<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 June 30, 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 Identification
incorporation or organization) Number)
51 West Pearl Street, Coldwater, Michigan 49036
- ----------------------------------------- -----
(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 - 1,872,677 shares at July 31, 1998
- -----------------------------------------------------------------
<PAGE> 2
CONDENSED CONSOLIDATED BALANCE SHEETS
SOUTHERN MICHIGAN BANCORP, INC AND SUBSIDIARY
<TABLE>
<CAPTION>
June 30 December 31
1998 1997
------------------------------------
(Unaudited) (A)
(In thousands)
<S> <C> <C>
ASSETS
Cash and due from banks $17,265 $16,848
Federal funds sold 3,500 4,500
Investment securities available-for-sale 22,748 12,853
Investment securities held to maturity (market value of $32,345 in 1998
and $32,572 in 1997) 32,028 32,221
Loans 161,907 158,741
Less allowance for loan losses (1,982) (1,863)
------------------------------------
159,925 156,878
Premises and equipment 6,187 5,588
Other assets 10,079 9,643
------------------------------------
TOTAL ASSETS $251,732 $238,531
====================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-interest bearing $33,485 $30,923
Interest bearing 185,916 176,142
------------------------------------
219,401 207,065
Accounts payable and other liabilities 2,719 2,977
Other long-term borrowings 5,000 3,000
------------------------------------
TOTAL LIABILITIES 227,120 213,042
Common stock subject to repurchase obligation in ESOP 6,620 4,899
Shareholders' equity:
Preferred stock, 100,000 shares authorized
Common stock, $2.50 par value:
Authorized--4,000,000 shares
Outstanding--1,722,229 shares (1997-1,772,839) 4,306 4,432
Capital surplus (deficit) (1,729) 1,914
Retained earnings 15,397 14,218
Net unrealized appreciation on available-for-sale securities
net of tax of $9 (1997--$13) 18 26
------------------------------------
TOTAL SHAREHOLDERS' EQUITY 17,992 20,590
------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $251,732 $238,531
====================================
</TABLE>
(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.
-2-
<PAGE> 3
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE
INCOME (UNAUDITED)
SOUTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARY
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
1998 1997 1998 1997
-----------------------------------------------------------------------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Interest income:
Loans, including fees $4,069 $3,963 $8,020 $7,668
Investment securities:
Taxable 537 584 1,074 1,209
Tax exempt 254 201 497 423
Other 83 18 119 24
-----------------------------------------------------------------------
Total interest income 4,943 4,766 9,710 9,324
Interest expense:
Deposits 1,861 1,793 3,682 3,585
Other 79 41 163 92
-----------------------------------------------------------------------
Total interest expense 1,940 1,834 3,845 3,677
-----------------------------------------------------------------------
NET INTEREST INCOME 3,003 2,932 5,865 5,647
Provision for loan losses 150 75 300 150
-----------------------------------------------------------------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 2,853 2,857 5,565 5,497
Non-interest income:
Service charges on deposit accounts 247 211 460 412
Trust department 126 155 245 291
Security gains 5 5
Secondary market gains 250 104 403 131
Other 215 210 292 275
-----------------------------------------------------------------------
838 685 1,400 1,114
-----------------------------------------------------------------------
3,691 3,542 6,965 6,611
Non-interest expenses:
Salaries and benefits 1,156 1,094 2,266 2,115
Occupancy 173 169 354 345
Equipment 188 181 375 369
Other 845 871 1,616 1,605
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2,362 2,315 4,611 4,434
-----------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 1,329 1,227 2,354 2,177
Federal income taxes 338 333 606 540
-----------------------------------------------------------------------
NET INCOME 991 894 1,748 1,637
Other comprehensive income, net of tax:
Change in unrealized gains on securities 8 69 (8) (37)
-----------------------------------------------------------------------
COMPREHENSIVE INCOME $999 $963 $1,740 $1,600
=======================================================================
Basic and Diluted Earnings Per Share $0.52 $0.47 $0.91 $0.86
=======================================================================
Dividends Declared Per Share $0.15 $0.12 $0.30 $0.25
=======================================================================
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE> 4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SOUTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARY
<TABLE>
<CAPTION>
Six Months Ended
June 30
1998 1997
---------------------------------------
(In thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $1,748 $1,637
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 300 150
Provision for depreciation 235 236
Increase in other assets (432) (136)
Decrease in accounts payable and other liabilities (156) (194)
---------------------------------------
Net cash provided by operating activities 1,695 1,693
INVESTING ACTIVITIES
Proceeds from maturity of investment securities 6,971 9,472
Purchases of investment securities (16,685) (1,701)
Decrease in federal funds sold 1,000
Net increase in loans (3,347) (8,818)
Net increase in premises and equipment (834) (468)
---------------------------------------
Net cash used in investing activities (12,895) (1,515)
FINANCING ACTIVITIES
Net increase (decrease) in deposits 12,336 (5,295)
Increase in federal funds purchased 6,900
Increase in other borrowings 2,000
Common stock issued 251 190
Common stock repurchased and retired (2,299)
Cash dividends (671) (800)
---------------------------------------
Net cash provided by financing activities 11,617 995
---------------------------------------
Increase in cash and cash equivalents 417 1,173
Cash and cash equivalents at beginning of period 16,848 13,520
---------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $17,265 $14,693
=======================================
</TABLE>
See notes to condensed consolidated financial statements.
-4-
<PAGE> 5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SOUTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARY
June 30, 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 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, 1997.
-5-
<PAGE> 6
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
FINANCIAL CONDITION
Total deposits have increased by 6.0% during the first six months of 1998. A
complete overhaul of the Bank's personal checking accounts at the beginning of
1998 allowed the Bank to increase the number of deposit accounts. The Bank
experienced an increase not only in demand deposit accounts, but in other
deposit accounts as well as customers opened secondary accounts to supplement
their new checking accounts. Approximately $4,000,000 of the increase represents
short-term deposits which are likely to be withdrawn prior to the end of 1998.
Loans have increased by 2.0% in the first six 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 June 30, 1998.
Investment securities increased by 21.5% during the first six months of 1998.
Funds received from increased Federal Home Loan Bank borrowings and funds
transferred 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.
<PAGE> 7
The following table summarizes the Company's capital
ratios as of June 30, 1998:
Tier 1 risk-based capital ratio 12.49%
Total risk-based capital ratio 13.56%
Leverage ratio 9.54%
The above table indicates that the Company's capital ratios are above the
regulatory minimum requirements.
The Company repurchased and retired 51,000 shares of outstanding common stock
during the second quarter of 1998.
RESULTS OF OPERATIONS
Net Interest Income
Net interest income increased by $171,000 and $218,000 for the three and six
month periods ended June 30, 1998 compared to the same periods 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 and $150,000 for the three
and six month periods ended June 30,1998 compared to the same periods 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
June 30, 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 $153,000 and $286,000 for the three and six month periods ended
June 30, 1998 compared to the same periods in 1997. This increase is due
primarily to gains recognized on the sale of real estate mortgage loans. In
order to reduce the risk
<PAGE> 8
associated with changing interest rates, the Bank regularly sells fixed rate
real estate mortgage loans on the secondary market. The Bank recognizes a profit
at the time of sale and receives a fee in order to service the loans. During
this period of relatively low interest rates, the Bank has generated large
volumes of fixed rate mortgage loans.
Non-interest Expense
Non-interest expenses increased by $47,000 and $177,000 for the three and six
month periods ended June 30, 1998 compared to the same periods 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 account 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
<PAGE> 9
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 June 30, 1998.
The Company had no derivative financial instruments, or trading portfolio, 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.
<PAGE> 10
<TABLE>
<CAPTION>
Principal Amount Maturing in:
----------------------------------------------------------------------------------------
06/30/99 06/30/00 06/30/01 06/30/02 06/30/03
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Rate sensitive assets:
Fixed interest rate loans $9,658 $5,748 $9,697 $12,943 $10,134
Average interest rate 9.43% 10.00% 10.13% 9.95% 9.95%
Variable interest rate loans 29,117 1,747 2,502 4,512 4,900
Average interest rate 9.55% 9.37% 9.00% 8.86% 8.90%
Fixed interest rate securities 19,211 8,990 11,206 5,344 3,249
Average interest rate 5.70% 5.69% 5.68% 5.65% 5.71%
Other interest bearing assets 3,500
Average interest rate 5.43%
Rate sensitive liabilities:
Interest bearing demand deposits $75,450
Average interest rate 3.16%
Savings deposits 35,972 4,041 1,481 730 0
Average interest rate 2.76% 5.60% 5.50% 5.40%
Time deposits 49,268 8,935 6,754 803 0
Average interest rate 5.62% 5.40% 5.50% 5.48%
Fixed interest rate borrowings 5,000
Average interest rate 5.47%
</TABLE>
<TABLE>
<CAPTION>
Fair
Principal Amount Maturing in: Value
--------------------------------
Thereafter Total 06/30/98
---------------------------------------------
<S> <C> <C> <C>
Rate sensitive assets:
Fixed interest rate loans $11,461 $59,641 $60,663
Average interest rate 9.93% 9.92%
Variable interest rate loans 59,489 102,267 102,267
Average interest rate 8.97% 9.31%
Fixed interest rate securities 6,776 54,776 55,093
Average interest rate 5.90% 5.73%
Other interest bearing assets 3,500 3,500
Average interest rate 5.43%
Rate sensitive liabilities:
Interest bearing demand deposits $ $75,450 $75,450
Average interest rate 3.21%
Savings deposits 2,482 44,706 44,706
Average interest rate 5.62% 3.32%
Time deposits 0 65,760 65,890
Average interest rate 5.47%
Fixed interest rate borrowings 5,000 5,000
Average interest rate 5.47%
</TABLE>
<PAGE> 11
PART II - OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Shareholders of Southern Michigan Bancorp, Inc. was held
on April 20, 1998 at Southern Michigan Bank & Trust. The following items were
approved by the shareholders at the Annual Meeting:
a. Amendment of the Company's Articles of Incorporation to provide for a
staggered board of directors, to provide that a Director may be removed only for
cause, to permit new Directorships to be created and filled only by the
shareholders or by the affirmative vote of not less than 80% of the Directors
then in office and to permit vacancies to be filled only by the affirmative vote
of not less than 80% of the Directors then in office.
b. Election of James P. Briskey, H. Kenneth Cole, 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 as directors.
c. Amendment of the Company's Articles of Incorporation to eliminate a provision
permitting shareholder action by less than unanimous written consent in lieu of
a meeting.
d. Amendment of the Company's Articles of Incorporation to require the
affirmative vote of the holders of not less than two-thirds of the voting stock
to alter, amend, repeal or adopt certain provisions of the Articles of
Incorporation and Bylaws, or 80% of the Directors then in office to alter,
amend, repeal or adopt certain provisions of the Bylaws.
e. Amendment of the Company's Article of Incorporation to authorize 100,000
shares of Preferred Stock.
f. Ratification of the selection of Crowe, Chizek and Company LLP as Independent
Auditors for 1998.
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 second quarter of 1998.
<PAGE> 12
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)
AUGUST 12, 1998 JERRY L. TOWNS
- --------------- --------------
Date Jerry L. Towns, President and
Chief Executive Officer
AUGUST 12, 1998 JAMES T. GROHALSKI
- --------------- ------------------
Date James T. Grohalski, Executive
Vice-President (Principal
Financial and Accounting
Officer)
<PAGE> 13
Exhibit Index
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Exhibit No. Description
- ----------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF INCOME AND
COMPREHENSIVE INCOME FILED AS PART OF THE QUARTERLY REPORT ON FORM 10-Q AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH QUARTERLY REPORT ON FORM 10-Q.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 17265
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 3500
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 22748
<INVESTMENTS-CARRYING> 32028
<INVESTMENTS-MARKET> 32345
<LOANS> 161907
<ALLOWANCE> 1982
<TOTAL-ASSETS> 251732
<DEPOSITS> 219401
<SHORT-TERM> 0
<LIABILITIES-OTHER> 9339
<LONG-TERM> 5000
0
0
<COMMON> 4306
<OTHER-SE> 13686
<TOTAL-LIABILITIES-AND-EQUITY> 251732
<INTEREST-LOAN> 8020
<INTEREST-INVEST> 1571
<INTEREST-OTHER> 119
<INTEREST-TOTAL> 9710
<INTEREST-DEPOSIT> 3682
<INTEREST-EXPENSE> 3845
<INTEREST-INCOME-NET> 5865
<LOAN-LOSSES> 300
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 4611
<INCOME-PRETAX> 2354
<INCOME-PRE-EXTRAORDINARY> 2354
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1748
<EPS-PRIMARY> .91
<EPS-DILUTED> .91
<YIELD-ACTUAL> 5.33
<LOANS-NON> 855
<LOANS-PAST> 720
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 3661
<ALLOWANCE-OPEN> 1863
<CHARGE-OFFS> 247
<RECOVERIES> 66
<ALLOWANCE-CLOSE> 1982
<ALLOWANCE-DOMESTIC> 1056
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 926
</TABLE>
