-----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, SuTo8Nj36k57EIh94bbLAcBEDSPYDbZ+MFI/GHqfo14hPiKqIrTN0ifM1PNLOEN3 ZhsgY2RmZPvCDiAMy1qhWQ== 0000950124-98-006347.txt : 19981113 0000950124-98-006347.hdr.sgml : 19981113 ACCESSION NUMBER: 0000950124-98-006347 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981112 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: 98743828 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 September 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 October 31, 1998 (including shares held by ESOP) 2 CONDENSED CONSOLIDATED BALANCE SHEETS SOUTHERN MICHIGAN BANCORP, INC AND SUBSIDIARY
September 30 December 31 1998 1997 --------------------------------------- (Unaudited) (A) (In thousands) ASSETS Cash and due from banks $17,192 $16,848 Federal funds sold 4,500 4,500 Investment securities available-for-sale 29,403 12,853 Investment securities held to maturity (market value of $29,405 in 1998 and $32,572 in 1997) 28,877 32,221 Loans 161,262 158,741 Less allowance for loan losses (1,985) (1,863) --------------------------------------- 159,277 156,878 Premises and equipment 6,969 5,588 Other assets 11,019 9,643 --------------------------------------- TOTAL ASSETS $257,237 $238,531 ======================================= LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Non-interest bearing $31,963 $30,923 Interest bearing 192,068 176,142 --------------------------------------- 224,031 207,065 Accounts payable and other liabilities 2,654 2,977 Other long-term borrowings 5,000 3,000 --------------------------------------- TOTAL LIABILITIES 231,685 213,042 Common stock subject to repurchase obligation in ESOP 6,481 4,899 Shareholders' equity: Preferred stock, 100,000 shares authorized Common stock, $2.50 par value: Authorized--4,000,000 shares Outstanding--1,721,950 shares (1997-1,772,839) 4,305 4,432 Capital surplus (deficit) (1,589) 1,914 Retained earnings 16,079 14,218 Net unrealized appreciation on available-for-sale securities net of tax of $144 (1997--$13) 276 26 --------------------------------------- TOTAL SHAREHOLDERS' EQUITY 19,071 20,590 --------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $257,237 $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 Nine Months Ended September 30 September 30 1998 1997 1998 1997 ----------------------------------------------------------------------- (In thousands, except per share amounts) Interest income: Loans, including fees $4,070 $4,085 $12,090 $11,753 Investment securities: Taxable 606 510 1,680 1,719 Tax exempt 297 213 794 636 Other 95 8 214 32 ----------------------------------------------------------------------- Total interest income 5,068 4,816 14,778 14,140 Interest expense: Deposits 1,993 1,865 5,675 5,450 Other 128 43 291 135 ----------------------------------------------------------------------- Total interest expense 2,121 1,908 5,966 5,585 ----------------------------------------------------------------------- NET INTEREST INCOME 2,947 2,908 8,812 8,555 Provision for loan losses 150 145 450 295 ----------------------------------------------------------------------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 2,797 2,763 8,362 8,260 Non-interest income: Service charges on deposit accounts 252 215 712 627 Trust department 132 125 377 416 Security gains 0 5 Secondary market gains 168 34 571 165 Other 185 162 477 462 ----------------------------------------------------------------------- 737 536 2,137 1,675 ----------------------------------------------------------------------- 3,534 3,299 10,499 9,935 Non-interest expenses: Salaries and benefits 996 1,067 3,262 3,182 Occupancy 186 186 540 531 Equipment 204 188 579 557 Other 826 772 2,442 2,402 ----------------------------------------------------------------------- 2,212 2,213 6,823 6,672 ----------------------------------------------------------------------- INCOME BEFORE INCOME TAXES 1,322 1,086 3,676 3,263 Federal income taxes 341 277 947 817 ----------------------------------------------------------------------- NET INCOME 981 809 2,729 2,446 Other comprehensive income, net of tax: Change in unrealized gains on securities 258 32 250 (5) ----------------------------------------------------------------------- COMPREHENSIVE INCOME $1,239 $841 $2,979 $2,441 ======================================================================= Basic and Diluted Earnings Per Share $0.52 $0.42 $1.43 $1.28 ======================================================================= Dividends Declared Per Share $0.16 $0.13 $0.46 $0.38 =======================================================================
See notes to condensed consolidated financial statements. -3- 4 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) SOUTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARY
Nine Months Ended September 30 1998 1997 --------------------------------------- (In thousands) OPERATING ACTIVITIES Net income $2,729 $2,446 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 450 295 Provision for depreciation 361 380 Increase in other assets (1,507) (500) Decrease in accounts payable and other liabilities (239) (200) --------------------------------------- Net cash provided by operating activities 1,794 2,421 INVESTING ACTIVITIES Proceeds from maturity of investment securities 11,784 12,737 Purchases of investment securities (24,609) (3,326) Net increase in loans (2,849) (9,159) Net increase in premises and equipment (1,742) (614) --------------------------------------- Net cash used in investing activities (17,416) (362) FINANCING ACTIVITIES Net increase (decrease) in deposits 16,966 (6,535) Increase in federal funds purchased 1,500 Increase in other borrowings 2,000 Common stock issued 251 290 Common stock repurchased and retired (2,299) Cash dividends (952) (801) --------------------------------------- Net cash provided by financing activities 15,966 (5,546) --------------------------------------- Increase in cash and cash equivalents 344 (3,487) Cash and cash equivalents at beginning of period 16,848 13,520 --------------------------------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $17,192 $10,033 =======================================
See notes to condensed consolidated financial statements. -4- 5 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SOUTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARY September 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 8.2% during the first nine 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. Also contributing to the increase in deposits is the recent turmoil in the stock market. An unknown amount of deposits may leave the Bank's savings and money market accounts when customers regain confidence in the stock market. Loans have increased by 1.6% in the first nine 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 and a healthy economy. 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 September 30, 1998. Investment securities increased by 29.3% during the first nine 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 Bank opened a new branch office in Hillsdale, Michigan in October 1998 at an approximate cost of $1,700,000. There were no significant fixed asset commitments as of September 30, 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 interest in equity accounts of consolidated subsidiaries less goodwill. -6- 7 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations--Continued 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. The following table summarizes the Company's capital ratios as of September 30, 1998: Tier 1 risk-based capital ratio 12.71% Total risk-based capital ratio 13.76% Leverage ratio 9.39% The above table indicates that the Company's capital ratios are above the regulatory minimum requirements. During the nine month period ended September 30, 1998, the Company has repurchased and retired 51,000 shares of outstanding common stock. RESULTS OF OPERATIONS Net Interest Income - ------------------- Net interest income increased by $39,000 and $257,000 for the three and nine month periods ended September 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. -7- 8 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations--Continued The provision for loan losses increased by $5,000 and $155,000 for the three and nine month periods ended September 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 September 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 $201,000 and $462,000 for the three and nine month periods ended September 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 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 decreased by $1,000 the three month period ended September 30, 1998 compared to the same period in 1997 as the result of fewer employees during the third quarter of 1998 compared to the third quarter of 1997. It is anticipated that most of the open positions will be filled in the fourth quarter of 1998 and that the number of employees at the end of 1998 will be comparable to 1997. Non-interest expenses increased by $151,000 during the nine month period ended September 30, 1998 compared to the same period in 1997. The primary expense categories that increased in 1998 were salaries and benefits, advertising expenditures and mortgage servicing amortization. Salaries and benefits increased due to a higher average number of employees for year to date 1998 compared to 1997 and normal cost of living adjustments. Advertising expenditures increased as the Bank revamped its checking account products. Mortgage servicing amortization increased as the number of real estate mortgage loans sold to the secondary market increased. -8- 9 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations--Continued Year 2000 - --------- The Company has developed a plan to assess Year 2000 issues. As part of the plan, the Company has identified all critical business processes and established a priority schedule for assessment of each process. The Company is in the process of testing hardware and software for Year 2000 compliance and expects to complete the testing of critical business systems by December 31, 1998. The Company has initiated formal communications with all of its critical vendors and service providers to determine the extent to which the Company is vunerable to any failure of those third parties to remedy their own Year 2000 issues. However, there can be no guarantee that the systems of other companies on which the Company's systems rely will be remedied in a timely manner or that there will be no adverse effect on the Company's systems. Critical companies include power companies and phone systems. Therefore, the Company could possibly be negatively impacted to the extent that other entities not affiliated with the Company are unsuccessful in properly addressing this issue. The Company expects to have vendor and service provider reports on their Year 2000 issues by March 1999. Once the testing of critical business systems and vendor communications phases are complete, the Company will implement contingency plans as necessary. The contingency plans are expected to be implemented and tested by September 1999. The Company will incur remediation and testing costs relating to Year 2000 issues through the Year 2000, but does not anticipate that material incremental costs will be incurred in any single period. The costs of the project and the date on which the Company plans to complete Year 2000 modifications are based upon management's best estimates. However, there can be no guarantee that these estimates will be achieved and actual results could differ materially from those anticipated. 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. -9- 10 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK--Continued 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 September 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- 11
Fair Principal Amount Maturing in: Value ------------------------------------------------------------------------------ 09/30/99 09/30/00 09/30/01 09/30/02 09/30/03 Thereafter Total 09/30/98 --------------------------------------------------------------------------------------- Rate sensitive assets: Fixed interest rate loans $10,473 $6,594 $7,754 $11,570 $10,689 $11,627 $58,707 $63,044 Average interest rate 9.85% 10.67% 10.12% 9.96% 9.80% 9.93% 10.05% Variable interest rate loans 78,848 8,799 5,441 1,677 5,281 2,509 102,555 102,555 Average interest rate 8.94% 9.01% 9.04% 9.36% 9.11% 8.95% 9.05% Fixed interest rate securities 21,038 10,433 6,076 5,675 5,939 9,119 58,280 58,808 Average interest rate 5.99% 6.08% 6.15% 6.12% 6.11% 8.38% 6.61% Other interest bearing assets 4,500 4,500 4,500 Average interest rate 5.46% 5.46% Rate sensitive liabilities: Interest bearing demand deposits $79,363 $79,363 $79,363 Average interest rate 2.90% 2.90% Savings deposits 36,268 3,271 1,345 584 0 3,680 45,148 45,148 Average interest rate 2.30% 5.29% 5.31% 5.30% 5.31% 3.29% Time deposits 48,683 11,099 6,034 1,741 0 0 67,557 67,920 Average interest rate 5.39% 5.59% 5.77% 5.84% 5.50% Fixed interest rate borrowings 5,000 5,000 5,000 Average interest rate 5.47% 5.47%
-11- 12 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 third 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. ------------------------------- (Registrant) NOVEMBER 12, 1998 /S/ JERRY L. TOWNS - ----------------- ------------------ Date Jerry L. Towns, President and Chief Executive Officer NOVEMBER 12, 1998 /S/ JAMES T. GROHALSKI - ----------------- ----------------------- Date James T. Grohalski, Executive Vice-President (Principal Financial and Accounting Officer) -12- 13 INDEX TO EXHIBITS EXHIBIT NO. DESCRIPTION - ------- --- ----------- EX. 27 Financial Data Schedule EX-27 2 FINANCIAL DATA SCHEDULE
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATE 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. 1,000 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 17,192 0 4,500 0 29,403 28,877 29,405 161,262 1,985 257,237 224,031 0 9,135 5,000 0 0 4,305 14,766 257,237 12,090 2,474 214 14,778 5,675 5,996 8,812 450 0 6,823 3,676 3,676 0 0 2,729 1.43 1.43 5.24 651 658 0 3,466 1,863 436 108 1,985 1,050 0 935
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