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 June 30, 1996 Commission file number 2-78178
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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
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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 - 945,328 shares at July 31, 1996
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CONDENSED CONSOLIDATED BALANCE SHEETS
SOUTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARY
June 30 December 31
1996 1995
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(Unaudited) (A)
(In thousands)
ASSETS
Cash and due from banks $ 8,638 $ 17,180
Federal funds sold 4,500
Investment securities available-for-sale 25,582 31,343
Investment securities (market value of
$25,527,000 in 1996 and $24,529,000 in
1995) 25,516 24,010
Loans 137,417 123,237
Less allowance for loan losses (1,858) (1,609)
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135,559 121,628
Premises and equipment 4,699 3,962
Other assets 7,821 7,354
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TOTAL ASSETS $207,815 $209,977
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LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 24,392 $ 24,571
Interest bearing 159,340 160,953
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183,732 185,524
Accounts payable and other liabilities 2,416 2,724
Capital notes 1,000
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TOTAL LIABILITIES 186,148 189,248
Common stock subject to repurchase obligation
in ESOP 2,317 2,232
Shareholders' equity:
Common stock, $2.50 par value:
Authorized--2,000,000 shares
Outstanding--863,828 shares (1995--
857,984 shares) 2,159 2,145
Capital surplus 3,677 3,511
Retained earnings 13,566 12,630
Net unrealized appreciation (depreciation)
on available-for-sale securities, net of
tax of $16,000 (1995--$117,000) (52) 211
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TOTAL SHAREHOLDERS' EQUITY 19,350 18,497
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $207,815 $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 Six Months Ended
June 30 June 30
1996 1995 1996 1995
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(In thousands, except per share amounts)
Interest income:
Loans, including fees $ 3,371 $ 3,030 $ 6,561 $ 5,839
Investment securities:
Taxable 632 671 1,335 1,230
Tax exempt 194 193 385 371
Other 13 42 32 72
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Total interest income 4,210 3,936 8,313 7,512
Interest expense:
Deposits 1,576 1,581 3,141 2,921
Capital notes and other 30 55 68 111
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Total interest expense 1,606 1,636 3,209 3,032
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NET INTEREST INCOME 2,604 2,300 5,104 4,480
Provision for loan losses 117 45 234 132
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NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 2,487 2,255 4,870 4,348
Non-interest income:
Service charges on deposit
accounts 182 174 361 362
Trust department 140 107 276 238
Security gains 5
Other 56 122 56 184
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378 403 698 784
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2,865 2,658 5,568 5,132
Non-interest expenses:
Salaries and benefits 983 892 1,876 1,670
Occupancy 134 122 274 241
Equipment 163 124 349 255
Deposit insurance premium 1 93 2 186
Legal fees 23 38 53 70
Other 575 537 1,192 989
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1,879 1,806 3,746 3,411
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INCOME BEFORE INCOME TAXES 986 852 1,822 1,721
Federal income taxes 241 190 435 392
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NET INCOME $ 745 $ 662 $ 1,387 $ 1,329
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Net income per share $ .79 $ .71 $ 1.48 $ 1.44
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Dividends declared per share $ .24 $ .21 $ .48 $ .41
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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
Six Months Ended
June 30
1996 1995
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(In thousands)
OPERATING ACTIVITIES
Net income $ 1,387 $ 1,329
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 234 132
Unrealized loss on loans held for sale 87
Provision for depreciation 160 150
Increase in other assets (334) (558)
Increase (decrease) in accounts payable
and other liabilities (198) (48)
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Net cash provided by operating activities 1,336 1,005
INVESTING ACTIVITIES
Proceeds from maturities of investment
securities 14,646 25,341
Purchases of investment securities (10,787) (23,001)
(Increase) decrease in federal funds sold 4,500 (500)
Net increase in loans (14,252) (5,288)
Purchases of premises and equipment (897) (110)
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Net cash used in investing activities (6,790) (3,558)
FINANCING ACTIVITIES
Net increase (decrease) in deposits (1,792) 2,116
Payment of capital note (1,000)
Common stock issued 265 225
Cash dividends (561) (363)
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Net cash provided by (used in)
financing activities (3,088) 1,978
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Decrease in cash and cash equivalents (8,542) (575)
Cash and cash equivalents at beginning of period 17,180 14,429
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 8,638 $13,854
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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
June 30, 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.
NOTE B -- ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses for the six months ended June 30 were
as follows:
1996 1995
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Balance at January 1 $1,609,422 $1,497,742
Provision for loan losses 234,000 132,000
Loans charged-off (59,026) (41,418)
Recoveries 73,964 52,038
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Net recoveries 14,938 10,620
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Balance at June 30 $1,858,360 $1,640,362
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Information regarding impaired loans for the first six months of 1996 follows:
Average investment in impaired loans $ 170,000
Interest income recognized on impaired loans
on a cash basis 5,000
Information regarding impaired loans at June 30, 1996 is as follows:
Total impaired loans $ 174,000
Less loans for which no allowance for loan
losses is allocated 15,000
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Impaired loans for which an allowance for loan
losses is allocated $ 159,000
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Portion of allowance allocated to these loans $ 45,000
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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 six months of 1996.
Loans have increased 11.5% during the first six months of 1996. The loan
growth occurred primarily in commercial loans and is the result of seasonal
commercial borrowings and 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 of the year and held for sale. $1,200,000 of
these loans were transferred to the Bank's loan portfolio to hold until
maturity during the second quarter. The remaining $1,400,000 in loans are held
for sale at June 30, 1996 and are carried at the lower of cost or market.
These loans were sold in July 1996 and a $27,000 loss was recognized at the
time of sale.
Investment securities decreased by 7.7% during the first six months of 1996.
This decrease is the result of the increase in loan volume. 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 18.6% during the first six months 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 June 30, 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 June 30,
1996:
Tier 1 risk-based capital ratio 13.84%
Total risk-based capital ratio 15.06%
Leverage ratio 10.16%
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 $304,000 and $624,000 for the three and six
month periods ended June 30, 1996 compared to the same period in 1995. This
increase is due to an improvement in net interest margin as a result of the
movement of funds from the securities portfolio to the loan portfolio.
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 $102,000 for the six month period
ended June 30, 1996 compared to the same period in 1995. This increase
occurred in order to account for the risk associated with the increase in
outstanding loans. Because of the Company's net recovery position, the
provision for loan losses was lowered to $33,000 for the third quarter of 1996.
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 June 30, 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 $25,000 and $86,000 during the three and six month periods ended
June 30, 1996 compared to the same periods in 1995. This decrease is primarily
due to unrealized losses on real estate mortgage loans held for sale.
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ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations--Continued
Non-Interest Expense
Non-interest expense increased by $73,000 and $335,000 for the three and six
month periods ended June 30, 1996 compared to the same period in 1995. 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 and
increased occupancy and equipment costs associated with the opening of the
Bank's new loan center. These increases are partially offset by a decrease in
FDIC insurance premiums.
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 April 22, 1996. At the meeting the following
individuals were elected to serve as directors until the next annual
shareholders meeting: James Briskey; William E. Galliers; James T. Grohalski;
Nolan E. Hooker; Gregory J. Hull; Thomas E. Kolassa; James J. Morrison; Harvey
B. Randall; Jane L. Randall; Freeman E. Riddle; and Jerry L. Towns.
ITEM 6. Exhibits and Reports on Form 8-K
a. Listing of Exhibits:
EXHIBIT 27 Financial Data Schedule
b. There were no reports on Form 8-K filed in the second 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)
August 9, 1996 /s/ Jerry L. Towns
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Date Jerry L. Towns, President and
Chief Executive Officer
August 9, 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
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
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27 Financial Data Schedule