<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [Fee Required] Special report which contains only financial
statements pursuant to Exchange Act Rule 15(d)-2
For the fiscal year ended December 31, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [Fee required]
For the transition period from _________________ to _____________________
Commission file number 0-21292
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Wisconsin 39-1413328
- --------------------------------------------- ---------------------------------------
(State or other jurisdiction of incorporation (I.R.S. Employer Identification Number)
or organization)
</TABLE>
573 West Lincoln Avenue
Milwaukee, Wisconsin 53207
--------------------------
(Address of principal executive office)
Registrant's telephone number, including area code: (414) 649-2073
Securities registered pursuant to Section 12(b) of the Act: Not Applicable
Securities registered pursuant to section 12(g) of the Act:
COMMON STOCK, PAR VALUE $1.00 PER SHARE
---------------------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required 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 by check mark if disclosure of delinquent filers pursuant to item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this form 10-K [ ]
As of March 1, 1997, 860,582 shares of Common Stock were outstanding, and the
aggregate market value of the shares (based upon the closing price) held by non
affiliates was approximately $21,503,000.
<PAGE> 2
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC.
*****
ANNUAL REPORT ON FORM 10-K
FOR FISCAL YEAR ENDED DECEMBER 31, 1996
PART I Page
Item 1. Business 3
Item 2. Properties 5
Item 3. Legal Proceedings 5
Item 4. Submission of Matters to a Vote of Security Holders 6
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholders Matters 6
Item 6. Selected Financial Data 7
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Item 8. Financial Statements and Supplementary Data 18
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 18
PART III
Item 10. Directors and Executive Officers of the Registrant 18
Item 11. Executive Compensation 18
Item 12 Security Ownership of Certain Beneficial Owners
and Management 18
Item 13. Certain Relationships and Related Transactions 18
PART IV
Item 14. Exhibits, Financial Statements Schedules and Reports
on Form 8-K 18
SIGNATURES 19
2
<PAGE> 3
PART I
ITEM 1. BUSINESS
GENERAL
Merchants and Manufacturers Bancorporation, Inc. (the Corporation), is a
registered multi-bank holding company under the Bank Holding Company Act of
1956, as amended, and a savings bank holding company under the Home Owners'
Loan Act of 1933, as amended. The Corporation was organized in 1982, and in
1983 and 1984 acquired all of the outstanding stock of Lincoln State Bank,
Milwaukee, Wisconsin and Franklin State Bank, Franklin, Wisconsin,
respectively. In 1993, the Corporation acquired all of the outstanding shares
of Lincoln Savings Bank, S.A., Milwaukee, Wisconsin in a business combination
accounted for as a pooling-of-interests. Lincoln Savings Bank, S.A. converted
from a mutual to stock form of organization and simultaneously merged with the
Corporation. In connection with the conversion, the Corporation sold 330,625
shares of its common stock in a subscription and community offering. Gross
proceeds from the stock sale amounted to $6,612,500. The net proceeds, after
conversion costs, were used to inject additional capital into Lincoln Savings
Bank, to repay short-term borrowings of the Corporation and for general
working-capital purposes. Lincoln State Bank and Franklin State Bank are
commercial banks chartered under the Wisconsin Banking Statutes; Lincoln
Savings Bank, S.A. is a Wisconsin chartered savings bank.
The Corporation operates ten banking facilities in Milwaukee and Waukesha
counties. In addition to its subsidiary banks (Lincoln State Bank, Franklin
State Bank and Lincoln Savings Bank, S.A.), the Corporation owns two non-bank
subsidiaries, the Lincoln Neighborhood Redevelopment Corporation, which was
organized for the purpose of redeveloping and rejuvenating certain areas
located primarily on the near south side of Milwaukee, and M&M Services, Inc.,
which was formed in 1994 to provide operational services to the Corporation's
subsidiary banks.
PRODUCTS AND SERVICES
Through the banking subsidiaries, the Corporation provides a broad range
of services to individual and commercial customers. These services include
accepting demand, savings, and time deposits, including regular checking
accounts, NOW accounts, money market accounts, certificates of deposit,
individual retirement accounts, and club accounts. The subsidiary banks also
make secured and unsecured commercial, mortgage, construction, and consumer
term loans on both a fixed and variable rate basis. Historically, the terms on
these loans range from one month to five years and are retained in the Bank's
portfolios. The subsidiary banks also provide lines of credit to commercial
borrowers and to individuals through home equity loans.
COMPETITION
The subsidiary banks primarily serve the southern half of Milwaukee County
and the southeastern portion of Waukesha County, including suburbs located to
the south and west of the City of Milwaukee. There are presently in excess of
one hundred other financial institutions in the primary service area that
directly compete with Lincoln State Bank, Franklin State Bank and Lincoln
Savings Bank, S.A. In addition to competing with other commercial banks, the
subsidiaries compete with savings and loan associations, credit unions,
small-loan companies, insurance companies, investment banking firms and large
retail companies. The principal methods of competition include interest rates
paid on deposits and charged on loans, personal contacts and efforts to obtain
deposits and loans, types and quality of services provided and convenience of
the locations. Many of the Corporation's competitors are larger and have
significantly greater financial resources than the Corporation and its
subsidiaries.
EMPLOYEES
At December 31, 1996, the Corporation and the subsidiary banks employed
138 full-time and 56 part-time employees. The Corporation provides a wide
range of benefits to employees, including educational activities, and considers
its employee relations to be excellent. The Corporation conducts extensive
training programs in order to enhance job-related knowledge and skills of its
people and to train its employees with a sales-orientated approach to
customers. Eligible employees participate in a 401k plan as well as group life
and major medical insurance programs.
THE BANKS AND OTHER SUBSIDIARIES
At or for the year ended December 31, 1996, the subsidiary banks (each
consolidated with its appropriate subsidiaries; see "Other Subsidiaries") had
total assets, total loans, total deposits, stockholder's equity, net income,
and return on assets as follows (dollars in thousands):
<TABLE>
<CAPTION>
LINCOLN STATE BANK LINCOLN SAVINGS BANK FRANKLIN STATE BANK
<S> <C> <C> <C>
Total assets $130,015 $102,712 $33,563
Total loans 97,829 67,054 24,932
Total deposits 115,653 88,902 30,923
Stockholders' equity 10,666 10,119 2,452
Net income 1,463 604 347
Return on average assets 1.19% 0.58% 1.06%
</TABLE>
3
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LINCOLN STATE BANK
Lincoln State Bank was organized as a state banking association under the
laws of the State of Wisconsin in 1919. It operates full service branch
offices in the southeastern Wisconsin communities of Muskego, New Berlin,
Brookfield and Pewaukee. In addition it operates six limited hours facilities
in Milwaukee County. It is engaged in the general commercial and consumer
banking business and provides full-service banking to individuals and
businesses, including checking and savings accounts, commercial loans, consumer
loans, real estate loans, safe deposit facilities, transmitting of funds, and
such other banking services as are usual and customary for commercial banks.
At December 31, 1996, Lincoln State Bank comprised 48.6% of the consolidated
assets of the Corporation.
FRANKLIN STATE BANK
Franklin State Bank was organized as a state banking association under the
laws of the State of Wisconsin in 1982. Its office is located in Franklin,
Wisconsin. It is engaged in the general commercial and consumer banking
business and provides full-service banking to individuals and businesses,
including checking and savings accounts, commercial loans, consumer loans, real
estate loans, safe deposit facilities, transmitting of funds, and such other
banking services as are usual and customary for commercial banks. At December
31, 1996, Franklin State Bank comprised 12.5% of the consolidated assets of the
Corporation.
LINCOLN SAVINGS BANK
Lincoln Savings Bank was organized as a state chartered mutual savings and
loan association under the laws of the State of Wisconsin in 1910. In April
1993, it converted from the mutual to stock form of organization, and all of
the shares of stock issued by the converted association were acquired by the
Corporation (See Business of the Corporation - General and Recent Acquisition).
Its principal office is presently located in Milwaukee, Wisconsin. It also
operates a branch office in Milwaukee, Wisconsin. Lincoln Savings Bank's
principal business consists of attracting deposits from the general public, and
investing such funds in securities, including mortgage-backed securities, and
mortgage loans, principally to finance the purchase or construction of
residential dwellings and, to a lesser extent, to finance the purchase or
construction of multi-family properties. Lincoln Savings Bank also originates
consumer loans and commercial loans. At December 31, 1996, Lincoln Savings
Bank comprised 38.4% of the consolidated assets of the Corporation.
LINCOLN NEIGHBORHOOD REDEVELOPMENT CORPORATION
The Lincoln Neighborhood Redevelopment Corporation was formed in June of
1988 and is a wholly owned subsidiary of the Corporation. The Redevelopment
Corporation was established to redevelop and rejuvenate certain areas located
on the south-side of Milwaukee by, among other things, arresting decay and
deterioration, working with local businesses to keep commercial areas strong
and attractive, pursuing means to preserve and create jobs, encouraging
appropriate land-use, involving community residents in economic planning and
retaining and attracting businesses. As of December 31, 1996, Lincoln
Neighborhood Redevelopment Corporation had assets of $539,000, liabilities of
$463,000 and equity of $76,000.
M&M SERVICES, INC.
M&M Services was formed in January of 1994 and is a wholly owned
subsidiary of the Corporation. The company provides operational activities to
the Corporation's subsidiary banks. These activities include: human resources,
auditing, marketing, financial analysis, loan document preparation, loan credit
analysis and check processing. Prior to 1994 these services were provided by
employees of Merchants and Manufacturers Bancorporation.
OTHER SUBSIDIARIES
Lincoln State Bank and Lincoln Savings Bank each have a wholly owned
subsidiary. In 1991 an investment subsidiary known as M&M - Lincoln Investment
Corporation was formed to manage the majority of Lincoln State Bank's
investment portfolio and to enhance the overall return of the portfolio. The
subsidiary received a capital contribution of approximately $13 million of
mortgage-backed and other investment securities from Lincoln State Bank in
exchange for 100% of the stock of the subsidiary. In 1995 an investment
subsidiary known as Lincoln Investment Management Corporation was formed to
manage the majority of Lincoln Savings Bank's investment portfolio and to
enhance the overall return of the portfolio. The subsidiary received a capital
contribution of approximately $21 million of mortgage-backed and other
investment securities from Lincoln Savings Bank in exchange for 100% of the
stock of the subsidiary.
SUPERVISION AND REGULATION
The operations of financial institutions, including bank companies,
commercial banks and savings banks, are highly regulated, both at federal and
state levels. Numerous statutes and regulations affect the businesses of the
Corporation and its financial service subsidiaries.
4
<PAGE> 5
The Corporation's own activities are regulated by the federal Bank Holding
Company Act (the "Act"), which requires each holding company to obtain the
prior approval of the Federal Reserve Board (the "Board") before acquiring
direct or indirect ownership or control of more than five percent of the voting
shares of any bank. The Act prohibits acquisition of shares of any bank
located outside the state in which the operations of the Corporation's banking
subsidiaries are principally conducted, unless specifically authorized by
statute of the other state. Since 1987, Wisconsin law has permitted interstate
bank acquisitions within those states in a nine-state region which have adopted
similar legislation. Laws reciprocal to the Wisconsin law have been enacted by
Illinois, Indiana, Iowa, Kentucky, Michigan, Minnesota and Ohio. A
Wisconsin-based holding company, such as the Corporation, may also acquire
banks in certain other states which expressly permit nationwide acquisitions,
with no requirement for reciprocal legislation.
The Act also prohibits, with certain exceptions for savings associations
and other entities engaged in bank related activities, acquisition of more than
five percent of the voting shares of any company (directly or through its
subsidiaries) doing business other than banking or performing services for its
subsidiaries, without prior approval of the Board. Pursuant to the Act, the
Corporation is supervised and regularly examined by the Board.
As a state chartered, SAIF-insured savings institution, Lincoln Savings
Bank is subject to extensive supervision and regulation by the Federal Deposit
Insurance Corporation (FDIC) and the Wisconsin Department of Financial
Institutions, Division of Savings Institutions. The lending activities and
other investments of Lincoln Savings Bank, S.A. must comply with certain
federal and state regulatory requirements. In addition, the FDIC and the
Wisconsin Department of Financial Institutions periodically examine Lincoln
Savings Bank, S.A. for compliance with various regulatory requirements, and the
savings bank must file reports describing its activities and financial
condition. Lincoln Savings Bank, S.A. is also subject to certain reserve
requirements promulgated by the Federal Reserve. This supervision and
regulation is intended primarily for the protection of depositors.
The commercial banks are supervised by the Office of the Commissioner of
Banking and regularly examined by that agency and the FDIC. The deposits of
each bank are insured by the Bank Insurance Fund (BIF) administered by the
FDIC.
ITEM 2. PROPERTIES
The Corporation's offices are located at 573 West Lincoln Avenue in
Milwaukee, Wisconsin. At that location, the Corporation maintains its
corporate operations and personnel.
The main office of Lincoln State Bank is at 2266 South 13th Street,
Milwaukee, Wisconsin. The South 13th Street location consists of a one-story
building containing approximately 11,000 square feet. An adjacent building of
approximately 750 square feet contains the two walk-up facilities operated by
Lincoln State Bank. In addition, there are three drive-up facilities, and the
parking lot provides space for 51 cars. One branch of Lincoln State Bank is
located in a one-story, 1,700 square foot building at 13500 Janesville Road,
Muskego, Wisconsin. The Muskego branch has three drive-up windows and parking
facilities for 25 vehicles. Another branch of Lincoln State Bank was opened in
May 1990 at 14000 West National Avenue, New Berlin, Wisconsin. The New Berlin
branch contains approximately 7,000 square feet and has 4 drive-up facilities,
4 walk-up windows and parking for 27 vehicles. During 1995 Lincoln State Bank
opened two other full-service branch locations one located at 17600 West
Capitol Drive, Brookfield, Wisconsin and at 585 Ryan Street, Pewaukee,
Wisconsin. Both facilities offer drive-up and walk-up facilities along with
parking for both customers and employees. In addition, Lincoln State Bank
operates customer facilities at Villa St. Francis located at South 20th and
Ohio Streets in Milwaukee, at Clement Manor located at South 92nd Street and
West Howard Avenue in Milwaukee, at Friendship Village located at North 73rd
and West Dean Road in Milwaukee, at Stoney Creek Adult Community in Muskego, at
the Milwaukee Protestant Home located on North Downer Avenue in Milwaukee and
at Forest Ridge located in Hales Corners, Wisconsin
Franklin State Bank is located in a modern three-story building at 7000
South 76th Street in the City of Franklin, Wisconsin. The building contains
21,308 square feet, has five drive-up lanes and three automatic tellers. The
parking lot accommodates 165 cars. The building is owned by the Corporation
and leases space to Franklin State Bank. Portions of the building that are not
used by Franklin State Bank are leased to various tenants.
Lincoln Savings Bank's main office is located at 3131 South 13th Street,
Milwaukee, Wisconsin in a modern one-story building. Lincoln Savings Bank also
operates a branch facility at 5400 West Forest Home Avenue, Milwaukee,
Wisconsin. Lincoln Savings Bank owns both facilities.
M&M Services is located at 6170 Industrial Court in the Greendale
Industrial Park. At that location, the Corporation maintains its subsidiary
service support facilities and personnel.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Corporation and the subsidiary banks are party to
legal proceedings arising out of their general lending activities and other
operations. However, there are no pending legal proceedings to which the
Corporation or the subsidiary banks are a party, or to which their property is
subject, which, if determined adversely to the Corporation, would individually
or in the aggregate have a material adverse effect on its consolidated
financial position.
5
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1996.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS
The stock of the Corporation is not listed on any stock exchange or quoted
on the National Association of Securities Dealers Quotation Automated Quotation
System. The Corporation's stock has been quoted on the "Pink Sheets", an
inter-broker quotation medium, since April 1993, and in the Over The Counter
Bulletin Board, an electronic quotation service. Robert W. Baird & Co.,
Incorporated, a regional securities and investment banking firm headquartered
in Milwaukee, Wisconsin, acts as a market maker for the Corporation's stock.
In connection with the acquisition of Lincoln Savings Bank on April 2, 1993,
the Corporation sold 330,625 shares of stock at $20 per share. The $20 price
was established through an independent appraisal in conformity with regulatory
requirements. Following the acquisition of Lincoln Savings Bank by the
Corporation in April 1993, Robert W. Baird has caused the Corporation's stock
to be quoted in the "Other Stocks" section of the Milwaukee Journal/Sentinel.
Prior to that time the Corporation's stock was not publicly listed. (Referred
to in the following table as n/a.)
Holders of the Corporation's stock are entitled to receive such dividends
as may be declared from time to time by the Board of Directors from funds
legally available for such payments. The Corporation's ability to pay cash
dividends is dependent primarily on the ability of its subsidiaries to pay
dividends to the Corporation. The ability of each subsidiary bank to pay
dividends depends on its earnings and financial condition and on compliance
with banking statutes and regulations.
The following table sets forth the quarterly "bid/ask" range for the
period indicated.
<TABLE>
<CAPTION>
Quotation or Price
Quarter Ended Bid Ask
-------------------------------------------------
<S> <C> <C>
March 31, 1995 $25.00 $25.75
June 30, 1995 25.00 n/a
September 30, 1995 26.50 n/a
December 31, 1995 26.50 n/a
MARCH 31, 1996 $28.00 $28.00
JUNE 30, 1996 29.25 29.25
SEPTEMBER 30, 1996 29.50 29.50
DECEMBER 31, 1996 30.00 30.00
</TABLE>
6
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ITEM 6. SELECTED FINANCIAL DATA
The following table summarizes certain historical financial data
regarding the Corporation. This information is derived in part from, and
should be read in conjunction with, the Consolidated Financial Statements of
the Corporation presented elsewhere herein (dollars in thousands, except per
share data):
<TABLE>
<CAPTION>
At or For the Year Ended December 31,
------------------------------------------------------
1996 1995 1994 1993 1992(2)
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
SELECTED BALANCE SHEET DATA
Total assets $267,723 $264,247 $248,181 $239,944 $238,324
Loans receivable, net 189,791 163,650 149,925 137,715 125,076
Investment securities held to maturity 0 0 4,326 4,451 11,060
Investment securities available for sale(5) 15,499 15,833 9,464 12,097 1,548
Mortgage-related securities available for sale(5) 27,154 44,251 54,634 52,185 0
Mortgage-related securities held to maturity 0 0 0 0 73,644
Deposits 232,933 233,083 223,446 214,631 216,485
Short-term borrowings 6,850 3,000 0 0 2,161
Stockholders' equity, substantially restricted 26,380 26,543 23,573 24,741 17,767
Realized stockholders' equity, substantially
restricted(6) 26,583 26,724 25,512 24,612 17,767
SELECTED INCOME STATEMENT DATA
Total interest income (taxable-equivalent)(1) $ 19,401 $ 18,479 $ 16,212 $ 15,543 $ 17,340
Total interest expense 8,362 7,921 6,155 6,476 9,140
----------------------------------------------------------
Net interest income 11,039 10,558 10,057 9,067 8,200
Provision for loan losses 460 132 43 211 311
----------------------------------------------------------
Net interest income after provision for
loan losses 10,579 10,426 10,014 8,856 7,889
Net gain (loss) on security sales 70 61 (244) (8) 114
Other noninterest income 1,485 1,267 1,185 1,391 1,432
----------------------------------------------------------
Total noninterest income 1,555 1,328 941 1,383 1,546
Noninterest expense 10,021 9,040 8,484 8,268 7,676
----------------------------------------------------------
Income before income taxes 2,113 2,714 2,471 1,971 1,759
Income taxes 730 917 874 651 495
Less taxable equivalent adjustment 73 96 73 101 138
----------------------------------------------------------
Net income $ 1,310 $ 1,701 $ 1,524 $ 1,219 $ 1,126
==========================================================
PER SHARE DATA
Net income(3) $ 1.50 $ 1.91 $ 1.71 $ 1.37 $ 1.27
Cash dividend declared $ 0.79 $ 0.64 $ 0.51 $ 0.50 $ 0.40
Book value(3),(5) $ 30.50 $ 29.80 $ 26.48 $ 27.82 $ 27.59
Average shares outstanding(3) 875,082 889,677 890,655 889,363 883,686
OTHER DATA
Net interest margin 3.87% 3.86% 3.93% 3.81% 3.40%
Allowance for loan losses to non-accrual loans 206.87% 232.92% 189.64% 157.49% 77.60%
Nonperforming assets to total assets 0.35% 0.25% 0.35% 0.41% 0.69%
Stockholders' equity to total assets(3),(5) 9.85% 10.04% 9.50% 10.31% 10.23%
Average stockholders' equity to average assets(5) 9.94% 10.01% 9.87% 10.91% 10.02%
Return on assets (ratio of net income to
average total assets) 0.50% 0.67% 0.62% 0.51% 0.48%
Return on stockholders' equity (ratio of net
income to average equity) 5.00% 6.71% 6.27% 4.87% 4.75%
Dividend payout ratio 52.75% 33.45% 29.79% 33.22% (4)
Facilities:
Number of full-service offices 8 8 6 6 6
Number of limited services offices 6 6 4 5 4
</TABLE>
(1) Taxable-equivalent adjustments to interest income involve the conversion of
tax-exempt sources of interest income to the equivalent amounts of interest
income that would be necessary to derive the same net return if the
investments had been subject to income taxes. A 34% incremental income tax
rate, consistent with the Corporation's historical experience, is used in
the conversion of tax-exempt interest income to a tax-equivalent basis.
(2) Restated to reflect the April 2, 1993 merger conversion of Lincoln Savings
Bank which was accounted for as a pooling-of-interests. Operating results
for the year indicated includes the year ended December 31 for Lincoln State
Bank and Franklin State Bank and for the year ended September 30 for Lincoln
Savings Bank.
(3) Computed assuming that the 330,625 shares of common stock issued in
connection with the April 2, 1993 merger conversion of Lincoln Savings Bank
were issued and outstanding for all periods presented. No adjustment for
the additional income that could have been earned had the net proceeds from
the issuance been available for prior periods had been made.
(4) Dividend payout information irrelevant prior to merger conversion with
Lincoln Savings Bank.
(5) The Corporation adopted Statement of Financial Accounting Standards No.
115, "Accounting for Certain Debt and Equity Securities" as of December 31,
1993. As a result, investment securities available-for-sale are carried at
fair value and stockholders' equity is adjusted for the unrealized holding
(loss) gain, net of applicable income taxes. See Note 1 to the Audited
Financial Statements.
(6) Excludes SFAS 115 mark-to-market equity adjustment.
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The following table sets forth certain unaudited income and expense
data on a quarterly basis for the periods indicated (dollars in thousands,
except per share data):
<TABLE>
<CAPTION>
1996 1995
------------------------------------------------------------------------------------------
3/31 6/30 9/30 12/31 3/31 6/30 9/30 12/31
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income
(taxable-equivalent) (1) $4,696 $4,750 $4,950 $5,005 $4,355 $4,536 $4,735 $4,853
Interest expense 2,024 2,044 2,138 2,156 1,727 1,938 2,136 2,120
------------------------------------------------------------------------------------------
Net interest income 2,672 2,706 2,812 2,849 2,628 2,598 2,599 2,733
Provision for loan losses 36 36 388 0 60 60 6 6
Noninterest income 368 366 405 416 301 334 321 372
Noninterest expense 2,592 2,183 2,989 2,257 2,288 2,270 2,202 2,280
------------------------------------------------------------------------------------------
Income (loss) before taxes 412 853 (160) 1,008 581 602 712 819
Income taxes (benefit) 133 290 (62) 369 201 195 240 281
Less taxable equivalent
adjustment 22 22 21 8 25 24 23 24
==========================================================================================
Net income (loss) $ 257 $ 541 ($119) $ 631 $ 355 $ 383 $ 449 $ 514
==========================================================================================
Net income (loss) per share $ 0.29 $ 0.62 ($0.14) $ 0.73 $ 0.40 $ 0.43 $ 0.50 $ 0.58
==========================================================================================
Dividends per share $ 0.17 $ 0.17 $ 0.20 $ 0.25 $ 0.15 $ 0.15 $ 0.17 $ 0.17
==========================================================================================
</TABLE>
(1) Taxable-equivalent adjustments to interest income involve the conversion of
tax-exempt sources of interest income to the equivalent amounts of interest
income that would be necessary to derive the same net return if the
investments had been subject to income taxes. A 34% incremental income tax
rate, consistent with the Corporation's historical experience, is used in
the conversion of tax-exempt interest income to a tax-equivalent basis.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The following discussion is intended as a review of significant
factors affecting the Corporation's financial condition and results of
operations as of and for the period ended December 31, 1996, as well as
providing comparisons with previous years. This discussion should be read in
conjunction with the Consolidated Financial Statements and accompanying notes
and the selected financial data presented elsewhere in this report. It should
be noted that the financial statements are restated to reflect the April 2,
1993 merger conversion of Lincoln Savings Bank S.A. which was accounted for as
a pooling-of-interests. Operating results presented for years prior to 1993
include the year ended December 31 for Lincoln State Bank and Franklin State
Bank and for the year ended September 30 for Lincoln Savings Bank.
NET INTEREST INCOME
Net interest income equals the difference between interest earned on
assets and the interest paid on liabilities and is a measure of how effectively
management has balanced and allocated the Corporation's interest rate sensitive
assets and liabilities. Net interest income is the most significant component
of earnings. Taxable-equivalent adjustments to interest income involve the
conversion of tax-exempt sources of interest income to the equivalent amounts
of interest income that would be necessary to derive the same net return if the
investments had been subject to income taxes. A 34% incremental income tax
rate, consistent with the Corporation's historical experience, is used in the
conversion of tax-exempt interest income to a taxable-equivalent basis.
Net interest income on a FTE basis increased to $11.0 million in 1996,
compared with $10.6 million in 1995 and $10.1 million in 1994. This increase
of $501,000 in net interest income in 1996 was due primarily to an increase in
the volume of earning assets in 1996 (a $1.2 million increase). This gain was
partially offset by an increase in the volume of interest bearing liabilities
(a $589,000 increase).
The total increase in average earning assets was primarily due to an
increase in average loans of $22.1 million. All of the loan growth was
internally generated. Interest bearing deposits increased $7.7 million in
1996. The Corporation's entrance into new markets, introduction of new
products and its pricing of time deposits were contributing factors to the
growth in deposits.
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The following table sets forth, for the periods indicated, information
regarding the average balances of assets and liabilities and the total dollar
amount of interest income from average interest-earning assets and interest
expense on average interest-bearing liabilities, resulting yields, interest
rate spread, ratio of interest-earning assets to interest-bearing liabilities,
and net interest margin. Average balances have been calculated using average
daily balances during such periods (dollars in thousands):
<TABLE>
<CAPTION>
At or for the Year Ended December 31,
---------------------------- ---------------------------- ---------------------------
1996 1995 1994
---------------------------- ---------------------------- ---------------------------
AVERAGE AVERAGE Average Average Average Average
BALANCE INTEREST RATE Balance Interest Rate Balance Interest Rate
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Loans(1),(2) $176,790 $15,230 8.61% $154,696 $13,502 8.73% $141,347 $11,337 8.02%
Loans exempt from federal
income taxes(3) 753 88 11.69% 825 97 11.76% 905 74 8.18%
Taxable investment
securities(4) 17,260 1,018 5.96% 13,796 800 5.80% 10,827 648 5.99%
Mortgage-related
securities(4) 38,475 2,407 6.26% 49,031 3,043 6.21% 56,249 3,205 5.70%
Investment securities exempt
from federal income
taxes(3),(4) 2,003 126 6.29% 2,643 186 7.04% 1,678 141 8.40%
Other securities 10,139 522 5.15% 14,812 851 5.75% 17,541 807 4.60%
------------------ ------------------ ------------------
Interest earning assets 245,420 19,401 7.91% 235,803 18,479 7.84% 228,547 16,212 7.09%
Non interest earning assets 18,238 17,289 17,852
-------- -------- --------
Average Assets $263,658 $253,092 $246,399
======== ======== ========
LIABILITIES AND
STOCKHOLDERS'
EQUITY
NOW deposits $ 23,011 479 2.08% $ 22,451 483 2.15% $ 24,938 518 2.08%
Money Market deposits 6,291 158 2.51% 7,514 187 2.49% 11,241 278 2.47%
Savings deposits 64,345 1,400 2.18% 68,860 1,694 2.46% 74,659 1,847 2.47%
Time deposits 109,862 6,109 5.56% 96,987 5,345 5.51% 83,315 3,495 4.19%
Other borrowings 3,564 216 6.06% 3,432 212 6.18% 329 17 5.17%
------------------ ------------------ ------------------
Interest bearing liabilities 207,073 8,362 4.04% 199,244 7,921 3.98% 194,482 6,155 3.16%
Demand deposits and other non ----- ----- ------
interest bearing
liabilities 30,369 28,505 27,595
Stockholders' equity 26,216 25,343 24,322
-------- -------- --------
Average Liabilities and
Stockholders' Equity $263,658 $253,092 $246,399
======== ======== ========
Net interest income/spread $11,039 3.87% $10,558 3.86% $10,057 3.93%
================= ================= =================
Net interest earning assets $ 38,347 $ 36,559 $ 34,065
======== ======== ========
Net yield on interest earning
assets 4.50% 4.48% 4.40%
==== ==== ====
Ratio of average interest-earning
assets to average interest-
bearing liabilities 1.19 1.18 1.18
======== ======== ========
</TABLE>
(1) For the purpose of these computations, nonaccrual loans are included in the
daily average loan amounts outstanding.
(2) Interest earned on loans includes loan fees (which are not material in
amount) and interest income which has been received from borrowers whose
loans were removed from nonaccrual status during the period indicated.
(3) Taxable-equivalent adjustments were made using a 34% corporate tax rate for
all years presented in calculating interest income and yields.
(4) Includes securities available for sale.
9
<PAGE> 10
The following table sets forth the effects of changing interest rates
and volumes of interest earning assets and interest bearing liabilities on net
interest income of the Corporation. Information is provided with respect to
(i) effect on net interest income attributable to changes in volume (changes in
volume multiplied by prior rate), (ii) effects on net interest income
attributable to changes in rate (changes in rate multiplied by prior volume),
(iii) changes in a combination of rate and volume (changes in rate multiplied
by changes in volume), and (iv) net change (in thousands):
<TABLE>
<CAPTION>
For the Year Ended December 31,
---------------------------------------- ----------------------------------------
1996 VS. 1995 1995 vs. 1994
---------------------------------------- ----------------------------------------
INCREASE/(DECREASE) Increase/(Decrease)
DUE TO Due to
---------------------------- TOTAL --------------------------- Total
VOLUME INCREASE Volume Increase
VOLUME RATE & RATE (DECREASE) Volume Rate & Rate (Decrease)
------ ---- ------ ---------- ------ ---- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Loans receivable(1) $1,928 ($175) ($25) $1,728 $1,071 $1,000 $ 94 $2,165
Loans exempt from federal
income taxes(2) (8) (1) 0 (9) (7) 32 (2) 23
Taxable investment securities(3) 201 22 5 228 178 (20) (6) 152
Mortgage-related securities(3) (45) (20) 5 (60) 81 (23) (13) 45
Investment securities exempt
from federal income taxes(2),(3) (655) 24 (5) (636) (411) 286 (37) (162)
Other securities (268) (88) 27 (329) (126) 201 (31) 44
---------------------------------------- --------------------------------------
Total interest-earning assets $1,153 ($238) $ 7 922 $ 786 $1,476 $5 2,267
======================================== ======================================
Interest-Bearing Liabilities:
NOW deposits $ 12 ($16) $ 0 ($4) ($52) $ 19 ($2) ($35)
Money market deposits (30) 1 0 (29) (92) 2 (1) (91)
Savings deposits (111) (196) 13 (294) (143) (10) 0 (153)
Time deposits 710 48 6 764 574 1,096 180 1,850
Other borrowings 8 (4) 0 4 160 3 32 195
---------------------------------------- --------------------------------------
Total interest-bearing liabilities $ 589 ($167) $19 $ 441 $ 447 $1,110 $209 $1,766
======================================== ======================================
Net change in net interest income $ 481 $ 501
====== ======
</TABLE>
(1) Interest earned on loans includes loan fees (which are not material in
amount) and interest income which has been received from borrowers whose
loans were removed from nonaccrual during the period indicated.
(2) Taxable-equivalent adjustments were made using a 34% corporate tax rate for
all years presented in calculating interest income and yields.
(3) Includes securities available for sale.
PROVISION FOR LOAN LOSSES
During 1996, the Corporation made a provision of $460,000 to the
allowance for loan losses, as compared to a provision of $132,000 in 1995 and
$43,000 in 1994. This increase did not reflect deteriorating quality in the
loan portfolio but primarily reflected an increase in loan volume and an
assessment regarding general economic conditions. Loan charge-offs for 1996
increased by $20,000, over 1995 to $83,000. This compares to charge-offs of
$12,000 in 1994. Although management considers the allowance for loan losses
to be adequate to provide for potential losses in the loan portfolio, there can
be no assurance that losses will not exceed estimated amounts or that the
subsidiary banks will not be required to make further and possibly larger
additions to their allowance in the future.
10
<PAGE> 11
NON-INTEREST INCOME
Non-interest income increased $227,000 in 1996 and $387,000 in 1995.
The composition of non-interest income is shown in the following table (in
thousands).
<TABLE>
<CAPTION>
For the Year Ended December 31,
1996 1995 1994
----------------------------------------
<S> <C> <C> <C>
Service charges on deposit accounts $ 725 $ 726 $ 706
Service charges on loans 172 75 42
Net gain (loss) on securities sales 70 61 (244)
Other 588 466 437
----------------------------------------
Total noninterest income $1,555 $1,328 $ 941
========================================
</TABLE>
Service charge income on deposit accounts decreased $1,000 in 1996 and
increased $20,000 in 1995. The increase in the number of no-charge accounts
caused the decline in 1996 income, while the 1995 increase can be attributed to
the increase in service charges.
The Corporation recorded a net gain of $70,000 on the sale of $15.8
million of securities in 1996 and $61,000 on the sale of $ 13.7 million of
securities in 1995 and a loss of $244,000 on the sale of $12.6 million of
securities in 1994. The sales in 1994 were made to reduce the future volatility
of the investment portfolio as interest rates began to increase. The proceeds
from the sale of the investments were used to purchase short term variable rate
securities and to meet existing loan demand.
Service charges on loans increased $97,000 from $75,000 in 1995 to
$172,000 in 1996. The 1996 increase can be attributed directly to the volume of
new loans generated.
Other non-interest income increased $122,000 in 1996 and increased
$29,000 in 1995. Other non-interest income consists of rents of safe deposit
boxes, lock box fees, TYME machine income, lease income and miscellaneous fees.
NON-INTEREST EXPENSE
Non-interest expense increased $981,000 (10.8%) for the year ended
December 31, 1996, and $556,000 (6.6%) for the year ended December 31, 1995. The
major components of non-interest expense are shown in the following table (in
thousands).
<TABLE>
<CAPTION>
For the Year Ended December 31,
1996 1995 1994
-----------------------------------------
<S> <C> <C> <C>
Salaries and employee benefits $ 5,223 $4,706 $4,396
Bank premises and equipment 1,340 1,208 1,160
Data processing fees 561 540 578
Federal deposit insurance premiums 159 362 490
SAIF Assessment 604 0 0
Other 2,134 2,224 1,860
-----------------------------------------
Total noninterest expense $10,021 $9,040 $8,484
=========================================
</TABLE>
Salaries and employee benefits increased $517,000 in 1996, reflecting
additional staff hires, higher benefit costs, changes in personnel and normal
pay raises. The 1996 increase in the cost of employee benefits, particularly
medical insurance amounted to $101,000. The 11.0% increase in salaries and
employee benefits in 1996 compares with the 7.0% increase in 1995.
Premises and equipment expense increased $132,000 in 1996. The
increase was due to the entire year operations of the two new branches of
Lincoln State Bank. The branches in Pewaukee and Brookfield were opened in
October 1995. The $48,000 increase in 1995 was the result of start-up expenses
associated with the branches.
Data processing fees increased $21,000 in 1996 and decreased $38,000
in 1995. The 1996 increase was due to increased volume and new services being
provided by the service bureau. The 1995 decrease was a result of a fixed fee
contract signed between the Corporation and the outside service provider.
During the third quarter of 1996 Lincoln Savings Bank incurred a
$604,000 charge from the FDIC which represented its share of the
recapitalization of the Savings Association Insurance Fund (SAIF). This charge
was set at 0.657% of Lincoln Savings Bank's deposit liabilities as of March 31,
1995. Although this charge adversely impacted results of operations, it is
expected to provide long-term benefits to the Corporation in the form of lower
federal insurance premiums.
Federal deposit insurance fees represent premiums paid for FDIC
insurance on the banks' deposits. The FDIC assesses the banks based on the
level of deposits. In 1995 the Bank Insurance Fund (BIF) reached its
prescribed capitalization level mandated by Congress as part of FDIC
Institutions Improvement Act of 1991. As a result the bank's premium was
reduced by $203,000 in 1996 and $128,000 in 1995.
11
<PAGE> 12
Other expenses decreased $90,000 in 1996. The decrease was primarily
due to a reduction in service charges being paid to the Corporation's
corespondent bank and a decrease in the Corporation's annual fee to the Lincoln
Neighborhood Redevelopment Corporation. In 1995 other expenses increased
$364,000 because of higher professional fees and other uncontrollable volume
related costs such as office supplies, postage and insurance.
INCOME TAXES
The Corporation's consolidated income tax rate varies from statutory
rates principally due to interest income from tax-exempt securities and loans
and interest income on securities in the M&M Lincoln Investment Corporation
portfolio and Lincoln Investment Management Corporation for which state taxes
are not imposed. The Corporation recorded provisions for income taxes totaling
$730,000 in 1996, $917,000 in 1995 and $874,000 in 1994. The 1996 decrease was
due to a reduction in taxable income and the 1995 increase was due to
additional taxable income and the reduction of tax exempt investments and
loans.
NET INCOME
For the years ended December 31, 1996, 1995 and 1994, the Corporation
posted net income of $1.310 million, $1.701 million and $1.524 million,
respectively.
LOANS RECEIVABLE
Net loans receivable increased $26.1 million, or 16.0%, from $163.7
million at December 31, 1995, to $189.8 million at December 31, 1996.
Currently, loans receivable consist mainly of mortgages secured by residential
properties located in the Corporation's primary market area and commercial
loans secured by business assets, real estate, and guarantees. The following
table shows the composition of the Corporation's loan portfolio on the dates
indicated (in thousands):
<TABLE>
<CAPTION>
At December 31,
1996 1995 1994 1993 1992
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
First Mortgage:
Conventional single-family residential $ 58,358 $ 57,629 $ 55,478 $ 53,006 $ 55,165
Commercial and multifamily residential 61,707 44,594 42,046 32,197 25,208
Construction and land 12,872 12,619 8,254 6,514 7,945
----------------------------------------------------------------
132,937 114,842 105,778 91,717 88,318
Commercial business loans 45,635 36,605 35,118 39,926 30,797
Home equity loans 1,367 1,695 1,577 1,620 1,605
Consumer and installment loans 10,984 10,810 7,377 5,222 4,094
Other 883 1,326 1,644 1,406 2,034
----------------------------------------------------------------
58,869 50,436 45,716 48,174 38,530
Less:
Undisbursed portion of loan proceeds 0 0 0 708 505
Deferred loan fees 76 95 105 112 148
Allowance for loan losses 1,939 1,533 1,464 1,356 1,119
----------------------------------------------------------------
$189,791 $163,650 $149,925 $137,715 $125,076
================================================================
</TABLE>
ALLOWANCE FOR LOAN LOSSES
The Corporation maintains an allowance for loan losses to absorb
potential losses in its loan portfolio. Management's determination of the
adequacy of the allowance is based on review of specific loans, past loan loss
experience, general economic conditions and other pertinent factors. If, as a
result of charge-offs or increases in the risk factors of the loan portfolio,
the allowance is below the level considered to be adequate to absorb future
losses, the periodic provision to the allowance is increased. Loans deemed
uncollectible are charged off and deducted from the allowance. The allowance
for loan losses increased from $1.533 million at December 31, 1995, to $1.939
million on December 31, 1996. Because of the Corporation's relatively low loss
experience, this increase was not required to absorb currently known losses but
was effected because of growth in loan volume in general, and growth in
commercial business loans specifically, and the Corporation's decision to
maintain or increase its allowance for loan losses as a percentage of
outstanding loans because of growing uncertainty regarding future economic
conditions. The ratio of the allowance for loan losses to total loans was
1.01% for 1996 and 0.93% in 1995. Based on the present economic environment
and its present analysis of the financial condition of the borrowers, the
Corporation considers the present allowance to be appropriate and adequate to
cover potential losses inherent in the loan portfolio, however, changes in
future economic conditions and in the financial condition of borrowers cannot
be predicted at this time. Deterioration in such conditions could result in
increases in charge-offs or adversely classified loans and accordingly, in
additional provisions for loan losses. Based on their review procedures,
management of the Corporation's subsidiary banks estimated charge-offs for the
twelve months ended December 31, 1997 to be as follows: commercial loans -
$25,000, real estate mortgage loans - $60,000 and installment loans - $5,000.
12
<PAGE> 13
The balance of the allowance for loan losses and actual loss experience
for the last five years is summarized in the following table (dollars in
thousands):
<TABLE>
<CAPTION>
At or for the Year Ended At December 31,
1996 1995 1994 1993 1992
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $1,533 $1,464 $1,356 $1,119 $ 917
Charge-offs:
Conventional single-family mortgage
residential 70 20 0 46 9
Commercial and multifamily residential 0 0 0 0 30
Construction and land 0 0 0 0 0
Commercial business loans 5 27 6 46 83
Home equity loans 0 0 0 0 0
Consumer and installment loans 8 16 6 1 0
---------------------------------------------------------------------------
Total charge-offs 83 63 12 93 122
Recoveries (29) 0 (77) (20) (13)
---------------------------------------------------------------------------
Net charge-offs (recoveries) 54 63 (65) 73 109
Provisions charged to operations 460 132 43 211 311
Adjustments to conform pooled
companies' year-ends 0 0 0 99 0
---------------------------------------------------------------------------
Balance at end of year $1,939 $1,533 $1,464 $1,356 $1,119
===========================================================================
Ratios:
Net charge-offs (recoveries) to
average loans outstanding 0.03% 0.04% (0.05)% 0.05% 0.09%
Net charge-offs (recoveries) to total
allowance 2.78% 4.11% (4.44)% 5.38% 9.74%
Allowance to year end gross loans
outstanding 1.01% 0.93% 0.97% 0.97% 0.88%
</TABLE>
NON-PERFORMING AND DELINQUENT LOANS
When in the opinion of management, serious doubt exists as to the
collectibility of a loan, the loan is placed on non-accrual status and interest
previously accrued but unpaid is deducted from interest income. The Corporation
does not recognize income on any loans past due 90 days or more. In 1996,
$23,000 of additional income on nonaccrual loans would have been reported if the
loans had been current in accordance with their original terms and had been
outstanding throughout the year since origination. The following table
summarizes non-performing assets on the dates indicated (dollars in thousands):
<TABLE>
<CAPTION>
December 31,
1996 1995 1994 1993 1992
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans:
Nonaccrual loans $ 938 $ 658 $ 772 $ 861 $1,442
Accruing loans past due 90 days or
more 0 0 0 0 0
Restructured loans 0 0 0 0 0
---------------------------------------------------------------------------
Total nonaccrual loans 938 658 772 861 1,442
Real estate in judgment 0 0 24 43 181
Other real estate owned 0 0 73 75 31
---------------------------------------------------------------------------
Total non-performing assets $ 938 $ 658 $ 869 $ 979 $1,654
===========================================================================
Ratios:
Non-accrual loans to total loans 0.49% 0.40% 0.51% 0.62% 1.14%
Allowance to non-accrual loans 206.72% 232.98% 189.64% 157.49% 77.60%
Non-performing assets to total assets 0.35% 0.25% 0.35% 0.41% 0.69%
</TABLE>
INVESTMENT SECURITIES
Investment securities at December 31, 1996, are made up of U.S. Treasury
and agency securities of $11.321 million, government agency mortgage-backed
securities of $24.211 million, SBA certificates of $1.080 million,
collateralized mortgage obligations of $2.943 million and mutual funds of $3.098
million. Total investment securities equaled $42.653 million. This compares to
$60.084 million on December 31, 1995.
13
<PAGE> 14
Management determines the appropriate classification of debt
securities (including mortgage-related securities) at the time of purchase.
Beginning December 31, 1993, debt securities are classified as
held-for-investment when the Corporation has the intent and ability to hold the
security on a long term basis or until maturity. Held-for-investment
securities are stated at amortized cost. See notes one and three to
Consolidated Financial Statements for further details.
Beginning December 31, 1993, debt securities not classified as
held-for-investment are classified as available-for-sale. Available-for-sale
securities are stated at fair value, with the unrealized gains and losses, net
of tax, reported as a separate component of stockholders' equity.
The amortized cost of debt securities classified as held-to-maturity
or available-for-sale are adjusted for amortization of premiums and accretion
of discounts to maturity, or in the case of mortgage-related securities, over
the estimated life of the security. Such amortization is included in interest
income from the related security. Interest and dividends are included in
interest income from the related securities. Realized gains and losses, and
declines in value judged to be other-than-temporary are included in net
securities gains (losses). The cost of securities sold is based on the
specific identification method.
The reason for the decrease in investment securities is the increase
in demand for funds for lending purposes. Funding for additional loans came
primarily from government agency mortgage-backed securities which either
matured or prepaid and were not sold. The following table sets forth the
Corporations aggregate amortized cost of investment securities held-to-maturity
and the estimated fair value of investment securities available-for-sale at the
dates indicated (in thousands):
<TABLE>
<CAPTION>
At December 31,
1996 1995 1994
-----------------------------------------
<S> <C> <C> <C>
Mutual funds $ 3,098 $ 3,086 $ 3,012
U.S. Treasury and other U.S.
Government securities 11,321 8,749 6,628
Small Business Administration
certificates 1,080 1,257 1,404
State and political subdivision
securities 0 2,741 2,746
Collateralized mortgage obligations 2,943 3,772 6,652
Government agency mortgage-backed
securities 24,211 40,479 47,982
-----------------------------------------
$42,653 $60,084 $68,424
=========================================
</TABLE>
The maturity distribution (based upon assumed maturities), and
weighted average yield of the investment portfolio of the Corporation as of
December 31, 1996 are summarized in the following table (dollars in thousands):
<TABLE>
<CAPTION>
WITHIN ONE YEAR ONE TO FIVE YEARS FIVE TO TEN YEARS OVER TEN YEARS
----------------------------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
MUTUAL FUNDS $ 3,098 6.08% $ -- -- % $ -- -- % $ -- -- %
U.S. TREASURY AND OTHER U.S.
GOVERNMENT SECURITIES 6,869 6.22 4,452 5.27 -- -- -- --
SMALL BUSINESS ADMINISTRATION
CERTIFICATES 1,080 7.91 -- -- -- -- -- --
COLLATERALIZED MORTGAGE OBLIGATIONS 1,790 5.35 306 6.40 847 6.09 -- --
GOVERNMENT AGENCY MORTGAGE-BACKED
SECURITIES 68 6.21 8,092 6.57 14,306 6.65 1,805 6.80
----------------------------------------------------------------------------------------
$12,905 6.21% $12,790 6.27% $15,153 6.62% $1,805 6.80%
========================================================================================
</TABLE>
Weighted average yield is calculated by dividing income within each
maturity range by the outstanding amount of the related investment.
14
<PAGE> 15
TOTAL DEPOSITS
The Corporation continues to stress its philosophy of core deposit
accumulation and retention as the fundamental basis for sound growth and
profitability. Core deposits consist of all deposits other than public funds
and certificates of deposit in excess of $100,000.
Total deposits decreased $150,000 to $232.933 million on December 31,
1996, from $233.083 million on December 31, 1995. This compares to a $9.637
million increase in 1995. The average increase in time deposits occurred via
increases in retail certificates of deposits and retail jumbo certificates of
deposits, while the increase in non-interest bearing demand deposits can be
attributed to the additional commercial account relationships being established
by the Banks. The following table sets forth the average amount of and the
average rate paid by the Banks on deposits by deposit category (dollars in
thousands):
<TABLE>
<CAPTION>
At December 31,
1996 1995 1994
------------------------------------------------------------------------
AVERAGE AVERAGE Average Average Average Average
AMOUNT RATE Amount Rate Amount Rate
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Non-interest-bearing demand deposits $ 29,362 0.00% $ 27,707 0.00% $ 26,476 0.00%
NOW and money market deposits 29,302 2.17 29,965 2.24 36,179 2.20
Savings deposits 64,345 2.18 68,860 2.47 74,659 2.47
Time deposits 109,862 5.51 96,987 5.51 83,315 4.19
------------------------------------------------------------------------
Total $232,871 3.46% $222,519 3.46% $220,628 2.78%
========================================================================
</TABLE>
Maturities of time deposits and certificate accounts with balances of
$100,000 or more, outstanding at December 31, 1996, are summarized as follows
(in thousands):
<TABLE>
<S> <C>
3 MONTHS OR LESS $ 8,323
OVER 3 THROUGH 6 MONTHS 2,463
OVER 6 THROUGH 12 MONTHS 3,86
OVER 12 MONTHS 741
-------
TOTAL $15,313
=======
</TABLE>
CAPITAL RESOURCES AND ADEQUACY
Stockholders' equity decreased from $26.543 million at December 31,
1995 to $26.380 million at December 31, 1996. The $1.310 million increase from
net earnings retention was offset by the net repurchase of 25,832 shares of
treasury stock and the payment of $691,000 in cash dividends to shareholders.
Pursuant to regulations promulgated by the Federal Reserve Board, bank
holding companies are required to maintain minimum levels of core capital as a
percent of total assets and total capital as a percent of risk-based assets.
The minimum core capital requirement ranges from 3% to 5% of total assets,
depending upon the Federal Reserve Board's determination of the financial
institution's strength. Similar capital guidelines are also established for
the individual banking subsidiaries of the Corporation. Most financial
institutions are required to meet a minimum core capital requirement of 4% or
more of total assets. The regulations assign risk weightings to assets and
off-balance sheet items and require minimum risk-based capital ratios. Bank
holding companies generally are required to have total capital equal to not
less than 8% of risk weighted assets. Core capital consists principally of
shareholders' equity less intangibles, while qualifying total capital consists
of core capital, certain debt instruments and a portion of the reserve for loan
losses. As of December 31, 1996, the Corporation had a core-capital to total
assets ratio of 9.85%, and Lincoln State Bank, Franklin State Bank and Lincoln
Savings Bank had risk-based capital ratios of 10.88%, 10.11% and 17.00%,
respectively. These ratios are well above the 1996 minimum requirements
established by regulatory agencies.
For a summary of the Banks' regulatory capital ratios at December 31,
1996, please see Note seven to Consolidated Financial Statements.
Management strives to maintain a strong capital position to take
advantage of opportunities for profitable geographic and product expansion and
to maintain depositor and investor confidence. Conversely, management believes
that capital must be maintained at levels that provide adequate returns on the
capital employed. Management actively reviews capital strategies for the
Corporation and for each of its subsidiaries to ensure that capital levels are
appropriate based on perceived business risks, growth and regulatory standards.
15
<PAGE> 16
LIQUIDITY
Liquidity is the ability to meet withdrawal requirements on deposit
accounts and satisfy loan demand. The principal sources of liquidity for the
subsidiary banks include additional deposits, repayments on loans and
investment securities, collections of interest, sales of investments,
borrowings and the retention of earnings.
The Corporation's liquidity, represented by cash and cash equivalents,
is a product of its operating activities, investing activities and financing
activities. These activities are summarized below (dollars in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994
----------------------------------------
<S> <C> <C> <C>
Cash and cash equivalents at beginning of period $28,447 $17,694 $23,183
Operating Activities:
Net Income 1,310 1,701 1,524
Adjustments to reconcile net income to net cash
provided by operating activities 1,074 1,065 822
----------------------------------------
Net cash provided by operating activities 2,384 2,766 2,346
Net cash used by investing activities (10,511) (4,426) (16,118)
Net cash provided by financing activities 1,952 12,413 8,283
----------------------------------------
Increase (decrease) in cash equivalents (6,175) 10,753 (5,489)
----------------------------------------
Cash and cash equivalents at end of period $22,272 $28,447 $17,694
========================================
</TABLE>
Net cash was provided by operating activities during the year ended
December 31, 1996, 1995 and 1994 primarily as a result of normal ongoing
business operations. The non-cash items, such as the provisions for loan
losses and depreciation and the net amortization of premiums, also contributed
to net cash provided by operating activities during these periods.
Liquidity is also necessary at the parent company level. The parent
company's primary source of funds are dividends from subsidiaries, borrowings
and proceeds from issuance of equity. The parent company manages its liquidity
position to provide the funds necessary to pay dividends to shareholders,
service debt, invest in subsidiaries and satisfy other operating requirements.
Dividends received from subsidiaries totaled $1.9 million, $1.2 million and
$938,000 for the years ended December 31, 1996, 1995 and 1994 respectively, and
will continue to be the parent's main source of long-term liquidity. The
dividends from the Banks were sufficient to pay cash dividends to the
Corporation's shareholders of $691,000, $569,000 and $454,000 for the years
ended December 31, 1996, 1995 and 1994, respectively. At December 31, 1996,
the parent company had a $500,000 line of credit with an unaffiliated bank,
which had no outstanding balance.
INTEREST RATE SENSITIVITY MANAGEMENT
Financial institutions are subject to interest rate risk to the extent
their interest-bearing liabilities (primarily deposits) mature or reprice at
different times and on a different basis than their interest-earning assets
(consisting primarily of loans and securities). Interest rate sensitivity
management seeks to match maturities on assets and liabilities and avoid
fluctuating net interest margins while enhancing net interest income during
periods of changing interest rates. The difference between the amount of
interest-earning assets maturing or repricing within a specific time period and
the amount of interest-bearing liabilities maturing or repricing within the
same time period is referred to as an interest rate gap. A gap is considered
positive when the amount of interest rate sensitive assets exceeds the amount
of interest rate sensitive liabilities. A gap is considered negative when the
amount of interest rate sensitive liabilities exceeds the amount of interest
rate sensitive assets. During periods of rising interest rates, a negative gap
tends to adversely affect net interest income while a positive gap tends to
result in an increase in net interest income. During a period of falling
interest rates, a negative gap tends to result in an increase in net interest
income while a positive gap tends to adversely affect net interest income.
16
<PAGE> 17
The following table shows the interest rate sensitivity gap for four
different time intervals as of December 31, 1996. Due to limitations in the
Corporation's data processing system, individual loan categories do not agree
with previously presented balances. The primary difference occurs in the
allocation between adjustable-rate mortgage loans and commercial business
loans. Total loans agree to audited financial statements. Assumptions
regarding prepayment and withdrawal rates are based upon the Corporation's
historical experience, and management believes such assumptions are reasonable.
<TABLE>
<CAPTION>
AMOUNT MATURING OR REPRICING
-----------------------------------------------------------------
WITHIN SIX TO TWELVE ONE TO FIVE OVER
SIX MONTHS MONTHS YEARS FIVE YEARS TOTAL
-----------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
FIXED-RATE MORTGAGE LOANS $14,054 $12,863 $ 57,204 $ 6,641 $ 90,762
ADJUSTABLE-RATE MORTGAGE LOANS 16,645 11,011 15,886 0 43,542
-----------------------------------------------------------------
TOTAL MORTGAGE LOANS 30,699 23,874 73,090 6,641 134,304
COMMERCIAL BUSINESS LOANS 30,224 1,975 13,290 146 45,635
CONSUMER LOANS 5,584 1,171 4,220 9 10,984
TAX-EXEMPT LOANS 750 0 0 0 750
MORTGAGE-RELATED SECURITIES 11,313 4,125 5,794 5,922 27,154
FIXED RATE INVESTMENT SECURITIES AND OTHER 301 501 9,062 1,457 11,321
VARIABLE RATE INVESTMENT SECURITIES AND OTHER 17,203 1,118 0 0 18,321
-----------------------------------------------------------------
TOTAL INTEREST-EARNING ASSETS $96,074 $32,764 $105,456 $14,175 $248,469
=================================================================
INTEREST-BEARING LIABILITIES:
DEPOSITS
TIME DEPOSITS $69,310 $32,085 $ 12,578 $ 4 $113,977
NOW ACCOUNTS 1,188 1,188 11,876 5,541 19,793
SAVINGS ACCOUNTS 3,653 3,586 35,861 16,469 59,569
MONEY MARKET ACCOUNTS 438 438 4,380 2,244 7,500
BORROWINGS 3,850 3,000 0 0 6,850
=================================================================
TOTAL INTEREST-BEARING LIABILITIES $78,439 $40,297 $ 64,695 $24,325 $207,689
=================================================================
INTEREST-EARNING ASSETS LESS
INTEREST-BEARING
LIABILITIES $17,635 ($7,533) $ 40,761 ($10,083) $ 40,780
=================================================================
CUMULATIVE INTEREST RATE SENSITIVITY GAP $17,635 $10,102 $ 50,863 $40,780
==================================================
CUMULATIVE INTEREST RATE SENSITIVITY GAP AS A
PERCENTAGE OF TOTAL ASSETS 6.59% 3.77% 19.00% 15.23%
==================================================
</TABLE>
At December 31, 1996, the Corporation's cumulative ratio of
interest-rate sensitive assets to interest-rate sensitive liabilities was 6.59%
for six months and 3.77% for one year maturities. Therefore the Corporation is
positively gapped and may benefit from rising interest rates.
Certain shortcomings are inherent in the method of analysis presented
in the Schedule. For example, although certain assets and liabilities have
similar maturities or periods of repricing, they may react in different degrees
to changes in market interest rates. Also, the interest rates on certain types
of assets and liabilities may fluctuate in advance of changes in market
interest rates, while interest rates on other types may lag behind changes in
market rates. Additionally, certain assets, such as adjustable rate mortgage
loans, have features that restrict changes in interest rates on a short term
basis over the life of the asset. Further, in the event of a change in
interest rates, prepayment and early withdrawal levels would likely deviate
significantly from those assumed in calculating the schedule. Finally, the
ability of many borrowers to service their debt may decrease in the event of an
interest rate increase.
17
<PAGE> 18
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated statements of financial condition of the Corporation
and its subsidiaries as of December 31, 1996 and 1995 and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the years in the three-year period ended December 31, 1996, along with the
related notes to the consolidated financial statements and the report of Ernst &
Young LLP, independent auditors are attached.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
NONE.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information in response to this item is incorporated herein by
reference to the Corporation's proxy statement, which shall be filed with the
Securities and Exchange Commission no later than 120 days after the
Corporation's fiscal year end or three (3) weeks prior to the Corporation's
Annual Meeting which shall be held on May 27, 1997, which ever comes first.
ITEM 11. EXECUTIVE COMPENSATION
The information in response to this item is incorporated herein by
reference to the Corporation's proxy statement, which shall be filed with the
Securities and Exchange Commission no later than 120 days after the
Corporation's fiscal year end or three (3) weeks prior to the Corporation's
Annual Meeting which shall be held on May 27, 1997, which ever comes first.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information in response to this item is incorporated herein by
reference to the Corporation's proxy statement, which shall be filed with the
Securities and Exchange Commission no later than 120 days after the
Corporation's fiscal year end or three (3) weeks prior to the Corporation's
Annual Meeting which shall be held on May 27, 1997, which ever comes first.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information in response to this item is incorporated herein by
reference to the Corporation's proxy statement, which shall be filed with the
Securities and Exchange Commission no later than 120 days after the
Corporation's fiscal year end or three (3) weeks prior to the Corporation's
Annual Meeting which shall be held on May 27, 1997, which ever comes first.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) DOCUMENTS FILED:
1 and 2. Financial Statements and Financial Statement Schedules. The
following financial statements of Merchants and Manufacturers
Bancorporation, Inc. and subsidiaries are filed as a part of
this report under Item 8. "Financial Statements and
Supplementary Data":
Report of Independent Auditors
Consolidated Statements of Financial Position as of
December 31, 1996 and 1995
Consolidated Statements of Income for the years ended
December 31, 1996, 1995, and 1994
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1996, 1995, and 1994
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements
All financial statement schedules have been omitted as they are
not applicable or because the information is included in the
financial statements or notes thereto.
3. Exhibits. All required exhibits have been furnished in
connection with and are incorporated by
reference to previous filings.
(B) REPORTS ON FORM 8-K:
No reports on Form 8-K were filed during the last quarter of
the period covered by this report.
18
<PAGE> 19
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC.
By: __________________________________
Michael J. Murry
Chief Executive Officer &
Chairman of the Board of Directors
Director
Date: March 31, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<S> <C>
By: __________________________________
James F. Bomberg
President
Director
Date: March 31, 1997
By: __________________________________
James C. Mroczkowski
Vice President and
Chief Financial Officer
Date: March 31, 1997
By: ______________________________ By: ______________________________
Leonard Helminiak Thomas F. Gapinski
Director Director
Date: March 31, 1997 Date: March 31, 1997
By: ______________________________ By: ______________________________
Nicholas S. Logarakis Thomas J. Kozina
Director Director
Date: March 31, 1997 Date: March 31, 1997
By: ______________________________ By: ______________________________
Conrad C. Kaminski David A. Kaczynski
Director Director
Date: March 31, 1997 Date: March 31, 1997
</TABLE>
19
<PAGE> 20
<TABLE>
<S> <C>
By: ______________________________ By: ______________________________
Jack P. Schwellinger Keith C. Winters
Director Director
Date: March 31, 1997 Date: March 31, 1997
By: ______________________________ By: ______________________________
Duane P. Cherek Robert J. Blonski
Director Director
Date: March 31, 1997 Date: March 31, 1997
By: ______________________________ By: ______________________________
John M. Krawczyk Robert V. Donaj
Director Director
Date: March 31, 1997 Date: March 31, 1997
By: ______________________________ By: ______________________________
Longin C. Prazynski Gervase Rose
Director Director
Date: March 31, 1997 Date: March 31, 1997
By: ______________________________ By: ______________________________
J. Michael Bartels Casimir S. Janiszewski
Director Director
Date: March 31, 1997 Date: March 31, 1997
By: ______________________________
James A. Sass
Director
Date: March 31, 1997
</TABLE>
20
<PAGE> 21
Merchants and Manufacturers
Bancorporation, Inc.
Consolidated Financial Statements
Years ended December 31, 1996 and 1995
CONTENTS
Report of Independent Auditors ...................................... 1
Consolidated Financial Statements
Consolidated Statements of Financial Condition ...................... 2
Consolidated Statements of Income ................................... 3
Consolidated Statements of Stockholders' Equity ..................... 4
Consolidated Statements of Cash Flows ............................... 5
Notes to Consolidated Financial Statements .......................... 7
<PAGE> 22
[ERNST & YOUNG LLP LETTERHEAD]
Report of Independent Auditors
The Board of Directors and Stockholders
Merchants and Manufacturers Bancorporation, Inc.
We have audited the accompanying consolidated statements of financial condition
of Merchants and Manufacturers Bancorporation, Inc. as of December 31, 1996 and
1995, and the related consolidated statements of income, stockholders' equity
and cash flows for each of the three years in the period ended December 31,
1996. These financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Merchants and
Manufacturers Bancorporation, Inc. at December 31, 1996 and 1995, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
Ernst & Young LLP
February 21, 1997
Milwaukee, Wisconsin
1
<PAGE> 23
Merchants and Manufacturers Bancorporation, Inc.
Consolidated Statements of Financial Condition
<TABLE>
<CAPTION>
DECEMBER 31
1996 1995
------------------
(In thousands)
<S> <C> <C>
ASSETS
Cash and due from banks $ 9,247 $ 11,164
Interest-bearing deposits at other banks 9,667 8,737
Federal funds sold 3,358 8,546
------------------
Cash and cash equivalents 22,272 28,447
Securities available-for-sale:
Investment securities 15,499 15,833
Mortgage-related securities 27,154 44,251
Loans receivable 189,791 163,650
Accrued interest receivable 1,470 1,532
Federal Home Loan Bank stock, at cost 1,118 702
Premises and equipment 7,800 7,605
Other assets 2,619 2,227
------------------
Total assets $267,723 $264,247
==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $232,933 $233,083
Accrued interest payable 395 575
Borrowings 6,850 3,000
Advance payments by borrowers for taxes and insurance 67 365
Other liabilities 1,098 681
------------------
Total liabilities 241,343 237,704
Stockholders' equity:
Common stock, par value $1.00 per share; authorized--
1,500,000 shares; issued 897,812 shares and 893,873
shares, respectively 898 898
Additional paid-in capital 10,759 10,759
Unrealized loss on securities available-for-sale (203) (181)
Retained earnings, substantially restricted 15,868 15,249
Less treasury stock, at cost--32,845 shares and
7,013 shares, respectively (942) (182)
------------------
Total stockholders' equity 26,380 26,543
------------------
Total liabilities and stockholders' equity $267,723 $264,247
==================
</TABLE>
See accompanying notes.
2
<PAGE> 24
Merchants and Manufacturers Bancorporation, Inc.
Consolidated Statements of Income
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1995 1994
---------------------------------------
(In thousands, except per share amounts)
<S> <C> <C> <C>
Interest income:
Loans, including fees $15,288 $13,566 $11,435
Investment securities:
Taxable 1,028 800 648
Exempt from federal income taxes 83 123 93
Mortgage-related securities 2,407 3,043 3,205
Other 522 851 758
---------------------------------------
Total interest income 19,328 18,383 16,139
Interest expense:
Deposits 8,146 7,709 6,138
Borrowings 216 212 17
---------------------------------------
Total interest expense 8,362 7,921 6,155
Net interest income 10,966 10,462 9,984
Provision for loan losses 460 132 43
---------------------------------------
Net interest income after provision
for loan losses 10,506 10,330 9,941
Noninterest income:
Service charges on deposits 725 726 706
Service charges on loans 172 75 42
Net gain (loss) on securities sales 70 61 (244)
Other 588 466 437
---------------------------------------
1,555 1,328 941
Noninterest expenses:
Salaries and employee benefits 5,223 4,706 4,396
Premises and equipment 1,340 1,208 1,160
Data processing fees 561 540 578
SAIF special assessment 604 - -
Federal deposit insurance premiums 159 362 490
Other 2,134 2,224 1,860
---------------------------------------
10,021 9,040 8,484
---------------------------------------
Income before income taxes 2,040 2,618 2,398
Income taxes 730 917 874
---------------------------------------
Net income $ 1,310 $ 1,701 $ 1,524
=======================================
Earnings per share $ 1.50 $ 1.91 $ 1.71
=======================================
Dividends per share $ .79 $ .64 $ .51
=======================================
</TABLE>
See accompanying notes.
3
<PAGE> 25
Merchants and Manufacturers Bancorporation, Inc.
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Unrealized
Additional Gain (Loss)
Paid-in on Securities Treasury
Common Stock Capital Available-for-Sale Retained Earnings Stock Total
-------------------------------------------------------------------------------------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 $894 $10,671 $ 129 $13,047 $ - $24,741
Net income - - - 1,524 - 1,524
Cash dividends declared--$.51 per share - - - (454) - (454)
Purchase of 13,200 shares of treasury stock - - - - (332) (332)
Sale of 6,900 shares of treasury stock - 3 - - 173 176
Additional expenses associated with
offering of common stock - (14) - - - (14)
Unrealized loss on securities available-
for-sale, net of deferred income taxes
of $1,292 - - (2,068) - - (2,068)
-------------------------------------------------------------------------------------
Balance at December 31, 1994 894 10,660 (1,939) 14,117 (159) 23,573
Net income - - - 1,701 - 1,701
Sale of 3,939 shares of common stock in
connection with dividend reinvestment
program 4 96 - - - 100
Sale of 5,934 shares of treasury stock - 3 - - 155 158
Purchase of 6,647 shares of treasury stock - - - - (178) (178)
Cash dividends declared - $.64 per share - - - (569) - (569)
Unrealized gain on securities available-
for-sale, net of deferred income taxes
of $1,118 - - 1,758 - - 1,758
-------------------------------------------------------------------------------------
Balance at December 31, 1995 898 10,759 (181) 15,249 (182) 26,543
Net income - - - 1,310 - 1,310
Purchase of 32,072 shares of treasury stock - - - - (946) (946)
Sale of 6,240 shares of treasury stock - - - - 186 186
Cash dividends declared - $.79 per share - - - (691) - (691)
Unrealized loss on securities available-
for-sale, net of deferred income taxes
of $7 - - (22) - - (22)
-------------------------------------------------------------------------------------
Balance at December 31, 1996 $898 $10,759 $ (203) $15,868 $(942) $26,380
=====================================================================================
</TABLE>
See accompanying notes.
4
<PAGE> 26
Merchants and Manufacturers Bancorporation, Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1995 1994
------------------------------
(In thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 1,310 $ 1,701 $ 1,524
Adjustments to reconcile net income to cash
provided by operating activities:
Provision for loan losses 460 132 43
Provision for depreciation 484 405 392
Net amortization of investment securities
premiums and discounts 287 339 370
Net realized (gains) losses on investment securities (70) (61) 244
Decrease (increase) in accrued interest receivable 62 (185) 11
Increase (decrease) in accrued interest payable (180) 241 129
Other 31 194 (367)
------------------------------
Net cash provided by operating activities 2,384 2,766 2,346
INVESTING ACTIVITIES
Proceeds from redemption and maturities of
investment securities held to maturity - 2,525 4,440
Purchases of investment securities held to maturity - (992) (4,820)
Purchases of securities available-for-sale (12,718) (15,264) (28,708)
Proceeds from sales of securities available-for-sale 15,848 13,724 12,637
Proceeds from redemption and maturities of securities
available-for-sale 14,054 10,977 12,786
Net increase in loans (26,700) (14,012) (12,242)
Purchases of premises and equipment (679) (1,852) (454)
Proceeds from sales of real estate 100 496 -
Purchases of Federal Home Loan Bank stock (416) (28) -
Proceeds from sales of Federal Home Loan Bank stock - - 243
------------------------------
Net cash used in investing activities (10,511) (4,426) (16,118)
</TABLE>
(continued)
5
<PAGE> 27
Merchants and Manufacturers Bancorporation, Inc.
Consolidated Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1995 1994
---------------------------
(In thousands)
<S> <C> <C> <C>
FINANCING ACTIVITIES
Net increase (decrease) in deposits $ (150) $ 9,637 $ 8,815
Payments of cash dividends to stockholders (691) (569) (454)
Net increase in borrowings 3,850 3,000 -
Increase (decrease) in advance payments by
borrowers for taxes and insurance (297) 265 78
Purchase of treasury stock (946) (178) (332)
Proceeds from the sale of treasury stock 186 158 176
Proceeds from dividend reinvestment plan - 100 -
---------------------------
Net cash provided by financing activities 1,952 12,413 8,283
---------------------------
Increase (decrease) in cash and cash equivalents (6,175) 10,753 (5,489)
Cash and cash equivalents at beginning of year 28,447 17,694 23,183
---------------------------
Cash and cash equivalents at end of year $22,272 $28,447 $17,694
===========================
Supplemental cash flow information and non-cash
transactions:
Interest paid $ 8,521 $ 7,680 $ 6,026
Income taxes paid 759 839 948
Investment securities transferred to available-
for-sale portfolio (at amortized cost) - 2,800 501
</TABLE>
See accompanying notes.
6
<PAGE> 28
Merchants and Manufacturers Bancorporation, Inc.
Notes to Consolidated Financial Statements
December 31, 1996
(Dollars in thousands, except per share amounts)
1. ACCOUNTING POLICIES
BUSINESS
Merchants and Manufacturers Bancorporation, Inc. (the Corporation) provides a
full range of personal and commercial financial services to customers through
its subsidiaries. The Corporation and its subsidiaries are subject to
competition from other financial institutions. They are also subject to the
regulations of certain federal and state agencies and undergo periodic
examinations by those regulatory agencies.
BASIS OF FINANCIAL STATEMENT PRESENTATION
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles and include the accounts of the
Corporation, its wholly owned subsidiaries, Lincoln State Bank (Lincoln),
Franklin State Bank (Franklin) and Lincoln Savings Bank, S.A. (Lincoln
Savings)--collectively, "the Banks," M&M Services, which provides management
services for the Banks, Achieve Mortgage Corporation, a wholly owned subsidiary
of Lincoln Savings, which provides mortgage banking services for the Banks and
Lincoln's wholly owned subsidiary, Lincoln Investment Corp., and Lincoln
Savings' wholly owned subsidiary, Lincoln Investment Management Corporation,
which manage an investment portfolio for the Banks. All significant
intercompany accounts and transactions have been eliminated.
In preparing the consolidated financial statements in conformity with generally
accepted accounting principles, management is required to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include amounts due from banks (both interest-bearing
and noninterest-bearing) and federal funds sold.
7
<PAGE> 29
Merchants and Manufacturers Bancorporation, Inc.
Notes to Consolidated Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
INVESTMENT AND MORTGAGE-RELATED SECURITIES
All of the Corporation's investment and mortgage-related securities are
classified as available-for-sale and are stated at fair value, with the
unrealized gains and losses, net of tax, reported as a separate component of
stockholders' equity.
On October 31, 1995, the Corporation chose to reclassify all remaining
investment securities that were classified as held-to-maturity to
available-for-sale. At the date of the transfer, the amortized cost of the
investment securities was $2,800. The unrealized gain on those securities was
$17, which is included in stockholders' equity net of income tax effect of $7.
The amortized cost of securities classified as available-for-sale is adjusted
for amortization of premiums and accretion of discounts to maturity, or in the
case of mortgage-related securities, over the estimated life of the security.
Such amortization is included in interest income from the related security.
Interest and dividends are included in interest income from the related
securities. Realized gains and losses and declines in value judged to be
other-than-temporary are included in net securities gains (losses). The cost of
securities sold is based on the specific identification method.
INTEREST AND FEES ON LOANS
Interest on loans is recorded as income when earned. An allowance for interest
on loans is provided when management considers the collection of these accounts
doubtful.
Loan origination and commitment fees and certain direct loan origination costs
are being deferred and the net amount amortized as an adjustment of the related
loans' yields. The Corporation is amortizing these amounts, using the
level-yield method, adjusted for prepayments, over the contractual life of the
related loans.
8
<PAGE> 30
Merchants and Manufacturers Bancorporation, Inc.
Notes to Consolidated Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
ALLOWANCE FOR LOAN LOSSES
A provision for loan losses is made when a loss is probable and can be
reasonably estimated. The provision is based on past experience and on
prevailing market conditions. Management's evaluation of loss considers various
factors including, but not limited to, general economic conditions, loan
portfolio composition, and prior loss experience.
The Corporation considers loans secured by one- to four-family residential
properties and all consumer loans as homogeneous loans and therefore exempt for
purposes of measuring impairment as defined by Statement of Financial
Accounting Standards (SFAS or Statement) No. 114, "Accounting by Creditors for
Impairment of a Loan," which requires that impaired loans be measured at the
present value of expected future cash flows discounted at the loan's effective
interest rate or, as a practical expedient, at the loan's observable market
price or the fair value of the collateral if the loan is collateral dependent.
The Corporation had no impaired loans in 1996 or 1995.
A substantial portion of the Banks' loans are collateralized by real estate in
metropolitan Milwaukee, Wisconsin. Accordingly, the ultimate collectibility of
a substantial portion of the Banks' loan portfolio and the recovery of a
substantial portion of the carrying amount of real estate owned are susceptible
to changes in market conditions in metropolitan Milwaukee, Wisconsin.
Management believes that the allowance for loan losses is adequate. While
management uses available information to recognize losses, future additions to
the allowance may be necessary based on changes in economic conditions.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost, less accumulated depreciation.
Expenditures for normal repairs and maintenance are charged to operations as
incurred. The cost of premises and equipment is depreciated, using the
straight-line or double-declining-balance methods, over the estimated useful
lives of the assets.
9
<PAGE> 31
Merchants and Manufacturers Bancorporation, Inc.
Notes to Consolidated Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
The Corporation and its subsidiaries file a consolidated federal income tax
return and separate state income tax returns. Provisions are made for deferred
taxes applicable to income and expense items reported in different periods than
for income tax purposes.
EARNINGS PER SHARE INFORMATION
Earnings per share of common stock have been computed based on the weighted
average number of common shares outstanding during each year. Weighted average
shares outstanding were 875,082, 889,677 and 890,655 in 1996, 1995 and 1994,
respectively.
PENDING ACCOUNTING CHANGE
In June 1996, the Financial Accounting Standards Board (FASB) issued Statement
No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," which provides new accounting and reporting
standards for sales, securitization, and servicing of receivables and other
financial assets and extinguishments of liabilities. The provisions of the
Statement are to be applied to transactions occurring after December 31, 1996.
Management does not believe the Company will be significantly impacted by the
adoption of Statement No. 125 or the amendment of Statement No. 125 by
Statement No. 127.
2. INVESTMENT AND MORTGAGE-BACKED SECURITIES
The following is a summary of securities:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
----------------------------------------
<S> <C> <C> <C> <C>
At December 31, 1996
Mutual funds $ 3,173 $ - $ 75 $ 3,098
U.S. treasury and other U.S. government
securities 11,404 16 99 11,321
Small Business Administration certificates 1,047 36 3 1,080
Collateralized mortgage obligations 2,962 3 22 2,943
Government agency mortgage-backed
securities 24,380 46 215 24,211
----------------------------------------
$42,966 $101 $414 $42,653
========================================
</TABLE>
10
<PAGE> 32
Merchants and Manufacturers Bancorporation, Inc.
Notes to Consolidated Financial Statements (continued)
2. INVESTMENT AND MORTGAGE-BACKED SECURITIES (CONTINUED)
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
------------------------------------------------------
<S> <C> <C> <C> <C>
At December 31, 1995
Mutual funds $ 3,173 $ - $ 87 $ 3,086
U.S. treasury and other U.S. government
securities 8,705 46 2 8,749
Small Business Administration certificates 1,224 35 2 1,257
State and political subdivision securities 2,741 2 2 2,741
Collateralized mortgage obligations 3,813 3 44 3,772
Government agency mortgage-backed
securities 40,710 117 348 40,479
------------------------------------------------------
$60,366 $203 $485 $60,084
======================================================
</TABLE>
Securities carried at $1,100 at December 31, 1996 were pledged principally to
secure liabilities to the U.S. Treasury.
The amortized cost and market value of securities at December 31, 1996, by
contractual maturity, are shown below. Expected maturities may differ from
contractual maturities because borrowers may have the right to call or prepay
obligations.
<TABLE>
<CAPTION>
Amortized
Cost Fair Value
-------------------
<S> <C> <C>
Due in one year or less $ 800 $ 802
Due after one year through five years 10,604 10,519
Mutual funds 3,173 3,098
Small Business Administration certificates 1,047 1,080
Collateralized mortgage obligations 2,962 2,943
Government agency mortgage-backed securities 24,380 24,211
-------------------
$42,966 $42,653
===================
</TABLE>
Proceeds from sales of securities available-for-sale during the years ended
December 31, 1996, 1995 and 1994, were $15,848, $13,724 and $12,637,
respectively. Gross gains of $87, $65 and $27 were recorded on those sales for
the years ended December 31, 1996, 1995 and 1994, respectively. Gross losses of
$17, $4 and $271 were also recorded in the years ended December 31, 1996, 1995
and 1994, respectively.
11
<PAGE> 33
Merchants and Manufacturers Bancorporation, Inc.
Notes to Consolidated Financial Statements (continued)
3. LOANS RECEIVABLE
Loans receivable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
1996 1995
-------------------
<S> <C> <C>
First mortgage:
Conventional single-family residential $ 58,358 $ 57,629
Commercial and multifamily residential 61,707 44,594
Construction 12,872 12,619
-------------------
132,937 114,842
Commercial business loans 45,635 36,605
Home equity loans 1,367 1,695
Consumer and installment loans 10,984 10,810
Other 883 1,326
-------------------
58,869 50,436
Less:
Deferred loan fees 76 95
Allowance for loan losses 1,939 1,533
-------------------
$189,791 $163,650
===================
</TABLE>
Transactions in the allowance for loan losses are summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1995 1994
--------------------------
<S> <C> <C> <C>
Balance at beginning of year $1,533 $1,464 $1,356
Provisions charged to operations 460 132 43
Recoveries 29 - 77
Charge-offs (83) (63) (12)
--------------------------
Balance at end of year $1,939 $1,533 $1,464
==========================
</TABLE>
Total nonaccrual loans were $937 and $658 at December 31, 1996 and 1995,
respectively.
12
<PAGE> 34
Merchants and Manufacturers Bancorporation, Inc.
Notes to Consolidated Financial Statements (continued)
4. PREMISES AND EQUIPMENT
Premises and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
1996 1995
---------------------
<S> <C> <C>
Land $ 2,248 $ 2,248
Office buildings and improvements 6,646 6,374
Furniture and equipment 3,566 3,160
---------------------
12,460 11,782
Less accumulated depreciation (4,660) (4,177)
---------------------
$ 7,800 $ 7,605
=====================
</TABLE>
5. DEPOSITS
Deposits consist of the following:
<TABLE>
DECEMBER 31
1996 1995
----------------------
<S> <C> <C>
Noninterest-bearing checking accounts $ 32,095 $ 32,575
Negotiable order of withdrawal accounts 19,793 22,989
Passbook accounts 59,569 63,420
Savings deposits and money market investment accounts 7,500 7,509
Time deposits and certificate accounts 113,976 106,590
----------------------
232,933 233,083
Accrued interest on deposits 395 575
----------------------
$233,328 $233,658
======================
</TABLE>
The scheduled maturities of time deposits and certificate accounts at December
31, 1996 are as follows:
<TABLE>
<S> <C>
One year or less $101,395
Over one, through two years 6,170
Over two, through three years 3,010
Thereafter 3,401
--------
$113,976
========
</TABLE>
At December 31, 1996 and 1995, time deposits and certificate accounts with
balances greater than or equal to $100 amounted to $15,313 and $18,862,
respectively.
13
<PAGE> 35
Merchants and Manufacturers Bancorporation, Inc.
Notes to Consolidated Financial Statements (continued)
6. BORROWINGS
At December 31, 1996, the Corporation had an unused line of credit with an
unaffiliated bank with a total available balance of $500. The line bears
interest at the lender's prime rate (8.25% at December 31, 1996) and is
collateralized by 100% of the capital stock of Franklin State Bank.
Lincoln Savings also has an advance of $3,000 from the Federal Home Loan Bank.
The advance bears interest of 6.04% and matures in July 1997.
Lincoln Savings is required to maintain unencumbered mortgage loans in its
portfolio aggregating at least 167% of the amount of outstanding advances from
the Federal Home Loan Bank as collateral. In addition, these advances are
collateralized by Lincoln Savings' Federal Home Loan Bank stock.
Lincoln State and Lincoln Savings have $3,500 and $350, respectively, of
overnight federal funds purchased at December 31, 1996, which bear interest at
7.75%.
7. STOCKHOLDERS' EQUITY
The Banks are subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory--and possibly additional discretionary--actions
by regulators that, if undertaken, could have a direct material effect on the
Banks' financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Banks must meet specific
capital guidelines that involve quantitative measures of the Banks' assets,
liabilities and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Banks' capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Banks to maintain minimum amounts and ratios (set forth in the
table that follows) of total and Tier I capital (as defined in the regulations)
to risk-weighted assets (as defined) and of Tier 1 capital (as defined) to
average assets (as defined). Management believes, as of December 31, 1996, that
the Banks meet all capital adequacy requirements to which they are subject.
14
<PAGE> 36
Merchants and Manufacturers Bancorporation, Inc.
Notes to Consolidated Financial Statements (continued)
7. STOCKHOLDERS' EQUITY (CONTINUED)
As of December 31, 1996, the most recent notification from Federal Deposit
Insurance Corporation categorized the Banks as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Banks must maintain minimum total risk-based, Tier I
risk-based, Tier I leverage ratios as set forth in the table. There are no
conditions or events since that notification that management believes have
changed the institutions' category.
<TABLE>
<CAPTION>
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
--------------- ------------------ --------------------
Amount Ratio Amount Ratio Amount Ratio
--------------- ------------------ --------------------
<S> <C> <C> <C> <C> <C> <C>
AS OF DECEMBER 31, 1996
Total Capital (to Risk-
Weighted Assets):
Lincoln State Bank $11,733 11.92% $7,871 >8.00% $9,839 >10.00%
Franklin State Bank 2,740 11.27% 1,945 >8.00% 2,431 >10.00%
Lincoln Savings Bank 10,837 18.05% 4,803 >8.00% 6,003 >10.00%
Tier 1 Capital (to Risk-
Weighted Assets):
Lincoln State Bank 10,703 10.88% 3,936 >4.00% 5,903 >6.00%
Franklin State Bank 2,458 10.11% 972 >4.00% 1,458 >6.00%
Lincoln Savings Bank 10,205 17.00% 2,401 >4.00% 3,602 >6.00%
Tier 1 Capital (to Average
Assets):
Lincoln State Bank 10,703 8.39% 5,101 >4.00% 6,376 >5.00%
Franklin State Bank 2,458 7.33% 1,342 >4.00% 1,677 >5.00%
Lincoln Savings Bank 10,205 9.70% 4,207 >4.00% 5,258 >5.00%
</TABLE>
8. RESTRICTIONS ON SUBSIDIARY DIVIDENDS, LOANS OR ADVANCES
Dividends are paid by the Corporation from funds which are mainly provided by
dividends from the Banks. However, certain restrictions exist regarding the
ability of the Banks to transfer funds to the Corporation in the form of cash
dividends, loans or advances. Approval of the regulatory authorities is
required to pay dividends in excess of certain levels of the Banks' retained
earnings.
As of December 31, 1996, the subsidiary banks collectively had equity of
$23,237 of which $2,415 was available for distribution to the Corporation as
dividends without prior regulatory approval.
15
<PAGE> 37
Merchants and Manufacturers Bancorporation, Inc.
Notes to Consolidated Financial Statements (continued)
8. RESTRICTIONS ON SUBSIDIARY DIVIDENDS, LOANS OR ADVANCES (CONTINUED)
Under FRB regulations, the Banks are limited as to the amount they may loan to
their affiliates, including the Corporation, unless such loans are
collateralized by specific obligations. At December 31, 1996, the maximum
amount available for transfer from any one of these Banks to the Corporation in
the form of loans approximates 8.6% of consolidated stockholders' equity.
9. EMPLOYEE BENEFIT PLANS
The Corporation has an Incentive Stock Option Plan under which 45,000 shares of
common stock are reserved for the grant of options to officers and key
employees at a price not less than the fair market value of the stock on the
date of the grant. The plan limits the options that may be granted to each
employee to $100 (based on aggregate fair market value at the date of the
grant) per calendar year, on a cumulative basis. Options must be exercised
within ten years of the date of grant and can be regranted if forfeited.
A summary of stock option transactions follows:
<TABLE>
<CAPTION>
Number Option Price
of Shares Per Share
--------- -------------
<S> <C> <C>
Total outstanding at December 31, 1993 20,000 $16.27-$20.64
Granted during 1994 5,000 $25.00
------
Total outstanding at December 31, 1996,
1995 and 1994 25,000 $16.27-$25.00
====== =============
</TABLE>
At December 31, 1996, all outstanding options are exercisable.
The Corporation has a 401(k) Profit Sharing Plan and Trust which covers
substantially all employees with at least six months of service who have
attained age twenty and one-half. Participating employees may annually
contribute up to 12% of their pre-tax compensation. The Corporation's annual
contribution consists of a discretionary matching percentage, limited to 1% of
employee compensation, and an additional discretionary amount, which is
determined annually by the Board of Directors. The Corporation's contributions
for 1996, 1995 and 1994, were $164, $149 and $144, respectively.
16
<PAGE> 38
Merchants and Manufacturers Bancorporation, Inc.
Notes to Consolidated Financial Statements (continued)
9. EMPLOYEE BENEFIT PLANS (CONTINUED)
The Corporation has a Management Recognition Plan (MRP) in order to provide
Lincoln Savings employees in management positions a proprietary interest in the
Corporation in a manner designed to encourage such key persons to remain with
the Corporation. The Corporation awarded 9,918 shares of common stock of the
Corporation at a price of $20 per share during the year ended December 31,
1993. All shares awarded became vested at December 31, 1993.
10. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1995 1994
-------------------------
<S> <C> <C> <C>
Current:
Federal $ 718 $769 $644
State 168 124 158
-------------------------
886 893 802
-------------------------
Deferred:
Federal (124) 4 48
State (32) 20 24
-------------------------
(156) 24 72
-------------------------
$ 730 $917 $874
=========================
</TABLE>
The provision for income taxes differs from that computed at the federal
statutory corporate tax rate as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1995 1994
------------------------
<S> <C> <C> <C>
Income tax at statutory rate $694 $890 $815
Increase (reduction) resulting from:
Tax-exempt interest income (49) (58) (46)
State income taxes, net of federal tax benefit 89 100 127
Other (4) (15) (22)
------------------------
$730 $917 $874
========================
</TABLE>
17
<PAGE> 39
Merchants and Manufacturers Bancorporation, Inc.
Notes to Consolidated Financial Statements (continued)
10. INCOME TAXES (CONTINUED)
The components of deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1996 1995
-------------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 533 $ 370
Unrealized loss on securities 103 101
Net operating loss carryforwards 440 334
Other assets 69 161
---------------
Total deferred tax assets 1,145 966
Valuation allowance (441) (334)
---------------
704 632
Deferred tax liabilities:
Depreciation 271 250
Other liabilities 30 32
---------------
Total deferred tax liabilities 301 282
---------------
Net deferred tax asset $ 403 $ 350
===============
</TABLE>
At December 31, 1996, the Corporation has state net operating loss
carryforwards of approximately $8,245 which expire at various dates through
2011. Due to the unlikelihood of realizing these benefits, a valuation
allowance of $441 has been established to offset the deferred tax assets
relating to these carryforwards.
Lincoln Savings qualifies under provisions of the Internal Revenue Code, that
previously permitted it to deduct from taxable income an allowance for bad
debts that differs from the provision for such losses charged to income for
financial reporting purposes. Such amounts accumulated prior to 1988 are
considered permanently deferred and, accordingly, no provision for federal
income taxes has been made for approximately $3,606 of retained income as of
December 31, 1996. If Lincoln Savings no longer qualified as a bank for tax
purposes, income taxes of approximately $1,486 would be imposed.
18
<PAGE> 40
Merchants and Manufacturers Bancorporation, Inc.
Notes to Consolidated Financial Statements (continued)
11. LOANS TO RELATED PARTIES
In the ordinary course of business, loans are granted to related parties, which
include management personnel, directors and entities in which such persons are
principal stockholders. Activity in loans to related parties is as follows:
<TABLE>
<S> <C>
Balance at December 31, 1994 $12,152
Loans originated 4,791
Repayments (2,325)
-------
Balance at December 31, 1995 14,618
Loans originated 7,136
Repayments (4,770)
-------
Balance at December 31, 1996 $16,984
=======
</TABLE>
12. COMMITMENTS AND CONTINGENT LIABILITIES
Off-balance-sheet financial instruments whose contracts represent credit and/or
interest rate risk at December 31, 1996 and 1995, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1996 1995
------------------
<S> <C> <C>
Commitments to originate mortgage loans (expiring
within three months):
Fixed rates $ 5,977 $ 4,699
Adjustable rates 194 364
Unused lines of credit:
Commercial business 22,002 19,213
Home equity (adjustable rate) 1,710 1,890
Credit cards (fixed rate) 2,317 1,455
Standby letters of credit 2,152 1,584
</TABLE>
19
<PAGE> 41
Merchants and Manufacturers Bancorporation, Inc.
Notes to Consolidated Financial Statements (continued)
12. COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
Loan commitments and line-of-credit loans are made to accommodate the financial
needs of the Banks' customers. Standby letters of credit commit the Banks to
make payments on behalf of customers when certain specified future events
occur. These arrangements have credit risk essentially the same as that
involved in extending loans to customers and are subject to the Banks' normal
credit policies. Collateral is obtained based on management's credit assessment
of the customer.
Except for the above-noted commitments to originate loans in the normal course
of business, the Corporation and the Banks have not undertaken the use of
off-balance-sheet derivative financial instruments for any purpose.
13. FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement No. 107, "Disclosures About Fair Value of Financial Instruments,"
requires disclosure of fair value information about financial instruments,
whether or not recognized in the statement of financial condition, for which it
is practicable to estimate that value. In cases where quoted market prices are
not available, fair values are based on estimates using present value or other
valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. In that regard, the derived fair value estimates cannot be substantiated
by comparison to independent markets and, in many cases, could not be realized
in immediate settlement of the instrument. Statement No. 107 excludes certain
financial instruments and all nonfinancial instruments from its disclosure
requirements. Accordingly, the aggregate fair value amounts presented do not
necessarily represent the underlying value of the Corporation. The Corporation
does not routinely measure the market value of financial instruments because
such measurements represent point-in-time estimates of value. It is generally
not the intent of the Corporation to liquidate and therefore realize the
difference between market value and carrying value and even if it were, there
is no assurance that the estimated market values could be realized. Thus, the
information presented is not particularly relevant to predicting the
Corporation's future earnings or cash flows.
The following methods and assumptions were used by the Corporation in
estimating its fair value disclosures for financial instruments:
CASH AND CASH EQUIVALENTS
The carrying amounts for cash and cash equivalents approximate those assets'
fair values.
20
<PAGE> 42
Merchants and Manufacturers Bancorporation, Inc.
Notes to Consolidated Financial Statements (continued)
13. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
INVESTMENT AND MORTGAGE-RELATED SECURITIES
Fair values for investment and mortgage-related securities are based on quoted
market prices, where available. If quoted market prices are not available, fair
values are based on quoted market prices of comparable instruments.
ACCRUED INTEREST INCOME AND EXPENSE
The fair value of accrued interest income and expense approximates the
respective book value.
LOANS RECEIVABLE
For variable-rate loans that reprice frequently and with no significant change
in credit risk, fair values are based on carrying values. The fair values for
residential mortgage loans are based on quoted market prices of similar loans
sold in conjunction with securitization transactions, adjusted for differences
in loan characteristics. The fair values for commercial real estate loans,
rental property mortgage loans, commercial business loans and consumer and
other loans are estimated using discounted cash flow analyses, using interest
rates currently being offered for loans with similar terms to borrowers of
similar credit quality.
FEDERAL HOME LOAN BANK STOCK
FHLB stock is carried at cost which is its redeemable value since the market
for this stock is restricted.
DEPOSITS
The fair values disclosed for noninterest-bearing checking accounts, negotiable
order of withdrawal accounts, passbook accounts and savings deposits and money
market investment accounts are, by definition, equal to the amount payable on
demand at the reporting date (i.e., their carrying amounts). The carrying
amounts for variable-rate, fixed term certificate accounts approximate their
fair values at the reporting date. The fair values of fixed-rate certificates
of deposit are estimated using a discounted cash flow calculation that applies
interest rates currently being offered on certificates to a schedule of
aggregated expected monthly maturities on time deposits.
21
<PAGE> 43
Merchants and Manufacturers Bancorporation, Inc.
Notes to Consolidated Financial Statements (continued)
13. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
BORROWINGS
The fair values of the Corporation's borrowings are estimated using discounted
cash flow analyses, based on the Corporation's current incremental borrowing
rates for similar types of borrowing arrangements.
OFF-BALANCE-SHEET INSTRUMENTS
Fair values for the Corporation's off-balance-sheet instruments (lending
commitments and standby letters of credit) are based on fees currently charged
to enter into similar agreements, taking into account the remaining terms of
the agreements, the counterparties' credit standing and discounted cash flow
analyses. The fair value of these off-balance-sheet items approximates the
recorded amounts of the related fees and is not material at December 31, 1996.
The carrying amounts and fair values of the Corporation's financial instruments
consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
--------------------- ---------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
--------------------- ---------------------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 22,272 $ 22,272 $ 28,447 $ 28,447
Securities available-for-sale:
Investment securities 15,499 15,499 15,833 15,833
Mortgage-related securities 27,154 27,154 44,251 44,251
Loans receivable 191,806 192,395 165,278 165,541
Accrued interest receivable 1,470 1,470 1,532 1,532
Federal Home Loan Bank stock 1,118 1,118 702 702
Deposits 232,933 232,865 233,083 233,231
Accrued interest payable 395 395 575 575
Borrowings 6,850 6,850 3,000 2,973
</TABLE>
22
<PAGE> 44
Merchants and Manufacturers Bancorporation, Inc.
Notes to Consolidated Financial Statements (continued)
14. SUBSEQUENT EVENT
On January 1, 1997, Lincoln Savings was converted from a Wisconsin stock
savings bank to a Wisconsin commercial bank to obtain increased flexibility in
structuring its investments and operations, thereby achieving certain
improvements in operating income, while maintaining financial soundness.
15. MERCHANTS AND MANUFACTURERS BANCORPORATION, INC. PARENT COMPANY ONLY
FINANCIAL INFORMATION
<TABLE>
<CAPTION>
DECEMBER 31
STATEMENTS OF FINANCIAL CONDITION 1996 1995
------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 683 $ 320
Mortgage-related securities available-for-sale,
at fair value - 713
Investment in subsidiaries 23,697 22,963
Premises and equipment 1,955 1,809
Other assets 925 998
------------------
Total assets $27,260 $26,803
==================
LIABILITIES
Other liabilities $ 880 $ 260
STOCKHOLDERS' EQUITY
Common stock 898 898
Additional paid-in capital 10,759 10,759
Retained earnings 15,665 15,068
Less treasury stock (942) (182)
------------------
Total stockholders' equity 26,380 26,543
------------------
Total liabilities and stockholders' equity $27,260 $26,803
==================
</TABLE>
23
<PAGE> 45
Merchants and Manufacturers Bancorporation, Inc.
Notes to Consolidated Financial Statements (continued)
15. MERCHANTS AND MANUFACTURERS BANCORPORATION, INC. PARENT COMPANY ONLY
FINANCIAL INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1995 1994
--------------------------
STATEMENTS OF INCOME
<S> <C> <C> <C>
Income:
Interest on loans, including fees $ 26 $ - $ -
Interest on investments 25 64 72
Dividends 1,876 1,198 938
Other 244 251 234
--------------------------
2,171 1,513 1,244
Expenses:
Salaries and employee benefits 847 503 482
Occupancy 281 272 268
Interest 3 - -
Other 544 656 310
--------------------------
1,675 1,431 1,060
--------------------------
Income before income taxes and equity in
undistributed net income of subsidiary banks 496 82 184
Income taxes 478 389 262
--------------------------
Income before equity in undistributed net income
of subsidiary banks 974 471 446
Equity in undistributed net income of subsidiary banks 336 1,230 1,078
--------------------------
Net income $1,310 $1,701 $1,524
==========================
</TABLE>
24
<PAGE> 46
Merchants and Manufacturers Bancorporation, Inc.
Notes to Consolidated Financial Statements (continued)
15. MERCHANTS AND MANUFACTURERS BANCORPORATION, INC. PARENT COMPANY ONLY
FINANCIAL INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------
1996 1995 1994
<S> <C> <C> <C>
CONDENSED STATEMENTS OF CASH FLOWS
OPERATING ACTIVITIES
Net income $1,310 $1,701 $1,524
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed net income of subsidiaries (336) (1,230) (1,078)
Provision for depreciation 80 73 62
Amortization of premiums on mortgage-backed securities 2 5 11
Decrease (increase) in other assets 73 (439) 267
Increase (decrease) in accrued liabilities 620 (40) 130
Other (429) - (14)
--------------------------
Net cash provided by operating activities 1,320 70 902
INVESTING ACTIVITIES
Sales of mortgage-backed securities 693 - -
Proceeds from repayments of mortgage-related securities 27 48 99
Proceeds from sales of furniture and equipment - - 186
Purchases of furniture and equipment (226) (56) (93)
--------------------------
Net cash provided by (used in) investing activities 494 (8) 192
FINANCING ACTIVITIES
Payment of cash dividends (691) (569) (454)
Capital contribution to subsidiary - - (300)
Purchase of treasury stock (946) (178) (332)
Proceeds from the sale of treasury stock 186 158 176
Proceeds from dividend reimbursement plan - 100 -
--------------------------
Net cash used in financing activities (1,451) (489) (910)
--------------------------
Increase (decrease) in cash and cash equivalents 363 (427) 184
Cash and cash equivalents at beginning of year 320 747 563
--------------------------
Cash and cash equivalents at end of year $ 683 $ 320 $ 747
==========================
</TABLE>
25
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 9,247
<INT-BEARING-DEPOSITS> 9,667
<FED-FUNDS-SOLD> 3,358
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 42,653
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 191,730
<ALLOWANCE> 1,939
<TOTAL-ASSETS> 267,723
<DEPOSITS> 232,933
<SHORT-TERM> 6,850
<LIABILITIES-OTHER> 1,560
<LONG-TERM> 0
0
0
<COMMON> 898
<OTHER-SE> 25,482
<TOTAL-LIABILITIES-AND-EQUITY> 267,723
<INTEREST-LOAN> 15,228
<INTEREST-INVEST> 3,518
<INTEREST-OTHER> 522
<INTEREST-TOTAL> 19,328
<INTEREST-DEPOSIT> 8,146
<INTEREST-EXPENSE> 8,362
<INTEREST-INCOME-NET> 10,966
<LOAN-LOSSES> 460
<SECURITIES-GAINS> 70
<EXPENSE-OTHER> 10,020
<INCOME-PRETAX> 2,041
<INCOME-PRE-EXTRAORDINARY> 2,041
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,311
<EPS-PRIMARY> 1.50
<EPS-DILUTED> 1.50
<YIELD-ACTUAL> 7.91
<LOANS-NON> 938
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,533
<CHARGE-OFFS> 85
<RECOVERIES> 29
<ALLOWANCE-CLOSE> 1,939
<ALLOWANCE-DOMESTIC> 1,939
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
