<PAGE> 1
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by registrant [X]
Filed by a party other than the registrant [ ]
Check the appropriate box:
[ ] Preliminary proxy statement [ ] Confidential for use of the
Commission only (as permitted by
Rule 14a-6(e)(2)).
[X] Definitive proxy statement
[ ] Definitive additional materials
[ ] Soliciting material pursuant to Rule 14a-11(c) or Rule 14a-12.
Merchants and Manufacturers Bancorporation, Inc.
- --------------------------------------------------------------------------------
(Name of Registrant as Specific in Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment of filing fee (check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
2
<PAGE> 2
May 4, 1998
To: The Shareholders of Merchants & Manufacturers Bancorporation, Inc.
You are cordially invited to attend the Annual Meeting of Shareholders of
Merchants & Manufacturers Bancorporation, Inc. scheduled for 4:00 P.M. on
Tuesday, May 26, 1998, at Alverno College, Milwaukee, Wisconsin. The meeting
will take place in Wehr Hall, #1 on the enclosed map. Enter parking lot A at
the southwest corner of the Alverno campus from Morgan Avenue.
The matters expected to be acted upon at the meeting are described in detail in
the attached Notice of Annual Meeting and Proxy Statement.
Your Board of Directors and management look forward to greeting you and
discussing the condition of your corporation with you.
Please be sure to sign and return the enclosed proxy card whether or not you
plan to attend the meeting so that your shares will be voted. If you do attend
the meeting, you may revoke your proxy and vote in person if you prefer. The
Board of Directors joins me in hoping that you will attend.
Sincerely yours,
By: /s/ Michael J. Murry
----------------------------
Michael J. Murry,
Chairman of the Board of Directors
Enclosure
3
<PAGE> 3
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC.
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
MAY 26, 1998
TO THE SHAREHOLDERS OF MERCHANTS AND MANUFACTURERS BANCORPORATION, INC.:
The Annual Meeting of Shareholders of Merchants and Manufacturers
Bancorporation, Inc. ("Merchants"), will be held at Alverno College, 3401 South
39th Street, Milwaukee, Wisconsin, on Tuesday, May 26, 1998, at 4:00 p.m., for
the purpose of considering and voting on:
1. Fixing the number of directors at 19, and the election of six Directors
to serve until the annual meeting in the year 2001 as Class III Directors.
Management's nominees are named in the accompanying Proxy Statement.
2. To consider and vote on a proposal to amend Article IV of Merchants'
Articles of Incorporation, as amended, to increase the number of
authorized shares of Common Stock from 1,500,000 to 3,000,000.
3. To consider and vote upon a proposal to amend Merchants' 1996 Incentive
Stock Option Plan to increase the number of Merchants' Common Stock
reserved for issuance upon the exercise of options granted from 13,500
shares (20,250 shares after 50% stock dividend) to 60,000 shares.
4. Such other business as may properly come before the meeting and all
adjournments thereof.
The Board of Directors has fixed April 15, 1998, as the record date for
determining the shareholders of Merchants and Manufacturers Bancorporation,
Inc., entitled to notice of and to vote at the meeting, and only holders of
Common Stock of Merchants and Manufacturers Bancorporation, Inc. of record at
the close of business on such date will be entitled to notice of and to vote at
such meeting and all adjournments.
THE BOARD OF DIRECTORS OF MERCHANTS AND MANUFACTURERS BANCORPORATION, INC.
RECOMMENDS THAT SHAREHOLDERS VOTE FOR THE ELECTION OF THE SIX PERSONS NOMINATED
BY THE BOARD OF DIRECTORS AND NAMED IN THE PROXY STATEMENT, AND FOR THE
ADOPTION OF PROPOSALS 2 AND 3 AS DISCUSSED IN THE PROXY STATEMENT.
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, PLEASE MARK, SIGN, DATE AND
RETURN THE ENCLOSED PROXY PROMPTLY IN THE ACCOMPANYING ENVELOPE. IT IS
IMPORTANT THAT YOUR SHARES BE REPRESENTED AT THE MEETING, WHETHER YOUR HOLDINGS
ARE LARGE OR SMALL. IF YOU DO ATTEND THE MEETING, OR FOR ANY OTHER REASON
DESIRE TO REVOKE YOUR PROXY, YOU MAY DO SO AT ANY TIME BEFORE IT IS VOTED.
Milwaukee, Wisconsin By Order of the Board of Directors of
May 4, 1998 Merchants and Manufacturers Bancorporation, Inc.
By: /s/ Michael J. Murry
----------------------------------------------------
Michael J. Murry, Chairman of the Board of Directors
4
<PAGE> 4
MERCHANTS & MANUFACTURERS BANCORPORATION, INC.
14100 WEST NATIONAL AVENUE
NEW BERLIN, WISCONSIN 53151
PROXY STATEMENT
ANNUAL MEETING - MAY 26, 1998
VOTING OF PROXIES AND REVOCABILITY
This Proxy Statement is furnished in connection with the solicitation of
proxies by the Board of Directors of Merchants & Manufacturers Bancorporation,
Inc., hereinafter called "Merchants," to be voted at the Annual Meeting of
Shareholders to be held on Tuesday, May 26, 1998, at 4:00 P.M., at Alverno
College, 3401 South 39th Street, Milwaukee, Wisconsin, and at any
adjournment(s) thereof (the "Annual Meeting").
The expense of printing and mailing proxy material, including forwarding
expense to beneficial owners of stock held in the name of another, will be
borne by Merchants. No solicitation of proxies other than by mail is
contemplated, except that officers or employees of Merchants or its
subsidiaries may solicit the return of proxies from certain shareholders by
telephone. The Proxy Statement and the accompanying Proxy are being sent to
Merchants' shareholders commencing on or about May 4, 1998.
Shares owned through participation in Merchants' Dividend Reinvestment Plan
will be included on the Proxy you receive and will be voted in accordance with
your instructions in the same manner as shares registered in your own name.
Arrangements will be made with brokerage houses, custodians, nominees, and
other fiduciaries to send proxy material to their principals.
The presence, in person or by proxy, of a majority of the shares of Common
Stock outstanding on the record date is required for a quorum, with respect to
the matters on which action is to be taken at the Annual Meeting. Abstentions
will be treated as shares that are present and entitled to vote for purposes of
determining the presence of a quorum, but as unvoted for purposes of
determining the approval of any matter submitted to the shareholders for a
vote.
Shares as to which proxies have been executed will be voted as specified in the
proxies. If no specification is made, the shares will be voted "FOR" the
election of management's nominees as directors. If additional matters are
properly presented, the persons named in the proxy will have discretion to vote
in accordance with their own judgment in such matters.
Proxies may be revoked at any time prior to the exercise thereof by filing with
the Secretary of Merchants a written revocation or a duly executed proxy
bearing a later date. Shareholders who are present at the Annual Meeting may
revoke their proxy and vote in person, if they so desire.
5
<PAGE> 5
RECORD DATE AND VOTING SECURITIES
The Board of Directors has fixed the close of business on April 15, 1998, as
the record date (the "Record Date") for the determination of shareholders
entitled to notice of, and to vote at, the Annual Meeting. The securities of
Merchants entitled to be voted at the Annual Meeting consist of shares of its
Common Stock, $1.00 par value ("Common Stock") of which 1,360,948 shares were
issued and outstanding at the close of business on the Record Date. Only
shareholders of record at the close of business on the Record Date will be
entitled to receive notice of and to vote at the Annual Meeting.
Each share of Common Stock is entitled to one vote on all matters. There are
no cumulative voting rights.
Unless otherwise directed, all proxies will be voted FOR the election of each
of the individuals nominated to serve as Class III director. The six nominees
receiving the largest number of affirmative votes cast at the Annual Meeting
will be elected as directors.
SHAREHOLDER PROPOSALS
Any shareholders desirous of including any proposal in Merchants' proxy
soliciting material for the next regularly scheduled annual meeting of
shareholders of Merchants must submit their proposal, in writing, at Merchants'
executive offices not later than December 26, 1998. Any such proposal must
comply with Rule 14a-8 of Regulation 14A of the proxy rules of the Securities
and Exchange Commission.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
No person is known to Merchants to own beneficially more than 5% of the
outstanding shares entitled to vote at the Annual Meeting.
ANNUAL REPORT
The 1997 Annual Report of Merchants, which includes financial statements for
the years ended December 31, 1997, 1996 and 1995, has been mailed concurrently
with this proxy statement to shareholders as of the Record Date. The Annual
Report does not constitute a part of the proxy material.
PROPOSAL 1
ELECTION OF DIRECTORS
The Board of Directors of Merchants is divided into three classes designated as
Class I, II and III, as nearly equal in size as possible, with each class of
directors serving staggered three-year terms. The term of office of directors
in Class III expires at the Annual Meeting. At the Annual Meeting,
shareholders will elect six Class III directors to serve until Merchants' 2001
annual meeting of shareholders and until their successors are elected and
qualified. All of the nominees for Class III, directors are currently
directors of Merchants. Messrs. Bomberg, Kaminski, Winters, Cherek, Murry and
Logarakis were elected at the 1995 annual meeting of shareholders of Merchants
to serve until the 1998 Annual Meeting.
6
<PAGE> 6
The six nominees have consented to serve, if elected, and at the date of this
Proxy Statement, Merchants has no reason to believe that any of the named
nominees will be unable to serve. Unless otherwise directed, the persons named
as proxies intend to vote in favor of the election of the six nominees listed
below.
The information presented below as to principal occupation and shares of Common
Stock beneficially owned as of April 15, 1998, is based in part on information
received from the respective persons and in part on the records of Merchants.
NOMINEES FOR CLASS III DIRECTORS
(TERM EXPIRING IN 2001)
<TABLE>
<CAPTION>
NAME PRINCIPAL OCCUPATION AND DIRECTORSHIPS
---- --------------------------------------
<S> <C>
James Bomberg President of Merchants from 1994 to present, appointed Chief
Age: 54 Executive Officer of Merchants in 1998, director and
president of Lincoln State Bank, Milwaukee, Wisconsin, a
subsidiary of Merchants from 1991 to 1993; director and
president of M&M Services, New Berlin, Wisconsin, a
subsidiary of Merchants from 1994 to 1996, director of
Merchants from 1994 to present.
Michael J. Murry Chairman of the Board of Directors of Merchants since 1992;
Age: 52 Chief Executive Officer of Merchants from 1982 to 1998 and
director of Merchants since 1982, director of Lincoln State
Bank since 1983, director of Franklin State Bank, Franklin,
Wisconsin, a subsidiary of Merchants since 1992; Director
of Lincoln Community Bank, Milwaukee, Wisconsin, a
subsidiary of Merchants since 1994.
Conrad Kaminski Appointed President Merchants -Milwaukee in 1998, President
Age: 63 of Lincoln State Bank from 1994 to 1998; director of
Lincoln State Bank from 1992 to present; President of
Lincoln Community Bank from 1997 to 1998, appointed director
of Lincoln Community Bank in 1997, director of Merchants
from 1991 to present; president of Merchants from 1991 to
1993; executive vice president of Merchants from 1982 to
1991.
Nicholas Logarakis President, General Automotive Manufacturing Co., Inc.
Age: 57 Franklin, WI; director of Lincoln State Bank from 1977 to
present; director of Merchants from 1982 to present.
Keith Winters President, Keith C. Winters & Assoc. Ltd. Franklin, WI;
Age: 59 director of Franklin State Bank from 1982 to present;
director of Merchants from 1989 to present.
Duane Cherek Auto dealer, Cherek Lincoln-Mercury, Greenfield, WI;
Age: 53 director of Lincoln Community Bank from 1987 to present;
director of Merchants since 1993, director of M&M Services
from 1994 to present.
</TABLE>
7
<PAGE> 7
<TABLE>
<CAPTION>
CLASS I DIRECTORS (TERM EXPIRING IN 1999)
---------------------------------------------
<S> <C>
Thomas Gapinski Insurance executive, director of Merchants from 1982 to
Age: 63 1986 and from 1992 to present, director of Lincoln State
Bank from 1977 to present.
J. Michael Bartels President Bartels Management Services, Inc., Milwaukee, WI;
Age: 58 director of Merchants since 1995; director of Franklin State
Bank from 1982 to present.
John Krawczyk Executive Vice President and Chief Operating Officer of
Age: 42 Merchants since 1994; director of Merchants from 1993 to
present; director of Lincoln Community Bank from 1987.
Gervase Rose President Roman Electric Co., Milwaukee WI, director of
Age: 61 Merchants from 1992 to 1993 and from 1994 to present;
director of Franklin State Bank from 1982 to present.
Robert Donaj President of Achieve Mortgage Corporation, Milwaukee,
Age: 54 Wisconsin, a subsidiary of Merchants from 1997 to present;
director of Lincoln Community Bank from 1987 to present;
director of Merchants 1993 to present.
James Sass President Max A. Sass Funeral Home; director of Lincoln
Age: 55 Community Bank from 1987 to present; director of Merchants
from 1993 to present.
CLASS II DIRECTORS (TERM EXPIRING IN 2000)
---------------------------------------------
Leonard Helminiak President, Buddy Squirrel Company; Vice President, Quality
Age: 77 Candy Company, St. Francis, WI; director of Merchants from
1983 to present; retired director of Lincoln State Bank.
Dr. Thomas Kozina Retired physician; director of Franklin State Bank from
Age: 67 1982 to present; director of Merchants since 1986
Casimir S. Janiszewski
Age: 45 President, Superior Die Set Corporation, Oak Creek, WI;
director of Merchants from 1995 to present, director of
Franklin State Bank from 1982 to 1991, director of Lincoln
State Bank from 1991 to present
David Kaczynski President, Cardinal Fabricating Corporation, Milwaukee, WI;
Age: 58 director of Lincoln Community Bank from 1994 to present,
director of Merchants from 1994 to present.
Longin Prazynski Retired building inspector, director of Lincoln Community
Age: 68 Bank from 1962 to present, director of Merchants since 1993.
Jack Schwellinger Retired executive; director of Lincoln State Bank from 1984
Age: 70 to present; director of Merchants from 1986 to 1992 and
from 1993 to present.
</TABLE>
8
<PAGE> 8
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth, as of April 15, 1998, information concerning
beneficial ownership of Common Stock of Merchants for each nominee, continuing
director and executive officer.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
TITLE OF NAME OF BENEFICIAL AMOUNT OF BENEFICIAL PERCENT OF
CLASS OWNER OWNERSHIP CLASS
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Common J. Michael Bartels 18,070 1.33
- -----------------------------------------------------------------------------
Common James Bomberg 16,003 1.18
- -----------------------------------------------------------------------------
Common Duane Cherek 8,061 *
- -----------------------------------------------------------------------------
Common Robert Donaj 7,266 *
- -----------------------------------------------------------------------------
Common Thomas Gapinski 2,070 *
- -----------------------------------------------------------------------------
Common Leonard Helminiak 22,099 1.62
- -----------------------------------------------------------------------------
Common Casimir S. Janiszewski 5,053 *
- -----------------------------------------------------------------------------
Common David Kaczynski 2,712 *
- -----------------------------------------------------------------------------
Common Conrad Kaminski 38,356 2.82
- -----------------------------------------------------------------------------
Common Dr. Thomas Kozina 7,577 *
- -----------------------------------------------------------------------------
Common John Krawczyk 16,196 1.19
- -----------------------------------------------------------------------------
Common Nicholas Logarakis 13,755 1.01
- -----------------------------------------------------------------------------
Common James Mroczkowski(1) 6,989 *
- -----------------------------------------------------------------------------
Common Michael Murry 9,233 *
- -----------------------------------------------------------------------------
Common Longin Prazynski 3,750 *
- -----------------------------------------------------------------------------
Common Gervase Rose 3,870 *
- -----------------------------------------------------------------------------
Common James Sass 9,197 *
- -----------------------------------------------------------------------------
Common Jack Schwellinger 13,074 *
- -----------------------------------------------------------------------------
Common Keith Winters 16,191 1.19
- -----------------------------------------------------------------------------
Directors and 219,522 16.13
Executive Officers(2)
- -----------------------------------------------------------------------------
</TABLE>
* Less than 1%
(1) Vice President, Chief Financial Officer; not a director of Merchants
(2) Includes all of the above as a group (18 individuals).
Share ownership includes shares issuable within 60 days upon exercise of
incentive stock options owned by certain officers.
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<PAGE> 9
All shares reported herein are owned with voting and investment power in those
persons whose names are provided herein or by their spouses. Some shares may
be owned in joint tenancy, by a spouse, or in the names of minor children.
BOARD COMMITTEES AND MEETING ATTENDANCE
The Board of Directors held five meetings during 1997. Each director attended
during his/her tenure 75% or more of the total number of meetings of the Board
of Directors and its committees of which they were members.
The Board of Directors of Merchants has the following committees:
THE EXECUTIVE PERSONNEL/COMPENSATION COMMITTEE meets periodically to
review the performance and compensation of certain senior officers
of Merchants and its subsidiaries, including all executive officers
of Merchants. The Executive Personnel/Compensation Committee is
comprised of Messrs. Sass, Rose, Logarakis, and Helminiak, none of
whom are employees of Merchants or its subsidiaries. The Executive
Personnel/Compensation Committee held two meetings during 1997.
Compensation for other officers and employees of Merchants and its
subsidiaries is determined by the management and directors of
Merchants and the respective subsidiary and reviewed by the
PERSONNEL/COMPENSATION COMMITTEE OF MERCHANTS. The
Personnel/Compensation Committee consists of directors of Merchants
and its subsidiary banks. Its members are Messrs. Murry, Logarakis,
Sass, Rose, Helminiak, Kaminski, Duginski, Bomberg, John Krawczyk
and Ms. Cameron. The Personnel/Compensation Committee held four
meetings during 1997.
THE STOCK OPTION COMMITTEE is responsible for administering
Merchants' 1996 Incentive Stock Option Plan. None of the members of
the Stock Option Committee is eligible to participate in the Stock
Option Plan. The Stock Option Committee consists of Messrs. Sass,
Rose, Logarakis, and Helminiak. The Stock Option Committee did not
meet in 1997.
THE MARKETING/SERVICES COMMITTEE assists management in analyzing
market trends for the products of the subsidiary banks and in
devising strategies for promoting, advertising and selling the
services of the subsidiary banks. The Marketing Committee consists
of directors of Merchants and the subsidiary banks. The present
members are Messrs. Murry, Dunham, Klose, Cherek, Sass, Kaminski,
and Bomberg. The Marketing Committee met four times during 1997.
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<PAGE> 10
THE ASSET/LIABILITY MANAGEMENT COMMITTEE monitors the interest rate
risk of the interest-earning assets of the subsidiary banks in
comparison to their interest-bearing liabilities. The
Asset/Liability Management Committee consists of directors of
Merchants and its subsidiary banks. Its members are Messrs. Murry,
Winters, Janiszewski, Dana, Bomberg, LaMacchia, Kaminski, Blonski,
John Krawczyk and Ms. Cameron. The Asset/Liability Management
Committee met four times during 1997.
THE AUDIT/OPERATIONS COMMITTEE reviews budget and auditing matters,
internal control procedures and audit and regulatory reports. The
Audit/Operations Committee consists of directors of Merchants and
its subsidiary banks. Its members are Messrs. Kozina, Gapinski,
Bartels, Schwellinger, Gary Krawczyk, Cherek, Aguilar, Kaczynski,
and Sister Mary Jendras. The Audit/Operations Committee met four
times during 1997.
THE COMPLIANCE COMMITTEE was formed in 1992. Its functions are to
oversee the establishment of policies and procedures and adherence
to such policies and procedures to ensure compliance by Merchants
and its subsidiaries with laws, rules and regulations applicable to
banks and bank holding companies. The Compliance Committee consists
of directors of Merchants and its subsidiary banks. Its members are
Sister Mary Jendras and Messrs. Kozina, Bartels, John Krawczyk,
Prazynski, Donaj, Murry, and Bomberg. The Compliance Committee met
two times during 1997.
The Board of Directors does not have a standing Nominating
Committee.
DIRECTOR COMPENSATION
Directors of Merchants who are not employees of Merchants or any of its
subsidiaries are paid a fee of $50 for each Board of Directors meeting and $200
for each committee meeting. Following two absences from directors or committee
meetings in any one year, the fees are only paid for actual attendance at such
meetings.
CERTAIN TRANSACTIONS
Various officers and directors of Merchants and its subsidiaries, members of
their families, and the companies or firms with which they are associated were
customers of, and had banking transactions, including loans, with one or more
of Merchants' subsidiary banks in the ordinary course of each such bank's
business during 1997. All such loans were made on substantially the same
terms, including interest rates and collateral, as those prevailing at the time
for comparable transactions with other persons and, in the opinion of the
management of Merchants' subsidiary banks, did not involve more than a normal
risk of collectibility or present other unfavorable features.
Keith C. Winters and Associates, LTD, a business interest of director Winters,
lease office space from Merchants. The lease terms are substantially the same
as those offered to other tenants.
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<PAGE> 11
Michael Duginski, director of Lincoln State Bank, and Gary Krawczyk, a director
of Franklin State Bank, are principals of the Krawczyk and Duginski, S.C. law
firm that performs legal services for Merchants and its subsidiaries. Krawczyk
and Duginski lease office space in the Merchants corporate headquarters at
terms substantially the same as those offered to other tenants.
Dana Investment Advisors, Inc., a registered investment advisor under the
Investment Advisor's Act of 1940, acts as an investment advisor to subsidiaries
of Merchants. Michael Dana, President of Dana Investment Advisors, Inc., is a
director of Lincoln State Bank. The advisory services are rendered on
substantially the same terms and conditions as those prevailing for similar
services in the relevant market.
EXECUTIVE COMPENSATION
The following table sets forth information concerning compensation paid or
accrued for services rendered in all capacities to Merchants and its affiliates
for the fiscal years ended December 31, 1997, 1996 and 1995 of the person who
was, on December 31, 1997, the Chief Executive Officer of Merchants and of
persons whose annual compensation exceeded $100,000 in 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Long-Term
Compensation
Annual Compensation Awards
- ------------------------------------------------------------------------------------------------------------
Securities
Name and Other Annual Underlying All Other
Principal Position Year Salary Bonus Compensation Options/SARs(#) Compensation
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Michael Murry 1997 $171,766 $80,000 $12,397 (2)
Chairman of the 1996 $204,907 $85,000 --- --- $13,527 (3)
Board of Directors 1995 $125,000 $76,204 --- --- $10,634 (4)
of Merchants(1)
- ------------------------------------------------------------------------------------------------------------
Robert Blonski 1997 $117,182 $15,000 $5,017 (5)
President and Chief 1996 $117,432 $14,335 --- --- $5,271 (6)
Executive Officer 1995 $117,186 $13,287 --- --- $4,723 (7)
of M&M Services
- ------------------------------------------------------------------------------------------------------------
Conrad Kaminski 1997 $121,217 $15,000 $5,346 (8)
President of 1996 $106,884 $14,335 --- --- $4,732 (9)
Merchants Milwaukee 1995 $101,157 $10,371 --- --- $4,327 (10)
Division
- ------------------------------------------------------------------------------------------------------------
James Bomberg 1997 $117,938 $15,000 $5,206 (11)
President and Chief 1996 $97,149 $14,335 --- --- $4,329 (12)
Executive Officer 1995 $91,603 $11,028 --- --- $3,997 (13)
of Merchants
- ------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Mr. Murry also serves in various capacities as an officer of
Merchants Subsidiaries.
(2) Contributions to the Corporation's Defined Contribution 401(k)
Plan of $9,938 and life insurance policy premium of $2,459
(3) Contributions to the Corporation's Defined Contribution 401(k)
Plan of $11,080 and life insurance policy premium of $2,447.
12
<PAGE> 12
(4) Contributions to the Corporation's Defined Contribution 401(k)
Plan of $8,241 and life insurance policy premium of $2,393.
(5) Contributions to the Corporation's Defined Contribution 401(k)
Plan of $5,017.
(6) Contributions to the Corporation's Defined Contribution 401(k)
Plan of $5,271.
(7) Contributions to the Corporation's Defined Contribution 401(k)
Plan of $4,723.
(8) Contributions to the Corporation's Defined Contribution 401(k)
Plan of $5,346.
(9) Contributions to the Corporation's Defined Contribution 401(k)
Plan of $4,732.
(10) Contributions to the Corporation's Defined Contribution 401(k)
Plan of $4,327.
(11) Contributions to the Corporation's Defined Contribution 401(k)
Plan of $5,206.
(12) Contributions to the Corporation's Defined Contribution 401(k)
Plan of $4,329.
(13) Contributions to the Corporation's Defined Contribution 401(k)
Plan of $3,997.
EMPLOYMENT AGREEMENTS
In February of 1996, Merchants entered into employment agreements with Messrs.
Murry, Bomberg, Kaminski, John Krawczyk and James Mroczkowski. At the same
time, M&M Services, Inc., a wholly-owned subsidiary of Merchants, entered into
employment agreements with Messrs. Blonski and Stengel, and Achieve Mortgage, a
wholly-owned subsidiary of Merchants, entered into an employment agreement with
Mr. Donaj (the "Employment Agreements"). Messrs. Murry, Bomberg, Kaminski,
Krawczyk and Mroczkowski serve as chairman of the board of directors, president
and chief executive officer, president Milwaukee division, executive vice
president and chief operating officer and vice president and chief financial
officer, respectively, of Merchants. Messrs. Blonski and Stengel are president
and chief executive officer and senior vice president and comptroller,
respectively, of M&M Services. Mr. Donaj serves as president and chief
executive officer, of Achieve Mortgage.
With the exception of the Employment Agreements with Messrs. Murry and
Mroczkowski, all of the Employment Agreements replace previous employment
agreements with the respective officers.
Except for the Employment Agreement with Mr. Murry, all of the Employment
Agreements have terms of three years. Mr. Murry's Employment Agreement has a
term of five years. Each Employment Agreement is automatically extended on its
anniversary date for an additional year, unless either party has given advance
notice that the Agreement will not be extended, in which case the Agreement
expires at the end of its then-remaining term.
Duties to be performed under the Agreements are set forth in the respective
By-Laws and are determined by the respective Board of Directors.
Compensation for services rendered under the Employment Agreements consists of
the Base Salary, as defined in the Agreements, and participation in bonus and
other benefit plans.
13
<PAGE> 13
If the Agreements are terminated by the employer prior to their expiration for
reasons other than the employee's death, retirement, disability, or other than
for cause as defined in the Agreements, or if the employee terminates the
Agreement for cause as defined in the Agreement or after a change in control,
as defined in the Agreements, then the employee will receive severance payments
equal to the sum of the Base Salary in effect at termination plus the cash
bonus, if any, for the year prior to termination times the number of years of
the remaining employment term. In addition, the employee will receive fringe
benefits during such remaining term.
If termination occurs because of death, retirement or for cause, or if the
employee terminates without cause, then the employer is obligated to pay the
compensation and benefits only through the date of termination.
If termination occurs due to disability, as defined in the Employment
Agreements, the employee will be entitled to payment of his Base Salary at 100%
for one year and at 75% for the remaining portion of the employment term,
adjusted by payments received by the employee pursuant to disability insurance
and social security and workers compensation programs.
The Employment Agreements provide that during the employment period and for one
year thereafter, the employee will not accept employment with any Significant
Competitor, as that term is defined in the Employment Agreements, of the
Corporation or its affiliates.
THE 1996 INCENTIVE STOCK OPTION PLAN
On April 25, 1996, the Board of Directors of Merchants adopted the Merchants
and Manufacturers Bancorporation, Inc. 1996 Incentive Stock Option Plan (the
"Plan") which was approved by the shareholders on May 28, 1996.
The Plan replaced the 1986 Incentive Stock Option Plan, which terminated in
April 1996. The purpose of the Plan is to advance the interests of Merchants
and its subsidiaries by encouraging and providing for the acquisition of an
equity interest in Merchants by key employees and by enabling Merchants and its
subsidiaries to attract and retain the services of employees upon whose skills
and efforts the success of Merchants depends.
The following summary description of the Plan is qualified in its entirety by
reference to the full text of the Plan a copy of which may be obtained from
Merchants upon request to John Krawczyk, Secretary, 14100 West National Avenue,
P.O. Box 511160, New Berlin, WI 53151.
The Plan is administered by the Stock Option Committee of the Board or by any
other committee appointed by the Board consisting of not less than three (3)
directors (the "Committee"). The Committee is comprised of directors who are
disinterested persons within the meaning of Rule 16b-3 as promulgated by the
Securities and Exchange Commission. Subject to the terms of the Plan and
applicable law, the Committee has the authority to: establish rules for the
administration of the Plan; select the individuals to whom options are granted;
determine the numbers of shares of Common Stock to be covered by such options;
and take any other action it deems necessary for the administration of the
Plan.
14
<PAGE> 14
Participants in the Plan consist of the individuals selected by the Committee.
Those selected individuals may include any executive officer or employee of
Merchants or its subsidiaries who, in the opinion of the Committee, contribute
to Merchants' growth and development.
Subject to adjustment for dividends or other distributions, recapitalizations,
stock splits or similar corporate transactions or events, the total number of
shares of Common Stock with respect to which options may be granted pursuant to
the Plan is 13,500. The shares of Common Stock to be delivered under the Plan
may consist of authorized but unissued stock or treasury stock.
Options may be granted by the Committee to key employees as determined by the
Committee. The Committee has complete discretion in determining the number of
options granted to each such grantee. It is intended that all options granted
under the Plan will qualify as incentive stock options within the meaning of
Section 422 of the Internal Revenue Code.
The exercise price for all options granted pursuant to the Plan is the fair
market value of the Common Stock on the date of grant of the option; however,
in case of options granted to a person then owning more than 10% of the
outstanding Common Stock, the option price will be not less than 110% of the
fair market value on such date. The exercise price must be paid in cash at the
time of exercise of the options.
Options granted under the Plan must be exercised within ten (10) years from the
date of grant, provided that options granted to a person then owning more than
10% of the outstanding stock of Merchants must be exercised before the fifth
anniversary of the date of grant. Options not exercised within the stated time
period will expire.
The Committee may impose such transfer restrictions on the shares of Common
Stock acquired pursuant to the exercise of options under the Plan as may be
required, among others, by applicable federal or state securities laws.
Merchants has a "right of first refusal" pursuant to which any shares of Common
Stock acquired by exercising an option must first be offered to Merchants
before they may be sold to a third party. Merchants may then purchase the
offered shares on the same terms and conditions (including price) as apply to
the potential third-party purchaser.
The Board of Directors of Merchants may terminate, amend or modify the Plan at
any time, provided that no such action of the Board, without prior approval of
the shareholders may: increase the number of shares which may be issued under
the Plan; materially increase the cost of the Plan or increase benefits to
participants or change the class of individuals eligible to receive options.
15
<PAGE> 15
The following is a summary of the principal federal income tax consequences
generally applicable to awards under the Plan. The grant of an option is not
expected to result in any taxable income for the recipient. The holder of an
Incentive Stock Option generally will have no taxable income upon exercising
the Incentive Stock Option (except that a liability may arise pursuant to the
alternative minimum tax), and Merchants will not be entitled to a tax deduction
when an Incentive Stock Option is excercised. The tax consequences to an
optionee upon disposition of share acquired through the exercise of an option
will depend on how long the shares have been held and upon whether such shares
were acquired by exercising an Incentive Stock Option which qualifies as such
under the Internal Revenue Code. Generally, there will be no tax consequences
to Merchants in connection with the disposition of shares acquired under an
option.
The following table presents information about stock options granted in 1997 to
the officers named in the Summary Compensation Table.
STOCK OPTION GRANTS IN 1997
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------
Options % of Total Options Exercise Expiration
Name Granted Granted in Fiscal Year Price Date
- -----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Michael Murry -0- -0- n/a n/a
- -----------------------------------------------------------------------
Robert Blonski -0- -0- n/a n/a
- -----------------------------------------------------------------------
Conrad Kaminski -0- -0- n/a n/a
- -----------------------------------------------------------------------
James Bomberg -0- -0- n/a n/a
- -----------------------------------------------------------------------
</TABLE>
The following table summarizes for each of the officers named in the Summary
Compensation Table the number of shares of Merchants stock acquired upon
exercise of options during the fiscal year ended December 31, 1997; the
aggregate dollar value realized upon exercise of options; the total number of
unexercised options held at the end of the fiscal year ended December 31, 1997;
and the aggregate dollar value of in-the-money unexercised options held at the
end of the fiscal year ended December 31, 1997. Value realized upon exercise
is the difference between fair market value of the underlying stock on the
exercise date and the exercise price of the option. Value of unexercised
in-the-money options at the fiscal year-end is the difference between exercise
price and the fair market value of the underlying stock on December 31, 1997,
which was $46.75 per share. These values, unlike any amount which may be set
forth in the column headed "Value Realized" have not been, and may never be,
realized. The underlying options have not been, and may never be, exercised;
the actual gains, if any, on exercise will depend on the value of Merchants'
stock on the date of exercise. As of December 31, 1997, all unexercised
options were exercisable.
16
<PAGE> 16
AGGREGATED OPTION EXERCISES IN FISCAL YEAR 1997
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
Number of Value of Unexercised
Shares Acquired Value Unexercised Options In-the-Money Options
on Exercise Realized on December 31, 1997 on December 31, 1997
Name (#) $ (#) ($)
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Michael Murry --- --- 1,500 $25,125
- -------------------------------------------------------------------------------------------
Robert Blonski 3,000 $80,250 --- ---
- -------------------------------------------------------------------------------------------
Conrad Kaminski 1,000 $15,980 2,000 $52,770
- -------------------------------------------------------------------------------------------
James Bomberg 2,000 $31,960 1,000 $26,660
- -------------------------------------------------------------------------------------------
</TABLE>
BENEFIT PLANS
Merchants maintains a 401k Profit Sharing Plan for the benefit of all employees
who have attained the age of 20-1/2 years and have completed six months of
service as of the 401k Profit Sharing Plan anniversary date, June 1st. A
participating employee may elect to defer a portion of his or her compensation
(between 1% and 12% of base compensation, subject to certain limitations, in 1%
increments) and contribute this amount to the 401k Profit Sharing Plan.
Deferrals of up to 6% of compensation which are contributed to a trust set up
pursuant to the 401k Profit Sharing Plan may be deducted by Merchants for
federal income tax purposes. Merchants may make either or both of the
following types of contributions out of its net profits to the 401k Profit
Sharing Plan (I) matching contributions up to 1% of base compensation; (ii)
discretionary contributions which are based on consolidated earnings of
Merchants. Employees of Merchants are fully vested in all amounts contributed
to their account under matching and discretionary contributions made by
Merchants. Total contributions amounted to $180,305 in 1997, contributions for
Messrs. Murry, Blonski, Kaminski and Bomberg (the persons listed in the
Compensation Table) were $9,938, $5,017, $5,346 and $5,206 respectively. With
respect to the investment of individual accounts, a participant may direct the
Trustee in writing to invest the vested portion of his/her account in specific
assets, including Merchants' securities.
Merchants has established a Salary Continuation Plan to provide retirement
income for President James Bomberg, Chief Financial Officer James Mroczkowski
and Vice President Cynthia Loew. The Salary Continuation Plan is a
non-qualified executive benefit plan in which Merchants agrees to pay the
executive additional benefits at retirement in return for continued
satisfactory performance. The Merchants Continuation Agreement provides for
annual retirement benefits of $60,700 for Mr. Bomberg, $35,800 for Mr.
Mroczkowski and $30,700 for Ms. Loew, commencing at age 65 and continuing for a
period of 15 years. The Salary Continuation Plan is unfunded (no specific
assets are set aside by Merchants in connection with the Plan). If the covered
executive leaves the bank's employ, either voluntarily or involuntarily, the
agreement under the Salary Continuation Plan terminates and the executive
receives no benefits unless obligations under the Plan are assumed by a
subsidiary of Merchants, because of the executive's employment status with such
subsidiary. The Salary Continuation Plan is informally linked with a single
premium universal life insurance policy. The executive is the insured under
the policy, but Merchants is the owner and beneficiary of the policy. The
executive has no claim on the insurance policy, its cash value or the proceeds
thereof.
17
<PAGE> 17
Franklin State Bank has adopted a Deferred Compensation Plan. Directors of
Franklin State Bank may elect to defer the directors' fees paid to them until
retirement with no income tax payable by the director until retirement benefits
are received. The deferral agreement provides for full vesting since the
covered director is setting aside his current compensation. Payments begin in
the first year following retirement.
PROPOSAL 2
PROPOSAL TO AMEND MERCHANTS' ARTICLES OF
INCORPORATION TO INCREASE AUTHORIZED COMMON STOCK.
DESCRIPTION OF AMENDMENT:
The Merchants' Board of Directors unanimously approved and recommended that
Merchants' shareholders approve an amendment to Article IV of the Articles
which will increase the number of authorized shares of Common Stock of
Merchants from 1,500,000 shares to 3,000,000 shares. If the proposal is
adopted by Merchants' shareholders, it is expected that the amendment will
become effective on May 26, 1998, or as soon as practicable thereafter. No
holder of the Common Stock of Merchants has any preemptive rights. The
complete text of the amendment is attached to this Proxy Statement as Exhibit
A.
Under the current Articles, Merchants is authorized to issue up to 1,500,000
shares of Common Stock, par value $1.00. As of April 15, 1998, 1,360,948
shares were outstanding. If the amendment is adopted, Merchants would be
authorized to issue up to 3,000,000 shares of Common Stock, par value $1.00.
REASONS FOR AND EFFECT OF AMENDMENT:
The Board of Directors believes that it is desirable to have additional
authorized shares of Common Stock available for stock dividends and splits
(such as the recent 50% stock dividend), possible acquisitions and other
general corporate purposes. While Merchants is engaged in an ongoing process
of evaluating potential acquisitions, Merchants is not involved in negotiating
an acquisition involving issuance of additional stock at the present time.
While Merchants cannot predict when and if stock dividends or stock splits or
acquisitions will occur, having the additional authorized shares available for
issuance in the future will provide greater flexibility and will avoid the
delay and expense of a special shareholders meeting, unless such meeting is
required by applicable law.
The increase in the number of authorized shares is not designed to deter or
prevent a change in control; however, under certain circumstances, Merchants
could use additional shares to avoid a takeover or change in control of
Merchants which the Board of Directors deems not to be in the best interest of
the Shareholders of Merchants. Merchants is not aware of any attempt to effect
such a takeover or change in control. As of this date there are no plans or
commitments with respect to the sale of additional shares of Common Stock of
Merchants.
The authorization of additional shares of Common Stock pursuant to this
proposal will have no dilutive effect upon proportionate voting power of
present shareholders of Merchants. However, to the extent that shares are
subsequently issued to persons other than present shareholders and/or in
proportions other than the proportion that presently exists, such issuance
could have a dilutive effect on present shareholders.
18
<PAGE> 18
If a quorum exists, the proposed amendment to the Articles of Incorporation is
approved if the votes cast favoring the amendment exceed the votes opposing the
amendment. A majority of the votes entitled to be cast on the amendment
constitutes a quorum. The Board of Directors recommends that the shareholders
vote FOR the amendment. Proxies solicited by the Board of Directors will be so
voted unless shareholders specify to the contrary in their proxies or abstain
from voting on this matter. The complete text of the proposed amendment is
attached to this proxy statement as Exhibit A.
PROPOSAL 3
PROPOSAL TO INCREASE THE NUMBER OF SHARES OF
COMMON STOCK TO BE RESERVED FOR ISSUANCE UNDER THE
INCENTIVE STOCK OPTION PLAN.
Merchants' 1996 Incentive Stock Option Plan was adopted by the shareholders at
the Annual Meeting in 1996. The purpose of the Plan is to advance the interest
of the shareholders of Merchants by providing opportunity for ownership of the
stock of Merchants to present and future officers and key employees of
Merchants and its subsidiaries. The Plan is intended to provide an incentive
for maximum effort in the successful operation of Merchants and its
subsidiaries. The Board of Directors also believes that the Plan will give
Merchants an additional type of incentive-based compensation to attract and
retain experienced and able employees.
A summary description of the Plan is contained herein under "Executive
Compensation - 1996 Incentive Stock Option Plan." The Summary is qualified in
its entirety by reference to the Plan, which may be reviewed upon request to
the Secretary of Merchants.
As adopted in 1996, a maximum of 13,500 shares (20,250 shares after adjustment
for the 50% stock dividend declared in 1998) were authorized for grant over the
ten (10) year period of the Plan.
Subject to approval of the shareholders, at the Annual Meeting, the Board of
Directors, on April 20, 1998 approved the increase of additional shares for
grant under the Plan. This increase will bring the total shares authorized for
grant to 60,000 shares. All other terms and conditions of the Plan will remain
in effect. No awards have been made of the additional shares.
The increase in the amount of shares of Common Stock reserved for issue upon
the exercise of options granted must be approved by the holders of a majority
of the issued and outstanding shares of Common Stock.
The Board of Directors recommends a vote FOR the approval of the resolution
amending the 1996 Incentive Stock Option Plan. Proxies solicited by the Board
of Directors will be so voted unless shareholders specify to the contrary in
their proxies or abstain from voting on this matter. The complete text of the
amendment is attached to this Proxy Statement as Exhibit B.
19
<PAGE> 19
INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors has selected Ernst & Young LLP as Merchants' independent
auditors for the fiscal year ending December 31, 1998. Representatives of
Ernst & Young will be present at the Annual Meeting to make any statement they
may desire and to respond to questions from shareholders.
OTHER MATTERS
Although management is not aware of any other matters that may come before the
meeting, if any such matters should be presented, the persons named in the
accompanying proxy intend to vote such proxy in accordance with their best
judgment.
SHAREHOLDERS MAY OBTAIN A COPY OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K AS
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION AT NO COST BY WRITING TO THE
OFFICE OF THE SECRETARY, MERCHANTS AND MANUFACTURERS BANCORPORATION, INC.,
14100 WEST NATIONAL AVENUE, P.O.BOX 511160, NEW BERLIN, WISCONSIN, 53151.
By Order of the Board of Directors,
By: /s/ Michael J. Murry
----------------------------------
Michael J. Murry
Chairman of the Board
May 4, 1998
20
<PAGE> 20
EXHIBIT A
RESOLVED, that the Articles of Incorporation of Merchants and
Manufacturers Bancorporation, Inc. be amended by striking out amended
Article IV, relating to Capital, reading as follows:
"The aggregate number of shares of stock which this Corporation
shall have authority to issue shall be one million five hundred
thousand (1,500,000) shares of Common Stock of the par value of
One Dollar ($1.00) per share."
and inserting in lieu thereof the following:
"The aggregate number of shares of stock which this Corporation
shall have authority to issue shall be three million
(3,000,000) shares of Common Stock of the par value of One
Dollar ($1.00) per share."
21
<PAGE> 21
EXHIBIT B
RESOLVED, that Subsection 5.1 of Section 5 of Merchants and
Manufacturers Bancorporation, Inc.'s 1996 Incentive Stock Option Plan
shall be, and it hereby is, amended by striking out the first sentence
reading as follows:
"Subject to adjustment as provided in Section 5.3, the total
number of shares of stock with respect to which options may be
granted pursuant to the Plan shall be 13,500."
and inserting in lieu thereof the following:
"Subject to adjustment as provided in Section 5.3, the total
number of shares of stock with respect to which options may be
granted pursuant to the Plan shall be 60,000."
22
<PAGE> 22
<TABLE>
<CAPTION>
1997 ANNUAL REPORT
TABLE OF CONTENTS
PAGE
<S> <C>
Chairman's Letter 2
Selected Consolidated Financial Data 4
Selected Quarterly Financial Data 5
Management's Discussion and Analysis of
Financial Conditions and Results of Operations 5
Business of The Corporation 16
Report of Management 20
Report of Independent Auditors 21
Consolidated Statements of Financial Condition 22
Consolidated Statements of Income 23
Consolidated Statements of Stockholders' Equity 24
Consolidated Statements of Cash Flows 25
Notes to Consolidated Financial Statements 27
Directors and Officers 42
Investor Information 46
</TABLE>
1
<PAGE> 23
Dear Stockholders:
1997 was an excellent year for the banking industry in general, and for
Merchants & Manufacturers Bancorp in particular. For the third consecutive
year, we enjoyed a substantial growth in earnings which was reflected in the
increased demand for MMBC stock. The successful introduction of new fee-based
service products, coupled with a strong growth trend throughout the branch
organization, has put us on a firm financial footing and enabled us to plan
ahead for continued expansion.
The consolidation that is occurring throughout the industry is familiar to any
reader of the financial pages. As key analysts have pointed out, this has
created new opportunities for banking organizations such as ours to increase
market share. Increasingly, small to medium sized businesses, as well as
individuals, are feeling squeezed out by the larger banks and are looking to
independents to provide the financial services they need. Our continuing
growth in both the commercial and retail sectors is reflecting this trend. Our
plans for 1998 and beyond are based on the principle of steady growth through
customer service.
To ensure equality banking relationships with customers at all levels, we have
undertaken a major reorganization. Several top executives have been promoted
to the office of President within the holding company for the express purpose
of working with new and existing commercial accounts. Additionally, our
commercial lending staff has been augmented to meet the needs of our business
customers.
On the consumer side, we have promoted some of our best and most experienced
officers to the Presidencies of our member banks. This will provide a seamless
transition which will enable those institutions to successfully absorb the
growth we anticipate in the consumer sector. Our ability to promote from
within demonstrates both the quality of our people and our ability to provide
career opportunities inside the organization.
1997 also saw the development of plans for the new office of Franklin State
Bank which will be located in the Franklin Business Park. In line with our
tradition of providing value-added services to our commercial customers, this
branch will be equipped with a state of the art business conference center
capable of providing teleconferencing, data networking, and other
communications services to our customers as well as to other businesses.
Because many of the firms that work with us are oriented toward manufacturing
and engineering the new center will be fully capable of handling technical data
transmission. We expect to be fully operational by October of 1998.
1998 will also see the opening of a new Senior Services Center in West Allis as
well as the introduction of a number of revenue-generating products including
trust services.
2
<PAGE> 24
As we progress toward the year 2000, we anticipate continued expansion. A
portion of this will take place through carefully selected acquisitions. In
order to facilitate this plan we will increase the number of authorized shares
for acquisition purposes.
M&M Bancorp shares are in great demand from many quarters including existing
shareholders, employee retirement programs, and new investors. Our actions
will provide the most effective means of accomplishing growth while continuing
to add value for stockholders.
As a family of neighborhood banks, we feel that it is our duty, both
collectively and individually, to participate in the life of our communities.
I would like to call to your attention the exemplary efforts undertaken by our
company and our employees on behalf of many worthy causes. We provide
continued support to the Lincoln Neighborhood Redevelopment Corporation, the
St. Josaphat Basilica Foundation, Alverno College, and many other civic and
charitable groups. Our employees are actively involved in activities in
support of neighborhood, civic, cultural and charitable organizations including
the Milwaukee Symphony, St. Francis Hospital, the American Cancer Society,
Polish Fest, and many others. Our commitment to our customers, our
neighborhoods, and to each other reflects what we mean when we say that
Merchants & Manufacturers Bancorp is truly "Going Beyond the Numbers."
Sincerely,
By: /s/ Michael J. Murry
--------------------------
Michael J. Murry
Chairman of the Board of Directors
3
<PAGE> 25
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,
--------------------------------------------------------
1997 1996(4) 1995 1994 1993
--------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
SELECTED BALANCE SHEET DATA
Total assets $296,678 $267,723 $264,247 $248,181 $239,944
Loans receivable, net 227,178 189,791 163,650 149,925 137,715
Investment securities held to maturity 0 0 0 4,326 4,451
Investment securities available for sale 12,649 15,499 15,833 9,464 12,097
Mortgage-related securities available for sale 28,169 27,154 44,251 54,634 52,185
Deposits 264,669 232,933 233,083 223,446 214,631
Short-term borrowings 1,500 6,850 3,000 0 0
Stockholders' equity 29,496 26,380 26,543 23,573 24,741
Realized stockholders' equity(3) 29,477 26,583 26,724 25,512 24,612
SELECTED INCOME STATEMENT DATA
Total interest income (taxable-equivalent)(1) $ 21,126 $ 19,401 $ 18,479 $ 16,212 $ 15,543
Total interest expense 9,090 8,362 7,921 6,155 6,476
--------------------------------------------------------
Net interest income 12,036 11,039 10,558 10,057 9,067
Provision for loan losses 192 96 132 43 211
--------------------------------------------------------
Net interest income after provision for
loan losses 11,844 10,943 10,426 10,014 8,856
Net gain (loss) on security sales 78 70 61 (244) (8)
Other noninterest income 1,578 1,485 1,267 1,185 1,391
--------------------------------------------------------
Total noninterest income 1,656 1,555 1,328 941 1,383
Noninterest expense 9,620 9,417 9,040 8,484 8,268
--------------------------------------------------------
Income before income taxes 3,880 3,081 2,714 2,471 1,971
Income taxes 1,439 1,064 917 874 651
Less taxable equivalent adjustment 32 73 96 73 101
--------------------------------------------------------
Net income $ 2,409 $ 1,944 $ 1,701 $ 1,524 $ 1,219
========================================================
PER SHARE DATA
Net income - basic(2) $ 2.75 $ 2.22 $ 1.91 $ 1.71 $ 1.37
Net income - diluted(2) $ 2.72 $ 2.20 $ 1.90 $ 1.70 $ 1.36
Cash dividend declared $ 0.80 $ 0.79 $ 0.64 $ 0.51 $ 0.50
Book value(2) $ 32.64 $ 30.50 $ 29.80 $ 26.48 $ 27.82
Average shares outstanding(2) 874,562 875,082 889,677 890,655 889,363
OTHER DATA
Net interest margin 3.95% 3.87% 3.86% 3.93% 3.81%
Allowance for loan losses to non-accrual loans 299.42% 206.87% 232.92% 189.64% 157.49%
Nonperforming assets to total assets 0.24% 0.35% 0.25% 0.35% 0.41%
Stockholders' equity to total assets(2), 9.94% 9.85% 10.04% 9.50% 10.31%
Average stockholders' equity to average assets 9.77% 9.94% 10.01% 9.87% 10.91%
Return on assets (ratio of net income to
average total assets) 0.86% 0.74% 0.67% 0.62% 0.51%
Return on stockholders' equity (ratio of net
income to average equity) 8.82% 7.42% 6.71% 6.27% 4.87%
Dividend payout ratio 29.18% 35.54% 33.45% 29.79% 33.22%
Facilities:
Number of full-service offices 8 8 8 6 6
Number of limited services offices 6 6 6 4 5
</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) Computed assuming that the 330,625 shares of common stock issued in
connection with the April 2, 1993 merger conversion of Lincoln Community
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.
(3) Excludes SFAS 115 mark-to-market equity adjustment.
(4) Restated to reflect additional loan loss provision of $364,000 and
one-time SAIF assessment of $604,000.
4
<PAGE> 26
SELECTED QUARTERLY FINANCIAL DATA
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>
1997 1996
--------------------------------------------------------------
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) $4,952 $5,173 $5,386 $5,615 $4,696 $4,750 $4,950 $5,005
Interest expense 2,168 2,201 2,321 2,400 2,024 2,044 2,138 2,156
--------------------------------------------------------------
Net interest income 2,784 2,972 3,065 3,215 2,672 2,706 2,812 2,849
Provision for loan losses 48 48 48 48 36 36 388 0
Noninterest income 396 390 433 437 368 366 405 416
Noninterest expense 2,625 2,318 2,343 2,334 2,592 2,183 2,989 2,257
--------------------------------------------------------------
Income (loss) before taxes 507 996 1,107 1,270 412 853 (160) 1,008
Income taxes (benefit) 196 366 408 469 133 290 (62) 369
Less taxable equivalent
Adjustment 6 6 8 12 22 22 21 8
===============================================================
Net income (loss) $ 305 $ 624 $ 691 $ 789 $ 257 $ 541 $(119) $ 631
===============================================================
Basic earnings (loss) per share $0.35 $0.72 $0.79 $0.89 $0.29 $0.62 ($0.14) $0.73
===============================================================
Diluted earnings (loss) per share $0.35 $0.71 $0.78 $0.88 $0.29 $0.61 ($0.14) $0.72
===============================================================
Dividends per share $0.20 $0.20 $0.20 $0.20 $0.17 $0.17 $0.20 $0.25
===============================================================
</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.
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, 1997, 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 Community Bank S.A. which was accounted for as a
pooling-of-interests.
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 $12.0 million in 1997,
compared with $11.0 million in 1996 and $10.6 million in 1995. This increase
of $997,000 in net interest income in 1997 was due primarily to an increase in
the volume of earning assets in 1997 (a $1.7 million increase). This gain was
partially offset by an increase in the volume of interest bearing liabilities
(a $777,000 increase).
The total increase in average earning assets was primarily due to an
increase in average loans of $32.0 million. All of the loan growth was
internally generated. Interest bearing deposits increased $11.6 million in
1997. 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.
5
<PAGE> 27
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,
--------------------------- -------------------------------------------
1997 1996
--------------------------- -------------------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE
-------- -------- ------- ------------- ------------- -------------
ASSETS
<S> <C> <C> <C> <C> <C> <C>
Loans(1),(2) $208,807 $17,972 8.61% $176,790 $15,230 8.61%
Loans exempt from federal
Income taxes(3) 683 77 11.27% 753 88 11.69%
Taxable investment securities(4) 16,043 967 6.03% 17,260 1,028 5.96%
Mortgage-related securities(4) 23,629 1,508 6.38% 38,475 2,407 6.26%
Investment securities exempt
From federal income taxes(3),(4) 233 18 7.73% 2,003 126 6.29%
Other securities 11,091 584 5.27% 10,139 522 5.15%
------------------ -----------------------
Interest earning assets 260,486 21,126 8.11% 245,420 19,401 7.91%
Non interest earning assets 19,082 18,238
-------- --------
Average Assets $279,568 $263,658
======== ========
LIABILITIES AND STOCKHOLDERS'
EQUITY
NOW deposits $21,466 405 1.89% $23,011 479 2.08%
Money market deposits 6,448 155 2.40% 6,291 158 2.51%
Savings deposits 61,575 1,327 2.16% 64,345 1,400 2.18%
Time deposits 125,600 7,010 5.58% 109,862 6,109 5.56%
Other borrowings 3,425 193 5.64% 3,564 216 6.06%
------------------ -----------------------
Interest bearing liabilities 218,514 9,090 4.16% 207,073 8,362 4.04%
------- ------------
Demand deposits and other non
Interest bearing liabilities 33,745 30,369
Stockholders' equity 27,309 26,216
-------- --------
Average Liabilities and
Stockholders' Equity $279,568 $263,658
======== ========
Net interest income/spread $12,036 3.95% $11,039 3.87%
================ ===========================
Net interest earning assets $41,972 $38,347
======== ========
Net yield on interest earning
Assets 4.62% 4.50%
Ratio of average interest-earning ===== =====
Assets to average interest-
Bearing liabilities 1.19 1.19
======== ========
</TABLE>
<TABLE>
<CAPTION>
At or for the Year Ended December 31,
-------------------------------------
1995
-------------------------------------
Average Average
Balance Interest Rate
-------- -------- -------
ASSETS
<S> <C> <C> <C>
Loans(1),(2) $154,696 $13,502 8.73%
Loans exempt from federal
Income taxes(3) 825 97 11.76%
Taxable investment securities(4) 13,796 800 5.80%
Mortgage-related securities(4) 49,031 3,043 6.21%
Investment securities exempt
From federal income taxes(3),(4) 2,643 186 7.04%
Other securities 14,812 851 5.75%
----------------------
Interest earning assets 235,803 18,479 7.84%
Non interest earning assets 17,289
--------
Average Assets $253,092
========
LIABILITIES AND STOCKHOLDERS'
EQUITY
NOW deposits $22,451 483 2.15%
Money market deposits 7,514 187 2.49%
Savings deposits 68,860 1,694 2.46%
Time deposits 96,987 5,345 5.51%
Other borrowings 3,432 212 6.18%
----------------------
Interest bearing liabilities 199,244 7,921 3.98%
Demand deposits and other non --------
Interest bearing liabilities 28,505
Stockholders' equity 25,343
--------
Average Liabilities and
Stockholders' Equity $253,092
========
Net interest income/spread $10,558 3.86%
=======================
Net interest earning assets $36,559
========
Net yield on interest earning
Assets 4.48%
========
Ratio of average interest-earning
Assets to average interest-
Bearing liabilities 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. Average balances of securities
available-for-sale are based on amortized cost.
6
<PAGE> 28
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,
-----------------------------------------------------
1997 vs. 1996
-----------------------------------------------------
INCREASE/(DECREASE)
DUE TO
---------------------------------------- TOTAL
VOLUME INCREASE
VOLUME RATE & RATE (DECREASE)
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
Interest-Earning Assets:
Loans receivable(1) $2,758 ($14) ($2) $2,742
Loans exempt from federal
Income taxes(2) (8) (3) 0 (11)
Taxable investment securities(3) (74) 12 1 (61)
Mortgage-related securities(3) (928) 48 (19) (899)
Investment securities exempt
From federal income taxes(2),(3) (112) 29 (25) (108)
Other securities 49 12 1 62
-----------------------------------------------------
Total interest-earning assets $1,685 $84 ($44) 1,725
=====================================================
Interest-Bearing Liabilities:
NOW deposits ($32) ($45) $3 ($74)
Money market deposits 4 (7) 0 (3)
Savings deposits (61) (13) 1 (73)
Time deposits 875 23 3 901
Other borrowings (9) (15) 1 (23)
-----------------------------------------------------
Total interest-bearing liabilities $777 ($57) $8 $728
=====================================================
Net change in net interest income $997
=========
</TABLE>
<TABLE>
<CAPTION>
For the Year Ended December 31,
-----------------------------------------------------
1996 vs. 1995
-----------------------------------------------------
INCREASE/(DECREASE)
DUE TO
---------------------------------------- TOTAL
VOLUME INCREASE
VOLUME RATE & RATE (DECREASE)
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
Interest-Earning Assets:
Loans receivable(1) $1,928 ($175) ($25) $1,728
Loans exempt from federal
Income taxes(2) (8) (1) 0 (9)
Taxable investment securities(3) 201 22 5 228
Mortgage-related securities(3) (45) (20) 5 (60)
Investment securities exempt
From federal income taxes(2),(3) (655) 24 (5) (636)
Other securities (268) (88) 27 (329)
------------------------------------------------------
Total interest-earning assets $1,153 ($238) $7 922
======================================================
Interest-Bearing Liabilities:
NOW deposits $12 ($16) $0 ($4)
Money market deposits (30) 1 0 (29)
Savings deposits (111) (196) 13 (294)
Time deposits 710 48 6 764
Other borrowings 8 (4) 0 4
------------------------------------------------------
Total interest-bearing liabilities $589 ($167) $19 $441
======================================================
Net change in net interest income $481
===========
</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 1997, the Corporation made a provision of $192,000 to the allowance
for loan losses, as compared to a provision of $460,000 in 1996 and $132,000 in
1995. The 1996 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 1997 decreased by
$45,000, over 1996 to $38,000. This compares to charge-offs of $63,000 in
1995. 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.
NON-INTEREST INCOME
Non-interest income increased $101,000 in 1997 and $227,000 in 1996. The
composition of non-interest income is shown in the following table (in
thousands).
<TABLE>
<CAPTION>
For the Year Ended December 31,
1997 1996 1995
----------------------------------
<S> <C> <C> <C>
Service charges on deposit accounts $ 746 $ 725 $ 726
Service charges on loans 141 172 75
Net gain on securities sales 78 70 61
Other 691 588 466
----------------------------------
Total noninterest income $1,656 $1,555 $1,328
==================================
</TABLE>
7
<PAGE> 29
Service charge income on deposit accounts increased $21,000 in 1997 and
decreased $1,000 in 1996. The increase in the charges on eligible accounts
caused the increase in 1997 income, while the 1996 decrease can be attributed
to the increase in no-charge accounts.
The Corporation recorded a net gain of $78,000 on the sale of $12.3
million of securities in 1997, $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. 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 decreased $31,000 from $172,000 in 1996 to
$141,000 in 1997. The 1997 decline can be attributed directly to the types of
new loans generated.
Other non-interest income increased $103,000 in 1997 and increased
$122,000 in 1996. 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 decreased $401,000 (4.0%) for the year ended December
31, 1997, and increased $981,000 (10.9%) for the year ended December 31, 1996.
The major components of non-interest expense are shown in the following table
(in thousands).
<TABLE>
<CAPTION>
For the Year Ended December 31,
1997 1996 1995
----------------------------------
<S> <C> <C> <C>
Salaries and employee benefits $5,453 $5,223 $4,706
Bank premises and equipment 1,412 1,340 1,208
Data processing fees 612 561 540
SAIF Assessment 0 604 0
Federal deposit insurance premiums 75 159 362
Other 2,068 2,134 2,224
------ ------- ------
Total noninterest expense $9,620 $10,021 $9,040
====== ======= ======
</TABLE>
Salaries and employee benefits increased $230,000 in 1997, reflecting
additional staff hires, higher benefit costs, changes in personnel and normal
pay raises. The 1997 increase in the cost of employee benefits, particularly
medical insurance amounted to $71,000. The 4.4% increase in salaries and
employee benefits in 1997 compares with the 10.9% increase in 1996.
Premises and equipment expense increased $72,000 in 1997. The increase
was due to the construction of the corporate headquarters located in New
Berlin. The 20,000 square foot building was completed in May 1997. The
$132,000 increase in 1996 was the result of the opening of two new branch
offices of Lincoln State Bank.
Data processing fees increased $51,000 in 1997 and $21,000 in 1996. The
1997 and 1996 increase was due to increased volume and new services being
provided by the service bureau.
During the third quarter of 1996 Lincoln Community 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 Community 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 $84,000
in 1997 and $203,000 in 1996.
Other expenses decreased $66,000 in 1997. The decrease was primarily due
to a reduction in service charges being paid to the Corporation's correspondent
bank and a decrease in the Corporation's annual fee to the Lincoln Neighborhood
Redevelopment Corporation. In 1996 other expenses decreased $90,000 because of
the continued management of operating expenses.
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
$1.4 million, $730,000 in 1996 and $917,000 in 1995. The 1997 increase was due
to the additional taxable income along with a reduction in the balance of
tax-exempt securities. The decline in 1996 income taxes is a result of lower
taxable income.
NET INCOME
For the years ended December 31, 1997, 1996 and 1995, the Corporation
posted net income of $2.409 million, $1.310 million and $1.701 million,
respectively.
8
<PAGE> 30
LOANS RECEIVABLE
Net loans receivable increased $37.4 million, or 19.7%, from $189.8
million at December 31, 1996, to $227.2 million at December 31, 1997.
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,
1997 1996 1995 1994 1993
------------------------------------------------
<S> <C> <C> <C> <C> <C>
First Mortgage:
Conventional single-family residential $58,821 $58,358 $57,629 $55,478 $53,006
Commercial and multifamily residential 78,365 61,707 44,594 42,046 32,197
Construction and land 18,191 12,872 12,619 8,254 6,514
------------------------------------------------
155,377 132,937 114,842 105,778 91,717
Commercial business loans 56,846 45,036 36,605 35,118 39,926
Consumer and installment loans 12,220 10,984 10,810 7,377 5,222
Leases 2,311 599 0 0 0
Home equity loans 1,496 1,367 1,695 1,577 1,620
Other 1,081 883 1,326 1,644 1,406
------------------------------------------------
73,954 58,869 50,436 45,716 48,174
Less:
Undisbursed portion of loan proceeds 0 0 0 0 708
Deferred loan fees 60 76 95 105 112
Allowance for loan losses 2,093 1,939 1,533 1,464 1,356
------------------------------------------------
$227,178 $189,791 $163,650 $149,925 $137,715
================================================
</TABLE>
The following table presents information as of December 31, 1997 regarding
loan maturities and contractual principal repayments by categories of loans
during the periods indicated. Loans with adjustable interest rates are shown
maturing in the year of their contractual maturity. Also provided are the
amounts due after one year classified according to the sensitivity to changes
in interest rates.
<TABLE>
<CAPTION>
AFTER ONE BUT
WITHIN ONE YEAR WITHIN FIVE YEARS AFTER FIVE YEARS TOTAL
----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMERCIAL BUSINESS LOANS $34,573 $22,099 $ 174 $ 56,846
REAL ESTATE LOANS 61,666 55,969 37,742 155,377
----------------------------------------------------------------------------
$96,239 $78,068 $37,916 $212,223
----------------------------------------------------------------------------
LOANS MATURING AFTER ONE YEAR WITH:
FIXED INTEREST RATES $70,407 $ 6,892
VARIABLE INTEREST RATES 7,661 31,024
----------------------------
$78,068 $37,916
----------------------------
</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 $1.939 million at December 31, 1996, to $2.093
million at December 31, 1997. 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
0.91% for 1997 and 1.01% in 1996. 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.
9
<PAGE> 31
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,
1997 1996 1995 1994 1993
-----------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $1,939 $1,533 $1,464 $1,356 $1,119
Charge-offs:
Conventional single-family mortgage
Residential 0 70 20 0 46
Commercial business loans 4 5 27 6 46
Consumer and installment loans 34 8 16 6 1
-----------------------------------------------
Total charge-offs 38 83 63 12 93
Recoveries 0 (29) 0 (77) (20)
-----------------------------------------------
Net charge-offs (recoveries) 38 54 63 (65) 73
Provisions charged to operations 192 460 132 43 211
Adjustments to conform pooled
companies' year-ends 0 0 0 0 99
-----------------------------------------------
Balance at end of year $2,093 $1,939 $1,533 $1,464 $1,356
===============================================
Ratios:
Net charge-offs (recoveries) to
Average loans outstanding 0.02% 0.03% 0.04% (0.05)% 0.05%
Net charge-offs (recoveries) to total
Allowance 1.81% 2.78% 4.11% (4.44)% 5.38%
Allowance to year end gross loans
Outstanding 0.91% 1.01% 0.93% 0.97% 0.97%
</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 1997, $18,000 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. Additionally in 1997 the
Corporation recorded $71,000 of interest income on non-accrual loans that was
included in net income for the year. The following table summarizes
non-performing assets on the dates indicated (dollars in thousands):
<TABLE>
<CAPTION>
At December 31,
1997 1996 1995 1994 1993
-----------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans:
Nonaccrual loans $699 $938 $658 $772 $861
-----------------------------------------
Total nonaccrual loans 699 938 658 772 861
Real estate in judgment 0 0 0 24 43
Other real estate owned 0 0 0 73 75
-----------------------------------------
Total non-performing assets $699 $938 $658 $869 $979
=========================================
Ratios:
Non-accrual loans to total loans 0.30% 0.49% 0.40% 0.51% 0.62%
Allowance to non-accrual loans 299.42% 206.72% 232.98% 189.64% 157.49%
Non-performing assets to total assets 0.24% 0.35% 0.25% 0.35% 0.41%
</TABLE>
INVESTMENT SECURITIES
Investment securities at December 31, 1997, are made up of U.S. Treasury
and agency securities of $7.801 million, government agency mortgage-backed
securities of $26.681 million, SBA certificates of $930,000, state and
political subdivision certificates of $814,000, collateralized mortgage
obligations of $1.488 million and mutual funds of $3.104 million. Total
investment securities equaled $40.818 million. This compares to $42.653
million on December 31, 1996.
Management determines the appropriate classification of debt securities
(including mortgage-related securities) at the time of purchase.
Held-to-maturity securities are stated at amortized cost. See notes one and
two to Consolidated Financial Statements for further details.
Debt securities not classified as held-to-maturity 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.
10
<PAGE> 32
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. 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,
1997 1996 1995
----------------------------
<S> <C> <C> <C>
Mutual funds $3,104 $3,098 $3,086
U.S. Treasury and other U.S.
Government securities 7,801 11,321 8,749
Small Business Administration
Certificates 930 1,080 1,257
State and political subdivision securities 814 0 2,741
Collateralized mortgage obligations 1,488 2,943 3,772
Government agency mortgage-backed
Securities 26,681 24,211 40,479
----------------------------
$40,818 $42,653 $60,084
============================
</TABLE>
The maturity distribution (based upon the average life), and weighted
average yield of the investment portfolio of the Corporation as of December 31,
1997 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 $ 3,104 6.04% $ -- --% $ -- --% $ -- --%
U.S. TREASURY AND OTHER U.S.
GOVERNMENT SECURITIES 5,806 5.78 1,995 6.37 -- -- -- --
SMALL BUSINESS ADMINISTRATION
CERTIFICATES 930 8.02 -- -- -- -- -- --
STATE AND POLITICAL SUBDIVISION
CERTIFICATES -- -- 814 5.25 -- -- -- --
COLLATERALIZED MORTGAGE OBLIGATIONS 356 5.30 638 6.13 494 6.62 -- --
GOVERNMENT AGENCY MORTGAGE-BACKED
SECURITIES -- -- 10,790 6.24 12,360 6.81 3,531 6.68
------------------------------------------------------------------------------------------
$10,196 6.05% $14,237 6.20% $12,854 6.80% $ 3,531 6.68%
==========================================================================================
</TABLE>
Weighted average yield is calculated by dividing income within each
maturity range by the outstanding amount of the related investment.
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.
11
<PAGE> 33
Total deposits increased $31.7 million to $264.669 million on December 31,
1997, from $232.933 million on December 31, 1996. This compares to a $150,000
decrease in 1996. 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,
1997 1996 1995
----------------------------------------------------------------------------------------
AVERAGE AVERAGE Average Average Average Average
AMOUNT RATE Amount Rate Amount Rate
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Non-interest-bearing demand deposits $ 32,749 0.00% $ 29,362 0.00% $ 27,707 0.00%
NOW and money market deposits 27,914 2.01 29,302 2.17 29,965 2.24
Savings deposits 61,575 2.16 64,345 2.18 68,860 2.47
Time deposits 125,600 5.58 109,862 5.51 96,987 5.51
----------------------------------------------------------------------------------------
Total $247,838 3.59% $232,871 3.46% $222,519 3.46%
========================================================================================
</TABLE>
Maturities of time deposits and certificate accounts with balances of
$100,000 or more, outstanding at December 31, 1997, are summarized as follows
(in thousands):
3 MONTHS OR LESS $21,799
OVER 3 THROUGH 6 MONTHS 3,378
OVER 6 THROUGH 12 MONTHS 2,286
OVER 12 MONTHS 1,064
-------
TOTAL $28,527
=======
CAPITAL RESOURCES AND ADEQUACY
Stockholders' equity increased from $26.380 million at December 31, 1996
to $29.496 million at December 31, 1997. The $2.409 million increase from net
earnings retention was supplemented by the net sale of 32,585 shares of
treasury stock and offset by the payment of $703,000 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, 1997, the Corporation had a core-capital to total
assets ratio of 9.94%, and Lincoln State Bank, Franklin State Bank and Lincoln
Community Bank had risk-based capital ratios of 11.52%, 13.43% and 18.61%,
respectively. These ratios are well above the 1997 minimum requirements
established by regulatory agencies.
For a summary of the Banks' regulatory capital ratios at December 31,
1997, 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.
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.
12
<PAGE> 34
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,
1997 1996 1995
---------------------------
<S> <C> <C> <C>
Cash and cash equivalents at beginning of period $22,272 $28,447 $17,694
Operating Activities:
Net income 2,409 1,310 1,701
Adjustments to reconcile net income to net cash
provided by operating activities 661 1,074 1,065
---------------------------
Net cash provided by operating activities 3,070 2,384 2,766
Net cash used by investing activities (36,967) (10,511) (4,426)
Net cash provided by financing activities 26,983 1,952 12,413
---------------------------
Increase (decrease) in cash equivalents (6,914) (6,175) 10,753
---------------------------
Cash and cash equivalents at end of period $15,358 $22,272 $28,447
===========================
</TABLE>
Net cash was provided by operating activities during the year ended
December 31, 1997, 1996 and 1995 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, $1.9 million and
$1.2 million for the years ended December 31, 1997, 1996 and 1995 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 $703,000, $691,000 and $569,000 for the years
ended December 31, 1997, 1996 and 1995, respectively. At December 31, 1997,
the parent company had a $2.0 million 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.
13
<PAGE> 35
The following table shows the interest rate sensitivity gap for four
different time intervals as of December 31, 1997. 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 $ 34,297 $18,614 $ 50,566 $ 6,885 $110,362
ADJUSTABLE-RATE MORTGAGE LOANS 15,340 11,897 17,670 234 45,141
--------------------------------------------------------------
TOTAL MORTGAGE LOANS 49,637 30,511 68,236 7,119 155,503
COMMERCIAL BUSINESS LOANS 31,223 5,669 21,979 496 59,367
CONSUMER LOANS 7,744 1,956 3,921 105 13,726
TAX-EXEMPT LOANS 675 0 0 0 675
MORTGAGE-RELATED SECURITIES 14,069 0 6,368 7,733 28,170
FIXED RATE INVESTMENT SECURITIES AND OTHER 3,503 2,302 2,809 0 8,614
VARIABLE RATE INVESTMENT SECURITIES AND OTHER 8,699 1,050 0 0 9,749
--------------------------------------------------------------
TOTAL INTEREST-EARNING ASSETS $115,550 $41,488 $103,313 $15,453 $275,804
==============================================================
INTEREST-BEARING LIABILITIES:
DEPOSITS
TIME DEPOSITS $ 96,225 $27,886 $ 14,410 $ 4 $138,525
NOW ACCOUNTS 1,208 1,208 12,083 5,638 20,137
SAVINGS ACCOUNTS 3,502 3,502 35,021 16,152 58,177
MONEY MARKET ACCOUNTS 494 494 4,941 2,496 8,425
ADVANCE PAYMENTS FOR TAXES AND INSURANCE 179 0 0 0 179
BORROWINGS 1,500 0 0 0 6,850
--------------------------------------------------------------
TOTAL INTEREST-BEARING LIABILITIES $103,108 $33,090 $ 66,455 $24,290 $226,943
==============================================================
INTEREST-EARNING ASSETS LESS INTEREST-BEARING
LIABILITIES $ 12,442 $ 8,398 $ 36,858 ($8,837) $ 48,861
==============================================================
CUMULATIVE INTEREST RATE SENSITIVITY GAP $ 12,442 $20,840 $ 57,698 $48,861
==================================================
CUMULATIVE INTEREST RATE SENSITIVITY GAP AS A
PERCENTAGE OF TOTAL ASSETS 4.19% 7.02% 19.45% 16.47%
==================================================
</TABLE>
At December 31, 1997, the Corporation's cumulative ratio of interest-rate
sensitive assets to interest-rate sensitive liabilities was 4.19% for six
months and 7.02% 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 table above. 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.
YEAR 2000 PREPAREDNESS
Preparedness for the year 2000 date change with respect to computer
systems is recognized as a serious issue throughout the banking industry. The
Year 2000 computer problem results from the design of many computer operating
systems now in use. The internal logic of these systems expresses the year in
two digits rather than four and assumes the first two digits are always 19
(.e.g., it uses "97" to express the year 1997). At the end of the century
these systems will revert to the year 1900 or to a previous date specified in
the system logic, such as the year 1980.
14
<PAGE> 36
The Corporation is in the midst of a project to determine the impact of
potential year 2000 problems on the Corporations computer systems. In most
major applications the Corporation utilizes a third party service bureau. We
have been kept apprised of their efforts which appear to be sufficient to
ensure that software used by the Corporation will adequately address
operational and regulatory concerns. The Corporation also is currently
analyzing and assembling a list of both its internally developed and purchased
software that utilize embedded date codes which may experience operational
problems when the year 2000 is reached. The Corporation plans to make
modifications to the identified software in 1998 and test the changes in 1999.
The cost of the year 2000 compliance efforts is not expected to have a material
effect to the financial position or the results of the Corporation.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Corporation's financial performance is impacted by, among other
factors, interest rate risk and credit risk. The Corporation utilizes no
derivatives to mitigate its credit risk, relying instead on loan review and an
adequate loan loss reserve (see Management's Discussion and Analysis of
Financial Condition and Results of Operation).
Interest rate risk is the risk of loss of net interest income due to
changes in interest rates. This risk is addressed by the Corporation's Asset
Liability Management Committee ("ALCO"), which includes senior management
representatives. The ALCO monitors and considers methods of managing interest
rate risk by monitoring changes in net interest income under various interest
rate scenarios. The ALCO attempts to manage various components of the
Corporation's balance sheet to minimize the impact of sudden and sustained
changes in interest rate on net interest income.
The Corporation's exposure to interest rate risk is reviewed on at least a
quarterly basis by the ALCO. Interest rate risk exposure is measured using
interest rate sensitivity analysis to determine the Corporation's change in net
interest income in the event of hypothetical changes in interest rates and
interest liabilities. If potential changes to net interest income resulting
from hypothetical interest rate swings are not within the limits established by
the ALCO, the asset and liability mix may be adjusted to bring interest rate
risk within approved limits.
In order to reduce the exposure to interest rate fluctuations, the
Corporation has developed strategies to manage its liquidity, shorten the
effective maturities of certain interest-earning assets, and increase the
effective maturities of certain interest-bearing liabilities. One strategy
used is focusing its residential lending on adjustable rate mortgages, which
generally reprice within one to three years. Another strategy used is
concentrating its non-residential lending on adjustable or floating rate and/or
short-term loans. The Corporation has also focused its investment activities
on short and medium-term securities, while attempting to maintain and increase
its savings account and transaction deposit accounts, which are considered to
be relatively resistant to changes in interest rates.
Along with the analysis of the interest rate sensitivity gap, determining
the sensitivity of future earnings to a hypothetical +/- 200 basis parallel
rate shock can be accomplished through the use of simulation modeling. In
addition to the assumptions used to measure the interest rate sensitivity gap,
simulation of earnings includes the modeling of the balance sheet as an ongoing
entity. Future business assumptions involving administered rate products,
prepayments for future rate sensitive balances, and the reinvestment of
maturing assets and liabilities are included. These items are then modeled to
project income based on a hypothetical change in interest rates. The resulting
pretax income for the next 12 month period is compared to the pretax income
calculated using flat rates. This difference represents the Corporation's
earning sensitivity to a +/- 200 basis point parallel rate shock. The table
below illustrates these amounts as of December 31, 1997.
<TABLE>
<CAPTION>
ESTIMATED
1998 PRETAX NET
CHANGE IN INTEREST INTEREST INCOME PERCENT CHANGE IN
RATES (DOLLARS IN THOUSANDS) ACTUAL CHANGE NET INTEREST INCOME
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
200 BASIS POINT RISE $12,995 $199 1.56%
150 BASIS POINT RISE 12,937 141 1.10%
100 BASIS POINT RISE 12,888 92 0.72%
50 BASIS POINT RISE 12,838 42 0.33%
BASE SCENARIO 12,796 0 0.00%
50 BASIS POINT DECLINE 12,752 (44) (0.34%)
100 BASIS POINT DECLINE 12,715 (81) (0.63%)
150 BASIS POINT DECLINE 12,670 (126) (0.98%)
200 BASIS POINT DECLINE 12,616 (180) (1.41%)
</TABLE>
These results are based solely on immediate and sustained parallel changes
in market rates and do not reflect the earnings sensitivity that may arise from
other factors such as changes in the shape of the yield curve, the change in
spread between key market rates, or accounting recognition for impairment of
certain intangibles. The above results are also considered to be conservative
estimates due to the fact that no management action to mitigate potential
income variances are included within the simulation process. This action would
include, but would no be limited to, adjustments to the repricing
characteristics of any on or off balance sheet item with regard to short-term
rate projections and current market value assessments.
15
<PAGE> 37
Another component of interest rate risk, fair value at risk, is determined
by the Corporation through the technique of simulating the fair value of equity
in changing rate environment. This technique involves determining the present
value of all contractual asset liability cash flows (adjusted for prepayments)
based on predetermined discount rate. The net result of all these balance
sheet items determine the fair value of equity. The fair value of equity
resulting from the current flat rate scenario is compared to the fair value of
equity calculated using discount rates +/- 200 basis points from flat rates to
determine the fair value of equity at risk. Currently, fair value of equity at
risk is less than 1.0% of the market value of the Corporation as of December
31, 1997.
BUSINESS OF THE CORPORATION
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. 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 State Bank and Franklin State Bank were
chartered as commercial banks under the Wisconsin Banking Statutes, while
Lincoln Savings Bank operated as a stock savings bank until 1997. In 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.
The Corporation operates fourteen banking facilities in Milwaukee and
Waukesha counties. In addition to its subsidiary banks (Lincoln State Bank,
Franklin State Bank and Lincoln Community Bank), the Corporation owns three
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, M&M Services,
Inc., which was formed in 1994 to provide operational services to the
Corporation's subsidiary banks and Achieve Mortgage Corporation, which was
formed in 1997 to act as the Corporation's mortgage broker.
This report contains various forward-looking statements concerning the
Corporation'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.
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
Community Bank. 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.
16
<PAGE> 38
EMPLOYEES
At December 31, 1997, the Corporation and its subsidiaries employed 139
full-time and 51 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, 1997, 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 COMMUNITY BANK FRANKLIN STATE BANK
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Total assets $152,631 $97,602 $43,338
Total loans 124,426 69,756 35,089
Total deposits 140,897 84,655 39,764
Stockholders' equity 11,369 11,213 3,274
Net income 1,893 1,349 448
Return on average assets 1.38% 1.33% 1.21%
</TABLE>
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, 1997, Lincoln State Bank comprised 51.4% of the consolidated
assets of the Corporation.
LINCOLN COMMUNITY 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).
In 1997 Lincoln Savings Bank, S.A. converted from a Wisconsin stock savings
bank to a Wisconsin commercial bank. Its principal office is presently located
in Milwaukee, Wisconsin. It also operates a branch office in Milwaukee,
Wisconsin. Lincoln Community 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 Community Bank also originates consumer loans and commercial loans. At
December 31, 1997, Lincoln Community Bank comprised 32.9% 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, 1997, Franklin State Bank comprised 14.6% of the consolidated assets of the
Corporation.
LINCOLN NEIGHBORHOOD REDEVELOPMENT CORPORATION
The Lincoln Neighborhood Redevelopment Corporation (the 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,
1997, Lincoln Neighborhood Redevelopment Corporation had assets of $68,000, no
liabilities and equity of $68,000.
17
<PAGE> 39
M&M SERVICES, INC.
M&M Services was formed in January of 1994 and is a wholly owned
subsidiary of the Corporation. M&M Services 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.
ACHIEVE MORTGAGE CORPORATION
Achieve Mortgage Corporation was formed in January of 1997 and is a wholly
owned subsidiary of the Corporation. The subsidiary was formed to expand the
origination of secondary market real estate mortgages on behalf of the
Corporation and the Banks.
OTHER SUBSIDIARIES
Lincoln State Bank and Lincoln Community 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 Community 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 Community Bank in exchange for 100% of the
stock of the subsidiary.
SUPERVISION AND REGULATION
The operations of financial institutions, including bank holding
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.
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 or before engaging, directly or indirectly, in certain
enumerated activities. While the act, with certain exceptions, previously
prohibited the acquisition of banks located in other states, recently enacted
legislation now generally authorizes such interstate acquisitions, subject to
regulatory approval.
The Act also prohibits, with certain exceptions acquisition of more than
five percent of the voting shares of any company (directly or indirectly) 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.
Lincoln State Bank, Franklin State Bank and Lincoln Community Bank are
subject to extensive regulation and supervision by the Wisconsin Department of
Financial Institutions. Because the deposits of all three banks are insured by
the Federal Deposit Insurance Corporation (FDIC), they are also subject to
supervision by the FDIC. In that connection, the banks must comply with
applicable state and federal statutes and a wide range of rules and regulations
promulgated by bank regulatory agencies under such statutes. To assure
compliance with such laws and to ascertain their safety and soundness, the
banks are periodically examined by the FDIC and the Wisconsin Department of
Financial Institutions. In addition, the Corporation itself is periodically
examined by the Federal Reserve Bank of Chicago. Such supervision and
regulation is intended primarily to ensure the safety of deposits accepted by
the banks.
PROPERTIES
The Corporation's offices are located in a two-story building at 14100
West National Avenue in New Berlin, Wisconsin. The building constructed in
1997, contains 20,000 square feet, of which the majority is used by the
Corporation and the remainder leased to a tenant. At this location, the
Corporation maintains its corporate operations and personnel.
18
<PAGE> 40
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 three-story building at 7000 South
76th Street in 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 Community Bank's main office is located at 3131 South 13th Street,
Milwaukee, Wisconsin in a one-story building. Lincoln Community Bank also
operates a branch facility at 5400 West Forest Home Avenue, Milwaukee,
Wisconsin. Lincoln Community Bank owns both facilities. Achieve Mortgage
Corporation leases office space at the Forest Home Avenue location.
M&M Services is located in the New Berlin corporate headquarters. At that
location, M&M Services maintains its subsidiary service support facilities and
personnel.
LEGAL PROCEEDINGS
From time to time, the Corporation and its subsidiaries 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 its subsidiaries 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.
19
<PAGE> 41
Report of Management
The management of Merchants and Manufacturers Bancorporation, Inc. is
responsible for the preparation and integrity of the Consolidated Financial
Statements and other financial information included in this annual report. The
financial statements have been prepared in accordance with generally accepted
accounting principles and include amounts that are based upon informed
judgements and estimates by management. The other financial information in this
annual report is consistent with the financial statements.
The Corporation maintains a system of internal accounting controls.
Management believes that the internal accounting controls provide reasonable
assurance that transactions are executed and recorded in accordance with the
Corporation's policies and procedures and that the accounting records may be
relied on as a basis for preparation of the financial statements and other
financial information.
Merchants and Manufacturers Bancorporation's independent auditors were
engaged to perform an audit of the Consolidated Financial Statements, and the
auditor's report expresses their opinion as to the fair presentation of the
financial statements in conformity with generally accepted accounting
principles.
The Audit Committee of the Board of Directors meets periodically with
management, the internal auditors, and the independent auditors to discuss the
adequacy of the internal accounting controls. Both the independent auditors and
the internal auditors have full and free access to the Audit Committee.
By: /s/ Michael J. Murry
------------------------------------------
Michael J. Murry
Chairman of the Board of Directors
By: /s/ James C. Mroczkowski
------------------------------------------
James C. Mroczkowski
Vice President and Chief Financial Officer
20
<PAGE> 42
Report of Independent Auditors
The Board of Directors and Stockholders
Merchants and Manufacturers Bancorporation, Inc. and subsidiaries
We have audited the accompanying consolidated statements of financial
condition of Merchants and Manufacturers Bancorporation, Inc. and subsidiaries
as of December 31, 1997 and 1996, and the related consolidated statements of
income, stockholders' equity and cash flows for each of the three years in the
period ended December 31, 1997. 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. and subsidiaries at December 31, 1997 and
1996, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles.
By: /s/ Ernst & Young LLP
------------------------------------------
Ernst & Young LLP
February 13, 1998
Milwaukee, Wisconsin
21
<PAGE> 43
Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries
Consolidated Statements of Financial Condition
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
--------------------
(In thousands)
ASSETS
<S> <C> <C>
Cash and due from banks $ 10,694 $ 9,247
Interest-bearing deposits at other banks 821 9,667
Federal funds sold 3,843 3,358
--------------------
Cash and cash equivalents 15,358 22,272
Securities available-for-sale at fair value:
Investment securities 12,649 15,499
Mortgage-related securities 28,169 27,154
Loans receivable 227,178 189,791
Accrued interest receivable 1,553 1,470
Federal Home Loan Bank stock 1,050 1,118
Premises and equipment 8,891 7,800
Other assets 1,830 2,619
--------------------
Total assets $296,678 $267,723
====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $264,669 $232,933
Borrowings 1,500 6,850
Accrued interest payable 332 395
Advance payments by borrowers for taxes and insurance 179 67
Other liabilities 502 1,098
--------------------
Total liabilities 267,182 241,343
7
Stockholders' equity:
Common stock $1.00 par value; 1,500,000 shares authorized;
shares issued: 903,970--1997; 897,812--1996; shares
outstanding: 903,710--1997; 864,967--1996 904 898
Additional paid-in capital 11,008 10,759
Net unrealized gain (loss) on securities available-for-sale 19 (203)
Retained earnings 17,574 15,868
Treasury stock, at cost (260 shares--1997; 32,845
shares--1996) (9) (942)
--------------------
Total stockholders' equity 29,496 26,380
--------------------
Total liabilities and stockholders' equity $296,678 $267,723
====================
</TABLE>
See accompanying notes.
22
<PAGE> 44
Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries
Consolidated Statements of Income
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
-------------------------------------------
(In thousands, except per share amounts)
Interest income:
<S> <C> <C> <C>
Loans, including fees $18,023 $15,288 $13,566
Investment securities:
Taxable 967 1,028 800
Exempt from federal income taxes 12 83 123
Mortgage-related securities 1,508 2,407 3,043
Other 584 522 851
-------------------------------------------
Total interest income 21,094 19,328 18,383
Interest expense:
Deposits 8,896 8,146 7,709
Borrowings 194 216 212
-------------------------------------------
Total interest expense 9,090 8,362 7,921
Net interest income 12,004 10,966 10,462
Provision for loan losses 192 460 132
-------------------------------------------
Net interest income after
provision for loan losses 11,812 10,506 10,330
Noninterest income:
Service charges on deposits 746 725 726
Service charges on loans 141 172 75
Net gain on securities sales 78 70 61
Other 691 588 466
-------------------------------------------
1,656 1,555 1,328
Noninterest expenses:
Salaries and employee benefits 5,453 5,223 4,706
Premises and equipment 1,412 1,340 1,208
Data processing fees 612 561 540
SAIF special assessment - 604 -
Federal deposit insurance premiums 75 159 362
Other 2,068 2,134 2,224
9,620 10,021 9,040
-------------------------------------------
Income before income taxes 3,848 2,040 2,618
Income taxes 1,439 730 917
-------------------------------------------
Net income $2,409 $1,310 $1,701
===========================================
Basic earnings per share $2.75 $1.50 $1.91
===========================================
Diluted earnings per share $2.72 $1.48 $1.90
===========================================
Dividends per share $.80 $.79 $.64
===========================================
</TABLE>
See accompanying notes.
23
<PAGE> 45
Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Unrealized
Gain (Loss)
Additional on Securities
Common Paid-in Available Retained Treasury
Stock Capital -for-Sale Earnings Stock Total
--------------------------------------------------------------------------------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 $894 $10,660 $(1,939) $14,117 $(159) $23,573
Comprehensive income:
Net income - - - 1,701 - 1,701
Other comprehensive income -
Change in unrealized gain on securities
available-for-sale, net of deferred income
taxes of $1,118 - - 1,758 - - 1,758
--------------------------------------------------------------------------------
Total comprehensive income - - 1,758 1,701 - 3,459
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)
--------------------------------------------------------------------------------
Balance at December 31, 1995 898 10,759 (181) 15,249 (182) 26,543
Comprehensive income:
Net income - - - 1,310 - 1,310
Other comprehensive income -
Change in unrealized loss on securities
available-for-sale, net of deferred income
taxes of $7 - - (22) - - (22)
--------------------------------------------------------------------------------
Total comprehensive income - - (22) 1,310 - 1,288
Sale of 6,240 shares of treasury stock - - - - 186 186
Purchase of 32,072 shares of treasury stock - - - - (946) (946)
Cash dividends declared - $.79 per share - - - (691) - (691)
--------------------------------------------------------------------------------
Balance at December 31, 1996 898 10,759 (203) 15,868 (942) 26,380
Comprehensive income:
Net income - - - 2,409 - 2,409
Other comprehensive income -
Change in unrealized loss on securities
available-for-sale, net of deferred income
taxes of $118 - - 222 - - 222
--------------------------------------------------------------------------------
Total comprehensive income - - 222 2,409 - 2,631
Sale of 3,157 shares of common stock in
connection with dividend reinvestment
program 3 120 - - - 123
Sale of 40,766 shares of treasury stock - 72 - - 1,184 1,256
Purchase of 8,181 shares of treasury stock - - - - (251) (251)
Cash dividends declared--$.80 per share - - - (703) - (703)
Exercise of stock options 3 57 - - - 60
--------------------------------------------------------------------------------
Balance at December 31, 1997 $904 $11,008 $ 19 $17,574 $ (9) $29,496
================================================================================
</TABLE>
See accompanying notes.
24
<PAGE> 46
Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
----------------------------
(In thousands)
OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income $2,409 $1,310 $1,701
Adjustments to reconcile net income to cash
provided by operating activities:
Provision for loan losses 192 460 132
Provision for depreciation 511 484 405
Net amortization of investment securities premiums
and discounts 112 287 339
Net realized gains on investment securities (78) (70) (61)
Decrease (increase) in accrued interest receivable (83) 62 (185)
Increase (decrease) in accrued interest payable (63) (180) 241
Other 70 31 194
----------------------------
Net cash provided by operating activities 3,070 2,384 2,766
INVESTING ACTIVITIES
Proceeds from redemption and maturities of
investment securities held to maturity - - 2,525
Purchases of investment securities held to maturity - - (992)
Purchases of securities available-for-sale (20,733) (12,718) (15,264)
Proceeds from sales of securities available-for-sale 12,308 15,848 13,724
Proceeds from redemption and maturities of
securities available-for-sale 10,566 14,054 10,977
Net increase in loans (37,627) (26,700) (14,012)
Purchases of premises and equipment (1,602) (679) (1,852)
Proceeds from sales of real estate 53 100 496
Redemption (purchases) of Federal Home Loan Bank
stock 68 (416) (28)
----------------------------
Net cash used in investing activities (36,967) (10,511) (4,426)
</TABLE>
(continued)
25
<PAGE> 47
Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
-----------------------------
(In thousands)
FINANCING ACTIVITIES
<S> <C> <C> <C>
Net increase (decrease) in deposits $ 31,736 $ (150) $ 9,637
Net (decrease) increase in borrowings (5,350) 3,850 3,000
Increase (decrease) in advance payments by
borrowers for taxes and insurance 112 (297) 265
Payments of cash dividends to stockholders (703) (691) (569)
Purchase of treasury stock (251) (946) (178)
Proceeds from the sale of treasury stock 1,256 186 158
Proceeds from issuing additional common stock 60 - -
Proceeds from dividend reinvestment plan 123 - 100
Net cash provided by financing activities 26,983 1,952 12,413
-----------------------------
Increase (decrease) in cash and cash equivalents (6,914) (6,175) 10,753
Cash and cash equivalents at beginning of year 22,272 28,447 17,694
-----------------------------
Cash and cash equivalents at end of year $15,358 $22,272 $28,447
=============================
Supplemental cash flow information and non-cash
transactions:
Interest paid $9,169 $8,521 $7,680
Income taxes paid 1,232 759 839
Investment securities transferred to
available-for-sale portfolio (at amortized
cost) - - 2,800
</TABLE>
See accompanying notes.
26
<PAGE> 48
Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1997
(Dollars in thousands, except per share amounts)
1. ACCOUNTING POLICIES
BUSINESS
Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries (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 Community Bank (Lincoln
Community)--collectively, "the Banks," M&M Services, which provides management
services for the Banks, Achieve Mortgage Corporation, a wholly owned subsidiary
of Lincoln Community, which provides mortgage banking services for the Banks
and Lincoln's wholly owned subsidiary, Lincoln Investment Corp., and Lincoln
Community's 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.
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.
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.
27
<PAGE> 49
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. Loans are placed on
non-accrual status, generally recognizing interest as income when received,
when in the opinion of management, the collectibility of principal or interest
becomes 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.
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 had no impaired loans in 1997 or 1996.
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 (five to thirty-two years).
EARNINGS PER SHARE INFORMATION
Earnings per share of common stock have been computed based on the weighted
average number of common stock and common stock equivalents, if dilutive,
outstanding during each year. The resulting number of shares used in computing
basic earnings per share is 874,562, 875,082 and 889,677 for the years ended
December 31, 1997, 1996 and 1995, respectively. The number of shares used in
computing diluted earnings per share is 884,499, 882,305, and 894,940, for the
years ended December 31, 1997, 1996 and 1995, respectively.
28
<PAGE> 50
ACCOUNTING CHANGES
The Company adopted Statement No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities" as of January 1, 1997,
which provides new accounting and reporting standards for sales,
securitization, and servicing of receivables and other financial assets and
extinguishments of liabilities in 1997. The Company was not significantly
impacted by the adoption of Statement No. 125.
In 1997, the Company adopted Statement No. 130, "Reporting Comprehensive
Income," which establishes new rules for reporting and display of comprehensive
income and its components in the consolidated financial statements. The new
rules require that all items that are recognized under accounting standards as
components of comprehensive income be reported with prominence in the financial
statements. Application of Statement No. 130 does not impact amounts previously
reported for net income or affect the comparability of previously issued
financial statements.
PENDING ACCOUNTING CHANGE
In June 1997, SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information" was issued. SFAS No. 131 establishes standards for the
reporting of financial information from operating segments in annual and
interim financial statements. This Statement requires that financial
information be reported on the basis that it is reported internally for
evaluating segment performance and deciding how to allocate resources to
segments. Because this Statement addresses how supplemental financial
information is disclosed in annual and interim reports, the adoption will not
have a material impact on the financial statements. SFAS No. 131 will become
effective in 1998.
RECLASSIFICATIONS
Certain amounts in the 1996 and 1995 financial statements have been
reclassified to conform to the 1997 presentation.
29
<PAGE> 51
2. INVESTMENT AND MORTGAGE-BACKED SECURITIES
The following is a summary of securities:
<TABLE>
<CAPTION>
Amortized Gross Unrealized Gross Unrealized
Cost Gains Losses Fair Value
-------------------------------------------------------------
<S> <C> <C> <C> <C>
At December 31, 1997
Mutual funds $ 3,173 $ - $ 69 $ 3,104
U.S. treasury and other U.S. government
securities 7,789 29 17 7,801
Small Business Administration certificates 886 44 - 930
State and political subdivision certificates 800 14 - 814
Collateralized mortgage obligations 1,498 3 13 1,488
Government agency mortgage-backed securities 26,644 117 80 26,681
-------------------------------------------------------------
$40,790 $207 $179 $40,818
=============================================================
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>
Securities carried at $1,100 at December 31, 1997 were pledged principally to
secure liabilities to the Federal Reserve Bank.
The amortized cost and market value of securities at December 31, 1997, 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 $ 1,298 $ 1,301
Due after one year through five years 7,291 7,314
Due after five years through ten years 335 348
Due after ten years 551 582
Mutual funds 3,173 3,104
Mortgage-related securities 28,142 28,169
---------------------
$40,790 $40,818
=====================
</TABLE>
Proceeds from sales of securities available-for-sale during the years ended
December 31, 1997, 1996 and 1995, were $12,308, $15,848 and $13,724,
respectively. Gross gains of $83, $87 and $65 were recorded on those sales for
the years ended December 31, 1997, 1996 and 1995, respectively. Gross losses of
$5, $17 and $4 were also recorded in the years ended December 31, 1997, 1996
and 1995, respectively.
30
<PAGE> 52
3. LOANS RECEIVABLE
Loans receivable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
-------------------
<S> <C> <C>
First mortgage:
Conventional single-family residential $58,821 $58,358
Commercial and multifamily residential 78,365 61,707
Construction 18,191 12,872
-------------------
155,377 132,937
Commercial business loans 56,846 45,036
Consumer and installment loans 12,220 10,984
Leases 2,311 599
Home equity loans 1,496 1,367
Other 1,081 883
-------------------
73,954 58,869
Less:
Deferred loan fees 60 76
Allowance for loan losses 2,093 1,939
-------------------
$227,178 $189,791
===================
</TABLE>
Transactions in the allowance for loan losses are summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
--------------------------
<S> <C> <C> <C>
Balance at beginning of year $1,939 $1,533 $1,464
Provisions charged to operations 192 460 132
Recoveries - 29 -
Charge-offs (38) (83) (63)
--------------------------
Balance at end of year $2,093 $1,939 $1,533
==========================
</TABLE>
Total nonaccrual loans were $498 and $937 at December 31, 1997 and 1996,
respectively.
4. PREMISES AND EQUIPMENT
Premises and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
-----------------
<S> <C> <C>
Land $ 2,353 $ 2,248
Office buildings and improvements 7,858 6,646
Furniture and equipment 3,807 3,566
14,018 12,460
Less accumulated depreciation (5,127) (4,660)
-----------------
$ 8,891 $ 7,800
=================
</TABLE>
31
<PAGE> 53
5. DEPOSITS
Deposits consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
-----------------------
<S> <C> <C>
Negotiable Order of Withdrawal accounts:
Noninterest-bearing $39,405 $32,095
Interest-bearing 20,137 19,793
Passbook accounts 58,177 59,569
Savings deposits and money market investment accounts 8,425 7,500
Time deposits and certificate accounts 138,525 113,976
-----------------------
$264,669 $232,933
=======================
</TABLE>
The scheduled maturities of time deposits and certificate accounts at December
31, 1997 are as follows:
<TABLE>
<CAPTION>
Maturities during the year ending December 31:
- ----------------------------------------------
<S> <C>
1998 $124,112
1999 8,032
2000 2,279
2001 2,334
2002 1,764
Thereafter 4
--------
$138,525
--------
</TABLE>
At December 31, 1997 and 1996, time deposits and certificate accounts with
balances greater than $100 amounted to $28,527 and $15,313, respectively.
6. BORROWINGS
At December 31, 1997 and 1996, the Banks have overnight federal funds purchased
of $1,500 and $3,850, respectively, which bear interest at 6.00% and 7.75%,
respectively.
Lincoln Community also had an advance of $3,000 from the Federal Home Loan Bank
at December 31, 1996. The advance matured in July 1997. There are no advances
outstanding from the Federal Home Loan Bank at December 31, 1997.
Lincoln Community 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 Federal Home Loan Bank stock.
At December 31, 1997 and 1996, the Corporation had an unused line of credit
with an unaffiliated bank with a total available balance of $2,000. The line
bears interest at the lender's prime rate (8.50% at December 31, 1997), is
collateralized by 100% of the capital stock of Franklin State Bank, and matures
April 13, 1998.
32
<PAGE> 54
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, 1997 and
1996, that the Banks meet all capital adequacy requirements to which they are
subject.
As of December 31, 1997, the most recent notification from the Federal Deposit
Insurance Corporation categorized Lincoln Community Bank and Franklin State
Bank as well capitalized and Lincoln State Bank as adequately capitalized under
the regulatory framework for prompt corrective action. As of December 31, 1996,
all the Banks were categorized as well capitalized. 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 Banks' classifications as of December 31, 1997.
<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, 1997
Total Capital (to
Risk-Weighted
Assets):
Lincoln State Bank $12,410 9.87% $10,056 8.00% $12,571 10.00%
Lincoln Community Bank 11,867 17.86 5,315 8.00 6,644 10.00
Franklin State Bank 3,586 10.49 2,734 8.00 3,477 10.00
Tier 1 Capital (to
Risk-Weighted
Assets):
Lincoln State Bank 11,332 11.52 5,028 4.00 7,542 6.00
Lincoln Community Bank 11,173 18.61 2,658 4.00 3,986 6.00
Franklin State Bank 3,265 13.43 1,367 4.00 2,050 6.00
Tier 1 Capital (to
Average Assets):
Lincoln State Bank 11,332 7.44 6,096 4.00 7,620 5.00
Lincoln Community Bank 11,173 11.18 3,996 4.00 4,995 5.00
Franklin State Bank 3,265 8.09 1,613 4.00 2,017 5.00
</TABLE>
33
<PAGE> 55
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, 1997, the subsidiary banks collectively had equity of
$25,856,736 of which $3,690,054 was available for distribution to the
Corporation as dividends without prior regulatory approval.
Under Federal Reserve Board 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 14,000 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>
Exercise Weighted Average Weighted Average
Number Price Exercise Price Remaining
Of Shares Per Share Per Share Contractual Life
--------- --------- ---------------- ----------------
<S> <C> <C> <C> <C>
Total outstanding at
December 31, 1996
and 1995 25,000 $16.27 - $25.00 $20.38 4.54 years
Expired (614) $16.27
Exercised during 1997 (7,386) $16.27 - $20.00
--------
Total outstanding at
December 31, 1997 17,000 $20.09 - $25.00 $21.66 4.83 years
========
</TABLE>
At December 31, 1997, 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 1997, 1996 and 1995, were $180, $164 and $149, respectively.
34
<PAGE> 56
10. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
----------------------------
<S> <C> <C> <C>
Current:
Federal $1,157 $718 $769
State 231 168 124
----------------------------
1,388 886 893
----------------------------
Deferred:
Federal 36 (124) 4
State 15 (32) 20
51 (156) 24
----------------------------
$1,439 $730 $917
============================
</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
1997 1996 1995
---------------------------
<S> <C> <C> <C>
Income tax at statutory rate $1,309 $ 694 $ 890
Increase (reduction) resulting from:
Tax-exempt interest income (21) (49) (58)
State income taxes, net of federal tax benefit 163 89 100
Other (12) (4) (15)
---------------------------
$1,439 $730 $917
</TABLE> ===========================
10. INCOME TAXES (CONTINUED)
The components of deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
----------------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 594 $ 533
Unrealized loss on securities - 103
Net operating loss carryforwards 509 440
Other assets 83 69
----------------
Total deferred tax assets 1,186 1,145
Valuation allowance (509) (441)
----------------
677 704
Deferred tax liabilities:
Unrealized gain on securities 9 -
Depreciation 293 271
Other liabilities 39 30
Total deferred tax liabilities 341 301
----------------
Net deferred tax asset $ 336 $ 403
================
</TABLE>
35
<PAGE> 57
At December 31, 1997, the Corporation and its subsidiaries, which file separate
state income tax returns, have state net operating loss carryforwards of
approximately $9,539 which expire at various dates through 2012. Due to the
unlikelihood of realizing these benefits, a valuation allowance of $509 has
been established to offset the deferred tax assets relating to these
carryforwards.
Lincoln Community qualified under provisions of the Internal Revenue Code,
which 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. At December 31, 1997, retained earnings included
approximately $3,606 for which no provision for income taxes has been made.
Income taxes of approximately $1,486 would be imposed if Lincoln Community Bank
were to use these retained earnings for any other purpose other than to absorb
bad debt losses.
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>
<CAPTION>
<S> <C>
Balance at December 31, 1995 $14,618
Loans originated 7,136
Repayments (4,770)
-------
Balance at December 31, 1996 16,984
Loans originated 13,852
Repayments (8,021)
-------
Balance at December 31, 1997 $22,815
=======
</TABLE>
12. COMMITMENTS AND CONTINGENT LIABILITIES
Off-balance-sheet financial instruments whose contracts represent credit and/or
interest rate risk at December 31, 1997 and 1996, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
-----------------
<S> <C> <C>
Commitments to originate
mortgage loans (expiring
within three months):
Fixed rates $3,008 $5,977
Adjustable rates 1,018 194
Unused lines of credit:
Commercial business 24,384 22,002
Home equity (adjustable rate) 1,278 1,710
Credit cards (fixed rate) 2,599 2,317
Standby letters of credit 1,975 2,152
</TABLE>
36
<PAGE> 58
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.
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.
37
<PAGE> 59
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.
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, 1997
or 1996.
38
<PAGE> 60
The carrying amounts and fair values of the Corporation's financial instruments
consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
--------------------- ------------------------
Carrying Carrying Fair Value
Amount Fair Value Amount
--------------------- ------------------------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 15,358 $ 15,358 $22,272 $ 22,272
Securities available-for-sale:
Investment securities 12,649 12,649 15,499 15,499
Mortgage-related securities 28,169 28,169 27,154 27,154
Loans receivable 229,331 229,779 191,806 192,395
Accrued interest receivable 1,553 1,553 1,470 1,470
Federal Home Loan Bank stock 1,050 1,050 1,118 1,118
Deposits 264,669 264,624 232,933 232,865
Accrued interest payable 332 332 395 395
Borrowings 1,500 1,500 6,850 6,850
</TABLE>
14. MERCHANTS AND MANUFACTURERS BANCORPORATION, INC. AND SUBSIDIARIES PARENT
COMPANY ONLY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
DECEMBER 31
STATEMENTS OF FINANCIAL CONDITION 1997 1996
-------- --------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 212 $ 683
Investment in subsidiaries 26,307 23,697
Premises and equipment 2,989 1,955
Other assets 959 925
-------------------
Total assets $30,467 $27,260
===================
LIABILITIES
Other liabilities $971 $ 880
STOCKHOLDERS' EQUITY
Common stock 904 898
Additional paid-in capital 11,008 10,759
Unrealized gain (loss) on available for sale securities 19 (203)
Retained earnings 17,574 15,868
Less treasury stock (9) (942)
-------------------
Total stockholders' equity 29,496 26,380
-------------------
Total liabilities and stockholders' equity $30,467 $27,260
===================
</TABLE>
39
<PAGE> 61
14. MERCHANTS AND MANUFACTURERS BANCORPORATION, INC. AND SUBSIDIARIES PARENT
COMPANY ONLY FINANCIAL INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
----------------------------
<S> <C> <C> <C>
STATEMENTS OF INCOME
Income:
Interest on loans, including fees $ - $ 26 $ -
Interest on investments - 25 64
Dividends from subsidiary banks 1,943 1,876 1,198
Other 280 244 251
--------------------------
2,223 2,171 1,513
Expenses:
Salaries and employee benefits 1,268 847 503
Occupancy 391 281 272
Interest 16 3 -
Other 547 544 656
--------------------------
2,222 1,675 1,431
--------------------------
Income before income tax benefit and equity in
undistributed net income of subsidiary banks 1 496 82
Income tax benefit 670 478 389
--------------------------
Income before equity in undistributed net income of
subsidiary banks 671 974 471
Equity in undistributed net income of subsidiary banks 1,738 336 1,230
--------------------------
Net income $2,409 $1,310 $1,701
==========================
</TABLE>
40
<PAGE> 62
14. MERCHANTS AND MANUFACTURERS BANCORPORATION, INC. AND SUBSIDIARIES PARENT
COMPANY ONLY FINANCIAL INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
----------------------------
<S> <C> <C> <C>
CONDENSED STATEMENTS OF CASH FLOWS
OPERATING ACTIVITIES
Net income $2,409 $1,310 $1,701
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed net income of subsidiaries (1,738) (336) (1,230)
Provision for depreciation 116 80 73
Other (593) 266 (474)
----------------------------
Net cash provided by operating activities 194 1,320 70
INVESTING ACTIVITIES
Sales of mortgage-backed securities - 693 -
Proceeds from repayments of mortgage-related securities - 27 48
Proceeds from sales of furniture and equipment 250 - -
Purchases of furniture and equipment (1,400) (226) (56)
----------------------------
Net cash provided (used) by investing activities (1,150) 494 (8)
FINANCING ACTIVITIES
Payment of cash dividends (703) (691) (569)
Purchase of treasury stock (251) (946) (178)
Proceeds from the sale of treasury stock 1,256 186 158
Proceeds from issuing additional common stock 60 - -
Proceeds from dividend reimbursement plan 123 - 100
----------------------------
Net cash provided (used) by financing activities 485 (1,451) (489)
----------------------------
Increase (decrease) in cash and cash equivalents (471) 363 (427)
Cash and cash equivalents at beginning of year 683 320 747
----------------------------
Cash and cash equivalents at end of year $ 212 $ 683 $ 320
============================
</TABLE>
41
<PAGE> 63
<TABLE>
<CAPTION>
DIRECTORS AND OFFICERS
<S> <C>
MERCHANTS AND MANUFACTURERS BANCORPORATION MERCHANTS AND MANUFACTURERS BANCORPORATION
DIRECTORS OFFICERS
Michael J. Murry Michael J. Murry
Chairman of the Board Chairman of the Board
James F. Bomberg James F. Bomberg
President, and Chief Executive Officer President and Chief Executive Officer
J. Michael Bartels Gerald Fusek
President, Bartels Management Services, Inc. President - West Allis Region
Duane P. Cherek Thomas Loew
President, Cherek Lincoln-Mercury, Inc. President - Franklin Region
Robert V. Donaj Conrad C. Kaminski
President Achieve Mortgage Corp. President - Milwaukee Region
Thomas F. Gapinski Linda Anderson
Insurance Executive Executive Administrative Assistant
Leonard Helminiak Donald Bray
President, Buddy Squirrel Company Assistant Vice President - Information Services
Casimir S. Janiszewski Cynthia M. Congemi
President, Superior Die Set Corporation Vice President - Training Director
David A. Kaczynski Debra L. Kapetanich
President, Cardinal Fabricating Corporation Vice President-Marketing Director
Conrad C. Kaminski John M. Krawczyk
President, M&M Bancorp - Milwaukee Region Executive Vice President and Chief Operating Officer
Dr. Thomas J. Kozina Kathryn N. Lazzaro
Retired Physician Executive Administrative Assistant
John M. Krawczyk Susan McClure
Executive Vice President Vice President Operations
Nicholas S. Logarakis James C. Mroczkowski
President, General Automotive Manufacturing Co. Vice President and Chief Financial Officer
Longin C. Prazynski Mark A. Ohlert
Retired Building Inspector Vice President - Credit Analyst Supervisor
Gervase R. Rose Steven Rutt
President, Roman Electric Co. Vice President - Special Loans
James A. Sass Anthony R. Smyczek
President, Max A. Sass Funeral Homes Vice President - Consumer Loans
Jack P. Schwellinger
Retired Businessmen
Keith C. Winters
President, Keith C. Winters & Associates, Ltd.
</TABLE>
42
<PAGE> 64
<TABLE>
<CAPTION>
<S> <C>
LINCOLN STATE BANK Richard L. Dennis
DIRECTORS Vice President - Branch Manager
Nicholas S. Logarakis
Chairman of the Board
Gerald Fusek
Conrad C. Kaminski Vice President Commercial Lending Officer
Vice Chairman of the Board
Debra Jeske
Dr. Francisco Aguilar Convenience Centers Assistant Manager
Physician
Diane Johnson
Michael L. Dana Assistant Vice President - Branch Manager
Chairman, Dana Investment Advisors, Inc.
Karolyn Kirkwood
Michael J. Duginski Assistant Branch Manager
Attorney, Krawczyk & Duginski, S.C.
Pamela M. Kurudza
Michael D. Dunham Vice President & Cashier
President, Effective Management Systems, Inc.
Robert A. Kurudza
Thomas F. Gapinski Assistant Vice President - Branch Manager
Casimir S. Janiszewski
Thomas G. Loew
Vice President Commercial Lending Officer
Sr. Mary Jendras
Administrator, Felician Health Care Michael J. Murry
Vice President Commercial Lending Officer
William E. La Macchia
President & CEO Mark Travel Corporation Vincent Paduano
Assistant Vice President - Branch Manager
Cynthia Loew
President and Chief Executive Officer Jean A. Pollnow
Executive Vice President
Michael J. Murry
Steven J. Rutt
Jack P. Schwellinger Vice President Commercial Lending Officer
LINCOLN STATE BANK Lisa Schott
OFFICERS Assistant Branch Manager
Nicholas S. Logarakis
Chairman of the Board Christine Schueller
Executive Secretary
Cynthia Loew
President and Chief Executive Officer Nicole Schultz-Thomas
Assistant Branch Manager
Conrad C. Kaminski
Vice Chairman of the Board
James F. Bomberg
Vice President Commercial Lending Officer
Rosalind E. Cesarz
Convenience Centers Manager
Cynthia Cullinan
Vice President and Lending Officer
</TABLE>
43
<PAGE> 65
<TABLE>
<S> <C>
FRANKLIN STATE BANK LINCOLN COMMUNITY BANK
DIRECTORS DIRECTORS
Keith C. Winters James A. Sass
Chairman of the Board Chairman of the Board
Thomas G. Loew Conrad C. Kaminski
Vice Chairman of the Board Vice Chairman of the Board
J. Michael Bartels Robert J. Blonski
Donna L. Kleinschmidt Maria Monreal-Cameron
President and Chief Executive Officer Executive Director Hispanic Chamber of Commerce
John P. Klose Duane P. Cherek
Realtor, Dwyer/Klose Realty
Robert V. Donaj
Dr. Thomas J. Kozina
David A. Kaczynski
Gary J. Krawczyk
Attorney, Krawczyk & Duginski, S.C. John M. Krawczyk
Michael J. Murry Mary Jo Krawczyk
President and Chief Executive Officer
Gervase R. Rose
Michael J. Murry
FRANKLIN STATE BANK
OFFICERS Longin C. Prazynski
Keith C. Winters
Chairman of the Board LINCOLN COMMUNITY BANK
OFFICERS
Thomas G. Loew James A. Sass
Vice Chairman of the Board Chairman of the Board
Donna L. Kleinschmidt Conrad C. Kaminski
President and Chief Executive Officer Vice Chairman of the Board
Cheryl Andrews Mary Jo Krawczyk
Assistant Vice President & Cashier President and Chief Executive Officer
James F. Bomberg James F. Bomberg
Vice President Commercial Lending Officer Vice President Commercial Lending Officer
Walter D. Bringardner Judith M. Donaj
Vice President Lending Officer Assistant Vice President - Branch Manager
Gerald Fusek Gerald Fusek
Vice President Commercial Lending Officer Vice President Commercial Lending Officer
Michael J. Murry Shelly Gardner
Vice President Commercial Lending Officer Assistant Branch Manager
Steven J. Rutt Thomas G. Loew
Vice President Commercial Lending Officer Vice President Commercial Lending Officer
Patricia A. Urban Michael J. Murry
Consumer Lending Officer Vice President Commercial Lending Officer
</TABLE>
44
<PAGE> 66
<TABLE>
<S> <C>
LINCOLN COMMUNITY BANK Marsha M. Sczerzen
OFFICERS (CONTINUED) Human Resource Director
Steven J. Rutt
Vice President Commercial Lending Officer Gregory B. Stengel
Executive Vice President - Comptroller
Beverly Sustache
Vice President & Cashier Barbara J. Wagner
Loan Services Administrator
Sharon Tocco
Executive Vice President LINCOLN NEIGHBORHOOD
REDEVELOPMENT CORPORATION
Bernadine M. Ziemba DIRECTORS
Assistant Vice President Conrad C. Kaminski
Director and Chairman of the Board
M&M SERVICES, INC.
DIRECTORS Richard W. Heine
Director and President
Michael J. Murry
Chairman of the Board
Robert J. Blonski
Robert J. Blonski Director and Vice President
Duane P. Cherek Steve Rutt
Director and Secretary
Michael Duginski
Thomas G. Loew
Gary Krawczyk Director and Treasurer
M&M SERVICES, INC. Robert Nicol
OFFICERS Director
Robert J. Blonski
President and Chief Executive Officer OFFICERS
Rosemary Chojnacki Michael D. Gapinski
Deposit Services Officer Vice President and Executive Director
Peter G. Eggers Hide Dewulf
Assistant Comptroller Project Manager
Helen A. Groshek ACHIEVE MORTGAGE CORPORATION
Assistant Customer Service Supervisor OFFICERS
Robert V. Donaj
Anne Marie Grulkowski President
Credit Review Officer
Rosemary Blonski
Duane Halvorsen Assistant Vice President - Chief Lending Administrator
Security Director
Mary Ann O'Bara
Nina Nowakowski Account Manager
Services Operations Officer
Ann Smessaert
Tims H. Petersons Account Manager
Assistant Comptroller
Jeannette R. Pinkowski
Assistant Vice President
</TABLE>
45
<PAGE> 67
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 "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.
The Corporation's stock is quoted in the "Other Stocks" section of the
Milwaukee Journal/Sentinel. The Corporation's common stock trading symbol is
"MMBI."
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 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, 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
MARCH 31, 1997 $31.00 $32.00
JUNE 30, 1997 32.25 32.25
SEPTEMBER 30, 1997 33.25 33.25
DECEMBER 31, 1997 46.25 46.75
</TABLE>
FINANCIAL INFORMATION TRANSFER AGENT
James C. Mroczkowski Firstar Trust Company
Vice President & Chief Financial Officer Corporate Trust Services
Merchants & Manufacturers Bancorporation, 1555 North RiverCenter Drive
Inc. Milwaukee, Wisconsin 53212
14100 West National Avenue (414) 905-5001
P.O. Box 511160
New Berlin, Wisconsin 53151
(414) 827-6713
46
<PAGE> 68
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC.
14100 WEST NATIONAL AVENUE
NEW BERLIN, WISCONSIN
PROXY FOR ANNUAL MEETING
This Proxy is solicited by the Board of Directors of Merchants and
Manufacturers Bancorporation, Inc. ("Merchants") for the Annual Meeting of
shareholders on May 26, 1998.
The undersigned hereby constitutes and appoints David Kaczynski and James Sass,
and each of them, with full power to act alone and with power of substitution,
to be the true and lawful attorney and proxy of the undersigned to vote at the
Annual Meeting of Shareholders of Merchants, to be held at Alverno College,
3401 South 39th Street, Milwaukee, Wisconsin 53215 on May 26, 1998 at 4:00 p.m.
(or at any adjournment(s) thereof), the shares of stock which the undersigned
would be entitled to vote on the election of Directors, on the proposals to
amend the Articles of Incorporation and the Incentive Stock Option Plan and in
their discretion on such other business as may properly come before the meeting
or adjournment(s). The undersigned hereby revokes any proxy heretofore given
and ratifies all that said attorneys and proxies or their substitutes may do by
virtue hereof.
1. ELECTION OF DIRECTORS
To fix the number of Directors at nineteen, and to elect the six persons
listed below as Directors as discussed in the Proxy Statement dated May 4,
1998 attached hereto.
James Bomberg Michael J. Murry
Conrad Kaminski Nicholas Logarakis
Keith Winters Duane Cherek
[ ] Elect as Directors the six nominees listed above.
[ ] Withhold authority to vote for the six nominees listed above.
[ ] Withhold authority to vote for individual nominees (to withhold
authority to vote for any individual nominee, check this box and
draw a line through that nominee's name above).
2. ADOPTION OF RESOLUTION AMENDING THE CORPORATION'S ARTICLES OF
INCORPORATION
Adoption of the resolution amending the Corporation's Articles of
Incorporation to increase the number of authorized shares of $1.00 par
value common stock from 1,500,000 to 3,000,000 shares.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
<PAGE> 69
3. ADOPTION OF RESOLUTION AMENDING THE CORPORATION'S INCENTIVE STOCK OPTION
PLAN
Adoption of the resolution amending the Corporation's 1996 Incentive Stock
Option Plan to increase the number of shares of the Corporation's common
stock, $1.00 par value, reserved for issue upon the exercise of options
granted, from 13,500 shares (20,250 shares adjusted for 50% stock dividend)
to 60,000 shares.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
The Board of Directors recommends a vote FOR the election of the six persons
listed above, and FOR adoption of Proposals 2 and 3, as described in the Proxy
Statement.
If any additional matters are properly presented, the persons named in the
proxy will have the discretion to vote in accordance with their own judgment in
such matters. This proxy is solicited on behalf of the Board of Directors and
may be revoked prior to its exercise by written notice to the Secretary of the
Corporation, or by submitting a later-dated proxy, or by attending the annual
meeting. This Proxy will be voted in accordance with instructions given by the
stockholder, but if no instructions are given, this Proxy will be voted to
elect the persons listed above and FOR adoption of the listed proposals.
The undersigned hereby acknowledges receipt of the Notice of Annual Meeting
dated May 1, 1998, and the Proxy Statement enclosed herewith.
Dated , 1998
-------------------
Number of Shares:
----------------
- ------------------------------ ---------------------------------
Signature of Stockholder Stockholder's Name (Please print)
- ------------------------------ ---------------------------------
Signature of Stockholder Stockholder's Name (Please print)
(Please sign your name exactly as it appears on the stock
certificate. In signing as Executor, Administrator, Personal
Representative, Guardian, Trustee, or Attorney, please add your
title as such. All joint owners should sign.)
