<PAGE> 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 September 30, 1995 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
- - ----------------------------------------- -----------------------------
(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 - 933,651 shares at October 31, 1995
- - ------------------------------------------------------------------
<PAGE> 2
CONDENSED CONSOLIDATED BALANCE SHEETS
SOUTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARY
<TABLE>
<CAPTION>
September 30 December 31
1995 1994
---------------------------
(Unaudited) (A)
(In Thousands)
<S> <C> <C>
ASSETS
Cash and due from banks $ 12,515 $ 14,429
Investment securities available-for-sale 14,552 11,288
Investment securities (market value of
$37,617,000 in 1995 and $36,576,000
in 1994) 37,227 39,991
Loans 124,255 120,338
Less allowance for loan losses (1,654) (1,498)
-------- --------
122,601 118,840
Federal funds sold 1,500
Premises and equipment 3,279 3,287
Other assets 7,136 6,290
-------- --------
TOTAL ASSETS $197,310 $195,625
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 21,647 $ 24,401
Interest bearing 152,049 149,670
-------- --------
173,696 174,071
Accounts payable and other liabilities 2,371 2,235
Capital notes 1,000 1,000
-------- --------
TOTAL LIABILITIES 177,067 177,306
Shareholders' equity:
Common stock, $2.50 par value:
Authorized -- 2,000,000 shares
Outstanding -- 930,493 shares (1994 --
917,358 shares) 2,326 2,293
Capital surplus 5,475 5,210
Retained earnings 12,342 10,935
Net unrealized appreciation (depreciation)
on available-for-sale securities, net of
tax of $50,000 (1994 -- $61,000) 100 (119)
-------- --------
TOTAL SHAREHOLDERS' EQUITY 20,243 18,319
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $197,310 $195,625
======== ========
</TABLE>
(A) The balance sheet at December 31, 1994 has been derived from the audited
consolidated financial statements at that date.
See notes to condensed consolidated financial statements.
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<PAGE> 3
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
SOUTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARY
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
1995 1994 1995 1994
-------------------------------------------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Interest income:
Loans, including fees $3,060 $2,686 $ 8,899 $7,390
Investment securities:
Taxable 687 416 1,917 1,310
Tax exempt 192 157 563 465
Other 29 1 101 8
------ ------ ------- ------
Total interest income 3,968 3,260 11,480 9,173
Interest expense:
Deposits 1,619 1,150 4,540 3,323
Capital notes and other 67 77 178 196
------ ------ ------- ------
Total interest expense 1,686 1,227 4,718 3,519
------ ------ ------- ------
NET INTEREST INCOME 2,282 2,033 6,762 5,654
Provision for loan losses 45 45 177 135
------ ------ ------- ------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 2,237 1,988 6,585 5,519
Non-interest income:
Service charges on deposit
accounts 182 187 544 556
Trust department 117 113 355 336
Other 56 34 240 199
------ ------ ------- ------
355 334 1,139 1,091
------ ------ ------- ------
2,592 2,322 7,724 6,610
Non-interest expenses:
Salaries and benefits 941 793 2,611 2,361
Occupancy 136 127 377 359
Equipment 128 125 383 376
Deposit insurance premium (10) 87 176 265
Other 547 434 1,606 1,319
------ ------ ------- ------
1,742 1,566 5,153 4,680
------ ------ ------- ------
INCOME BEFORE INCOME TAXES 850 756 2,571 1,930
Federal income taxes 188 185 580 485
------ ------ ------- ------
NET INCOME $ 662 $ 571 $ 1,991 $1,445
====== ====== ======= ======
Net income per share $ .82 $ .63 $ 2.26 $ 1.59
====== ====== ======= ======
Dividends declared per share $ .22 $ .19 $ .63 $ .55
====== ====== ======= ======
</TABLE>
See notes to condensed consolidated financial statements.
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<PAGE> 4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SOUTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARY
<TABLE>
<CAPTION>
Nine Months Ended
September 30
1995 1994
----------------------------
(In thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 1,991 $ 1,445
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 177 135
Provision for depreciation 226 222
Increase in other assets (957) (590)
Decrease in accounts payable and
other liabilities 110 148
-------- --------
Net cash provided by operating activities 1,547 1,360
INVESTING ACTIVITIES
Proceeds from maturities of investment
securities 28,671 16,451
Purchases of investment securities (28,841) (10,468)
Decrease in federal funds sold 1,500
Net increase in loans (3,938) (12,185)
Purchases of premises and equipment (218) (478)
-------- --------
Net cash used in investing activities (2,826) (6,680)
FINANCING ACTIVITIES
Net increase (decrease) in deposits (375) 1,213
Increase in federal funds purchased 3,000
Common stock issued 298 288
Cash dividends (558) (485)
-------- --------
Net cash provided by (used in)
financing activities (635) 4,016
-------- --------
Decrease in cash and cash equivalents (1,914) (1,304)
Cash and cash equivalents at beginning of period 14,429 8,380
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 12,515 $ 7,076
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
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<PAGE> 5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SOUTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARY
September 30, 1995
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 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, 1994.
NOTE B -- ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses for the nine months ended September
30 were as follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Balance at January 1 $1,497,742 $1,364,452
Provision for loan losses 177,000 135,000
Loans charged-off (92,736) (123,986)
Recoveries 71,825 81,916
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Net charge-offs (20,911) (42,070)
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Balance at September 30 $1,653,831 $1,457,382
========== ==========
</TABLE>
The aggregate balance of nonaccrual loans totaled $559,000 and $171,000 at
September 30, 1995 and 1994, respectively. Loans renegotiated to provide a
reduction or deferral of interest or principal because of deterioration in the
financial position of the borrower totaled $139,000 and $150,000 at September
30, 1995 and 1994, respectively.
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<PAGE> 6
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
1995. A shift has occurred between non-interest bearing deposits and interest
bearing deposits with non-interest bearing decreasing by 11.3%.
Loans have increased 3.3% during the first nine months of 1995. The loan growth
occurred in both commercial and consumer loans and is the result of seasonal
commercial borrowings, increased commercial loan demand and increased consumer
purchases. Loan growth occurred as a result of a decline in cash and due from
banks and federal funds sold, rather than from deposit growth. Historically,
the Company has experienced a decline in commercial loans during the fourth
quarter as seasonal borrowings are reduced.
Investment securities have remainded fairly steady during the first nine months
of 1995. This is consistent with the steady deposit base.
The Company has committed to approximately $1,000,000 in capital expenditures
related to the renovation of a building purchased for a new branch. It is
anticipated that this branch, which is a consumer lending center, will be
opened in the fourth quarter of 1995.
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.
The following table summarizes the Company's capital ratios as of September 30,
1995:
Tier 1 risk-based capital ratio 14.32%
Total risk-based capital ratio 15.61%
Leverage ratio 9.90%
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<PAGE> 7
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations--Continued
The table above indicates that the Company's capital ratios are above the
regulatory minimum requirements.
All per share amounts in the accompanying financial statements have been
restated for a 2:1 stock split in the third quarter of 1995.
RESULTS OF OPERATIONS
Net Interest Income
Net interest income increased by $249,000 and $1,108,000 for the three and nine
month periods ended September 30, 1995 compared to the same periods in 1994.
This increase is due to an improvement in net interest margin. Loan interest
rates have risen at a faster pace than deposit rates, thus causing the net
interest margin to rise.
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 $42,000 for the nine month period
ended September 30, 1995 compared to the same period in 1994. This increase
occurred in order to account for the risk associated with the increase in
outstanding loans. 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, 1995.
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 $21,000 and $48,000 during the three and nine month periods ended
September 30, 1995 compared to the same periods in 1994. This increase is due
to additional trust income, as a result of increased trust assets, and the
receipt of life insurance proceeds.
Non-Interest Expense
Non-interest expense increased by $176,000 and $473,000 for the three and nine
month periods ended September 30, 1995 compared to the same periods in 1994.
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,
increased postage costs and increased office supply costs due to recent paper
price increases.
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<PAGE> 8
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations--Continued
Contingent Liabilities
As discussed in the 1994 Annual Report to Shareholders, the Michigan Department
of Environmental Quality (MDEQ), formerly the Michigan Department of Natural
Resources, notified the Bank in December 1993 that it is considered a
potentially responsible party ("PRP") with respect to the groundwater
contamination of the Residential Wells of the Village of Tekonsha. Recent
changes adopted in June 1995 to the Natural Resources and Environmental
Protection Act have modified the liability standards for sites of environmental
contamination. Based on this amendment, the MDEQ has notified the Bank that it
is no longer considered a PRP.
As discussed in the 1994 Annual Report, the Company has agreed to indemnify
Jerry L. Towns, chief executive officer and a director of the Company, against
any loss he may incur in litigation involving Community Assets
Management, Inc. (CAM) as a result of his being a director of CAM. There has
been no change in the status of this suit since December 31, 1994 and the
Company has assessed that the amount of any loss cannot be reasonably
estimated.
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<PAGE> 9
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 March 20, 1995. At the meeting the following
individuals were elected to serve as directors until the next annual
shareholders meeting: Richard Bettinger; James Briskey; William E. Galliers;
James T. Grohalski; Nolan E. Hooker; James E. Koss; James J. Morrison; Harvey
B. Randall; Jane L. Randall; Freeman E. Riddle; Raymond W. Smith and Jerry L.
Towns. Mr. Bettinger served as a director until his death on April 2, 1995.
Shareholders also approved an amendment to the Articles of Incorporation to
increase the number of authorized shares from 800,000 to 2,000,000.
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 1995.
c. Exhibit 27 - Financial Data Schedule
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.
-------------------------------
(Registrant)
- - ---------------- -------------------------------
Date Jerry L. Towns, President and
Chief Executive Officer
- - ----------------- -------------------------------
Date James T. Grohalski, Executive
Vice-President (Principal
Financial and Accounting
Officer)
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<PAGE> 10
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION PAGE
- - ------- ----------- ----
<S> <C> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) THE
CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF INCOME FILED AS PART OF
THE QUARTERLY REPORT ON FORM 10-Q INCOME FILED AS PART OF THE QUARTERLY REPORT
ON FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (B) QUARTERLY
REPORT ON FORM 10-Q
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JUL-01-1995
<PERIOD-END> SEP-30-1995
<CASH> 12515
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 14552
<INVESTMENTS-CARRYING> 37227
<INVESTMENTS-MARKET> 37617
<LOANS> 124255
<ALLOWANCE> 1654
<TOTAL-ASSETS> 197310
<DEPOSITS> 173696
<SHORT-TERM> 0
<LIABILITIES-OTHER> 2371
<LONG-TERM> 1000
<COMMON> 2326
0
0
<OTHER-SE> 17917
<TOTAL-LIABILITIES-AND-EQUITY> 197310
<INTEREST-LOAN> 8899
<INTEREST-INVEST> 2480
<INTEREST-OTHER> 101
<INTEREST-TOTAL> 11480
<INTEREST-DEPOSIT> 4540
<INTEREST-EXPENSE> 4718
<INTEREST-INCOME-NET> 6762
<LOAN-LOSSES> 177
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 5153
<INCOME-PRETAX> 2571
<INCOME-PRE-EXTRAORDINARY> 2571
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1991
<EPS-PRIMARY> 2.26
<EPS-DILUTED> 2.26
<YIELD-ACTUAL> 5.12
<LOANS-NON> 559
<LOANS-PAST> 291
<LOANS-TROUBLED> 139
<LOANS-PROBLEM> 2635
<ALLOWANCE-OPEN> 1498
<CHARGE-OFFS> 93
<RECOVERIES> 72
<ALLOWANCE-CLOSE> 1654
<ALLOWANCE-DOMESTIC> 591
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1063
</TABLE>
