<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 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
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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
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Registrant's telephone number, including area code:
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports) and (2) has been subject to such filing requirements for
the past 90 days. Yes X No .
--- ---
Applicable Only to Corporate Issuers
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Common Stock, par value $1.00 per share 1,491,438 Shares
--------------------------------------- -------------------------------
Class Outstanding at November 1, 1999
<PAGE> 2
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC.
FORM 10-Q
INDEX
PAGE NUMBER
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Consolidated Statements of Financial Condition
as of September 30, 1999 and December 31, 1998 3
Unaudited Consolidated Statements of Income for the Three
Months and the Nine Months ended September 30, 1999 and 1998 4
Unaudited Consolidated Statements of Cash Flows for the Nine
Months ended September 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 20
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
(In Thousands)
ASSETS
<S> <C> <C>
Cash and due from banks $ 9,958 $ 9,946
Interest-bearing deposits at other banks 810 10,095
Federal funds sold 214 8,587
-------- --------
Cash and cash equivalents 10,982 28,628
Securities available-for-sale at fair value:
Investment securities 18,319 15,721
Mortgage-related securities 16,275 22,850
Loans receivable 278,234 251,815
Accrued interest receivable 1,783 1,674
Federal Home Loan Bank stock 995 1,057
Premises and equipment 8,495 10,130
Other assets 4,892 2,628
-------- --------
Total assets $339,975 $334,503
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $295,314 $289,230
Borrowings 10,700 13,260
Accrued interest payable 301 421
Advance payments by borrowers for taxes and insurance 955 52
Other liabilities 1,275 543
-------- --------
Total liabilities 308,545 303,506
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: 1,491,438--1999; 1,490,331--1998 1,508 1,508
Additional paid in capital 10,783 10,820
Net unrealized loss on securities available-for-sale (875) (88)
Retained earnings 20,624 19,391
Treasury stock, at cost (16,350 shares--1999;
17,457 shares--1998) (610) (634)
--------- --------
Total stockholders' equity 31,430 30,997
-------- --------
Total liabilities and stockholders' equity $339,975 $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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
------ ------ ------ ------
(In Thousands, except per share data)
<S> <C> <C> <C> <C>
Interest income:
Loans, including fees $5,529 $5,085 $16,036 $14,771
Investment securities:
Taxable 135 167 410 541
Exempt from federal income taxes 103 107 307 137
Mortgage-related securities 251 413 830 1,387
Other 39 118 153 378
------ ------ ------- -------
Total interest income 6,057 5,890 17,736 17,214
Interest expense:
Deposits 2,395 2,708 7,333 7,791
Borrowings 174 11 367 46
------ ------ ------- -------
Total interest expense 2,569 2,719 7,700 7,837
Net interest income 3,488 3,171 10,036 9,377
Provision for loan losses 642 50 742 200
------ ------ ------- -------
Net interest income after provision for
loan losses 2,846 3,121 9,294 9,177
Non-interest income:
Service charges on deposit accounts 186 185 545 560
Service charges on loans 68 74 169 148
Net gain on securities sales 0 6 9 55
Net gain on sale of building 566 0 566 0
Other 230 264 686 775
------ ------ ------- -------
1,050 529 1,975 1,538
Non-interest expenses:
Salaries and employee benefits 1,456 1,435 4,987 4,687
Premises and equipment 414 380 1,267 1,187
Data processing 151 156 468 474
Federal deposit insurance premiums 21 30 81 67
Other 557 544 1,632 1,642
------ ------ ------- -------
2,599 2,545 8,435 8,057
Income before income taxes 1,297 1,105 2,834 2,658
Income taxes 428 382 930 929
------ ------ ------- -------
Net income $ 869 $ 723 $ 1,904 $ 1,729
====== ====== ======= =======
Basic earnings per share $ 0.58 $ 0.48 $ 1.28 $ 1.15
====== ====== ======= =======
Diluted earnings per share $ 0.57 $ 0.47 $ 1.25 $ 1.14
====== ====== ======= =======
Dividends per share $ 0.15 $ 0.15 $ 0.45 $ 0.39
====== ====== ======= =======
</TABLE>
See notes to unaudited consolidated financial statements.
4
<PAGE> 5
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1999 1998
-------- --------
(In Thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 1,904 $ 1,729
Adjustments to reconcile net income to cash provided by
Operating activities:
Provision for loan losses 742 200
Provision for depreciation 488 427
Net amortization of investment securities premiums and discounts 47 81
Net realized investment security gains (9) (55)
Net realized gain on sale of building (566) 0
Increase in accrued interest receivable (109) (173)
Increase (decrease) in accrued interest payable (120) 35
Other (1,601) (454)
-------- --------
Net cash provided by operating activities 776 1,790
INVESTING ACTIVITIES
Purchases of securities available-for-sale (3,588) (21,471)
Proceeds from sales of securities available-for-sale 2,704 10,538
Proceeds from redemptions and maturities of securities available-for-sale 3,615 4,869
Net increase in loans (27,207) (22,301)
Purchase of premises and equipment (589) (1,350)
Proceeds from sale of building 2,839 0
Redemption (purchase) of Federal Home Loan Bank stock 62 (22)
-------- --------
Net cash used by investing activities (22,164) (29,737)
FINANCING ACTIVITIES
Net increase in deposits 6,083 23,373
Net increase (decrease) in borrowings (2,560) 3,210
Increase in advance payments by borrowers for taxes and insurance 903 1,101
Payments of cash dividends to stockholders (671) (591)
Purchase of treasury stock (107) (613)
Proceeds from sale of treasury stock 94 344
Proceeds from issuing additional common stock 0 422
-------- --------
Net cash provided by financing activities 3,742 27,246
Decrease in cash and cash equivalents (17,646) (701)
Cash and cash equivalents at beginning of period 28,628 15,358
-------- --------
Cash and cash equivalents at end of period $ 10,982 $ 14,657
======== ========
Supplemental cash flow information:
Interest paid $ 5,163 $ 7,802
Income taxes paid 579 809
</TABLE>
See notes to unaudited consolidated financial statements
5
<PAGE> 6
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC.
Notes to Unaudited Consolidated Financial Statements
September 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 nine-month period ended September 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
Presented below are the calculations for basic and diluted earnings per share:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
Basic 1999 1998 1999 1998
---------------------------------------------------------------------------------- ----------------------------
<S> <C> <C> <C> <C>
Net income $ 869,090 $ 722,854 $ 1,903,720 $1,729,469
Weighted average shares outstanding 1,491,122 1,502,631 1,490,176 1,499,139
Basic earnings per share $ 0.58 $ 0.48 $ 1.28 $ 1.15
=========================== ============================
Diluted:
---------------------------------------------------------------------------------- ----------------------------
Net income $ 869,090 $ 722,854 $ 1,903,720 $1,729,469
Weighted average shares outstanding 1,491,122 1,502,631 1,490,176 1,499,139
Effect of dilutive stock options outstanding 32,641 20,105 32,253 16,570
--------------------------- ----------------------------
Diluted weighted average shares outstanding 1,523,763 1,522,736 1,522,429 1,515,709
Diluted earnings per share $ 0.57 $ 0.47 $ 1.25 $ 1.14
=========================== ============================
</TABLE>
NOTE C - COMPREHENSIVE INCOME
The following table presents the Corporation's comprehensive income.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
--------------------------- ----------------------------
<S> <C> <C> <C> <C>
Net income $ 869,090 $ 722,854 $ 1,903,720 $1,729,469
Other comprehensive income
Net change in unrealized securities gains
(losses), net (201,648) 198,714 (786,813) 165,127
--------------------------- ----------------------------
Total comprehensive income $ 667,442 $ 921,568 $ 1,116,907 $1,894,596
=========================== ============================
</TABLE>
NOTE D -- LOANS RECEIVABLE
Loans are comprised of the following categories:
<TABLE>
<CAPTION>
September 30
1999 1998
------------------------------
(In Thousands)
<S> <C> <C>
Commercial business loans $ 67,619 $ 62,201
Commercial real estate 121,709 100,311
Real estate mortgages 75,913 75,479
Installments 15,075 12,952
Other 733 651
------------------------------
Total loans 281,049 251,594
Unearned income (35) (48)
Allowance for loan losses (2,780) (2,267)
==============================
Loans, net $278,234 $249,279
==============================
</TABLE>
7
<PAGE> 8
The following table presents changes in the allowance for loan losses:
<TABLE>
<CAPTION>
Nine Months Ended
September 30
1999 1998
------------------------
(In Thousands)
<S> <C> <C>
Balance at January 1 $2,302 $2,093
Provisions 742 200
Charge-offs (273) (32)
Recoveries 9 6
------------------------
Balance at September 30 $2,780 $2,267
========================
</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 September 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
------------------------------------------------------ --------------------------
AS OF SEPTEMBER 30, 1999 (In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Total Capital (to Risk-
Weighted Assets):
Lincoln State Bank $16,819 10.72% $12,554 >8.00% $15,692 >10.00%
Lincoln Community 9,572 11.93% 6,419 >8.00% 8,024 >10.00%
Franklin State Bank 5,263 10.51% 4,007 >8.00% 5,009 >10.00%
Tier 1 Capital (to Risk-
Weighted Assets):
Lincoln State Bank 15,345 9.78% 6,277 >4.00% 9,415 >6.00%
Lincoln Community 8,752 10.91% 3,209 >4.00% 4,814 >6.00%
Franklin State Bank 4,777 9.54% 2,003 >4.00% 3,005 >6.00%
Tier 1 Capital (to Average
Assets):
Lincoln State Bank 15,345 8.67% 7,081 >4.00% 8,851 >5.00%
Lincoln Community 8,752 8.97% 3,901 >4.00% 4,877 >5.00%
Franklin State Bank 4,777 10.04% 1,904 >4.00% 2,380 >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 fourth quarter
of 1999, and will be accounted for as a pooling of interests. At September 30,
1999, PBI had total assets and shareholder's equity of $109.6 million and $9.2
million respectively.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Financial Condition
At September 30, 1999, the Corporation's consolidated total assets were $340.0
million as compared to $334.5 million at December 31, 1998. This increase was
due to a $26.4 million increase in loans, which was partially offset by a $17.6
million reduction in short term investments and a $4.0 million decline in
investment securities and mortgage-related securities. The increase in assets
was funded by a $6.1 million increase in total deposits.
Investment securities available-for-sale increased $2.6 million, or 16.5% from
$15.7 million at December 31, 1998 to $18.3 million at September 30, 1999.
Purchases of US government agency notes caused the increase.
Mortgage-related securities available-for-sale decreased $6.6 million, or 28.8%
from $22.9 million at December 31, 1998, to $16.3 million at September 30, 1999.
Purchases of mortgage-related securities were offset by sales, redemptions and
maturities of this type of security.
Net loans receivable increased $26.4 million, or 10.5%, from $251.8 million at
December 31, 1998 compared to $278.2 million at September 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 September 30, 1999 the Corporation has not designated any as loans held
for sale.
Premises and equipment decreased $1.6 million, or 16.1%, from $10.1 million at
December 31, 1998 compared to $8.5 million at September 30, 1999. During the
quarter ended September 30, 1999 the Corporation entered into a transaction to
sell one of its banking facilities and lease the facility back from the new
owner.
Stockholders' equity at September 30, 1999 was $31.4 million compared to $31.0
million at December 31, 1998, an increase of $400,000. The change in the
individual components of stockholders' equity consisted of net income of $1.9
million, less the net purchase of treasury stock of $24,000, payments of
dividends to shareholders of $671,000 and the $787,000 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
Non-performing Assets and Allowance for Losses
Generally a loan is classified as non-accrual 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.
Non-performing assets are summarized, for the dates indicated, as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
(dollars in thousands)
<S> <C> <C>
Non-accrual loans:
Mortgage loans
One-to-four family $ 580 $ 505
Commercial real estate 437 7
------- -------
Total mortgage loans 1,017 512
Commercial business 340 391
Consumer and other 80 118
------- -------
Total non-accrual loans 1,437 1,021
Other real estate owned 25 0
------- -------
Total non-performing assets $ 1,462 $ 1,021
======= =======
RATIOS:
Non-accrual loans to total loans 0.51% 0.40%
Non-performing assets to total assets 0.43 0.31
Loan loss allowance to non-accrual loans 193.46 225.47
Loan loss allowance to total loans 0.99 0.91
</TABLE>
Non-performing assets increased by $441,000 from $1.0 million at December 31,
1998 to $1.5 million at September 30, 1999, an increase of 43.2%. The increase
in non-performing assets primarily resulted from increases in non-accrual loans
of $416,000. Non-accrual loans increased primarily due to a $430,000 increase in
commercial real estate delinquencies. The $430,000 increase in commercial real
estate delinquencies is primarily the result of three loans that became 90 days
past due during 1999 and were placed on non-accrual status.
10
<PAGE> 11
Results of Operations
Net interest income for the three months ended September 30, 1999 was $3.5
million, an increase of 10.0% from the $3.2 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 September 30, 1998 to 7.73% 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 3.81% for the three months ended September 30, 1998
to 3.37% for the three months ended September 30, 1999. Net interest income for
the nine months ended September 30, 1999 was $10.0 million, an increase of 7.03%
from the $9.4 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 nine and three months
ended September 30, 1999 and 1998.
<TABLE>
<CAPTION>
During the During the
Three Months Ended Nine Months
September 30, Ended
September 30,
1999 1998 1999 1998
-------------------- --------------------
<S> <C> <C> <C> <C>
Weighted average yield on
interest-earning assets 7.73% 7.95% 7.64% 7.98%
Weighted average rate paid on
deposit accounts and borrowings 3.37 3.81 3.42 3.77
-------------------- --------------------
Net interest spread 4.36% 4.14% 4.22% 4.21%
==================== ====================
Net interest margin (net interest
income divided by average
earning assets) 4.45% 4.28% 4.33% 4.35%
==================== ====================
</TABLE>
The provision for loan losses for the three-month period ended September 30,
1999 was $642,000 compared to $50,000 for the three months ended September 30,
1998. The increased provision in the three-month period ended September 30, 1999
was made to support the rapid growth in the loan portfolio and the increased
level of non-performing assets. For the nine months ended September 30, 1999,
the provision for loan losses was $742,000 compared to $200,000 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 September 30, 1999 was $1.1
million compared to $529,000 for the three months ended September 30, 1998, an
increase of $521,000, or 98.5%. The sale and leaseback of one of the
Corporation's banking facilities resulted in a $566,000 immediate gain, while
the remaining portion of the gain ($537,000) will be recognized over the term of
the lease. Non-interest income for the nine months ended September 30, 1999 was
$2.0 million compared to $1.5 million for the nine months ended September 30,
1998, an increase of $437,000, or 28.4%. The gain on the sale of the building
was partially offset by fewer fees collected on ATM transactions and reduced
gains on sales of investment securities during the nine-month period.
Non-interest expense for the three months ended September 30, 1999 was $2.6
million compared to $2.5 million for the three months ended September 30, 1998,
an increase of $54,000, or 2.1%. Non-interest expense for the nine months ended
September 30, 1999 was $8.4 million compared to $8.06 million for the nine
months ended September 30, 1998, an increase of $378,000, or 4.7%. Salaries and
employee benefits increased $21,000 or 1.5% from $1.4 million for the
three-month period ended September 30, 1998 to $1.5 million for the 1999
three-month period. Salaries and employee benefits increased $300,000 or 6.4%
from $4.7 million for the nine-month period ended September 30, 1998 to $5.00
million for the nine-month period ended September 30, 1999. Employee bonus
payments, higher benefit costs and the hiring of new commercial business
developers accounted for this increase. Premises and equipment expense increased
$34,000 from $380,000 for the three-month period ended September 30, 1998
compared to $414,000 for the three-month period ended September 30, 1999.
Premises and equipment expense increased $80,000 or 6.7% from $1.2 million for
the nine-month period ended September 30, 1998 compared to $1.3 million for the
nine-month period ended September 30, 1999. The increases 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. Other
expenses increased $13,000 or 2.4% in the third quarter and decreased $10,000 or
0.1% for the nine-month period ended September 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 September 30, 1999 was $1.3
million compared to $1.1 million for the three months ended September 30, 1998,
an increase of $192,000 or 17.4%. Income before taxes for the nine-month period
ended September 30, 1999 was $2.8 million compared to $2.7 million for the nine
months ended September 30, 1998, an increase of $176,000 or 6.6%. The income tax
expense for the three months ended September 30, 1999 increased $46,000 over the
1998 third quarter tax expense. The effective tax rate for the three months
ended September 30, 1999 was 33.0% compared to 34.6% for the three months ended
September 30, 1998. The income tax expense for the nine months ended September
30, 1999 increased $1,000 over the same period in 1998. The effective tax rate
for the nine months ended September 30, 1999 was 32.8% compared to 35.0% for the
nine months ended September 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
$869,000 for the three month period ended September 30, 1999 compared to
$723,000 for the same period in 1998; and for the nine month period ended
September 30, 1999, the Corporation reported net income of $1.90 million
compared to $1.73 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 $11.0 million and $28.6 million at
September 30, 1999 and December 31, 1998, respectively.
Management believes liquidity and capital levels are adequate at September 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 September 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 SEPTEMBER 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 $ 25,870 $15,117 $ 87,800 $15,031 $143,818
Adjustable-rate mortgage loans 20,077 6,843 25,288 1,168 53,376
----------------------------------------------------------------------
Total mortgage loans 45,947 21,960 113,088 16,199 197,194
Commercial business loans 35,619 3,867 28,336 225 68,047
Consumer loans 4,638 1,800 7,455 1,182 15,075
Other loans 697 0 0 0 697
Mortgage-related securities 11,086 233 3,542 1,340 16,201
Fixed rate investment securities and other 958 1,303 2,710 9,931 14,902
Variable rate investment securities
and other 4,515 995 0 0 5,510
----------------------------------------------------------------------
Total interest-earning assets $103,460 $30,158 $155,131 $28,877 $317,626
======================================================================
Interest-bearing liabilities:
Deposits
Time deposits $111,807 $32,340 $ 13,629 $0 $157,776
NOW accounts 1,727 1,727 17,269 8,059 28,782
Savings accounts 3,572 3,572 35,715 16,667 59,526
Money market accounts 506 506 5,056 2,360 8,428
Advance payments for taxes and insurance 955 0 0 0 955
Borrowings 10,700 0 0 0 10,700
----------------------------------------------------------------------
Total interest-bearing liabilities $129,267 $38,145 $ 71,669 $27,086 $266,167
======================================================================
Interest-earning assets less
interest-bearing
Liabilities ($25,807) ($7,987) $ 83,462 $1,791 $51,459
======================================================================
Cumulative interest rate sensitivity gap ($25,807) ($33,794) $ 49,668 $51,459
========================================================
Cumulative interest rate sensitivity gap
as a Percentage of total assets (7.59%) (9.94%) 14.61% 15.14%
========================================================
</TABLE>
At September 30, 1999, the Corporation's cumulative interest-rate sensitive gap
as a percentage of total assets was a negative 7.59% for six months and a
negative 9.94% 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: 100% 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: 100% 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: 100% 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 revisited
businesses to review their state of Year 2000 readiness and efforts. This second
review was completed in September 1999 and follow up reviews will be made in the
fourth quarter of 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
were made available in the third quarter of 1999. Materials from the FDIC and
the State of Wisconsin regarding Year 2000 readiness were 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, 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 and
all of the vendors currently supply Year 2000 ready products or services. 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.
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.
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
17
<PAGE> 18
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 all 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. Additional testing and validation will
take place on January 1 and January 2, 2000 to ensure completion of the project.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not Applicable
18
<PAGE> 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
As of September 30, 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 - NONE
Item 5 Other Information - NONE
Item 6 Exhibits and Reports on Form 8-K
The Corporation did not file any reports on Form 8-K during the
three months ended September 30, 1999.
EXHIBIT INDEX
Exhibit
No. Description
* (2) Agreement and Plan of Merger as of March 9, 1999, among Merchants
and Manufacturers Bancorporation, Inc., Merchants Merger Corp. and
Pyramid Bancorp., Inc., as amended as of June 10, 1999.
* Incorporated by reference to Exhibit 2(a) of Registrant's
Registration Statement on Form S-4 filed on September 10, 1999,
SEC File No. 333-86855
19
<PAGE> 20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed by on its behalf by the
undersigned thereunto duly authorized.
MERCHANTS AND MANUFACTURERS
BANCORPORATION, INC.
---------------------------
(Registrant)
Date November 15, 1999 . /s/ James F. Bomberg
------------------------ ----------------------------------------
James F. Bomberg
President & Chief Executive Officer
Date November 15, 1999 . /s/ James C. Mroczkowski
------------------------ ----------------------------------------
James C. Mroczkowski
Executive Vice President & Chief
Financial Officer
Principal Financial Officer
20
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 9,958
<INT-BEARING-DEPOSITS> 810
<FED-FUNDS-SOLD> 214
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 34,594
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 281,014
<ALLOWANCE> 2,780
<TOTAL-ASSETS> 339,975
<DEPOSITS> 295,314
<SHORT-TERM> 10,700
<LIABILITIES-OTHER> 2,531
<LONG-TERM> 0
0
0
<COMMON> 1,508
<OTHER-SE> 32,802
<TOTAL-LIABILITIES-AND-EQUITY> 339,375
<INTEREST-LOAN> 16,036
<INTEREST-INVEST> 1,547
<INTEREST-OTHER> 153
<INTEREST-TOTAL> 17,736
<INTEREST-DEPOSIT> 7,333
<INTEREST-EXPENSE> 7,700
<INTEREST-INCOME-NET> 10,036
<LOAN-LOSSES> 742
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 8,435
<INCOME-PRETAX> 2,834
<INCOME-PRE-EXTRAORDINARY> 2,834
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,904
<EPS-BASIC> 1.28
<EPS-DILUTED> 1.25
<YIELD-ACTUAL> 7.64
<LOANS-NON> 1,437
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,302
<CHARGE-OFFS> 273
<RECOVERIES> 9
<ALLOWANCE-CLOSE> 2,780
<ALLOWANCE-DOMESTIC> 2,780
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
