<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
----------------- ---------------------
Commission file Number 0-21292
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Wisconsin 39-1413328
- ---------------------------------- ----------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
14100 West National Avenue, PO Box 511160
New Berlin, Wisconsin 53151-1160
- --------------------------------------------------------------------------------
(Address of principal executive office)
(414) 827-6713
- --------------------------------------------------------------------------------
Registrant's telephone number, including area code:
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports) and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
----- -----
Applicable Only to Corporate Issuers
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Common Stock, par value $1.00 per share 1,491,438 Shares
- ------------------------------------------ ----------------------------------
Class Outstanding at August 1, 1999
<PAGE> 2
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE NUMBER
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Consolidated Statements of Financial Condition as of
June 30, 1999 and December 31, 1998 3
Unaudited Consolidated Statements of Income for the Three Months and
the Six Months ended June 30, 1999 and 1998 4
Unaudited Consolidated Statements of Cash Flows for the Six Months
ended June 30, 1999 and 1998 5
Notes to Unaudited Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 9
Item 3. Quantitative and Qualitative Disclosure About Market Risk 18
PART II. OTHER INFORMATION
Items 1-6 19
Signatures 22
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
------------ -------------
(In Thousands)
<S> <C> <C>
ASSETS
Cash and due from banks $ 13,626 $ 9,946
Interest-bearing deposits at other banks 651 10,095
Federal funds sold 7,058 8,587
--------- ---------
Cash and cash equivalents 21,335 28,628
Securities available-for-sale at fair value:
Investment securities 17,760 15,721
Mortgage-related securities 17,492 22,850
Loans receivable 270,033 251,815
Accrued interest receivable 1,729 1,674
Federal Home Loan Bank stock 995 1,057
Premises and equipment 10,228 10,130
Other assets 4,592 2,628
--------- ---------
Total assets $ 344,164 $ 334,503
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 298,012 $ 289,230
Borrowings 13,390 13,260
Accrued interest payable 323 421
Advance payments by borrowers for taxes and insurance 713 52
Other liabilities 726 543
--------- ---------
Total liabilities 313,164 303,506
Stockholders' equity
Common stock $1.00 par value;
Shares authorized: 6,000,000--1999; 3,000,000--1998;
Shares issued: 1,507,788;
Shares outstanding: 1,489,754--1999; 1,490,331--1998 1,508 1,508
Additional paid in capital 10,824 10,820
Net unrealized loss on securities available-for-sale (636) (88)
Retained earnings 19,978 19,391
Treasury stock, at cost (18,034 shares--1999;
17,457 shares--1998) (674) (634)
--------- ---------
Total stockholders' equity 31,000 30,997
--------- ---------
Total liabilities and stockholders' equity $ 344,164 $ 334,503
========= =========
</TABLE>
See notes to unaudited consolidated financial statements.
3
<PAGE> 4
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1999 1998 1999 1998
-------- -------- -------- --------
(In Thousands, except per share data)
<S> <C> <C> <C> <C>
Interest income:
Loans, including fees $ 5,355 $ 4,849 $10,507 $ 9,686
Investment securities:
Taxable 146 179 275 374
Exempt from federal income taxes 102 19 204 30
Mortgage-related securities 275 495 579 974
Other 52 151 114 260
------- ------- ------- -------
Total interest income 5,930 5,693 11,679 11,324
Interest expense:
Deposits 2,478 2,596 4,938 5,083
Borrowings 77 10 193 35
------- ------- ------- -------
Total interest expense 2,555 2,606 5,131 5,118
Net interest income 3,375 3,087 6,548 6,206
Provision for loan losses 50 75 100 150
------- ------- ------- -------
Net interest income after provision for
loan losses 3,325 3,012 6,448 6,056
Non-interest income:
Service charges on deposit accounts 188 188 359 375
Service charges on loans 59 52 101 74
Net gain (loss) on securities sales 0 49 9 49
Other 244 270 456 511
------- ------- ------- -------
491 559 925 1,009
Non-interest expenses:
Salaries and employee benefits 1,462 1,446 3,531 3,252
Premises and equipment 384 386 853 807
Data processing 160 161 317 318
Federal deposit insurance premiums 30 18 60 37
Other 494 535 1,075 1,097
------- ------- ------- -------
2,530 2,546 5,836 5,511
Income before income taxes 1,286 1,025 1,537 1,554
Income taxes 441 367 502 547
------- ------- ------- -------
Net income $ 845 $ 658 $ 1,035 $ 1,007
======= ======= ======= =======
Basic earnings per share $ 0.57 $ 0.44 $ 0.69 $ 0.67
======= ======= ======= =======
Diluted earnings per share $ 0.55 $ 0.43 $ 0.68 $ 0.67
======= ======= ======= =======
Dividends per share $ 0.15 $ 0.14 $ 0.30 $ 0.25
======= ======= ======= =======
</TABLE>
See notes to unaudited consolidated financial statements.
4
<PAGE> 5
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
1999 1998
--------- --------
(In Thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 1,036 $ 1,007
Adjustments to reconcile net income to cash provided by
Operating activities:
Provision for loan losses 100 150
Provision for depreciation 321 275
Net amortization of investments securities premiums and discounts 29 60
Net realized investment security gains (9) (49)
Increase in accrued interest receivable (55) (114)
Increase in cash surrender value, officer/director life insurance (1,281) (25)
Increase in accounts receivable 217 (746)
Increase in accrued interest payable (98) 19
Other (397) (276)
-------- --------
Net cash provided (used) by operating activities (137) 301
INVESTING ACTIVITIES
Purchases of securities available-for-sale (2,589) (13,692)
Proceeds from sales of securities available-for-sale 2,704 9,132
Proceeds from redemptions and maturities of securities available-for-sale 2,351 3,300
Net increase in loans (18,354) (4,625)
Purchase of premises and equipment (419) (371)
Redemption (purchase) of Federal Home Loan Bank stock 62 (22)
-------- --------
Net cash used by investing activities (16,245) (6,278)
FINANCING ACTIVITIES
Net increase in deposits 8,782 15,713
Net increase (decrease) in borrowings 130 (1,500)
Increase in advance payments by borrowers for taxes and insurance 661 735
Payments of cash dividends to stockholders (448) (372)
Purchase of treasury stock (107) (205)
Proceeds from sale of treasury stock 67 196
Proceeds from issuing additional common stock 4 290
-------- --------
Net cash provided by financing activities 9,089 14,857
Increase (decrease) in cash and cash equivalents (7,293) 8,880
Cash and cash equivalents at beginning of period 28,628 15,358
-------- --------
Cash and cash equivalents at end of period $ 21,335 $ 24,238
======== ========
Supplemental cash flow information:
Interest paid $ 5,163 $ 5,098
Income taxes paid 579 478
</TABLE>
See notes to unaudited consolidated financial statements
5
<PAGE> 6
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC.
Notes to Unaudited Consolidated Financial Statements
June 30, 1999
NOTE A -- BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include the
accounts of Merchants and Manufacturers Bancorporation, Inc. (the Corporation)
and its wholly owned subsidiaries, Lincoln State Bank, Franklin State Bank,
Lincoln Community Bank (collectively, the Banks), Achieve Mortgage Corporation
and M&M Services, Inc. Lincoln State Bank also includes the accounts of its
wholly owned subsidiary, M&M Lincoln Investment Corporation. Lincoln Community
Bank also includes the accounts of its wholly owned subsidiary, Lincoln
Investment Management Corporation. All significant intercompany balances and
transactions have been eliminated.
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the six-month period ended June 30, 1999
are not necessarily indicative of the results that may be expected for the year
ended December 31, 1999. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Corporation's Form
10-K for the year ended December 31, 1998.
This 10-Q contains various forward-looking statements concerning the Company's
prospects that are based on the current expectations and beliefs of management.
Forward-looking statements may also be made by the Corporation from time to time
in other reports and documents as well as oral presentations. When used in
written documents or oral statements, the words anticipate, believe, estimate,
expect, objective and similar expressions are intended to identify
forward-looking statements. The statements contained herein and such future
statements involve or may involve certain assumptions, risks and uncertainties,
many of which are beyond the Corporation's control, that could cause the
Corporation's actual results and performance to differ materially from what is
expected. In addition to the assumptions and other factors referenced
specifically in connection with such statements, the following factors could
impact the business and financial prospects of the Corporation: general economic
conditions; legislative and regulatory initiatives; monetary and fiscal policies
of the federal government; deposit flows; disintermidiation; the cost of funds;
general market rates of interest; interest rates or investment returns on
competing investments; demand for loan products; demand for financial services;
changes in accounting policies or guidelines; and changes in the quality or
composition of the Corporation's loan and investment portfolio.
6
<PAGE> 7
NOTE B -- EARNINGS PER SHARE
On August 27, 1998 the Board of Directors of the Corporation declared a 10%
common stock dividend that was distributed on October 15, 1998 to shareholders
of record on October 1, 1998. All prior periods share data have been adjusted to
reflect the 10% stock dividend.
Presented below are the calculations for basic and diluted earnings per share:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
Basic 1999 1998 1999 1998
------------------------------------------------ --------------------------------- ----------------------------------
<S> <C> <C> <C> <C>
Net income $ 844,950 $ 657,411 $ 1,034,630 $ 1,006,615
Weighted average shares outstanding 1,489,754 1,500,528 1,489,696 1,497,169
Basic earnings per share $ 0.57 $ 0.44 $ 0.69 $ 0.67
================================= ==================================
Diluted:
------------------------------------------------ --------------------------------- ----------------------------------
<S> <C> <C> <C> <C>
Net income $ 844,950 $ 657,411 $ 1,034,630 $ 1,006,615
Weighted average shares outstanding 1,489,754 1,500,528 1,489,696 1,479,169
Effect of dilutive stock options outstanding 33,263 16,569 32,056 15,866
--------------------------------- ----------------------------------
Diluted weighted average shares outstanding 1,523,016 1,517,097 1,521,751 1,513,035
Diluted earnings per share $ 0.55 $ 0.43 $ 0.68 $ 0.67
================================= ==================================
</TABLE>
NOTE C - COMPREHENSIVE INCOME
The following table presents the Corporation's comprehensive income.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
--------------------------------- ----------------------------------
<S> <C> <C> <C> <C>
Net income $ 844,950 $ 657,411 $ 1,034,630 $ 1,006,615
Other comprehensive income
Net change in unrealized securities gains
(losses), net (390,752) (76,459) (547,697) (33,587)
--------------------------------- ----------------------------------
Total comprehensive income $ 454,198 $ 580,952 $ 486,933 $ 973,028
================================= ==================================
</TABLE>
NOTE D -- LOANS RECEIVABLE
Loans are comprised of the following categories:
<TABLE>
<CAPTION>
June 30
1999 1998
---------------------------------------
(In Thousands)
<S> <C> <C>
Commercial business loans $ 68,190 $ 54,886
Commercial real estate 120,230 92,724
Real estate mortgages 69,454 73,073
Installments 13,329 12,240
Other 1,181 1,010
---------------------------------------
Total loans 272,384 233,933
Unearned income (37) (51)
Allowance for loan losses (2,314) (2,229)
---------------------------------------
Loans, net $ 270,033 $ 231,653
=======================================
</TABLE>
7
<PAGE> 8
The following table presents changes in the allowance for loan losses:
<TABLE>
<CAPTION>
Six Months Ended June 30
1999 1998
-------------------------------
(In Thousands)
<S> <C> <C>
Balance at January 1 $ 2,302 $ 2,093
Provisions 100 150
Charge-offs (95) (18)
Recoveries 7 4
===============================
Balance at June 30 $ 2,314 $ 2,229
===============================
</TABLE>
NOTE E -- STOCKHOLDERS' EQUITY
Under federal law and regulations, the Banks are required to meet certain
capital requirements, leverage ratios and risk-based capital requirements. The
leverage ratio, in general, is stockholders' equity as a percentage of total
assets. The risk-based capital ratio, in general, is stockholders' equity plus
general loan loss allowances (within certain limitations) as a percentage of
risk adjusted assets.
As of June 30, 1999, the most recent notification from the Federal Deposit
Insurance Corporation categorized Lincoln State Bank, Lincoln Community Bank and
Franklin State Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized, the Banks must
maintain minimum total risk-based, Tier I risk-based and Tier I leverage ratios
as set forth in the table. There are no conditions or events since that
notification that management believes have changed the banks' category.
<TABLE>
<CAPTION>
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
--------------------------- -------------------------- --------------------------
Amount Ratio Amount Ratio Amount Ratio
--------------------------- -------------------------- --------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
AS OF JUNE 30, 1999
Total Capital (to Risk-
Weighted Assets):
Lincoln State Bank $16,308 10.59% $12,314 >8.00% $15,393 >10.00%
Lincoln Community 9,477 11.73% 6,462 >8.00% 8,077 >10.00%
Franklin State Bank 4,974 10.74% 3,706 >8.00% 4,632 >10.00%
Tier 1 Capital (to Risk-
Weighted Assets):
Lincoln State Bank 15,190 9.87% 6,157 >4.00% 9,236 >6.00%
Lincoln Community 8,664 10.73% 3,231 >4.00% 4,846 >6.00%
Franklin State Bank 4,590 9.91% 1,853 >4.00% 2,779 >6.00%
Tier 1 Capital (to Average
Assets):
Lincoln State Bank 15,190 8.69% 6,992 >4.00% 8,740 >5.00%
Lincoln Community 8,664 8.90% 3,894 >4.00% 4,868 >5.00%
Franklin State Bank 4,590 8.02% 2,288 >4.00% 2,860 >5.00%
</TABLE>
8
<PAGE> 9
NOTE F -- 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 third quarter
of 1999, and will be accounted for as a pooling of interests. At June 30, 1999,
PBI had total assets and shareholder's equity of $108,936 and $8,934,
respectively.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Financial Condition
At June 30, 1999, the Corporation's consolidated total assets were $344.2
million as compared to $334.5 million at December 31, 1998. This increase was
due to a $18.2 million increase in loans, which was partially offset by a $11.0
million reduction in short term investments and a $3.3 million decline in
investment securities and mortgage-related securities. The increase in assets
was funded by a $8.8 million increase in total deposits.
Investment securities available-for-sale increased $2.0 million, or 13.0% from
$15.7 million at December 31, 1998 to $17.8 million at June 30, 1999. Purchases
of US government agency notes caused the increase.
Mortgage-related securities available-for-sale decreased $5.4 million, or 23.4%
from $22.9 million at December 31, 1998, to $17.5 million at June 30, 1999.
Purchases of mortgage-related securities were offset by sales, redemptions and
maturities of this type of security.
Net loans receivable increased $18.2 million, or 7.2%, from $251.8 million at
December 31, 1998 compared to $270.0 million at June 30, 1999. This increase was
primarily due to new commercial loan relationships. This movement corresponds to
the Corporation's strategic plan of emphasizing commercial business. Currently,
loans receivable consists mainly of commercial loans secured by business assets,
real estate, and guarantees as well as mortgages secured by residential
properties located in the Corporation's primary market area. At June 30, 1999
the Corporation has not designated any as loans held for sale.
Stockholders' equity at June 30, 1999 was $31.0 million unchanged from December
31, 1998. The change in the individual components of stockholders' equity
consisted of net income of $1.0 million, less the net purchase of treasury stock
of $36,000, payments of dividends to shareholders of $448,000 and the $548,000
net decrease in the market value of securities categorized as available for
sale. The Banks continue to exceed their regulatory capital requirements.
9
<PAGE> 10
Nonperforming Assets and Allowance for Losses
Generally a loan is classified as nonaccrual and the accrual of interest on such
loan is discontinued when the contractual payment of principal or interest has
become 90 days past due or management has serious doubts about further
collectibility of principal or interest. Generally, loans are restored to
accrual status when the obligation is brought current, has performed in
accordance with the contractual terms for a reasonable period of time and the
ultimate collectibility of the total contractual principal and interest is no
longer in doubt.
Nonperforming assets are summarized, for the dates indicated, as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------- --------------
(dollars in thousands)
<S> <C> <C>
Non-accrual loans:
Mortgage loans
One-to-four family $ 539 $ 505
Commercial real estate 505 7
------ ------
Total mortgage loans 1,044 512
Commercial business 553 391
Consumer and other 109 118
------ ------
Total non-accrual loans 1,706 1,021
Other real estate owned 25 0
------ ------
Total nonperforming assets $1,731 $1,021
====== ======
RATIOS:
Non-accrual loans to total loans 0.63% 0.40%
Nonperforming assets to total assets 0.50 0.31
Loan loss allowance to non-accrual loans 135.64 225.47
Loan loss allowance to total loans 0.85 0.91
</TABLE>
Nonperforming assets increased by $710,000 from $1.0 million at December 31,
1998 to $1.7 million at June 30, 1999, an increase of 69.5%. Management believes
that losses will be minimal on the remaining balances, due to the collateral
position in each situation.
10
<PAGE> 11
Results of Operations
Net interest income for the three months ended June 30, 1999 was $3.38 million,
an increase of 9.3% from the $3.09 million reported for the same period in 1998.
The increased volume of interest-earning assets as well as an improved net
interest margin accounted for the higher net interest income. The weighted
average yield on interest-earning assets decreased from 7.95% for the three
months ended June 30, 1998 to 7.61% for the same period in 1999. Competitive
pressures and lower market interest rates caused the weighted average yield on
interest earning assets to decline. The lower average cost of new deposits
generated caused the weighted average rate paid on deposits and borrowings to
decrease from 3.77% for the three months ended June 30, 1998 to 3.38% for the
three months ended June 30, 1999. Net interest income for the six months ended
June 30, 1999 was $6.55 million, an increase of 5.5% from the $6.21 million
reported for the same period in 1998. The increased volume of interest-earning
assets was the primary reason for the improvement in the year-to-date net
interest income.
The following table sets forth the weighted average yield earned on the
Corporation's consolidated loan and investment portfolios, the weighted average
interest paid on deposits and borrowings, the net spread between yield earned
and rates paid and the net interest margin during the six and three months ended
June 30, 1999 and 1998.
<TABLE>
<CAPTION>
During the During the
Three Months Ended Six Months
June 30, Ended June 30,
1999 1998 1999 1998
---------------------- -----------------------
<S> <C> <C> <C> <C>
Weighted average yield on
interest-earning assets 7.61% 7.95% 7.60% 7.99%
Weighted average rate paid on
deposit accounts and borrowings 3.38 3.77 3.45 3.76
---------------------- -------------------------
Net interest spread 4.23% 4.18% 4.15% 4.23%
====================== =========================
Net interest margin (net interest
income divided by average
earning assets) 4.33% 4.31% 4.26% 4.38%
====================== =========================
</TABLE>
The provision for loan losses for the three month period ended June 30, 1999 was
$50,000 compared to $75,000 for the three months ended June 30, 1998. For the
six months ended June 30, 1999, the provision for loan losses was $100,000
compared to $150,000 for than the same period in 1998. The Corporation uses a
risk-based assessment of its loan portfolio to determine the level of the loan
loss allowance. This procedure is based on internal reviews intended to
determine the adequacy of the loan loss allowance in view of presently known
factors. However, changes in economic conditions in the future financial
conditions of borrowers cannot be predicted and may result in increased future
provisions to the loan loss allowance.
11
<PAGE> 12
Non-interest income for the three months ended June 30, 1999 was $491,000
compared to $559,000 for the three months ended June 30, 1998, a decrease of
$68,000, or 12.2%. Non-interest income for the six months ended June 30, 1999
was $925,000 million compared to $1.0 million for the six months ended June 30,
1998, a decrease of $84,000, or 8.3%. The decrease for both periods is due to
fewer fees collected on ATM transactions and reduced gains on sales of
investment securities.
Non-interest expense for the three months ended June 30, 1999 was $2.53 million
compared to $2.55 million for the three months ended June 30, 1998, a decrease
of $16,000, or 0.1%. Non-interest expense for the six months ended June 30, 1999
was $5.84 million compared to $5.51 million for the six months ended June 30,
1998, an increase of $325,000, or 5.9%. Salaries and employee benefits increased
$16,000 or 1.1% from $1.45 million for the three-month period ended June 30,
1998 to $1.46 million for the 1999 three-month period. Salaries and employee
benefits increased $279,000 or 8.6% from $3.25 million for the six-month period
ended June 30, 1998 to $3.53 million for the six-month period ended June 30,
1999. Employee bonus payments, higher benefit costs and the hiring of new
commercial business developers accounted for this increase. Premises and
equipment expense decreased $2,000 from $386,000 for the three-month period
ended June 30, 1998 compared to $384,000 for the three-month period ended June
30, 1999. Premises and equipment expense increased $46,000 or 5.7% from $807,000
for the six-month period ended June 30, 1998 compared to $853,000 for the
six-month period ended June 30, 1999. The six-month increase in occupancy
expense can be attributed to maintenance and repairs made on the Corporation's
properties and the opening of a new branch of the Franklin State Bank. Federal
deposit insurance premiums increased $12,000 from $18,000 for the three-month
period ended June 30, 1998 to $30,000 and $23,000 for the six-month period ended
June 30, 1998 compared to 1999. The insurance premiums increased in 1999 due to
the higher level of deposits. Other expenses decreased $41,000 or 7.7% in the
second quarter and $22,000 or 0.1% for the six-month period ended June 30, 1999.
This can be attributed to decreases in operating expenses such as office
supplies, examination costs and human resource expenses.
Income before taxes for the three-month period ended June 30, 1999 was $1.29
million compared to $1.03 million for the three months ended June 30, 1998, an
increase of $261,000 or 23.1%. Income before taxes for the six-month period
ended June 30, 1999 was $1.54 million compared to $1.55 million for the six
months ended June 30, 1998, a decrease of $17,000 or 1.1%. The income tax
expense for the three months ended June 30, 1999 increased $74,000 over the 1998
second quarter tax expense. The effective tax rate for the three months ended
June 30, 1999 was 34.3% compared to 35.8% for the three months ended June 30,
1998. The income tax expense for the six months ended June 30, 1999 decreased
$45,000 over the same period in 1998. The effective tax rate for the six months
ended June 30, 1999 was 32.7% compared to 35.2% for the six months ended June
30, 1998. The decrease in the tax rate can be attributed to the purchase of
tax-exempt investment securities held by the Corporation and a reallocation of
expenses throughout the Corporation's subsidiaries. On an after tax basis, the
Corporation reported net income of $845,000 for the three month period ended
June 30, 1999 compared to $658,000 for the same period in 1998; and for the six
month period ended June 30, 1999, the Corporation reported net income of $1.04
million compared to $1.00 million for the same period in 1998.
12
<PAGE> 13
Liquidity and Capital Resources
Liquidity management involves the ability to meet the cash flow requirements of
customers who may be either depositors wanting to withdraw funds or borrowers
needing assurance that sufficient funds will be available to meet their credit
needs. The Corporation had liquid assets of $21.3 million and $28.6 million at
June 30, 1999 and December 31, 1998, respectively.
Management believes liquidity and capital levels are adequate at June 30, 1999.
For a discussion of regulatory requirements, see Note D to the Unaudited
Consolidated Financial Statements.
Asset/Liability Management
Financial institutions are subject to interest rate risk to the extent their
interest-bearing liabilities (primarily deposits) mature or reprice at different
times and on a different basis than their interest-earning assets (consisting
primarily of loans and securities). Interest rate sensitivity management seeks
to match maturities on assets and liabilities and avoid fluctuating net interest
margins while enhancing net interest income during periods of changing interest
rates. The difference between the amount of interest-earning assets maturing or
repricing within a specific time period and the amount of interest-bearing
liabilities maturing or repricing within the same time period is referred to as
an interest rate gap. A gap is considered positive when the amount of interest
rate sensitive assets exceeds the amount of interest rate sensitive liabilities.
A gap is considered negative when the amount of interest rate sensitive
liabilities exceeds the amount of interest rate sensitive assets. During periods
of rising interest rates, a negative gap tends to adversely affect net interest
income while a positive gap tends to result in an increase in net interest
income. During a period of falling interest rates, a negative gap tends to
result in an increase in net interest income while a positive gap tends to
adversely affect net interest income.
13
<PAGE> 14
The following table shows the interest rate sensitivity gap for four different
time intervals as of June 30, 1999. Certain assumptions regarding prepayment and
withdrawal rates are based upon the Corporation's historical experience, and
management believes such assumptions are reasonable.
<TABLE>
<CAPTION>
AMOUNTS MATURING OR REPRICING AS OF JUNE 30, 1999
-------------------------------------------------------------------------
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 $ 31,360 $ 14,722 $ 81,534 $14,887 $ 142,503
Adjustable-rate mortgage loans 18,831 5,331 20,502 2,062 46,726
-------------------------------------------------------------------------
Total mortgage loans 50,191 20,053 102,036 16,949 189,229
Commercial business loans 35,874 4,599 26,910 1,225 68,608
Consumer loans 4,258 1,649 6,514 908 13,329
Other loans 656 525 0 0 1,181
Mortgage-related securities 11,933 0 4,192 1,367 17,492
Fixed rate investment securities and other 488 806 2,731 10,128 14,153
Variable rate investment securities and
other 11,317 995 0 0 12,312
-------------------------------------------------------------------------
Total interest-earning assets $114,717 $ 28,627 $142,383 $30,577 $ 316,304
=========================================================================
Interest-bearing liabilities:
Deposits
Time deposits $112,980 $ 36,378 $ 13,773 $ 0 $ 163,131
NOW accounts 1,500 1,500 14,997 6,998 24,995
Savings accounts 3,580 3,580 35,798 16,706 59,664
Money market accounts 475 475 4,752 2,217 7,919
Advance payments for taxes and insurance 0 713 0 0 713
Borrowings 13,390 0 0 0 13,390
-------------------------------------------------------------------------
Total interest-bearing liabilities $131,925 $ 42,646 $ 69,320 $25,921 $ 269,812
=========================================================================
Interest-earning assets less
interest-bearing
Liabilities ($17,208) ($14,019) $ 73,063 $ 4,656 $ 46,492
=========================================================================
Cumulative interest rate sensitivity gap ($17,208) ($31,227) $ 41,836 $46,492
============================================================
Cumulative interest rate sensitivity gap as
a
Percentage of total assets (5.00%) (9.07%) 12.16% 13.51%
============================================================
</TABLE>
At June 30, 1999, the Corporation's cumulative interest-rate sensitive gap as a
percentage of total assets was a negative 5.00% for six months and a negative
9.07% for one-year maturities. Therefore, the Corporation is negatively gapped
and may benefit from falling interest rates.
Certain shortcomings are inherent in the method of analysis presented in the
above schedule. For example, although certain assets and liabilities may have
similar maturities or periods of repricing, they may react in different degrees
to changes in market interest rates. Also, the interest rates on certain types
of assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag behind changes in market
rates. Additionally, certain assets, such as adjustable rate mortgage loans,
have features that restrict changes in interest rates, on a short term basis
over the life of the asset. Further, in the event of a change in interest rates,
prepayment and early withdrawal levels would likely deviate significantly from
those assumed in calculating the schedule.
14
<PAGE> 15
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 its 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 its Year 2000 Project Plan, the Corporation defined the Year 2000
problem in 5 stages:
Awareness: The need to define the scope of the Year 2000 problem.
Assessment: Identify all systems and components which are affected.
Renovation: The problem should be "fixed" by the appropriate means.
Validation: Year 2000 compliance must be tested.
Implementation: Final confirmation of Year 2000 compliance.
The Corporation began working on its Year 2000 project in the spring of 1997.
The project plan was written, personnel recruited and timetables established.
Awareness: Completed Summer-Fall 1997
15
<PAGE> 16
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: 99% 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 was completed by June 1, 1999. Small miscellaneous updates, not
directly related to Year 2000, for systems are anticipated till the end of the
year.
Validation: 99% Completed
For those systems that had been renovated, they were tested to ensure Year 2000
compliance. Each system was tested by individuals familiar with its operation
and all tests were documented for support purposes. Validation was 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. As with the Renovation phase, the Corporation will
continue to monitor and test its systems for readiness till the end of the year.
Implementation: 99% Completed
The implementation phase consisted of implementing those renovated and validated
systems. Based on the type of systems in place, the implementation phase was
completed in the 2nd quarter of 1999. Monitoring of the systems will be ongoing
till the end of the year.
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 reviewed 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.
This second review is to be completed by September 1999.
16
<PAGE> 17
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. Additional brochures regarding consumer fraud
will be made available in the third quarter of 1999. Materials from the FDIC and
the State of Wisconsin regarding Year 2000 readiness are being included in the
Corporation's public awareness plan.
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 was the Corporation's goal that these interfaces be ready by June 1, 1999.
Currently, 99% 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: Currently Completed
Credit Card Processing: Currently Completed
Asset Liability Management: Currently Completed
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 99% of all vendors currently supply Year 2000 ready products or
services. The remaining one percent has indicated that their products or
services will be ready during the second 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 its 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
17
<PAGE> 18
issue. Internal staff costs incurred due to the project have amounted to
approximately $20,000 to $30,000.
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). External vendors support most of these
systems. Failure by any of these systems could have a negative impact on the
Corporation's ability to process its customers' transactions.
Although the Corporation has completed 99% of its Year 2000 activities, 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 business resumption contingency plan to address alternatives in the
event of some kind of a Year 2000 failure. The Corporation's contingency plan
was completed and tested by June 30, 1999. Random testing of the plan will
continue through the end of the year.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not Applicable
18
<PAGE> 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
As of June 30, 1999 there were no material pending legal
proceedings, other than ordinary routine litigation incidental
to the business of the Corporation, to which the Corporation or
any of its subsidiaries was a party or to which any of their
property was subject.
Item 2. Changes in Securities - NONE
Item 3 Defaults upon Senior Securities - NONE
Item 4 Submission of Matters to Vote of Security Holders
ANNUAL MEETING OF SHAREHOLDERS. On May 25, 1999, at the Annual
Meeting of the shareholders of the Corporation, the
Corporation's shareholders reelected Thomas Gapinski, J. Michael
Bartels, John Krawczyk, Gervase Rose, Robert Donaj and James
Sass as directors for three year terms expiring on the date of
the annual shareholders meeting to be held in 2001. The
shareholders also ratified the adoption of the resolution to
amend the Corporation's Articles of Incorporation to increase
the number of authorized shares of $1.00 par value of common
stock from 3,000,000 to 6,000,000 shares
SHAREHOLDER VOTE WITH RESPECT TO MATTERS ACTED UPON AT THE
ANNUAL MEETING
ELECTION OF DIRECTORS. Under Wisconsin law, the number of
persons corresponding to the number of director positions to be
filled at the Annual Meeting who received the highest number of
votes would be elected as directors. Thomas Gapinski, J. Michael
Bartels, John Krawczyk, Gervase Rose, Robert Donaj and James
Sass were standing for reelection. The vote with respect to the
reelection of each was as follows:
THOMAS GAPINSKI
1,489,750 Total votes were eligible to be cast
1,002,840 Votes were represented in person or by proxy at the
Annual Meeting
998,514 Votes were cast "FOR" the reelection of Mr. Gapinski
0 Votes were cast "AGAINST" the reelection of
Mr. Gapinski
4,326 Votes abstained or were broker non-votes
J. MICHAEL BARTELS
1,489,750 Total votes were eligible to be cast
1,002,840 Votes were represented in person or by proxy at the
Annual Meeting
999,126 Votes were cast "FOR" the reelection of Mr. Bartels
0 Votes were cast "AGAINST" the reelection of
Mr. Bartels
19
<PAGE> 20
JOHN KRAWCZYK
1,489,750 Total votes were eligible to be cast
1,002,840 Votes were represented in person or by proxy at the
Annual Meeting
998,458 Votes were cast "FOR" the reelection of Mr. Krawczyk
0 Votes were cast "AGAINST" the reelection of Mr. Krawczyk
4,382 Votes abstained or were broker non-votes
GERVASE ROSE
1,489,750 Total votes were eligible to be cast
1,002,840 Votes were represented in person or by proxy at the
Annual Meeting
999,126 Votes were cast "FOR" the reelection of Mr. Rose
0 Votes were cast "AGAINST" the reelection of Mr. Rose
3,714 Votes abstained or were broker non-votes
ROBERT DONAJ
1,489,750 Total votes were eligible to be cast
1,002,840 Votes were represented in person or by proxy at the
Annual Meeting
993,290 Votes were cast "FOR" the reelection of Mr. Donaj
0 Votes were cast "AGAINST" the reelection of Mr. Donaj
9,550 Votes abstained or were broker non-votes
JAMES SASS
1,489,750 Total votes were eligible to be cast
1,002,840 Votes were represented in person or by proxy at the
Annual Meeting
996,921 Votes were cast "FOR" the reelection of Mr. Sass
0 Votes were cast "AGAINST" the reelection of Mr. Sass
5,919 Votes abstained or were broker non-votes
20
<PAGE> 21
ADOPTION OF THE RESOLUTION TO AMEND THE CORPORATION'S ARTICLES
OF INCORPORATION TO INCREASE THE NUMBER OF AUTHORIZED SHARES OF
$1.00 PAR VALUE OF COMMON STOCK FROM 3,000,000 TO 6,000,000
SHARES. Under Wisconsin law, the resolution would be approved
if, at the Annual Meeting, a greater number of votes were cast
"FOR" the proposal than were cast "AGAINST" the proposal.
Abstentions and broker non-votes were not counted except for
purposes of establishing a quorum. The vote on the adoption of
the resolution to amend the Corporation's Articles of
Incorporation to increase the number of authorized shares of
$1.00 par value of common stock from 3,000,000 to 6,000,000
shares was as follows:
1,489,750 Total votes were eligible to be cast
1,002,840 Votes were represented in person or by proxy at the
Annual Meeting
984,775 Votes were cast "FOR" the adoption of the resolution
to amend the corporation's Articles of Incorporation to
increase the number of authorized shares of $1.00 par
value of common stock from 3,000,000 to 6,000,000 shares
12,803 Votes were cast "AGAINST" the adoption of the resolution
to amend the corporation's Articles of Incorporation
to increase the number of authorized shares of
$1.00 par value of common stock from 3,000,000 to
6,000,000 shares
5,262 Votes abstained or were broker non-votes
Item 5 Other Information - NONE
Item 6 Exhibits and Reports on Form 8-K
The Corporation did not file any reports on Form 8-K during the
three months ended June 30, 1999. Required exhibits are
incorporated by reference to previously filed Securities Act
registration statements.
21
<PAGE> 22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed by on its behalf by the
undersigned thereunto duly authorized.
MERCHANTS AND MANUFACTURERS
BANCORPORATION, INC.
------------------------------------------
(Registrant)
Date August 10, 1999 /s/ James F. Bomberg
-------------------- ------------------------------------------
James F. Bomberg
President & Chief Executive Officer
Date August 10, 1999 /s/ James C. Mroczkowski
-------------------- ------------------------------------------
James C. Mroczkowski
Executive Vice President & Chief Financial
Officer
Principal Financial Officer
22
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 13,626
<INT-BEARING-DEPOSITS> 651
<FED-FUNDS-SOLD> 7,058
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 35,252
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 272,347
<ALLOWANCE> 2,314
<TOTAL-ASSETS> 344,164
<DEPOSITS> 298,012
<SHORT-TERM> 13,390
<LIABILITIES-OTHER> 1,762
<LONG-TERM> 0
0
0
<COMMON> 1,508
<OTHER-SE> 29,492
<TOTAL-LIABILITIES-AND-EQUITY> 344,164
<INTEREST-LOAN> 10,507
<INTEREST-INVEST> 1,058
<INTEREST-OTHER> 114
<INTEREST-TOTAL> 11,679
<INTEREST-DEPOSIT> 4,938
<INTEREST-EXPENSE> 5,131
<INTEREST-INCOME-NET> 6,548
<LOAN-LOSSES> 100
<SECURITIES-GAINS> 9
<EXPENSE-OTHER> 5,836
<INCOME-PRETAX> 1,537
<INCOME-PRE-EXTRAORDINARY> 1,537
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,035
<EPS-BASIC> .69
<EPS-DILUTED> .68
<YIELD-ACTUAL> 7.61
<LOANS-NON> 1,706
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,302
<CHARGE-OFFS> 95
<RECOVERIES> 7
<ALLOWANCE-CLOSE> 2,314
<ALLOWANCE-DOMESTIC> 2,314
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
