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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, 1998 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.
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 - 1,923,756 shares at April 30, 1998
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CONDENSED CONSOLIDATED BALANCE SHEETS
SOUTHERN MICHIGAN BANCORP, INC AND SUBSIDIARY
March 31 December 31
1998 1997
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(Unaudited) (A)
(In thousands)
ASSETS
Cash and due from banks $16,194 $16,848
Federal funds sold 1,000 4,500
Investment securities available-for-sale 16,717 12,853
Investment securities held to maturity (market value of $34,563 in 1998
and $32,572 in 1997) 33,237 32,221
Loans 160,514 158,741
Less allowance for loan losses (1,915) (1,863)
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158,599 156,878
Premises and equipment 5,874 5,588
Other assets 9,912 9,643
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TOTAL ASSETS $241,533 $238,531
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LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-interest bearing $27,819 $30,923
Interest bearing 179,923 176,142
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207,742 207,065
Accounts payable and other liabilities 2,702 2,977
Other long-term borrowings 5,000 3,000
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TOTAL LIABILITIES 215,444 213,042
Common stock subject to repurchase obligation in ESOP 6,061 4,899
Shareholders' equity:
Common stock, $2.50 par value:
Authorized--4,000,000 shares
Outstanding--1,773,425 shares (1997-1,772,839) 4,433 4,432
Capital surplus 898 1,914
Retained earnings 14,687 14,218
Net unrealized appreciation on available-for-sale securities
net of tax of $5 (1997--$13) 10 26
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TOTAL SHAREHOLDERS' EQUITY 20,028 20,590
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $241,533 $238,531
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(A) The balance sheet at December 31, 1997 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 AND COMPREHENSIVE
INCOME (UNAUDITED)
SOUTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARY
Three Months Ended
March 31
1998 1997
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(In thousands, except
per share amounts)
Interest income:
Loans, including fees $3,951 $3,705
Investment securities:
Taxable 537 625
Tax exempt 243 222
Other 36 6
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Total interest income 4,767 4,558
Interest expense:
Deposits 1,821 1,792
Other 84 51
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Total interest expense 1,905 1,843
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NET INTEREST INCOME 2,862 2,715
Provision for loan losses 150 75
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NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 2,712 2,640
Non-interest income:
Service charges on deposit accounts 213 201
Trust department 119 136
Security gains 0 0
Other 230 92
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562 429
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3,274 3,069
Non-interest expenses:
Salaries and benefits 1,110 1,021
Occupancy 181 176
Equipment 187 188
Other 771 734
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2,249 2,119
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INCOME BEFORE INCOME TAXES 1,025 950
Federal income taxes 268 207
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NET INCOME 757 743
Other comprehensive income, net of tax:
Change in unrealized gains on securities (16) (106)
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COMPREHENSIVE INCOME $741 $637
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Basic and Diluted Earnings Per Share $0.39 $0.39
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Dividends Declared Per Share $0.15 $0.13
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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
1998 1997
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(In thousands)
OPERATING ACTIVITIES
Net income $757 $743
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 150 75
Provision for depreciation 115 123
Increase in other assets (261) (257)
Decrease in accounts payable and other liabilities (180) (379)
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Net cash provided by operating activities 581 305
INVESTING ACTIVITIES
Proceeds from maturity of investment securities 2,342 2,099
Purchases of investment securities (7,246) (751)
(Increase) decrease in federal funds sold 3,500 (1,500)
Net increase in loans (1,871) (36)
Net increase in premises and equipment (401) (87)
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Net cash used in investing activities (3,676) (275)
FINANCING ACTIVITIES
Net increase (decrease) in deposits 677 (253)
Increase in other borrowings 2,000 0
Common stock issued 147 110
Cash dividends (383) (323)
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Net cash provided by (used in) financing activities 2,441 (466)
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Decrease in cash and cash equivalents (654) (436)
Cash and cash equivalents at beginning of period 16,848 13,520
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $16,194 $13,084
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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, 1998
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 for Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not included 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, 1997.
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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 quarter of 1998. A
complete overhaul of the Bank's personal checking accounts allowed the Bank to
increase the number of deposit accounts and overcome the decline in deposits
that the Company has traditionally experienced in the first quarter of the year.
Loans have increased by 1.1% in the first three months of 1998. The loan growth
has occurred in the commercial portfolio while the real estate mortgage
portfolio has declined. The commercial growth is due to an increase in
borrowers' seasonal demands. The real estate mortgage decline is due to many
existing customers rewriting their adjustable rate loans into fixed rate loans
which are then sold to the secondary market. There were no loans held for sale
as of March 31, 1998.
Investment securities increased by 10.8% during the first quarter of 1998. Funds
received from increased Federal Home Loan Bank borrowings and funds transfered
from federal funds sold were invested in the securities portfolio.
The Company has committed approximately $1,700,000 for the construction of 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
equal to 4.0 percent of risk-weighted assets. Tier 1 capital includes common
shareholders' equity, qualifying perpetual preferred stock and minority interest
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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The following table summarizes the Company's capital ratios as of
March 31, 1998:
Tier 1 risk-based capital ratio 13.63%
Total risk-based capital ratio 14.69%
Leverage ratio 10.34%
The above table indicates that the Company's capital ratios are above the
regulatory minimum requirements.
RESULTS OF OPERATIONS
Net Interest Income
Net interest income increased by $147,000 for the three month period ended March
31, 1998 compared to the same period in 1997. This increase is due to the
reinvestment of funds held in overnight federal funds accounts into higher
yielding loans and securities.
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 $75,000 for the first quarter of 1998
compared to the same period in 1997. This increase occurred to provide for loan
growth and increased charge-offs and delinquencies, primarily as a result of
increased customer bankruptcies. 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, 1998.
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 $133,000 during the first quarter of 1998 compared to the same
period in 1997. This increase is due primarily to gains recognized on the sale
of real estate mortgage loans to the secondary market.
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Non-interest Expense
Non-interest expenses increased by $130,000 for the three month period ended
March 31, 1998 compared to the same period in 1997. The primary expense
categories that increased in 1998 were salaries and benefits and advertising
expenditures. Salaries and benefits increased due to an increase in the number
of employees and normal cost of living adjustments. Advertising expenditures
increased as the Bank revamped its checking products.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary market risk exposure is interest rate risk and to a lesser
extent liquidity risk. Interest rate risk arises when the maturity or repricing
characteristics of assets differ significantly from the maturity or the
repricing characteristics of liabilities. Accepting this risk can be an
important source of profitability and shareholder value, however, excessive
levels of interest rate risk could pose a significant threat to the Company's
earnings and capital base. Accordingly, effective risk management that maintains
interest rate risk at prudent levels is essential to the Company's safety and
soundness.
The Company measures the impact of changes in interest rates on net interest
income through a comprehensive analysis of the Bank's interest rate sensitive
assets and liabilities. Interest rate sensitivity varies with different types of
interest-earning assets and interest-bearing liabilities. Overnight federal
funds and mutual funds on which rates change daily and loans which are tied to
the prime rate or a comparable index differ considerably from long-term
investment securities and fixed-rate loans. Similarly, certificates of deposit
and money market investment accounts are much more interest sensitive than
passbook savings accounts. The shorter term interest rate sensitivities are key
to measuring the interest sensitivity gap, or excess interest-earning assets
over interest-bearing liabilities. In addition to reviewing the interest
sensitivity gap, the Company also analyzes projected changes in market interest
rates and the resulting effect on net interest income.
Liquidity management involves the ability to meet the cash flow requirements of
customers who may be either depositors wanting withdraw funds or borrowers
needing assurance that sufficient funds will be available to meet their credit
needs. Certain portions of the Bank's liabilities may be short-term or due on
demand, while most of its assets may be invested in long-term loans or
investments. Accordingly, the Company seeks to have in place sources of cash to
meet short-term demands. These funds can be obtained by increasing deposits,
borrowing or selling assets. Also, Federal Home Loan Bank advances and
short-term borrowings provide additional sources of liquidity for the Company.
The following table provides information about the Company's financial
instruments that are sensitive to changes in interest rates as of March 31,
1998. The Company had no
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derivative financial instruments, or trading portolio, as of that date. The
expected maturity date values for loans receivable were calculated without
adjusting the instrument's contractual maturity date for expectations of
prepayments. Investment securities are reported at the earlier of maturity date
or anticipated call date. Expected maturity date values for interest-bearing
core deposits were not based upon estimates of the period over which the
deposits would be outstanding, but rather the opportunity for repricing.
Similarly, with respect to its variable rate instruments, the Company believes
that repricing dates, as opposed to expected maturity dates, may be more
relevant in analyzing the value of such instruments and are reported as such in
the following table. Company borrowings are also reported based on conversion or
repricing dates.
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Principal Amount Maturing in: Fair
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03/31/99 03/31/00 03/31/01 03/31/02 03/31/03 Thereafter Total 03/31/98
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Rate sensitive assets:
Fixed interest rate loans 19,418 12,423 9,318 7,186 4,859 4,427 57,631 57,684
Average interest rate 9.80% 10.00% 10.11% 10.21% 10.19% 10.01% 9.94%
Variable interest rate loans 12,040 583 464 9,762 11,401 68,633 102,883 102,883
Average interest rate 9.18% 9.30% 9.60% 9.56% 9.61% 9.40% 9.39%
Fixed interest rate securities 16,836 11,821 8,418 5,104 2,932 4,843 49,954 51,280
Average interest rate 5.98% 6.43% 5.45% 5.46% 5.40% 4.82% 6.25%
Other interest bearing assets 1,000 1,000 1,000
Average interest rate 5.29% 5.29%
Rate sensitive liabilities:
Interest bearing demand deposits 67,040 67,040 67,040
Average interest rate 3.21% 3.21%
Savings deposits 34,722 5,233 2,134 1,305 138 0 43,532 43,532
Average interest rate 2.80% 5.90% 5.50% 5.32% 5.73% 3.38%
Time deposits 52,794 8,585 6,698 1,259 15 0 69,351 69,298
Average interest rate 5.39% 5.68% 5.83% 6.18% 5.64% 5.33%
Fixed interest rate borrowings 5,000 5,000 5,000
Average interest rate 5.47% 5.47%
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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: Financial Data Schedule
b. There were no reports on Form 8-K filed in the first quarter of 1998.
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, 1998 JERRY L. TOWNS
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Date Jerry L. Towns, President and
Chief Executive Officer
MAY 13, 1998 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
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