<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
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Commission file Number 0-21292
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
incorporation or organization) Identification Number)
14100 West National Avenue, PO Box 511160
New Berlin, Wisconsin 53151-1160
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(Address of principal executive office)
(414) 827-6713
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Registrant's telephone number, including area code:
- --------------------------------------------------------------------------------
(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 1,499,727 Shares
- ------------------------------------------ -------------------------------
Class Outstanding at November 1, 1998
<PAGE> 2
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE NUMBER
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Consolidated Statements of Financial Condition as of September
30, 1998 and December 31, 1997 3
Unaudited Consolidated Statements of Income for the Three Months and
the Nine Months ended September 30, 1998 and 1997
4
Unaudited Consolidated Statements of Cash Flows for the Nine Months ended
September 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 18
PART II. OTHER INFORMATION
Items 1-6 19
Signatures 20
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
SEPTEMBER, 30 DECEMBER 31,
1998 1997
------------- ------------
(In Thousands)
<S> <C> <C>
ASSETS
Cash and due from banks $ 9,155 $ 10,694
Interest-bearing deposits at other banks 1,485 821
Federal funds sold 4,017 3,843
--------- ---------
Cash and cash equivalents 14,657 15,358
Securities available-for-sale at fair value:
Investment securities 20,854 12,649
Mortgage-related securities 26,246 28,169
Loans receivable 249,279 227,178
Accrued interest receivable 1,726 1,553
Federal Home Loan Bank stock 1,072 1,050
Premises and equipment 9,814 8,891
Other assets 2,499 1,830
--------- ---------
Total assets $ 326,147 $ 296,678
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 288,042 $ 264,669
Borrowings 4,710 1,500
Accrued interest payable 367 332
Advance payments by borrowers for taxes and insurance 1,280 179
Other liabilities 796 502
--------- ---------
Total liabilities 295,195 267,182
Stockholders' equity
Common stock $1.00 par value;
shares authorized: 3,000,000--1998; 1,500,000--1997
shares issued: 1,507,788--1998; 1,491,241--1997
shares outstanding: 1,499,683--1998; 1,490,812--1997 1,508 1,491
Additional paid in capital 10,826 10,421
Net unrealized gain on securities available-for-sale 184 19
Retained earnings 18,712 17,574
Treasury stock, at cost--(8,105 shares--1998; 429
shares--1997) (278) (9)
--------- ---------
Total stockholders' equity 30,952 29,496
--------- ---------
Total liabilities and stockholders' equity $ 326,147 $ 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
---- ---- ---- ----
(In Thousands, except per share data)
<S> <C> <C> <C> <C>
Interest income:
Loans, including fees $ 5,085 $ 4,648 $14,771 $13,192
Investment securities:
Taxable 167 251 541 757
Exempt from federal income taxes 107 2 137 2
Mortgage-related securities 413 372 1,387 1,082
Other 118 105 378 458
------- ------- ------- -------
Total interest income 5,890 5,378 17,214 15,491
Interest expense:
Deposits 2,708 2,294 7,791 6,498
Borrowings 11 27 46 192
------- ------- ------- -------
Total interest expense 2,719 2,321 7,837 6,690
Net interest income 3,171 3,057 9,377 8,801
Provision for loan losses 50 48 200 144
------- ------- ------- -------
Net interest income after provision for
loan losses 3,121 3,009 9,177 8,657
Non-interest income:
Service charges on deposit accounts 185 164 560 509
Service charges on loans 74 50 148 90
Net gain on securities sales 6 35 55 78
Other 264 184 775 542
------- ------- ------- -------
529 433 1,538 1,219
Non-interest expenses:
Salaries and employee benefits 1,435 1,263 4,687 4,181
Premises and equipment 380 387 1,187 1,067
Data processing fees 156 158 474 455
Federal deposit insurance premiums 30 20 67 57
Other 544 515 1,642 1,526
------- ------- ------- -------
2,545 2,343 8,057 7,286
Income before income taxes 1,105 1,099 2,658 2,590
Income taxes 382 408 929 970
------- ------- ------- -------
Net income $ 723 $ 691 $ 1,729 $ 1,620
======= ======= ======= =======
Basic earnings per share $ 0.48 $ 0.48 $ 1.15 $ 1.13
======= ======= ======= =======
Diluted earnings per share $ 0.47 $ 0.47 $ 1.14 $ 1.12
======= ======= ======= =======
Dividends per share $ 0.15 $ 0.12 $ 0.39 $ 0.36
======= ======= ======= =======
</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>
NINE MONTHS ENDED SEPTEMBER 30,
1998 1997
------------ ------------
(In Thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 1,729 $ 1,620
Adjustments to reconcile net income to cash provided by
Operating activities:
Provision for loan losses 200 144
Provision for depreciation 427 379
Net amortization of investments securities premiums and discounts 81 97
Net realized investment security gains (55) (78)
Increase in accrued interest receivable (173) (131)
Increase (decrease) in accrued interest payable 35 (22)
Other (454) 233
-------- --------
Net cash provided by operating activities 1,790 2,242
INVESTING ACTIVITIES
Purchases of securities available-for-sale (21,471) (15,177)
Proceeds from sales of securities available-for-sale 10,538 12,308
Proceeds from redemptions and maturities of securities available-for-sale 4,869 6,966
Net increase in loans (22,301) (26,237)
Purchase of premises and equipment (1,350) (1,491)
Redemption (purchase) of Federal Home Loan Bank stock (22) 68
-------- --------
Net cash used by investing activities (29,737) (23,563)
FINANCING ACTIVITIES
Net increase in deposits 23,373 24,034
Net increase (decrease) in borrowings 3,210 (6,850)
Increase in advance payments by borrowers for taxes and insurance 1,101 1,381
Payments of cash dividends to stockholders (591) (523)
Purchase of treasury stock (613) (251)
Proceeds from sale of treasury stock 344 1,255
Proceeds from issuing additional common stock 422 62
-------- --------
Net cash provided by financing activities 27,246 19,108
Decrease in cash and cash equivalents (701) (2,213)
Cash and cash equivalents at beginning of period 15,358 22,272
-------- --------
Cash and cash equivalents at end of period $ 14,657 $ 20,059
======== ========
Supplemental cash flow information:
Interest paid $ 7,802 $ 6,706
Income taxes paid 809 688
</TABLE>
See notes to unaudited consolidated financial statements
5
<PAGE> 6
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC.
Notes to Unaudited Consolidated Financial Statements
September 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 nine-month period ended September 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 August 27, 1998 the Board of Directors of the Corporation declared a 10%
common stock dividend that was distributed on October 15, 1998 to shareholders
of record on October 1, 1998. All prior periods share data have been adjusted to
reflect the 10% stock dividend.
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 Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Basic
- --------------------------------------------------------------------------------------- ----------------------------
Net income $ 722,854 $ 690,958 $ 1,729,469 $ 1,619,914
Weighted average shares outstanding 1,502,631 1,443,193 1,499,139 1,428,990
Basic earnings per share $ 0.48 $ 0.48 $ 1.15 $ 1.13
============================ ============================
Diluted:
- --------------------------------------------------------------------------------------- ----------------------------
Net income $ 722,854 $ 690,958 $ 1,729,469 $ 1,619,914
Weighted average shares outstanding 1,502,631 1,443,193 1,499,139 1,428,990
Effect of dilutive stock options outstanding 20,105 15,450 16,570 14,404
---------------------------- ----------------------------
Diluted weighted average shares outstanding 1,522,736 1,458,643 1,515,709 1,443,394
Diluted earnings per share $ 0.47 $ 0.47 $ 1.14 $ 1.12
============================ ============================
</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.
7
<PAGE> 8
The following table presents the Corporation's comprehensive income.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
---------------------------- ----------------------------
<S> <C> <C> <C> <C>
Net income $ 722,854 $ 690,958 $ 1,729,469 $ 1,619,914
Other comprehensive income
Net change in unrealized securities gains
(losses), net 198,714 89,280 165,127 (260,999)
---------------------------- ----------------------------
Total comprehensive income $ 921,568 $ 780,238 $ 1,894,596 $ 1,358,915
============================ ============================
</TABLE>
NOTE D -- LOANS RECEIVABLE
Loans are comprised of the following categories:
<TABLE>
<CAPTION>
September 30
1998 1997
--------- ---------
(In Thousands)
<S> <C> <C>
Commercial business loans $ 62,201 $ 55,730
Commercial real estate 100,311 69,128
Real estate mortgages 75,479 81,591
Installments 12,952 10,771
Other 651 796
--------- ---------
Total loans 251,594 218,016
Unearned income (48) (69)
Allowance for loan losses (2,267) (2,064)
--------- ---------
Loans, net $ 249,279 $ 215,883
========= =========
</TABLE>
The following table presents changes in the allowance for loan losses:
<TABLE>
<CAPTION>
Nine Months Ended September 30
1998 1997
---------------------------------------
(In Thousands)
<S> <C> <C>
Balance at January 1 $ 2,093 $ 1,939
Provisions 200 144
Charge-offs (32) (19)
Recoveries 6 0
------------- --------------
Balance at September 30 $ 2,267 $ 2,064
============= ==============
</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 September 30, 1998, the most recent notification from the Federal Deposit
Insurance Corporation categorized Lincoln Community Bank as well capitalized and
Lincoln State Bank and Franklin 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
------------------------------------------------------ --------------------------
<S> <C> <C> <C> <C> <C> <C>
AS OF SEPTEMBER 30, 1998 (In Thousands)
Total Capital (to Risk-
Weighted Assets):
Lincoln State Bank $13,355 9.37% $11,402 >8.00% $14,253 >10.00%
Lincoln Community 12,144 16.32% 5,951 >8.00% 7,439 >10.00%
Franklin State Bank 3,794 9.59% 3,135 >8.00% 3,919 >10.00%
Tier 1 Capital (to Risk-
Weighted Assets):
Lincoln State Bank 12,211 8.57% 5,701 >4.00% 8,552 >6.00%
Lincoln Community 11,382 15.30% 2,976 >4.00% 4,463 >6.00%
Franklin State Bank 3,433 8.76% 1,568 >4.00% 2,351 >6.00%
Tier 1 Capital (to Average
Assets):
Lincoln State Bank 12,211 7.56% 6,461 >4.00% 8,076 >5.00%
Lincoln Community 11,382 11.65% 3,909 >4.00% 4,886 >5.00%
Franklin State Bank 3,433 7.66% 1,794 >4.00% 2,242 >5.00%
</TABLE>
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Financial Condition
At September 30, 1998, the Corporation's consolidated total assets were $326.1
million as compared to $296.7 million at December 31, 1997. This increase was
due to a $23.4 million increase in total deposits, which was used to fund
purchases of investment securities and fund new loan relationships.
Investment securities available-for-sale increased $8.2 million, or 64.9% from
$12.6 million at December 31, 1997 to $20.9 million at September 30, 1998.
Purchases of tax-exempt securities caused the increase.
Mortgage-related securities available-for-sale decreased $1.9 million, or 6.8%
from $28.2 million at December 31, 1997, to $26.2 million at September 30, 1998.
Purchases of mortgage-related securities were offset by sales, redemptions and
maturities of this type of security.
Loans receivable increased $22.1 million, or 9.7%, from $227.2 million at
December 31, 1997 compared to $249.3 million at September 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. Currently, loans receivable consists mainly of commercial loans
secured by business assets, real estate, and guarantees located in the
Corporation's primary market area and mortgages secured by residential
properties also located in the Corporation's market area. At September 30, 1998
the Corporation has not designated any loans held for sale.
Stockholders' equity at September 30, 1998 was $31.0 million compared to $29.5
million at December 31, 1997, an increase of $1.5 million. The change in
stockholders' equity consists of net income of $1.7 million, $422,000 from the
issuance of additional common stock, the $165,000 net increase in the market
value of securities categorized as available for sale, less the net purchase of
treasury stock of $269,000 and payments of dividends to shareholders of
$591,000.
Nonperforming Assets and Allowance for Losses
Generally a loan is classified as nonaccrual and the accrual of interest on such
loan is discontinued when the contractual payment of principal or interest has
become 90 days past due or management has serious doubts about further
collectibility of principal or interest. Generally, loans are restored to
accrual status when the obligation is brought current, has performed in
accordance with the contractual terms for a reasonable period of time and the
ultimate collectibility of the total contractual principal and interest is no
longer in doubt.
10
<PAGE> 11
Nonperforming assets are summarized, for the dates indicated, as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------ ------------
(dollars in thousands)
<S> <C> <C>
Non-accrual loans:
Mortgage loans
One-to-four family $393 $383
Commercial real estate 12 82
---- ----
Total mortgage loans 405 465
Commercial business 109 177
Consumer and other 100 57
---- ----
Total non-accrual loans 614 699
Other real estate owned 0 0
---- ----
Total nonperforming assets $614 $699
==== ====
RATIOS:
Non-accrual loans to total loans 0.24% 0.32%
Nonperforming assets to total assets 0.19 0.24
Loan loss allowance to non-accrual loans 369.22 299.42
Loan loss allowance to total loans 0.90 0.91
</TABLE>
Nonperforming assets decreased by $85,000 from $699,000 at December 31, 1997 to
$614,000 at September 30, 1998, a decrease of 12.2%. Payments collected on
past-due loans caused the decrease. Management believes that losses on the
remaining balances will be minimal, due to the collateral position in each
situation.
Results of Operations
Net interest income for the three months ended September 30, 1998 was $3.17
million, an increase of 3.7% from the $3.06 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 8.20% for the three
months ended September 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 3.65% for the three months ended
September 30, 1997 to 3.81% for the three months ended September 30, 1998. Net
interest income for the nine months ended September 30, 1998 was $9.38 million,
an increase of 6.5% from the $8.80 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 nine and three months
ended September 30, 1998 and 1997.
<TABLE>
<CAPTION>
During the During the
Three Months Nine Months
Ended Ended
September 30, September 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average yield on
interest-earning assets 7.95% 8.20% 7.98% 8.05%
Weighted average rate paid on
deposit accounts and borrowings 3.81 3.65 3.77 3.60
---------------------------------------------
Net interest spread 4.14% 4.55% 4.21% 4.45%
=============================================
Net interest margin (net interest
income divided by average
earning assets) 4.28% 4.66% 4.35% 4.58%
=============================================
</TABLE>
The provision for loan losses for the three-month period ended September 30,
1998 was $50,000 compared to $48,000 for the three months ended September 30,
1997. For the nine months ended September 30, 1998, the provision for loan
losses was $200,000 compared to $144,000 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 September 30, 1998 was $529,000
compared to $433,000 for the three months ended September 30, 1997, an increase
of $96,000, or 22.2%. Non-interest income for the nine months ended September
30, 1998 was $1.5 million compared to $1.2 million for the nine months ended
September 30, 1997, an increase of $319,000, or 26.2%. The increase for both
periods is due to fees collected on ATM transactions and higher service charges
on loans.
Non-interest expense for the three months ended September 30, 1998 was $2.55
million compared to $2.34 million for the three months ended September 30, 1997,
an increase of $202,000, or 8.6%. Non-interest expense for the nine months ended
September 30, 1998 was $8.06 million compared to $7.29 million for the nine
months ended September 30, 1997, an increase of $770,000, or 10.6%. Salaries and
employee benefits increased $172,000 or 13.6% to $1.44 million for the
three-month period ended September 30, 1998 compared to $1.26 million for the
1997 three-month period. Salaries and employee benefits increased $506,000 or
12.1% from $4.18 million for the nine-month period ended September 30, 1997 to
$4.69 million for the nine-month period ended September 30, 1998. Employee
promotions, higher benefit costs and additions in personnel accounted for the
change. Premises and equipment
12
<PAGE> 13
expense decreased $7,000 or 1.8% from $387,000 for the three-month period ended
September 30, 1997 compared to $380,000 for the three-month period ended
September 30, 1998. Premises and equipment expense increased $120,000 or 11.2%
from $1.07 million for the nine-month period ended September 30, 1997 compared
to $1.19 million for the nine-month period ended September 30, 1998. The
construction of the Corporation's headquarters and repairs to existing
facilities accounted for the change. Federal deposit insurance premiums
increased $10,000 or 50.0% from $20,000 for the three-month period ended
September 30, 1997 to $30,000 for the three-month period ended September 30,
1997. The insurance premiums also increased $10,000 or 17.5% from $57,000 for
the nine-month period ended September 30, 1997 to $67,000 for the three-month
period ended September 30, 1998. The insurance premium increase can be
attributed to the deposit growth being experienced at the subsidiary banks.
Other expenses increased $29,000 or 5.6% in the third quarter and $115,000 or
7.5% for the nine-month period ended September 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 September 30, 1998 was
$1.11 million compared to $1.10 million for the three months ended September 30,
1997, an increase of $6,000 or 0.5%. Income before taxes for the nine-month
period ended September 30, 1998 was $2.66 million compared to $2.59 million for
the nine months ended September 30, 1997, an increase of $69,000 or 2.7%. The
income tax expense for the three months ended September 30, 1998 decreased
$26,000 over the 1997 third quarter tax expense. The effective tax rate for the
three months ended September 30, 1998 was 34.6% compared to 37.1% for the three
months ended September 30, 1997. The income tax expense for the nine months
ended September 30, 1998 decreased $41,000 over the same period in 1997. The
effective tax rate for the nine months ended September 30, 1998 was 34.9%
compared to 37.5% for the nine months ended September 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 $723,000 for the three month period ended September 30, 1998 compared
to $691,000 for the same period in 1997; while for the nine month period ended
September 30, 1998, the Corporation reported net income of $1.73 million
compared to $1.62 million 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 $14.7 million and $15.4 million at
September 30, 1998 and December 31, 1997, respectively.
Management believes liquidity and capital levels are adequate at September 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 September 30, 1998.
<TABLE>
<CAPTION>
AMOUNTS MATURING OR REPRICING AS OF SEPTEMBER 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 $ 26,104 $ 22,438 $ 70,576 $ 10,159 $ 129,277
Adjustable-rate mortgage loans 15,996 11,117 17,980 70 45,163
----------------------------------------------------------------
Total mortgage loans 42,100 33,555 88,556 10,229 174,440
Commercial business loans 31,042 9,263 21,766 128 62,199
Consumer loans 6,977 1,436 5,460 434 14,307
Tax-exempt loans 600 0 0 0 600
Mortgage-related securities 14,916 247 9,158 1,925 26,246
Fixed rate investment securities and other 5,432 0 1,890 9,800 17,122
Variable rate investment securities and other 9,234 1,072 0 0 10,306
----------------------------------------------------------------
Total interest-earning assets $ 110,301 $ 45,573 $ 126,830 $ 22,516 $ 305,220
================================================================
Interest-bearing liabilities:
Deposits
Time deposits $ 106,202 $ 42,160 $ 11,190 $ 4 $ 159,556
NOW accounts 1,460 1,460 14,605 6,816 24,341
Savings accounts 3,569 3,569 35,691 16,656 59,485
Money market accounts 477 477 4,768 2,225 7,947
Borrowings 4,710 0 0 0 4,710
Advance payments for taxes and insurance 1,280 0 0 0 1,280
-----------------------------------------------------------------
Total interest-bearing liabilities $117,698 $ 47,666 $ 66,254 $ 25,701 $ 257,319
=================================================================
Interest-earning assets less
interest-bearing Liabilities ($ 7,397) ($ 2,093) $ 60,576 ($ 3,185) $ 47,901
================================================================
Cumulative interest rate sensitivity gap ($ 7,397) ($ 9,490) $ 51,086 $ 47,901
==================================================
Cumulative interest rate sensitivity gap as a
Percentage of total assets (2.27%) (2.91%) 15.66% 14.69%
==================================================
</TABLE>
14
<PAGE> 15
At September 30, 1998, the Corporation's ratio of cumulative interest-rate
sensitive gap as a percentage of total assets was (2.27%) for six months and
(2.91)% for one year maturities. Therefore, the Corporation is negatively gapped
and may benefit from falling interest rates and conversely would adversely be
effected by increasing 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
The Year 2000 poses a potential risk to normal operations of both Information
Technology (IT) and non-IT systems. The Year 2000 problem is pervasive and
complex. The majority of computer operating systems and programs currently in
use have been developed utilizing six digits date fields (YYMMDD). For example,
December 31st, 1999, would be represented by "991231" in computer code. The two
digit field for the year (in example "99") is the basis for all calculation
formulas within most computer systems, particularly those processed through
mainframe computers.
Up until now, this two-digit field has sufficed, using a subtraction of current
date from some future date (up to 12-31-99). As the industry enters the year
2000, the digit-field "00" will not permit accurate calculations based on the
current formulas. January 1, 2000 would be read as the year 000101. Many
computer systems will recognize this date as the year 1900 or other erroneous
dates. The potential impact is that data could cause system failures. This could
affect all forms of financial accounts, pensions, personnel benefits,
investments, legal commitments, record keeping, inventories, maintenance, and
file retention.
Systems that work independently of IT equipment have the same potential for
failure due to the prevalence of embedded computer chips. These "hidden" chips
have forced the Corporation to review all of it's environmental, security, and
communication systems.
Year 2000 Project Status
The Corporation has taken the Year 2000 issue very seriously. The Corporation
sees the Year 2000 as an opportunity to help increase service, functionality,
and performance to its customers. Outdated systems, procedures, and products are
being replaced or renovated with those that will meet the challenges of the new
millennium.
A Year 2000 project team was assembled early in 1997 to assess the scope of the
project as it relates to all of the Corporation's banks and subsidiaries. Once
this assessment was completed, an aggressive project plan was put into place
that consists of renovating or replacing affected systems, validation and
testing of any changes, effective risk management and employee and consumer
awareness.
15
<PAGE> 16
In developing it's Year 2000 Project Plan, the Corporation defined the Year 2000
problem in 5 stages:
Awareness: The need to define the scope of the Year 2000 problem.
Assessment: Identify all systems and components which are affected.
Renovation: The problem should be "fixed" by the appropriate means.
Validation: Year 2000 compliance must be tested.
Implementation: Final confirmation of Year 2000 compliance.
The Corporation began working on its Year 2000 project in the spring of 1997.
The project plan was written, personnel was recruited and timetables were
established.
Awareness: Completed Summer-Fall 1997
The awareness phase consisted of analyzing the effects that the Year 2000 posed
to the Corporation. It was during this phase that the project plan was written,
our company consultant was retained, the project time-lines established and
introductory information was sent to our employees.
Assessment: Completed Fall 1997 - Spring 1998
The assessment phase consisted of a complete inventory of all the Corporation's
facilities. This inventory was used to prioritize those systems considered
mission-critical and assigning project team members to determine their Year 2000
compliance.
Renovation: 80% Completed
The renovation phase consists of replacing or upgrading those systems that have
been found non-Year 2000 compliant. Based on the type of systems in place, the
renovation phase is projected to be completed by 1st quarter of 1999.
Validation: 75% Completed
For those systems being renovated, they must be tested to ensure Year 2000
compliance. Each system is tested by individuals familiar with its operation and
all tests are documented for support purposes. Validation will be completed
along with renovation and implementation. No apparent problems inherent to the
Year 2000 have been observed in the completed testing
Implementation: 50% Completed
The implementation phase consists of implementing those renovated and validated
systems. Based on the type of systems in place, the implementation phase is
estimated to be completed in 2nd quarter of 1999.
Note: A outside service bureau provides the core processing systems for the
Corporation. The renovation, validation, and implementation phases of its Year
2000 project were completed on October 4th, 1998.
16
<PAGE> 17
Corporate Customers
The Corporation and its subsidiary banks have prepared a corporate contingency
plan for addressing the Year 2000 problem and implementing the necessary
changes. One of the facets of this contingency plan is to ensure that its
customers are made aware of this problem and that they are involved at some
level in reviewing their company's ability to handle and effectively deal with
the year 2000. Each of the lending officers within the Corporation is aware of
the Year 2000 Problem and has or will be reviewing those businesses to which
funds have been borrowed to assure that they are also becoming Year 2000 ready.
The same review process will be included with all new applicants.
Third Party Vendors
A third party vendor is a supplier, processor, or governmental agency that has
material interfaces directly with the Corporation.
Significant Vendors
The Corporation is working directly with all vendors with material interfaces.
It is the Corporation's goal that these interfaces be ready by March 1st, 1999.
Currently, 75% of all interfaces have been tested and no apparent problems have
been discovered. Below are several key interfaces and their project status:
Deposit and Loan Processing: Currently Completed
Loan Preparation: Target January - 1999
Payroll: Target February - 1999
Credit Card Processing: Currently Completed
Asset Liability Management: Target March - 1999
Other Third Party Vendors
Other third party vendors are suppliers that provide services or products to the
Corporation. All vendors have been queried as to their Year 2000 readiness.
Approximately 90% of all vendors currently supply Year 2000 ready products or
services. The remaining 10% have indicated that their products or services will
be ready during the first half of 1999. To date, the Corporation is not aware of
any vendor with a Year 2000 issue that would significantly impact the
Corporation's operations, liquidity or capital resources. The Corporation has
tested for readiness wherever possible and feels comfortable with the results.
Should a vendor be unable to supply a Year 2000 ready product or services, the
Corporation will follow those guidelines set forth in it's Year 2000 contingency
plan.
Costs
Managing the Year 2000 issue will result in direct and indirect costs to the
Corporation. Based on the program to date the Corporation has incurred $12,000
in fees to an external consultant. In addition, over the past months nearly
all-existing hardware has been replaced and financed out of regular operating
sources. These items of equipment would normally have been replaced irrespective
of the Year 2000 issue. Internal staff costs incurred due to the project have
amounted to approximately $15,000 to $20,000.
17
<PAGE> 18
The Corporation anticipates that it will incur expenses, both internal and
external for 1999 in the range of $30,000 to $50,000. Most of these costs will
be incurred due to staff time being allocated to the project and for contingency
planning preparation. The Corporation intends to fund these costs out of normal
operating sources.
The estimated costs of, and timetable for, becoming Year 2000 compliant
constitute "forward looking statements" as defined in the Private Securities
Litigation Reform Act of 1995. Investors are cautioned that such estimates are
based on numerous assumptions by management, including assumptions regarding the
continued availability of certain resources, the accuracy of representations
made by third parties concerning their compliance with Year 2000 issues, and
other factors. The estimated costs of Year 2000 compliance also do not give
effect to any future corporate acquisitions made by the Corporation or its
subsidiaries.
Risk of Non-Compliance and Contingency Plans
Management of the Corporation believes it has an effective program in place to
resolve the Year 2000 issue in a timely manner. The major applications which
pose the greatest Year 2000 risk if the implementation of the Year 2000
Compliance Program is not successful are the Corporation's data processing
system (which processes various documents to allow for accurate record keeping
of transactional data), teller system and transaction interfaces (which provide
customer access to accounts), loan system (which monitors and transacts loan
payments by customers), and internal network system (which supports the computer
components throughout the Corporation). Most of these systems are supported by
external vendors. Failure by any of these systems could have a negative impact
on the Corporation's ability to process its customers' transactions.
Although the Corporation intends to complete all Year 2000 activities in a
timely fashion, and although the Corporation has initiated Year 2000
Communications with significant customers, vendors and other important parties,
and is monitoring the progress of such communications, such third parties
nonetheless represent a risk that cannot be assessed with precision nor
absolutely controlled despite the Corporation's best efforts. For that reason,
The Corporation is developing a contingency plan to address alternatives in the
event of some kind of a Year 2000 failure. Preliminary work has been begun on
such a plan and the Corporation anticipates that the plan should be completed by
the end of the first quarter in 1999.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not Applicable
18
<PAGE> 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
As of September 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 - NONE
Item 5 Other Information - NONE
Item 6 Exhibits and Reports on Form 8-K
The Corporation did not file any reports on Form 8-K during the
three months ended September 30, 1998. Required exhibits are
incorporated by reference to previously filed Securities Act
registration statements.
19
<PAGE> 20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed by on its behalf by the
undersigned thereunto duly authorized.
MERCHANTS AND MANUFACTURERS
BANCORPORATION, INC.
---------------------------
(Registrant)
Date November 11, 1998 /s/ James F. Bomberg
-------------------------- -------------------------------
James F. Bomberg
President & Chief Executive
Officer
Date November 11, 1998 /s/ James C. Mroczkowski
-------------------------- -------------------------------
James C. Mroczkowski
Vice President & Chief Financial
Officer
Principal Financial Officer
20
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 9,155
<INT-BEARING-DEPOSITS> 1,485
<FED-FUNDS-SOLD> 4,017
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 47,100
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 251,546
<ALLOWANCE> 2,267
<TOTAL-ASSETS> 326,147
<DEPOSITS> 288,042
<SHORT-TERM> 4,710
<LIABILITIES-OTHER> 2,443
<LONG-TERM> 0
0
0
<COMMON> 1,508
<OTHER-SE> 29,444
<TOTAL-LIABILITIES-AND-EQUITY> 326,147
<INTEREST-LOAN> 14,771
<INTEREST-INVEST> 2,065
<INTEREST-OTHER> 378
<INTEREST-TOTAL> 17,214
<INTEREST-DEPOSIT> 7,791
<INTEREST-EXPENSE> 7,837
<INTEREST-INCOME-NET> 9,377
<LOAN-LOSSES> 200
<SECURITIES-GAINS> 55
<EXPENSE-OTHER> 8,057
<INCOME-PRETAX> 2,658
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,729
<EPS-PRIMARY> 1.15
<EPS-DILUTED> 1.14
<YIELD-ACTUAL> 7.98
<LOANS-NON> 614
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,093
<CHARGE-OFFS> 200
<RECOVERIES> 32
<ALLOWANCE-CLOSE> 2,267
<ALLOWANCE-DOMESTIC> 2,267
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
