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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 June 30, 1997 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 Identification
incorporation or organization) 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 filling
requirements for the past 90 days. Yes X No
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Common Stock, $2.50 Par Value - 956,695 shares at July 31, 1997
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CONDENSED CONSOLIDATED BALANCE SHEETS
SOUTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARY
June 30 December 31
1997 1996
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(Unaudited) (A)
(In thousands)
ASSETS
Cash and due from banks $ 14,693 $ 13,520
Investment securities available-for-sale 18,436 24,089
Investment securities held to maturity (market value of
$30,506,000 in 1997 and $32,796,000 in 1996) 30,337 32,510
Loans 161,395 152,678
Less allowance for loan losses (1,863) (1,814)
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159,532 150,864
Premises and equipment 5,459 5,227
Other assets 9,506 9,352
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TOTAL ASSETS $237,963 $237,963
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LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 30,621 $ 35,230
Interest bearing 173,552 174,238
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204,173 209,468
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Federal funds purchased 6,900
Accounts payable and other liabilities 2,405 2,922
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TOTAL LIABILITIES $213,478 212,390
Common stock subject to repurchase obligation 3,584 3,555
in ESOP
Shareholders' equity:
Common stock, $2.50 par value:
Authorized --- 4,000,000 shares
Outstanding --- 878,815 shares (1996 ---
869,550 shares) 2,197 2,174
Capital surplus: 2,873 2,735
Retained earnings 15,847 14,687
Net unrealized appreciation (depreciation)
on available-for-sale securities,
net of tax of $8,000 (1996 -- $10,000) (16) 21
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TOTAL SHAREHOLDERS' EQUITY 20,901 19,617
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $237,963 $235,562
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(A) The balance sheet at December 31, 1996 has been derived from the audited
consolidated financial statements at the 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
1997 1996 1997 1996
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(In thousands, except per share amounts)
Interest Income: $ 3,963 $ 3,371 $ 7,668 $ 6,561
Loans, including fees
Investment securities:
Taxable 584 632 1,209 1,335
Tax exempt 201 194 423 385
Other 18 13 24 32
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Total interest income 4,766 4,210 9,324 8,313
Interest expense:
Deposits 1,793 1,576 3,585 3,141
Capital notes and other 41 30 92 68
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Total interest expense 1,834 1,606 3,677 3,209
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NET INTEREST INCOME 2,932 2,604 5,647 5,104
Provision for loan losses 75 117 150 234
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NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 2,857 2,487 5,497 4,870
Non-interest income:
Service charges on deposit account 211 182 412 361
Trust Department 155 140 291 276
Security Gains 5 5 5
Other 212 56 304 56
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583 378 1,012 698
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3,440 2,865 6,509 5,568
Non-interest expenses:
Salaries and benefits 1,094 983 2,115 1,876
Occupancy 169 134 345 274
Equipment 181 163 369 349
Other 769 599 1,503 1,247
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2,213 1,879 4,332 3,746
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INCOME BEFORE INCOME TAXES 1,227 986 2,177 1,822
Federal income taxes 333 241 540 435
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NET INCOME $ 894 $ 745 $ 1,637 $ 1,387
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Net income per share $ 0.93 $ 0.79 $ 1.71 $ 1.48
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Dividends declared per share $ 0.25 $ 0.24 $ 0.50 $ 0.48
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See notes to condensed consolidated financial statements.
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CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
SOUTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARY
Six Months Ended
June 30
1997 1996
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(in thousands)
OPERATING ACTIVITES
Net Income $ 1,637 $ 1,387
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 150 234
Unrealized loss on loans held for sale 87
Provision for depreciation 236 160
Increase in other assets (136) (334)
Decrease in accounts payable
and other liabilities (194) (198)
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Net cash provided by operating activities 1,693 1,336
INVESTING ACTIVITIES
Proceeds from maturities of investment securities 9,472 14,646
Purchase of investment securities (1,701) (10,787)
Decrease in federal funds sold 4,500
Net increase in loans (8,818) (14,252)
Purchase of premises and equipment (468) (897)
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Net cash used in investing activities (1,515) (6,790)
FINANCING ACTIVITIES
Net increase (decrease) in deposits (5,295) (1,792)
Increase in federal funds purchased 6,900
Payment of capital note (1,000)
Common stock issued 190 265
Cash dividends (800) (561)
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Net cash provided by (used in) financing activities 995 (3,088)
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Increase (decrease) in cash and cash equivalents 1,173 (8,542)
Cash and cash equivalents at beginning of period 13,520 17,180
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $14,693 $ 8,638
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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, 1997
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, 1996.
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ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
FINANCIAL CONDITION
Total deposits decreased by 2.4% during the second quarter of 1997. This
decline occurred in all deposit categories. The decline was not unexpected due
to short-term municipal and school deposits that matured in June. Total
deposits increased by 2.0% in July but again this increase was due to
short-term deposits to be used by local school districts in August and
September.
Loans remained fairly steady during the first quarter of 1997 but increased
5.7% in the second quarter. The Company historically experiences loan growth
in the second and third quarters of the year as borrowers' seasonal demands
increase. No loans are held for sale at June 30, 1997.
Investment securities decreased by 23.5% during the first half of 1997. The
funds received from maturing securities were used to fund a portion of the loan
growth during the first half of 1997.
The Company had an outstanding commitment for capital expenditures of
$1,300,000 at June 30, 1997. The commitment is for a new branch office in
Hillsdale, Michigan.
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 to total assets (less goodwill) of 3.0 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 4.0
percent to 5.0 percent, depending on the particular circumstances and risk
profile of the institution.
The following table summarizes the Company's capital ratios as of June 30,
1997:
Tier 1 risk-based capital ratio 13.51%
Total risk-based capital ratio 12.48%
Leverage ratio 9.72%
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 $328,000 and $543,000 for the three and six
month periods ended June 30, 1997 compared to the same period in 1996. 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 and to
loan rates rising at a faster pace than the rates paid on deposit accounts.
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.
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The provision for loan losses decreased by $84,000 for the six month period
ended June 30, 1997 compared to the same period in 1996. This decrease
occurred as a result of the low level of loan losses experience in recent
years. 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, 1997.
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 $205,000 and $314,000 during the three and six month periods
ended June 30, 1997 compared to the same periods in 1996. This increase is due
to increased service charges on deposit accounts in 1997 as a result of the
additional deposits purchased in connection with the acquisition of two
branches in late 1996, increased gains on sale of secondary market real estate
mortgage loans in 1997 and unrealized losses on mortgage loans held for sale
recorded in 1996. Increased fees from our Investment Center of $29,000 over
the same period in 1996 also contributed to our success in the first six months
of 1997.
Non-interest Expense
Non-interest expense increased by $334,000 and $586,000 for the three and six
month periods ended June 30, 1997 compared to the same periods in 1996. This
increase is due to additional personnel costs, occupancy costs, marketing and
advertising expenditures and training costs resulting from the acquisition of
two branch offices late in 1996.
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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 Michigan Gas
Utilities Building on April 21, 1997. 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; Jane L. Randall; Freeman
E. Riddle; and Jerry L. Towns.
Shareholders also approved an amendment to the Articles of Incorporation to
increase the number of authorized shares from 2,000,000 to 4,000,000.
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 1997.
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 12, 1997 Jerry L. Towns
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(Date) Jerry L. Towns, President and
Chief Executive Officer
August 12, 1997 James T. Grohalski
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(Date) James T. Grohalski, Executive
Vice President (Principal Financial
and Accounting Officer)
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INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
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27 Financial Data Schedule