<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1997
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 incorporation (I.R.S. Employer
or organization) Identification Number)
14100 West National Avenue, PO Box 511160
New Berlin, Wisconsin 53151-1160
--------------------------------
(Address of principal executive office)
Registrant's telephone number, including area code: (414) 827-6713
Securities registered pursuant to Section 12(b) of the Act: Not Applicable
--------------
Securities registered pursuant to section 12(g) of the Act:
COMMON STOCK, PAR VALUE $1.00 PER SHARE
---------------------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports) and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
form 10-K [X]
As of March 1, 1998, 900,675 shares of Common Stock were outstanding, and the
aggregate market value of the shares (based upon the closing price) held by
non-affiliates was approximately $35,682,000.
<PAGE> 2
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC.
*****
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
PART I Page
----
<S> <C> <C>
Item 1. Business 3
Item 2. Properties 5
Item 3. Legal Proceedings 6
Item 4. Submission of Matters to a Vote of Security Holders 6
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder's Matters 6
Item 6. Selected Financial Data 7
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 8
Item 7a. Quantitative and Qualitative Disclosures About Market Risk 18
Item 8. Financial Statements and Supplementary Data 19
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 19
PART III
Item 10. Directors and Executive Officers of the Registrant 19
Item 11. Executive Compensation 19
Item 12 Security Ownership of Certain Beneficial Owners and Management 19
Item 13. Certain Relationships and Related Transactions 19
PART IV
Item 14. Exhibits, Financial Statements Schedules and Reports on Form 8-K 20
SIGNATURES 21
</TABLE>
2
<PAGE> 3
PART I
ITEM 1. BUSINESS
GENERAL
Merchants and Manufacturers Bancorporation, Inc. (the Corporation), is
a registered multi-bank holding company under the Bank Holding Company Act of
1956, as amended. The Corporation was organized in 1982, and in 1983 and 1984
acquired all of the outstanding stock of Lincoln State Bank, Milwaukee,
Wisconsin and Franklin State Bank, Franklin, Wisconsin, respectively. In 1993,
the Corporation acquired all of the outstanding shares of Lincoln Savings Bank,
S.A., Milwaukee, Wisconsin in a business combination accounted for as a
pooling-of-interests. Lincoln State Bank and Franklin State Bank were chartered
as commercial banks under the Wisconsin Banking Statutes, while Lincoln Savings
Bank operated as a stock savings bank until 1997. In 1997 Lincoln Savings Bank
converted from a Wisconsin stock savings bank to a Wisconsin commercial bank.
Upon conversion Lincoln Savings Bank changed its name to Lincoln Community Bank.
The Corporation operates fourteen banking facilities in Milwaukee and
Waukesha counties. In addition to its subsidiary banks (Lincoln State Bank,
Franklin State Bank and Lincoln Community Bank), the Corporation owns three
non-bank subsidiaries, the Lincoln Neighborhood Redevelopment Corporation, which
was organized for the purpose of redeveloping and rejuvenating certain areas
located primarily on the near south side of Milwaukee, M&M Services, Inc., which
was formed in 1994 to provide operational services to the Corporation's
subsidiary banks and Achieve Mortgage Corporation, which was formed in 1997 to
act as the Corporation's mortgage broker.
This report contains various forward-looking statements concerning the
Corporation's prospects that are based on the current expectations and beliefs
of management. Forward-looking statements may also be made by the Corporation
from time to time in other reports and documents as well as oral presentations.
When used in written documents or oral statements, the words anticipate,
believe, estimate, expect, objective and similar expressions are intended to
identify forward-looking statements. The statements contained herein and such
future statements involve or may involve certain assumptions, risks and
uncertainties, many of which are beyond the Corporation's control, that could
cause the Corporation's actual results and performance to differ materially from
what is expected. In addition to the assumptions and other factors referenced
specifically in connection with such statements, the following factors could
impact the business and financial prospects of the Corporation: general economic
conditions; legislative and regulatory initiatives; monetary and fiscal policies
of the federal government; deposit flows; disintermidiation; the cost of funds;
general market rates of interest; interest rates or investment returns on
competing investments; demand for loan products; demand for financial services;
changes in accounting policies or guidelines; and changes in the quality or
composition of the Corporation's loan and investment portfolio.
PRODUCTS AND SERVICES
Through the banking subsidiaries, the Corporation provides a broad
range of services to individual and commercial customers. These services include
accepting demand, savings, and time deposits, including regular checking
accounts, NOW accounts, money market accounts, certificates of deposit,
individual retirement accounts, and club accounts. The subsidiary banks also
make secured and unsecured commercial, mortgage, construction, and consumer term
loans on both a fixed and variable rate basis. Historically, the terms on these
loans range from one month to five years and are retained in the Bank's
portfolios. The subsidiary banks also provide lines of credit to commercial
borrowers and to individuals through home equity loans.
COMPETITION
The subsidiary banks primarily serve the southern half of Milwaukee
County and the southeastern portion of Waukesha County, including suburbs
located to the south and west of the City of Milwaukee. There are presently in
excess of one hundred other financial institutions in the primary service area
that directly compete with Lincoln State Bank, Franklin State Bank and Lincoln
Community Bank. In addition to competing with other commercial banks, the
subsidiaries compete with savings and loan associations, credit unions,
small-loan companies, insurance companies, investment banking firms and large
retail companies. The principal methods of competition include interest rates
paid on deposits and charged on loans, personal contacts and efforts to obtain
deposits and loans, types and quality of services provided and convenience of
the locations. Many of the Corporation's competitors are larger and have
significantly greater financial resources than the Corporation and its
subsidiaries.
EMPLOYEES
At December 31, 1997, the Corporation and its subsidiaries employed 139
full-time and 51 part-time employees. The Corporation provides a wide range of
benefits to employees, including educational activities, and considers its
employee relations to be excellent. The Corporation conducts extensive training
programs in order to enhance job-related knowledge and skills of its people and
to train its employees with a sales-orientated approach to customers. Eligible
employees participate in a 401K plan as well as group life and major medical
insurance programs.
3
<PAGE> 4
THE BANKS AND OTHER SUBSIDIARIES
At or for the year ended December 31, 1997, the subsidiary banks (each
consolidated with its appropriate subsidiaries; see "Other Subsidiaries") had
total assets, total loans, total deposits, stockholder's equity, net income, and
return on assets as follows (dollars in thousands):
<TABLE>
<CAPTION>
LINCOLN STATE BANK LINCOLN COMMUNITY BANK FRANKLIN STATE BANK
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Total assets $ 152,631 $ 97,602 $ 43,338
Total loans 124,426 69,756 35,089
Total deposits 140,897 84,655 39,764
Stockholders' equity 11,369 11,213 3,274
Net income 1,893 1,349 448
Return on average assets 1.38% 1.33% 1.21%
</TABLE>
LINCOLN STATE BANK
Lincoln State Bank was organized as a state banking association under
the laws of the State of Wisconsin in 1919. It operates full service branch
offices in the southeastern Wisconsin communities of Muskego, New Berlin,
Brookfield and Pewaukee. In addition it operates six limited hours facilities in
Milwaukee County. It is engaged in the general commercial and consumer banking
business and provides full-service banking to individuals and businesses,
including checking and savings accounts, commercial loans, consumer loans, real
estate loans, safe deposit facilities, transmitting of funds, and such other
banking services as are usual and customary for commercial banks. At December
31, 1997, Lincoln State Bank comprised 51.4% of the consolidated assets of the
Corporation.
LINCOLN COMMUNITY BANK
Lincoln Savings Bank was organized as a state chartered mutual savings
and loan association under the laws of the State of Wisconsin in 1910. In April
1993, it converted from the mutual to stock form of organization, and all of the
shares of stock issued by the converted association were acquired by the
Corporation (See Business of the Corporation - General and Recent Acquisition).
In 1997 Lincoln Savings Bank, S.A. converted from a Wisconsin stock savings bank
to a Wisconsin commercial bank. Its principal office is presently located in
Milwaukee, Wisconsin. It also operates a branch office in Milwaukee, Wisconsin.
Lincoln Community Bank's principal business consists of attracting deposits from
the general public, and investing such funds in securities, including
mortgage-backed securities, and mortgage loans, principally to finance the
purchase or construction of residential dwellings and, to a lesser extent, to
finance the purchase or construction of multi-family properties. Lincoln
Community Bank also originates consumer loans and commercial loans. At December
31, 1997, Lincoln Community Bank comprised 32.9% of the consolidated assets of
the Corporation.
FRANKLIN STATE BANK
Franklin State Bank was organized as a state banking association under
the laws of the State of Wisconsin in 1982. Its office is located in Franklin,
Wisconsin. It is engaged in the general commercial and consumer banking business
and provides full-service banking to individuals and businesses, including
checking and savings accounts, commercial loans, consumer loans, real estate
loans, safe deposit facilities, transmitting of funds, and such other banking
services as are usual and customary for commercial banks. At December 31, 1997,
Franklin State Bank comprised 14.6% of the consolidated assets of the
Corporation.
LINCOLN NEIGHBORHOOD REDEVELOPMENT CORPORATION
The Lincoln Neighborhood Redevelopment Corporation (the Redevelopment
Corporation) was formed in June of 1988 and is a wholly owned subsidiary of the
Corporation. The Redevelopment Corporation was established to redevelop and
rejuvenate certain areas located on the south-side of Milwaukee by, among other
things, arresting decay and deterioration, working with local businesses to keep
commercial areas strong and attractive, pursuing means to preserve and create
jobs, encouraging appropriate land-use, involving community residents in
economic planning and retaining and attracting businesses. As of December 31,
1997, Lincoln Neighborhood Redevelopment Corporation had assets of $68,000, no
liabilities and equity of $68,000.
M&M SERVICES, INC.
M&M Services was formed in January of 1994 and is a wholly owned
subsidiary of the Corporation. M&M Services provides operational activities to
the Corporation's subsidiary banks. These activities include: human resources,
auditing, marketing, financial analysis, loan document preparation, loan credit
analysis and check processing. Prior to 1994 these services were provided by
employees of Merchants and Manufacturers Bancorporation.
4
<PAGE> 5
ACHIEVE MORTGAGE CORPORATION
Achieve Mortgage Corporation was formed in January of 1997 and is a
wholly owned subsidiary of the Corporation. The subsidiary was formed to expand
the origination of secondary market real estate mortgages on behalf of the
Corporation and the Banks.
OTHER SUBSIDIARIES
Lincoln State Bank and Lincoln Community Bank each have a wholly owned
subsidiary. In 1991 an investment subsidiary known as M&M - Lincoln Investment
Corporation was formed to manage the majority of Lincoln State Bank's investment
portfolio and to enhance the overall return of the portfolio. The subsidiary
received a capital contribution of approximately $13 million of mortgage-backed
and other investment securities from Lincoln State Bank in exchange for 100% of
the stock of the subsidiary. In 1995 an investment subsidiary known as Lincoln
Investment Management Corporation was formed to manage the majority of Lincoln
Community Bank's investment portfolio and to enhance the overall return of the
portfolio. The subsidiary received a capital contribution of approximately $21
million of mortgage-backed and other investment securities from Lincoln
Community Bank in exchange for 100% of the stock of the subsidiary.
SUPERVISION AND REGULATION
The operations of financial institutions, including bank holding
companies, commercial banks and savings banks, are highly regulated, both at
federal and state levels. Numerous statutes and regulations affect the
businesses of the Corporation and its financial service subsidiaries.
The Corporation's own activities are regulated by the federal Bank
Holding Company Act (the "Act"), which requires each holding company to obtain
the prior approval of the Federal Reserve Board (the "Board") before acquiring
direct or indirect ownership or control of more than five percent of the voting
shares of any bank or before engaging, directly or indirectly, in certain
enumerated activities. While the act, with certain exceptions, previously
prohibited the acquisition of banks located in other states, recently enacted
legislation now generally authorizes such interstate acquisitions, subject to
regulatory approval.
The Act also prohibits, with certain exceptions acquisition of more
than five percent of the voting shares of any company (directly or indirectly)
doing business other than banking or performing services for its subsidiaries,
without prior approval of the Board. Pursuant to the Act, the Corporation is
supervised and regularly examined by the Board.
Lincoln State Bank, Franklin State Bank and Lincoln Community Bank are
subject to extensive regulation and supervision by the Wisconsin Department of
Financial Institutions. Because the deposits of all three banks are insured by
the Federal Deposit Insurance Corporation (FDIC), they are also subject to
supervision by the FDIC. In that connection, the banks must comply with
applicable state and federal statutes and a wide range of rules and regulations
promulgated by bank regulatory agencies under such statutes. To assure
compliance with such laws and to ascertain their safety and soundness, the banks
are periodically examined by the FDIC and the Wisconsin Department of Financial
Institutions. In addition, the Corporation itself is periodically examined by
the Federal Reserve Bank of Chicago. Such supervision and regulation is intended
primarily to ensure the safety of deposits accepted by the banks.
ITEM 2. PROPERTIES
The Corporation's offices are located in a two-story building at 14100
West National Avenue in New Berlin, Wisconsin. The building constructed in 1997,
contains 20,000 square feet, of which the majority is used by the Corporation
and the remainder leased to a tenant. At this location, the Corporation
maintains its corporate operations and personnel.
The main office of Lincoln State Bank is at 2266 South 13th Street,
Milwaukee, Wisconsin. The South 13th Street location consists of a one-story
building containing approximately 11,000 square feet. An adjacent building of
approximately 750 square feet contains the two walk-up facilities operated by
Lincoln State Bank. In addition, there are three drive-up facilities, and the
parking lot provides space for 51 cars. One branch of Lincoln State Bank is
located in a one-story, 1,700 square foot building at 13500 Janesville Road,
Muskego, Wisconsin. The Muskego branch has three drive-up windows and parking
facilities for 25 vehicles. Another branch of Lincoln State Bank was opened in
May 1990 at 14000 West National Avenue, New Berlin, Wisconsin. The New Berlin
branch contains approximately 7,000 square feet and has 4 drive-up facilities, 4
walk-up windows and parking for 27 vehicles. During 1995 Lincoln State Bank
opened two other full-service branch locations one located at 17600 West Capitol
Drive, Brookfield, Wisconsin and at 585 Ryan Street, Pewaukee, Wisconsin. Both
facilities offer drive-up and walk-up facilities along with parking for both
customers and employees. In addition, Lincoln State Bank operates customer
facilities at Villa St. Francis located at South 20th and Ohio Streets in
Milwaukee, at Clement Manor located at South 92nd Street and West Howard Avenue
in Milwaukee, at Friendship Village located at North 73rd and West Dean Road in
Milwaukee, at Stoney Creek Adult Community in Muskego, at the Milwaukee
Protestant Home located on North Downer Avenue in Milwaukee and at Forest Ridge
located in Hales Corners, Wisconsin
5
<PAGE> 6
Franklin State Bank is located in a three-story building at 7000 South
76th Street in Franklin, Wisconsin. The building contains 21,308 square feet,
has five drive-up lanes and three automatic tellers. The parking lot
accommodates 165 cars. The building is owned by the Corporation and leases space
to Franklin State Bank. Portions of the building that are not used by Franklin
State Bank are leased to various tenants.
Lincoln Community Bank's main office is located at 3131 South 13th
Street, Milwaukee, Wisconsin in a one-story building. Lincoln Community Bank
also operates a branch facility at 5400 West Forest Home Avenue, Milwaukee,
Wisconsin. Lincoln Community Bank owns both facilities. Achieve Mortgage
Corporation leases office space at the Forest Home Avenue location.
M&M Services is located in the New Berlin corporate headquarters. At
that location, M&M Services maintains its subsidiary service support facilities
and personnel.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Corporation and its subsidiaries are party to
legal proceedings arising out of their general lending activities and other
operations. However, there are no pending legal proceedings to which the
Corporation or its subsidiaries are a party, or to which their property is
subject, which, if determined adversely to the Corporation, would individually
or in the aggregate have a material adverse effect on its consolidated financial
position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of 1997.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS
The stock of the Corporation is not listed on any stock exchange or
quoted on the National Association of Securities Dealers Quotation Automated
Quotation System. The Corporation's stock has been quoted on "Pink Sheets", an
inter-broker quotation medium, since April 1993, and in the Over The Counter
Bulletin Board, an electronic quotation service. Robert W. Baird & Co.,
Incorporated, a regional securities and investment banking firm headquartered in
Milwaukee, Wisconsin, acts as a market maker for the Corporation's stock. The
Corporation's stock is quoted in the "Other Stocks" section of the Milwaukee
Journal/Sentinel. The Corporation's common stock trading symbol is "MMBI."
Holders of the Corporation's stock are entitled to receive such
dividends as may be declared from time to time by the Board of Directors from
funds legally available for such payments. The Corporation's ability to pay cash
dividends is dependent primarily on the ability of its subsidiaries to pay
dividends to the Corporation. The ability of each subsidiary to pay dividends
depends on its earnings and financial condition and on compliance with banking
statutes and regulations.
The following table sets forth the quarterly "bid/ask" range for the
period indicated.
<TABLE>
<CAPTION>
Quotation or Price
Quarter Ended Bid Ask
------------------------- ---------------- ----------------
<S> <C> <C> <C>
March 31, 1996 $ 28.00 $ 28.00
June 30, 1996 29.25 29.25
September 30, 1996 29.50 29.50
December 31, 1996 30.00 30.00
MARCH 31, 1997 $ 31.00 $ 32.00
JUNE 30, 1997 32.25 32.25
SEPTEMBER 30, 1997 33.25 33.25
DECEMBER 31, 1997 46.25 46.75
</TABLE>
6
<PAGE> 7
ITEM 6. SELECTED FINANCIAL DATA
The following table summarizes certain historical financial data
regarding the Corporation. This information is derived in part from, and should
be read in conjunction with, the Consolidated Financial Statements of the
Corporation presented elsewhere herein (dollars in thousands, except per share
data):
<TABLE>
<CAPTION>
At or For the Year Ended December 31,
--------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
SELECTED BALANCE SHEET DATA
Total assets $ 296,678 $ 267,723 $ 264,247 $ 248,181 $ 239,944
Loans receivable, net 227,178 189,791 163,650 149,925 137,715
Investment securities held to maturity 0 0 0 4,326 4,451
Investment securities available for sale 12,649 15,499 15,833 9,464 12,097
Mortgage-related securities available for sale 28,169 27,154 44,251 54,634 52,185
Deposits 264,669 232,933 233,083 223,446 214,631
Short-term borrowings 1,500 6,850 3,000 0 0
Stockholders' equity 29,496 26,380 26,543 23,573 24,741
Realized stockholders' equity(3) 29,477 26,583 26,724 25,512 24,612
SELECTED INCOME STATEMENT DATA
Total interest income (taxable-equivalent)(1) $ 21,126 $ 19,401 $ 18,479 $ 16,212 $ 15,543
Total interest expense 9,090 8,362 7,921 6,155 6,476
----------------------------------------------------------------
Net interest income 12,036 11,039 10,558 10,057 9,067
Provision for loan losses 192 460 132 43 211
----------------------------------------------------------------
Net interest income after provision for
loan losses 11,844 10,579 10,426 10,014 8,856
Net gain (loss) on security sales 78 70 61 (244) (8)
Other noninterest income 1,578 1,485 1,267 1,185 1,391
-----------------------------------------------------------------
Total noninterest income 1,656 1,555 1,328 941 1,383
Noninterest expense 9,620 10,021 9,040 8,484 8,268
----------------------------------------------------------------
Income before income taxes 3,880 2,113 2,714 2,471 1,971
Income taxes 1,439 730 917 874 651
Less taxable equivalent adjustment 32 73 96 73 101
----------------------------------------------------------------
Net income $ 2,409 $ 1,310 $ 1,701 $ 1,524 $ 1,219
================================================================
PER SHARE DATA
Net income - basic(2) $ 2.75 $ 1.50 $ 1.91 $ 1.71 $ 1.37
Net income - diluted(2) $ 2.72 $ 1.48 $ 1.90 $ 1.70 $ 1.36
Cash dividend declared $ 0.80 $ 0.79 $ 0.64 $ 0.51 $ 0.50
Book value(2) $ 32.64 $ 30.50 $ 29.80 $ 26.48 $ 27.82
Average shares outstanding(2) 874,562 875,082 889,677 890,655 889,363
OTHER DATA
Net interest margin 3.95% 3.87% 3.86% 3.93% 3.81%
Allowance for loan losses to non-accrual loans 299.42% 206.87% 232.92% 189.64% 157.49%
Nonperforming assets to total assets 0.24% 0.35% 0.25% 0.35% 0.41%
Stockholders' equity to total assets(2), 9.94% 9.85% 10.04% 9.50% 10.31%
Average stockholders' equity to average assets 9.77% 9.94% 10.01% 9.87% 10.91%
Return on assets (ratio of net income to
average total assets) 0.86% 0.50% 0.67% 0.62% 0.51%
Return on stockholders' equity (ratio of net
income to average equity) 8.82% 5.00% 6.71% 6.27% 4.87%
Dividend payout ratio 29.18% 52.75% 33.45% 29.79% 33.22%
Facilities:
Number of full-service offices 8 8 8 6 6
Number of limited services offices 6 6 6 4 5
</TABLE>
(1) Taxable-equivalent adjustments to interest income involve the conversion of
tax-exempt sources of interest income to the equivalent amounts of interest
income that would be necessary to derive the same net return if the
investments had been subject to income taxes. A 34% incremental income tax
rate, consistent with the Corporation's historical experience, is used in
the conversion of tax-exempt interest income to a tax-equivalent basis.
(2) Computed assuming that the 330,625 shares of common stock issued in
connection with the April 2, 1993 merger conversion of Lincoln Community
Bank were issued and outstanding for all periods presented. No adjustment
for the additional income that could have been earned had the net proceeds
from the issuance been available for prior periods had been made.
(3) Excludes SFAS 115 mark-to-market equity adjustment.
7
<PAGE> 8
The following table sets forth certain unaudited income and expense
data on a quarterly basis for the periods indicated (dollars in thousands,
except per share data):
<TABLE>
<CAPTION>
1997 1996
----------------------------------------------------------------------------------------------
3/31 6/30 9/30 12/31 3/31 6/30 9/30 12/31
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income
(taxable-equivalent) (1) $4,952 $5,173 $5,386 $5,615 $4,696 $4,750 $4,950 $5,005
Interest expense 2,168 2,201 2,321 2,400 2,024 2,044 2,138 2,156
---------------------------------------------------------------------------------------------
Net interest income 2,784 2,972 3,065 3,215 2,672 2,706 2,812 2,849
Provision for loan losses 48 48 48 48 36 36 388 0
Noninterest income 396 390 433 437 368 366 405 416
Noninterest expense 2,625 2,318 2,343 2,334 2,592 2,183 2,989 2,257
---------------------------------------------------------------------------------------------
Income (loss) before taxes 507 996 1,107 1,270 412 853 (160) 1,008
Income taxes (benefit) 196 366 408 469 133 290 (62) 369
Less taxable equivalent
Adjustment 6 6 8 12 22 22 21 8
=============================================================================================
Net income (loss) $305 $624 $691 $789 $257 $541 ($119) $631
=============================================================================================
Basic earnings (loss) per share $0.35 $0.72 $0.79 $0.89 $0.29 $0.62 ($0.14) $0.73
=============================================================================================
Diluted earnings (loss) per share $0.35 $0.71 $0.78 $0.88 $0.29 $0.61 ($0.14) $0.72
=============================================================================================
Dividends per share $0.20 $0.20 $0.20 $0.20 $0.17 $0.17 $0.20 $0.25
=============================================================================================
</TABLE>
(1) Taxable-equivalent adjustments to interest income involve the conversion of
tax-exempt sources of interest income to the equivalent amounts of interest
income that would be necessary to derive the same net return if the
investments had been subject to income taxes. A 34% incremental income tax
rate, consistent with the Corporation's historical experience, is used in
the conversion of tax-exempt interest income to a tax-equivalent basis.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The following discussion is intended as a review of significant factors
affecting the Corporation's financial condition and results of operations as of
and for the period ended December 31, 1997, as well as providing comparisons
with previous years. This discussion should be read in conjunction with the
Consolidated Financial Statements and accompanying notes and the selected
financial data presented elsewhere in this report. It should be noted that the
financial statements are restated to reflect the April 2, 1993 merger conversion
of Lincoln Community Bank S.A. which was accounted for as a
pooling-of-interests.
NET INTEREST INCOME
Net interest income equals the difference between interest earned on
assets and the interest paid on liabilities and is a measure of how effectively
management has balanced and allocated the Corporation's interest rate sensitive
assets and liabilities. Net interest income is the most significant component of
earnings. Taxable-equivalent adjustments to interest income involve the
conversion of tax-exempt sources of interest income to the equivalent amounts of
interest income that would be necessary to derive the same net return if the
investments had been subject to income taxes. A 34% incremental income tax rate,
consistent with the Corporation's historical experience, is used in the
conversion of tax-exempt interest income to a taxable-equivalent basis.
Net interest income on a FTE basis increased to $12.0 million in 1997,
compared with $11.0 million in 1996 and $10.6 million in 1995. This increase of
$997,000 in net interest income in 1997 was due primarily to an increase in the
volume of earning assets in 1997 (a $1.7 million increase). This gain was
partially offset by an increase in the volume of interest bearing liabilities (a
$777,000 increase).
The total increase in average earning assets was primarily due to an
increase in average loans of $32.0 million. All of the loan growth was
internally generated. Interest bearing deposits increased $11.6 million in 1997.
The Corporation's entrance into new markets, introduction of new products and
its pricing of time deposits were contributing factors to the growth in
deposits.
8
<PAGE> 9
The following table sets forth, for the periods indicated, information
regarding the average balances of assets and liabilities and the total dollar
amount of interest income from average interest-earning assets and interest
expense on average interest-bearing liabilities, resulting yields, interest rate
spread, ratio of interest-earning assets to interest-bearing liabilities, and
net interest margin. Average balances have been calculated using average daily
balances during such periods (dollars in thousands):
<TABLE>
<CAPTION>
At or for the Year Ended
December 31,
-------------------------------- -------------------------------- -------------------------------
1997 1996 1995
-------------------------------- -------------------------------- -------------------------------
AVERAGE AVERAGE Average Average Average Average
BALANCE INTEREST RATE Balance Interest Rate Balance Interest Rate
ASSETS
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans(1),(2) $208,807 $17,972 8.61% $176,790 $15,230 8.61% $154,696 $13,502 8.73%
Loans exempt from federal
Income taxes(3) 683 77 11.27% 753 88 11.69% 825 97 11.76%
Taxable investment
securities(4) 16,043 967 6.03% 17,260 1,028 5.96% 13,796 800 5.80%
Mortgage-related securities(4) 23,629 1,508 6.38% 38,475 2,407 6.26% 49,031 3,043 6.21%
Investment securities exempt
From federal income
taxes(3),(4) 233 18 7.73% 2,003 126 6.29% 2,643 186 7.04%
Other securities 11,091 584 5.27% 10,139 522 5.15% 14,812 851 5.75%
-------------------- -------------------- ---------------------
Interest earning assets 260,486 21,126 8.11% 245,420 19,401 7.91% 235,803 18,479 7.84%
Non interest earning assets 19,082 18,238 17,289
---------- ---------- ----------
Average Assets $279,568 $263,658 $253,092
========== ========== ==========
LIABILITIES AND STOCKHOLDERS'
EQUITY
NOW deposits $21,466 405 1.89% $23,011 479 2.08% $22,451 483 2.15%
Money market deposits 6,448 155 2.40% 6,291 158 2.51% 7,514 187 2.49%
Savings deposits 61,575 1,327 2.16% 64,345 1,400 2.18% 68,860 1,694 2.46%
Time deposits 125,600 7,010 5.58% 109,862 6,109 5.56% 96,987 5,345 5.51%
Other borrowings 3,425 193 5.64% 3,564 216 6.06% 3,432 212 6.18%
-------------------- -------------------- ---------------------
Interest bearing liabilities 218,514 9,090 4.16% 207,073 8,362 4.04% 199,244 7,921 3.98%
--------- --------- ----------
Demand deposits and other non
Interest bearing 33,745 30,369 28,505
liabilities
Stockholders' equity 27,309 26,216 25,343
---------- ---------- ----------
Average Liabilities and
Stockholders' Equity $279,568 $263,658 $253,092
========== ========== ==========
Net interest income/spread $12,036 3.95% $11,039 3.87% $10,558 3.86%
=================== =================== ===================
Net interest earning assets $41,972 $38,347 $36,559
========== ========== =======
Net yield on interest earning
Assets 4.62% 4.50% 4.48%
========= ========= ========
Ratio of average
interest-earning
Assets to average interest-
Bearing liabilities 1.19 1.19 1.18
========== ========== ==========
</TABLE>
(1) For the purpose of these computations, nonaccrual loans are included in the
daily average loan amounts outstanding.
(2) Interest earned on loans includes loan fees (which are not material in
amount) and interest income which has been received from borrowers whose
loans were removed from nonaccrual status during the period indicated.
(3) Taxable-equivalent adjustments were made using a 34% corporate tax rate or
all years presented in calculating interest income and yields.
(4) Includes securities available for sale. Average balances of securities
available-for-sale are based on amortized cost.
9
<PAGE> 10
The following table sets forth the effects of changing interest rates
and volumes of interest earning assets and interest bearing liabilities on net
interest income of the Corporation. Information is provided with respect to (i)
effect on net interest income attributable to changes in volume (changes in
volume multiplied by prior rate), (ii) effects on net interest income
attributable to changes in rate (changes in rate multiplied by prior volume),
(iii) changes in a combination of rate and volume (changes in rate multiplied by
changes in volume), and (iv) net change (in thousands):
<TABLE>
<CAPTION>
For the Year Ended December 31,
--------------------------------------------- ---------------------------------------------
1997 VS. 1996 1996 vs. 1995
--------------------------------------------- ---------------------------------------------
INCREASE/(DECREASE) Increase/(Decrease)
DUE TO Due to
---------------------------------- TOTAL ---------------------------------- Total
VOLUME INCREASE Volume Increase
VOLUME RATE & RATE (DECREASE) Volume Rate & Rate (Decrease)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Loans receivable(1) $2,758 ($14) ($2) $2,742 $1,928 ($175) ($25) $1,728
Loans exempt from federal
Income taxes(2) (8) (3) 0 (11) (8) (1) 0 (9)
Taxable investment securities(3) (74) 12 1 (61) 201 22 5 228
Mortgage-related securities(3) (928) 48 (19) (899) (45) (20) 5 (60)
Investment securities exempt
From federal income taxes(2),(3) (112) 29 (25) (108) (655) 24 (5) (636)
Other securities 49 12 1 62 (268) (88) 27 (329)
-------------------------------------------- --------------------------------------------
Total interest-earning assets $1,685 $84 ($44) 1,725 $1,153 ($238) $7 922
==================================---------- ==================================----------
Interest-Bearing Liabilities:
NOW deposits ($32) ($45) $3 ($74) $12 ($16) $0 ($4)
Money market deposits 4 (7) 0 (3) (30) 1 0 (29)
Savings deposits (61) (13) 1 (73) (111) (196) 13 (294)
Time deposits 875 23 3 901 710 48 6 764
Other borrowings (9) (15) 1 (23) 8 (4) 0 4
-------------------------------------------- --------------------------------------------
Total interest-bearing liabilities $777 ($57) $8 $728 $589 ($167) $19 $441
==================================---------- ==================================----------
Net change in net interest income $997 $481
========== ==========
</TABLE>
(1) Interest earned on loans includes loan fees (which are not material in
amount) and interest income which has been received from borrowers whose
loans were removed from nonaccrual during the period indicated.
(2) Taxable-equivalent adjustments were made using a 34% corporate tax rate
for all years presented in calculating interest income and yields.
(3) Includes securities available for sale.
PROVISION FOR LOAN LOSSES
During 1997, the Corporation made a provision of $192,000 to the
allowance for loan losses, as compared to a provision of $460,000 in 1996 and
$132,000 in 1995. The 1996 increase did not reflect deteriorating quality in the
loan portfolio but primarily reflected an increase in loan volume and an
assessment regarding general economic conditions. Loan charge-offs for 1997
decreased by $45,000, over 1996 to $38,000. This compares to charge-offs of
$63,000 in 1995. Although management considers the allowance for loan losses to
be adequate to provide for potential losses in the loan portfolio, there can be
no assurance that losses will not exceed estimated amounts or that the
subsidiary banks will not be required to make further and possibly larger
additions to their allowance in the future.
NON-INTEREST INCOME
Non-interest income increased $101,000 in 1997 and $227,000 in 1996.
The composition of non-interest income is shown in the following table
(in thousands).
<TABLE>
<CAPTION>
For the Year Ended December 31,
1997 1996 1995
----------------------------------------------------
<S> <C> <C> <C>
Service charges on deposit accounts $ 746 $ 725 $ 726
Service charges on loans 141 172 75
Net gain on securities sales 78 70 61
Other 691 588 466
====================================================
Total noninterest income $1,656 $1,555 $1,328
====================================================
</TABLE>
10
<PAGE> 11
Service charge income on deposit accounts increased $21,000 in 1997 and
decreased $1,000 in 1996. The increase in the charges on eligible accounts
caused the increase in 1997 income, while the 1996 decrease can be attributed to
the increase in no-charge accounts.
The Corporation recorded a net gain of $78,000 on the sale of $12.3
million of securities in 1997, $70,000 on the sale of $15.8 million of
securities in 1996 and $61,000 on the sale of $13.7 million of securities in
1995. The proceeds from the sale of the investments were used to purchase short
term variable rate securities and to meet existing loan demand.
Service charges on loans decreased $31,000 from $172,000 in 1996 to
$141,000 in 1997. The 1997 decline can be attributed directly to the types of
new loans generated.
Other non-interest income increased $103,000 in 1997 and increased
$122,000 in 1996. Other non-interest income consists of rents of safe deposit
boxes, lock box fees, TYME machine income, lease income and miscellaneous fees.
NON-INTEREST EXPENSE
Non-interest expense decreased $401,000 (4.0%) for the year ended
December 31, 1997, and increased $981,000 (10.9%) for the year ended December
31, 1996. The major components of non-interest expense are shown in the
following table (in thousands).
<TABLE>
<CAPTION>
For the Year Ended December 31,
1997 1996 1995
---------------- ----------------- -----------------
<S> <C> <C> <C>
Salaries and employee benefits $5,453 $5,223 $4,706
Bank premises and equipment 1,412 1,340 1,208
Data processing fees 612 561 540
SAIF Assessment 0 604 0
Federal deposit insurance premiums 75 159 362
Other 2,068 2,134 2,224
===================================================
Total noninterest expense $9,620 $10,021 $9,040
===================================================
</TABLE>
Salaries and employee benefits increased $230,000 in 1997, reflecting
additional staff hires, higher benefit costs, changes in personnel and normal
pay raises. The 1997 increase in the cost of employee benefits, particularly
medical insurance amounted to $71,000. The 4.4% increase in salaries and
employee benefits in 1997 compares with the 10.9% increase in 1996.
Premises and equipment expense increased $72,000 in 1997. The increase
was due to the construction of the corporate headquarters located in New Berlin.
The 20,000 square foot building was completed in May 1997. The $132,000 increase
in 1996 was the result of the opening of two new branch offices of Lincoln State
Bank.
Data processing fees increased $51,000 in 1997 and $21,000 in 1996.
The 1997 and 1996 increase was due to increased volume and new services being
provided by the service bureau.
During the third quarter of 1996 Lincoln Community Bank incurred a
$604,000 charge from the FDIC which represented its share of the
recapitalization of the Savings Association Insurance Fund (SAIF). This charge
was set at 0.657% of Lincoln Community Bank's deposit liabilities as of March
31, 1995. Although this charge adversely impacted results of operations, it is
expected to provide long-term benefits to the Corporation in the form of lower
federal insurance premiums.
Federal deposit insurance fees represent premiums paid for FDIC
insurance on the banks' deposits. The FDIC assesses the banks based on the level
of deposits. In 1995 the Bank Insurance Fund (BIF) reached its prescribed
capitalization level mandated by Congress as part of FDIC Institutions
Improvement Act of 1991. As a result the bank's premium was reduced by $84,000
in 1997 and $203,000 in 1996.
Other expenses decreased $66,000 in 1997. The decrease was primarily
due to a reduction in service charges being paid to the Corporation's
corespondent bank and a decrease in the Corporation's annual fee to the Lincoln
Neighborhood Redevelopment Corporation. In 1996 other expenses decreased $90,000
because of the continued management of operating expenses.
INCOME TAXES
The Corporation's consolidated income tax rate varies from statutory
rates principally due to interest income from tax-exempt securities and loans
and interest income on securities in the M&M Lincoln Investment Corporation
portfolio and Lincoln Investment Management Corporation for which state taxes
are not imposed. The Corporation recorded provisions for income taxes totaling
$1.4 million, $730,000 in 1996 and $917,000 in 1995. The 1997 increase was due
to the additional taxable income along with a reduction in the balance of
tax-exempt securities. The decline in 1996 income taxes is a result of lower
taxable income.
NET INCOME
For the years ended December 31, 1997, 1996 and 1995, the Corporation
posted net income of $2.409 million, $1.310 million and $1.701 million,
respectively.
11
<PAGE> 12
LOANS RECEIVABLE
Net loans receivable increased $37.4 million, or 19.7%, from $189.8
million at December 31, 1996, to $227.2 million at December 31, 1997. Currently,
loans receivable consist mainly of mortgages secured by residential properties
located in the Corporation's primary market area and commercial loans secured by
business assets, real estate, and guarantees. The following table shows the
composition of the Corporation's loan portfolio on the dates indicated (in
thousands):
<TABLE>
<CAPTION>
At December 31,
1997 1996 1995 1994 1993
---------------------------------------------------------------------------------
First Mortgage:
<S> <C> <C> <C> <C> <C>
Conventional single-family residential $58,821 $58,358 $57,629 $55,478 $53,006
Commercial and multifamily residential 78,365 61,707 44,594 42,046 32,197
Construction and land 18,191 12,872 12,619 8,254 6,514
---------------------------------------------------------------------------------
155,377 132,937 114,842 105,778 91,717
Commercial business loans 56,846 45,036 36,605 35,118 39,926
Consumer and installment loans 12,220 10,984 10,810 7,377 5,222
Leases 2,311 599 0 0 0
Home equity loans 1,496 1,367 1,695 1,577 1,620
Other 1,081 883 1,326 1,644 1,406
---------------------------------------------------------------------------------
73,954 58,869 50,436 45,716 48,174
Less:
Undisbursed portion of loan proceeds 0 0 0 0 708
Deferred loan fees 60 76 95 105 112
Allowance for loan losses 2,093 1,939 1,533 1,464 1,356
---------------------------------------------------------------------------------
$227,178 $189,791 $163,650 $149,925 $137,715
================================================================================
</TABLE>
The following table presents information as of December 31, 1997
regarding loan maturities and contractual principal repayments by categories of
loans during the periods indicated. Loans with adjustable interest rates are
shown maturing in the year of their contractual maturity. Also provided are the
amounts due after one year classified according to the sensitivity to changes in
interest rates.
<TABLE>
<CAPTION>
AFTER ONE BUT
WITHIN ONE YEAR WITHIN FIVE AFTER FIVE YEARS
YEARS TOTAL
----------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMERCIAL BUSINESS LOANS $34,573 $22,099 $ 174 $ 56,846
REAL ESTATE LOANS 61,666 55,969 37,742 155,377
----------------------------------------------------------------------
$96,239 $78,068 $37,916 $212,223
=====================================================================
LOANS MATURING AFTER ONE YEAR WITH:
FIXED INTEREST RATES $70,407 $ 6,892
VARIABLE INTEREST RATES 7,661 31,024
---------------------------------
$78,068 $37,916
=================================
</TABLE>
ALLOWANCE FOR LOAN LOSSES
The Corporation maintains an allowance for loan losses to absorb
potential losses in its loan portfolio. Management's determination of the
adequacy of the allowance is based on review of specific loans, past loan loss
experience, general economic conditions and other pertinent factors. If, as a
result of charge-offs or increases in the risk factors of the loan portfolio,
the allowance is below the level considered to be adequate to absorb future
losses, the periodic provision to the allowance is increased. Loans deemed
uncollectible are charged off and deducted from the allowance. The allowance for
loan losses increased from $1.939 million at December 31, 1996, to $2.093
million at December 31, 1997. Because of the Corporation's relatively low loss
experience, this increase was not required to absorb currently known losses but
was effected because of growth in loan volume in general, and growth in
commercial business loans specifically, and the Corporation's decision to
maintain or increase its allowance for loan losses as a percentage of
outstanding loans because of growing uncertainty regarding future economic
conditions. The ratio of the allowance for loan losses to total loans was 0.91%
for 1997 and 1.01% in 1996. Based on the present economic environment and its
present analysis of the financial condition of the borrowers, the Corporation
considers the present allowance to be appropriate and adequate to cover
potential losses inherent in the loan portfolio, however, changes in future
economic conditions and in the financial condition of borrowers cannot be
predicted at this time. Deterioration in such conditions could result in
increases in charge-offs or adversely classified loans and accordingly, in
additional provisions for loan losses.
12
<PAGE> 13
The balance of the allowance for loan losses and actual loss experience
for the last five years is summarized in the following table (dollars in
thousands):
<TABLE>
<CAPTION>
At or for the Year Ended At December 31,
1997 1996 1995 1994 1993
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $1,939 $1,533 $1,464 $1,356 $1,119
Charge-offs:
Conventional single-family mortgage
Residential 0 70 20 0 46
Commercial business loans 4 5 27 6 46
Consumer and installment loans 34 8 16 6 1
---------------------------------------------------------------------------------
Total charge-offs 38 83 63 12 93
Recoveries 0 (29) 0 (77) (20)
---------------------------------------------------------------------------------
Net charge-offs (recoveries) 38 54 63 (65) 73
Provisions charged to operations 192 460 132 43 211
Adjustments to conform pooled companies'
year-ends 0 0 0 0 99
---------------------------------------------------------------------------------
Balance at end of year $2,093 $1,939 $1,533 $1,464 $1,356
=================================================================================
Ratios:
Net charge-offs (recoveries) to
Average loans outstanding 0.02% 0.03% 0.04% (0.05)% 0.05%
Net charge-offs (recoveries) to total
Allowance 1.81% 2.78% 4.11% (4.44)% 5.38%
Allowance to year end gross loans
Outstanding 0.91% 1.01% 0.93% 0.97% 0.97%
</TABLE>
NON-PERFORMING AND DELINQUENT LOANS
When in the opinion of management, serious doubt exists as to the
collectibility of a loan, the loan is placed on non-accrual status and interest
previously accrued but unpaid is deducted from interest income. The Corporation
does not recognize income on any loans past due 90 days or more. In 1997,
$18,000 of additional income on nonaccrual loans would have been reported if the
loans had been current in accordance with their original terms and had been
outstanding throughout the year. Additionally in 1997 the Corporation recorded
$71,000 of interest income on non-accrual loans that was included in net income
for the year. The following table summarizes non-performing assets on the dates
indicated (dollars in thousands):
<TABLE>
<CAPTION>
At December 31,
1997 1996 1995 1994 1993
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans:
Nonaccrual loans $ 699 $ 938 $ 658 $ 772 $ 861
-------------------------------------------------------------------------------
Total nonaccrual loans 699 938 658 772 861
Real estate in judgment 0 0 0 24 43
Other real estate owned 0 0 0 73 75
-------------------------------------------------------------------------------
Total non-performing assets $ 699 $ 938 $ 658 $ 869 $ 979
===============================================================================
Ratios:
Non-accrual loans to total loans 0.30% 0.49% 0.40% 0.51% 0.62%
Allowance to non-accrual loans 299.42% 206.72% 232.98% 189.64% 157.49%
Non-performing assets to total assets 0.24% 0.35% 0.25% 0.35% 0.41%
</TABLE>
INVESTMENT SECURITIES
Investment securities at December 31, 1997, are made up of U.S.
Treasury and agency securities of $7.801 million, government agency
mortgage-backed securities of $26.681 million, SBA certificates of $930,000,
state and political subdivision certificates of $814,000, collateralized
mortgage obligations of $1.488 million and mutual funds of $3.104 million. Total
investment securities equaled $40.818 million. This compares to $42.653 million
on December 31, 1996.
Management determines the appropriate classification of debt securities
(including mortgage-related securities) at the time of purchase.
Held-to-maturity securities are stated at amortized cost. See notes one and two
to Consolidated Financial Statements for further details.
Debt securities not classified as held-to-maturity are classified as
available-for-sale. Available-for-sale securities are stated at fair value, with
the unrealized gains and losses, net of tax, reported as a separate component of
stockholders' equity.
13
<PAGE> 14
The amortized cost of debt securities classified as held-to-maturity or
available-for-sale are adjusted for amortization of premiums and accretion of
discounts to maturity, or in the case of mortgage-related securities, over the
estimated life of the security. Such amortization is included in interest income
from the related security. Interest and dividends are included in interest
income from the related securities. Realized gains and losses, and declines in
value judged to be other-than-temporary are included in net securities gains
(losses). The cost of securities sold is based on the specific identification
method.
The reason for the decrease in investment securities is the increase in
demand for funds for lending purposes. Funding for additional loans came
primarily from government agency mortgage-backed securities which either matured
or prepaid. The following table sets forth the Corporations aggregate amortized
cost of investment securities held-to-maturity and the estimated fair value of
investment securities available-for-sale at the dates indicated (in thousands):
<TABLE>
<CAPTION>
At December 31,
1997 1996 1995
---------------------------------------------------
<S> <C> <C> <C>
Mutual funds $ 3,104 $ 3,098 $ 3,086
U.S. Treasury and other U.S.
Government securities 7,801 11,321 8,749
Small Business Administration
Certificates 930 1,080 1,257
State and political subdivision securities 814 0 2,741
Collateralized mortgage obligations 1,488 2,943 3,772
Government agency mortgage-backed
Securities 26,681 24,211 40,479
---------------------------------------------------
$40,818 $42,653 $60,084
==================================================
</TABLE>
The maturity distribution (based upon the average life), and weighted
average yield of the investment portfolio of the Corporation as of December 31,
1997 are summarized in the following table (dollars in thousands):
<TABLE>
<CAPTION>
WITHIN ONE YEAR ONE TO FIVE YEARS FIVE TO TEN YEARS OVER TEN YEARS
----------------------------------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
MUTUAL FUNDS $ 3,104 6.04% $ - -% $ -- --% $ -- --%
U.S. TREASURY AND OTHER U.S.
GOVERNMENT SECURITIES 5,806 5.78 1,995 6.37 -- -- -- --
SMALL BUSINESS ADMINISTRATION
CERTIFICATES 930 8.02 - -- -- -- -- --
STATE AND POLITICAL SUBDIVISION
CERTIFICATES -- -- 814 5.25 -- -- -- --
COLLATERALIZED MORTGAGE OBLIGATIONS 356 5.30 638 6.13 494 6.62 -- --
GOVERNMENT AGENCY MORTGAGE-BACKED
SECURITIES -- 10,790 6.24 12,360 6.81 3,531 6.68
----------------------------------------------------------------------------------------------
$10,196 6.05% $14,237 6.20% $12,854 6.80% $3,531 6.68%
==============================================================================================
</TABLE>
Weighted average yield is calculated by dividing income within each
maturity range by the outstanding amount of the related investment.
TOTAL DEPOSITS
The Corporation continues to stress its philosophy of core deposit
accumulation and retention as the fundamental basis for sound growth and
profitability. Core deposits consist of all deposits other than public funds and
certificates of deposit in excess of $100,000.
14
<PAGE> 15
Total deposits increased $31.7 million to $264.669 million on December
31, 1997, from $232.933 million on December 31, 1996. This compares to a
$150,000 decrease in 1996. The average increase in time deposits occurred via
increases in retail certificates of deposits and retail jumbo certificates of
deposits, while the increase in non-interest bearing demand deposits can be
attributed to the additional commercial account relationships being established
by the Banks. The following table sets forth the average amount of and the
average rate paid by the Banks on deposits by deposit category (dollars in
thousands):
<TABLE>
<CAPTION>
At December 31,
1997 1996 1995
------------------------------------------------------------------------------------
AVERAGE AVERAGE Average Average Average Average
AMOUNT RATE Amount Rate Amount Rate
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Non-interest-bearing demand deposits $ 32,749 0.00% $ 29,362 0.00% $ 27,707 0.00%
NOW and money market deposits 27,914 2.01 29,302 2.17 29,965 2.24
Savings deposits 61,575 2.16 64,345 2.18 68,860 2.47
Time deposits 125,600 5.58 109,862 5.51 96,987 5.51
------------------------------------------------------------------------------------
Total $ 247,838 3.59% $ 232,871 3.46% $ 222,519 3.46%
====================================================================================
</TABLE>
Maturities of time deposits and certificate accounts with balances of
$100,000 or more, outstanding at December 31, 1997, are summarized as follows
(in thousands):
<TABLE>
<S> <C>
3 MONTHS OR LESS $ 21,799
OVER 3 THROUGH 6 MONTHS 3,378
OVER 6 THROUGH 12 MONTHS 2,286
OVER 12 MONTHS 1,064
---------
TOTAL $ 28,527
=========
</TABLE>
CAPITAL RESOURCES AND ADEQUACY
Stockholders' equity increased from $26.380 million at December 31,
1996 to $29.496 million at December 31, 1997. The $2.409 million increase from
net earnings retention was supplemented by the net sale of 32,585 shares of
treasury stock and offset by the payment of $703,000 in cash dividends to
shareholders.
Pursuant to regulations promulgated by the Federal Reserve Board, bank
holding companies are required to maintain minimum levels of core capital as a
percent of total assets and total capital as a percent of risk-based assets. The
minimum core capital requirement ranges from 3% to 5% of total assets, depending
upon the Federal Reserve Board's determination of the financial institution's
strength. Similar capital guidelines are also established for the individual
banking subsidiaries of the Corporation. Most financial institutions are
required to meet a minimum core capital requirement of 4% or more of total
assets. The regulations assign risk weightings to assets and off-balance sheet
items and require minimum risk-based capital ratios. Bank holding companies
generally are required to have total capital equal to not less than 8% of risk
weighted assets. Core capital consists principally of shareholders' equity less
intangibles, while qualifying total capital consists of core capital, certain
debt instruments and a portion of the reserve for loan losses. As of December
31, 1997, the Corporation had a core-capital to total assets ratio of 9.94%, and
Lincoln State Bank, Franklin State Bank and Lincoln Community Bank had
risk-based capital ratios of 11.52%, 13.43% and 18.61%, respectively. These
ratios are well above the 1997 minimum requirements established by regulatory
agencies.
For a summary of the Banks' regulatory capital ratios at December 31,
1997, please see Note seven to Consolidated Financial Statements.
Management strives to maintain a strong capital position to take
advantage of opportunities for profitable geographic and product expansion and
to maintain depositor and investor confidence. Conversely, management believes
that capital must be maintained at levels that provide adequate returns on the
capital employed. Management actively reviews capital strategies for the
Corporation and for each of its subsidiaries to ensure that capital levels are
appropriate based on perceived business risks, growth and regulatory standards.
LIQUIDITY
Liquidity is the ability to meet withdrawal requirements on deposit
accounts and satisfy loan demand. The principal sources of liquidity for the
subsidiary banks include additional deposits, repayments on loans and investment
securities, collections of interest, sales of investments, borrowings and the
retention of earnings.
15
<PAGE> 16
The Corporation's liquidity, represented by cash and cash equivalents,
is a product of its operating activities, investing activities and financing
activities. These activities are summarized below (dollars in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995
---------------------------------------------------
<S> <C> <C> <C>
Cash and cash equivalents at beginning of period $22,272 $28,447 $17,694
Operating Activities:
Net income 2,409 1,310 1,701
Adjustments to reconcile net income to net cash
provided by operating activities 661 1,074 1,065
---------------------------------------------------
Net cash provided by operating activities 3,070 2,384 2,766
Net cash used by investing activities (36,967) (10,511) (4,426)
Net cash provided by financing activities 26,983 1,952 12,413
---------------------------------------------------
Increase (decrease) in cash equivalents (6,914) (6,175) 10,753
---------------------------------------------------
Cash and cash equivalents at end of period $15,358 $22,272 $28,447
===================================================
</TABLE>
Net cash was provided by operating activities during the year ended
December 31, 1997, 1996 and 1995 primarily as a result of normal ongoing
business operations. The non-cash items, such as the provisions for loan losses
and depreciation and the net amortization of premiums, also contributed to net
cash provided by operating activities during these periods.
Liquidity is also necessary at the parent company level. The parent
company's primary source of funds are dividends from subsidiaries, borrowings
and proceeds from issuance of equity. The parent company manages its liquidity
position to provide the funds necessary to pay dividends to shareholders,
service debt, invest in subsidiaries and satisfy other operating requirements.
Dividends received from subsidiaries totaled $1.9 million, $1.9 million and $1.2
million for the years ended December 31, 1997, 1996 and 1995 respectively, and
will continue to be the parent's main source of long-term liquidity. The
dividends from the Banks were sufficient to pay cash dividends to the
Corporation's shareholders of $703,000, $691,000 and $569,000 for the years
ended December 31, 1997, 1996 and 1995, respectively. At December 31, 1997, the
parent company had a $2.0 million line of credit with an unaffiliated bank,
which had no outstanding balance.
INTEREST RATE SENSITIVITY MANAGEMENT
Financial institutions are subject to interest rate risk to the extent
their interest-bearing liabilities (primarily deposits) mature or reprice at
different times and on a different basis than their interest-earning assets
(consisting primarily of loans and securities). Interest rate sensitivity
management seeks to match maturities on assets and liabilities and avoid
fluctuating net interest margins while enhancing net interest income during
periods of changing interest rates. The difference between the amount of
interest-earning assets maturing or repricing within a specific time period and
the amount of interest-bearing liabilities maturing or repricing within the same
time period is referred to as an interest rate gap. A gap is considered positive
when the amount of interest rate sensitive assets exceeds the amount of interest
rate sensitive liabilities. A gap is considered negative when the amount of
interest rate sensitive liabilities exceeds the amount of interest rate
sensitive assets. During periods of rising interest rates, a negative gap tends
to adversely affect net interest income while a positive gap tends to result in
an increase in net interest income. During a period of falling interest rates, a
negative gap tends to result in an increase in net interest income while a
positive gap tends to adversely affect net interest income.
16
<PAGE> 17
The following table shows the interest rate sensitivity gap for four
different time intervals as of December 31, 1997. Assumptions regarding
prepayment and withdrawal rates are based upon the Corporation's historical
experience, and management believes such assumptions are reasonable.
<TABLE>
<CAPTION>
AMOUNT MATURING OR REPRICING
---------------------------------------------------------------------------
WITHIN SIX TO TWELVE ONE TO FIVE OVER
SIX MONTHS MONTHS YEARS FIVE YEARS TOTAL
--------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
FIXED-RATE MORTGAGE LOANS $34,297 $18,614 $50,566 $6,885 $110,362
ADJUSTABLE-RATE MORTGAGE LOANS 15,340 11,897 17,670 234 45,141
----------------------------------------------------------------------
TOTAL MORTGAGE LOANS 49,637 30,511 68,236 7,119 155,503
COMMERCIAL BUSINESS LOANS 31,223 5,669 21,979 496 59,367
CONSUMER LOANS 7,744 1,956 3,921 105 13,726
TAX-EXEMPT LOANS 675 0 0 0 675
MORTGAGE-RELATED SECURITIES 14,069 0 6,368 7,733 28,170
FIXED RATE INVESTMENT SECURITIES AND OTHER 3,503 2,302 2,809 0 8,614
VARIABLE RATE INVESTMENT SECURITIES AND OTHER 8,699 1,050 0 0 9,749
----------------------------------------------------------------------
TOTAL INTEREST-EARNING ASSETS $115,550 $41,488 $103,313 $15,453 $275,804
======================================================================
INTEREST-BEARING LIABILITIES:
DEPOSITS
TIME DEPOSITS $96,225 $27,886 $14,410 $4 $138,525
NOW ACCOUNTS 1,208 1,208 12,083 5,638 20,137
SAVINGS ACCOUNTS 3,502 3,502 35,021 16,152 58,177
MONEY MARKET ACCOUNTS 494 494 4,941 2,496 8,425
ADVANCE PAYMENTS FOR TAXES AND INSURANCE 179 0 0 0 179
BORROWINGS 1,500 0 0 0 6,850
----------------------------------------------------------------------
TOTAL INTEREST-BEARING LIABILITIES $103,108 $33,090 $66,455 $24,290 $226,943
======================================================================
INTEREST-EARNING ASSETS LESS
INTEREST-BEARING
LIABILITIES $12,442 $8,398 $36,858 ($8,837) $48,861
======================================================================
CUMULATIVE INTEREST RATE SENSITIVITY GAP $12,442 $20,840 $57,698 $48,861
========================================================
CUMULATIVE INTEREST RATE SENSITIVITY GAP
AS A PERCENTAGE OF TOTAL ASSETS 4.19% 7.02% 19.45% 16.47%
========================================================
</TABLE>
At December 31, 1997, the Corporation's cumulative ratio of
interest-rate sensitive assets to interest-rate sensitive liabilities was 4.19%
for six months and 7.02% for one year maturities. Therefore the Corporation is
positively gapped and may benefit from rising interest rates.
Certain shortcomings are inherent in the method of analysis presented
in the table above. For example, although certain assets and liabilities have
similar maturities or periods of repricing, they may react in different degrees
to changes in market interest rates. Also, the interest rates on certain types
of assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag behind changes in market
rates. Additionally, certain assets, such as adjustable rate mortgage loans,
have features that restrict changes in interest rates on a short term basis over
the life of the asset. Further, in the event of a change in interest rates,
prepayment and early withdrawal levels would likely deviate significantly from
those assumed in calculating the schedule. Finally, the ability of many
borrowers to service their debt may decrease in the event of an interest rate
increase.
YEAR 2000 PREPAREDNESS
Preparedness for the year 2000 date change with respect to computer
systems is recognized as a serious issue throughout the banking industry. The
Year 2000 computer problem results from the design of many computer operating
systems now in use. The internal logic of these systems expresses the year in
two digits rather than four and assumes the first two digits are always 19
(.e.g., it uses "97" to express the year 1997). At the end of the century these
systems will revert to the year 1900 or to a previous date specified in the
system logic, such as the year 1980.
17
<PAGE> 18
The Corporation is in the midst of a project to determine the impact of
potential year 2000 problems on the Corporations computer systems. In most major
applications the Corporation utilizes a third party service bureau. We have been
kept apprised of their efforts which appear to be sufficient to ensure that
software used by the Corporation will adequately address operational and
regulatory concerns. The Corporation also is currently analyzing and assembling
a list of both its internally developed and purchased software that utilize
embedded date codes which may experience operational problems when the year 2000
is reached. The Corporation plans to make modifications to the identified
software in 1998 and test the changes in 1999. The cost of the year 2000
compliance efforts is not expected to have a material effect to the financial
position or the results of the Corporation.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Corporation's financial performance is impacted by, among other
factors, interest rate risk and credit risk. The Corporation utilizes no
derivatives to mitigate its credit risk, relying instead on loan review and an
adequate loan loss reserve (see Management's Discussion and Analysis of
Financial Condition and Results of Operation).
Interest rate risk is the risk of loss of net interest income due to
changes in interest rates. This risk is addressed by the Corporation's Asset
Liability Management Committee ("ALCO"), which includes senior management
representatives. The ALCO monitors and considers methods of managing interest
rate risk by monitoring changes in net interest income under various interest
rate scenarios. The ALCO attempts to manage various components of the
Corporation's balance sheet to minimize the impact of sudden and sustained
changes in interest rate on net interest income.
The Corporation's exposure to interest rate risk is reviewed on at
least a quarterly basis by the ALCO. Interest rate risk exposure is measured
using interest rate sensitivity analysis to determine the Corporation's change
in net interest income in the event of hypothetical changes in interest rates
and interest liabilities. If potential changes to net interest income resulting
from hypothetical interest rate swings are not within the limits established by
the ALCO, the asset and liability mix may be adjusted to bring interest rate
risk within approved limits.
In order to reduce the exposure to interest rate fluctuations, the
Corporation has developed strategies to manage its liquidity, shorten the
effective maturities of certain interest-earning assets, and increase the
effective maturities of certain interest-bearing liabilities. One strategy used
is focusing its residential lending on adjustable rate mortgages, which
generally reprice within one to three years. Another strategy used is
concentrating its non-residential lending on adjustable or floating rate and/or
short-term loans. The Corporation has also focused its investment activities on
short and medium-term securities, while attempting to maintain and increase its
savings account and transaction deposit accounts, which are considered to be
relatively resistant to changes in interest rates.
Along with the analysis of the interest rate sensitivity gap,
determining the sensitivity of future earnings to a hypothetical +/- 200 basis
parallel rate shock can be accomplished through the use of simulation modeling.
In addition to the assumptions used to measure the interest rate sensitivity
gap, simulation of earnings includes the modeling of the balance sheet as an
ongoing entity. Future business assumptions involving administered rate
products, prepayments for future rate sensitive balances, and the reinvestment
of maturing assets and liabilities are included. These items are then modeled to
project income based on a hypothetical change in interest rates. The resulting
pretax income for the next 12 month period is compared to the pretax income
calculated using flat rates. This difference represents the Corporation's
earning sensitivity to a +/- 200 basis point parallel rate shock. The table
below illustrates these amounts as of December 31, 1997.
<TABLE>
<CAPTION>
ESTIMATED
1998 PRETAX NET INTEREST
INCOME PERCENT CHANGE IN NET
CHANGE IN INTEREST RATES (DOLLARS IN THOUSANDS) ACTUAL CHANGE INTEREST INCOME
---------------------------- --------------------------- -------------------------- -------------------------
<S> <C> <C> <C>
200 BASIS POINT RISE $12,995 $199 1.56%
150 BASIS POINT RISE 12,937 141 1.10%
100 BASIS POINT RISE 12,888 92 0.72%
50 BASIS POINT RISE 12,838 42 0.33%
BASE SCENARIO 12,796 0 0.00%
50 BASIS POINT DECLINE 12,752 (44) (0.34%)
100 BASIS POINT DECLINE 12,715 (81) (0.63%)
150 BASIS POINT DECLINE 12,670 (126) (0.98%)
200 BASIS POINT DECLINE 12,616 (180) (1.41%)
</TABLE>
These results are based solely on immediate and sustained parallel
changes in market rates and do not reflect the earnings sensitivity that may
arise from other factors such as changes in the shape of the yield curve, the
change in spread between key market rates, or accounting recognition for
impairment of certain intangibles. The above results are also considered to be
conservative estimates due to the fact that no management action to mitigate
potential income variances are included within the simulation process. This
action would include, but would no be limited to, adjustments to the repricing
characteristics of any on or off balance sheet item with regard to short-term
rate projections and current market value assessments.
18
<PAGE> 19
Another component of interest rate risk, fair value at risk, is
determined by the Corporation through the technique of simulating the fair value
of equity in changing rate environment. This technique involves determining the
present value of all contractual asset liability cash flows (adjusted for
prepayments) based on predetermined discount rate. The net result of all these
balance sheet items determine the fair value of equity. The fair value of equity
resulting from the current flat rate scenario is compared to the fair value of
equity calculated using discount rates +/- 200 basis points from flat rates to
determine the fair value of equity at risk. Currently, fair value of equity at
risk is less than 1.0% of the market value of the Corporation as of December 31,
1997.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated statements of financial condition of the Corporation
and its subsidiaries as of December 31, 1997 and 1996 and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the years in the three-year period ended December 31, 1997, along with the
related notes to the consolidated financial statements and the report of Ernst &
Young LLP, independent auditors are attached.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information in response to this item is incorporated herein by
reference to the Corporation's proxy statement, which shall be filed with the
Securities and Exchange Commission no later than 120 days after the
Corporation's fiscal year end or three (3) weeks prior to the Corporation's
Annual Meeting which shall be held on May 26, 1998, which ever comes first. ITEM
11. EXECUTIVE COMPENSATION
The information in response to this item is incorporated herein by
reference to the Corporation's proxy statement, which shall be filed with the
Securities and Exchange Commission no later than 120 days after the
Corporation's fiscal year end or three (3) weeks prior to the Corporation's
Annual Meeting which shall be held on May 26, 1998, which ever comes first.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information in response to this item is incorporated herein by
reference to the Corporation's proxy statement, which shall be filed with the
Securities and Exchange Commission no later than 120 days after the
Corporation's fiscal year end or three (3) weeks prior to the Corporation's
Annual Meeting which shall be held on May 26, 1998, which ever comes first.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information in response to this item is incorporated herein by
reference to the Corporation's proxy statement, which shall be filed with the
Securities and Exchange Commission no later than 120 days after the
Corporation's fiscal year end or three (3) weeks prior to the Corporation's
Annual Meeting which shall be held on May 26, 1998, which ever comes first.
19
<PAGE> 20
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) DOCUMENTS FILED:
1 and 2. Financial Statements and Financial Statement Schedules.
The following financial statements of Merchants and
Manufacturers Bancorporation, Inc. and subsidiaries are filed
as a part of this report under Item 8. "Financial Statements
and Supplementary Data":
Report of Independent Auditors
Consolidated Statements of Financial Position as of
December 31, 1997 and 1996
Consolidated Statements of Income for the years ended
December 31, 1997, 1996, and 1995
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1997, 1996, and 1995
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements
All financial statement schedules have been omitted as they
are not applicable or because the information is included in
the financial statements or notes thereto.
3. Exhibits. All required exhibits have been furnished in
connection with and are incorporated by reference
to previous filings.
(B) REPORTS ON FORM 8-K:
No reports on Form 8-K were filed during the last quarter of
the period covered by this report.
20
<PAGE> 21
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC.
By: /s/ Michael J. Murry
----------------------------------
Michael J. Murry
Chairman of the Board of Directors
Director
Date: March 27, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the registrant
and in the capacities and on the dates indicated. The Registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
<TABLE>
<CAPTION>
PRINCIPAL EXECUTIVE OFFICERS
<S> <C> <C>
/s/ James F. Bomberg President & Chief Executive Officer March 27, 1998
----------------------------------
James F. Bomberg
/s/ James C. Mroczkowski Vice President & Chief Financial Officer March 27, 1998
----------------------------------
James C. Mroczkowski
DIRECTORS
/s/ Michael J. Murry Director March 27, 1998
----------------------------------
Michael J. Murry
/s/ James F. Bomberg Director March 27, 1998
----------------------------------
James F. Bomberg
/s/ Leonard Helminiak Director March 27, 1998
----------------------------------
Leonard Helminiak
/s/ Thomas F. Gapinski Director March 27, 1998
----------------------------------
Thomas F. Gapinski
/s/ Nicholas S. Logarakis Director March 27, 1998
----------------------------------
Nicholas S. Logarakis
/s/ Thomas J. Kozina Director March 27, 1998
----------------------------------
Thomas J. Kozina
/s/ Conrad C. Kaminski Director March 27, 1998
----------------------------------
Conrad C. Kaminski
/s/ David A. Kaczynski Director March 27, 1998
----------------------------------
David A. Kaczynski
/s/ Jack P. Schwellinger Director March 27, 1998
----------------------------------
Jack P. Schwellinger
</TABLE>
21
<PAGE> 22
<TABLE>
<S> <C> <C>
/s/ Keith C. Winters Director March 27, 1998
----------------------------------
Keith C. Winters
/s/ Duane P. Cherek Director March 27, 1998
----------------------------------
Duane P. Cherek
/s/ James A. Sass Director March 27, 1998
----------------------------------
James A. Sass
/s/ John M. Krawczyk Director March 27, 1998
----------------------------------
John M. Krawczyk
/s/ Robert V. Donaj Director March 27, 1998
----------------------------------
Robert V. Donaj
/s/ Longin C. Prazynski Director March 27, 1998
----------------------------------
Longin C. Prazynski
/s/ Gervase Rose Director March 27, 1998
----------------------------------
Gervase Rose
/s/ J. Michael Bartels Director March 27, 1998
----------------------------------
J. Michael Bartels
/s/ Casimir S. Janiszewski Director March 27, 1998
----------------------------------
Casimir S. Janiszewski
</TABLE>
22
<PAGE> 23
Merchants and Manufacturers
Bancorporation, Inc. and Subsidiaries
Consolidated Financial Statements
Years ended December 31, 1997 and 1996
CONTENTS
<TABLE>
<S> <C>
Report of Independent Auditors ..........................................................................1
Consolidated Financial Statements
Consolidated Statements of Financial Condition ..........................................................2
Consolidated Statements of Income .......................................................................3
Consolidated Statements of Stockholders' Equity .........................................................4
Consolidated Statements of Cash Flows ...................................................................5
Notes to Consolidated Financial Statements ..............................................................7
</TABLE>
<PAGE> 24
Report of Independent Auditors
The Board of Directors and Stockholders
Merchants and Manufacturers Bancorporation, Inc. and subsidiaries
We have audited the accompanying consolidated statements of financial condition
of Merchants and Manufacturers Bancorporation, Inc. and subsidiaries as of
December 31, 1997 and 1996, and the related consolidated statements of income,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1997. These financial statements are the responsibility of
the Corporation's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Merchants and
Manufacturers Bancorporation, Inc. and subsidiaries at December 31, 1997 and
1996, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles.
February 13, 1998
Milwaukee, Wisconsin
1
<PAGE> 25
Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries
Consolidated Statements of Financial Condition
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
--------------------------
(In thousands)
<S> <C> <C>
ASSETS
Cash and due from banks $ 10,694 $ 9,247
Interest-bearing deposits at other banks 821 9,667
Federal funds sold 3,843 3,358
----------------------
Cash and cash equivalents 15,358 22,272
Securities available-for-sale at fair value:
Investment securities 12,649 15,499
Mortgage-related securities 28,169 27,154
Loans receivable 227,178 189,791
Accrued interest receivable 1,553 1,470
Federal Home Loan Bank stock 1,050 1,118
Premises and equipment 8,891 7,800
Other assets 1,830 2,619
----------------------
Total assets $ 296,678 $ 267,723
======================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 264,669 $ 232,933
Borrowings 1,500 6,850
Accrued interest payable 332 395
Advance payments by borrowers for taxes and insurance 179 67
Other liabilities 502 1,098
----------------------
Total liabilities 267,182 241,343
Stockholders' equity:
Common stock $1.00 par value; 1,500,000 shares authorized;
shares issued: 903,970--1997; 897,812--1996; shares outstanding:
903,710--1997; 864,967--1996 904 898
Additional paid-in capital 11,008 10,759
Net unrealized gain (loss) on securities available-for-sale 19 (203)
Retained earnings 17,574 15,868
Treasury stock, at cost (260 shares--1997; 32,845 shares--1996) (9) (942)
----------------------
Total stockholders' equity 29,496 26,380
----------------------
Total liabilities and stockholders' equity $ 296,678 $ 267,723
======================
</TABLE>
See accompanying notes.
2
<PAGE> 26
Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries
Consolidated Statements of Income
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
------------------------------------------------------
(In thousands, except per share amounts)
<S> <C> <C> <C>
Interest income:
Loans, including fees $18,023 $15,288 $13,566
Investment securities:
Taxable 967 1,028 800
Exempt from federal income taxes 12 83 123
Mortgage-related securities 1,508 2,407 3,043
Other 584 522 851
-----------------------------
Total interest income 21,094 19,328 18,383
Interest expense:
Deposits 8,896 8,146 7,709
Borrowings 194 216 212
-----------------------------
Total interest expense 9,090 8,362 7,921
Net interest income 12,004 10,966 10,462
Provision for loan losses 192 460 132
-----------------------------
Net interest income after provision for
loan losses 11,812 10,506 10,330
Noninterest income:
Service charges on deposits 746 725 726
Service charges on loans 141 172 75
Net gain on securities sales 78 70 61
Other 691 588 466
-----------------------------
1,656 1,555 1,328
Noninterest expenses:
Salaries and employee benefits 5,453 5,223 4,706
Premises and equipment 1,412 1,340 1,208
Data processing fees 612 561 540
SAIF special assessment -- 604 --
Federal deposit insurance premiums 75 159 362
Other 2,068 2,134 2,224
-----------------------------
9,620 10,021 9,040
-----------------------------
Income before income taxes 3,848 2,040 2,618
Income taxes 1,439 730 917
-----------------------------
Net income $ 2,409 $ 1,310 $ 1,701
=============================
Basic earnings per share $ 2.75 $ 1.50 $ 1.91
=============================
Diluted earnings per share $ 2.72 $ 1.48 $ 1.90
=============================
Dividends per share $ .80 $ .79 $ .64
=============================
</TABLE>
See accompanying notes.
3
<PAGE> 27
Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Unrealized
Gain (Loss)
Additional on Securities
Common Paid-in Available- Retained Treasury
Stock Capital for Sale Earnings Stock Total
---------------------------------------------------------------------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 $894 $10,660 $(1,939) $14,117 $ (159) $23,573
Comprehensive income:
Net income - - - 1,701 - 1,701
Other comprehensive income -
Change in unrealized gain on
securities available-for-sale, net
of deferred income taxes of $1,118 - - 1,758 - - 1,758
---------------------------------------------------------------------
Total comprehensive income - - 1,758 1,701 - 3,459
Sale of 3,939 shares of common stock in
connection with dividend reinvestment 4 96 - - - 100
program
Sale of 5,934 shares of treasury stock - 3 - - 155 158
Purchase of 6,647 shares of treasury stock - - - - (178) (178)
Cash dividends declared - $.64 per share - - - (569) - (569)
---------------------------------------------------------------------
Balance at December 31, 1995 898 10,759 (181) 15,249 (182) 26,543
Comprehensive income:
Net income - - - 1,310 - 1,310
Other comprehensive income -
Change in unrealized loss on
securities available-for-sale, net
of deferred income taxes of $7 - - (22) - - (22)
---------------------------------------------------------------------
Total comprehensive income - - (22) 1,310 - 1,288
Sale of 6,240 shares of treasury stock - - - - 186 186
Purchase of 32,072 shares of treasury stock - - - - (946) (946)
Cash dividends declared - $.79 per share - - - (691) - (691)
---------------------------------------------------------------------
Balance at December 31, 1996 898 10,759 (203) 15,868 (942) 26,380
Comprehensive income:
Net income - - - 2,409 - 2,409
Other comprehensive income -
Change in unrealized loss on
securities available-for-sale,
net of deferred income taxes of - - 222 - - 222
$118
---------------------------------------------------------------------
Total comprehensive income - - 222 2,409 - 2,631
Sale of 3,157 shares of common stock in
connection with dividend reinvestment
program 3 120 - - - 123
Sale of 40,766 shares of treasury stock - 72 - - 1,184 1,256
Purchase of 8,181 shares of treasury stock - - - - (251) (251)
Cash dividends declared--$.80 per share - - - (703) - (703)
Exercise of stock options 3 57 - - - 60
=====================================================================
Balance at December 31, 1997 $904 $11,008 $ 19 $17,574 $ (9) $29,496
=====================================================================
</TABLE>
See accompanying notes.
4
<PAGE> 28
Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
-----------------------------------------
(In thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 2,409 $ 1,310 $ 1,701
Adjustments to reconcile net income to cash provided by
operating activities:
Provision for loan losses 192 460 132
Provision for depreciation 511 484 405
Net amortization of investment securities premiums
and discounts 112 287 339
Net realized gains on investment securities (78) (70) (61)
Decrease (increase) in accrued interest receivable (83) 62 (185)
Increase (decrease) in accrued interest payable (63) (180) 241
Other 70 31 194
------------------------------------
Net cash provided by operating activities 3,070 2,384 2,766
INVESTING ACTIVITIES
Proceeds from redemption and maturities of investment
securities held to maturity - - 2,525
Purchases of investment securities held to maturity - - (992)
Purchases of securities available-for-sale (20,733) (12,718) (15,264)
Proceeds from sales of securities available-for-sale 12,308 15,848 13,724
Proceeds from redemption and maturities of securities
available-for-sale 10,566 14,054 10,977
Net increase in loans (37,627) (26,700) (14,012)
Purchases of premises and equipment (1,602) (679) (1,852)
Proceeds from sales of real estate 53 100 496
Redemption (purchases) of Federal Home Loan Bank stock 68 (416) (28)
------------------------------------
Net cash used in investing activities (36,967) (10,511) (4,426)
</TABLE>
(continued)
5
<PAGE> 29
Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
----------------------------------------
(In thousands)
FINANCING ACTIVITIES
<S> <C> <C> <C>
Net increase (decrease) in deposits $ 31,736 $ (150) $ 9,637
Net (decrease) increase in borrowings (5,350) 3,850 3,000
Increase (decrease) in advance payments by borrowers for taxes
and insurance 112 (297) 265
Payments of cash dividends to stockholders (703) (691) (569)
Purchase of treasury stock (251) (946) (178)
Proceeds from the sale of treasury stock 1,256 186 158
Proceeds from issuing additional common stock 60 -- --
Proceeds from dividend reinvestment plan 123 -- 100
--------------------------------
Net cash provided by financing activities 26,983 1,952 12,413
--------------------------------
Increase (decrease) in cash and cash equivalents (6,914) (6,175) 10,753
Cash and cash equivalents at beginning of year 22,272 28,447 17,694
--------------------------------
Cash and cash equivalents at end of year $ 15,358 $ 22,272 $ 28,447
================================
Supplemental cash flow information and non-cash transactions:
Interest paid $ 9,169 $ 8,521 $ 7,680
Income taxes paid 1,232 759 839
Investment securities transferred to available-for-sale
portfolio (at amortized cost) -- -- 2,800
</TABLE>
See accompanying notes.
6
<PAGE> 30
Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1997
(Dollars in thousands, except per share amounts)
1. ACCOUNTING POLICIES
BUSINESS
Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries (the
Corporation) provides a full range of personal and commercial financial services
to customers through its subsidiaries. The Corporation and its subsidiaries are
subject to competition from other financial institutions. They are also subject
to the regulations of certain federal and state agencies and undergo periodic
examinations by those regulatory agencies.
BASIS OF FINANCIAL STATEMENT PRESENTATION
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles and include the accounts of the
Corporation, its wholly owned subsidiaries, Lincoln State Bank (Lincoln),
Franklin State Bank (Franklin) and Lincoln Community Bank (Lincoln
Community)--collectively, "the Banks," M&M Services, which provides management
services for the Banks, Achieve Mortgage Corporation, a wholly owned subsidiary
of Lincoln Community, which provides mortgage banking services for the Banks and
Lincoln's wholly owned subsidiary, Lincoln Investment Corp., and Lincoln
Community's wholly owned subsidiary, Lincoln Investment Management Corporation,
which manage an investment portfolio for the Banks. All significant intercompany
accounts and transactions have been eliminated.
In preparing the consolidated financial statements in conformity with generally
accepted accounting principles, management is required to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include amounts due from banks (both interest-bearing
and noninterest-bearing) and federal funds sold.
7
<PAGE> 31
Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
INVESTMENT AND MORTGAGE-RELATED SECURITIES
All of the Corporation's investment and mortgage-related securities are
classified as available-for-sale and are stated at fair value, with the
unrealized gains and losses, net of tax, reported as a separate component of
stockholders' equity.
The amortized cost of securities classified as available-for-sale is adjusted
for amortization of premiums and accretion of discounts to maturity, or in the
case of mortgage-related securities, over the estimated life of the security.
Such amortization is included in interest income from the related security.
Interest and dividends are included in interest income from the related
securities. Realized gains and losses and declines in value judged to be
other-than-temporary are included in net securities gains (losses). The cost of
securities sold is based on the specific identification method.
INTEREST AND FEES ON LOANS
Interest on loans is recorded as income when earned. Loans are placed on
non-accrual status, generally recognizing interest as income when received, when
in the opinion of management, the collectibility of principal or interest
becomes doubtful.
Loan origination and commitment fees and certain direct loan origination costs
are being deferred and the net amount amortized as an adjustment of the related
loans' yields. The Corporation is amortizing these amounts, using the
level-yield method, adjusted for prepayments, over the contractual life of the
related loans.
ALLOWANCE FOR LOAN LOSSES
A provision for loan losses is made when a loss is probable and can be
reasonably estimated. The provision is based on past experience and on
prevailing market conditions. Management's evaluation of loss considers various
factors including, but not limited to, general economic conditions, loan
portfolio composition, and prior loss experience.
8
<PAGE> 32
Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
The Corporation had no impaired loans in 1997 or 1996.
A substantial portion of the Banks' loans are collateralized by real estate in
metropolitan Milwaukee, Wisconsin. Accordingly, the ultimate collectibility of a
substantial portion of the Banks' loan portfolio and the recovery of a
substantial portion of the carrying amount of real estate owned are susceptible
to changes in market conditions in metropolitan Milwaukee, Wisconsin.
Management believes that the allowance for loan losses is adequate. While
management uses available information to recognize losses, future additions to
the allowance may be necessary based on changes in economic conditions.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost, less accumulated depreciation.
Expenditures for normal repairs and maintenance are charged to operations as
incurred. The cost of premises and equipment is depreciated, using the
straight-line or double-declining-balance methods, over the estimated useful
lives of the assets (five to thirty-two years).
EARNINGS PER SHARE INFORMATION
Earnings per share of common stock have been computed based on the weighted
average number of common stock and common stock equivalents, if dilutive,
outstanding during each year. The resulting number of shares used in computing
basic earnings per share is 874,562, 875,082 and 889,677 for the years ended
December 31, 1997, 1996 and 1995, respectively. The number of shares used in
computing diluted earnings per share is 884,499, 882,305, and 894,940, for the
years ended December 31, 1997, 1996 and 1995, respectively.
ACCOUNTING CHANGES
The Company adopted Statement No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities" as of January 1, 1997,
which provides new accounting and reporting standards for sales, securitization,
and servicing of receivables and other financial assets and extinguishments of
liabilities in 1997. The Company was not significantly impacted by the adoption
of Statement No. 125.
9
<PAGE> 33
Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
In 1997, the Company adopted Statement No. 130, "Reporting Comprehensive
Income," which establishes new rules for reporting and display of comprehensive
income and its components in the consolidated financial statements. The new
rules require that all items that are recognized under accounting standards as
components of comprehensive income be reported with prominence in the financial
statements. Application of Statement No. 130 does not impact amounts previously
reported for net income or affect the comparability of previously issued
financial statements.
PENDING ACCOUNTING CHANGE
In June 1997, SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information" was issued. SFAS No. 131 establishes standards for the
reporting of financial information from operating segments in annual and interim
financial statements. This Statement requires that financial information be
reported on the basis that it is reported internally for evaluating segment
performance and deciding how to allocate resources to segments. Because this
Statement addresses how supplemental financial information is disclosed in
annual and interim reports, the adoption will not have a material impact on the
financial statements. SFAS No. 131 will become effective in 1998.
RECLASSIFICATIONS
Certain amounts in the 1996 and 1995 financial statements have been reclassified
to conform to the 1997 presentation.
10
<PAGE> 34
Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. INVESTMENT AND MORTGAGE-BACKED SECURITIES
The following is a summary of securities:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
--------------------------------------------------------
<S> <C> <C> <C> <C>
At December 31, 1997
Mutual funds $ 3,173 $ - $ 69 $ 3,104
U.S. treasury and other U.S. government
securities 7,789 29 17 7,801
Small Business Administration certificates 886 44 - 930
State and political subdivision certificates 800 14 - 814
Collateralized mortgage obligations 1,498 3 13 1,488
Government agency mortgage-backed securities 26,644 117 80 26,681
--------------------------------------------------------
$40,790 $207 $179 $40,818
========================================================
At December 31, 1996
Mutual funds $ 3,173 $ - $ 75 $ 3,098
U.S. treasury and other U.S. government
securities 11,404 16 99 11,321
Small Business Administration certificates 1,047 36 3 1,080
Collateralized mortgage obligations 2,962 3 22 2,943
Government agency mortgage-backed securities 24,380 46 215 24,211
--------------------------------------------------------
$42,966 $101 $414 $42,653
========================================================
</TABLE>
Securities carried at $1,100 at December 31, 1997 were pledged principally to
secure liabilities to the Federal Reserve Bank.
The amortized cost and market value of securities at December 31, 1997, by
contractual maturity, are shown below. Expected maturities may differ from
contractual maturities because borrowers may have the right to call or prepay
obligations.
11
<PAGE> 35
Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. INVESTMENT AND MORTGAGE-BACKED SECURITIES (CONTINUED)
<TABLE>
<CAPTION>
Amortized
Cost Fair Value
----------------------
<S> <C> <C>
Due in one year or less $ 1,298 $ 1,301
Due after one year through five years 7,291 7,314
Due after five years through ten years 335 348
Due after ten years 551 582
Mutual funds 3,173 3,104
Mortgage-related securities 28,142 28,169
---------------------
$40,790 $40,818
=====================
</TABLE>
Proceeds from sales of securities available-for-sale during the years ended
December 31, 1997, 1996 and 1995, were $12,308, $15,848 and $13,724,
respectively. Gross gains of $83, $87 and $65 were recorded on those sales for
the years ended December 31, 1997, 1996 and 1995, respectively. Gross losses of
$5, $17 and $4 were also recorded in the years ended December 31, 1997, 1996 and
1995, respectively.
3. LOANS RECEIVABLE
Loans receivable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
----------------------------------
<S> <C> <C>
First mortgage:
Conventional single-family residential $ 58,821 $ 58,358
Commercial and multifamily residential 78,365 61,707
Construction 18,191 12,872
-----------------------------
155,377 132,937
Commercial business loans 56,846 45,036
Consumer and installment loans 12,220 10,984
Leases 2,311 599
Home equity loans 1,496 1,367
Other 1,081 883
-----------------------------
73,954 58,869
Less:
Deferred loan fees 60 76
Allowance for loan losses 2,093 1,939
-----------------------------
$227,178 $189,791
=============================
</TABLE>
12
<PAGE> 36
Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. LOANS RECEIVABLE (CONTINUED)
Transactions in the allowance for loan losses are summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
-----------------------------
<S> <C> <C> <C>
Balance at beginning of year $ 1,939 $ 1,533 $ 1,464
Provisions charged to operations 192 460 132
Recoveries -- 29 --
Charge-offs (38) (83) (63)
-----------------------------
Balance at end of year $ 2,093 $ 1,939 $ 1,533
=============================
</TABLE>
Total nonaccrual loans were $498 and $937 at December 31, 1997 and 1996,
respectively.
4. PREMISES AND EQUIPMENT
Premises and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
--------------------
<S> <C> <C>
Land $ 2,353 $ 2,248
Office buildings and improvements 7,858 6,646
Furniture and equipment 3,807 3,566
--------------------
14,018 12,460
Less accumulated depreciation (5,127) (4,660)
--------------------
$ 8,891 $ 7,800
====================
</TABLE>
5. DEPOSITS
Deposits consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
-------------------
<S> <C> <C>
Negotiable Order of Withdrawal accounts:
Noninterest-bearing $ 39,405 $ 32,095
Interest-bearing 20,137 19,793
Passbook accounts 58,177 59,569
Savings deposits and money market investment accounts 8,425 7,500
Time deposits and certificate accounts 138,525 113,976
-------------------
$264,669 $232,933
===================
</TABLE>
13
<PAGE> 37
Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. DEPOSITS (CONTINUED)
The scheduled maturities of time deposits and certificate accounts at December
31, 1997 are as follows:
Maturities during the year ending December 31:
----------------------------------------------
<TABLE>
<S> <C>
1998 $124,112
1999 8,032
2000 2,279
2001 2,334
2002 1,764
Thereafter 4
--------
$138,525
========
</TABLE>
At December 31, 1997 and 1996, time deposits and certificate accounts with
balances greater than $100 amounted to $28,527 and $15,313, respectively.
6. BORROWINGS
At December 31, 1997 and 1996, the Banks have overnight federal funds
purchased of $1,500 and $3,850, respectively, which bear interest at 6.00% and
7.75%, respectively.
Lincoln Community also had an advance of $3,000 from the Federal Home Loan Bank
at December 31, 1996. The advance matured in July 1997. There are no advances
outstanding from the Federal Home Loan Bank at December 31, 1997.
Lincoln Community is required to maintain unencumbered mortgage loans in its
portfolio aggregating at least 167% of the amount of outstanding advances from
the Federal Home Loan Bank as collateral. In addition, these advances are
collateralized by Federal Home Loan Bank stock.
At December 31, 1997 and 1996, the Corporation had an unused line of credit with
an unaffiliated bank with a total available balance of $2,000. The line bears
interest at the lender's prime rate (8.50% at December 31, 1997), is
collateralized by 100% of the capital stock of Franklin State Bank, and matures
April 13, 1998.
14
<PAGE> 38
Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. STOCKHOLDERS' EQUITY
The Banks are subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory--and possibly additional discretionary--actions by
regulators that, if undertaken, could have a direct material effect on the
Banks' financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Banks must meet specific
capital guidelines that involve quantitative measures of the Banks' assets,
liabilities and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Banks' capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Banks to maintain minimum amounts and ratios (set forth in the table
that follows) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined) and of Tier 1 capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1997 and 1996, that
the Banks meet all capital adequacy requirements to which they are subject.
As of December 31, 1997, the most recent notification from the Federal Deposit
Insurance Corporation categorized Lincoln Community Bank and Franklin State Bank
as well capitalized and Lincoln State Bank as adequately capitalized under the
regulatory framework for prompt corrective action. As of December 31, 1996, all
the Banks were categorized as well capitalized. To be categorized as well
capitalized, the Banks must maintain minimum total risk-based, Tier I
risk-based, Tier I leverage ratios as set forth in the table. There are no
conditions or events since that notification that management believes have
changed the Banks' classifications as of December 31, 1997.
15
<PAGE> 39
Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. STOCKHOLDERS' EQUITY (CONTINUED)
<TABLE>
<CAPTION>
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
----------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
AS OF DECEMBER 31, 1997
Total Capital (to Risk-
Weighted Assets):
Lincoln State Bank $12,410 9.87% $10,056 8.00% $12,571 10.00%
Lincoln Community Bank 11,867 17.86 5,315 8.00 6,644 10.00
Franklin State Bank 3,586 10.49 2,734 8.00 3,477 10.00
Tier 1 Capital (to Risk-
Weighted Assets):
Lincoln State Bank 11,332 11.52 5,028 4.00 7,542 6.00
Lincoln Community Bank 11,173 18.61 2,658 4.00 3,986 6.00
Franklin State Bank 3,265 13.43 1,367 4.00 2,050 6.00
Tier 1 Capital (to Average
Assets):
Lincoln State Bank 11,332 7.44 6,096 4.00 7,620 5.00
Lincoln Community Bank 11,173 11.18 3,996 4.00 4,995 5.00
Franklin State Bank 3,265 8.09 1,613 4.00 2,017 5.00
</TABLE>
8. RESTRICTIONS ON SUBSIDIARY DIVIDENDS, LOANS OR ADVANCES
Dividends are paid by the Corporation from funds which are mainly provided by
dividends from the Banks. However, certain restrictions exist regarding the
ability of the Banks to transfer funds to the Corporation in the form of cash
dividends, loans or advances. Approval of the regulatory authorities is required
to pay dividends in excess of certain levels of the Banks' retained earnings.
As of December 31, 1997, the subsidiary banks collectively had equity of
$25,856,736 of which $3,690,054 was available for distribution to the
Corporation as dividends without prior regulatory approval.
Under Federal Reserve Board regulations, the Banks are limited as to the amount
they may loan to their affiliates, including the Corporation, unless such loans
are collateralized by specific obligations. At December 31, 1996, the maximum
amount available for transfer from any one of these Banks to the Corporation in
the form of loans approximates 8.6% of consolidated stockholders' equity.
16
<PAGE> 40
Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. EMPLOYEE BENEFIT PLANS
The Corporation has an Incentive Stock Option Plan under which 14,000 shares of
common stock are reserved for the grant of options to officers and key employees
at a price not less than the fair market value of the stock on the date of the
grant. The plan limits the options that may be granted to each employee to $100
(based on aggregate fair market value at the date of the grant) per calendar
year, on a cumulative basis. Options must be exercised within ten years of the
date of grant and can be regranted if forfeited.
A summary of stock option transactions follows:
<TABLE>
<CAPTION>
Weighted Weighted Average
Exercise Average Remaining
Number Price Exercise Price Contractual Life
of Shares Per Share Per Share
-------------- --------------------- ------------------ -------------------
<S> <C> <C> <C> <C>
Total outstanding at
December 31, 1996 and
1995 25,000 $16.27 - $25.00 $20.38 4.54 years
Expired (614) $16.27
Exercised during 1997 (7,386) $16.27 - $20.00
--------------
Total outstanding at
December 31, 1997 17,000 $20.09 - $25.00 $21.66 4.83 years
==============
</TABLE>
At December 31, 1997, all outstanding options are exercisable.
The Corporation has a 401(k) Profit Sharing Plan and Trust which covers
substantially all employees with at least six months of service who have
attained age twenty and one-half. Participating employees may annually
contribute up to 12% of their pre-tax compensation. The Corporation's annual
contribution consists of a discretionary matching percentage, limited to 1% of
employee compensation, and an additional discretionary amount, which is
determined annually by the Board of Directors. The Corporation's contributions
for 1997, 1996 and 1995, were $180, $164 and $149, respectively.
17
<PAGE> 41
Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
10. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
-----------------------------
<S> <C> <C> <C>
Current:
Federal $ 1,157 $ 718 $ 769
State 231 168 124
-----------------------------
1,388 886 893
-----------------------------
Deferred:
Federal 36 (124) 4
State 15 (32) 20
-----------------------------
51 (156) 24
-----------------------------
$ 1,439 $ 730 $ 917
=============================
</TABLE>
The provision for income taxes differs from that computed at the federal
statutory corporate tax rate as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
-------------------------------
<S> <C> <C> <C>
Income tax at statutory rate $ 1,309 $ 694 $ 890
Increase (reduction) resulting from:
Tax-exempt interest income (21) (49) (58)
State income taxes, net of federal tax benefit 163 89 100
Other (12) (4) (15)
-----------------------------
$ 1,439 $ 730 $ 917
=============================
</TABLE>
18
<PAGE> 42
Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
10. INCOME TAXES (CONTINUED)
The components of deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
--------------------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 594 $ 533
Unrealized loss on securities -- 103
Net operating loss carryforwards 509 440
Other assets 83 69
------------------
Total deferred tax assets 1,186 1,145
Valuation allowance (509) (441)
------------------
677 704
Deferred tax liabilities:
Unrealized gain on securities 9 --
Depreciation 293 271
Other liabilities 39 30
------------------
Total deferred tax liabilities 341 301
------------------
Net deferred tax asset $ 336 $ 403
==================
</TABLE>
At December 31, 1997, the Corporation and its subsidiaries, which file separate
state income tax returns, have state net operating loss carryforwards of
approximately $9,539 which expire at various dates through 2012. Due to the
unlikelihood of realizing these benefits, a valuation allowance of $509 has been
established to offset the deferred tax assets relating to these carryforwards.
Lincoln Community qualified under provisions of the Internal Revenue Code, which
previously permitted it to deduct from taxable income an allowance for bad debts
that differs from the provision for such losses charged to income for financial
reporting purposes. At December 31, 1997, retained earnings included
approximately $3,606 for which no provision for income taxes has been made.
Income taxes of approximately $1,486 would be imposed if Lincoln Community Bank
were to use these retained earnings for any other purpose other than to absorb
bad debt losses.
19
<PAGE> 43
Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
11. LOANS TO RELATED PARTIES
In the ordinary course of business, loans are granted to related parties, which
include management personnel, directors and entities in which such persons are
principal stockholders. Activity in loans to related parties is as follows:
<TABLE>
<S> <C>
Balance at December 31, 1995 $ 14,618
Loans originated 7,136
Repayments (4,770)
--------
Balance at December 31, 1996 16,984
Loans originated 13,852
Repayments (8,021)
--------
Balance at December 31, 1997 $ 22,815
========
</TABLE>
12. COMMITMENTS AND CONTINGENT LIABILITIES
Off-balance-sheet financial instruments whose contracts represent credit
and/or interest rate risk at December 31, 1997 and 1996, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
-----------------
<S> <C> <C>
Commitments to originate mortgage loans
(expiring within three months):
Fixed rates $ 3,008 $ 5,977
Adjustable rates 1,018 194
Unused lines of credit:
Commercial business 24,384 22,002
Home equity (adjustable rate) 1,278 1,710
Credit cards (fixed rate) 2,599 2,317
Standby letters of credit 1,975 2,152
</TABLE>
Loan commitments and line-of-credit loans are made to accommodate the financial
needs of the Banks' customers. Standby letters of credit commit the Banks to
make payments on behalf of customers when certain specified future events occur.
These arrangements have credit risk essentially the same as that involved in
extending loans to customers and are subject to the Banks' normal credit
policies. Collateral is obtained based on management's credit assessment of the
customer.
20
<PAGE> 44
Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
12. COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
Except for the above-noted commitments to originate loans in the normal course
of business, the Corporation and the Banks have not undertaken the use of
off-balance-sheet derivative financial instruments for any purpose.
13. FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement No. 107, "Disclosures About Fair Value of Financial Instruments,"
requires disclosure of fair value information about financial instruments,
whether or not recognized in the statement of financial condition, for which it
is practicable to estimate that value. In cases where quoted market prices are
not available, fair values are based on estimates using present value or other
valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. In that regard, the derived fair value estimates cannot be substantiated
by comparison to independent markets and, in many cases, could not be realized
in immediate settlement of the instrument. Statement No. 107 excludes certain
financial instruments and all nonfinancial instruments from its disclosure
requirements. Accordingly, the aggregate fair value amounts presented do not
necessarily represent the underlying value of the Corporation. The Corporation
does not routinely measure the market value of financial instruments because
such measurements represent point-in-time estimates of value. It is generally
not the intent of the Corporation to liquidate and therefore realize the
difference between market value and carrying value and even if it were, there is
no assurance that the estimated market values could be realized. Thus, the
information presented is not particularly relevant to predicting the
Corporation's future earnings or cash flows.
The following methods and assumptions were used by the Corporation in estimating
its fair value disclosures for financial instruments:
CASH AND CASH EQUIVALENTS
The carrying amounts for cash and cash equivalents approximate those assets'
fair values.
INVESTMENT AND MORTGAGE-RELATED SECURITIES
Fair values for investment and mortgage-related securities are based on quoted
market prices, where available. If quoted market prices are not available, fair
values are based on quoted market prices of comparable instruments.
21
<PAGE> 45
Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
13. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
ACCRUED INTEREST INCOME AND EXPENSE
The fair value of accrued interest income and expense approximates the
respective book value.
LOANS RECEIVABLE
For variable-rate loans that reprice frequently and with no significant change
in credit risk, fair values are based on carrying values. The fair values for
residential mortgage loans are based on quoted market prices of similar loans
sold in conjunction with securitization transactions, adjusted for differences
in loan characteristics. The fair values for commercial real estate loans,
rental property mortgage loans, commercial business loans and consumer and other
loans are estimated using discounted cash flow analyses, using interest rates
currently being offered for loans with similar terms to borrowers of similar
credit quality.
FEDERAL HOME LOAN BANK STOCK
FHLB stock is carried at cost which is its redeemable value since the market for
this stock is restricted.
DEPOSITS
The fair values disclosed for noninterest-bearing checking accounts, negotiable
order of withdrawal accounts, passbook accounts and savings deposits and money
market investment accounts are, by definition, equal to the amount payable on
demand at the reporting date (i.e., their carrying amounts). The carrying
amounts for variable-rate, fixed term certificate accounts approximate their
fair values at the reporting date. The fair values of fixed-rate certificates of
deposit are estimated using a discounted cash flow calculation that applies
interest rates currently being offered on certificates to a schedule of
aggregated expected monthly maturities on time deposits.
BORROWINGS
The fair values of the Corporation's borrowings are estimated using discounted
cash flow analyses, based on the Corporation's current incremental borrowing
rates for similar types of borrowing arrangements.
22
<PAGE> 46
Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
13. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
OFF-BALANCE-SHEET INSTRUMENTS
Fair values for the Corporation's off-balance-sheet instruments (lending
commitments and standby letters of credit) are based on fees currently charged
to enter into similar agreements, taking into account the remaining terms of the
agreements, the counterparties' credit standing and discounted cash flow
analyses. The fair value of these off-balance-sheet items approximates the
recorded amounts of the related fees and is not material at December 31, 1997 or
1996.
The carrying amounts and fair values of the Corporation's financial
instruments consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
------------------------------- -------------------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
------------------------------- -------------------------------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 15,358 $ 15,358 $ 22,272 $ 22,272
Securities available-for-sale:
Investment securities 12,649 12,649 15,499 15,499
Mortgage-related securities 28,169 28,169 27,154 27,154
Loans receivable 229,331 229,779 191,806 192,395
Accrued interest receivable 1,553 1,553 1,470 1,470
Federal Home Loan Bank stock 1,050 1,050 1,118 1,118
Deposits 264,669 264,624 232,933 232,865
Accrued interest payable 332 332 395 395
Borrowings 1,500 1,500 6,850 6,850
</TABLE>
23
<PAGE> 47
Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
14. MERCHANTS AND MANUFACTURERS BANCORPORATION, INC. AND SUBSIDIARIES
PARENT COMPANY ONLY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
DECEMBER 31
STATEMENTS OF FINANCIAL CONDITION 1997 1996
-----------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 212 $ 683
Investment in subsidiaries 26,307 23,697
Premises and equipment 2,989 1,955
Other assets 959 925
--------------------
Total assets $ 30,467 $ 27,260
====================
LIABILITIES
Other liabilities $ 971 $ 880
STOCKHOLDERS' EQUITY
Common stock 904 898
Additional paid-in capital 11,008 10,759
Unrealized gain (loss) on available for sale securities 19 (203)
Retained earnings 17,574 15,868
Less treasury stock (9) (942)
--------------------
Total stockholders' equity 29,496 26,380
--------------------
Total liabilities and stockholders' equity $ 30,467 $ 27,260
====================
</TABLE>
24
<PAGE> 48
Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
14. MERCHANTS AND MANUFACTURERS BANCORPORATION, INC. AND SUBSIDIARIES
PARENT COMPANY ONLY FINANCIAL INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
----------------------------------
<S> <C> <C> <C>
STATEMENTS OF INCOME
Income:
Interest on loans, including fees $ - $ 26 $ -
Interest on investments - 25 64
Dividends from subsidiary banks 1,943 1,876 1,198
Other 280 244 251
---------------------------------
2,223 2,171 1,513
Expenses:
Salaries and employee benefits 1,268 847 503
Occupancy 391 281 272
Interest 16 3 -
Other 547 544 656
---------------------------------
2,222 1,675 1,431
---------------------------------
Income before income tax benefit and equity in undistributed
net income of subsidiary banks 1 496 82
Income tax benefit 670 478 389
---------------------------------
Income before equity in undistributed net income of
subsidiary banks 671 974 471
Equity in undistributed net income of subsidiary banks 1,738 336 1,230
=================================
Net income $2,409 $1,310 $1,701
=================================
</TABLE>
25
<PAGE> 49
Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
14. MERCHANTS AND MANUFACTURERS BANCORPORATION, INC. AND SUBSIDIARIES
PARENT COMPANY ONLY FINANCIAL INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
-------------------------------------
<S> <C> <C> <C>
CONDENSED STATEMENTS OF CASH FLOWS
OPERATING ACTIVITIES
Net income $ 2,409 $ 1,310 $ 1,701
Adjustments to reconcile net income to net cash provided by
operating activities:
Equity in undistributed net income of subsidiaries (1,738) (336) (1,230)
Provision for depreciation 116 80 73
Other (593) 266 (474)
--------------------------------
Net cash provided by operating activities 194 1,320 70
INVESTING ACTIVITIES
Sales of mortgage-backed securities - 693 -
Proceeds from repayments of mortgage-related securities - 27 48
Proceeds from sales of furniture and equipment 250 - -
Purchases of furniture and equipment (1,400) (226) (56)
--------------------------------
Net cash provided (used) by investing activities (1,150) 494 (8)
FINANCING ACTIVITIES
Payment of cash dividends (703) (691) (569)
Purchase of treasury stock (251) (946) (178)
Proceeds from the sale of treasury stock 1,256 186 158
Proceeds from issuing additional common stock 60 - -
Proceeds from dividend reimbursement plan 123 - 100
--------------------------------
Net cash provided (used) by financing activities 485 (1,451) (489)
--------------------------------
Increase (decrease) in cash and cash equivalents (471) 363 (427)
Cash and cash equivalents at beginning of year 683 320 747
================================
Cash and cash equivalents at end of year $ 212 $ 683 $ 320
================================
</TABLE>
26
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 10,694
<INT-BEARING-DEPOSITS> 821
<FED-FUNDS-SOLD> 3,843
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 40,818
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 229,271
<ALLOWANCE> 2,093
<TOTAL-ASSETS> 296,678
<DEPOSITS> 264,669
<SHORT-TERM> 1,500
<LIABILITIES-OTHER> 1,013
<LONG-TERM> 0
0
0
<COMMON> 904
<OTHER-SE> 28,592
<TOTAL-LIABILITIES-AND-EQUITY> 296,678
<INTEREST-LOAN> 18,023
<INTEREST-INVEST> 2,487
<INTEREST-OTHER> 584
<INTEREST-TOTAL> 21,094
<INTEREST-DEPOSIT> 8,896
<INTEREST-EXPENSE> 9,090
<INTEREST-INCOME-NET> 12,004
<LOAN-LOSSES> 192
<SECURITIES-GAINS> 78
<EXPENSE-OTHER> 9,620
<INCOME-PRETAX> 3,848
<INCOME-PRE-EXTRAORDINARY> 3,848
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,409
<EPS-PRIMARY> 2.75
<EPS-DILUTED> 2.72
<YIELD-ACTUAL> 8.11
<LOANS-NON> 699
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,939
<CHARGE-OFFS> 38
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 2,093
<ALLOWANCE-DOMESTIC> 2,093
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
