-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SJILv9aA/rPzgdpDfaejHYAfrLTGgRZ+yY8lP61llPqCMxFwBuryg/D1QR5Atk2X tIld4EregPUztfMkwn4lmg== 0000950124-98-004345.txt : 19980813 0000950124-98-004345.hdr.sgml : 19980813 ACCESSION NUMBER: 0000950124-98-004345 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980812 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SOUTHERN MICHIGAN BANCORP INC CENTRAL INDEX KEY: 0000703699 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 382407501 STATE OF INCORPORATION: MI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 002-78178 FILM NUMBER: 98684060 BUSINESS ADDRESS: STREET 1: 51 W PEARL ST CITY: COLDWATER STATE: MI ZIP: 49036 BUSINESS PHONE: 5172795500 10-Q 1 FORM 10-Q 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 ------------- ------- Southern Michigan Bancorp, Inc. ------------------------------- (Exact name of registrant as specified in its charter) Michigan 38-2407501 -------- ---------- (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 ------------- 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 - ----------------------------------------------------------------- 2 CONDENSED CONSOLIDATED BALANCE SHEETS SOUTHERN MICHIGAN BANCORP, INC AND SUBSIDIARY
June 30 December 31 1998 1997 ------------------------------------ (Unaudited) (A) (In thousands) 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 ====================================
(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- 3 CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED) SOUTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARY
Three Months Ended Six Months Ended June 30 June 30 1998 1997 1998 1997 ----------------------------------------------------------------------- (In thousands, except per share amounts) 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 ----------------------------------------------------------------------- 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 =======================================================================
See notes to condensed consolidated financial statements. 4 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) SOUTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARY
Six Months Ended June 30 1998 1997 --------------------------------------- (In thousands) 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 =======================================
See notes to condensed consolidated financial statements. -4- 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- 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. 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 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 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. 10
Principal Amount Maturing in: ---------------------------------------------------------------------------------------- 06/30/99 06/30/00 06/30/01 06/30/02 06/30/03 ---------------------------------------------------------------------------------------- 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%
Fair Principal Amount Maturing in: Value -------------------------------- Thereafter Total 06/30/98 --------------------------------------------- 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%
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. 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) 13 Exhibit Index ------------- Exhibit No. Description - ----------- ----------- 27 Financial Data Schedule EX-27 2 EXHIBIT 27
9 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. 1000 6-MOS DEC-31-1998 JAN-01-1998 JUN-30-1998 17265 0 3500 0 22748 32028 32345 161907 1982 251732 219401 0 9339 5000 0 0 4306 13686 251732 8020 1571 119 9710 3682 3845 5865 300 0 4611 2354 2354 0 0 1748 .91 .91 5.33 855 720 0 3661 1863 247 66 1982 1056 0 926
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