1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended September 30, 1995 Commission file number 2-78178 ------- ------------------ Southern Michigan Bancorp, Inc. - - --------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Michigan 38-2407501 - - ----------------------------------------- ----------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 51 West Pearl Street, Coldwater, Michigan 49036 - - ------------------------------------------ ----------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code--(517) 279-5500 ------------- Indicate by check mark whether registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: Common Stock, $2.50 Par Value - 933,651 shares at October 31, 1995 - - ------------------------------------------------------------------ 2 CONDENSED CONSOLIDATED BALANCE SHEETS SOUTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARY September 30 December 31 1995 1994 --------------------------- (Unaudited) (A) (In Thousands) ASSETS Cash and due from banks $ 12,515 $ 14,429 Investment securities available-for-sale 14,552 11,288 Investment securities (market value of $37,617,000 in 1995 and $36,576,000 in 1994) 37,227 39,991 Loans 124,255 120,338 Less allowance for loan losses (1,654) (1,498) -------- -------- 122,601 118,840 Federal funds sold 1,500 Premises and equipment 3,279 3,287 Other assets 7,136 6,290 -------- -------- TOTAL ASSETS $197,310 $195,625 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Non-interest bearing $ 21,647 $ 24,401 Interest bearing 152,049 149,670 -------- -------- 173,696 174,071 Accounts payable and other liabilities 2,371 2,235 Capital notes 1,000 1,000 -------- -------- TOTAL LIABILITIES 177,067 177,306 Shareholders' equity: Common stock, $2.50 par value: Authorized -- 2,000,000 shares Outstanding -- 930,493 shares (1994 -- 917,358 shares) 2,326 2,293 Capital surplus 5,475 5,210 Retained earnings 12,342 10,935 Net unrealized appreciation (depreciation) on available-for-sale securities, net of tax of $50,000 (1994 -- $61,000) 100 (119) -------- -------- TOTAL SHAREHOLDERS' EQUITY 20,243 18,319 -------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $197,310 $195,625 ======== ======== (A) The balance sheet at December 31, 1994 has been derived from the audited consolidated financial statements at that date. See notes to condensed consolidated financial statements. -2- 3 CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) SOUTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARY Three Months Ended Nine Months Ended September 30 September 30 1995 1994 1995 1994 ------------------------------------------- (In thousands, except per share amounts) Interest income: Loans, including fees $3,060 $2,686 $ 8,899 $7,390 Investment securities: Taxable 687 416 1,917 1,310 Tax exempt 192 157 563 465 Other 29 1 101 8 ------ ------ ------- ------ Total interest income 3,968 3,260 11,480 9,173 Interest expense: Deposits 1,619 1,150 4,540 3,323 Capital notes and other 67 77 178 196 ------ ------ ------- ------ Total interest expense 1,686 1,227 4,718 3,519 ------ ------ ------- ------ NET INTEREST INCOME 2,282 2,033 6,762 5,654 Provision for loan losses 45 45 177 135 ------ ------ ------- ------ NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 2,237 1,988 6,585 5,519 Non-interest income: Service charges on deposit accounts 182 187 544 556 Trust department 117 113 355 336 Other 56 34 240 199 ------ ------ ------- ------ 355 334 1,139 1,091 ------ ------ ------- ------ 2,592 2,322 7,724 6,610 Non-interest expenses: Salaries and benefits 941 793 2,611 2,361 Occupancy 136 127 377 359 Equipment 128 125 383 376 Deposit insurance premium (10) 87 176 265 Other 547 434 1,606 1,319 ------ ------ ------- ------ 1,742 1,566 5,153 4,680 ------ ------ ------- ------ INCOME BEFORE INCOME TAXES 850 756 2,571 1,930 Federal income taxes 188 185 580 485 ------ ------ ------- ------ NET INCOME $ 662 $ 571 $ 1,991 $1,445 ====== ====== ======= ====== Net income per share $ .82 $ .63 $ 2.26 $ 1.59 ====== ====== ======= ====== Dividends declared per share $ .22 $ .19 $ .63 $ .55 ====== ====== ======= ====== See notes to condensed consolidated financial statements. -3- 4 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) SOUTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARY Nine Months Ended September 30 1995 1994 ---------------------------- (In thousands) OPERATING ACTIVITIES Net income $ 1,991 $ 1,445 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 177 135 Provision for depreciation 226 222 Increase in other assets (957) (590) Decrease in accounts payable and other liabilities 110 148 -------- -------- Net cash provided by operating activities 1,547 1,360 INVESTING ACTIVITIES Proceeds from maturities of investment securities 28,671 16,451 Purchases of investment securities (28,841) (10,468) Decrease in federal funds sold 1,500 Net increase in loans (3,938) (12,185) Purchases of premises and equipment (218) (478) -------- -------- Net cash used in investing activities (2,826) (6,680) FINANCING ACTIVITIES Net increase (decrease) in deposits (375) 1,213 Increase in federal funds purchased 3,000 Common stock issued 298 288 Cash dividends (558) (485) -------- -------- Net cash provided by (used in) financing activities (635) 4,016 -------- -------- Decrease in cash and cash equivalents (1,914) (1,304) Cash and cash equivalents at beginning of period 14,429 8,380 -------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 12,515 $ 7,076 ======== ======== See notes to condensed consolidated financial statements. -4- 5 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SOUTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARY September 30, 1995 NOTE A -- BASIS OF PRESENTATION The accompanying year-end balance sheet data was derived from audited consolidated financial statements, but does not include all disclosures required by generally accepted accounting principles. The unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 1994. NOTE B -- ALLOWANCE FOR LOAN LOSSES Changes in the allowance for loan losses for the nine months ended September 30 were as follows: 1995 1994 ---- ---- Balance at January 1 $1,497,742 $1,364,452 Provision for loan losses 177,000 135,000 Loans charged-off (92,736) (123,986) Recoveries 71,825 81,916 ---------- ---------- Net charge-offs (20,911) (42,070) ---------- ---------- Balance at September 30 $1,653,831 $1,457,382 ========== ========== The aggregate balance of nonaccrual loans totaled $559,000 and $171,000 at September 30, 1995 and 1994, respectively. Loans renegotiated to provide a reduction or deferral of interest or principal because of deterioration in the financial position of the borrower totaled $139,000 and $150,000 at September 30, 1995 and 1994, respectively. -5- 6 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations FINANCIAL CONDITION Total deposits have remained fairly steady during the first nine months of 1995. A shift has occurred between non-interest bearing deposits and interest bearing deposits with non-interest bearing decreasing by 11.3%. Loans have increased 3.3% during the first nine months of 1995. The loan growth occurred in both commercial and consumer loans and is the result of seasonal commercial borrowings, increased commercial loan demand and increased consumer purchases. Loan growth occurred as a result of a decline in cash and due from banks and federal funds sold, rather than from deposit growth. Historically, the Company has experienced a decline in commercial loans during the fourth quarter as seasonal borrowings are reduced. Investment securities have remainded fairly steady during the first nine months of 1995. This is consistent with the steady deposit base. The Company has committed to approximately $1,000,000 in capital expenditures related to the renovation of a building purchased for a new branch. It is anticipated that this branch, which is a consumer lending center, will be opened in the fourth quarter of 1995. CAPITAL RESOURCES The Federal Reserve Board (FRB) has adopted risk-based capital guidelines applicable to the Company. These guidelines require that bank holding companies maintain capital commensurate with both on and off balance sheet credit risks of their operations. Under the guidelines, a bank holding company must have a minimum ratio of total capital to risk-weighted assets of 8.0 percent. In addition, a bank holding company must maintain a minimum ratio of Tier 1 capital equal to 4.0 percent of risk-weighted assets. Tier 1 capital includes common shareholders' equity, qualifying perpetual preferred stock and minority interests in equity accounts of consolidated subsidiaries less goodwill. As a supplement to the risk-based capital requirements, the FRB has also adopted leverage capital ratio requirements. The new leverage ratio requirements establish a minimum ratio of Tier 1 capital to total assets less goodwill of 3 percent for the most highly rated bank holding companies. All other bank holding companies are required to maintain additional Tier 1 capital yielding a leverage ratio of 4 percent to 5 percent, depending on the particular circumstances and risk profile of the institution. The following table summarizes the Company's capital ratios as of September 30, 1995: Tier 1 risk-based capital ratio 14.32% Total risk-based capital ratio 15.61% Leverage ratio 9.90% -6- 7 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations--Continued The table above indicates that the Company's capital ratios are above the regulatory minimum requirements. All per share amounts in the accompanying financial statements have been restated for a 2:1 stock split in the third quarter of 1995. RESULTS OF OPERATIONS Net Interest Income Net interest income increased by $249,000 and $1,108,000 for the three and nine month periods ended September 30, 1995 compared to the same periods in 1994. This increase is due to an improvement in net interest margin. Loan interest rates have risen at a faster pace than deposit rates, thus causing the net interest margin to rise. Provision for Loan Losses The provision for loan losses is based on an analysis of outstanding loans. In assessing the adequacy of the allowance, management reviews the characteristics of the loan portfolio in order to determine the overall quality and risk profile. Some factors considered by management in determining the level at which the allowance is maintained include a continuing evaluation of those loans identified as being subject to possible problems in collection, results of examinations by regulatory agencies, current economic conditions and historical loan loss experience. The provision for loan losses increased by $42,000 for the nine month period ended September 30, 1995 compared to the same period in 1994. This increase occurred in order to account for the risk associated with the increase in outstanding loans. The allowance for loan losses is being maintained at a level which, in management's opinion, is adequate to absorb possible loan losses in the loan portfolio as of September 30, 1995. Non-Interest Income Non-interest income, which includes service charges on deposit accounts, trust fee income, security gains and losses and other miscellaneous charges and fees, increased by $21,000 and $48,000 during the three and nine month periods ended September 30, 1995 compared to the same periods in 1994. This increase is due to additional trust income, as a result of increased trust assets, and the receipt of life insurance proceeds. Non-Interest Expense Non-interest expense increased by $176,000 and $473,000 for the three and nine month periods ended September 30, 1995 compared to the same periods in 1994. This increase is primarily due to an increase in personnel costs as the result of an increase in the number of employees, increased marketing expenditures, increased postage costs and increased office supply costs due to recent paper price increases. -7- 8 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations--Continued Contingent Liabilities As discussed in the 1994 Annual Report to Shareholders, the Michigan Department of Environmental Quality (MDEQ), formerly the Michigan Department of Natural Resources, notified the Bank in December 1993 that it is considered a potentially responsible party ("PRP") with respect to the groundwater contamination of the Residential Wells of the Village of Tekonsha. Recent changes adopted in June 1995 to the Natural Resources and Environmental Protection Act have modified the liability standards for sites of environmental contamination. Based on this amendment, the MDEQ has notified the Bank that it is no longer considered a PRP. As discussed in the 1994 Annual Report, the Company has agreed to indemnify Jerry L. Towns, chief executive officer and a director of the Company, against any loss he may incur in litigation involving Community Assets Management, Inc. (CAM) as a result of his being a director of CAM. There has been no change in the status of this suit since December 31, 1994 and the Company has assessed that the amount of any loss cannot be reasonably estimated. -8- 9 PART II - OTHER INFORMATION ITEM 4. Submission of Matters to a Vote of Security Holders The annual meeting of shareholders of the Registrant was held at Southern Michigan Bank & Trust on March 20, 1995. At the meeting the following individuals were elected to serve as directors until the next annual shareholders meeting: Richard Bettinger; James Briskey; William E. Galliers; James T. Grohalski; Nolan E. Hooker; James E. Koss; James J. Morrison; Harvey B. Randall; Jane L. Randall; Freeman E. Riddle; Raymond W. Smith and Jerry L. Towns. Mr. Bettinger served as a director until his death on April 2, 1995. Shareholders also approved an amendment to the Articles of Incorporation to increase the number of authorized shares from 800,000 to 2,000,000. ITEM 6. Exhibits and Reports on Form 8-K a. Listing of Exhibits: None b. There were no reports on Form 8-K filed in the third quarter of 1995. c. Exhibit 27 - Financial Data Schedule SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Southern Michigan Bancorp, Inc. ------------------------------- (Registrant) - - ---------------- ------------------------------- Date Jerry L. Towns, President and Chief Executive Officer - - ----------------- ------------------------------- Date James T. Grohalski, Executive Vice-President (Principal Financial and Accounting Officer) -9- 10 EXHIBIT INDEX EXHIBIT NO. DESCRIPTION PAGE - - ------- ----------- ---- 27 Financial Data Schedule