<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _________________ to ________________
Commission file Number 0-21292
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Wisconsin 39-1413328
------------------------------- ---------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
14100 West National Avenue, PO Box 511160
New Berlin, Wisconsin 53151-1160
- --------------------------------------------------------------------------------
(Address of principal executive office)
(414) 827-6713
- --------------------------------------------------------------------------------
Registrant's telephone number, including area code:
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the Registrant (1) has filed all reports required
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports) and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No .
--- ---
Applicable Only to Corporate Issuers
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Common Stock, par value $1.00 per share 1,367,195 Shares
- --------------------------------------- ------------------------------
Class Outstanding at August 1, 1998
<PAGE> 2
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE NUMBER
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Consolidated Statements of Financial Condition as of June 30,
1998 and December 31, 1997 3
Unaudited Consolidated Statements of Income for the Three Months and the
Six Months ended June 30, 1998 and 1997 4
Unaudited Consolidated Statements of Cash Flows for the Six Months ended
June 30, 1998 and 1997 5
Notes to Unaudited Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations 10
Item 3. Quantitative and Qualitative Disclosure About Market Risk 15
PART II. OTHER INFORMATION
Items 1-6 16
Signatures 19
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
-------- ------------
(In Thousands)
<S> <C>
ASSETS
Cash and due from banks $ 11,247 $ 10,694
Interest-bearing deposits at other banks 4,107 821
Federal funds sold 8,884 3,843
---------- ---------
Cash and cash equivalents 24,238 15,358
Securities available-for-sale at fair value:
Investment securities 14,404 12,649
Mortgage-related securities 27,610 28,169
Loans receivable 231,653 227,178
Accrued interest receivable 1,667 1,553
Federal Home Loan Bank stock 1,072 1,050
Premises and equipment 8,987 8,891
Cash surrender value, officer/director life insurance 1,034 1,009
Accounts receivable 783 37
Other assets 1,257 784
---------- ---------
Total assets $312,705 $296,678
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $280,382 $264,669
Borrowings 0 1,500
Accrued interest payable 351 332
Advance payments by borrowers for taxes and insurance 921 179
Other liabilities 673 502
---------- ---------
Total liabilities 282,327 267,182
Stockholders' equity
Common stock $1.00 par value; 1,500,000 shares authorized;
shares issued: 1,366,639--1998; 1,355,565--1997
shares outstanding: 1,366,082--1998; 1,355,175--1997 1,367 1,356
Additional paid in capital 10,835 10,556
Net unrealized gain (loss) on securities available-for-sale (14) 19
Retained earnings 18,208 17,574
Treasury stock, at cost--(557 shares--1998; 390
shares--1997) (18) (9)
---------- ---------
Total stockholders' equity 30,378 29,496
---------- ---------
Total liabilities and stockholders' equity $312,705 $296,678
========== =========
</TABLE>
See notes to unaudited consolidated financial statements.
3
<PAGE> 4
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1998 1997 1998 1997
---- ---- ---- ----
(In Thousands, except per share data)
<S> <C> <C> <C> <C>
Interest income:
Loans, including fees $4,849 $4,403 $9,686 $8,544
Investment securities:
Taxable 179 263 374 506
Exempt from federal income taxes 19 0 30 0
Mortgage-related securities 495 330 974 710
Other 151 171 260 353
------ ----- ------ ------
Total interest income 5,693 5,167 11,324 10,113
Interest expense:
Deposits 2,596 2,147 5,083 4,204
Borrowings 10 54 35 165
------ ----- ------ ------
Total interest expense 2,606 2,201 5,118 4,369
Net interest income 3,087 2,966 6,206 5,744
Provision for loan losses 75 48 150 96
------ ----- ------ ------
Net interest income after provision for
loan losses 3,012 2,918 6,056 5,648
Non-interest income:
Service charges on deposit accounts 188 179 375 345
Service charges on loans 52 25 74 40
Net gain on securities sales 49 0 49 43
Other 270 186 511 358
------ ----- ------ ------
559 390 1,009 786
Non-interest expenses:
Salaries and employee benefits 1,446 1,298 3,252 2,918
Premises and equipment 386 348 807 680
Data processing fees 161 147 318 297
Federal deposit insurance premiums 18 19 37 37
Other 535 506 1,097 1,011
------ ----- ------ ------
2,546 2,318 5,511 4,943
Income before income taxes 1,025 990 1,554 1,491
Income taxes 367 366 547 562
------ ----- ------ ------
Net income $ 658 $ 624 $1,007 $ 929
====== ====== ====== ======
Basic earnings per share $ 0.48 $ 0.48 $ 0.74 $ 0.72
====== ====== ====== ======
Diluted earnings per share $ 0.48 $ 0.48 $ 0.73 $ 0.71
====== ====== ====== ======
Dividends per share $ 0.14 $ 0.13 $ 0.27 $ 0.27
====== ====== ====== ======
</TABLE>
See notes to unaudited consolidated financial statements.
4
<PAGE> 5
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
1998 1997
---- ----
(In Thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 1,007 $ 929
Adjustments to reconcile net income to cash provided by
Operating activities:
Provision for loan losses 150 96
Provision for depreciation 275 244
Net amortization of investments securities premiums and discounts 60 72
Net realized investment security gains (49) (43)
Increase in accrued interest receivable (114) (375)
Increase in cash surrender value, officer/director life insurance (25) (24)
Increase in accounts receivable (746) (30)
Increase in accrued interest payable 19 170
Other (276) 80
---------- --------
Net cash provided by operating activities 301 1,119
INVESTING ACTIVITIES
Purchases of securities available-for-sale (13,692) (7,865)
Proceeds from sales of securities available-for-sale 9,132 7,803
Proceeds from redemptions and maturities of securities available-for-sale 3,300 4,081
Net increase in loans (4,625) (18,450)
Purchase of premises and equipment (371) (1,249)
Redemption (purchase) of Federal Home Loan Bank stock (22) 68
---------- --------
Net cash used by investing activities (6,278) (15,612)
FINANCING ACTIVITIES
Net increase in deposits 15,713 15,462
Net decrease in borrowings (1,500) (3,340)
Increase in advance payments by borrowers for taxes and insurance 735 887
Payments of cash dividends to stockholders (372) (344)
Purchase of treasury stock (205) (237)
Proceeds from sale of treasury stock 196 175
Proceeds from issuing additional common stock 290 0
---------- --------
Net cash provided by financing activities 14,857 12,603
Increase (decrease) in cash and cash equivalents 8,880 (1,890)
Cash and cash equivalents at beginning of period 15,358 22,272
---------- --------
Cash and cash equivalents at end of period $ 24,238 $ 20,382
========== ========
Supplemental cash flow information:
Interest paid $ 5,098 $ 4,200
Income taxes paid 478 404
</TABLE>
See notes to unaudited consolidated financial statements
5
<PAGE> 6
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC.
Notes to Unaudited Consolidated Financial Statements
June 30, 1998
NOTE A -- BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include the
accounts of Merchants and Manufacturers Bancorporation, Inc. (the Corporation)
and its wholly owned subsidiaries, Lincoln State Bank, Franklin State Bank,
Lincoln Community Bank (collectively, the Banks), Achieve Mortgage Corporation
and M&M Services, Inc. Lincoln State Bank also includes the accounts of its
wholly owned subsidiary, M&M Lincoln Investment Corporation. Lincoln Community
Bank also includes the accounts of its wholly owned subsidiary, Lincoln
Investment Management Corporation. All significant intercompany balances and
transactions have been eliminated.
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the six-month period ended June 30, 1998
are not necessarily indicative of the results that may be expected for the year
ended December 31, 1998. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Corporation's Form
10-K for the year ended December 31, 1997.
This 10-Q contains various forward-looking statements concerning the Company's
prospects that are based on the current expectations and beliefs of management.
Forward-looking statements may also be made by the Corporation from time to time
in other reports and documents as well as oral presentations. When used in
written documents or oral statements, the words anticipate, believe, estimate,
expect, objective and similar expressions are intended to identify
forward-looking statements. The statements contained herein and such future
statements involve or may involve certain assumptions, risks and uncertainties,
many of which are beyond the Corporation's control, that could cause the
Corporation's actual results and performance to differ materially from what is
expected. In addition to the assumptions and other factors referenced
specifically in connection with such statements, the following factors could
impact the business and financial prospects of the Corporation: general economic
conditions; legislative and regulatory initiatives; monetary and fiscal policies
of the federal government; deposit flows; disintermidiation; the cost of funds;
general market rates of interest; interest rates or investment returns on
competing investments; demand for loan products; demand for financial services;
changes in accounting policies or guidelines; and changes in the quality or
composition of the Corporation's loan and investment portfolio.
6
<PAGE> 7
NOTE B -- EARNINGS PER SHARE
On March 27, 1998 the Board of Directors of the Corporation declared a
three-for-two stock split, in the form of a 50% common stock dividend, that was
distributed on April 10, 1998 to shareholders of record on April 1, 1998. All
prior periods share data have been adjusted to reflect the effect of the
three-for-two split.
The Corporation adopted Statement of Financial Accounting Standards (SFAS) No.
128, "Earnings Per Share," which became effective at year-end 1997 for all
periods presented. Under the provisions of SFAS No. 128, primary and fully
diluted earnings per share were replaced with basic and diluted earnings per
share. Basic earnings per share is calculated by dividing net income available
to common shareholders by the weighted average number of common shares
outstanding. Diluted earnings per share is calculated by dividing net income by
the weighted average number of shares adjusted for the dilutive effect of
outstanding stock options.
Presented below are the calculations for basic and diluted earnings per share:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
Basic 1998 1997 1998 1997
- --------------------------------------------------------------------------------- ----------------------------------
<S> <C> <C> <C> <C>
Net income $ 657,411 $ 623,858 $ 1,006,615 $ 928,952
Weighted average shares outstanding 1,364,294 1,291,173 1,361,240 1,292,519
Basic earnings per share $ 0.48 $ 0.48 $ 0.74 $ 0.72
=========== ============ =========== ============
Diluted:
- --------------------------------------------------------------------------------- ----------------------------------
Net income $ 657,411 $ 623,858 $ 1,006,615 $ 928,952
Weighted average shares outstanding 1,364,294 1,291,173 1,361,240 1,292,519
Effect of dilutive stock options outstanding 15,064 14,040 14,423 13,096
------------ ------------- ----------- ------------
Diluted weighted average shares outstanding 1,379,358 1,305,213 1,375,663 1,305,615
Diluted earnings per share $ 0.48 $ 0.48 $ 0.73 $ 0.71
=========== ============ =========== ============
</TABLE>
NOTE C - COMPREHENSIVE INCOME
On January 1, 1998, the Corporation adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income." This statement establishes
standards for reporting and display of comprehensive income and its components
in a complete set of financial statements. Comprehensive income is the total of
reported net income and all other revenues, expenses, gains and losses that
under generally accepted accounting principles are not includable in reported
net income but are reflected in shareholders' equity. The standard permits the
statement of changes in shareholders' equity to be used to satisfy its
requirements and requires companies to report comparative totals for
comprehensive income in interim reports. The following table presents the
Corporation's comprehensive income.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
---------------------------------- ----------------------------------
<S> <C> <C> <C> <C>
Net income $ 657,411 $ 623,858 $ 1,006,615 $ 928,952
Other comprehensive income
Net change in unrealized securities gains
(losses), net (76,459) 158,388 (33,587) 56,245
------------ ----------- ------------ ------------
Total comprehensive income $ 580,952 $ 782,246 $ 973,028 $ 985,197
============ ============ ============ ============
</TABLE>
7
<PAGE> 8
NOTE D -- LOANS RECEIVABLE
Loans are comprised of the following categories:
<TABLE>
<CAPTION>
June 30
1998 1997
---- ----
(In Thousands)
<S> <C> <C>
Commercial business loans $ 54,886 $ 50,195
Commercial real estate 92,724 67,663
Real estate mortgages 73,073 80,815
Installments 12,240 10,688
Other 1,010 879
----------- -----------
Total loans 233,933 210,240
Unearned income (51) (72)
Allowance for loan losses (2,229) (2,024)
=========== ===========
Loans, net $ 231,653 $ 208,144
=========== ===========
</TABLE>
The following table presents changes in the allowance for loan losses:
<TABLE>
<CAPTION>
Six Months Ended June 30
1998 1997 1996
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Balance at January 1 $ 2,093 $ 1,939 $ 1,533
Provisions 150 96 72
Charge-offs (18) (11) (73)
Recoveries 4 0 29
========= ======== ========
Balance at June 30 $ 2,229 $ 2,024 $ 1,561
========= ======== ========
</TABLE>
NOTE E -- STOCKHOLDERS' EQUITY
Under federal law and regulations, the Corporation is required to meet certain
capital requirements. The Banks are required to meet leverage and risk-based
capital requirements. The leverage ratio, in general, is stockholders' equity as
a percentage of total assets. The risk-based capital ratio, in general, is
stockholders' equity plus general loan loss allowances (within certain
limitations) as a percentage of risk adjusted assets.
8
<PAGE> 9
As of June 30, 1998, 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. To be categorized as well
capitalized, the Banks must maintain minimum total risk-based, Tier I risk-based
and 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'
category.
<TABLE>
<CAPTION>
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------------ ---------------------------- --------------------------
Amount Ratio Amount Ratio Amount Ratio
------------------------ ---------------------------- --------------------------
AS OF JUNE 30, 1998 (In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Total Capital (to Risk-
Weighted Assets):
Lincoln State Bank $13,044 9.59% $10,878 >8.00% $13,597 >10.00%
Lincoln Community 12,059 17.52% 5,506 >8.00% 6,882 >10.00%
Franklin State Bank 3,710 10.22% 2,903 >8.00% 3,629 >10.00%
Tier 1 Capital (to Risk-
Weighted Assets):
Lincoln State Bank 11,908 8.76% 5,439 >4.00% 8,158 >6.00%
Lincoln Community 11,316 16.44% 2,753 >4.00% 4,129 >6.00%
Franklin State Bank 3,359 9.26% 1,452 >4.00% 2,178 >6.00%
Tier 1 Capital (to Average
Assets):
Lincoln State Bank 11,908 7.39% 6,447 >4.00% 8,059 >5.00%
Lincoln Community 11,316 11.66% 3,884 >4.00% 4,855 >5.00%
Franklin State Bank 3,359 7.50% 1,791 >4.00% 2,239 >5.00%
</TABLE>
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Financial Condition
At June 30, 1998, the Corporation's consolidated total assets were $312.7
million as compared to $296.7 million at December 31, 1997. This increase was
due to a $15.7 million increase in total deposits, which was used to fund
short-term investments and loans.
Investment securities available-for-sale increased $1.8 million, or 13.9% from
$12.6 million at December 31, 1997 to $14.4 million at June 30, 1998. Purchases
of tax-exempt securities caused the increase.
Mortgage-related securities available-for-sale decreased $559,000, or 2.0% from
$28.2 million at December 31, 1997, to $27.6 million at June 30, 1998. Purchases
of mortgage-related securities were offset by sales, redemptions and maturities
of this type of security.
Loans receivable increased $4.5 million, or 2.0%, from $227.2 million at
December 31, 1997 compared to $231.7 million at June 30, 1998. This increase was
primarily due to new commercial loan relationships. This movement corresponds to
the Corporation's strategic plan of emphasizing commercial business. These
assets tend to be rate-sensitive and will add interest income in a rising
interest rate environment. Currently, loans receivable consists mainly of
mortgages secured by residential properties located in the Corporation's primary
market area and commercial loans secured by business assets, real estate, and
guarantees also located in the Corporation's market area. At June 30, 1998 the
Corporation has not designated any loans held for sale.
Stockholders' equity at June 30, 1998 was $30.4 million compared to $29.5
million at December 31, 1997, an increase of $882,000. The change in
stockholders' equity consists of net income of $1.0 million, $290,000 from the
issuance of additional common stock, less the net purchase of treasury stock of
$9,000, payments of dividends to shareholders of $372,000 and the $33,000 net
decrease in the market value of securities categorized as available for sale.
The Banks continue to exceed their regulatory capital requirements.
Nonperforming Assets and Allowance for Losses
Generally a loan is classified as nonaccrual and the accrual of interest on such
loan is discontinued when the contractual payment of principal or interest has
become 90 days past due or management has serious doubts about further
collectibility of principal or interest. Generally, loans are restored to
accrual status when the obligation is brought current, has performed in
accordance with the contractual terms for a reasonable period of time and the
ultimate collectibility of the total contractual principal and interest is no
longer in doubt.
10
<PAGE> 11
Nonperforming assets are summarized, for the dates indicated, as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
-------- ------------
(dollars in thousands)
<S> <C> <C>
Non-accrual loans:
Mortgage loans
One-to-four family $ 486 $ 383
Commercial real estate 19 82
------ ----------
Total mortgage loans 505 465
Commercial business 233 177
Consumer and other 90 57
------ ----------
Total non-accrual loans 828 699
Other real estate owned 0 0
------ ----------
Total nonperforming assets $ 828 $ 699
====== ==========
RATIOS:
Non-accrual loans to total loans 0.35% 0.30%
Nonperforming assets to total assets 0.26 0.24
Loan loss allowance to non-accrual loans 269.20 299.42
Loan loss allowance to total loans 0.95 0.91
</TABLE>
Nonperforming assets increased by $129,000 from $699,000 at December 31, 1997 to
$828,000 at June 30, 1998, an increase of 18.5%. Management believes that losses
will be minimal on the remaining balances, due to the collateral position in
each situation.
Results of Operations
Net interest income for the three months ended June 30, 1998 was $3.09 million,
an increase of 4.1% from the $2.97 million reported for the same period in 1997.
The increased volume of interest-earning assets accounted for the higher net
interest income. The net interest income generated by additional volume was
partially offset by the reduced net interest spread. The weighted average yield
on interest-earning assets decreased from 8.10% for the three months ended June
30, 1997 to 7.95% for the same period in 1998. Competitive pressures and the
increased volumes of low yielding fed funds caused the weighted average yield on
interest earning assets to decline. The higher average cost of new deposits
generated caused the weighted average rate paid on deposits and borrowings to
increase from 3.57% for the three months ended June 30, 1997 to 3.77% for the
three months ended June 30, 1998. Net interest income for the six months ended
June 30, 1998 was $6.21 million, an increase of 8.0% from the $5.74 million
reported for the same period in 1997. The increased volume of interest-earning
assets was the primary reason for the improvement in the year-to-date net
interest income as well.
11
<PAGE> 12
The following table sets forth the weighted average yield earned on the
Corporation's consolidated loan and investment portfolios, the weighted average
interest paid on deposits and borrowings, the net spread between yield earned
and rates paid and the net interest margin during the six and three months ended
June 30, 1998 and 1997.
<TABLE>
<CAPTION>
During the During the
Three Months Ended Six Months
June 30, Ended June 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average yield on
interest-earning assets 7.95% 8.10% 7.99% 7.99%
Weighted average rate paid on
deposit accounts and borrowings 3.77 3.57 3.76 3.58
---- ---- ---- ----
Net interest spread 4.18% 4.53% 4.23% 4.41%
==== ==== ==== ====
Net interest margin (net interest
income divided by average
earning assets) 4.31% 4.64% 4.38% 4.54%
==== ==== ==== ====
</TABLE>
The provision for loan losses for the three-month period ended June 30, 1998 was
$75,000 compared to $48,000 for the three months ended June 30, 1997. For the
six months ended June 30, 1998, the provision for loan losses was $150,000
compared to $96,000 for than the same period in 1997. The higher provision is
primarily due to increases in the loan portfolio and not any anticipated loan
losses. In fact, the Corporation's ratio of nonperforming loans to total loans
is well below its peer group average. The Corporation uses a risk-based
assessment of its loan portfolio to determine the level of the loan loss
allowance. This procedure is based on internal reviews intended to determine the
adequacy of the loan loss allowance in view of presently known factors. However,
changes in economic conditions in the future financial conditions of borrowers
cannot be predicted and may result in increased future provisions to the loan
loss allowance.
Non-interest income for the three months ended June 30, 1998 was $559,000
compared to $390,000 for the three months ended June 30, 1997, an increase of
$169,000, or 43.3%. Non-interest income for the six months ended June 30, 1998
was $1.0 million compared to $786,000 for the six months ended June 30, 1997, an
increase of $223,000, or 28.4%. The increase for both periods is due to fees
collected on ATM transactions, higher service charges on loans, and gains on
sales of investment securities.
Non-interest expense for the three months ended June 30, 1998 was $2.55 million
compared to $2.32 million for the three months ended June 30, 1997, an increase
of $228,000, or 9.8%. Non-interest expense for the six months ended June 30,
1998 was $5.51 million compared to $4.94 million for the six months ended June
30, 1997, an increase of $568,000, or 11.5%. Salaries and employee benefits
increased $148,000 or 11.4% from $1.45 million for the three-month period ended
June 30, 1998 compared to $1.30 million for the 1997 three-month period.
Salaries and employee benefits increased $334,000 or 11.5% from $2.92 million
for the six-month period ended June 30, 1997 to $3.25 million for the six-month
period ended June 30, 1998. Employee bonus payments, higher benefit costs and
changes in personnel accounted for the change. Premises and equipment expense
increased $38,000 or 10.9% from $348,000 for the three-month period ended June
30, 1997 compared to $386,000 for the
12
<PAGE> 13
three-month period ended June 30, 1998. Premises and equipment expense increased
$127,000 or 18.7% from $680,000 for the six-month period ended June 30, 1997
compared to $807,000 for the six-month period ended June 30, 1998. The
construction of the Corporation's headquarters and repairs to existing
facilities accounted the change. Federal deposit insurance premiums decreased
$1,000 or 5.3% from $19,000 for the three-month period ended June 30, 1997 to
$18,000 for the three-month period ended June 30, 1997. Insurance premiums were
unchanged for the six-month period ended June 30, 1997 compared to 1998. Other
expenses increased $29,000 or 5.7% in the second quarter and $86,000 or 8.5% for
the six-month period ended June 30, 1998. This can be attributed to increases in
operating expenses such as office supplies, insurance costs and check losses.
Income before taxes for the three-month period ended June 30, 1998 was $1.03
million compared to $990,000 for the three months ended June 30, 1997, an
increase of $35,000 or 3.5%. Income before taxes for the six-month period ended
June 30, 1998 was $1.55 million compared to $1.49 million for the six months
ended June 30, 1997, an increase of $63,000 or 4.2%. The income tax expense for
the three months ended June 30, 1998 increased $1,000 over the 1997 second
quarter tax expense. The effective tax rate for the three months ended June 30,
1998 was 35.8% compared to 37.0% for the three months ended June 30, 1997. The
income tax expense for the six months ended June 30, 1998 decreased $15,000 over
the same period in 1997. The effective tax rate for the six months ended June
30, 1998 was 35.2% compared to 37.7% for the six months ended June 30, 1997. The
decrease in the tax rate can be attributed to the purchase of tax-exempt
investment securities held by the Corporation and a reallocation of expenses
throughout the Corporation's subsidiaries. On an after tax basis, the
Corporation reported net income of $658,000 for the three month period ended
June 30, 1998 compared to $624,000 for the same period in 1997; and for the six
month period ended June 30, 1998, the Corporation reported net income of $1.0
million compared to $929,000 for the same period in 1997.
Liquidity and Capital Resources
Liquidity management involves the ability to meet the cash flow requirements of
customers who may be either depositors wanting to withdraw funds or borrowers
needing assurance that sufficient funds will be available to meet their credit
needs. The Corporation had liquid assets of $24.2 million and $15.4 million at
June 30, 1998 and December 31, 1997, respectively.
Management believes liquidity and capital levels are adequate at June 30, 1998.
For a discussion of regulatory requirements, see Note D to the Unaudited
Consolidated Financial Statements.
13
<PAGE> 14
Asset/Liability Management
Financial institutions are subject to interest rate risk to the extent their
interest-bearing liabilities (primarily deposits) mature or reprice at different
times and on a different basis than their interest-earning assets (consisting
primarily of loans and securities). Interest rate sensitivity management seeks
to match maturities on assets and liabilities and avoid fluctuating net interest
margins while enhancing net interest income during periods of changing interest
rates. The difference between the amount of interest-earning assets maturing or
repricing within a specific time period and the amount of interest-bearing
liabilities maturing or repricing within the same time period is referred to as
an interest rate gap. A gap is considered positive when the amount of interest
rate sensitive assets exceeds the amount of interest rate sensitive liabilities.
A gap is considered negative when the amount of interest rate sensitive
liabilities exceeds the amount of interest rate sensitive assets. During periods
of rising interest rates, a negative gap tends to adversely affect net interest
income while a positive gap tends to result in an increase in net interest
income. During a period of falling interest rates, a negative gap tends to
result in an increase in net interest income while a positive gap tends to
adversely affect net interest income.
In the following table, assumptions regarding prepayment and withdrawal rates
are based upon the Corporation's historical experience, and management believes
such assumptions are reasonable.
The following table shows the interest rate sensitivity gap for four different
time intervals as of June 30, 1998.
<TABLE>
<CAPTION>
AMOUNTS MATURING OR REPRICING AS OF JUNE 30, 1998
---------------------------------------------------------------------------
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 $33,173 $21,076 $ 60,177 $ 5,347 $ 119,73
Adjustable-rate mortgage loans 19,628 8,103 17,152 0 44,883
-------- ------- -------- ------- --------
Total mortgage loans 52,801 29,179 77,329 5,347 164,656
Commercial business loans 26,570 4,276 23,996 48 54,890
Consumer loans 6,846 1,462 5,084 344 13,736
Tax-exempt loans 600 0 0 0 600
Mortgage-related securities 15,684 0 10,433 1,493 27,610
Fixed rate investment securities and other 2,917 3,900 811 3,010 10,638
Variable rate investment securities and 16,757 1,072 0 0 17,829
other
-------- ------- -------- ------- --------
Total interest-earning assets $122,175 $39,889 $117,653 $10,242 $289,959
======== ======= ======== ======= ========
Interest-bearing liabilities:
Deposits
Time deposits $99,879 $38,921 $ 11,878 $3 $150,681
NOW accounts 1,469 1,469 14,690 6,857 24,485
Savings accounts 3,516 3,516 35,159 16,406 58,597
Money market accounts 460 460 4,601 2,148 7,669
Advance payments for taxes and insurance 921 0 0 0 921
======== ======= ======== ======= ========
Total interest-bearing liabilities $106,245 $44,366 $ 66,328 $25,414 $242,353
======== ======= ======== ======= ========
Interest-earning assets less
interest-bearing
Liabilities $15,930 ($4,447) $ 51,325 ($15,172) $47,606
======== ======= ======== ======= ========
Cumulative interest rate sensitivity gap $15,930 $11,453 $ 62,778 $47,606
======== ======= ======== =======
Cumulative interest rate sensitivity gap
as a Percentage of total assets 5.09% 3.66% 20.08% 15.22%
======== ======= ======== =======
</TABLE>
14
<PAGE> 15
At June 30, 1998, the Corporation's ratio of cumulative interest-rate sensitive
gap as a percentage of total assets was 5.09% for six months and 3.66% for one
year maturities. Therefore, the Corporation is positively gapped and may benefit
from rising interest rates and conversely would adversely be effected by
declining interest rates.
Certain shortcomings are inherent in the method of analysis presented in the
above schedule. For example, although certain assets and liabilities may have
similar maturities or periods of repricing, they may react in different degrees
to changes in market interest rates. Also, the interest rates on certain types
of assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag behind changes in market
rates. Additionally, certain assets, such as adjustable rate mortgage loans,
have features that restrict changes in interest rates, on a short term basis
over the life of the asset. Further, in the event of a change in interest rates,
prepayment and early withdrawal levels would likely deviate significantly from
those assumed in calculating the schedule.
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.
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 is in the process of making modifications to the
identified software and will 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not Applicable
15
<PAGE> 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
As of June 30, 1998 there were no material pending legal
proceedings, other than ordinary routine litigation incidental to
the business of the Corporation, to which the Corporation or any
of its subsidiaries was a party or to which any of their property
was subject.
Item 2. Changes in Securities - NONE
Item 3 Defaults upon Senior Securities - NONE
Item 4 Submission of Matters to Vote of Security Holders
ANNUAL MEETING OF SHAREHOLDERS. On May 26, 1998, at the Annual
Meeting of the shareholders of the Corporation, the Corporation's
shareholders reelected James F. Bomberg, Conrad C. Kaminski, Keith
C. Winters, Michael J. Murry, Nicholas S. Logarakis and Duane P.
Cherek as directors for three year terms expiring on the date of
the annual shareholders meeting to be held in 2001. The
shareholders also ratified the adoption of the resolution to amend
the Corporation's Articles of Incorporation to increase the number
of authorized shares of $1.00 par value of common stock from
1,500,000 to 3,000,000 shares and approved the adoption of the
resolution to amend 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
the 50% stock dividend) to 60,000 shares.
SHAREHOLDER VOTE WITH RESPECT TO MATTERS ACTED UPON AT THE ANNUAL
MEETING
ELECTION OF DIRECTORS. Under Wisconsin law, the number of persons
corresponding to the number of director positions to be filled at
the Annual Meeting who received the highest number of votes would
be elected as directors. James F. Bomberg, Conrad C. Kaminski,
Keith C. Winters, Michael J. Murry, Nicholas S. Logarakis and
Duane P. Cherek were standing for reelection. The vote with
respect to the reelection of each was as follows:
JAMES F. BOMBERG
1,360,944 Total votes were eligible to be
cast
911,422 Votes were represented in person or
by proxy at the Annual Meeting
909,120 Votes were cast "FOR" the
reelection of Mr. Bomberg
0 Votes were cast "AGAINST" the
reelection of Mr. Bomberg
2,302 Votes abstained or were broker
non-votes
CONRAD C. KAMINSKI
1,360,944 Total votes were eligible to be
cast
911,422 Votes were represented in person or
by proxy at the Annual Meeting
908,920 Votes were cast "FOR" the
reelection of Mr. Kaminski
0 Votes were cast "AGAINST" the
reelection of Mr. Kaminski
2,502 Votes abstained or were broker
non-votes
16
<PAGE> 17
KEITH C. WINTERS
1,360,944 Total votes were eligible to be
cast
911,422 Votes were represented in person or
by proxy at the Annual Meeting
885,960 Votes were cast "FOR" the
reelection of Mr. Winters
0 Votes were cast "AGAINST" the
reelection of Mr. Winters
25,462 Votes abstained or were broker
non-votes
MICHAEL J. MURRY
1,360,944 Total votes were eligible to be
cast
911,422 Votes were represented in person or
by proxy at the Annual Meeting
909,157 Votes were cast "FOR" the
reelection of Mr. Murry
0 Votes were cast "AGAINST" the
reelection of Mr. Murry
2,265 Votes abstained or were broker
non-votes
NICHOLAS S. LOGARAKIS
1,360,944 Total votes were eligible to be
cast
911,422 Votes were represented in person or
by proxy at the Annual Meeting
909,120 Votes were cast "FOR" the
reelection of Mr. Logarkis
0 Votes were cast "AGAINST" the
reelection of Mr. Logarakis
2,302 Votes abstained or were broker
non-votes
DUANE P. CHEREK
1,360,944 Total votes were eligible to be
cast
911,422 Votes were represented in person or
by proxy at the Annual Meeting
909,120 Votes were cast "FOR" the
reelection of Mr. Cherek
0 Votes were cast "AGAINST" the
reelection of Mr. Cherek
2,302 Votes abstained or were broker
non-votes
ADOPTION OF THE RESOLUTION TO AMEND THE CORPORATION'S ARTICLES OF
INCORPORATION TO INCREASE THE NUMBER OF AUTHORIZED SHARES OF $1.00
PAR VALUE OF COMMON STOCK FROM 1,500,000 TO 3,000,000 SHARES.
Under Wisconsin law, the resolution would be approved if, at the
Annual Meeting, a greater number of votes were cast "FOR" the
proposal than were cast "AGAINST" the proposal. Abstentions and
broker non-votes were not counted except for purposes of
establishing a quorum. The vote on the adoption of the resolution
to amend the Corporation's Articles of Incorporation to increase
the number of authorized shares of $1.00 par value of common stock
from 1,500,000 to 3,000,000 shares was as follows:
1,360,944 Total votes were eligible to be
cast
911,422 Votes were represented in person or
by proxy at the Annual Meeting
888,276 Votes were cast "FOR" the adoption
of the resolution to amend the
corporation's Articles of
Incorporation to increase the
number of authorized shares of
$1.00 par value of common stock
from 1,500,000 to 3,000,000 shares
17
<PAGE> 18
21,208 Votes were cast "AGAINST" the
adoption of the resolution to amend
the corporation's Articles of
Incorporation to increase the
number of authorized shares of
$1.00 par value of common stock
from 1,500,000 to 3,000,000 shares
1,938 Votes abstained or were broker
non-votes
ADOPTION OF THE RESOLUTION TO AMEND 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 THE 50% STOCK DIVIDEND) TO 60,000
SHARES. Under Wisconsin law, the resolution would be approved if,
at the Annual Meeting, a greater number of votes were cast "FOR"
the proposal than were cast "AGAINST" the proposal. Abstentions
and broker non-votes were not counted except for purposes of
establishing a quorum. The vote on the adoption of the resolution
to amend 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 the 50%
stock dividend) to 60,000 shares was as follows:
1,360,944 Total votes were eligible to be
cast
911,422 Votes were represented in person or
by proxy at the Annual Meeting
861,558 Votes were cast "FOR" the adoption
of the resolution to amend 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 the 50% stock
dividend) to 60,000 shares
40,464 Votes were cast "AGAINST" the
adoption of the resolution to amend
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 the 50% stock
dividend) to 60,000 shares
9,400 Votes abstained or were broker
non-votes
Item 5 Other Information - NONE
Item 6 Exhibits and Reports on Form 8-K
The Corporation did not file any reports on Form 8-K during the
three months ended June 30, 1998. Required exhibits are
incorporated by reference to previously filed Securities Act
registration statements.
18
<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed by on its behalf by the
undersigned thereunto duly authorized.
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC.
------------------------------------------------
(Registrant)
Date August 7, 1998 /s/ Michael J. Murry
--------------------------- ---------------------------------
Michael J. Murry
Chief Executive Officer &
Chairman of the Board of
Directors
Date August 7, 1998 /s/ James C. Mroczkowski
--------------------------- ---------------------------------
James C. Mroczkowski
Vice President & Chief Financial
Officer
Principal Financial Officer
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 11,247
<INT-BEARING-DEPOSITS> 4,107
<FED-FUNDS-SOLD> 8,884
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 42,014
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 233,882
<ALLOWANCE> 2,229
<TOTAL-ASSETS> 312,705
<DEPOSITS> 280,382
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,945
<LONG-TERM> 0
0
0
<COMMON> 1,367
<OTHER-SE> 29,011
<TOTAL-LIABILITIES-AND-EQUITY> 312,705
<INTEREST-LOAN> 9,686
<INTEREST-INVEST> 1,378
<INTEREST-OTHER> 260
<INTEREST-TOTAL> 11,324
<INTEREST-DEPOSIT> 5,083
<INTEREST-EXPENSE> 5,118
<INTEREST-INCOME-NET> 6,206
<LOAN-LOSSES> 150
<SECURITIES-GAINS> 49
<EXPENSE-OTHER> 5,511
<INCOME-PRETAX> 1,554
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,007
<EPS-PRIMARY> 0.74
<EPS-DILUTED> 0.73
<YIELD-ACTUAL> 7.95
<LOANS-NON> 828
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,093
<CHARGE-OFFS> 18
<RECOVERIES> 4
<ALLOWANCE-CLOSE> 2,229
<ALLOWANCE-DOMESTIC> 2,229
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
