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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended March 31, 1996 Commission file number 2-78178
Southern Michigan Bancorp, Inc.
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(Exact name of registrant as specified in its charter)
Michigan 38-2407501
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
51 West Pearl Street, Coldwater, Michigan 49036
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code--(517) 279-5500
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
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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 - 942,124 shares at April 30, 1996
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CONDENSED CONSOLIDATED BALANCE SHEETS
SOUTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARY
March 31 December 31
1996 1995
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(Unaudited) (A)
(In thousands)
Cash and due from banks $ 10,674 $ 17,180
Federal funds sold 4,500
Investment securities available-for-sale 27,929 31,343
Investment securities (fair value of
$27,026,000 in 1996 and $24,529,000 in
1995) 26,814 24,010
Loans 130,648 123,237
Less allowance for loan losses - Note B (1,709) (1,609)
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128,939 121,628
Premises and equipment 4,608 3,962
Other assets 7,518 7,354
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TOTAL ASSETS $206,482 $209,977
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LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 23,693 $ 24,571
Interest bearing 159,524 160,953
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183,217 185,524
Accounts payable and other liabilities 2,162 2,724
Capital notes 1,000
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TOTAL LIABILITIES 185,379 189,248
Common stock subject to repurchase obligation
in ESOP 2,348 2,232
Shareholders' equity:
Common stock, $2.50 par value:
Authorized--2,000,000 shares
Outstanding--858,852 shares (1995--
857,984 shares) 2,147 2,145
Capital surplus 3,522 3,511
Retained earnings 13,046 12,630
Net unrealized appreciation on
available-for-sale securities, net of
tax of $29,000 (1995--$117,000) 40 211
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TOTAL SHAREHOLDERS' EQUITY 18,755 18,497
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $206,482 $209,977
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(A) The balance sheet at December 31, 1995 has been derived from the audited
consolidated financial statements at that date.
See notes to condensed consolidated financial statements.
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CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
SOUTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARY
Three Months Ended
March 31
1996 1995
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(In thousands)
Interest income:
Loans, including fees $3,190 $2,809
Investment securities:
Taxable 703 559
Tax exempt 191 178
Other 19 30
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Total interest income 4,103 3,576
Interest expense:
Deposits 1,565 1,340
Capital notes and other 38 56
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Total interest expense 1,603 1,396
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NET INTEREST INCOME 2,500 2,180
Provision for loan losses 117 87
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NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 2,383 2,093
Non-interest income:
Service charges on deposit accounts 179 188
Trust department 136 131
Security gains 5
Other 0 62
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320 381
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2,703 2,474
Non-interest expenses:
Salaries and benefits 893 778
Occupancy 140 119
Equipment 186 131
Deposit insurance premium 1 62
Legal fees 30 32
Other 617 483
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1,867 1,605
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INCOME BEFORE INCOME TAXES 836 869
Federal income taxes 194 202
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NET INCOME $ 642 $ 667
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Net income per share $ .69 $ .73
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Dividends declared per share $ .24 $ .20
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See notes to condensed consolidated financial statements.
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SOUTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARY
Three Months Ended
March 31
1996 1995
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(In thousands)
OPERATING ACTIVITIES
Net income $ 642 $ 667
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 117 87
Unrealized loss on loans held for sale 65
Provision for depreciation 72 69
Increase in other assets (76) (550)
Decrease in accounts payable and
other liabilities (452) (76)
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Net cash provided by operating activities 368 197
INVESTING ACTIVITIES
Proceeds from maturities of investment
securities 8,514 10,431
Purchases of investment securities (8,163) (6,326)
(Increase) decrease in federal funds sold 4,500 (1,100)
Net increase in loans (7,493) (2,496)
Purchases of premises and equipment (718) (39)
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Net cash provided by (used in)
investing activities (3,360) 470
FINANCING ACTIVITIES
Net decrease in deposits (2,307) (2,820)
Payment of matured capital note (1,000)
Common stock issued 129 74
Cash dividends paid (336) (179)
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Net cash used in financing activities (3,514) (2,925)
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Decrease in cash and cash equivalents (6,506) (2,258)
Cash and cash equivalents at beginning of period 17,180 14,429
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $10,674 $12,171
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See notes to condensed consolidated financial statements.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SOUTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARY
March 31, 1996
NOTE A -- BASIS OF PRESENTATION
The accompanying year-end balance sheet data was derived from audited
consolidated financial statements, but does not include all disclosures
required by generally accepted accounting principles.
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions 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, 1995.
Effective January 1, 1996, the Company adopted Financial Accounting Standards
Board Statement 122, Accounting for Mortgage Servicing Rights. The Statement
requires that the Company recognize mortgage servicing rights on loans it
purchases or originates with the intent to sell as an asset. Capitalized
mortgage servicing rights are included in other assets and are not material at
March 31, 1996.
NOTE B -- ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses for the quarter ended March 31 were as
follows:
1995 1994
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Balance at January 1 $1,609,422 $1,497,742
Provision for loan losses 117,000 87,000
Loans charged-off (45,126) (31,016)
Recoveries 28,141 31,906
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Net (charge-offs) recoveries (16,985) 890
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Balance at March 31 $1,709,437 $1,585,632
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Information regarding impaired loans for the first quarter of 1996 follows:
Average investment in impaired loans $ 230,000
Interest income recognized on impaired loans
on a cash basis 2,000
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-- Continued
NOTE B -- ALLOWANCE FOR LOAN LOSSES (Continued)
Information regarding impaired loans at March 31, 1996 is as follows:
Total impaired loans $ 228,000
Less loans for which no allowance for loan
losses is allocated 16,000
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Impaired loans for which an allowance for loan
losses is allocated $ 212,000
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Portion of allowance allocated to these loans $ 87,000
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ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
FINANCIAL CONDITION
Total deposits have decreased by 1.2% during the first quarter of 1996. The
decline occurred in all deposit categories and follows the Company's historical
decline in deposits during the first quarter of the year.
Loans have increased 6.0% during the first quarter of 1996. Loan growth
occurred in commercial loans as result of increased loan demand. Also
contributing to the increase in loans is approximately $2,600,000 in real
estate mortgage loans recorded in the first quarter and held for sale. These
loans are carried at the lower of cost or market.
Investment securities decreased by 1.1% during the first quarter of 1996. This
decrease is the result of the decline in deposits combined with the increase in
loans. The Company sold 191 shares of common stock from its available-for-sale
portfolio at a gain of $5,000 during the first quarter of 1996.
Premises and equipment increased by 16.3% during the first quarter of 1996.
This increase is due to renovation costs and equipment purchases related to the
Bank's consumer loan center which opened in February 1996. The Company had no
material commitments for capital expenditures at March 31, 1996.
The Company paid off the $1,000,000 capital note at its maturity date of
January 30, 1996.
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.
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ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations--Continued
The following table summarizes the Company's capital ratios as of March 31,
1996:
Tier 1 risk-based capital ratio 13.94%
Total risk-based capital ratio 15.10%
Leverage ratio 9.89%
The table above indicates that the Company's capital ratios are above the
regulatory minimum requirements.
RESULTS OF OPERATIONS
Net Interest Income
Net interest income increased by $320,000 for the three month period ended
March 31, 1996 compared to the same period in 1995. This increase is due to an
improvement in net interest margin which occurred because of a decrease in
deposit rates, while loans rates remained fairly steady, and the payoff of the
capital note.
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 specific
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
$30,000 during the first quarter of 1996 compared to the same period in 1995.
This increase occurred in order to provide for loan growth. 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 March 31,
1996.
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,
decreased by $61,000 during the first quarter of 1996 compared to the same
period in 1995. This decrease was primarily due to unrealized losses on real
estate mortgage loans held for sale.
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Non-Interest Expenses
Non-interest expenses increased by $262,000 for the three month period ended
March 31, 1996. This increase is primarily due to an increase in salaries as
the result of an increase in the number of employees and increases in occupancy
costs, equipment costs and marketing expenditures associated with the opening
of the Bank's new loan center. These increases are partially offset by a
$61,000 decrease in FDIC insurance premiums.
PART II - OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders
None
ITEM 6. Exhibits and Reports on Form 8-K
a. Listing of Exhibits: None
b. There were no reports on Form 8-K filed in the first quarter of 1996.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Southern Michigan Bancorp, Inc.
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(Registrant)
MAY 13, 1996 /s/ JERRY L. TOWNS
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Date Jerry L. Towns, President and
Chief Executive Officer
MAY 13, 1996 /s/ JAMES T. GROHALSKI
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Date James T. Grohalski, Executive
Vice-President (Principal
Financial and Accounting
Officer)
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Exhibit Index
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Exhibit No. Description
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27 Financial Data Schedule