<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, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
----------------- ------------------
Commission file number 0-21292
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC.
------------------------------------------------
(Exact name of registrant as specified in its charter)
Wisconsin 39-1413328
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(State or other jurisdiction of incorporation or (I.R.S. Employer
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, 1999, 1,488,621 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 $52,114,000.
<PAGE> 2
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC.
*****
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1998
<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 20
Item 8. Financial Statements and Supplementary Data 21
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 21
PART III
Item 10. Directors and Executive Officers of the Registrant 22
Item 11. Executive Compensation 22
Item 12 Security Ownership of Certain Beneficial Owners and Management 22
Item 13. Certain Relationships and Related Transactions 22
PART IV
Item 14. Exhibits, Financial Statements Schedules and Reports on Form 8-K 22
SIGNATURES 23
</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. 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 seventeen 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, mortgage
brokers, 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, 1998, the Corporation and its subsidiaries employed 141
full-time and 55 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, 1998, 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 182,027 $ 97,061 $ 52,065
Total loans 150,650 61,038 42,428
Total deposits 154,141 88,161 47,561
Stockholders' equity 14,533 8,639 4,464
Net income 1,770 1,191 458
Return on average assets 1.07% 1.20% 0.99%
</TABLE>
The Banks have consistent products, services and delivery systems and
comply with similar regulatory guidance. As such they are not segments as that
term is defined in Financial Accounting Standards Board Statement 131.
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 eight limited hours facilities
in Milwaukee County. At December 31, 1998, Lincoln State Bank comprised 54.4% of
the consolidated assets of the Corporation.
LINCOLN COMMUNITY BANK
Lincoln Community Bank was organized as a state chartered mutual
savings and loan association under the laws of the State of Wisconsin in 1910.
It operates two full service branch offices in the city of Milwaukee. 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. In 1997 Lincoln Community Bank converted from a Wisconsin stock
savings bank to a Wisconsin commercial bank. Its principal office and a branch
office are located in Milwaukee, Wisconsin. At December 31, 1998, Lincoln
Community Bank comprised 29.0% 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 principal office and a branch
office are located in Franklin, Wisconsin. At December 31, 1998, Franklin State
Bank comprised 15.6% 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,
1998, Lincoln Neighborhood Redevelopment Corporation had assets of $103,000,
$68,000 in liabilities and equity of $35,000.
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.
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.
4
<PAGE> 5
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. These
subsidiaries are an intrinsic component of their respective parent banks and
assets there of are included in the total assets of the respective Bank above.
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. In 1998 Lincoln State Bank opened two new
limited hour facilities. These offices are located in Landmark of West Allis and
Lexington Village in the City of Greenfield.
5
<PAGE> 6
Franklin State Bank's main office 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. In 1998 Franklin State Bank
opened a branch facility at 9719 South Franklin Drive in the Franklin Business
Park, Franklin, Wisconsin. Franklin State Bank owns the facility.
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 1998.
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>
March 31, 1997 $ 18.79 $ 19.39
June 30, 1997 19.55 19.55
September 30, 1997 20.15 20.15
December 31, 1997 28.03 28.33
MARCH 31, 1998 $ 30.30 $ 30.30
JUNE 30, 1998 31.25 31.25
SEPTEMBER 30, 1998 40.00 39.00
DECEMBER 31, 1998 39.50 39.50
</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,
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1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
SELECTED BALANCE SHEET DATA
Total assets $ 334,503 $ 296,678 $ 267,723 $ 264,247 $ 248,181
Loans receivable, net 251,815 227,178 189,791 163,650 149,925
Investment securities held to maturity 0 0 0 0 4,326
Investment securities available for sale 15,721 12,649 15,499 15,833 9,464
Mortgage-related securities available for sale 22,850 28,169 27,154 44,251 54,634
Deposits 289,230 264,669 232,933 233,083 223,446
Short-term borrowings 13,260 1,500 6,850 3,000 0
Stockholders' equity 30,997 29,496 26,380 26,543 23,573
Realized stockholders' equity(2) 31,631 29,505 26,583 26,724 25,512
SELECTED INCOME STATEMENT DATA
Total interest income (taxable-equivalent)(1) $23,336 $21,126 $19,401 $ 18,479 $ 16,212
Total interest expense 10,589 9,090 8,362 7,921 6,155
--------------------------------------------------------------------
Net interest income 12,747 12,036 11,039 10,558 10,057
Provision for loan losses 250 192 460 132 43
--------------------------------------------------------------------
Net interest income after provision for
loan losses 12,497 11,844 10,579 10,426 10,014
Net gain (loss) on security sales 217 78 70 61 (244)
Other noninterest income 2,113 1,578 1,485 1,267 1,185
--------------------------------------------------------------------
Total noninterest income 2,330 1,656 1,555 1,328 941
Noninterest expense 10,532 9,620 10,021 9,040 8,484
--------------------------------------------------------------------
Income before income taxes 4,295 3,880 2,113 2,714 2,471
Income taxes 1,468 1,439 730 917 874
Less taxable equivalent adjustment 121 32 73 96 73
--------------------------------------------------------------------
Net income $ 2,706 $ 2,409 $ 1,310 $ 1,701 $ 1,524
====================================================================
PER SHARE DATA(3)
Net income - basic $ 1.81 $ 1.67 $ 0.91 $ 1.16 $ 1.04
Net income - diluted $ 1.78 $ 1.65 $ 0.90 $ 1.15 $ 1.03
Cash dividend declared $ 0.59 $ 0.48 $ 0.48 $ 0.39 $ 0.31
Book value $ 20.80 $ 19.78 $ 18.48 $ 18.06 $ 16.10
Average shares outstanding 1,497,763 1,442,723 1,439,560 1,467,967 1,469,581
OTHER DATA
Net interest margin 3.64% 3.95% 3.87% 3.86% 3.93%
Allowance for loan losses to non-accrual loans 225.47% 299.42% 206.87% 232.92% 189.64%
Nonperforming assets to total assets 0.31% 0.24% 0.35% 0.25% 0.35%
Stockholders' equity to total assets 9.27% 9.94% 9.85% 10.04% 9.50%
Average stockholders' equity to average assets 9.69% 9.77% 9.94% 10.01% 9.87%
Return on assets (ratio of net income to
average total assets) 0.86% 0.86% 0.50% 0.67% 0.62%
Return on stockholders' equity (ratio of net
income to average equity) 8.92% 8.82% 5.00% 6.71% 6.27%
Dividend payout ratio 32.85% 29.18% 52.75% 33.45% 29.79%
Facilities:
Number of full-service offices 9 8 8 8 6
Number of limited services offices 8 6 6 6 4
</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) Excludes SFAS 115 mark-to-market equity adjustment.
(3) All per share information presented in this report has been retroactively
restated to give effect to the 3 for 2 stock split, declared in April 1998
and the 10% stock dividend declared in October 1998, as if each occurred as
of January 1, 1994.
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>
1998 1997
----------------------------------------------------------------------------------------------------
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) $5,643 $5,709 $5,940 $6,044 $4,952 $5,173 $5,386 $5,615
Interest expense 2,512 2,606 2,719 2,752 2,168 2,201 2,321 2,400
----------------------------------------------------------------------------------------------------
Net interest income 3,131 3,103 3,221 3,292 2,784 2,972 3,065 3,215
Provision for loan losses 75 75 50 50 48 48 48 48
Noninterest income 450 559 529 792 396 390 433 437
Noninterest expense 2,965 2,546 2,545 2,476 2,625 2,318 2,343 2,334
----------------------------------------------------------------------------------------------------
Income before taxes 541 1,041 1,155 1,558 507 996 1,107 1,270
Income taxes 180 367 382 539 196 366 408 469
Less taxable equivalent
adjustment 12 16 50 43 6 6 8 12
====================================================================================================
Net income $349 $658 $723 $976 $305 $624 $691 $789
====================================================================================================
Basic earnings per share $0.24 $0.44 $0.48 $0.65 $0.21 $0.44 $0.48 $0.54
====================================================================================================
Diluted earnings per share $0.23 $0.44 $0.47 $0.64 $0.21 $0.43 $0.48 $0.53
====================================================================================================
Dividends per share $0.12 $0.13 $0.15 $0.20 $0.12 $0.12 $0.12 $0.12
====================================================================================================
</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, 1998, 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.
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 on a fully tax equivalent basis. 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 fully tax equivalent basis increased to $12.7
million in 1998, compared with $12.0 million in 1997 and $11.0 million in 1996.
This increase of $711,000 in net interest income in 1998 was due primarily to an
increase in the volume of earning assets in 1998 (a $2.8 million increase). This
gain was partially offset by an increase in the volume of interest bearing
liabilities (a $1.4 million increase).
The total increase in average earning assets was primarily due to an
increase in average loans of $29.2 million. All of the loan growth was
internally generated. Interest bearing deposits increased $27.6 million in 1998.
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,
-------------------------------- -------------------------------- --------------------------------
1998 1997 1996
-------------------------------- -------------------------------- --------------------------------
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) $237,977 $19,985 8.40% $208,807 $17,972 8.61% $176,790 $15,230 8.61%
Loans exempt from federal
income taxes(3) 600 71 11.83% 683 77 11.27% 753 88 11.69%
Taxable investment
securities(4) 11,896 715 6.01% 16,043 967 6.03% 17,260 1,028 5.96%
Mortgage-related securities(4) 28,350 1,761 6.21% 23,629 1,508 6.38% 38,475 2,407 6.26%
Investment securities exempt
from federal income
taxes(3),(4) 4,194 285 6.80% 233 18 7.73% 2,003 126 6.29%
Other securities 10,079 519 5.15% 11,091 584 5.27% 10,139 522 5.15%
---------------------- ---------------------- ---------------------
Interest earning assets 293,096 23,336 7.96% 260,486 21,126 8.11% 245,420 19,401 7.91%
Non interest earning assets 20,258 19,082 18,238
----------- ----------- ----------
Average Assets $313,354 $279,568 $263,658
=========== =========== ==========
LIABILITIES AND STOCKHOLDERS'
EQUITY
NOW deposits $23,656 592 2.50% $21,466 405 1.89% $23,011 479 2.08%
Money market deposits 7,407 176 2.38% 6,448 155 2.40% 6,291 158 2.51%
Savings deposits 60,032 1,318 2.20% 61,575 1,327 2.16% 64,345 1,400 2.18%
Time deposits 151,590 8,363 5.52% 125,600 7,010 5.58% 109,862 6,109 5.56%
Other borrowings 2,454 140 5.70% 3,425 193 5.64% 3,564 216 6.06%
---------------------- ---------------------- ---------------------
Interest bearing liabilities 245,139 10,589 4.32% 218,514 9,090 4.16% 207,073 8,362 4.04%
----------- ----------- -----------
Demand deposits and other non
interest bearing
liabilities 37,846 33,745 30,369
Stockholders' equity 30,369 27,309 26,216
----------- ----------- ----------
Average Liabilities and
stockholders' Equity $313,354 $279,568 $263,658
=========== =========== ==========
Net interest income/spread $12,747 3.64% $12,036 3.95% $11,039 3.87%
===================== ===================== =====================
Net interest earning assets $47,957 $41,972 $38,347
=========== =========== ==========
Net yield on interest earning
assets 4.35% 4.62% 4.50%
========== ========== ==========
Ratio of average
interest-earning
assets to average interest-
bearing liabilities 1.20 1.19 1.19
=========== =========== ==========
</TABLE>
(1) For the purpose of these computations, nonaccrual loans are included in the
daily average loan amounts outstanding.
(2) Interest earned on loans includes loan fees (which are not material in
amount) and interest income which has been received from borrowers whose
loans were removed from nonaccrual status during the period indicated.
(3) Taxable-equivalent adjustments were made using a 34% corporate tax rate for
all years presented in calculating interest income and yields.
(4) 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,
--------------------------------------------- ---------------------------------------------
1998 VS. 1997 1997 vs. 1996
--------------------------------------------- ---------------------------------------------
INCREASE/(DECREASE) Increase/(Decrease)
DUE TO
---------------------------------- TOTAL --------------------------------- Due to
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) $2,511 ($437) ($61) $2,013 $2,758 ($14) ($2) $2,742
Loans exempt from federal
income taxes(2) (10) 4 0 (6) (8) (3) 0 (11)
Taxable investment securities (250) (3) 1 (252) (74) 12 1 (61)
Mortgage-related securities 301 (40) (8) 253 (928) 48 (19) (899)
Investment securities exempt
from federal income taxes(2) 306 (2) (37) 267 (112) 29 (25) (108)
Other securities (53) (13) 1 (65) 49 12 1 62
--------------------------------------------- ---------------------------------------------
Total interest-earning assets $2,805 ($491) ($104) 2,210 $1,685 $84 ($44) 1,725
==================================----------- =================================------------
Interest-Bearing Liabilities:
NOW deposits $42 $132 $13 $187 ($32) ($45) $3 ($74)
Money market deposits 23 (2) 0 21 4 (7) 0 (3)
Savings deposits (33) 25 (1) (9) (61) (13) 1 (73)
Time deposits 1,451 (81) (17) 1,353 875 23 3 901
Other borrowings (54) 2 (1) (53) (9) (15) 1 (23)
--------------------------------------------- ---------------------------------------------
Total interest-bearing liabilities $1,429 $76 ($6) $1,499 $777 ($57) $8 $728
==================================----------- =================================------------
Net change in net interest income $711 $997
=========== ============
</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.
PROVISION FOR LOAN LOSSES
During 1998, the Corporation made a provision of $250,000 to the
allowance for loan losses, as compared to a provision of $192,000 in 1997 and
$460,000 in 1996. The 1996 increase did not reflect deteriorating quality in the
loan portfolio but primarily reflected an increase in loan volume and
management's assessment of general economic conditions. Loan charge-offs for
1998 increased by $10,000, over 1997 to $48,000. This compares to charge-offs of
$82,000 in 1996. 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 $674,000 in 1998 and $101,000 in 1997.
The composition of non-interest income is shown in the following table (in
thousands).
<TABLE>
<CAPTION>
For the Year Ended December 31,
1998 1997 1996
----------------------------------------------------
<S> <C> <C> <C>
Service charges on deposit accounts $743 $746 $725
Service charges on loans 255 141 172
Net gain on securities sales 217 78 70
Other 1,115 691 588
====================================================
Total noninterest income $2,330 $1,656 $1,555
====================================================
</TABLE>
10
<PAGE> 11
Service charge income on deposit accounts decreased $3,000 in 1998 and
increased $21,000 from 1996 to 1997. The decrease in the charges on eligible
accounts caused the change in 1998 income, while the 1997 increase can be
attributed to raising of fees assessed on deposit accounts.
Service charges on loans increased $114,000 from $141,000 in 1997 to
$255,000 in 1998. The 1998 increase can be attributed to the high volume of loan
refinancing and the sizable increase in new loans generated.
The Corporation recorded a net gain of $217,000 on the sale of $26.8
million of securities in 1998, $78,000 on the sale of $12.3 million of
securities in 1997 and $70,000 on the sale of $15.8 million of securities in
1996. The proceeds from the sale of the investments were used to purchase short
term variable rate securities and to meet existing loan demand.
Other non-interest income increased $424,000 in 1998 and increased
$103,000 in 1997. Two items were primarily responsible for the 1998 increase.
The first was a $124,000 gain on the sale of $9.7 million of residential
mortgage loans. The proceeds from the sale of these loans were used to fund new
commercial loans and to meet the liquidity needs of the banks. The other
component of increased fee income is the charge assessed non-customers for the
use of the Corporation's automated teller machines. The Corporation initiated a
surcharge in late 1997 that charged non-customers $1.00 per ATM transaction.
This new source of income generated $309,000 of additional income in 1998 over
1997. The Corporation anticipates this income may decline in the future as
consumers adjust their ATM use habits and as the Corporation shares these
revenues with merchants that allow the banks to place machines in their
businesses.
NON-INTEREST EXPENSE
Non-interest expense increased $912,000 (9.5%) for the year ended
December 31, 1998, and decreased $401,000 (4.0%) for the year ended December 31,
1997. The major components of non-interest expense are shown in the following
table (in thousands).
<TABLE>
<CAPTION>
For the Year Ended December 31,
1998 1997 1996
----------------------------------------------------
<S> <C> <C> <C>
Salaries and employee benefits $6,099 $5,453 $5,223
Premises and equipment 1,580 1,412 1,340
Data processing fees 623 612 561
SAIF Assessment 0 0 604
Federal deposit insurance premiums 95 75 159
Other 2,135 2,068 2,134
====================================================
Total noninterest expense $10,532 $9,620 $10,021
====================================================
</TABLE>
Salaries and employee benefits increased $646,000 in 1998, reflecting
additional staff hires, higher benefit costs, changes in personnel and normal
pay raises. The 1998 increase in the cost of employee benefits, particularly
medical insurance amounted to $75,000.
Premises and equipment expense increased $168,000 in 1998. The increase
was due to the first full year operation of the corporate headquarters completed
in May 1997 and the construction of the Franklin State Bank branch office that
was completed in October 1998. The $72,000 increase in 1997 was the result of
the construction of the corporate headquarters and increase in regular occupancy
expenses.
Data processing fees increased $11,000 in 1998 and $51,000 in 1997. The
increases were 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. The 1998 insurance premium increased $22,000, due to the higher
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.
Other expenses increased $67,000 in 1998. These increases are the
result of changes in operating expenses such as consulting fees, examination
costs, insurance costs, robberies and check losses. In 1997 other expenses
decreased $66,000. 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.
11
<PAGE> 12
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 in 1998, $1.4 million in 1997 and $730,000 in 1996. Although the
1998 tax expense increased $29,000, the effective tax rate declined from 37.4%
in 1997 to 35.2% in 1998. This was achieved by increasing the balance of
tax-exempt securities. The increase in 1997 income taxes is a result of higher
taxable income.
NET INCOME
For the years ended December 31, 1998, 1997 and 1996, the Corporation
posted net income of $2.706 million, $2.409 million and $1.310 million,
respectively.
LOANS RECEIVABLE
Net loans receivable increased $24.6 million, or 10.8%, from $227.2
million at December 31, 1997, to $251.8 million at December 31, 1998. 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,
1998 1997 1996 1995 1994
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
First Mortgage:
Conventional single-family residential $43,912 $58,821 $58,358 $57,629 $55,478
Commercial and multifamily residential 112,015 78,365 61,707 44,594 42,046
Construction and land 15,853 18,191 12,872 12,619 8,254
--------------------------------------------------------------------------------------
171,780 155,377 132,937 114,842 105,778
Commercial business loans 64,094 56,846 45,036 36,605 35,118
Consumer and installment loans 13,578 12,220 10,984 10,810 7,377
Leases 2,599 2,311 599 0 0
Home equity loans 1,346 1,496 1,367 1,695 1,577
Other 763 1,081 883 1,326 1,644
--------------------------------------------------------------------------------------
82,380 73,954 58,869 50,436 45,716
Less:
Deferred loan fees 43 60 76 95 105
Allowance for loan losses 2,302 2,093 1,939 1,533 1,464
======================================================================================
$251,815 $227,178 $189,791 $163,650 $149,925
======================================================================================
</TABLE>
The following table presents information as of December 31, 1998
regarding first mortgage and commercial business loan maturities and contractual
principal repayments 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 WITHIN AFTER
ONE YEAR FIVE YEARS FIVE YEARS TOTAL
----------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMERCIAL BUSINESS LOANS $34,829 $29,042 $ 223 $ 64,094
FIRST MORTGAGE LOANS 56,281 81,478 34,021 171,780
----------------------------------------------------------------------
$91,110 $110,520 $34,244 $235,874
======================================================================
LOANS MATURING AFTER ONE YEAR WITH:
FIXED INTEREST RATES $103,506 $11,337
VARIABLE INTEREST RATES 7,013 22,907
----------------------------------
$110,519 $34,244
==================================
</TABLE>
12
<PAGE> 13
ALLOWANCE FOR LOAN LOSSES
The Corporation maintains an allowance for loan losses to absorb
estimated 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 estimated
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 $2.093 million at December 31, 1997, to $2.302
million at December 31, 1998. This increase was 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
economic conditions. The ratio of the allowance for loan losses to total loans
was 0.91% for 1998 and 0.91% in 1997. 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.
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,
1998 1997 1996 1995 1994
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $2,093 $1,939 $1,533 $1,464 $1,356
Charge-offs:
Conventional single-family mortgage
residential 0 0 70 20 0
Commercial business loans 21 4 5 27 6
Consumer and installment loans 27 34 8 16 6
--------------------------------------------------------------------------------------
Total charge-offs 48 38 83 63 12
Recoveries (7) 0 (29) 0 (77)
--------------------------------------------------------------------------------------
Net charge-offs (recoveries) 41 38 54 63 (65)
Provisions charged to operations 250 192 460 132 43
======================================================================================
Balance at end of year $2,302 $2,093 $1,939 $1,533 $1,464
======================================================================================
Ratios:
Net charge-offs (recoveries) to
average loans outstanding 0.02% 0.02% 0.03% 0.04% (0.05)%
Net charge-offs (recoveries) to total
allowance 1.78% 1.81% 2.78% 4.11% (4.44)%
Allowance to year end gross loans
outstanding 0.91% 0.91% 1.01% 0.93% 0.97%
</TABLE>
13
<PAGE> 14
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 1998,
$24,000 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 1998 the Corporation recorded
$68,000 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,
1998 1997 1996 1995 1994
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $ 1,021 $699 $938 $658 $772
Real estate in judgment 0 0 0 0 24
Other real estate owned 0 0 0 0 73
======================================================================================
Total non-performing assets $ 1,021 $699 $938 $658 $869
======================================================================================
Ratios:
Non-accrual loans to total loans 0.40% 0.30% 0.49% 0.40% 0.51%
Allowance to non-accrual loans 225.47% 299.42% 206.72% 232.98% 189.64%
Non-performing assets to total assets 0.31% 0.24% 0.35% 0.25% 0.35%
</TABLE>
INVESTMENT AND MORTGAGE RELATED SECURITIES
Investment securities at December 31, 1998, are made up of U.S.
Treasury and agency securities of $1.517 million, government agency
mortgage-backed securities of $20.659 million, SBA certificates of $628,000,
state and political subdivision certificates of $10.517 million, collateralized
mortgage obligations of $2.191 million and mutual funds of $3.059 million. Total
investment securities equaled $38.571 million. This compares to $40.818 million
on December 31, 1997.
Management determines the appropriate classification of securities
(including mortgage-related securities) at the time of purchase.
Held-to-maturity securities are stated at amortized cost where as available for
sale securities are stated at fair value with changes in fair value reflected as
a component of net income, net of tax . See notes one and two to Consolidated
Financial Statements for further details.
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.
The amortized cost of debt securities 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 estimated fair value
of investment securities available-for-sale at the dates indicated (in
thousands):
<TABLE>
<CAPTION>
At December 31,
1998 1997 1996
---------------------------------------------------
<S> <C> <C> <C>
Mutual funds $3,059 $3,104 $3,098
U.S. Treasury and other U.S.
government securities 1,517 7,801 11,321
Small Business Administration
certificates 628 930 1,080
State and political subdivision securities 10,517 814 0
Collateralized mortgage obligations 2,191 1,488 2,943
Government agency mortgage-backed
securities 20,659 26,681 24,211
===================================================
$38,571 $40,818 $42,653
===================================================
</TABLE>
14
<PAGE> 15
The maturity distribution (based upon the average life), and weighted
average yield of the securities portfolio of the Corporation as of December 31,
1998 are summarized in the following table (dollars in thousands):
<TABLE>
<CAPTION>
WITHIN ONE YEAR ONE TO FIVE YEARS FIVE TO TEN YEARS OVER TEN YEARS
----------------------------------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
MUTUAL FUNDS $3,059 5.43% $ -- -- % $ -- -- % $ -- --%
U.S. TREASURY AND OTHER U.S.
GOVERNMENT SECURITIES -- -- 1,517 5.18 -- -- -- --
SMALL BUSINESS ADMINISTRATION
CERTIFICATES 628 8.20 -- -- -- -- -- --
STATE AND POLITICAL SUBDIVISION
CERTIFICATES -- -- 814 5.25 4,343 5.42 5,360 4.29
COLLATERALIZED MORTGAGE OBLIGATIONS 1,204 6.00 492 5.96 495 6.32 -- --
GOVERNMENT AGENCY MORTGAGE-BACKED
SECURITIES 846 6.59 12,539 6.41 5,598 5.97 1,676 6.77
----------------------------------------------------------------------------------------------
$5,737 6.02% $ 15,362 6.21% $ 10,436 5.76% $7,036 4.88%
==============================================================================================
</TABLE>
Weighted average yield is calculated by dividing income within each
maturity range by the outstanding amount of the related investment based on
carrying value.
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.
Total deposits increased $24.6 million to $289.2 million on December
31, 1998, from $264.7 million on December 31, 1997. This compares to a $31.7
million increase in 1997. 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,
1998 1997 1996
------------------------------------------------------------------------------------
AVERAGE AVERAGE RATE Average Average Rate Average Average Rate
AMOUNT Amount Amount
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Non-interest-bearing demand deposits $ 37,184 0.00% $ 32,749 0.00% $ 29,362 0.00%
NOW and money market deposits 31,063 2.47 27,914 2.01 29,302 2.17
Savings deposits 60,032 2.20 61,575 2.16 64,345 2.18
Time deposits 151,590 5.52 125,600 5.58 109,862 5.51
------------------------------------------------------------------------------------
Total $ 279,869 3.74% $ 247,838 3.59% $ 232,871 3.46%
====================================================================================
</TABLE>
Maturities of time deposits and certificate accounts with balances of
$100,000 or more, outstanding at December 31, 1998, are summarized as follows
(in thousands):
<TABLE>
<S> <C>
3 MONTHS OR LESS $22,702
OVER 3 THROUGH 6 MONTHS 4,917
OVER 6 THROUGH 12 MONTHS 4,445
OVER 12 MONTHS 1,202
==============
TOTAL $33,266
==============
</TABLE>
CAPITAL RESOURCES AND ADEQUACY
Stockholders' equity increased from $29.496 million at December 31,
1997 to $30.997 million at December 31, 1998. The $2.706 million increase from
net earnings retention was primarily offset by the net purchase of 21,311 shares
of treasury stock and the payment of $889,000 in cash dividends to shareholders.
15
<PAGE> 16
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, 1998, the Corporation had a core-capital to total assets ratio of 9.27%, and
Lincoln State Bank, Franklin State Bank and Lincoln Community Bank had
risk-based capital ratios of 9.27%, 10.42% and 12.10%, respectively. These
ratios are above the 1998 minimum requirements established by regulatory
agencies.
For a summary of the Banks' regulatory capital ratios at December 31,
1998, 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.
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,
1998 1997 1996
----------------------------------------------------
<S> <C> <C> <C>
Cash and cash equivalents at beginning of period $15,358 $22,272 $28,447
Operating Activities:
Net income 2,706 2,409 1,310
Adjustments to reconcile net income to net cash
provided by operating activities (143) 661 1,074
----------------------------------------------------
Net cash provided by operating activities 2,563 3,070 2,384
Net cash used by investing activities (24,389) (36,967) (10,511)
Net cash provided by financing activities 35,096 26,983 1,952
----------------------------------------------------
Increase (decrease) in cash equivalents 13,270 (6,914) (6,175)
----------------------------------------------------
Cash and cash equivalents at end of period $28,628 $15,358 $22,272
====================================================
</TABLE>
Net cash was provided by operating activities during the year ended
December 31, 1998, 1997 and 1996 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 $4.8 million, $1.9 million and $1.9
million for the years ended December 31, 1998, 1997 and 1996 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 $889,000, $703,000 and $691,000 for the years
ended December 31, 1998, 1997 and 1996, respectively. At December 31, 1998, the
parent company had a $2.0 million line of credit with an unaffiliated bank,
which had a $260,000 outstanding balance.
16
<PAGE> 17
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.
The following table shows the interest rate sensitivity gap for four
different time intervals as of December 31, 1998. 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 $24,785 $22,269 $76,929 $11,187 $135,170
ADJUSTABLE-RATE MORTGAGE LOANS 13,185 7,116 15,753 556 36,610
--------------------------------------------------------------------------
TOTAL MORTGAGE LOANS 37,970 29,385 92,682 11,743 171,780
COMMERCIAL BUSINESS LOANS 33,375 3,788 26,781 150 64,094
CONSUMER LOANS 6,054 1,435 5,686 523 13,698
LEASES 0 0 2,599 0 2,599
HOME EQUITY LOANS 1,346 0 0 0 1,346
TAX-EXEMPT LOANS 600 0 0 0 600
MORTGAGE-RELATED SECURITIES 13,729 386 6,414 2,321 22,850
FIXED RATE INVESTMENT SECURITIES AND OTHER 500 0 2,382 9,704 12,586
VARIABLE RATE INVESTMENT SECURITIES AND
OTHER 21,817 1,057 0 0 22,874
--------------------------------------------------------------------------
TOTAL INTEREST-EARNING ASSETS $115,391 $36,051 $136,544 $24,441 $312,427
==========================================================================
INTEREST-BEARING LIABILITIES:
DEPOSITS
TIME DEPOSITS $113,572 $33,869 $12,456 $6 $159,903
NOW ACCOUNTS 1,274 1,274 12,745 5,946 21,239
SAVINGS ACCOUNTS 3,463 3,463 34,631 15,999 57,556
MONEY MARKET ACCOUNTS 503 503 5,032 2,509 8,547
ADVANCE PAYMENTS FOR TAXES AND INSURANCE 0 52 0 0 52
BORROWINGS 13,260 0 0 0 13,260
--------------------------------------------------------------------------
TOTAL INTEREST-BEARING LIABILITIES $132,072 $39,161 $64,864 $24,460 $260,557
==========================================================================
INTEREST-EARNING ASSETS LESS
INTEREST-BEARING LIABILITIES ($16,681) ($3,110) $71,680 ($19) $51,870
==========================================================================
CUMULATIVE INTEREST RATE SENSITIVITY GAP ($16,681) ($19,791) $51,889 $51,870
============================================================
CUMULATIVE INTEREST RATE SENSITIVITY GAP AS
A PERCENTAGE OF TOTAL ASSETS (4.99%) (5.92%) 15.51% 15.51%
============================================================
</TABLE>
At December 31, 1998, the Corporation's cumulative ratio of
interest-rate sensitive assets to interest-rate sensitive liabilities was a
negative 4.99% for six months and a negative 5.92% for one year maturities.
Therefore the Corporation is negatively gapped and may benefit from falling
interest rates.
17
<PAGE> 18
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
The Year 2000 poses a potential risk to normal operations of both
Information Technology (IT) and non-IT systems. The Year 2000 problem is
pervasive and complex. The majority of computer operating systems and programs
currently in use have been developed utilizing six digit date fields (YYMMDD).
For example, December 31st, 1999, would be represented by "991231" in computer
code. The two digit field for the year (in example "99") is the basis for all
calculation formulas within most computer systems, particularly those processed
through mainframe computers.
Up until now, this two-digit field has sufficed, using a subtraction of
current date from some future date (up to 12-31-99). As the industry enters the
year 2000, the digit-field "00" will not permit accurate calculations based on
the current formulas. January 1, 2000 would be read as the year 000101. Many
computer systems will recognize this date as the year 1900 or other erroneous
dates. The potential impact is that data could cause system failures. This could
affect all forms of financial accounts, pensions, personnel benefits,
investments, legal commitments, record keeping, inventories, maintenance, and
file retention.
Systems that work independently of IT equipment have the same potential
for failure due to the prevalence of embedded computer chips. These "hidden"
chips have forced the Corporation to review all of it's environmental, security,
and communication systems.
YEAR 2000 PROJECT STATUS
The Corporation has taken the Year 2000 issue very seriously. The
Corporation sees the Year 2000 as an opportunity to help increase service,
functionality, and performance to its customers. Outdated systems, procedures,
and products are being replaced or renovated with those that will meet the
challenges of the new millennium.
A Year 2000 project team was assembled early in 1997 to assess the
scope of the project as it relates to all of the Corporation's banks and
subsidiaries. Once this assessment was completed, an aggressive project plan was
put into place that consists of renovating or replacing affected systems,
validation and testing of any changes, effective risk management and employee
and consumer awareness.
In developing it's Year 2000 Project Plan, the Corporation defined the
Year 2000 problem in 5 stages:
<TABLE>
<S> <C>
Awareness: The need to define the scope of the Year 2000 problem.
Assessment: Identify all systems and components which are affected.
Renovation: The problem should be "fixed" by the appropriate means.
Validation: Year 2000 compliance must be tested.
Implementation: Final confirmation of Year 2000 compliance.
</TABLE>
The Corporation began working on its Year 2000 project in the spring of
1997. The project plan was written, personnel recruited and timetables
established.
AWARENESS: Completed Summer-Fall 1997
The awareness phase consisted of analyzing the effects that the Year
2000 posed to the Corporation. It was during this phase that the project plan
was written, our company consultant was retained, the project time-lines
established and introductory information was sent to our employees.
ASSESSMENT: Completed Fall 1997 - Spring 1998
The assessment phase consisted of a complete inventory of all the
Corporation's facilities. This inventory was used to prioritize those systems
considered mission-critical and to assign project team members to determine
their Year 2000 compliance.
RENOVATION: 95% Completed
The renovation phase consisted of replacing or upgrading those systems
that had been found non-Year 2000 compliant. Based on the type of systems in
place, the renovation phase is projected to be completed by May 1, 1999.
18
<PAGE> 19
VALIDATION: 95% Completed
For those systems being renovated, they must be tested to ensure Year
2000 compliance. Each system is tested by individuals familiar with its
operation and all tests are documented for support purposes. Validation will be
completed along with renovation and implementation. No apparent problems
inherent to the Year 2000 have been observed in the completed testing. During
the first week of March 1999, the Corporation concluded its proxy testing and
validation of its outside service bureau.
IMPLEMENTATION: 90% Completed
The implementation phase consists of implementing those renovated and
validated systems. Based on the type of systems in place, the implementation
phase is estimated to be completed in the 2nd quarter of 1999.
CORPORATE CUSTOMERS
The Corporation and its subsidiary banks have prepared a corporate
contingency plan for addressing the Year 2000 problem and implementing the
necessary changes. One of the facets of this contingency plan is to ensure that
its customers are made aware of this problem and that they are involved at some
level in reviewing their company's ability to handle and effectively deal with
the year 2000. Each of the lending officers within the Corporation is aware of
the Year 2000 Problem and has or will be reviewing those businesses to which
funds have been borrowed to assure that they are also becoming Year 2000 ready.
The same review process is being used with all new applicants. The Corporation
is currently revisiting businesses to review their state of Year 2000 readiness
and efforts.
PUBLIC AWARENESS
The Corporation fully realizes the impact that the media has on public
perception regarding the Year 2000. A campaign of public awareness has been
implemented that consists of informational pieces directly mailed to customers
or available throughout the Corporation. These, in addition to lobby displays
are intended to assure customers of the Corporation's efforts. Employees of the
Corporation have been trained on answering questions and where to direct
customers for additional information. The Corporation's web site also contains
information regarding this topic.
THIRD PARTY VENDORS
A third party vendor is a supplier, processor, or governmental agency
that has material interfaces directly with the Corporation.
SIGNIFICANT VENDORS
The Corporation is working directly with all vendors with material
interfaces. It is the Corporation's goal that these interfaces be ready by April
1st, 1999. Currently, 90% of all interfaces have been tested and no apparent
problems have been discovered. Below are several key interfaces and their
project status:
Deposit and Loan Processing: Currently Completed
Loan Preparation: Currently Completed
Payroll: Target March - 1999
Credit Card Processing: Currently Completed
Asset Liability Management: Target March - 1999
OTHER THIRD PARTY VENDORS
Other third party vendors are suppliers that provide services or
products to the Corporation. All vendors have been queried as to their Year 2000
readiness. Approximately 95% of all vendors currently supply Year 2000 ready
products or services. The remaining 5% have indicated that their products or
services will be ready during the first half of 1999. To date, the Corporation
is not aware of any vendor with a Year 2000 issue that would significantly
impact the Corporation's operations, liquidity or capital resources. The
Corporation has tested for readiness wherever possible and feels comfortable
with the results. Should a vendor be unable to supply a Year 2000 ready product
or services, the Corporation will follow the guidelines set forth in it's Year
2000 contingency plan.
COSTS
Managing the Year 2000 issue will result in direct and indirect costs
to the Corporation. Based on the program to date the Corporation has incurred
$12,000 in fees to an external consultant. In addition, over the past months
nearly all-existing hardware has been replaced and financed out of regular
operating sources. These items of equipment would normally have been replaced
irrespective of the Year 2000 issue. Internal staff costs incurred due to the
project have amounted to approximately $20,000 to $30,000.
19
<PAGE> 20
The Corporation anticipates that it will incur expenses, both internal
and external for 1999 in the range of $30,000 to $50,000. Most of these costs
will be incurred due to staff time being allocated to the project and for
contingency planning preparation. The Corporation intends to fund these costs
out of normal operating sources.
The estimated costs of, and timetable for, becoming Year 2000 compliant
constitute "forward looking statements" as defined in the Private Securities
Litigation Reform Act of 1995. Investors are cautioned that such estimates are
based on numerous assumptions by management, including assumptions regarding the
continued availability of certain resources, the accuracy of representations
made by third parties concerning their compliance with Year 2000 issues, and
other factors. The estimated costs of Year 2000 compliance also do not give
effect to any future corporate acquisitions made by the Corporation or its
subsidiaries.
RISK OF NON-COMPLIANCE AND CONTINGENCY PLANS
Management of the Corporation believes it has an effective program in
place to resolve the Year 2000 issue in a timely manner. The major applications
which pose the greatest Year 2000 risk if the implementation of the Year 2000
Compliance Program is not successful are the Corporation's data processing
system (which processes various documents to allow for accurate record keeping
of transactional data), teller system and transaction interfaces (which provide
customer access to accounts), loan system (which monitors and transacts loan
payments by customers), and internal network system (which supports the computer
components throughout the Corporation). Most of these systems are supported by
external vendors. Failure by any of these systems could have a negative impact
on the Corporation's ability to process its customers' transactions.
Although the Corporation intends to complete all Year 2000 activities
in a timely fashion, and although the Corporation has initiated Year 2000
Communications with significant customers, vendors and other important parties,
and is monitoring the progress of such communications, such third parties
nonetheless represent a risk that cannot be assessed with precision nor
absolutely controlled despite the Corporation's best efforts. For that reason,
the Corporation is modifying its existing a business resumption contingency plan
to address alternatives in the event of some kind of a Year 2000 failure. A
completed contingency plan is targeted for May 1, 1999. Once finalized, the
contingency plan will be thoroughly tested throughout the second and third
quarters of 1999.
PENDING ACQUISITION
On March 9, 1999, the Corporation entered into a definitive agreement
to acquire Pyramid Bancorp., Inc. (PBI) through the exchange of nine shares of
the Corporation's stock for each outstanding common share of PBI. Upon closing,
PBI will be merged into the Corporation. The transaction is expected to close in
the second quarter of 1999, and will be accounted for as a pooling of interests.
At December 31, 1998, PBI had total assets and shareholder's equity of $106.9
million and $8.4 million, respectively.
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.
20
<PAGE> 21
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, 1998.
<TABLE>
<CAPTION>
ESTIMATED
1999 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 $12,981 422 3.36%
150 BASIS POINT RISE 12,886 327 2.61%
100 BASIS POINT RISE 12,772 213 1.70%
50 BASIS POINT RISE 12,660 101 0.81%
BASE SCENARIO 12,559 0 0.00%
50 BASIS POINT DECLINE 12,465 (94) (0.75%)
100 BASIS POINT DECLINE 12,352 (207) (1.65%)
150 BASIS POINT DECLINE 12,266 (293) (2.33%)
200 BASIS POINT DECLINE 12,143 (416) (3.31%)
</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.
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,
1998.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated statements of financial condition of the Corporation
and its subsidiaries as of December 31, 1998 and 1997 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, 1998, 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.
21
<PAGE> 22
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 25, 1999, 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 25, 1999, 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 25, 1999, 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 25, 1999, which ever comes first.
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, 1998 and 1997
Consolidated Statements of Income for the years ended
December 31, 1998, 1997, and 1996
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1998, 1997, and 1996
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996
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.
22
<PAGE> 23
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/ James F. Bomberg
-------------------------------------------
James F. Bomberg
President & Chief Executive Officer
Director
Date: March 27, 1999
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, 1999
------------------------------------
James F. Bomberg
/s/ James C. Mroczkowski Vice President & Chief Financial Officer March 27, 1999
------------------------------------
James C. Mroczkowski
DIRECTORS
/s/ Michael J. Murry Chairman of the Board of Directors March 27, 1999
------------------------------------
Michael J. Murry
/s/ James F. Bomberg Director March 27, 1999
------------------------------------
James F. Bomberg
/s/ Thomas F. Gapinski Director March 27, 1999
------------------------------------
Thomas F. Gapinski
/s/ Nicholas S. Logarakis Director March 27, 1999
------------------------------------
Nicholas S. Logarakis
/s/ Conrad C. Kaminski Director March 27, 1999
------------------------------------
Conrad C. Kaminski
/s/ David A. Kaczynski Director March 27, 1999
------------------------------------
David A. Kaczynski
/s/ Keith C. Winters Director March 27, 1999
------------------------------------
Keith C. Winters
/s/ Duane P. Cherek Director March 27, 1999
------------------------------------
Duane P. Cherek
/s/ James A. Sass Director March 27, 1999
------------------------------------
James A. Sass
</TABLE>
23
<PAGE> 24
<TABLE>
<S> <C> <C>
/s/ John M. Krawczyk Director March 27, 1999
------------------------------------
John M. Krawczyk
/s/ Robert V. Donaj Director March 27, 1999
------------------------------------
Robert V. Donaj
/s/ Longin C. Prazynski Director March 27, 1999
------------------------------------
Longin C. Prazynski
/s/ Gervase Rose Director March 27, 1999
------------------------------------
Gervase Rose
/s/ J. Michael Bartels Director March 27, 1999
------------------------------------
J. Michael Bartels
/s/ Casimir S. Janiszewski Director March 27, 1999
------------------------------------
Casimir S. Janiszewski
</TABLE>
24
<PAGE> 25
Merchants and Manufacturers
Bancorporation, Inc. and Subsidiaries
Consolidated Financial Statements
Years ended December 31, 1998 and 1997
CONTENTS
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
<PAGE> 26
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 (the
Corporation) as of December 31, 1998 and 1997, and the related consolidated
statements of income, stockholders' equity and cash flows for each of the three
years in the period ended December 31, 1998. 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, 1998 and
1997, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles.
/s/ Ernst & Young LLP
- ----------------------
Ernst & Young LLP
February 26, 1999
Milwaukee, Wisconsin
1
<PAGE> 27
Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries
Consolidated Statements of Financial Condition
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
------------------------------------
(Dollars In Thousands)
ASSETS
<S> <C> <C>
Cash and due from banks $ 9,946 $ 10,694
Interest-bearing deposits at other banks 10,095 821
Federal funds sold 8,587 3,843
------------------------------------
Cash and cash equivalents 28,628 15,358
Securities available-for-sale at fair value:
Investment securities 15,721 12,649
Mortgage-related securities 22,850 28,169
Loans receivable 251,815 227,178
Accrued interest receivable 1,674 1,553
Federal Home Loan Bank stock 1,057 1,050
Premises and equipment 10,130 8,891
Other assets 2,628 1,830
------------------------------------
Total assets $334,503 $296,678
====================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $289,230 $264,669
Borrowings 13,260 1,500
Accrued interest payable 421 332
Advance payments by borrowers for taxes and insurance 52 179
Other liabilities 543 502
------------------------------------
Total liabilities 303,506 267,182
Stockholders' equity:
Common stock $1.00 par value; 3,000,000 shares authorized;
shares issued: 1,507,788--1998; 1,491,241--1997; shares
outstanding: 1,490,331--1998; 1,490,812--1997 1,508 1,491
Additional paid-in capital 10,820 10,421
Net unrealized gain (loss) on securities available-for-sale (88) 19
Retained earnings 19,391 17,574
Treasury stock, at cost (17,457 shares--1998; 429 shares--1997) (634) (9)
------------------------------------
Total stockholders' equity 30,997 29,496
------------------------------------
Total liabilities and stockholders' equity $334,503 $296,678
====================================
</TABLE>
See accompanying notes.
2
<PAGE> 28
Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries
Consolidated Statements of Income
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
------------------------------------------------------
(In Thousands, Except Per Share Amounts)
<S> <C> <C> <C>
Interest income:
Loans, including fees $20,032 $18,023 $15,288
Investment securities:
Taxable 715 967 1,028
Exempt from federal income taxes 188 12 83
Mortgage-related securities 1,761 1,508 2,407
Other 519 584 522
------------------------------------------------------
Total interest income 23,215 21,094 19,328
Interest expense:
Deposits 10,449 8,896 8,146
Borrowings 140 194 216
------------------------------------------------------
Total interest expense 10,589 9,090 8,362
Net interest income 12,626 12,004 10,966
Provision for loan losses 250 192 460
------------------------------------------------------
Net interest income after provision for
loan losses 12,376 11,812 10,506
Noninterest income:
Service charges on deposits 743 746 725
Service charges on loans 255 141 172
Net gain on securities sales 217 78 70
Other 1,115 691 588
------------------------------------------------------
2,330 1,656 1,555
Noninterest expenses:
Salaries and employee benefits 6,099 5,453 5,223
Premises and equipment 1,580 1,412 1,340
Data processing fees 623 612 561
SAIF special assessment - - 604
Federal deposit insurance premiums 95 75 159
Other 2,135 2,068 2,134
------------------------------------------------------
10,532 9,620 10,021
------------------------------------------------------
Income before income taxes 4,174 3,848 2,040
Income taxes 1,468 1,439 730
------------------------------------------------------
Net income $ 2,706 $ 2,409 $ 1,310
======================================================
Basic earnings per share $ 1.81 $ 1.67 $ .91
======================================================
Diluted earnings per share $ 1.78 $ 1.65 $ .90
======================================================
Dividends per share $ .59 $ .48 $ .48
======================================================
</TABLE>
See accompanying notes.
3
<PAGE> 29
Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Common Stock Unrealized
And Gain (Loss)
Additional on Securities
Paid-in Available- Retained Treasury
Capital for-Sale Earnings Stock Total
----------------------------------------------------------
(In Thousands, Except Per Share Amounts)
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1996 $11,657 $(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 1,288
Sale of 16,988 shares of treasury stock - - - 186 186
Purchase of 87,316 shares of treasury stock - - - (946) (946)
Cash dividends declared - $.48 per share - - (691) - (691)
----------------------------------------------------------
Balance at December 31, 1996 11,657 (203) 15,868 (942) 26,380
Comprehensive income:
Net income - - 2,409 - 2,409
Other comprehensive income -
Change in unrealized loss on securities
available-for-sale, net of deferred income
taxes of $118 - 222 - - 222
------------
Total comprehensive income 2,631
Sale of 8,595 shares of common stock in connection
with dividend reinvestment program 123 - - - 123
Sale of 110,986 shares of treasury stock 72 - - 1,184 1,256
Purchase of 22,273 shares of treasury stock - - - (251) (251)
Cash dividends declared--$.48 per share - - (703) - (703)
Exercise of stock options 60 - - - 60
----------------------------------------------------------
Balance at December 31, 1997 11,912 19 17,574 (9) 29,496
Comprehensive income:
Net income - - 2,706 - 2,706
Other comprehensive income -
Change in unrealized loss on securities
available-for-sale, net of deferred income
taxes of $68 - (107) - - (107)
------------
Total comprehensive income 2,599
Issuance of new shares 349 - - (12) 337
Fractional shares issued due to stock split and stock
dividend (10) - - - (10)
Sale of 4,088 shares of common stock in connection
with dividend reinvestment program 132 - - - 132
Sale of 1,544 shares of treasury stock 6 - - 104 110
Purchase of 22,855 shares of treasury stock - - - (845) (845)
Cash dividends declared - $.59 per share - - (889) - (889)
Exercise of stock options (61) - - 128 67
----------------------------------------------------------
Balance at December 31, 1998 $12,328 $ (88) $19,391 $ (634) $30,997
==========================================================
</TABLE>
See accompanying notes.
4
<PAGE> 30
Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
----------------------------------------
(In Thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 2,706 $ 2,409 $ 1,310
Adjustments to reconcile net income to cash provided by
operating activities:
Provision for loan losses 250 192 460
Provision for depreciation 577 511 484
Net amortization of investment securities premiums
and discounts 92 112 287
Net realized gains on investment securities (217) (78) (70)
Decrease (increase) in accrued interest receivable (121) (83) 62
Increase (decrease) in accrued interest payable 89 (63) (180)
Other (813) 70 31
----------------------------------------
Net cash provided by operating activities 2,563 3,070 2,384
INVESTING ACTIVITIES
Purchases of securities available-for-sale (30,735) (20,733) (12,718)
Proceeds from sales of securities available-for-sale 26,779 12,308 15,848
Proceeds from redemption and maturities of securities
available-for-sale 6,153 10,566 14,054
Net increase in loans (24,763) (37,627) (26,700)
Purchases of premises and equipment (1,816) (1,602) (679)
Proceeds from sales of real estate - 53 100
Redemption (purchases) of Federal Home Loan Bank stock (7) 68 (416)
-----------------------------------------
Net cash used in investing activities (24,389) (36,967) (10,511)
</TABLE>
(continued)
5
<PAGE> 31
Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
-----------------------------------------
(In Thousands)
<S> <C> <C> <C>
FINANCING ACTIVITIES
Net increase (decrease) in deposits $24,561 $31,736 $ (150)
Net increase (decrease) in borrowings 11,760 (5,350) 3,850
Increase (decrease) in advance payments by borrowers for
taxes and insurance (127) 112 (297)
Payments of cash dividends to stockholders (889) (703) (691)
Purchase of treasury stock (845) (251) (946)
Proceeds from the sale of treasury stock 110 1,256 186
Proceeds from issuing additional common stock 394 60 -
Proceeds from dividend reinvestment plan 132 123 -
-----------------------------------------
Net cash provided by financing activities 35,096 26,983 1,952
-----------------------------------------
Increase (decrease) in cash and cash equivalents 13,270 (6,914) (6,175)
Cash and cash equivalents at beginning of year 15,358 22,272 28,447
-----------------------------------------
Cash and cash equivalents at end of year $28,628 $15,358 $22,272
========================================
Supplemental cash flow information and non-cash transactions:
Interest paid $10,566 $ 9,169 $ 8,521
Income taxes paid 1,483 1,232 759
</TABLE>
See accompanying notes.
6
<PAGE> 32
Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1998
(Dollars In Thousands, Except 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, 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> 33
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 debt securities 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> 34
Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
The Corporation had no impaired loans in 1998 or 1997.
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).
STOCK SPLITS
Share data and equity amounts have been adjusted to recognize a three-for-two
stock split on April 10, 1998, and a 10% stock dividend on October 15, 1998.
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 1,497,763, 1,442,723 and 1,439,560 for the years
ended December 31, 1998, 1997 and 1996, respectively. The number of shares used
in computing diluted earnings per share is 1,517,605, 1,459,117 and 1,455,555,
for the years ended December 31, 1998, 1997 and 1996, respectively.
9
<PAGE> 35
Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
ACCOUNTING CHANGES
Statement No. 131, "Disclosures About Segments of an Enterprise and Related
Information," requires public companies to report financial and descriptive
information about their operating segments using a "management approach."
Operating segments are defined as revenue-producing components of the enterprise
for which separate financial information is produced internally and are subject
to evaluation the chief operating decision maker in deciding how to allocate
resources to segments. Statement No. 131 is effective for 1998; however, the
Corporation has determined that its only operating and reportable segment is
community banking and therefore it is not required to present any further
information under Statement No. 131.
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, 1998:
Mutual funds $ 3,173 $ - $114 $ 3,059
U.S. treasury and other U.S. government
securities 1,521 8 12 1,517
Small Business Administration certificates 597 31 - 628
State and political subdivision certificates 10,580 33 96 10,517
Collateralized mortgage obligations 2,195 2 6 2,191
Government agency mortgage-backed securities 20,653 129 123 20,659
--------------------------------------------------------
$38,719 $203 $351 $38,571
========================================================
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
========================================================
</TABLE>
10
<PAGE> 36
Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. INVESTMENT AND MORTGAGE-BACKED SECURITIES (CONTINUED)
Securities carried at $1,100 at December 31, 1998 were pledged principally to
secure liabilities to the Federal Reserve Bank.
The amortized cost and market value of securities at December 31, 1998, by
contractual maturity, are shown below. Expected maturities may differ from
contractual maturities because borrowers may have the right to call or prepay
obligations.
<TABLE>
<CAPTION>
Amortized
Cost Fair Value
-----------------------------
<S> <C> <C>
Due in one year or less $ 492 $ 500
Due after one year through five years 2,005 2,012
Due after five years through ten years 9,122 9,067
Due after ten years 1,079 1,083
Mutual funds 3,173 3,059
Mortgage-related securities 22,848 22,850
=============================
$38,719 $38,571
=============================
</TABLE>
Proceeds from sales of securities available-for-sale during the years ended
December 31, 1998, 1997 and 1996, were $26,779, $12,308 and $15,848,
respectively. Gross gains of $217, $83 and $87 were recorded on those sales for
the years ended December 31, 1998, 1997 and 1996, respectively. Gross losses of
$0, $5 and $17 were also recorded in the years ended December 31, 1998, 1997 and
1996, respectively.
11
<PAGE> 37
Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. LOANS RECEIVABLE
Loans receivable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
------------------------------------
<S> <C> <C>
First mortgage:
Conventional single-family residential $ 43,912 $ 58,821
Commercial and multifamily residential 112,015 78,365
Construction 15,853 18,191
-------------------------------------
171,780 155,377
Commercial business loans 64,094 56,846
Consumer and installment loans 13,578 12,220
Leases 2,599 2,311
Home equity loans 1,346 1,496
Other 763 1,081
------------------------------------
82,380 73,954
Less:
Deferred loan fees 43 60
Allowance for loan losses 2,302 2,093
------------------------------------
$251,815 $227,178
====================================
</TABLE>
Transactions in the allowance for loan losses are summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
-----------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $2,093 $1,939 $1,533
Provisions charged to operations 250 192 460
Recoveries 7 - 29
Charge-offs (48) (38) (83)
-----------------------------------------
Balance at end of year $2,302 $2,093 $1,939
=========================================
</TABLE>
Total nonaccrual loans were $1,021 and $498 at December 31, 1998 and 1997,
respectively.
12
<PAGE> 38
Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. PREMISES AND EQUIPMENT
Premises and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
--------------------------------
<S> <C> <C>
Land $ 2,351 $ 2,353
Office buildings and improvements 9,085 7,858
Furniture and equipment 4,402 3,807
--------------------------------
15,838 14,018
Less accumulated depreciation (5,708) (5,127)
--------------------------------
$10,130 $ 8,891
================================
</TABLE>
5. DEPOSITS
Deposits consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
--------------------------------
Negotiable Order of Withdrawal accounts:
<S> <C> <C>
Noninterest-bearing $ 41,985 $ 39,405
Interest-bearing 21,239 20,137
Savings deposits 57,556 58,177
Money market investment accounts 8,547 8,425
Time deposits and certificate accounts 159,903 138,525
--------------------------------
$289,230 $264,669
================================
</TABLE>
The scheduled maturities of time deposits and certificate accounts at December
31, 1998 are as follows:
<TABLE>
<CAPTION>
Maturities during the year ending December 31:
-----------------------------------------------------------
<S> <C>
1999 $147,451
2000 6,187
2001 2,881
2002 1,541
2003 1,837
Thereafter 6
----------------
$159,903
================
</TABLE>
At December 31, 1998 and 1997, time deposits and certificate accounts with
balances greater than $100 amounted to $33,266 and $28,527, respectively.
13
<PAGE> 39
Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. BORROWINGS
At December 31, 1998 and 1997, the Banks have overnight federal funds purchased
of $9,500 and $1,500, respectively, with weighted-average interest of 5.40% and
6.00%, respectively.
Lincoln also had a short-term advance of $3,500 from the Federal Home Loan Bank
at December 31, 1998, which bears interest at 5.13%. Lincoln 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, 1998 and 1997, the Corporation had $260 and $0 outstanding,
respectively, on a 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
(7.75% at December 31, 1998), and is collateralized by 100% of the capital stock
of Franklin State Bank.
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, 1998 and 1997, that
the Banks meet all capital adequacy requirements to which they are subject.
14
<PAGE> 40
Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. STOCKHOLDERS' EQUITY (CONTINUED)
As of December 31, 1998, the most recent notification from the Federal Deposit
Insurance Corporation categorized all the Banks as well capitalized under the
regulatory framework for prompt corrective action. As of December 31, 1997,
Lincoln Community Bank and Franklin State Bank were categorized as well
capitalized and Lincoln State Bank as adequately 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, 1998.
<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, 1998
Total Capital (to Risk-
Weighted Assets):
Lincoln State Bank $15,721 10.01% $12,570 8.00% $15,713 10.00%
Lincoln Community Bank 9,326 13.20 5,652 8.00 7,065 10.00
Franklin State Bank 4,866 11.27 3,454 8.00 4,317 10.00
Tier 1 Capital (to Risk-
Weighted Assets):
Lincoln State Bank 14,567 9.27 6,285 4.00 9,428 6.00
Lincoln Community Bank 8,546 12.10 2,826 4.00 4,239 6.00
Franklin State Bank 4,498 10.42 1,727 4.00 2,590 6.00
Tier 1 Capital (to Average
Assets):
Lincoln State Bank 14,567 8.41 6,925 4.00 8,656 5.00
Lincoln Community Bank 8,546 8.34 4,097 4.00 5,121 5.00
Franklin State Bank 4,498 8.96 2,008 4.00 2,510 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.
15
<PAGE> 41
Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. RESTRICTIONS ON SUBSIDIARY DIVIDENDS, LOANS OR ADVANCES (CONTINUED)
As of December 31, 1998, the subsidiary banks collectively had equity of
$27,635,649 of which $3,419,574 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, 1998, the maximum
amount available for transfer from any one of these Banks to the Corporation in
the form of loans approximates 8.6% of consolidated stockholders' equity.
9. EMPLOYEE BENEFIT PLANS
The Corporation has an Incentive Stock Option Plan under which 23,100 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
Exercise Average Weighted Average
Number Price Exercise Price Remaining
of Shares Per Share Per Share Contractual Life
-------------- --------------------- ------------------ -------------------
<S> <C> <C> <C> <C>
Total outstanding at
December 31, 1996 41,250 $9.86 - $15.15 $12.35 4.54 years
Expired (1,013) 9.86
Exercised (12,187) 9.86 - 12.12
--------------
Total outstanding at
December 31, 1997 28,050 12.18 - 15.15 13.13 4.83 years
Granted 49,775 30.91 - 31.14 30.98 10 years
Exercised (4,620) 12.18 - 15.15 12.68
--------------
Total outstanding at
December 31, 1998 73,205 12.12 - 31.14 25.29 7.20 years
==============
</TABLE>
At December 31, 1998, all outstanding options are exercisable.
16
<PAGE> 42
Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. EMPLOYEE BENEFIT PLANS (CONTINUED)
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 1998, 1997 and 1996, were $193, $180 and $164, respectively.
10. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $1,341 $1,157 $ 718
State 255 231 168
------------------------------------------------------
1,596 1,388 886
------------------------------------------------------
Deferred (benefit):
Federal (73) 36 (124)
State (55) 15 (32)
-------------------------------------------------------
(128) 51 (156)
-------------------------------------------------------
$1,468 $1,439 $ 730
======================================================
</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
1998 1997 1996
-----------------------------------------
<S> <C> <C> <C>
Income tax at statutory rate $1,419 $1,309 $694
Increase (reduction) resulting from:
Tax-exempt interest income (76) (21) (49)
State income taxes, net of federal tax benefit 132 163 89
Other (7) (12) (4)
-----------------------------------------
$1,468 $1,439 $730
=========================================
</TABLE>
17
<PAGE> 43
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
1998 1997
---------------------------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 692 $ 594
Unrealized loss on securities 59 -
Net operating loss carryforwards 546 509
Other assets 91 83
---------------------------
Total deferred tax assets 1,388 1,186
Valuation allowance (557) (509)
---------------------------
831 677
Deferred tax liabilities:
Unrealized gain on securities - 9
Depreciation 298 293
Other liabilities 35 39
---------------------------
Total deferred tax liabilities 333 341
---------------------------
Net deferred tax asset $ 498 $ 336
===========================
</TABLE>
At December 31, 1998, the Corporation and its subsidiaries, which file separate
state income tax returns, have state net operating loss carryforwards of
approximately $10,462 which expire at various dates through 2013. Due to the
unlikelihood of realizing these benefits, a valuation allowance of $546 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, 1998, retained earnings included
approximately $3,606 for which no provision for income taxes has been made.
Income taxes of approximately $1,414 would be imposed if Lincoln Community Bank
were to use these retained earnings for any other purpose other than to absorb
bad debt losses.
18
<PAGE> 44
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>
<CAPTION>
<S> <C>
Balance at December 31, 1996 $ 16,984
Loans originated 13,852
Repayments (8,021)
----------------
Balance at December 31, 1997 22,815
Loans originated 16,155
Repayments (16,249)
================
Balance at December 31, 1998 $ 22,721
================
</TABLE>
12. COMMITMENTS AND CONTINGENT LIABILITIES
Off-balance-sheet financial instruments whose contracts represent credit and/or
interest rate risk at December 31, 1998 and 1997, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
------------------------------------
<S> <C> <C>
Commitments to originate mortgage loans (expiring within three months):
Fixed rates $ 4,172 $ 3,008
Adjustable rates 3,541 1,018
Unused lines of credit:
Commercial business 29,957 24,384
Home equity (adjustable rate) 1,279 1,278
Credit cards (fixed rate) 3,148 2,599
Standby letters of credit 2,941 1,975
</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.
19
<PAGE> 45
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.
20
<PAGE> 46
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.
21
<PAGE> 47
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, 1998 or
1997.
The carrying amounts and fair values of the Corporation's financial instruments
consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
------------------------------- -------------------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
------------------------------- -------------------------------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 28,628 $ 28,628 $ 15,358 $ 15,358
Securities available-for-sale:
Investment securities 15,721 15,721 12,649 12,649
Mortgage-related securities 22,850 22,850 28,169 28,169
Loans receivable 254,160 254,964 229,331 229,779
Accrued interest receivable 1,674 1,674 1,553 1,553
Federal Home Loan Bank stock 1,057 1,057 1,050 1,050
Deposits 289,230 289,357 264,669 264,624
Accrued interest payable 421 421 332 332
Borrowings 13,260 13,260 1,500 1,500
</TABLE>
22
<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
<TABLE>
<CAPTION>
DECEMBER 31
STATEMENTS OF FINANCIAL CONDITION 1998 1997
------------------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 30 $ 212
Investment in subsidiaries 28,213 26,307
Premises and equipment 2,915 2,989
Other assets 1,086 959
------------------------------------
Total assets $32,244 $30,467
====================================
LIABILITIES
Other liabilities $ 987 $ 971
Borrowings 260 -
------------------------------------
Total liabilities 1,247 971
STOCKHOLDERS' EQUITY
Common stock 1,508 904
Additional paid-in capital 10,820 11,008
Unrealized gain (loss) on available for sale securities (88) 19
Retained earnings 19,391 17,574
Less treasury stock (634) (9)
------------------------------------
Total stockholders' equity 30,997 29,496
------------------------------------
Total liabilities and stockholders' equity $32,244 $30,467
====================================
</TABLE>
23
<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
1998 1997 1996
------------------------------------
<S> <C> <C> <C>
STATEMENTS OF INCOME
Income:
Interest on loans, including fees $ - $ - $ 26
Interest on investments - - 25
Dividends from subsidiaries 4,783 1,943 1,876
Other 1,227 280 244
------------------------------------
6,010 2,223 2,171
Expenses:
Salaries and employee benefits 1,511 1,268 847
Occupancy 476 391 281
Interest 12 16 3
Other 517 547 544
------------------------------------
2,516 2,222 1,675
------------------------------------
Income before income tax benefit and equity in undistributed
net income of subsidiaries 3,494 1 496
Income tax benefit 448 670 478
------------------------------------
Income before equity in undistributed net income of
subsidiaries 3,942 671 974
Equity in undistributed net income of subsidiaries (1,236) 1,738 336
------------------------------------
Net income $ 2,706 $2,409 $1,310
====================================
</TABLE>
24
<PAGE> 50
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
1998 1997 1996
-------------------------------------
<S> <C> <C> <C>
CONDENSED STATEMENTS OF CASH FLOWS
OPERATING ACTIVITIES
Net income $2,706 $ 2,409 $ 1,310
Adjustments to reconcile net income to net cash provided by
operating activities:
Equity in undistributed net income of subsidiaries 1,236 (1,738) (336)
Provision for depreciation 153 116 80
Other (110) (593) 266
--------------------------------------
Net cash provided by operating activities 3,985 194 1,320
INVESTING ACTIVITIES
Sales of mortgage-backed securities - - 693
Proceeds from repayments of mortgage-related securities - - 27
Proceeds from sales of furniture and equipment - 250 -
Purchases of furniture and equipment (79) (1,400) (226)
-------------------------------------
Net cash provided (used) by investing activities (79) (1,150) 494
FINANCING ACTIVITIES
Net increase in notes payable 260 - -
Capital contribution to subsidiary (3,250) - -
Payment of cash dividends (889) (703) (691)
Purchase of treasury stock (845) (251) (946)
Proceeds from the sale of treasury stock 110 1,256 186
Proceeds from issuing additional common stock 394 60 -
Proceeds from dividend reimbursement plan 132 123 -
-------------------------------------
Net cash provided (used) by financing activities (4,088) 485 (1,451)
-------------------------------------
Increase (decrease) in cash and cash equivalents (182) (471) 363
Cash and cash equivalents at beginning of year 212 683 320
-------------------------------------
Cash and cash equivalents at end of year $ 30 $ 212 $ 683
=====================================
</TABLE>
25
<PAGE> 51
Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
15. PENDING ACQUISITION
On March 9, 1999, the Corporation entered into a definitive agreement to acquire
Pyramid Bancorp., Inc. (PBI) by exchanging nine shares of the Corporation's
stock for each outstanding common share of PBI. Upon closing, PBI will be merged
into the Corporation. The transaction is expected to close in the second quarter
of 1999, and will be accounted for as a pooling of interests. At December 31,
1998, PBI had total assets and shareholder's equity of $106,909 and $8,441,
respectively.
26
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 9946
<INT-BEARING-DEPOSITS> 10095
<FED-FUNDS-SOLD> 8587
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 38571
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 254117
<ALLOWANCE> 2302
<TOTAL-ASSETS> 334503
<DEPOSITS> 289230
<SHORT-TERM> 13260
<LIABILITIES-OTHER> 1016
<LONG-TERM> 0
1508
0
<COMMON> 0
<OTHER-SE> 29489
<TOTAL-LIABILITIES-AND-EQUITY> 334503
<INTEREST-LOAN> 20032
<INTEREST-INVEST> 2664
<INTEREST-OTHER> 519
<INTEREST-TOTAL> 23215
<INTEREST-DEPOSIT> 10449
<INTEREST-EXPENSE> 10589
<INTEREST-INCOME-NET> 12626
<LOAN-LOSSES> 250
<SECURITIES-GAINS> 217
<EXPENSE-OTHER> 10532
<INCOME-PRETAX> 4174
<INCOME-PRE-EXTRAORDINARY> 4174
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2706
<EPS-PRIMARY> 1.81
<EPS-DILUTED> 1.78
<YIELD-ACTUAL> 7.96
<LOANS-NON> 1021
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2093
<CHARGE-OFFS> 48
<RECOVERIES> 7
<ALLOWANCE-CLOSE> 2302
<ALLOWANCE-DOMESTIC> 2302
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
