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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, 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 (IRS Employer
corporation 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 - 1,916,921 shares at October 31, 1997
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CONDENSED CONSOLIDATED BALANCE SHEETS
SOUTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARY
September 30 December 31
1997 1996
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(Unaudited) (A)
(In thousands)
ASSETS
Cash and due from banks $ 10,033 $ 13,520
Investment securities available-for-sale 15,019 24,089
Investment securities held to maturity (fair value of
$32,146,000 in 1997 and $32,796,000 in 1996) 32,162 32,510
Loans 161,626 152,678
Less allowance for loan losses (1,898) (1,814)
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159,728 150,864
Premises and equipment 5,461 5,227
Other assets 9,854 9,352
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TOTAL ASSETS $232,257 $235,562
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LIABILITES AND SHAREHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 30,030 $ 35,230
Interest bearing 172,903 174,238
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202,933 209,468
Federal funds purchased 1,500
Accounts payable and other liabilities 2,647 2,922
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TOTAL LIABILITIES 207,080 212,390
Common stock subject to repurchase obligation in ESOP 4,272 3,555
Shareholder's equity
Common stock, $2.50 par value:
Authorized --- 4,000,000 shares (2,000,000 shares in 1996)
Outstanding --- 1,760,818 shares (1996---869,550 shares) 4,402 2,174
Capital surplus 2,472 2,735
Retained earnings 14,015 14,687
Net unrealized appreciation on available-for-sale
securities, net of tax of $8,000 (1996 -- $11,000) 16 21
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TOTAL SHAREHOLDERS' EQUITY 20,905 17,443
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $232,257 $233,388
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(A) The balance sheet at December 31, 1996 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 SUBSIDAIRY
Three Months Ended Nine Months Ended
September 30 September 30
1997 1996 1997 1996
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(In thousands, except per share amounts)
Interest income: $4,085 $3,485 $11,753 $10,046
Loans, including fees
Investment securities
Taxable 510 564 1,719 1,899
Tax exempt 213 196 636 581
Other 8 20 32 52
Total interest income -------- -------- --------- ---------
4,816 4,265 14,140 12,578
Interest expense:
Deposits 1,865 1,624 5,450 4,765
Capital notes and other 43 34 135 102
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Total interest expense 1,908 1,658 5,585 4,867
NET INTEREST INCOME 2,908 2,607 8,555 7,711
Provision for loan losses 145 33 295 267
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NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 2,763 2,574 8,260 7,444
Non-interest income:
Service charges on deposit accounts 215 175 627 536
Trust department 125 138 416 414
Security gains 0 5 5 10
Other 196 80 500 136
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536 398 1,548 1,096
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3,299 2,972 9,808 8,540
Non-interest expenses:
Salaries and benefits 1,067 950 3,182 2,826
Occupancy 186 156 531 430
Equipment 188 165 557 514
Other 772 537 2,275 1,784
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2,213 1,808 6,545 5,554
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INCOME BEFORE INCOME TAXES 1,086 1,164 3,263 2,986
Federal income taxes 277 282 817 717
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NET INCOME $809 $882 $2,446 $2,269
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Net income per share $0.42 $047 $128 $1.21
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Dividends declared per share $0.13 $012 $0.38 $0.36
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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
Nine Months Ended
September 30
1997 1996
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(In thousands)
OPERATING ACTIVITIES
Net Income $ 2,446 $ 2,269
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 295 267
Unrealized loss on loans held for sale 62
Provision for depreciation 380 266
Increase in other assets (500) (227)
Decrease in accounts payable and other liabilities (200) (546)
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Net cash provided by operating activities 2,421 2,091
INVESTING ACTIVITIES
Proceeds from maturities of investment securities 12,737 20,198
Purchase of investment securities (3,326) (12,229)
Decrease in federal funds sold 4,500
Net increase in loans (9,159) (20,366)
Purchases of premises and equipment (614) (1,162)
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Net cash used in investing activities (362) (9,129)
FINANCING ACTIVITIES
Net decrease in deposits (6,535) (567)
Increase in federal funds purchased 1,500 5,700
Payment of capital note (1,000)
Common stock issued 290 378
Cash dividends (801) (787)
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Net cash provided by (used in) financing activities (5,546) 3,724
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Decrease in cash and cash equivalents (3,487) (3,314)
Cash and cash equivalents at beginning of period 13,520 17,180
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $10,033 $13,866
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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, 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.
All per share amounts have been adjusted for a September 1997 stock split
effected in the form of a 100% stock dividend.
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ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
FINANCIAL CONDITION
Total deposits decreased by 3.1% during the first nine months of 1997. This
decline occurred as short-term municipal and school deposits matured and as
depositors sought higher yielding instruments with other competitors. The
Company traditionally experiences a growth in deposits in the fourth quarter of
the year.
Loans have increased 5.9% during the first nine months of 1997. 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. The Company
anticipates loan volume to remain fairly steady for the fourth quarter of 1997
as seasonal borrowings are reduced and offset new loans. There were no loans
held for sale at September 30, 1997.
Investment securities decreased by 16.6% during the first nine months of 1997.
The funds received from maturing securities were used to fund the loan growth
experienced in 1997.
The Company has committed approximately $1,7000,000 for the construction of a
new branch office in Hillsdale, Michigan. This office is expected to open in
the second quarter of 1998.
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 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 Operation---Continued
The following table summarizes the Company's capital ratios as of
September 30, 1997:
Tier 1 risk-based capital ratio 13.02%
Total risk-based capital ratio 14.08%
Leverage ratio 10.03%
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 $301,000 and $844,000 for the three and nine
month periods ended September 30, 1997 compared to the same periods in 1996.
This increase is due to the reinvestment of funds received from maturing
investment securities into the higher yielding loan portfolio and loan rates
rising at a faster pace than the rates paid on deposits.
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 $112,000 and $28,000 for the three
and nine month periods ended September 30, 1997 compared to the same periods in
1996. This increase occurred in response to increased consumer loan
charge-offs and commercial loan delinquencies. Some increase in losses was to
be expected with the significant loan growth that occurred in the last two
years. Several customers, including a large commercial borrower, have recently
declared bankruptcy, which has also contributed to increased losses during the
third quarter of 1997. These trends could lead to an increased provision in
the fourth quarter of 1997.
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ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations---Continued
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 $138,000 and $452,000 during the three and nine month periods
ended September 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 recognized on the sale of secondary
market real estate mortgage loans in 1997, increased fees from the sale of
nondepository investment products in 1997 and unrecognized losses on real
estate mortgage loans held for sale recorded in 1996.
Non-interest Expense
Non-interest expense increased by $405,000 and $991,000 for the three and nine
month periods ended September 30, 1997 compared to the same periods in 1996.
This increase is due to additional personnel costs, occupancy costs, marketing
and advertising expenditures, training costs and intangible asset amortization
as a result of the acquisition of two branches in late 1996. Trust department
expenses also increased in 1997 as professional consultants and new trust
administrators were added in order to increase the trust department's market
share.
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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:
EXHIBIT 27 Financial Data Schedule
b. There were no reports on Form 8-K filed in the third 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)
November 13, 1997 /s/ Jerry L. Towns
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(Date) Jerry L. Towns, President and
Chief Executive Officer
November 13, 1997 /s/ 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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EX-27 Financial Data Schedule