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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 September 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 - 950,347 shares at October 31, 1996
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CONDENSED CONSOLIDATED BALANCE SHEETS
SOUTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARY
September 30 December 31
1996 1995
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(Unaudited) (A)
(In thousands)
ASSETS
Cash and due from banks $ 13,866 $ 17,180
Federal funds sold 4,500
Investment securities available-for-sale 21,579 31,343
Investment securities (market value of
$25,719,000 in 1996 and $24,529,000 in
1995) 25,511 24,010
Loans 143,527 123,237
Less allowance for loan losses (1,862) (1,609)
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141,665 121,628
Premises and equipment 4,858 3,962
Other assets 7,710 7,354
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TOTAL ASSETS $215,189 $209,977
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LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 24,978 $ 24,571
Interest bearing 159,979 160,953
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184,957 185,524
Federal funds purchased 5,700
Accounts payable and other liabilities 2,069 2,724
Capital notes 1,000
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TOTAL LIABILITIES 192,726 189,248
Common stock subject to repurchase obligation
in ESOP 2,319 2,232
Shareholders' equity:
Common stock, $2.50 par value:
Authorized--2,000,000 shares
Outstanding--945,328 shares (1995--
933,651 shares) 2,168 2,145
Capital surplus 3,779 3,511
Retained earnings 14,221 12,630
Net unrealized appreciation (depreciation)
on available-for-sale securities, net of
tax of $12,000 (1995--$117,000) (24) 211
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TOTAL SHAREHOLDERS' EQUITY 20,144 18,497
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $215,189 $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 Nine Months Ended
September 30 September 30
1996 1995 1996 1995
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(In thousands, except per share amounts)
Interest income:
Loans, including fees $3,485 $3,060 $10,046 $ 8,899
Investment securities:
Taxable 564 687 1,899 1,917
Tax exempt 196 192 581 563
Other 20 29 52 101
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Total interest income 4,265 3,968 12,578 11,480
Interest expense:
Deposits 1,624 1,619 4,765 4,540
Capital notes and other 34 67 102 178
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Total interest expense 1,658 1,686 4,867 4,718
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NET INTEREST INCOME 2,607 2,282 7,711 6,762
Provision for loan losses 33 45 267 177
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NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 2,574 2,237 7,444 6,585
Non-interest income:
Service charges on deposit
accounts 175 182 536 544
Trust department 138 117 414 355
Security gains 5 10
Other 80 56 136 240
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398 355 1,096 1,139
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2,972 2,592 8,540 7,724
Non-interest expenses:
Salaries and benefits 950 941 2,826 2,611
Occupancy 156 136 430 377
Equipment 165 128 514 383
Deposit insurance premium 0 (10) 2 176
Legal fees 13 36 66 106
Other 524 511 1,716 1,500
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1,808 1,742 5,554 5,153
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INCOME BEFORE INCOME TAXES 1,164 850 2,986 2,571
Federal income taxes 282 188 717 580
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NET INCOME $ 882 $ 662 $ 2,269 $ 1,991
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Net income per share $ .93 $ .82 $ 2.41 $ 2.26
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Dividends declared per share $ .24 $ .22 $ .72 $ .63
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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
Nine Months Ended
September 30
1996 1995
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(In thousands)
OPERATING ACTIVITIES
Net income $ 2,269 $ 1,991
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 267 177
Unrealized loss on loans held for sale 62
Provision for depreciation 266 226
Increase in other assets (227) (957)
Increase (decrease) in account payable
and other liabilities (546) 110
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Net cash provided by operating activities 2,091 1,547
INVESTING ACTIVITIES
Proceeds from maturities of investment
securities 20,198 28,671
Purchases of investment securities (12,299) (28,841)
Decrease in federal funds sold 4,500 1,500
Net increase in loans (20,366) (3,938)
Purchases of premises and equipment (1,162) (218)
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Net cash used in investing activities (9,129) (2,826)
FINANCING ACTIVITIES
Net decrease in deposits (567) (375)
Increase in federal funds purchased 5,700
Payment of capital note (1,000)
Common stock issued 378 298
Cash dividends (787) (558)
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Net cash provided by (used in)
financing activities 3,724 (635)
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Decrease in cash and cash equivalents (3,314) (1,914)
Cash and cash equivalents at beginning of period 17,180 14,429
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 13,866 $ 12,515
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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
September 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 nine months ended September 30
were as follows:
1996 1995
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Balance at January 1 $1,609,422 $1,497,742
Provision for loan losses 267,000 177,000
Loans charged-off (101,935) (92,736)
Recoveries 87,546 71,825
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Net charge-offs (14,389) (20,911)
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Balance at September 30 $1,862,033 $1,653,831
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Information regarding impaired loans for the first nine months of 1996
follows:
Average investment in impaired loans $ 219,000
Interest income recognized on impaired loans
on a cash basis 8,000
Information regarding impaired loans at September 30, 1996 is as
follows:
Total impaired loans $ 213,000
Less loans for which no allowance for loan
losses is allocated 13,000
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Impaired loans for which an allowance for loan
losses is allocated $ 200,000
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Portion of allowance allocated to these loans $ 34,000
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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 nine months of
1996. The Company has entered into an agreement with First of America Bank -
Michigan, N.A. to purchase two branches. This purchase will be completed in
the fourth quarter of 1996 and will increase the Company's deposits by
approximately $22,000,000.
Loans have increased 16.5% during the first nine months of 1996. The loan
growth occurred in all loan categories and is the result of seasonal commercial
borrowings and increased loan demand. The Company was required to purchase
federal funds in order to meet its increased loan demand. Historically, the
Company has experienced a decline in loans during the fourth quarter as
seasonal borrowings are reduced.
During the second quarter of 1996, $1,200,000 in real estate mortgage loans
previously classified as held for sale were transferred to the Bank's loan
portfolio to hold until maturity. At the time of the transfer, the loans had
an unrealized loss of $62,000. This loss is being amortized until the maturity
dates of the loans. There were no loans held for sale at September 30, 1996.
Investment securities decreased by 14.9% during the first nine months of 1996.
This decrease is the result of the increase in loan volume. The Company sold
two available-for-sale securities and recognized gains of $10,000 during the
first nine months of 1996.
Premises and equipment increased by 22.6% during the first nine months of 1996.
This increase is due to renovation costs and equipment purchases related to two
new consumer loan centers opened in February 1996 and September 1996. The
Company had no material commitments for capital expenditures at September 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 September 30,
1996:
Tier 1 risk-based capital ratio 13.77%
Total risk-based capital ratio 14.94%
Leverage ratio 10.35%
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 $325,000 and $949,000 for the three and nine
month periods ended September 30, 1996 compared to the same periods in 1995.
This increase is due to the reinvestment of funds received from maturing
investment securities into the higher yielding loan portfolio along with the
stability of the Company's cost of funds.
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 $90,000 for the nine month period
ended September 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 1996 net charge-offs are lower than 1995 net
charge-offs, management's analysis of the required allowance for loan losses
indicates that the Company has adequate reserves and no significant losses are
anticipated prior to year end, no provision for loan losses will be recorded in
the fourth 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 September 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,
increased by $43,000 during the three month period ended September 30, 1996
compared to the same period in 1995. This increase is due to additional trust
income, as a result of increased trust assets, and increased rental income.
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ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations--Continued
Non-interest income decreased by $43,000 for the nine month period ended
September 30, 1996 compared to the same period in 1995. This decrease is
primarily due to unrecognized losses on real estate mortgage loans previously
held for sale, partially offset by life insurance proceeds received in 1995.
Non-Interest Expense
Non-interest expense increased by $66,000 and $401,000 for the three and nine
month periods ended September 30, 1996 compared to the same periods 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 and advertising
expenditures and increased occupancy and equipment costs associated with the
opening of the Bank's two new loan centers. These increases are partially
offset by a decrease in FDIC insurance premiums and legal fees.
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 third 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)
11-8-96 /s/ Jerry L. Towns
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Date Jerry L. Towns, President and
Chief Executive Officer
11-8-96 /s/ James T. Grohalski
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Date James T. Grohalski, Executive
Vice-President (Principal
Financial and Accounting
Officer)
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SOUTHERN MICHIGAN
EXHIBIT INDEX
Exhibit No. Description Page No.
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27 Financial Data Schedule 10
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