exceeding $60,000 in the aggregate to these individuals and their associates.
All of these loans were made in the ordinary course of business, were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable loans with persons not related to
the Company and did not involve more than the normal risk of collectability or present other unfavorable features. None of these loans were in default at December 31, 2012. Other changes include adjustments for loans applicable to one reporting
period that are excludable from the other reporting period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
Balance at January 1
|
|
$
|
13,542
|
|
|
$
|
14,099
|
|
|
$
|
16,578
|
|
New loans, including renewals
|
|
|
5,306
|
|
|
|
11,230
|
|
|
|
7,805
|
|
Repayments
|
|
|
(4,626
|
)
|
|
|
(11,659
|
)
|
|
|
(10,192
|
)
|
Other changes, net
|
|
|
58
|
|
|
|
(128
|
)
|
|
|
(92
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31
|
|
$
|
14,280
|
|
|
$
|
13,542
|
|
|
$
|
14,099
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The unpaid principal balance of mortgage loans serviced for others, which are not included on the consolidated balance sheet, was
$197,238,000 and $168,025,000 at December 31, 2012 and 2011, respectively.
Activity for capitalized mortgage servicing rights, included in other assets,
was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
Balance at January 1
|
|
$
|
969
|
|
|
$
|
868
|
|
|
$
|
753
|
|
Additions
|
|
|
641
|
|
|
|
412
|
|
|
|
371
|
|
Amortized to expense
|
|
|
(367
|
)
|
|
|
(311
|
)
|
|
|
(256
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31
|
|
$
|
1,243
|
|
|
$
|
969
|
|
|
$
|
868
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
No valuation allowance for capitalized mortgage servicing rights was considered necessary at December 31, 2012 or 2011 because the
estimated fair value of such rights exceeded the carrying value.
Changes in the allowance for loan losses for the years ended
December 31 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
Balance at January 1
|
|
$
|
5,412
|
|
|
$
|
5,694
|
|
|
$
|
6,075
|
|
Provision for loan losses
|
|
|
1,350
|
|
|
|
1,050
|
|
|
|
1,375
|
|
Loans charged off
|
|
|
(1,547
|
)
|
|
|
(1,561
|
)
|
|
|
(2,031
|
)
|
Recoveries
|
|
|
240
|
|
|
|
229
|
|
|
|
275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs
|
|
|
(1,307
|
)
|
|
|
(1,332
|
)
|
|
|
(1,756
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31
|
|
$
|
5,455
|
|
|
$
|
5,412
|
|
|
$
|
5,694
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In evaluating the allowance for loan losses, loans are analyzed based on the department originating the loan (commercial, mortgage or
consumer), which in some instances may be different than how the loans are categorized for regulatory reporting purposes. Consequently, loan groupings may vary within the disclosures.
57
S
OUTHERN
M
ICHIGAN
B
ANCORP
, I
NC
.
N
OTES
T
O
C
ONSOLIDATED
F
INANCIAL
S
TATEMENTS
(
CONTINUED
)
N
OTE
D L
OANS
AND
A
LLOWANCE
F
OR
L
OAN
L
OSSES
(
CONTINUED
)
The following is an analysis of the allowance for loan
losses by portfolio segment based on impairment method as of and for the years ended December 31, 2012 and 2011 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
including
Commercial
Real Estate
|
|
|
Consumer
|
|
|
Real
Estate
Mortgage
1
st
Lien
|
|
|
Real
Estate
Mortgage
Junior
Lien
|
|
|
Total
|
|
December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1
|
|
$
|
4,039
|
|
|
$
|
68
|
|
|
$
|
1,155
|
|
|
$
|
150
|
|
|
$
|
5,412
|
|
Provision for loan losses
|
|
|
1,038
|
|
|
|
9
|
|
|
|
249
|
|
|
|
54
|
|
|
|
1,350
|
|
Loans charged off
|
|
|
(1,084
|
)
|
|
|
(40
|
)
|
|
|
(341
|
)
|
|
|
(82
|
)
|
|
|
(1,547
|
)
|
Recoveries
|
|
|
165
|
|
|
|
20
|
|
|
|
42
|
|
|
|
13
|
|
|
|
240
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31
|
|
$
|
4,158
|
|
|
$
|
57
|
|
|
$
|
1,105
|
|
|
$
|
135
|
|
|
$
|
5,455
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance individually evaluated for impairment
|
|
$
|
534
|
|
|
|
|
|
|
$
|
224
|
|
|
|
|
|
|
$
|
758
|
|
|
|
|
|
|
|
Ending balance collectively evaluated for impairment
|
|
|
3,624
|
|
|
|
57
|
|
|
|
881
|
|
|
|
135
|
|
|
|
4,697
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,158
|
|
|
$
|
57
|
|
|
$
|
1,105
|
|
|
$
|
135
|
|
|
$
|
5,455
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1
|
|
$
|
4,239
|
|
|
$
|
87
|
|
|
$
|
1,211
|
|
|
$
|
157
|
|
|
$
|
5,694
|
|
Provision for loan losses
|
|
|
498
|
|
|
|
14
|
|
|
|
433
|
|
|
|
105
|
|
|
|
1,050
|
|
Loans charged off
|
|
|
(875
|
)
|
|
|
(71
|
)
|
|
|
(498
|
)
|
|
|
(117
|
)
|
|
|
(1,561
|
)
|
Recoveries
|
|
|
177
|
|
|
|
38
|
|
|
|
9
|
|
|
|
5
|
|
|
|
229
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31
|
|
$
|
4,039
|
|
|
$
|
68
|
|
|
$
|
1,155
|
|
|
$
|
150
|
|
|
$
|
5,412
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance individually evaluated for impairment
|
|
$
|
744
|
|
|
|
|
|
|
$
|
240
|
|
|
|
|
|
|
$
|
984
|
|
|
|
|
|
|
|
Ending balance collectively evaluated for impairment
|
|
|
3,295
|
|
|
|
68
|
|
|
|
915
|
|
|
|
150
|
|
|
|
4,428
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,039
|
|
|
$
|
68
|
|
|
$
|
1,155
|
|
|
$
|
150
|
|
|
$
|
5,412
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loans also include demand deposit loan account charge-offs and recoveries amounting to $132,000 and $125,000, respectively,
for the year ended December 31, 2012 and $167,000 and $72,000, respectively, for the year ended December 31, 2011.
58
S
OUTHERN
M
ICHIGAN
B
ANCORP
, I
NC
.
N
OTES
T
O
C
ONSOLIDATED
F
INANCIAL
S
TATEMENTS
(
CONTINUED
)
N
OTE
D L
OANS
A
ND
A
LLOWANCE
F
OR
L
OAN
L
OSSES
(C
ONTINUED
)
The following is a summary of the recorded investment in loans, by
portfolio segment and based on impairment method, as of December 31, 2012 and 2011 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
including
Commercial
Real Estate
|
|
|
Consumer
|
|
|
Real
Estate
Mortgage
1
st
Lien
|
|
|
Real
Estate
Mortgage
Junior
Lien
|
|
|
Total
|
|
December 31, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance individually evaluated for impairment
|
|
$
|
5,964
|
|
|
$
|
17
|
|
|
$
|
2,879
|
|
|
$
|
129
|
|
|
$
|
8,989
|
|
|
|
|
|
|
|
Ending balance collectively evaluated for impairment
|
|
|
276,539
|
|
|
|
7,884
|
|
|
|
64,143
|
|
|
|
12,050
|
|
|
|
360,616
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
282,503
|
|
|
$
|
7,901
|
|
|
$
|
67,022
|
|
|
$
|
12,179
|
|
|
$
|
369,605
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance individually evaluated for impairment
|
|
$
|
6,440
|
|
|
$
|
29
|
|
|
$
|
3,326
|
|
|
$
|
86
|
|
|
$
|
9,881
|
|
|
|
|
|
|
|
Ending balance collectively evaluated for impairment
|
|
|
237,263
|
|
|
|
7,800
|
|
|
|
64,927
|
|
|
|
12,933
|
|
|
|
322,923
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
243,703
|
|
|
$
|
7,829
|
|
|
$
|
68,253
|
|
|
$
|
13,019
|
|
|
$
|
332,804
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following tables present loans individually evaluated for impairment by class of loans as of
December 31, 2012 and December 31, 2011 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012
|
|
Unpaid
Principal
Balance
|
|
|
Recorded
Investment
|
|
|
Allowance for
Loan Losses
Allocated
|
|
|
|
|
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
492
|
|
|
$
|
492
|
|
|
$
|
|
|
Real estate - commercial
|
|
|
2,599
|
|
|
|
2,194
|
|
|
|
|
|
Real estate - construction
|
|
|
80
|
|
|
|
80
|
|
|
|
|
|
Consumer
|
|
|
16
|
|
|
|
16
|
|
|
|
|
|
Real estate mortgage
|
|
|
1,835
|
|
|
|
1,698
|
|
|
|
|
|
|
|
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
482
|
|
|
|
423
|
|
|
|
37
|
|
Real estate - commercial
|
|
|
1,590
|
|
|
|
1,561
|
|
|
|
122
|
|
Real estate - construction
|
|
|
188
|
|
|
|
188
|
|
|
|
161
|
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate mortgage
|
|
|
2,337
|
|
|
|
2,337
|
|
|
|
438
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
9,619
|
|
|
$
|
8,989
|
|
|
$
|
758
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
59
S
OUTHERN
M
ICHIGAN
B
ANCORP
, I
NC
.
N
OTES
T
O
C
ONSOLIDATED
F
INANCIAL
S
TATEMENTS
(
CONTINUED
)
N
OTE
D L
OANS
AND
A
LLOWANCE
F
OR
L
OAN
L
OSSES
(C
ONTINUED
)
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011
|
|
Unpaid
Principal
Balance
|
|
|
Recorded
Investment
|
|
|
Allowance for
Loan
Losses
Allocated
|
|
|
|
|
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
135
|
|
|
$
|
135
|
|
|
$
|
|
|
Real estate - commercial
|
|
|
2,808
|
|
|
|
2,649
|
|
|
|
|
|
Real estate - construction
|
|
|
244
|
|
|
|
232
|
|
|
|
|
|
Consumer
|
|
|
29
|
|
|
|
29
|
|
|
|
|
|
Real estate mortgage
|
|
|
2,999
|
|
|
|
2,485
|
|
|
|
|
|
|
|
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
804
|
|
|
|
744
|
|
|
|
26
|
|
Real estate - commercial
|
|
|
1,434
|
|
|
|
1,403
|
|
|
|
490
|
|
Real estate - construction
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate mortgage
|
|
|
2,204
|
|
|
|
2,204
|
|
|
|
468
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
10,657
|
|
|
$
|
9,881
|
|
|
$
|
984
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Information regarding impaired loans at December 31 follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
Average balance of impaired loans during the year
|
|
$
|
9,486
|
|
|
$
|
10,530
|
|
|
$
|
11,719
|
|
|
|
|
|
Cash basis interest income recognized during the year
|
|
$
|
252
|
|
|
$
|
250
|
|
|
$
|
345
|
|
|
|
|
|
Interest income recognized during the year
|
|
$
|
268
|
|
|
$
|
285
|
|
|
$
|
396
|
|
The Companys loan portfolio also includes certain loans that have been modified in a TDR, where economic concessions have been
granted to borrowers who have experienced or are expected to experience financial difficulties. These concessions typically result from the Companys loss mitigation activities and could include reductions in the interest rate, payment
extensions, forgiveness of principal, forbearance or other actions.
When the Company modifies a loan, management evaluates any possible
concession based on the present value of expected future cash flows, discounted at the contractual interest rate of the original loan agreement, except when the sole source of repayment for the loan is the liquidation of collateral. In these cases,
management uses the current fair value of the collateral, less selling costs. If management determines that the value of the modified loan is less than the recorded investment in the loan (net of previous charge-offs and deferred loan fees or
costs), impairment is recognized through an allowance estimate or a charge-off to the allowance.
60
S
OUTHERN
M
ICHIGAN
B
ANCORP
, I
NC
.
N
OTES
T
O
C
ONSOLIDATED
F
INANCIAL
S
TATEMENTS
(
CONTINUED
)
N
OTE
D L
OANS
A
ND
A
LLOWANCE
F
OR
L
OAN
L
OSSES
(C
ONTINUED
)
The following table summarizes the number and volume of TDRs the Company
has recorded in its loan portfolio as of December 31, 2012 and 2011, as well as the number of TDR loans added each year and the amount of specific reserves in the allowance for loan losses relating to TDRs (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
Added During the Year
|
|
December 31, 2012
|
|
Number of
Loans
|
|
|
Amount
|
|
|
Specific
Reserves
Allocated
|
|
|
Number of
Loans
|
|
|
Amount
|
|
|
Specific
Reserves
Allocated
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
6
|
|
|
$
|
740
|
|
|
$
|
37
|
|
|
|
1
|
|
|
$
|
98
|
|
|
$
|
|
|
Real estate - commercial
|
|
|
7
|
|
|
|
2,088
|
|
|
|
122
|
|
|
|
2
|
|
|
|
518
|
|
|
|
11
|
|
Real estate - construction
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate - mortgage
|
|
|
17
|
|
|
|
1,483
|
|
|
|
117
|
|
|
|
2
|
|
|
|
92
|
|
|
|
30
|
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
30
|
|
|
$
|
4,311
|
|
|
$
|
276
|
|
|
|
5
|
|
|
$
|
708
|
|
|
$
|
41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
5
|
|
|
$
|
733
|
|
|
$
|
23
|
|
|
|
2
|
|
|
$
|
267
|
|
|
$
|
11
|
|
Real estate - commercial
|
|
|
5
|
|
|
|
1,619
|
|
|
|
13
|
|
|
|
2
|
|
|
|
455
|
|
|
|
13
|
|
Real estate - construction
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate - mortgage
|
|
|
21
|
|
|
|
1,882
|
|
|
|
181
|
|
|
|
13
|
|
|
|
1,182
|
|
|
|
112
|
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
31
|
|
|
$
|
4,234
|
|
|
$
|
217
|
|
|
|
17
|
|
|
$
|
1,904
|
|
|
$
|
136
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The modification of the terms of loans that resulted in a TDR included one or a combination of the following: a reduction of the stated
interest rate of the loan or an extension of the maturity date or amortization period. The post-modified loan balance for TDRs was essentially the same as the pre-modified balance.
The Company has not committed to lend any additional funds to these borrowers.
There was one
$30,000 real estate mortgage TDR in default of its modified terms as of December 31, 2012. No charge off or specific reserve was recorded for this loan through December 31, 2012.
The following table presents the aging of the recorded investment in past due and nonaccrual
loans as of December 31, 2012 and December 31, 2011 by class of loans (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012
|
|
Loans Past Due Accruing Interest
|
|
|
|
|
|
|
|
|
|
|
|
|
30-59
Days
|
|
|
60-89
Days
|
|
|
Over
90
Days
|
|
|
Total
|
|
|
Loans
on Non-Accrual
|
|
|
Loans Not
Past Due
or Non-Accrual
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
46
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
46
|
|
|
$
|
492
|
|
|
$
|
82,005
|
|
|
$
|
82,543
|
|
Real estate - commercial
|
|
|
199
|
|
|
|
62
|
|
|
|
|
|
|
|
261
|
|
|
|
2,189
|
|
|
|
170,314
|
|
|
|
172,764
|
|
Real estate - construction
|
|
|
10
|
|
|
|
|
|
|
|
26
|
|
|
|
36
|
|
|
|
269
|
|
|
|
16,497
|
|
|
|
16,802
|
|
Consumer
|
|
|
22
|
|
|
|
6
|
|
|
|
7
|
|
|
|
35
|
|
|
|
16
|
|
|
|
8,298
|
|
|
|
8,349
|
|
Real estate mortgage
|
|
|
442
|
|
|
|
109
|
|
|
|
|
|
|
|
551
|
|
|
|
2,417
|
|
|
|
86,179
|
|
|
|
89,147
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
719
|
|
|
$
|
177
|
|
|
$
|
33
|
|
|
$
|
929
|
|
|
$
|
5,383
|
|
|
$
|
363,293
|
|
|
$
|
369,605
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61
S
OUTHERN
M
ICHIGAN
B
ANCORP
, I
NC
.
N
OTES
T
O
C
ONSOLIDATED
F
INANCIAL
S
TATEMENTS
(
CONTINUED
)
N
OTE
D L
OANS
A
ND
A
LLOWANCE
F
OR
L
OAN
L
OSSES
(C
ONTINUED
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011
|
|
Loans Past Due Accruing Interest
|
|
|
|
|
|
|
|
|
|
|
|
|
30-59
Days
|
|
|
60-89
Days
|
|
|
Over
90
Days
|
|
|
Total
|
|
|
Loans
on
Non-Accrual
|
|
|
Loans Not
Past
Due
or Non-Accrual
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
182
|
|
|
$
|
120
|
|
|
$
|
6
|
|
|
$
|
308
|
|
|
$
|
413
|
|
|
$
|
69,335
|
|
|
$
|
70,056
|
|
Real estate - commercial
|
|
|
538
|
|
|
|
144
|
|
|
|
|
|
|
|
682
|
|
|
|
2,982
|
|
|
|
147,165
|
|
|
|
150,829
|
|
Real estate - construction
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
231
|
|
|
|
12,248
|
|
|
|
12,479
|
|
Consumer
|
|
|
22
|
|
|
|
4
|
|
|
|
|
|
|
|
26
|
|
|
|
29
|
|
|
|
8,112
|
|
|
|
8,167
|
|
Real estate mortgage
|
|
|
1,476
|
|
|
|
780
|
|
|
|
|
|
|
|
2,256
|
|
|
|
2,048
|
|
|
|
86,969
|
|
|
|
91,273
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,218
|
|
|
$
|
1,048
|
|
|
$
|
6
|
|
|
$
|
3,272
|
|
|
$
|
5,703
|
|
|
$
|
323,829
|
|
|
$
|
332,804
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit Quality Indicators:
The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt, such as: current financial information, historical payment
experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis includes all loans from the commercial loan
department. This analysis is performed at least annually. The Company uses the following definitions for risk ratings:
Pass:
Loans classified as pass have no existing or known potential weaknesses deserving of managements close attention.
Special Mention:
Loans classified as special mention have a potential weakness that deserves managements close
attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the Companys credit position at some future date.
Substandard:
Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor
or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the
deficiencies are not corrected.
Doubtful:
Loans classified as doubtful have all the weaknesses inherent in those
classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.
As of December 31, 2012 and December 31, 2011, based on the most recent
analysis performed, the risk category of loans by class of loans was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012
|
|
Pass
|
|
|
Special
Mention
|
|
|
Substandard
|
|
|
Doubtful
|
|
|
Not Risk
Rated
|
|
|
Total
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
72,521
|
|
|
$
|
8,993
|
|
|
$
|
1,029
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
82,543
|
|
Real estate - commercial
|
|
|
156,105
|
|
|
|
10,755
|
|
|
|
4,971
|
|
|
|
|
|
|
|
933
|
|
|
|
172,764
|
|
Real estate - construction
|
|
|
10,572
|
|
|
|
869
|
|
|
|
359
|
|
|
|
|
|
|
|
5,002
|
|
|
|
16,802
|
|
Real estate - mortgage
|
|
|
9,797
|
|
|
|
2,483
|
|
|
|
2,533
|
|
|
|
|
|
|
|
74,334
|
|
|
|
89,147
|
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,349
|
|
|
|
8,349
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
248,995
|
|
|
$
|
23,100
|
|
|
$
|
8,892
|
|
|
$
|
|
|
|
$
|
88,618
|
|
|
$
|
369,605
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62
S
OUTHERN
M
ICHIGAN
B
ANCORP
, I
NC
.
N
OTES
T
O
C
ONSOLIDATED
F
INANCIAL
S
TATEMENTS
(
CONTINUED
)
N
OTE
D L
OANS
A
ND
A
LLOWANCE
F
OR
L
OAN
L
OSSES
(C
ONTINUED
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011
|
|
Pass
|
|
|
Special
Mention
|
|
|
Substandard
|
|
|
Doubtful
|
|
|
Not Risk
Rated
|
|
|
Total
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
59,492
|
|
|
$
|
5,855
|
|
|
$
|
4,709
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
70,056
|
|
Real estate - commercial
|
|
|
128,405
|
|
|
|
14,681
|
|
|
|
7,437
|
|
|
|
|
|
|
|
306
|
|
|
|
150,829
|
|
Real estate - construction
|
|
|
5,547
|
|
|
|
2,542
|
|
|
|
520
|
|
|
|
|
|
|
|
3,870
|
|
|
|
12,479
|
|
Real estate - mortgage
|
|
|
7,399
|
|
|
|
3,177
|
|
|
|
2,743
|
|
|
|
|
|
|
|
77,954
|
|
|
|
91,273
|
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,167
|
|
|
|
8,167
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
200,843
|
|
|
$
|
26,255
|
|
|
$
|
15,409
|
|
|
$
|
|
|
|
$
|
90,297
|
|
|
$
|
332,804
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
N
OTE
E P
REMISES
AND
E
QUIPMENT
, N
ET
Premises and equipment, net at December 31 consisted of (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
Land
|
|
$
|
2,362
|
|
|
$
|
2,362
|
|
Buildings and improvements
|
|
|
17,025
|
|
|
|
16,854
|
|
Furniture and equipment
|
|
|
8,628
|
|
|
|
10,255
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,015
|
|
|
|
29,471
|
|
Less accumulated depreciation
|
|
|
(15,596
|
)
|
|
|
(16,925
|
)
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
12,419
|
|
|
$
|
12,546
|
|
|
|
|
|
|
|
|
|
|
Depreciation of premises and equipment charged to operations was $923,000, $869,000 and $995,000 in 2012, 2011 and 2010, respectively.
Rent expense under operating leases amounted to $110,000, $50,000 and $42,000 in 2012, 2011 and 2010, respectively.
Lease commitments under noncancelable operating equipment leases at December 31, 2012 were
as follows (in thousands):
|
|
|
|
|
2013
|
|
$
|
136
|
|
2014
|
|
|
107
|
|
2015
|
|
|
107
|
|
2016
|
|
|
107
|
|
2017
|
|
|
27
|
|
Thereafter
|
|
|
6
|
|
|
|
|
|
|
Total
|
|
$
|
490
|
|
|
|
|
|
|
N
OTE
F I
NTANGIBLE
A
SSETS
Acquired core deposit intangible assets as of December 31 were as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
Gross carrying amount
|
|
$
|
3,122
|
|
|
$
|
3,122
|
|
Accumulated amortization
|
|
|
(1,781
|
)
|
|
|
(1,456
|
)
|
|
|
|
|
|
|
|
|
|
Unamortized balance
|
|
$
|
1,341
|
|
|
$
|
1,666
|
|
|
|
|
|
|
|
|
|
|
Amortization of core deposit intangible assets for the years ended December 31, 2012, 2011 and 2010 was $325,000, $339,000 and
$350,000, respectively.
Estimated future amortization of core deposit intangible
assets for each of the years subsequent to December 31, 2012 is as follows (in thousands):
|
|
|
|
|
2013
|
|
$
|
296
|
|
2014
|
|
|
284
|
|
2015
|
|
|
272
|
|
2016
|
|
|
260
|
|
2017
|
|
|
229
|
|
63
S
OUTHERN
M
ICHIGAN
B
ANCORP
, I
NC
.
N
OTES
T
O
C
ONSOLIDATED
F
INANCIAL
S
TATEMENTS
(
CONTINUED
)
N
OTE
G D
EPOSITS
The carrying amount of domestic deposits at year-end follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
Non-interest bearing checking
|
|
$
|
87,013
|
|
|
$
|
61,930
|
|
Interest bearing checking
|
|
|
119,241
|
|
|
|
110,153
|
|
Savings
|
|
|
55,478
|
|
|
|
53,468
|
|
Money market accounts
|
|
|
78,953
|
|
|
|
74,996
|
|
Time deposits
|
|
|
103,485
|
|
|
|
119,964
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
444,170
|
|
|
$
|
420,511
|
|
|
|
|
|
|
|
|
|
|
The carrying amount of time deposits over $100,000 was $35,962,000 and $42,358,000 at December 31, 2012 and 2011, respectively.
Interest expense on time deposits over $100,000 was $584,000, $898,000 and $979,000 for the years ended December 31, 2012, 2011 and 2010, respectively.
At year-end 2012, scheduled maturities of time deposits were as follows for the years ending
December 31 (in thousands):
|
|
|
|
|
2013
|
|
$
|
46,424
|
|
2014
|
|
|
36,470
|
|
2015
|
|
|
12,924
|
|
2016
|
|
|
4,680
|
|
2017
|
|
|
2,979
|
|
Thereafter
|
|
|
8
|
|
|
|
|
|
|
Total
|
|
$
|
103,485
|
|
|
|
|
|
|
Related party deposits were $17,781,000 and $24,522,000 at December 31, 2012 and 2011, respectively.
N
OTE
H O
THER
B
ORROWINGS
Other borrowings at December 31, 2012 and 2011 included $1,039,000 and $6,117,000, respectively, of advances from the Federal Home
Loan Bank (FHLB) of Indianapolis. Advances outstanding at December 31, 2012 require payments through December 31, 2013 with fixed interest rates ranging from 4.29% to 4.57%, with a weighted average rate of 4.30%. Principal is due at
maturity for the advances.
All of the advances are secured by blanket collateral agreements with the FHLB, which gives the FHLB an
unperfected security interest in certain one-to-four family mortgage, home equity, and commercial real estate loans. Eligible FHLB loan collateral at December 31, 2012 and 2011 was approximately $66,870,000 and $75,048,000, respectively.
On December 29, 2009, the Company entered into a Business Loan agreement with Great Lakes Bankers Bank (GLBB), consisting of a
$3,000,000 term loan, subject to sub-participation of at least $2,100,000 with banks mutually acceptable to both parties, maturing in five years with a variable rate equal to the New York Prime, as published in the Wall Street Journal, with a floor
of four and one-half (4.5%) percent and monthly principal and interest payments amortized over five years. Outstanding borrowings under the loan amounted to $1,439,000 at December 31, 2011. In December 2012, the loan was fully paid off
without penalty.
Other borrowings at December 31, 2011 also included a loan from a local community bank with a balance of $195,000. In
December 2012, the loan was fully paid off without penalty.
64
S
OUTHERN
M
ICHIGAN
B
ANCORP
, I
NC
.
N
OTES
T
O
C
ONSOLIDATED
F
INANCIAL
S
TATEMENTS
(
CONTINUED
)
N
OTE
I S
ECURITIES
S
OLD
U
NDER
A
GREEMENTS
TO
R
EPURCHASE
AND
O
VERNIGHT
B
ORROWINGS
Securities sold under agreements to repurchase (repurchase agreements) are direct obligations and are secured by securities held in
safekeeping at a correspondent bank. Repurchase agreements are offered primarily to certain large deposit customers as deposit equivalent investments.
Information relating to securities sold under agreements to repurchase is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
At December 31:
|
|
|
|
|
|
|
|
|
Outstanding balance
|
|
$
|
16,134
|
|
|
$
|
18,074
|
|
Average interest rate
|
|
|
0.20
|
%
|
|
|
0.24
|
%
|
|
|
|
Daily average for the year:
|
|
|
|
|
|
|
|
|
Outstanding balance
|
|
$
|
17,026
|
|
|
$
|
16,162
|
|
Average interest rate
|
|
|
0.22
|
%
|
|
|
0.32
|
%
|
|
|
|
Maximum outstanding at any month end
|
|
$
|
18,439
|
|
|
$
|
18,074
|
|
At December 31, 2012, the Bank had a $3,000,000 line of credit arrangement available to purchase federal funds, with no
outstanding borrowings.
N
OTE
J S
UBORDINATED
D
EBENTURES
A
ND
T
RUST
P
REFERRED
S
ECURITIES
In March 2004, Southern Michigan Bancorp Capital Trust I, a trust formed by the Company, closed a pooled private offering of 5,000
trust preferred securities with a liquidation amount of $1,000 per security. The Company issued $5,155,000 of subordinated debentures to the trust in exchange for ownership of all of the common securities of the trust and the proceeds of the
preferred securities sold by the trust. The Company is not considered the primary beneficiary of this trust, therefore the trust is not consolidated in the Companys financial statements, but rather the subordinated debentures are shown as a
liability. The Company may redeem the subordinated debentures, subject to the receipt by the Company of the proper approval of the Federal Reserve, if such approval is required under applicable capital guidelines or policies of the Federal Reserve.
The subordinated debentures may be redeemed on January 7, April 7, July 7 and October 7 of each year either in whole or in integrals of $1,000 at 100% of the principal amount, plus accrued and unpaid interest. The
subordinated debentures mature on April 6, 2034. The subordinated debentures are also redeemable in whole, but not in part, from time to time upon the occurrence of specific events defined within the trust indenture. The Company has the option
to defer interest payments on the subordinated debentures from time to time for a period not to exceed 20 consecutive quarters.
The
$5,000,000 in trust preferred securities may be included in Tier I capital (with certain limitations applicable) under current regulatory guidelines and interpretations. The trust preferred securities and subordinated debentures have a variable rate
of interest equal to the three month London Interbank Offered Rate (LIBOR) plus 2.75%. The rate at December 31, 2012 was 3.09%. Interest expense related to the subordinated debentures amounted to $163,000 in 2012, $156,000 in 2011, and $157,000
in 2010. The Companys investment in the common stock of the trust is $155,000 and is included in other assets.
N
OTE
K I
NCOME
T
AXES
Income tax provision (credit) consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
Current
|
|
$
|
1,552
|
|
|
$
|
809
|
|
|
$
|
546
|
|
Deferred
|
|
|
(122
|
)
|
|
|
150
|
|
|
|
175
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax provision
|
|
$
|
1,430
|
|
|
$
|
959
|
|
|
$
|
721
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The deferred income tax provision (credit) consists of the tax effect of temporary differences, including a credit of $207,000 in 2010
resulting from the utilization of net operating loss carryforwards.
65
S
OUTHERN
M
ICHIGAN
B
ANCORP
, I
NC
.
N
OTES
T
O
C
ONSOLIDATED
F
INANCIAL
S
TATEMENTS
(
CONTINUED
)
N
OTE
K I
NCOME
T
AXES
(
CONTINUED
)
Income tax provision calculated at the statutory federal income tax rate of
34% differs from actual income tax provision as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
Income tax at statutory rate
|
|
$
|
1,965
|
|
|
$
|
1,483
|
|
|
$
|
1,298
|
|
Tax-exempt interest income, net
|
|
|
(358
|
)
|
|
|
(311
|
)
|
|
|
(289
|
)
|
Earnings on life insurance assets, including gain from proceeds in 2010
|
|
|
(113
|
)
|
|
|
(118
|
)
|
|
|
(172
|
)
|
Low income housing partnership tax credits
|
|
|
(127
|
)
|
|
|
(127
|
)
|
|
|
(127
|
)
|
Write-off capital loss carryforward
|
|
|
|
|
|
|
|
|
|
|
60
|
|
Change in valuation allowance
|
|
|
|
|
|
|
|
|
|
|
(54
|
)
|
Other items, net
|
|
|
63
|
|
|
|
32
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
1,430
|
|
|
$
|
959
|
|
|
$
|
721
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets and liabilities consist of the following at December 31
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
$
|
1,425
|
|
|
$
|
1,134
|
|
Deferred compensation and supplemental retirement liability
|
|
|
835
|
|
|
|
769
|
|
Pension liability
|
|
|
259
|
|
|
|
170
|
|
Nonaccrual loan interest
|
|
|
292
|
|
|
|
252
|
|
Tax credit carryforwards
|
|
|
387
|
|
|
|
655
|
|
Stock based compensation
|
|
|
189
|
|
|
|
175
|
|
Other
|
|
|
172
|
|
|
|
157
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
3,559
|
|
|
|
3,312
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Mortgage servicing rights
|
|
|
(423
|
)
|
|
|
(329
|
)
|
Goodwill
|
|
|
(211
|
)
|
|
|
(211
|
)
|
Purchase accounting adjustments
|
|
|
(533
|
)
|
|
|
(646
|
)
|
Net unrealized gain on available for sale securities
|
|
|
(413
|
)
|
|
|
(465
|
)
|
Depreciation
|
|
|
(310
|
)
|
|
|
(296
|
)
|
Other
|
|
|
(165
|
)
|
|
|
(124
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
(2,055
|
)
|
|
|
(2,071
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets, included in other assets
|
|
$
|
1,504
|
|
|
$
|
1,241
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2012, the Company has available alternative minimum tax credit carryforwards of $387,000, which may be utilized in
the future to the extent computed regular tax exceeds the alternative minimum tax.
The Company and its subsidiaries file U.S. federal and
certain state tax returns. In general, tax returns are no longer subject to tax examinations by tax authorities for years before 2010.
The
Company believes that it had no significant uncertain tax positions as of December 31, 2012 and 2011.
66
S
OUTHERN
M
ICHIGAN
B
ANCORP
, I
NC
.
N
OTES
T
O
C
ONSOLIDATED
F
INANCIAL
S
TATEMENTS
(
CONTINUED
)
N
OTE
L B
ENEFIT
P
LANS
Defined Benefit Pension Plan:
Effective December 31, 2009, The Southern Michigan Bank & Trust Pension Plan was fully frozen. The Company uses a December 31 measurement date for the plan.
Information about the pension plan is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
Change in projected benefit obligation:
|
|
|
|
|
|
|
|
|
Beginning benefit obligation
|
|
$
|
(2,096
|
)
|
|
$
|
(2,214
|
)
|
Interest cost
|
|
|
(107
|
)
|
|
|
(124
|
)
|
Actuarial loss
|
|
|
(244
|
)
|
|
|
(166
|
)
|
Benefits paid
|
|
|
89
|
|
|
|
408
|
|
|
|
|
|
|
|
|
|
|
Ending benefit obligation
|
|
|
(2,358
|
)
|
|
|
(2,096
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in plan assets, at fair value:
|
|
|
|
|
|
|
|
|
Beginning plan assets
|
|
|
1,449
|
|
|
|
1,744
|
|
Actual return
|
|
|
57
|
|
|
|
57
|
|
Employer contributions
|
|
|
313
|
|
|
|
82
|
|
Benefits paid
|
|
|
(89
|
)
|
|
|
(408
|
)
|
Plan expenses paid
|
|
|
(26
|
)
|
|
|
(26
|
)
|
|
|
|
|
|
|
|
|
|
Ending plan assets
|
|
|
1,704
|
|
|
|
1,449
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized in accrued expenses and other liabilitiesfunded status
|
|
$
|
(654
|
)
|
|
$
|
(647
|
)
|
|
|
|
|
|
|
|
|
|
The accumulated benefit obligation for the defined benefit pension plan was $2,358,000 and $2,096,000 at December 31, 2012 and
2011, respectively.
The components of pension expense and related actuarial assumptions were as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
Components of net periodic benefit cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost, including plan expenses
|
|
$
|
26
|
|
|
$
|
26
|
|
|
$
|
26
|
|
Interest cost
|
|
|
107
|
|
|
|
124
|
|
|
|
130
|
|
Expected return on plan assets
|
|
|
(99
|
)
|
|
|
(105
|
)
|
|
|
(114
|
)
|
Recognized net actuarial loss
|
|
|
24
|
|
|
|
17
|
|
|
|
3
|
|
Settlement adjustment
|
|
|
|
|
|
|
92
|
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
58
|
|
|
$
|
154
|
|
|
$
|
81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2012 and 2011, net actuarial losses of $763,000 and $502,000, respectively, have not yet been recognized as a
component of net periodic benefit cost. The estimated net loss that will be amortized from accumulated other comprehensive income into net periodic benefit cost for 2013 is $40,000.
Weighted average assumptions for determining projected benefit obligation and net periodic benefit
cost were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Discount rate on benefit obligation
|
|
|
4.0
|
%
|
|
|
5.0
|
%
|
|
|
5.5
|
%
|
Long-term expected rate of return on plan assets
|
|
|
6.0
|
%
|
|
|
7.0
|
%
|
|
|
7.0
|
%
|
Rate of compensation increase
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
67
S
OUTHERN
M
ICHIGAN
B
ANCORP
, I
NC
.
N
OTES
T
O
C
ONSOLIDATED
F
INANCIAL
S
TATEMENTS
(
CONTINUED
)
N
OTE
L B
ENEFIT
P
LANS
(
CONTINUED
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Category
|
|
Target
Allocation
2013
|
|
|
Percentage
of Plan
Assets
at Year-end
|
|
|
Weighted
Average
Expected
Long-Term
Rate of
Return - 2012
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
Equity securities
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Debt securities
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Cash and time certificates
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
.20
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
.20
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The pension plan assets are managed by the Banks Trust Department. A written investment policy which we believe meets the
standards of the prudent investor rule is followed. In addition, Main Street Advisors, of Chicago, has provided investment advisory services, guidance and expertise.
Investments or debt obligations of Southern Michigan Bancorp, Inc. are not allowed as holdings within the plan.
The plans investment objective at December 31, 2012 is primarily fixed income investments with a target of 90% time certificates and 10% cash. The allocation percentages may be reduced or
increased depending upon market conditions and interest rates. Due to the plan being frozen, the investment allocations have been established with shorter term objectives.
The investments in the plan are managed for the benefit of the participants. They are structured to meet the cash flow necessary to pay retiring employees. ERISA guidelines for diversification of the
investments are followed in all material respects and giving due consideration to the plans frozen status.
Fair Value of Plan Assets:
Fair value is the exchange price that would be received for an asset in the principal or most advantageous market for the asset in an orderly transaction between market participants on the measurement date.
The Company uses the following methods and significant assumptions to estimate the fair value of each type of financial instrument:
Debt Securities: The fair values for investment securities are determined by quoted market prices, if available (Level 1). For securities where quoted
prices are not available, fair values are calculated based on market prices of similar securities (Level 2). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted
cash flows or other market indicators (Level 3). Discounted cash flows are calculated using spread to swap and LIBOR curves that are updated to incorporate loss severities, volatility, credit spread and optionality. During times when trading is more
liquid, broker quotes are used (if available) to validate the model. Rating agency and industry research reports as well as defaults and deferrals on individual securities are reviewed and incorporated into the calculations.
The fair value of the plan assets at December 31, 2012 amounted to $1,704,000 consisting of cash and time certificates with fair value measured
using quoted prices in active markets (Level 1). There were no plan assets measured at fair value using significant unobservable inputs (Level 3) as of or for the years ended December 31, 2012 or 2011.
The Company expects to contribute $123,000 to the plan in 2013.
68
S
OUTHERN
M
ICHIGAN
B
ANCORP
, I
NC
.
N
OTES
T
O
C
ONSOLIDATED
F
INANCIAL
S
TATEMENTS
(
CONTINUED
)
N
OTE
L B
ENEFIT
P
LANS
(
CONTINUED
)
At December 31, 2012, estimated future benefit payments from the plan were as follows
for the years ending December 31 (in thousands):
|
|
|
|
|
2013
|
|
$
|
115
|
|
2014
|
|
|
37
|
|
2015
|
|
|
34
|
|
2016
|
|
|
150
|
|
2017
|
|
|
505
|
|
2018 2022
|
|
|
833
|
|
Employee Stock Ownership Plan:
The Company has an employee stock ownership plan (ESOP) for substantially all full-time
employees. The Plan includes a 401(k) provision with the Companys matching contribution provided in Company stock. The Board of Directors determines the Companys contribution level annually. Assets of the plan are held in trust by the
Bank and administrative costs of the plan are borne by the Company. Expense charged to operations for contributions to the plan totaled $242,000, $253,000 and $299,000 in 2012, 2011and 2010, respectively.
Shares held by the ESOP at year-end are as follows:
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
Allocated shares
|
|
|
125,125
|
|
|
|
115,170
|
|
Unallocated shares
|
|
|
6,195
|
|
|
|
15,402
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total ESOP shares
|
|
|
131,320
|
|
|
|
130,572
|
|
|
|
|
|
|
|
|
|
|
The fair value of the allocated shares held by the ESOP is $2,065,000 and $1,296,000 at December 31, 2012 and 2011, 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. In 2008, the ESOP obtained a loan for $609,000 to purchase 28,500 shares. The balance of the loan at December 31, 2012 and 2011 was $35,000 and $169,000, respectively.
Deferred Compensation Plan:
Directors and certain officers of the Bank may defer a portion of their director fees or compensation in a
non-qualified deferred compensation plan. An account is established for each participant in the plan and credited with the participants annual deferred compensation plus interest based on the stated rate determined annually. Upon
retirement, participants receive the balance in their account over 15 years. Participants also continue to earn interest during retirement based on their remaining account balance. Participants are immediately vested in their account
balances. The plan is intended to be funded by certain bank-owned life insurance contracts. The interest rate paid on deferred compensation balances as of December 31, 2012 ranged from 4.53% to 12.98%. There were no new participants
in the plan during 2012. Deferred compensation expense was $219,000, $232,000 and $245,000 in 2012, 2011 and 2010, respectively. The liability for deferred compensation benefits was $2,098,000 and $1,984,000 at December 31, 2012 and 2011,
respectively, and is included in accrued expenses and other liabilities in the accompanying consolidated balance sheets.
69
S
OUTHERN
M
ICHIGAN
B
ANCORP
, I
NC
.
N
OTES
T
O
C
ONSOLIDATED
F
INANCIAL
S
TATEMENTS
(
CONTINUED
)
N
OTE
L B
ENEFIT
P
LANS
(
CONTINUED
)
Supplemental Retirement Plans:
The Bank also maintains a supplemental retirement plan (SERP) to
provide annual payments to certain current and former executives subsequent to their retirement. Benefits under the SERP were frozen effective December 31, 2008. Expense associated with the SERP totaled $14,000, $15,000 and $28,000 in 2012,
2011 and 2010, respectively. Liabilities associated with the SERP totaled $187,000 and $207,000 at December 31, 2012 and 2011, respectively.
In December 2011, the Board of Directors approved the Defined Contribution Supplemental Executive Retirement Plan (2011 SERP), which is intended to provide select executive officers with a retirement
benefit that is competitive with industry practices for bank executives when combined with the executives other employer-funded retirement benefits. In contrast to the frozen SERP, the 2011 SERP is a defined contribution arrangement which
gives the Bank the discretion to make a specific annual nonqualified deferred compensation contribution to the account of participating executives. Whether an annual deferred compensation contribution will be made to the account balance of a
participating executive, as well as the amount of the contribution, is at the discretion of the Banks Board of Directors. The contribution that will be made by the Bank to the account of each executive is determined based on a percentage of
base salary. Participants are generally entitled to receive payment of the benefit in their account in 120 equal monthly installments commencing at age 65. The Companys 2012 and 2011 contributions amounted to $100,000 and $70,000 respectively.
Liabilities associated with the 2011 SERP totaled $172,000 and $70,000 at December 31, 2012 and 2011, respectively.
N
OTE
M S
TOCK
B
ASED
C
OMPENSATION
The Company has stock based compensation plans as described below. Total compensation cost charged against income for those plans was
$203,000, $168,000 and $154,000 in 2012, 2011 and 2010, respectively.
On June 6, 2005, shareholders of the Company approved the Stock
Incentive Plan of 2005 to advance the interest of the Company and its shareholders by affording to directors, officers and other employees of the Company an opportunity for increased stock ownership. The plan permits the grant and award of stock
options, stock appreciation rights, restricted stock and stock awards. A maximum of 300,000 shares of common stock are available under the plan. The plan will be terminated June 5, 2015 or earlier if determined by the Board of Directors. At
December 31, 2012, 63,792 shares were available for issuance under the plan.
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 totaled 115,500. Options were 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 were granted, and a vesting period as
determined by the Board of Directors. This plan terminated on March 20, 2010.
The fair value of each option award is estimated on
the date of grant using a Black-Scholes option valuation model that uses the weighted average assumptions noted in the following table.
The expected volatility and life assumptions are based on historical experience. The interest rate is based on the U.S. Treasury yield curve and the dividend yield assumption is based on the Companys history and expected
dividend payouts.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
Risk-free interest rate
|
|
|
0.26
|
%
|
|
|
0.33
|
%
|
|
|
0.96
|
%
|
Expected option life
|
|
|
8 years
|
|
|
|
8 years
|
|
|
|
8 years
|
|
Expected stock price volatility
|
|
|
22.84
|
%
|
|
|
23.40
|
%
|
|
|
23.64
|
%
|
Dividend yield
|
|
|
2.93
|
%
|
|
|
2.99
|
%
|
|
|
3.29
|
%
|
|
|
|
|
Weighted-average fair value of options granted during year
|
|
$
|
1.59
|
|
|
$
|
1.86
|
|
|
$
|
1.53
|
|
70
S
OUTHERN
M
ICHIGAN
B
ANCORP
, I
NC
.
N
OTES
T
O
C
ONSOLIDATED
F
INANCIAL
S
TATEMENTS
(
CONTINUED
)
N
OTE
M S
TOCK
O
PTIONS
(
CONTINUED
)
A summary of the activity in the plans for 2012 follows:
Stock Options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
Subject
to
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Term
|
|
|
Aggregate
Intrinsic
Value
|
|
|
|
|
|
|
Outstanding at beginning of year
|
|
|
221,026
|
|
|
$
|
21.06
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
7,875
|
|
|
|
11.20
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(760
|
)
|
|
|
8.11
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(7,690
|
)
|
|
|
21.43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of year
|
|
|
220,451
|
|
|
$
|
20.74
|
|
|
|
3.9 years
|
|
|
$
|
235,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at year-end
|
|
|
205,101
|
|
|
$
|
21.40
|
|
|
|
3.5 years
|
|
|
$
|
165,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
Intrinsic value of options exercised
|
|
$
|
4,000
|
|
|
|
|
|
|
|
|
|
Cash received from option exercise
|
|
|
6,000
|
|
|
|
|
|
|
|
|
|
Tax benefit realized from option exercises
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2012, there was $10,000 of total unrecognized compensation cost related to nonvested stock options granted
under the plans. The cost is expected to be recognized over a weighted average period of .75 years.
Restricted Stock
Restricted shares may be issued under the 2005 plan described above. Compensation expense is recognized over the vesting period of the shares based on the market value of the shares on the issue date. The total fair value of shares vested during the
years ended December 31, 2012, 2011 and 2010 was $157,000, $91,000 and $39,000, respectively. As of December 31, 2012, there was $399,000 of total unrecognized compensation cost related to unvested shares granted under the plan. The cost
is expected to be recognized over a weighted average period of 3.1 years.
A summary of activity for restricted
stock for 2012 follows:
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Weighted
Average
Grant
Date Fair
Value
|
|
|
|
|
Nonvested at January 1, 2012
|
|
|
41,309
|
|
|
$
|
11.33
|
|
Granted
|
|
|
18,125
|
|
|
|
11.20
|
|
Vested
|
|
|
(12,239
|
)
|
|
|
12.83
|
|
Forfeited
|
|
|
(1,082
|
)
|
|
|
11.50
|
|
|
|
|
|
|
|
|
|
|
Nonvested at December 31, 2011
|
|
|
46,113
|
|
|
$
|
11.19
|
|
|
|
|
|
|
|
|
|
|
71
S
OUTHERN
M
ICHIGAN
B
ANCORP
, I
NC
.
N
OTES
T
O
C
ONSOLIDATED
F
INANCIAL
S
TATEMENTS
(
CONTINUED
)
N
OTE
N C
OMMITMENTS
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. These arrangements have credit risk essentially the same as that involved in extending loans to customers and are subject to the Banks normal credit policies. Collateral generally
consists of receivables, inventory and equipment and is obtained based on managements credit assessment of the customer.
At
December 31, 2012 and 2011, the Company had no commitments under commercial letters of credit used to facilitate customers trade transactions.
Under standby letter of credit agreements, the Company agrees to honor certain commitments in the event that its customers are unable to do so. At December 31, 2012 and 2011, commitments under
outstanding standby letters of credit were $1,767,000 and $1,690,000, respectively.
Loan commitments outstanding to extend credit are detailed below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
Fixed rate
|
|
$
|
3,734
|
|
|
$
|
3,475
|
|
Variable rate
|
|
|
75,613
|
|
|
|
73,672
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
79,347
|
|
|
$
|
77,147
|
|
|
|
|
|
|
|
|
|
|
The fixed rate commitments have stated interest rates ranging from 1.25% to 14.00%. The terms of the above commitments range from 1 to
121 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.
Certain executives of the Bank have
employment contracts which have change of control clauses. The employment contracts provide for the payment of 2.99 times the officers base salary and bonus if the officer is terminated in the event of a change of control.
N
OTE
O A
CCUMULATED
O
THER
C
OMPREHENSIVE
I
NCOME
Accumulated other comprehensive income amounted to $297,000 at
December 31, 2012 and $571,000 at December 31, 2011 consisting of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
Unrealized gain on available-for-sale securities, net of income taxes of $413 in 2012 and $465 in 2011
|
|
$
|
801
|
|
|
$
|
903
|
|
Pension liability, net of income taxes of $259 in 2012 and $170 in 2011
|
|
|
(504
|
)
|
|
|
(332
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
297
|
|
|
$
|
571
|
|
|
|
|
|
|
|
|
|
|
N
OTE
P R
ESTRICTIONS
O
N
T
RANSFERS
F
ROM
S
UBSIDIARIES
Capital guidelines adopted by federal and state regulatory agencies and restrictions imposed by law limit the amount of cash dividends
the Bank can pay to the Company. At December 31, 2012, using the most restrictive of these conditions, the aggregate cash dividends that the Bank could pay the Company without prior regulatory approval was approximately $9.1 million.
72
S
OUTHERN
M
ICHIGAN
B
ANCORP
, I
NC
.
N
OTES
T
O
C
ONSOLIDATED
F
INANCIAL
S
TATEMENTS
(
CONTINUED
)
N
OTE
Q S
OUTHERN
M
ICHIGAN
B
ANCORP
, I
NC
.
(P
ARENT
C
OMPANY
O
NLY
) F
INANCIAL
I
NFORMATION
Condensed financial statements of Southern Michigan Bancorp, Inc. follow (in thousands):
|
|
|
|
|
|
|
|
|
Balance Sheets
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
218
|
|
|
$
|
404
|
|
Investment in subsidiary bank
|
|
|
60,053
|
|
|
|
57,947
|
|
Investment in non banking subsidiary
|
|
|
186
|
|
|
|
188
|
|
Premises and equipment, net
|
|
|
813
|
|
|
|
844
|
|
Other assets
|
|
|
910
|
|
|
|
778
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
62,180
|
|
|
$
|
60,161
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity
|
|
|
|
|
|
|
|
|
Dividends payable
|
|
$
|
285
|
|
|
$
|
165
|
|
Other liabilities
|
|
|
40
|
|
|
|
46
|
|
Other borrowings
|
|
|
|
|
|
|
1,634
|
|
Subordinated debentures
|
|
|
5,155
|
|
|
|
5,155
|
|
Common stock subject to repurchase obligation in ESOP
|
|
|
2,065
|
|
|
|
1,296
|
|
Shareholders equity
|
|
|
54,635
|
|
|
|
51,865
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Shareholders Equity
|
|
$
|
62,180
|
|
|
$
|
60,161
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statements of Income
|
|
Year ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
Dividends from subsidiary bank
|
|
$
|
2,254
|
|
|
$
|
1,437
|
|
|
$
|
1,358
|
|
Interest income
|
|
|
7
|
|
|
|
16
|
|
|
|
25
|
|
Interest expense
|
|
|
(228
|
)
|
|
|
(266
|
)
|
|
|
(300
|
)
|
Rental income from subsidiary bank
|
|
|
137
|
|
|
|
137
|
|
|
|
137
|
|
Other expenses
|
|
|
(344
|
)
|
|
|
(310
|
)
|
|
|
(290
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,826
|
|
|
|
1,014
|
|
|
|
930
|
|
Federal income tax credit
|
|
|
(146
|
)
|
|
|
(144
|
)
|
|
|
(146
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,972
|
|
|
|
1,158
|
|
|
|
1,076
|
|
Equity in net income, less dividends received from:
|
|
|
|
|
|
|
|
|
|
|
|
|
Subsidiary bank
|
|
|
2,380
|
|
|
|
2,245
|
|
|
|
2,023
|
|
Non-banking subsidiary
|
|
|
(2
|
)
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
4,350
|
|
|
$
|
3,402
|
|
|
$
|
3,098
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
73
S
OUTHERN
M
ICHIGAN
B
ANCORP
, I
NC
.
N
OTES
T
O
C
ONSOLIDATED
F
INANCIAL
S
TATEMENTS
(
CONTINUED
)
N
OTE
Q S
OUTHERN
M
ICHIGAN
B
ANCORP
, I
NC
. (P
ARENT
C
OMPANY
O
NLY
) F
INANCIAL
I
NFORMATION
(
CONTINUED
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Statements of Cash Flows
|
|
Year ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
4,350
|
|
|
$
|
3,402
|
|
|
$
|
3,098
|
|
Adjustments to reconcile net income to net cash from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in net income, less dividends received from:
|
|
|
|
|
|
|
|
|
|
|
|
|
Subsidiary bank
|
|
|
(2,380
|
)
|
|
|
(2,245
|
)
|
|
|
(2,023
|
)
|
Non-banking subsidiary
|
|
|
2
|
|
|
|
1
|
|
|
|
1
|
|
Stock option and restricted stock grant compensation expense
|
|
|
203
|
|
|
|
168
|
|
|
|
154
|
|
Depreciation
|
|
|
31
|
|
|
|
32
|
|
|
|
32
|
|
Net change in obligation under ESOP
|
|
|
134
|
|
|
|
128
|
|
|
|
140
|
|
Other, net
|
|
|
(138
|
)
|
|
|
(84
|
)
|
|
|
(224
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from operating activities
|
|
|
2,202
|
|
|
|
1,402
|
|
|
|
1,178
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayments of other borrowings
|
|
|
(1,634
|
)
|
|
|
(1,211
|
)
|
|
|
(644
|
)
|
Cash dividends paid
|
|
|
(760
|
)
|
|
|
(470
|
)
|
|
|
(467
|
)
|
Stock options exercised
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from financing activities
|
|
|
(2,388
|
)
|
|
|
(1,681
|
)
|
|
|
(1,111
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
|
(186
|
)
|
|
|
(279
|
)
|
|
|
67
|
|
Beginning cash and cash equivalents
|
|
|
404
|
|
|
|
683
|
|
|
|
616
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending cash and cash equivalents
|
|
$
|
218
|
|
|
$
|
404
|
|
|
$
|
683
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
N
OTE
R S
UPPLEMENTAL
C
ASH
F
LOW
D
ISCLOSURES
The following supplemental cash flow disclosures are provided for the years ended
December 31, 2012, 2011 and 2010 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
2,840
|
|
|
$
|
3,791
|
|
|
$
|
4,527
|
|
Income taxes
|
|
|
1,135
|
|
|
|
590
|
|
|
|
492
|
|
|
|
|
|
Non-cash operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in deferred income taxes on net unrealized gain on available for sale securities
|
|
|
(52
|
)
|
|
|
417
|
|
|
|
(168
|
)
|
Change in deferred income taxes on pension liability
|
|
|
(89
|
)
|
|
|
(35
|
)
|
|
|
(18
|
)
|
Change in pension liability
|
|
|
261
|
|
|
|
106
|
|
|
|
53
|
|
|
|
|
|
Non-cash investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gain on available for sale securities
|
|
|
(154
|
)
|
|
|
1,227
|
|
|
|
(494
|
)
|
Transfers from loans to other real estate owned
|
|
|
2,069
|
|
|
|
892
|
|
|
|
1,545
|
|
74
S
OUTHERN
M
ICHIGAN
B
ANCORP
, I
NC
.
N
OTES
T
O
C
ONSOLIDATED
F
INANCIAL
S
TATEMENTS
(
CONTINUED
)
N
OTE
S F
AIR
V
ALUE
I
NFORMATION
The following methods and assumptions were used by the Company in estimating fair values for financial instruments, as well as an
indication of where the instrument falls within the fair value hierarchy, which is described in greater detail in Note T.
Cash and cash equivalents:
The carrying amount reported in the balance sheet approximates fair value resulting in a level 1
classification.
Securities available for sale:
Fair values for securities available for sale are based on quoted market
prices, where available. For all other securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows,
the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information, and the bonds terms and conditions, among other things. Securities are classified as either level 1, 2 or 3. See
Footnote T for the hierarchy level breakdown.
Loans, net:
For variable-rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on carrying values resulting in a level 3 classification. 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 resulting in a level 3 classification. The allowance for loan losses is considered to be a reasonable estimate of discount for credit quality concerns.
Loans held for sale:
The fair value of loans held for sale is estimated based upon binding contracts and quotes from third party
investors resulting in a level 2 classification.
Accrued interest receivable:
The carrying amount reported in
the balance sheet approximates fair value.
Off-balance-sheet financial instruments:
The estimated fair value of
off-balance-sheet financial 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.
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) resulting in a level 2 classification. 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 resulting in a level 2 classification.
Securities sold under agreements to repurchase, overnight borrowings and federal funds sold:
The carrying amount reported in the
balance sheet approximates fair value resulting in a level 2 classification.
Other borrowings:
The fair value of
other borrowings is estimated using discounted cash flows analysis based on the current incremental borrowing rate for similar types of borrowing arrangements resulting in a level 2 classification.
Subordinated debentures:
The carrying amount reported in the balance sheet approximates fair value of the variable-rate
subordinated debentures. The fair value is estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a level 3 classification.
Accrued interest payable:
The carrying amount reported in the balance sheet approximates fair value.
75
S
OUTHERN
M
ICHIGAN
B
ANCORP
, I
NC
.
N
OTES
T
O
C
ONSOLIDATED
F
INANCIAL
S
TATEMENTS
(
CONTINUED
)
N
OTE
S F
AIR
V
ALUE
I
NFORMATION
(
CONTINUED
)
While these estimates of fair value are based on managements judgment of appropriate factors,
there is no assurance that if the Company had disposed of such items at December 31, 2012 and 2011, 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, 2012 and 2011 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 Companys financial instruments at year end are as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
Value
Hierarchy
|
|
2012
|
|
|
2011
|
|
|
|
|
Carrying
Amount
|
|
|
Fair
Value
|
|
|
Carrying
Amount
|
|
|
Fair
Value
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
Level 1
|
|
$
|
50,334
|
|
|
$
|
50,334
|
|
|
$
|
42,185
|
|
|
$
|
42,185
|
|
Federal funds sold
|
|
Level 1
|
|
|
276
|
|
|
|
276
|
|
|
|
287
|
|
|
|
287
|
|
Securities available for sale
|
|
See Note T
|
|
|
64,525
|
|
|
|
64,525
|
|
|
|
90,344
|
|
|
|
90,344
|
|
Loans held for sale
|
|
Level 3
|
|
|
1,776
|
|
|
|
1,776
|
|
|
|
1,088
|
|
|
|
1,088
|
|
Loans, net of allowance for loan losses
|
|
Level 3
|
|
|
364,150
|
|
|
|
368,715
|
|
|
|
327,392
|
|
|
|
333,283
|
|
Accrued interest receivable
|
|
Level 1
|
|
|
2,059
|
|
|
|
2,059
|
|
|
|
2,148
|
|
|
|
2,148
|
|
|
|
|
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
Level 2
|
|
$
|
(444,170
|
)
|
|
$
|
(445,371
|
)
|
|
$
|
(420,511
|
)
|
|
$
|
(422,493
|
)
|
Securities sold under agreements to repurchase and overnight borrowings
|
|
Level 1
|
|
|
(16,134
|
)
|
|
|
(16,134
|
)
|
|
|
(18,074
|
)
|
|
|
(18,074
|
)
|
Other borrowings
|
|
Level 2
|
|
|
(1,039
|
)
|
|
|
(1,049
|
)
|
|
|
(7,751
|
)
|
|
|
(7,860
|
)
|
Subordinated debentures
|
|
Level 3
|
|
|
(5,155
|
)
|
|
|
(5,155
|
)
|
|
|
(5,155
|
)
|
|
|
(5,155
|
)
|
Accrued interest payable
|
|
Level 1
|
|
|
(108
|
)
|
|
|
(108
|
)
|
|
|
(131
|
)
|
|
|
(131
|
)
|
The preceding table does not include net cash surrender value of life insurance and dividends payable which are also considered
financial instruments. The estimated fair value of such items is considered to be their carrying amount.
Southern also has unrecognized
financial instruments which relate to commitments to extend credit and standby letters of credit, as described in Note N. The contract amount of such instruments is considered to be the fair value.
76
S
OUTHERN
M
ICHIGAN
B
ANCORP
, I
NC
.
N
OTES
T
O
C
ONSOLIDATED
F
INANCIAL
S
TATEMENTS
(
CONTINUED
)
N
OTE
T F
AIR
V
ALUE
M
EASUREMENTS
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous
market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability shall not be adjusted for transaction costs. An orderly transaction is a transaction that assumes
exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers
and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact, and (iv) willing to transact.
Fair value must be determined using valuation techniques that are consistent with the market approach, the income approach, and/or the cost approach. The market approach uses prices and other relevant
information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert future amounts, such as cash flows or earnings, to a single present amount on a
discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement cost). Valuation techniques should be consistently applied. Inputs to valuation techniques refer to
the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data
obtained from independent sources, or unobservable, meaning those that reflect the reporting entitys own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information
available in the circumstances. A fair value hierarchy for valuation inputs has been established that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs.
The fair value hierarchy is as follows:
Level 1 Inputs
- Unadjusted quoted prices in active markets for identical assets or
liabilities that the reporting entity has the ability to access at the measurement date.
Level 2 Inputs
- Inputs other than
quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar
assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds, credit risks, etc.), or inputs that are derived
principally from or corroborated by market data by correlation or other means.
Level 3 Inputs
- Unobservable inputs for
determining the fair values of assets or liabilities that reflect an entitys own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.
A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments
pursuant to the valuation hierarchy, follows. These valuation methodologies were applied to all of the Companys financial and nonfinancial assets and liabilities carried at fair value.
In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as
inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality, the companys
creditworthiness, among other things, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time. The Companys valuation methodologies may produce a fair value calculation that may not be indicative
of net realizable value or reflective of future fair values. While management believes the Companys valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to
determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.
77
S
OUTHERN
M
ICHIGAN
B
ANCORP
, I
NC
.
N
OTES
T
O
C
ONSOLIDATED
F
INANCIAL
S
TATEMENTS
(
CONTINUED
)
N
OTE
T F
AIR
V
ALUE
M
EASUREMENTS
(
CONTINUED
)
Securities Available for Sale.
Securities classified as available for sale are reported at fair
value utilizing Level 1, Level 2 and Level 3 inputs. Unadjusted quoted prices in active markets for identical assets are utilized to determine fair value at the measurement date for Level 1 securities. For all other securities, the Company
obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, the U.S. Treasury yield curve, live trading levels, trade execution data,
market consensus prepayment speeds, credit information, and the bonds terms and conditions, among other things. When there are unobservable inputs, such securities are classified as Level 3.
Securities available for sale classified as Level 3 inputs represent non-publicly traded municipal issues with limited trading activity from entities
within the Companys market area. The fair value of these investments was determined using Level 3 valuation techniques, as there is no market available to price these investment securities. The method used for determining the fair value for
these investment securities included a comparison to the fair value of other investment securities valued with Level 2 inputs with similar characteristics (credit, time to maturity, call structure, etc.) and the interest yield curve for comparable
debt investment securities.
Impaired Loans.
The Company does not record impaired loans at fair value on a recurring basis. However,
periodically, a loan is considered impaired and is reported at the fair value of the underlying collateral, less estimated costs to sell, if repayment is expected solely from the collateral or at estimated discounted cash flows if the credit is
performing. Impaired loans measured at fair value typically consist of loans on nonaccrual status and loans with a portion of the allowance for loan losses allocated specific to the loan. Some loans may be included in both categories whereas other
loans may only be included in one category. Collateral values are estimated using level 2 and level 3 inputs, including recent appraisals and customized discounting criteria including discounting of appraisals based on age or changes in
property or market conditions. These discounts generally range from 10% to 55%. Collateral values are also discounted for estimated selling costs of 10%. Estimated cash flows are discounted considering the loan rate and current market rates and
generally range from 5% to 11%. Due to the significance of the level 3 inputs, impaired loans have been classified as level 3.
Other
Real Estate Owned (OREO).
The Company values OREO at the fair value of the underlying collateral less expected selling costs. Collateral values are estimated primarily using discounted appraisals and reflect a market value approach. Due to the
significance of unobservable inputs used in estimating fair value, OREO has been classified as level 3.
The following table summarizes financial and nonfinancial assets
(there were no financial or nonfinancial liabilities) measured at fair value as of December 31, 2012 and 2011, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
Level 1
Inputs
|
|
|
Level 2
Inputs
|
|
|
Level 3
Inputs
|
|
|
Total
Fair Value
|
|
|
|
|
|
|
Recurring:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal agencies
|
|
$
|
16,030
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
16,030
|
|
U.S. government sponsored entities and agencies
|
|
|
7,902
|
|
|
|
|
|
|
|
|
|
|
|
7,902
|
|
States and political subdivisions
|
|
|
|
|
|
|
33,231
|
|
|
|
1,747
|
|
|
|
34,978
|
|
Collateralized mortgage obligations
|
|
|
|
|
|
|
5,189
|
|
|
|
|
|
|
|
5,189
|
|
Mortgage-backed securities
|
|
|
|
|
|
|
426
|
|
|
|
|
|
|
|
426
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available for sale
|
|
$
|
23,932
|
|
|
$
|
38,846
|
|
|
$
|
1,747
|
|
|
$
|
64,525
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonrecurring:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
$
|
|
|
|
$
|
|
|
|
$
|
8,231
|
|
|
$
|
8,231
|
|
Other real estate owned:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,336
|
|
|
$
|
1,336
|
|
Residential Real Estate
|
|
$
|
|
|
|
$
|
|
|
|
$
|
297
|
|
|
$
|
297
|
|
78
S
OUTHERN
M
ICHIGAN
B
ANCORP
, I
NC
.
N
OTES
T
O
C
ONSOLIDATED
F
INANCIAL
S
TATEMENTS
(
CONTINUED
)
N
OTE
T F
AIR
V
ALUE
M
EASUREMENTS
(C
ONTINUED
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
Level 1
Inputs
|
|
|
Level 2
Inputs
|
|
|
Level 3
Inputs
|
|
|
Total
Fair Value
|
|
|
|
|
|
|
Recurring:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal agencies
|
|
$
|
28,435
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
28,435
|
|
U.S. government sponsored entities and agencies
|
|
|
22,956
|
|
|
|
|
|
|
|
|
|
|
|
22,956
|
|
States and political subdivisions
|
|
|
|
|
|
|
31,213
|
|
|
|
2,232
|
|
|
|
33,445
|
|
Asset-backed securities
|
|
|
2,476
|
|
|
|
|
|
|
|
|
|
|
|
2,476
|
|
Mortgage-backed securities
|
|
|
|
|
|
|
3,032
|
|
|
|
|
|
|
|
3,032
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available for sale
|
|
$
|
53,867
|
|
|
$
|
34,245
|
|
|
$
|
2,232
|
|
|
$
|
90,344
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonrecurring:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
$
|
|
|
|
$
|
|
|
|
$
|
8,897
|
|
|
$
|
8,897
|
|
|
|
|
|
|
Other real estate owned
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,530
|
|
|
$
|
1,530
|
|
Impaired loans are reported net of an allowance for loan losses of $758,000 at December 31, 2012 and $984,000 at December 31,
2011.
Other real estate owned, which is measured at the lower of carrying or fair value less costs to sell, had a net carrying amount as of
December 31, 2012 of $1,633,000, which is made up of the balance of $1,825,000, net of a valuation allowance of $192,000. Other real estate owned had a net carrying amount of $1,530,000, made up of the balance of $1,599,000, net of a valuation
allowance of $69,000, at December 31, 2011.
The following is a reconciliation of the beginning and
ending balances of securities available for sale which are measured at fair value on a recurring basis using significant unobservable (Level 3) inputs during the years ended December 31, 2012 and 2011 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
Balance at January 1
|
|
$
|
2,232
|
|
|
$
|
2,992
|
|
Net maturities and calls
|
|
|
(450
|
)
|
|
|
(1,264
|
)
|
Unrealized net gains included in other comprehensive income
|
|
|
(35
|
)
|
|
|
153
|
|
Purchases
|
|
|
|
|
|
|
351
|
|
Net transfers to or from level 3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31
|
|
$
|
1,747
|
|
|
$
|
2,232
|
|
|
|
|
|
|
|
|
|
|
There were no transfers of financial instruments between Levels 1 and 2 during 2012 and 2011.
79
S
OUTHERN
M
ICHIGAN
B
ANCORP
, I
NC
.
N
OTES
T
O
C
ONSOLIDATED
F
INANCIAL
S
TATEMENTS
(
CONTINUED
)
N
OTE
U R
EGULATORY
M
ATTERS
Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital
adequacy guidelines and, additionally for banks, 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. Failure to meet capital requirements can initiate regulatory action that could have a direct material adverse effect on the consolidated financial statements. Prompt corrective
action provisions are not applicable to bank holding companies.
The prompt corrective action regulations provide five capital categories,
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 or worse,
regulatory approval is required to, among other things, 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 and minimum
required levels were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual
|
|
|
Minimum Required
For Capital
Adequacy Purposes
|
|
|
Minimum Required
To
Be
Well Capitalized
Under Prompt Corrective
Action Regulations
|
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital (to risk weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
51,717
|
|
|
|
13.7
|
%
|
|
$
|
30,310
|
|
|
|
8.0
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
Bank
|
|
|
50,053
|
|
|
|
13.3
|
|
|
|
30,201
|
|
|
|
8.0
|
|
|
$
|
37,752
|
|
|
|
10.0
|
%
|
|
|
|
|
|
|
|
Tier 1 capital (to risk weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
46,972
|
|
|
|
12.4
|
|
|
|
15,155
|
|
|
|
4.0
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Bank
|
|
|
45,325
|
|
|
|
12.0
|
|
|
|
15,101
|
|
|
|
4.0
|
|
|
|
22,651
|
|
|
|
6.0
|
|
Tier 1 capital (to average assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
46,972
|
|
|
|
9.3
|
|
|
|
20,132
|
|
|
|
4.0
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Bank
|
|
|
45,325
|
|
|
|
9.0
|
|
|
|
20,134
|
|
|
|
4.0
|
|
|
|
25,168
|
|
|
|
5.0
|
|
|
|
|
|
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital (to risk weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
47,309
|
|
|
|
13.7
|
%
|
|
$
|
27,684
|
|
|
|
8.0
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
Bank
|
|
|
47,078
|
|
|
|
13.7
|
|
|
|
27,572
|
|
|
|
8.0
|
|
|
$
|
34,465
|
|
|
|
10.0
|
%
|
Tier 1 capital (to risk weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
42,970
|
|
|
|
12.4
|
|
|
|
13,842
|
|
|
|
4.0
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Bank
|
|
|
42,756
|
|
|
|
12.4
|
|
|
|
13,786
|
|
|
|
4.0
|
|
|
|
20,679
|
|
|
|
6.0
|
|
Tier 1 capital (to average assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
42,970
|
|
|
|
8.6
|
|
|
|
19,917
|
|
|
|
4.0
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Bank
|
|
|
42,756
|
|
|
|
8.6
|
|
|
|
19,963
|
|
|
|
4.0
|
|
|
|
24,953
|
|
|
|
5.0
|
|
80
S
OUTHERN
M
ICHIGAN
B
ANCORP
, I
NC
.
N
OTES
T
O
C
ONSOLIDATED
F
INANCIAL
S
TATEMENTS
(
CONTINUED
)
N
OTE
U R
EGULATORY
M
ATTERS
(
CONTINUED
)
Regulatory Developments:
On July 21, 2010, President Obama signed into law the Dodd-Frank
Wall Street Reform and Consumer Protection Act (the Act), which brings significant financial reform. Among other things, the Act:
|
|
Creates a Financial Services Oversight Council to identify emerging systemic risks and improve interagency cooperation;
|
|
|
Creates a Consumer Financial Protection Agency authorized to promulgate and enforce consumer protection regulations relating to financial products,
which would affect both banks and non-bank finance companies;
|
|
|
Establishes strengthened capital standards for banks and bank holding companies, and disallows trust preferred securities from being included in Tier 1
capital determination for certain financial institutions;
|
|
|
Enhances regulation of financial markets, including derivatives and securitization markets;
|
|
|
Contains a series of provisions covering mortgage loan origination standards affecting, among other things, originator compensation, minimum repayment
standards and prepayments;
|
|
|
Grants the Board of Governors of the Federal Reserve System the power to regulate debit card interchange fees;
|
|
|
Prohibits certain trading activities by banks;
|
|
|
Permanently increases the maximum standards FDIC deposit insurance amount to $250,000; and
|
|
|
Creates an Office of National Insurance with the U.S. Department of Treasury.
|
While the provisions of the Act receiving the most public attention have generally been those more likely to affect larger institutions, the Act also
contains many provisions which will affect smaller institutions, such as the Company, in substantial and unpredictable ways. Consequently, compliance with the Acts provisions may curtail the Companys revenue opportunities, increase its
operating costs, require it to hold higher levels of regulatory capital and/or liquidity or otherwise adversely affect the Companys business or financial results in the future. Because many aspects of the Act are subject to future rulemaking,
it is difficult to precisely anticipate its overall financial impact on the Company and Bank at this time.
N
OTE
V Q
UARTERLY
F
INANCIAL
D
ATA
(
IN
THOUSANDS
,
EXCEPT
PER
SHARE
DATA
) (U
NAUDITED
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Income
|
|
|
Net
Interest
Income
|
|
|
Provision
for Loan
Losses
|
|
|
Net
Income
|
|
|
Earnings Per Share
|
|
|
|
|
|
|
Basic
|
|
|
Fully
Diluted
|
|
|
|
|
|
|
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
4,935
|
|
|
$
|
4,141
|
|
|
$
|
225
|
|
|
$
|
1,002
|
|
|
$
|
.43
|
|
|
$
|
.43
|
|
Second Quarter
|
|
|
4,969
|
|
|
|
4,253
|
|
|
|
475
|
|
|
|
1,027
|
|
|
|
.43
|
|
|
|
.43
|
|
Third Quarter
|
|
|
5,057
|
|
|
|
4,384
|
|
|
|
350
|
|
|
|
1,154
|
|
|
|
.49
|
|
|
|
.49
|
|
Fourth Quarter
|
|
|
5,030
|
|
|
|
4,396
|
|
|
|
300
|
|
|
|
1,167
|
|
|
|
.49
|
|
|
|
.49
|
|
|
|
|
|
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
4,866
|
|
|
$
|
3,863
|
|
|
$
|
125
|
|
|
$
|
748
|
|
|
$
|
.32
|
|
|
$
|
.32
|
|
Second Quarter
|
|
|
4,822
|
|
|
|
3,871
|
|
|
|
375
|
|
|
|
762
|
|
|
|
.33
|
|
|
|
.33
|
|
Third Quarter
|
|
|
4,944
|
|
|
|
4,027
|
|
|
|
375
|
|
|
|
887
|
|
|
|
.38
|
|
|
|
.38
|
|
Fourth Quarter
|
|
|
5,046
|
|
|
|
4,166
|
|
|
|
175
|
|
|
|
1,005
|
|
|
|
.43
|
|
|
|
.43
|
|
81
S
ELECTED
F
INANCIAL
D
ATA
(in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
Total interest income
|
|
$
|
19,991
|
|
|
$
|
19,387
|
|
|
$
|
20,416
|
|
|
$
|
21,938
|
|
|
|
25,929
|
|
Net interest income
|
|
|
17,174
|
|
|
|
15,636
|
|
|
|
15,946
|
|
|
|
16,538
|
|
|
|
17,740
|
|
Provision for loan losses
|
|
|
1,350
|
|
|
|
1,050
|
|
|
|
1,375
|
|
|
|
2,725
|
|
|
|
5,080
|
|
Net income
|
|
|
4,350
|
|
|
|
3,402
|
|
|
|
3,098
|
|
|
|
1,936
|
|
|
|
813
|
|
Per share data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
|
1.84
|
|
|
|
1.46
|
|
|
|
1.34
|
|
|
|
.84
|
|
|
|
.36
|
|
Diluted earnings per share
|
|
|
1.84
|
|
|
|
1.46
|
|
|
|
1.34
|
|
|
|
.84
|
|
|
|
.36
|
|
Cash dividends
|
|
|
.37
|
|
|
|
.22
|
|
|
|
.20
|
|
|
|
.20
|
|
|
|
.80
|
|
Balance sheet data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross loans
|
|
|
369,605
|
|
|
|
332,804
|
|
|
|
309,524
|
|
|
|
333,079
|
|
|
|
335,310
|
|
Deposits
|
|
|
444,170
|
|
|
|
420,511
|
|
|
|
409,901
|
|
|
|
380,905
|
|
|
|
394,043
|
|
Other borrowings
|
|
|
1,039
|
|
|
|
7,751
|
|
|
|
10,079
|
|
|
|
10,832
|
|
|
|
12,492
|
|
Common stock subject to repurchase
|
|
|
2,065
|
|
|
|
1,296
|
|
|
|
1,399
|
|
|
|
945
|
|
|
|
728
|
|
Equity
|
|
|
54,635
|
|
|
|
51,865
|
|
|
|
47,843
|
|
|
|
45,734
|
|
|
|
44,416
|
|
Total assets
|
|
|
528,860
|
|
|
|
509,220
|
|
|
|
493,880
|
|
|
|
462,409
|
|
|
|
474,996
|
|
Return on average assets
|
|
|
.84
|
%
|
|
|
.68
|
%
|
|
|
.65
|
%
|
|
|
.41
|
%
|
|
|
.17
|
%
|
Return on average equity (1)
|
|
|
8.09
|
|
|
|
6.80
|
|
|
|
6.56
|
|
|
|
4.29
|
|
|
|
1.77
|
|
Dividend payout ratio (2)
|
|
|
20.23
|
|
|
|
15.23
|
|
|
|
15.11
|
|
|
|
24.13
|
|
|
|
227.33
|
|
Average equity to average assets (1)
|
|
|
10.41
|
|
|
|
9.96
|
|
|
|
9.87
|
|
|
|
9.66
|
|
|
|
9.59
|
|
(1)
|
Average equity used in the above table excludes common stock subject to repurchase obligation but includes average unrealized appreciation or depreciation on securities
available for sale.
|
(2)
|
Dividends declared divided by net income.
|
C
OMMON
S
TOCK
M
ARKET
P
RICES
AND
D
IVIDENDS
The Companys common stock is regularly quoted on the OTCQB under the symbol SOMC. The sale prices described below are quotations
reflecting inter-dealer prices, without retail markup, markdown or commissions, and may not necessarily represent actual transactions. As of March 11, 2013, there were 2,393,943 shares of Southern common stock issued and outstanding held by 384
holders of record.
The following table sets forth the range of high and low
closing sales prices and dividends declared on the Companys common stock for the two most recent fiscal years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
2012
|
|
|
|
Closing Price
|
|
|
Cash
Dividends
Declared
|
|
|
Closing Price
|
|
|
Cash
Dividends
Declared
|
|
Quarter Ended
|
|
High
|
|
|
Low
|
|
|
|
High
|
|
|
Low
|
|
|
March 31
|
|
$
|
13.25
|
|
|
$
|
12.00
|
|
|
$
|
.05
|
|
|
$
|
12.65
|
|
|
$
|
11.20
|
|
|
$
|
.07
|
|
June 30
|
|
|
12.85
|
|
|
|
11.90
|
|
|
|
.05
|
|
|
|
14.50
|
|
|
|
12.50
|
|
|
|
.09
|
|
September 30
|
|
|
12.69
|
|
|
|
11.80
|
|
|
|
.05
|
|
|
|
15.30
|
|
|
|
13.25
|
|
|
|
.09
|
|
December 31
|
|
|
12.55
|
|
|
|
11.05
|
|
|
|
.07
|
|
|
|
16.75
|
|
|
|
13.50
|
|
|
|
.12
|
|
There are restrictions that currently limit the Companys ability to pay cash dividends. Information regarding dividend payment
restrictions is described in Note P to the consolidated financial statements.
82