<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file Number 0-21292
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<S><C>
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC.
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(Exact name of registrant as specified in its charter)
Wisconsin 39-1413328
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(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
14100 West National Avenue, PO Box 511160
New Berlin, Wisconsin 53151-1160
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(Address of principal executive office)
(414) 827-6713
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Registrant's telephone number, including area code:
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(Former name, former address and former fiscal year, if changed since last report)
</TABLE>
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 .
---- ----
Applicable Only to Corporate Issuers
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Common Stock, par value $1.00 per share 899,390 Shares
--------------------------------------- -------------------------------
Class Outstanding at November 1, 1997
<PAGE> 2
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE NUMBER
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Consolidated Statements of Financial Condition
as of September 30, 1997 and December 31, 1996 3
Unaudited Consolidated Statements of Income for the Three
Months and the Nine Months ended
September 30, 1997 and 1996 4
Unaudited Consolidated Statements of Cash Flows for the
Nine Months ended September 30, 1997
and 1996 5
Notes to Unaudited Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
PART II. OTHER INFORMATION
Items 1-6 16
Signatures 17
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2
<PAGE> 3
PART I. FINANCIAL INFORMATION
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
--------------- ---------------
(In Thousands)
<S> <C> <C>
ASSETS
Cash and due from banks $ 12,606 $ 9,247
Interest-bearing deposits at other banks 2,087 9,667
Federal funds sold 5,366 3,358
-------- --------
Cash and cash equivalents 20,059 22,272
Securities available-for-sale (at fair value):
Investment securities 15,127 15,499
Mortgage-related securities 23,632 27,154
Loans receivable, net 215,883 189,791
Accrued interest receivable 1,601 1,470
Federal Home Loan Bank stock, at cost 1,050 1,118
Premises and equipment, net 8,912 7,800
Other assets 1,937 2,619
-------- --------
Total assets $288,201 $267,723
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $256,967 $232,933
Accrued interest payable 373 395
Short-term borrowings 0 6,850
Advance payments by borrowers for taxes and insurance 1,449 67
Other liabilities 724 1,098
-------- --------
Total liabilities 259,513 241,343
Stockholders' equity
Common stock, par value $1.00 per share: authorized--
1,500,000 shares; issued and outstanding--899,650 shares
and 897,812 shares, respectively 900 898
Additional paid in capital 10,890 10,759
Net unrealized loss on securities available-for-sale (58) (203)
Retained earnings 16,965 15,868
Less treasury stock, at cost--260 shares and 32,845
shares, respectively (9) (942)
-------- --------
Total stockholders' equity 28,688 26,380
-------- --------
Total liabilities and stockholders' equity $288,201 $267,723
======== ========
See notes to unaudited consolidated financial statements.
</TABLE>
3
<PAGE> 4
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
---------- ---------- -------- ----------
(In Thousands, except per share data)
<S> <C> <C> <C> <C>
Interest income:
Loans, including fees $ 4,610 $ 3,920 $ 13,154 $ 11,184
Investment securities:
Taxable 298 321 999 849
Exempt from federal income taxes 2 67 2 82
Mortgage-related securities 372 599 1,082 1,924
Other 96 22 254 292
------- ------- --------- ---------
Total interest income 5,378 4,929 15,491 14,331
Interest expense:
Deposits 2,294 2,077 6,498 6,045
Borrowings 27 61 192 161
------- ------- --------- ---------
Total interest expense 2,321 2,138 6,690 6,206
Net interest income 3,057 2,791 8,801 8,125
Provision for loan losses 48 388 144 460
------- ------- --------- ---------
Net interest income after provision for
loan losses 3,009 2,403 8,657 7,665
Non-interest income:
Service charges on deposit accounts 164 181 509 542
Service charges on loans 50 47 90 156
Net gain on securities sales 35 11 78 18
Other 184 166 542 423
------- ------- --------- ---------
433 405 1,219 1,139
Non-interest expenses:
Salaries and employee benefits 1,263 1,340 4,181 3,965
Premises and equipment 387 343 1,067 1,035
Data processing fees 158 142 455 417
SAIF special assessment 0 604 0 604
Federal deposit insurance premiums 20 53 57 159
Other 515 507 1,526 1,584
------- ------- --------- ---------
2,343 2,989 7,286 7,764
Income (loss) before income taxes 1,099 (181) 2,590 1,040
Income taxes (credit) 408 (62) 970 361
------- ------- --------- ---------
Net income (loss) $ 691 $ (119) $ 1,620 $ 679
======= ======= ========= =========
Earnings (loss) per share $ 0.79 $ (0.14) $ 1.87 $ 0.77
======= ======= ========= =========
Dividends per share $ 0.20 $ 0.20 $ 0.60 $ 0.54
======= ======= ========= =========
See notes to unaudited consolidated financial statements.
</TABLE>
4
<PAGE> 5
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1997 1996
---------- ----------
(In Thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 1,620 $ 679
Adjustments to reconcile net income to cash provided by
Operating activities:
Provision for loan losses 144 460
Provision for depreciation 379 310
Net amortization of investments securities premiums and discounts 97 236
Net realized investment security gains (78) (18)
Increase in accrued interest receivable (131) (80)
Decrease in accrued interest payable (22) (84)
Other 233 503
--------- ---------
Net cash provided by operating activities 2,242 2,006
INVESTING ACTIVITIES
Purchase of securities available for sale (15,177) (12,318)
Proceeds from redemptions and maturities of securities available for sale 6,966 11,884
Proceeds from sales of securities available for sale 12,308 6,960
Net increase in loans (26,237) (24,243)
Purchase of premises and equipment (1,491) (388)
Proceeds from sales of real estate 0 100
Redemption (purchase) of Federal Home Loan Bank stock 68 (416)
--------- ---------
Net cash used in investing activities (23,563) (18,421)
FINANCING ACTIVITIES
Net increase in deposits 24,034 4,003
Payment of cash dividends to stockholders (523) (473)
Net increase (decrease) in short term borrowings (6,850) 800
Purchase of treasury stock (251) (628)
Proceeds from sale of treasury stock 1,255 104
Increase in advance payments by borrowers for taxes and insurance 1,381 1,162
Proceeds from dividend reinvestment plan 62 0
--------- ---------
Net cash provided in financing activities 19,108 4,968
Decrease in cash and cash equivalents (2,213) (11,447)
Cash and cash equivalents at beginning of period 22,272 28,447
--------- ---------
Cash and cash equivalents at end of period $ 20,059 $ 17,000
========= =========
Supplemental cash flow information:
Interest paid $ 6,706 $ 6,268
Income taxes paid 688 729
Loans transferred to other real estate owned 0 100
See notes to unaudited consolidated financial statements
</TABLE>
5
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MERCHANTS AND MANUFACTURERS BANCORPORATION, INC.
Notes to Unaudited Consolidated Financial Statements
September 30, 1997
NOTE A -- BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include the
accounts of Merchants and Manufacturers Bancorporation, Inc. (the Corporation)
and its wholly owned subsidiaries, Lincoln State Bank, Franklin State Bank
("collectively the Banks"), Lincoln Community Bank, S.A. ("Lincoln Community")
formerly known as Lincoln Savings Bank, Achieve Mortgage Corporation and M&M
Services, Inc. Lincoln State Bank also includes the accounts of its wholly
owned subsidiary, M&M Lincoln Investment Corporation. Lincoln Community Bank
also includes the accounts of its wholly owned subsidiary, Lincoln Investment
Management Corporation. All significant intercompany balances and transactions
have been eliminated.
On January 1, 1997, Lincoln Savings Bank converted from a Wisconsin stock
savings bank to a Wisconsin commercial bank. Upon conversion Lincoln Savings
Bank changed its name to Lincoln Community Bank.
On January 1, 1997, Achieve Mortgage Corporation was formed to act as the
Corporation's mortgage broker.
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for
a fair presentation have been included. Operating results for the nine-month
period ended September 30, 1997 are not necessarily indicative of the results
that may be expected for the year ended December 31, 1997. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Corporation's Form 10-K for the year ended December 31,
1996.
6
<PAGE> 7
This 10-Q contains various forward-looking statements concerning the Company's
prospects that are based on the current expectations and beliefs of management.
Forward-looking statements may also be made by the Corporation from time to
time in other reports and documents as well as oral presentations. When used
in written documents or oral statements, the words anticipate, believe,
estimate, expect, objective and similar expressions are intended to identify
forward-looking statements. The statements contained herein and such future
statements involve or may involve certain assumptions, risks and uncertainties,
many of which are beyond the Corporation's control, that could cause the
Corporation's actual results and performance to differ materially from what is
expected. In addition to the assumptions and other factors referenced
specifically in connection with such statements, the following factors could
impact the business and financial prospects of the Corporation: general
economic conditions; legislative and regulatory initiatives; monetary and
fiscal policies of the federal government; deposit flows; disintermidiation;
the cost of funds; general market rates of interest; interest rates or
investment returns on competing investments; demand for loan products; demand
for financial services; changes in accounting policies or guidelines; and
changes in the quality or composition of the Corporation's loan and investment
portfolio.
NOTE B -- EARNINGS PER SHARE INFORMATION
Primary earnings (loss) per share for the three months ended September 30,
1997, and 1996 and for the nine months ended September 30, 1997 and 1996 have
been determined by dividing net income (loss) for the respective periods by the
weighted average number of shares of common stock and common stock equivalents
outstanding during the period.
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<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
- --------------------------------------------------- ------------------------
<S> <C> <C> <C> <C>
Net income (loss) $690,958 $(119,237) $ 1,619,914 $ 679,263
Weighted average
shares outstanding 874,730 872,079 866,122 878,016
------------------------------------------------ ------------------------
Earnings (loss) per
share $ 0.79 $ (0.14) $ 1.87 $ 0.77
===================== ========================
</TABLE>
Statement of Financial Accounting Standard No. 128, Earnings Per Share, was
issued in February 1997 and is effective for interim and annual periods ending
after December 15, 1997. Statement 128 replaces the presentation of primary
earnings per share ("EPS") with a presentation of basic EPS. Basic EPS
excludes dilution and is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding for
the period. Basic EPS will typically be higher than primary EPS. Statement
No. 128 also requires presentation of diluted EPS which is computed similarly
to fully diluted EPS under existing accounting rules.
7
<PAGE> 8
Earnings per share data for the three and nine months ended September 30, 1997
are calculated in accordance with Statement 128 are as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
- ----------------------------------------------------------- --------------------
<S> <C> <C> <C> <C>
Basic earnings (loss) per share $ 0.79 $(0.14) $ 1.87 $ 0.77
Diluted earnings (loss) per share $ 0.79 $(0.14) $ 1.87 $ 0.77
</TABLE>
NOTE C -- LOANS RECEIVABLE
Loans are comprised of the following categories:
<TABLE>
<CAPTION>
September 30
1997 1996
----------- -----------
(In Thousands)
<S> <C> <C>
Commercial business loans $ 55,730 $ 45,665
Commercial real estate 69,128 54,548
Real estate mortgages 81,591 78,013
Installments 10,771 9,847
Other 796 1,292
-------- --------
Total loans 218,016 189,365
Unearned income (69) (85)
-------- --------
Loans, net of unearned income $217,947 $189,280
======== ========
</TABLE>
The following table presents changes in the allowance for loan losses:
<TABLE>
<CAPTION>
September 30
1997 1996 1995
-------- -------- --------
(In Thousands)
<S> <C> <C> <C>
Balance at January 1 $ 1,939 $ 1,533 $ 1,464
Provisions 144 460 126
Charge-offs (19) (75) (40)
Recoveries 0 29 0
------- ------- -------
Balance at September 30 $ 2,064 $ 1,947 $ 1,550
======= ======= =======
</TABLE>
NOTE D -- STOCKHOLDERS' EQUITY
Under federal law and regulations, the Corporation is required to meet certain
capital requirements. The Banks and Lincoln Community are required to meet
leverage and risk-based capital requirements. The leverage ratio, in general,
is stockholders' equity as a percentage of total assets. The risk-based
capital ratio, in general, is stockholders' equity plus general loan loss
allowances (within certain limitations) as a percentage of risk adjusted
assets.
8
<PAGE> 9
As of September 30, 1997, 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 SEPTEMBER 30, 1997
Total Capital (to Risk-
Weighted Assets):
Lincoln State Bank $12,158 10.33% $9,418 >8.00% $11,772 >10.00%
Franklin State Bank 3,507 11.47% 2,246 >8.00% 3,058 >10.00%
Lincoln Community 11,579 17.05% 5,433 >8.00% 6,791 >10.00%
Tier 1 Capital (to Risk-
Weighted Assets):
Lincoln State Bank 11,088 9.42% 4,709 >4.00% 7,063 > 6.00%
Franklin State Bank 3,191 10.43% 1,223 >4.00% 1,835 > 6.00%
Lincoln Community 10,901 16.05% 2,717 >4.00% 4,075 > 6.00%
Tier 1 Capital (to
Average Assets):
Lincoln State Bank 11,088 8.27% 5,363 >4.00% 6,703 > 5.00%
Franklin State Bank 3,191 9.09% 1,405 >4.00% 1,756 > 5.00%
Lincoln Community 10,964 10.70% 4,100 >4.00% 5,125 > 5.00%
</TABLE>
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Financial Condition
At September 30, 1997, the Corporation's consolidated total assets were $288.2
million as compared to $267.7 million at December 31, 1996. This increase was
due to a $24.0 million increase in total deposits, from $232.9 million at
December 31, 1996 to $256.9 million at September 30, 1997.
Investment securities available-for-sale decreased $372,000, or 2.4%, from
$15.5 million at December 31, 1996 to $15.1 million at September 30, 1997.
Maturing investment securities in this category caused the decrease.
Mortgage-related securities available-for-sale decreased $3.6 million, or 13.2%
from $27.2 million at December 31, 1996, to $23.6 million at September 30,
1997. The proceeds from sales, maturities and repayments are being used to
fund new loans rather than purchase additional mortgage-related securities.
Loans receivable increased $26.1 million, or 13.7%, from $189.8 million at
December 31, 1996 compared to $215.9 million at September 30, 1997. This
increase was primarily due to new commercial loan relationships. This movement
corresponds to the Corporation's strategic plan of emphasizing commercial
business. These assets tend to be rate-sensitive and will add interest income
in a rising interest rate environment. Currently, loans receivable consists
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. At September 30, 1997 the Corporation has
not designated any loans held for sale. Past loan sales have been loan
participations sold to correspondent banks when the borrowers reached their
lending limit at the Corporation's subsidiary Banks.
Stockholders' equity at September 30, 1997 was $28.7 million compared to $26.4
million at December 31, 1996, an increase of $2.3 million. The change in
stockholders' equity consists of net income of $1.6 million, the net sale of
treasury stock of $1.0 million, less payments of dividends to shareholders of
$523,000 and the $145,000 net increase in the market value of securities
categorized as available for sale. The Banks continue to exceed their
regulatory capital requirements.
Nonperforming Assets and Allowance for Losses
Generally a loan is classified as nonaccrual and the accrual of interest on
such loan is discontinued when the contractual payment of principal or interest
has become 90 days past due or management has serious doubts about further
collectibility of principal or interest. Generally, loans are restored to
accrual status when the obligation is brought current, has performed in
accordance with the contractual terms for a reasonable period of time and the
ultimate collectibility of the total contractual principal and interest is no
longer in doubt.
10
<PAGE> 11
Nonperforming assets are summarized, for the dates indicated, as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- ------------
(dollars in thousands)
<S> <C> <C>
Non-accrual loans:
Mortgage loans
One-to-four family $ 527 $ 616
Commercial real estate 82 94
------ ------
Total mortgage loans 609 710
Commercial business 222 176
Consumer and other 62 52
------ ------
Total non-accrual loans 893 938
Other real estate owned 0 0
------ ------
Total nonperforming assets $ 893 $ 938
====== ======
RATIOS:
Non-accrual loans to total loans 0.41% 0.49%
Nonperforming assets to total assets 0.31 0.35
Loan loss allowance to non-accrual loans 231.13 206.72
Loan loss allowance to total loans 0.95 1.01
</TABLE>
Nonperforming assets decreased by $45,000 from $938,000 at December 31, 1996 to
$893,000 at September 30, 1997, a decrease of 4.8%. Payments collected on
nonperforming loans caused the decrease. Management believes that losses will
be minimal on the remaining balances, due to the collateral position in each
situation.
Results of Operation
Net interest income, for the three months ended September 30, 1997 was $3.06
million, an increase of 9.5% from the $2.79 million reported for the same
period in 1996. The substantial increase in the volume of loans receivable was
the major contributing factor to the increase in net interest income. Net
interest income for the nine months ended September 30, 1997 was $8.80 million,
an increase of 8.3% from the $8.13 million reported for the same period in
1996. The increase in loans and the higher net interest margin were the
primary reasons for the improvement in the year-to-date net interest income as
well.
The following table sets forth the weighted average yield earned on the
Corporation's consolidated loan and investment portfolios, the weighted average
interest paid on deposits and borrowings, the net spread between yield earned
and rates paid and the net interest margin during the nine and three months
ended September 30, 1997 and 1996.
11
<PAGE> 12
<TABLE>
<CAPTION>
During the During the
Three Months Nine Months
Ended Ended
September 30, September 30,
1997 1996 1997 1996
-----------------------------------
<S> <C> <C> <C> <C>
Weighted average yield on
interest-earning assets 8.20% 7.95% 8.05% 7.87%
Weighted average rate paid on
deposit accounts and borrowings 3.65 3.56 3.60 3.53
-----------------------------------
Net interest spread 4.55% 4.39% 4.45% 4.34%
===================================
Net interest margin (net interest
income divided by average
earning assets) 4.66% 4.64% 4.58% 4.46%
===================================
</TABLE>
The provision for loan losses for the three-month period ended September 30,
1997 was $48,000 compared to $388,000 for the three months ended September 30,
1996. For the nine months ended September 30, 1997, the provision for loan
losses was $144,000 compared to $460,000 for the same period in 1996. The
higher provision in 1996 was due to the rapid growth in the loan portfolio and
not any anticipated loan losses. In fact, the Corporation's ratio of
nonperforming loans to total loans is well below its peer group average. The
Corporation uses a risk-based assessment of its loan portfolio to determine the
level of the loan loss allowance. This procedure is based on internal reviews
intended to determine the adequacy of the loan loss allowance in view of
presently known factors. However, changes in economic conditions and the
future financial conditions of borrowers cannot be predicted and may result in
increased future provisions to the loan loss allowance.
Non-interest income for the three months ended September 30, 1997 was $433,000
compared to $405,000 for the three months ended September 30, 1996, an increase
of $28,000, or 6.9%. Non-interest income for the nine months ended September
30, 1997 was $1.2 million compared to $1.1 million for the nine months ended
September 30, 1996, an increase of $80,000, or 7.0%. The increase is due to
fees collected on new products and services and gains on sales of investment
securities.
Non-interest expense for the three months ended September 30, 1997 was $2.34
million compared to $2.99 million for the three months ended September 30,
1996, a decrease of $646,000, or 21.6%. Non-interest expense for the nine
months ended September 30, 1997 was $7.29 million compared to $7.76 million for
the nine months ended September 30, 1996, a decrease of $478,000, or 6.2%. The
three month and nine month periods ended September 30, 1996 included $604,000
of a congressionally mandated one-time assessment to recapitalize the Savings
Association Insurance Fund. Without the special SAIF assessment non-interest
expense for the three months ended September 30, 1996 would have been $2.39
million and $7.16 million for the nine months ended September 30, 1996.
Salaries and employee benefits decreased $77,000 or 5.7% from $1.34 million for
the three-month period ended September 30, 1996 compared to $1.26 million for
the 1997 three-month period. Salaries and employee benefits increased $216,000
or 5.4% from $3.97 million for the nine-month period ended September 30, 1996
to $4.18 million for the nine-month period ended September 30, 1997. Employee
bonus payments, higher benefit costs and changes in personnel accounted for the
change. Premises and equipment
12
<PAGE> 13
expense increased $44,000 or 12.8% from $343,000 for the three month period
ended September 30, 1996 compared to $387,000 for the three month period ended
September 30, 1997. Premises and equipment expense increased $32,000 or 3.1%
from $1.04 million for the nine month period ended September 30, 1996 compared
to $1.07 million for the nine month period ended September 30, 1997. Federal
deposit insurance premiums decreased $33,000 or 62.3% from $53,000 for the
three month period ended September 30, 1996 to $20,000 for the three month
period ended September 30, 1997. Insurance premiums decreased $102,000 or
64.2% from $159,000 for the nine month period ended September 30, 1996 to
$57,000 for the nine month period ended September 30, 1997. The decrease in
FDIC insurance premiums can be attributed to the reduction in premiums being
charged to Lincoln Community Bank. The recapitalization of the Savings
Association Insurance Fund in 1996 reduced the premiums charged to Lincoln
Community Bank. Other expense increased $8,000 or 1.6% from $507,000 for the
three month period ended September 30, 1996 compared to $515,000 for the three
month period ended September 30, 1997. Other expenses decreased $58,000 or
3.7% from $1.58 million for the nine-month period ended September 30, 1996
compared to $1.53 million for the nine-month period ended September 30, 1997.
The minimal increase in the third quarter and reduction for the nine-month
period can be attributed to controlling operating expenses such as office
supplies, legal fees, accounting fees and check losses.
Income before taxes for the three month period ended September 30, 1997 was
$1.10 million compared to a $181,000 loss for the three months ended September
30, 1996, an increase of $1.28 million. Income before taxes for the nine month
period ended September 30, 1997 was $2.59 million compared to $1.04 million for
the nine months ended September 30, 1996, an increase of $1.55 million. The
1996 income before tax income was effected by the $604,000 special SAIF
assessment and the additional $352,000 contribution to the loan loss allowance.
Income tax expense for the three months ended September 30, 1997 increased
$470,000 over the 1996 third quarter tax expense. The effective tax rate for
the three months ended September 30, 1997 was 37.1% compared to 34.3% for the
three months ended September 30, 1996. Income tax expense for the nine months
ended September 30, 1997 increased $609,000 over the same period in 1996. The
effective tax rate for the nine months ended September 30, 1997 was 37.5%
compared to 34.7% for the nine months ended September 30, 1996. The increase
in the tax rate can be attributed to the reduction of tax-exempt investment
securities held by the Corporation.
On an after tax basis, the Corporation reported net income of $691,000 for the
three month period ended September 30, 1997 compared to a loss of $119,000 for
the same period in 1996. For the nine month period ended September 30, 1997,
the Corporation reported net income of $1.62 million compared to $679,000 for
the same period in 1996. After adjusting income for nonrecurring items, net
income for the three-month period ended September 30, 1996 would have been
$568,000 or $0.65 per share and for the nine-month period ended September 30,
1996 net income would have been $1.37 million or $1.56 per share.
Liquidity and Capital Resources
Liquidity management involves the ability to meet the cash flow requirements of
customers who may be either depositors wanting to withdraw funds or borrowers
needing assurance that sufficient funds will be available to meet their credit
needs. The Corporation had liquid assets of $20.1 million and $22.3 million at
September 30, 1997 and December 31, 1996, respectively.
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<PAGE> 14
Management believes liquidity and capital levels are adequate at September 30,
1997. For a discussion of regulatory requirements, see Note D to the Unaudited
Consolidated Financial Statements.
Asset/Liability 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.
Assumptions regarding prepayment and withdrawal rates are based upon the
Corporation's historical experience, and management believes such assumptions
are reasonable.
14
<PAGE> 15
The following table shows the interest rate sensitivity gap for four different
time intervals as of September 30, 1997.
<TABLE>
<CAPTION>
AMOUNTS MATURING OR REPRICING AS OF SEPTEMBER 30, 1997
-----------------------------------------------------------------
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 $ 23,538 $ 21,834 $ 52,213 $ 6,093 $ 103,678
Adjustable-rate mortgage loans 17,990 11,149 16,500 0 45,639
-------- ---------- -------- -------- ---------
Total mortgage loans 41,528 32,983 68,713 6,093 149,317
Commercial business loans 28,677 6,309 20,781 15 55,782
Consumer loans 6,264 1,304 4,484 122 12,174
Tax-exempt loans 675 0 0 0 675
Mortgage-related securities 13,767 0 5,097 4,767 23,631
Fixed rate investment securities and other 3,991 902 6,198 0 11,091
Variable rate investment securities and other 11,489 1,050 0 0 12,539
-------- ---------- -------- -------- ---------
Total interest-earning assets $106,391 $ 42,548 $105,273 $ 10,997 $ 265,209
======== ========== ======== ======== =========
Interest-bearing liabilities:
Deposits
Time deposits $ 91,743 $ 29,734 $ 13,338 $ 4 $ 134,819
NOW accounts 1,304 1,304 13,037 6,084 21,729
Savings accounts 5,058 3,609 36,089 16,841 61,597
Money market accounts 400 400 3,998 1,866 6,664
-------- ---------- -------- -------- ---------
Total deposits 98,505 35,047 66,462 24,795 224,809
Borrowings 0 0 0 0 0
-------- ---------- -------- -------- ---------
Total interest-bearing liabilities $ 98,505 $ 35,047 $ 66,462 $ 24,795 $ 224,809
======== ========== ======== ======== =========
Interest-earning assets less interest-bearing
Liabilities $ 7,886 $ 7,501 $ 38,811 $(13,798) $ 40,400
======== ========== ======== ======== =========
Cumulative interest rate sensitivity gap $ 7,886 $ 15,387 $ 54,198 $ 40,400
======== ========== ======== ========
Cumulative interest rate sensitivity gap as a
Percentage of total assets 2.74% 5.34% 18.81% 14.02%
======== ========== ======== ========
</TABLE>
At September 30, 1997, the Corporation's ratio of cumulative interest-rate
sensitive gap as a percentage of total assets was 2.74% for six months and
5.34% 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
above schedule. For example, although certain assets and liabilities may 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.
15
<PAGE> 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
As of September 30, 1997 there were no material pending legal
proceedings, other than ordinary routine litigation incidental to the
business of the Corporation, to which the Corporation or any of its
subsidiaries was a party or to which any of their property was
subject.
Item 2. Changes in Securities - NONE
Item 3 Defaults upon Senior Securities - NONE
Item 4 Submission of Matters to Vote of Security Holders - NONE
Item 5 Other Information - NONE
Item 6 Exhibits and Reports on Form 8-K
The Corporation did not file any reports on Form 8-K during the three
months ended September 30, 1997. Required exhibits are incorporated
by reference to previously filed Securities Act registration
statements.
16
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed by on its behalf by the
undersigned thereunto duly authorized.
MERCHANTS AND MANUFACTURERS
BANCORPORATION, INC.
-------------------------------
(Registrant)
Date November 10, 1997 /s/ Michael J. Murry
----------------- -------------------------------
Michael J. Murry
Chief Executive Officer & Chairman
of the Board of Directors
Date November 10, 1997 /s/ James C. Mroczkowski
----------------- ------------------------
James C. Mroczkowski
Vice President & Chief Financial
Officer Principal Financial Officer
17
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 12,606
<INT-BEARING-DEPOSITS> 2,087
<FED-FUNDS-SOLD> 5,366
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 38,759
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 217,947
<ALLOWANCE> 2,064
<TOTAL-ASSETS> 288,201
<DEPOSITS> 256,967
<SHORT-TERM> 0
<LIABILITIES-OTHER> 2,546
<LONG-TERM> 0
0
0
<COMMON> 900
<OTHER-SE> 27,788
<TOTAL-LIABILITIES-AND-EQUITY> 288,201
<INTEREST-LOAN> 13,154
<INTEREST-INVEST> 2,083
<INTEREST-OTHER> 254
<INTEREST-TOTAL> 15,491
<INTEREST-DEPOSIT> 6,498
<INTEREST-EXPENSE> 6,690
<INTEREST-INCOME-NET> 8,801
<LOAN-LOSSES> 144
<SECURITIES-GAINS> 78
<EXPENSE-OTHER> 7,286
<INCOME-PRETAX> 2,590
<INCOME-PRE-EXTRAORDINARY> 2,590
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,620
<EPS-PRIMARY> 1.87
<EPS-DILUTED> 1.87
<YIELD-ACTUAL> 8.20
<LOANS-NON> 893
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,939
<CHARGE-OFFS> 19
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 2,064
<ALLOWANCE-DOMESTIC> 2,064
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
