<PAGE> 1
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
---
Filed by registrant [X]
Filed by a party other than the registrant [ ]
Check the appropriate box:
[ ] Preliminary proxy statement [ ] Confidential for use of the
Commission only (as permitted
[X] Definitive proxy statement by Rule 14a-6(e)(2)).
[ ] Definitive additional materials
[ ] Soliciting material pursuant to Rule 14a-11(c) or Rule 14a-12.
Merchants and Manufacturers Bancorporation, Inc.
- --------------------------------------------------------------------------------
(Name of Registrant as Specific in Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment of filing fee (check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
<PAGE> 2
May 5, 1999
To: The Shareholders of Merchants & Manufacturers Bancorporation, Inc.
You are cordially invited to attend the Annual Meeting of Shareholders of
Merchants & Manufacturers Bancorporation; Inc. scheduled for 4:00 P.M. on
Tuesday, May 25, 1999, at Alverno College, Milwaukee, Wisconsin. The meeting
will take place in Wehr Hall, #1 indicated on the enclosed map. Enter parking
lot A at the southwest corner of the Alverno campus from Morgan Avenue.
The matters expected to be acted upon at the meeting are described in detail in
the attached Notice of Annual Meeting and Proxy Statement.
We have previously informed you that Merchants and Pyramid Bancorp. (the holding
company for Grafton State Bank) have signed an agreement whereby Pyramid will be
merged into Merchants and Grafton State Bank will become a subsidiary of
Merchants. You will be asked to vote on the merger at a special meeting to be
called after required regulatory filings have been completed and after you have
received proxy materials explaining the merger in detail. For that reason, we
will not be able to discuss the merger at the Annual Meeting on May 25, 1999.
Your Board of Directors and management look forward to greeting you and
discussing the condition of your corporation with you.
Please be sure to sign and return the enclosed proxy card whether or not you
plan to attend the meeting so that your shares will be voted. If you do attend
the meeting, you may revoke your proxy and vote in person if you prefer.
The Board of Directors joins me in hoping that you will attend.
Sincerely yours,
By: /s/ Michael J. Murry
-----------------------------------------
Michael J. Murry,
Chairman of the Board of Directors
Enclosure
<PAGE> 3
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC.
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
MAY 25, 1999
TO THE SHAREHOLDERS OF MERCHANTS AND MANUFACTURERS BANCORPORATION, INC.:
The Annual Meeting of Shareholders of Merchants and Manufacturers
Bancorporation, Inc. ("Merchants"), will be held at Alverno College, 3401 South
39th Street, Milwaukee, Wisconsin, on Tuesday, May 25, 1999, at 4:00 p.m., for
the purpose of considering and voting on:
1. To elect six Directors to serve until the annual meeting in the year
2002 as Class I Directors. Management's nominees are named in the
accompanying Proxy Statement.
2. To consider and vote on a proposal to amend Article IV of Merchants'
Articles of Incorporation, as amended, to increase the number of
authorized shares of Common Stock from 3,000,000 to 6,000,000.
3. Such other business as may properly come before the meeting and all
adjournments thereof.
The Board of Directors has fixed April 19, 1999, as the record date for
determining the shareholders of Merchants and Manufacturers Bancorporation,
Inc., entitled to notice of and to vote at the meeting, and only holders of
Common Stock of Merchants and Manufacturers Bancorporation, Inc. of record at
the close of business on such date will be entitled to notice of and to vote at
such meeting and all adjournments.
THE BOARD OF DIRECTORS OF MERCHANTS AND MANUFACTURERS BANCORPORATION, INC.
RECOMMENDS THAT SHAREHOLDERS VOTE FOR THE ELECTION OF THE SIX PERSONS NOMINATED
BY THE BOARD OF DIRECTORS AND NAMED IN THE PROXY STATEMENT, AND FOR THE ADOPTION
OF PROPOSAL 2 AS DISCUSSED IN THE PROXY STATEMENT.
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, PLEASE MARK, SIGN, DATE AND
RETURN THE ENCLOSED PROXY PROMPTLY IN THE ACCOMPANYING ENVELOPE. IT IS IMPORTANT
THAT YOUR SHARES BE REPRESENTED AT THE MEETING, WHETHER YOUR HOLDINGS ARE LARGE
OR SMALL. IF YOU DO ATTEND THE MEETING, OR FOR ANY OTHER REASON DESIRE TO REVOKE
YOUR PROXY, YOU MAY DO SO AT ANY TIME BEFORE IT IS VOTED.
Milwaukee, Wisconsin By Order of the Board of Directors of
May 5, 1999 Merchants and Manufacturers Bancorporation, Inc.
By: /s/ Michael J. Murry
--------------------------------------------
Michael J. Murry, Chairman of the Board of Directors
<PAGE> 4
MERCHANTS & MANUFACTURERS BANCORPORATION, INC.
14100 WEST NATIONAL AVENUE
NEW BERLIN, WISCONSIN 53151
PROXY STATEMENT
ANNUAL MEETING - MAY 25, 1999
VOTING OF PROXIES AND REVOCABILITY
This Proxy Statement is furnished in connection with the solicitation of proxies
by the Board of Directors of Merchants & Manufacturers Bancorporation, Inc.,
hereinafter called "Merchants," to be voted at the Annual Meeting of
Shareholders to be held on Tuesday, May 25, 1999, at 4:00 P.M., at Alverno
College, 3401 South 39th Street, Milwaukee, Wisconsin, and at any adjournment(s)
thereof (the "Annual Meeting").
The expense of printing and mailing proxy material, including forwarding expense
to beneficial owners of stock held in the name of another, will be borne by
Merchants. No solicitation of proxies other than by mail is contemplated, except
that officers or employees of Merchants or its subsidiaries may solicit the
return of proxies from certain shareholders by telephone. The Proxy Statement
and the accompanying Proxy are being sent to Merchants' shareholders commencing
on or about May 5, 1999.
Shares owned through participation in Merchants' Dividend Reinvestment Plan will
be included on the Proxy you receive and will be voted in accordance with your
instructions in the same manner as shares registered in your own name.
Arrangements will be made with brokerage houses, custodians, nominees, and other
fiduciaries to send proxy material to their principals.
The presence, in person or by proxy, of a majority of the shares of Common Stock
outstanding on the record date is required for a quorum, with respect to the
matters on which action is to be taken at the Annual Meeting. Abstentions will
be treated as shares that are present and entitled to vote for purposes of
determining the presence of a quorum, but as unvoted for purposes of determining
the approval of any matter submitted to the shareholders for a vote.
Shares as to which proxies have been executed will be voted as specified in the
proxies. If no specification is made, the shares will be voted "FOR" the
election of management's nominees as directors and FOR adoption of Proposal 2 as
described below. If additional matters are properly presented, the persons named
in the proxy will have discretion to vote in accordance with their own judgment
in such matters.
Proxies may be revoked at any time prior to the exercise thereof by filing with
the Secretary of Merchants a written revocation or a duly executed proxy bearing
a later date. Shareholders who are present at the Annual Meeting may revoke
their proxy and vote in person, if they so desire.
RECORD DATE AND VOTING SECURITIES
The Board of Directors has fixed the close of business on April 19, 1999, as the
record date (the "Record Date") for the determination of shareholders entitled
to notice of, and to vote at, the Annual Meeting. The securities of Merchants
entitled to be voted at the Annual Meeting consist of shares of its Common
Stock, $1.00 par value ("Common Stock") of which 1,489,754 shares were issued
and outstanding at the
<PAGE> 5
close of business on the Record Date. Only shareholders of record at the close
of business on the Record Date will be entitled to receive notice of and to vote
at the Annual Meeting.
Each share of Common Stock is entitled to one vote on all matters. The Common
Stock carries no cumulative voting rights.
SHAREHOLDER PROPOSALS
Any shareholders desirous of including any proposal in Merchants' proxy
soliciting material for the next regularly scheduled annual meeting of
shareholders of Merchants must submit their proposal, in writing, at Merchants'
executive offices not later than January 2, 2000. Any such proposal must comply
with Rule 14a-8 of Regulation 14A of the proxy rules of the Securities and
Exchange Commission.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
No person is known to Merchants to own beneficially more than 5% of the
outstanding shares entitled to vote at the Annual Meeting.
ANNUAL REPORT
The 1998 Annual Report of Merchants, which includes financial statements for the
years ended December 31, 1998, 1997 and 1996, has been mailed concurrently with
this proxy statement to shareholders as of the Record Date. The Annual Report
does not constitute a part of the proxy material.
PROPOSAL 1
ELECTION OF DIRECTORS
The Board of Directors of Merchants is divided into three classes designated as
Class I, II and III, as nearly equal in size as possible, with each class of
directors serving staggered three-year terms. The term of office of directors in
Class I expires at the Annual Meeting. At the Annual Meeting, shareholders will
elect six Class I directors to serve until Merchants' 2002 annual meeting of
shareholders and until their successors are elected and qualified. All of the
nominees for Class I, directors are currently directors of Merchants. Messrs.
Gapinski, Bartels, Krawczyk, Rose, Donaj and Sass were elected at the 1996
annual meeting of shareholders of Merchants to serve until the 1999 Annual
Meeting.
The six nominees have consented to serve, if elected, and at the date of this
Proxy Statement, Merchants has no reason to believe that any of the named
nominees will be unable to serve. Unless otherwise directed, the persons named
as proxies intend to vote in favor of the election of the six nominees listed
below.
The information presented below as to principal occupation and shares of Common
Stock beneficially owned as of April 19, 1999, is based in part on information
received from the respective persons and in part on the records of Merchants.
<PAGE> 6
NOMINEES FOR CLASS I DIRECTORS
(TERM EXPIRING IN 2002)
<TABLE>
<CAPTION>
NAME, AGE PRINCIPAL OCCUPATION AND DIRECTORSHIPS
<S> <C>
Thomas Gapinski Insurance executive, director of Merchants from 1982 to 1986 and
Age: 64 from 1992 to present, director of Lincoln State Bank from 1977 to
present.
J. Michael Bartels President Bartels Management Services, Inc., Milwaukee, WI;
Age: 59 director of Merchants since 1995; director of Franklin State Bank
from 1982 to present.
John Krawczyk Executive Vice President and Chief Operating Officer of Merchants
Age: 43 since 1994; director of Merchants from 1993 to present; director of
Lincoln Community Bank since 1987.
Gervase Rose President Roman Electric Co., Milwaukee WI, director of Merchants
Age: 62 from 1992 to 1993 and from 1994 to present; director of Franklin
State Bank from 1982 to present.
Robert Donaj President of Achieve Mortgage Corporation, from 1997 to present;
Age: 55 Director of Lincoln Community Bank from 1987 to present; director of
Merchants 1993 to present.
James Sass President, Max A. Sass Funeral Home; director of Lincoln Community
Age: 56 Bank from 1987 to present; director of Merchants from 1993 to
present.
DIRECTORS CONTINUING IN OFFICE
CLASS II DIRECTORS (TERM EXPIRING IN 2000)
NAME, AGE PRINCIPAL OCCUPATION AND DIRECTORSHIPS
Casimir S. Janiszewski President, Superior Die Set Corporation, Oak Creek, WI; director of
Age: 46 Merchants from 1995 to present, director of Franklin State Bank from
1982 to 1991, director of Lincoln State Bank from 1991 to present
David Kaczynski President, Cardinal Fabricating Corporation, Milwaukee, WI; director
Age: 59 of Lincoln Community Bank from 1994 to present, director of
Merchants from 1994 to present.
Longin Prazynski Retired building inspector, director of Lincoln Community Bank from
Age: 69 1962 to present, director of Merchants since 1993.
</TABLE>
<PAGE> 7
<TABLE>
<CAPTION>
CLASS III DIRECTORS (TERM EXPIRING IN 2001)
NAME, AGE PRINCIPAL OCCUPATION AND DIRECTORSHIPS
<S> <C>
James Bomberg President of Merchants from 1994 to present, Chief Executive Officer
Age: 55 of Merchants since 1998, director and president of Lincoln State
Bank, from 1991 to 1993; director and president of M&M Services, from
1994 to 1996, director of Merchants from 1994 to present.
Michael J. Murry Chairman of the Board of Directors of Merchants since 1992; Chief
Age: 53 Executive Officer of Merchants from 1982 to 1998 and director of
Merchants since 1982, director of Lincoln State Bank since 1983,
director of Franklin State Bank, Franklin, Wisconsin, since 1992;
Director of Lincoln Community Bank, since 1994.
Conrad Kaminski Executive officer of Merchants since 1998, President of Lincoln
Age: 64 State Bank from 1994 to 1998; director of Lincoln State Bank from
1992 to present; President of Lincoln Community Bank from 1997 to 1998,
director of Lincoln Community Bank since 1997, director of Merchants
from 1991 to present; president of Merchants from 1991 to 1993;
executive vice president of Merchants from 1982 to 1991.
Nicholas Logarakis President, General Automotive Manufacturing Co., Inc. Franklin, WI;
Age: 58 director of Lincoln State Bank from 1977 to present; director of
Merchants from 1982 to present.
Keith Winters President, Keith C. Winters & Assoc. Ltd. Franklin, WI; director of
Age: 60 Franklin State Bank from 1982 to present; director of Merchants from
1989 to present.
Duane Cherek Auto dealer, Cherek Lincoln-Mercury, Greenfield, WI; director of
Age: 54 Lincoln Community Bank from 1987 to present; director of Merchants
since 1993, director of M&M Services from 1994 to present.
</TABLE>
Lincoln State Bank, Milwaukee, Lincoln Community Bank, Milwaukee, Franklin State
Bank, Franklin, Achieve Mortgage Corporation, Milwaukee, and M&M Services
Corporation, New Berlin are wholly owned subsidiaries of Merchants.
<PAGE> 8
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth, as of April 19, 1999, information concerning
beneficial ownership of Common Stock of Merchants for each nominee, continuing
director and executive officer.
<TABLE>
<CAPTION>
================== ============================== ============================= =============================
TITLE OF NAME OF BENEFICIAL AMOUNT OF BENEFICIAL PERCENT OF
CLASS OWNER OWNERSHIP CLASS
- ------------------ ------------------------------ ----------------------------- -----------------------------
<S> <C> <C> <C>
Common J. Michael Bartels 19,987 1.34
- ------------------ ------------------------------ ----------------------------- -----------------------------
Common James Bomberg 22,448 1.51
- ------------------ ------------------------------ ----------------------------- -----------------------------
Common Duane Cherek 8,913 *
- ------------------ ------------------------------ ----------------------------- -----------------------------
Common Robert Donaj 8,250 *
- ------------------ ------------------------------ ----------------------------- -----------------------------
Common Thomas Gapinski 1,946 *
- ------------------ ------------------------------ ----------------------------- -----------------------------
Common Casimir S. Janiszewski 5,647 *
- ------------------ ------------------------------ ----------------------------- -----------------------------
Common David Kaczynski 3,035 *
- ------------------ ------------------------------ ----------------------------- -----------------------------
Common Conrad Kaminski 46,821 3.14
- ------------------ ------------------------------ ----------------------------- -----------------------------
Common John Krawczyk 22,894 1.54
- ------------------ ------------------------------ ----------------------------- -----------------------------
Common Nicholas Logarakis 15,352 1.00
- ------------------ ------------------------------ ----------------------------- -----------------------------
Common James Mroczkowski(1) 10,774 *
- ------------------ ------------------------------ ----------------------------- -----------------------------
Common Michael Murry 20,690 1.39
- ------------------ ------------------------------ ----------------------------- -----------------------------
Common Longin Prazynski 4,124 *
- ------------------ ------------------------------ ----------------------------- -----------------------------
Common Gervase Rose 4,330 *
- ------------------ ------------------------------ ----------------------------- -----------------------------
Common James Sass 10,247 *
- ------------------ ------------------------------ ----------------------------- -----------------------------
Common Keith Winters 18,117 1.22
- ------------------ ------------------------------ ----------------------------- -----------------------------
Directors and Executive 223,048 14.97
Officers(2)
================== ============================== ============================= =============================
</TABLE>
* Less than 1%
(1) Vice President, Chief Financial Officer; not a director of Merchants
(2) Includes all of the above as a group (16 individuals).
Share ownership includes shares issuable within 60 days upon exercise of
incentive stock options owned by certain officers.
All shares reported herein are owned with voting and investment power vested in
those persons whose names are provided herein or their spouses. Some shares may
be owned in joint tenancy, by a spouse, or in the names of minor children.
<PAGE> 9
BOARD COMMITTEES AND MEETING ATTENDANCE
The Board of Directors held eight meetings during 1998. Each director attended
during his/her tenure 75% or more of the total number of meetings of the Board
of Directors and its committees of which they were members.
The Board of Directors of Merchants has the following committees:
EXECUTIVE PERSONNEL COMPENSATION COMMITTEE - See Compensation Committee
Report on Executive Compensation.
Compensation for non-executive officers and employees of Merchants and
its subsidiaries is determined by the management and directors of
Merchants and the respective subsidiary and reviewed by the
PERSONNEL/COMPENSATION COMMITTEE OF MERCHANTS. The Personnel/
Compensation Committee consists of directors of Merchants and its
subsidiary banks. Its members are Messrs. Logarakis, Sass, Rose,
Michael Duginski and Ms. Maria Cameron. The Personnel/Compensation
Committee held four meetings during 1998.
THE STOCK OPTION COMMITTEE is responsible for administering Merchants'
1996 Incentive Stock Option Plan. None of the members of the Stock
Option Committee is eligible to participate in the Stock Option Plan.
The Stock Option Committee consists of Messrs. Sass, Rose and
Logarakis. The Stock Option Committee held one meeting in 1998.
THE MARKETING/SERVICES COMMITTEE assists management in analyzing market
trends for the products of the subsidiary banks and in devising
strategies for promoting, advertising and selling the services of the
subsidiary banks. The Marketing Committee consists of directors of
Merchants and the subsidiary banks. The present members are Messrs.
Michael Dunham, John Klose, Cherek and Sass. The Marketing Committee
met four times during 1998.
THE ASSET/LIABILITY MANAGEMENT COMMITTEE monitors the interest rate
risk of the interest-earning assets of the subsidiary banks in
comparison to their interest-bearing liabilities. The Asset/Liability
Management Committee consists of directors of Merchants and its
subsidiary banks. Its members are Messrs. Winters, Casimir Janiszewski,
Michael Dana, William LaMacchia and Ms. Cameron. The Asset/Liability
Management Committee met four times during 1998.
THE AUDIT/OPERATIONS COMMITTEE reviews budget and auditing matters,
internal control procedures and audit and regulatory reports. The
Audit/Operations Committee consists of directors of Merchants and its
subsidiary banks. Its members are Messrs. Gapinski, Bartels, Gary
Krawczyk, Cherek, Francisco Aguilar, Kaczynski, and Sister Mary
Jendras. The Audit/Operations Committee met four times during 1998.
<PAGE> 10
THE COMPLIANCE COMMITTEE oversees the establishment of policies and
procedures and adherence to such policies and procedures to ensure
compliance by Merchants and its subsidiaries with laws, rules and
regulations applicable to banks and bank holding companies. The
Compliance Committee consists of directors of Merchants and its
subsidiary banks. Its members are Sister Jendras and Messrs. Bartels
and Prazynski. The Compliance Committee met four times during 1998.
THE TECHNOLOGY COMMITTEE was formed in 1998. The purpose of the
committee is to establish framework within which Merchants will meet
the challenges of the new millennium, by providing quality products and
services to its varied constituencies in a cost efficient manner, along
with ensuring that the internal technological architecture of Merchants
meets industry state of the art standards wherever possible. Its
members are Messrs. Bartels, Casimir Janiszewski, Frank Janiszewski and
Dunham. The Technology Committee met two times during 1998.
The Board of Directors does not have a standing Nominating Committee.
DIRECTOR COMPENSATION
Directors of Merchants who are not employees of Merchants or any of its
subsidiaries are paid a fee of $50 for each Board of Directors meeting and $200
for each committee meeting. Fees are only paid for actual attendance at such
meetings.
CERTAIN TRANSACTIONS AND REPORTS
Various officers and directors of Merchants and its subsidiaries, members of
their families, and the companies or firms with which they are associated were
customers of, and had banking transactions, including loans, with one or more of
Merchants' subsidiary banks in the ordinary course of each such bank's business
during 1998. All such loans were made on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for comparable
transactions with other persons and, in the opinion of the management of
Merchants' subsidiary banks, did not involve more than a normal risk of
collectibility or present other unfavorable features.
Keith C. Winters and Associates, LTD, a business interest of director Winters,
lease office space from Merchants. The lease terms are substantially the same as
those offered to other tenants.
Michael Duginski, director of Lincoln State Bank, and Gary Krawczyk, a director
of Franklin State Bank, are principals of the Krawczyk and Duginski, S.C. law
firm that performs legal services for Merchants and its subsidiaries. Krawczyk
and Duginski lease office space in the Merchants corporate headquarters at terms
substantially the same as those offered to other tenants.
Dana Investment Advisors, Inc., a registered investment advisor under the
Investment Advisor's Act of 1940, acts as an investment advisor to subsidiaries
of Merchants. Michael Dana, President of Dana Investment Advisors, Inc., is a
director of Lincoln State Bank. The advisory services are rendered on
substantially the same terms and conditions as those prevailing for similar
services in the relevant market.
<PAGE> 11
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Under Section 16(a) of the Securities Exchange Act of 1934, Merchants' directors
and executive officers, as well as certain persons holding more than 10% of
Merchants' stock, are required to report their initial ownership of stock and
subsequent changes in such ownership to the Securities and Exchange Commission
and Merchants (such requirements herein after referred to as "Section 16(a)
filing requirements"). Specific time deadlines for the Section 16(a) filing
requirements have been established.
To Merchants' knowledge, and based solely upon a review of the copies of such
reports furnished to Merchants, with respect to the fiscal year ended December
31, 1998, Merchants directors and executive officers complied with the
applicable Section 16(a) filing requirements.
EXECUTIVE COMPENSATION
The following table sets forth information concerning compensation paid or
accrued for services rendered in all capacities to Merchants and its affiliates
for the fiscal years ended December 31, 1998, 1997 and 1996 of the person who
was, on December 31, 1998, the Chief Executive Officer of Merchants and of the
four highest paid persons whose annual compensation exceeded $100,000 in 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
======================= ================================================== =====================================
Long-Term Compensation
Annual Compensation Awards
- ----------------------- -------- ---------- ----------- ------------------ -------------------- ----------------
Securities
Name and Other Annual Underlying All Other
Principal Position Year Salary Bonus Compensation Options/SARs(#) Compensation
- ----------------------- -------- ---------- ----------- ------------------ -------------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
James Bomberg 1998 $149,723 $18,000 --- --- $ 6,589 (1)
President and Chief 1997 $117,938 $15,000 --- --- $ 5,206 (1)
Executive Officer of 1996 $ 97,149 $14,335 --- --- $ 4,329 (1)
Merchants
- ----------------------- -------- ---------- ----------- ------------------ -------------------- -----------------
Michael Murry 1998 $125,232 $50,000 --- --- $ 9,356 (2)
Chairman of the Board 1997 $171,766 $80,000 --- --- $ 12,397 (3)
of Directors of 1996 $204,907 $85,000 --- --- $ 13,527 (4)
Merchants
- ----------------------- -------- ---------- ----------- ------------------ -------------------- -----------------
Robert Blonski 1998 $119,689 $18,000 --- --- $ 5,508 (1)
President and Chief 1997 $117,182 $15,000 --- --- $ 5,017 (1)
Executive Officer of 1996 $117,432 $14,335 --- --- $ 5,271 (1)
M&M Services
- ----------------------- -------- ---------- ----------- ------------------ -------------------- -----------------
Conrad Kaminski 1998 $132,408 $18,000 --- --- $ 5,906 (1)
President of 1997 $121,217 $15,000 --- --- $ 5,346 (1)
Merchants Milwaukee 1996 $106,884 $14,335 --- --- $ 4,732 (1)
Division
- ----------------------- -------- ---------- ----------- ------------------ -------------------- -----------------
John Krawczyk 1998 $ 95,631 $13,147 --- --- $ 4,266 (1)
Executive Vice 1997 $ 87,405 $11,939 --- --- $ 3,974 (1)
President and Chief 1996 $ 81,087 $10,823 --- --- $ 3,676 (1)
Operations Officer of
Merchants
======================= ======== ========== =========== ================== ==================== =================
</TABLE>
(1) Contributions to the Corporation's Defined Contribution 401(k) Plan
(2) Contributions to the Corporation's Defined Contribution 401(k) Plan
of $6,800 and life insurance policy premium of $2,556.
<PAGE> 12
(3) Contributions to the Corporation's Defined Contribution 401(k) Plan
of $9,938 and life insurance policy premium of $2,459.
(4) Contributions to the Corporation's Defined Contribution 401(k) Plan
of $11,080 and life insurance policy premium of $2,447.
EMPLOYMENT AGREEMENTS
In February of 1996, Merchants entered into employment agreements with Messrs.
Murry, Bomberg, Kaminski, John Krawczyk and James Mroczkowski. At the same time,
M&M Services, Inc., a wholly-owned subsidiary of Merchants, entered into
employment agreements with Messrs. Blonski and Stengel, and Achieve Mortgage, a
wholly-owned subsidiary of Merchants, entered into an employment agreement with
Mr. Donaj (the "Employment Agreements"). Messrs. Murry, Bomberg, Kaminski,
Krawczyk and Mroczkowski serve as chairman of the board of directors, president
and chief executive officer, president Milwaukee division, executive vice
president and chief operating officer and vice president and chief financial
officer, respectively, of Merchants. Messrs. Blonski and Stengel are president
and chief executive officer and senior vice president and comptroller,
respectively, of M&M Services. Mr. Donaj serves as president and chief executive
officer, of Achieve Mortgage.
With the exception of the Employment Agreements with Messrs. Murry and
Mroczkowski, all of the Employment Agreements replace previous employment
agreements with the respective officers.
Except for the Employment Agreement with Mr. Murry, all of the Employment
Agreements have terms of three years. Mr. Murry's Employment Agreement has a
term of five years. Each Employment Agreement is automatically extended on its
anniversary date for an additional year, unless either party has given advance
notice that the Agreement will not be extended, in which case the Agreement
expires at the end of its then-remaining term.
Duties to be performed under the Agreements are set forth in the respective
By-Laws and are determined by the respective Board of Directors.
Compensation for services rendered under the Employment Agreements consists of
the Base Salary, as defined in the Agreements, and participation in bonus and
other benefit plans.
If the Agreements are terminated by the employer prior to their expiration for
reasons other than the employee's death, retirement, disability, or other than
for cause as defined in the Agreements, or if the employee terminates the
Agreement for cause as defined in the Agreement or after a change in control, as
defined in the Agreements, then the employee will receive severance payments
equal to the sum of the Base Salary in effect at termination plus the cash
bonus, if any, for the year prior to termination times the number of years of
the remaining employment term. In addition, the employee will receive fringe
benefits during such remaining term.
If termination occurs because of death, retirement or for cause, or if the
employee terminates without cause, then the employer is obligated to pay the
compensation and benefits only through the date of termination.
If termination occurs due to disability, as defined in the Employment
Agreements, the employee will be entitled to payment of his Base Salary at 100%
for one year and at 75% for the remaining portion of the employment term,
adjusted by payments received by the employee pursuant to disability insurance
and social security and workers compensation programs.
<PAGE> 13
The Employment Agreements provide that during the employment period and for one
year thereafter, the employee will not accept employment with any Significant
Competitor, as that term is defined in the Employment Agreements, of the
Corporation or its affiliates.
THE 1996 INCENTIVE STOCK OPTION PLAN
On April 25, 1996, the Board of Directors of Merchants adopted the Merchants and
Manufacturers Bancorporation, Inc. 1996 Incentive Stock Option Plan (the "Plan")
which was approved by the shareholders on May 28, 1996.
The Plan replaced the 1986 Incentive Stock Option Plan, which terminated in
April 1996. The purpose of the Plan is to advance the interests of Merchants and
its subsidiaries by encouraging and providing for the acquisition of an equity
interest in Merchants by key employees and by enabling Merchants and its
subsidiaries to attract and retain the services of employees upon whose skills
and efforts the success of Merchants depends.
The following summary description of the Plan is qualified in its entirety by
reference to the full text of the Plan a copy of which may be obtained from
Merchants upon request to John Krawczyk, Secretary, 14100 West National Avenue,
P.O. Box 511160, New Berlin, WI 53151.
The Plan is administered by the Stock Option Committee of the Board or by any
other committee appointed by the Board consisting of not less than three (3)
directors (the "Committee"). The Committee is comprised of directors who are
disinterested persons within the meaning of Rule 16b-3 as promulgated by the
Securities and Exchange Commission. Subject to the terms of the Plan and
applicable law, the Committee has the authority to: establish rules for the
administration of the Plan; select the individuals to whom options are granted;
determine the numbers of shares of Common Stock to be covered by such options;
and take any other action it deems necessary for the administration of the Plan.
Participants in the Plan consist of the individuals selected by the Committee.
Those selected individuals may include any executive officer or employee of
Merchants or its subsidiaries who, in the opinion of the Committee, contribute
to Merchants' growth and development.
Subject to adjustment for dividends or other distributions, recapitalizations,
stock splits or similar corporate transactions or events, the total number of
shares of Common Stock with respect to which options may be granted pursuant to
the Plan is 60,000. The shares of Common Stock to be delivered under the Plan
may consist of authorized but unissued stock or treasury stock.
Options may be granted by the Committee to key employees as determined by the
Committee. The Committee has complete discretion in determining the number of
options granted to each such grantee. It is intended that all options granted
under the Plan will qualify as incentive stock options within the meaning of
Section 422 of the Internal Revenue Code.
The exercise price for all options granted pursuant to the Plan is the fair
market value of the Common Stock on the date of grant of the option; however, in
case of options granted to a person then owning more than 10% of the outstanding
Common Stock, the option price will be not less than 110% of the fair market
value on such date. The exercise price must be paid in cash at the time of
exercise of the options.
<PAGE> 14
Options granted under the Plan must be exercised within ten (10) years from the
date of grant, provided that options granted to a person then owning more than
10% of the outstanding stock of Merchants must be exercised before the fifth
anniversary of the date of grant. Options not exercised within the stated time
period will expire.
The Committee may impose such transfer restrictions on the shares of Common
Stock acquired pursuant to the exercise of options under the Plan as may be
required, among others, by applicable federal or state securities laws.
Merchants has a "right of first refusal" pursuant to which any shares of Common
Stock acquired by exercising an option must first be offered to Merchants before
they may be sold to a third party. Merchants may then purchase the offered
shares on the same terms and conditions (including price) as apply to the
potential third-party purchaser.
The Board of Directors of Merchants may terminate, amend or modify the Plan at
any time, provided that no such action of the Board, without prior approval of
the shareholders may: increase the number of shares which may be issued under
the Plan; materially increase the cost of the Plan or increase benefits to
participants or change the class of individuals eligible to receive options.
The following is a summary of the principal federal income tax consequences
generally applicable to awards under the Plan. The grant of an option is not
expected to result in any taxable income for the recipient. The holder of an
Incentive Stock Option generally will have no taxable income upon exercising the
Incentive Stock Option (except that a liability may arise pursuant to the
alternative minimum tax), and Merchants will not be entitled to a tax deduction
when an Incentive Stock Option is exercised. The tax consequences to an optionee
upon disposition of shares acquired through the exercise of an option will
depend on how long the shares have been held and upon whether such shares were
acquired by exercising an Incentive Stock Option which qualifies as such under
the Internal Revenue Code. Generally, there will be no tax consequences to
Merchants in connection with the disposition of shares acquired under an option.
The following table presents information about stock options granted in 1998 to
the officers named in the Summary Compensation Table.
STOCK OPTION GRANTS IN 1998
<TABLE>
<CAPTION>
======================== ================= =========================== ================== =================
Options % of Total Options Exercise Expiration
Name Granted Granted in Fiscal Year Price Date
- ------------------------ ----------------- --------------------------- ------------------ -----------------
<S> <C> <C> <C> <C>
Michael Murry 11,000 22.10% $31.14 7/31/08
- ------------------------ ----------------- --------------------------- ------------------ -----------------
Robert Blonski 2,475 4.97% $30.91 4/30/08
- ------------------------ ----------------- --------------------------- ------------------ -----------------
Conrad Kaminski 3,300 6.63% $30.91 4/30/08
- ------------------------ ----------------- --------------------------- ------------------ -----------------
James Bomberg 4,950 9.94% $30.91 4/30/08
- ------------------------ ----------------- --------------------------- ------------------ -----------------
John Krawczyk 3,300 6.63% $30.91 4/30/08
======================== ================= =========================== ================== =================
</TABLE>
The following table summarizes for each of the officers named in the Summary
Compensation Table the number of shares of Merchants stock acquired upon
exercise of options during the fiscal year ended December 31, 1998; the
aggregate dollar value realized upon exercise of options; the total number of
unexercised options held at the end of the fiscal year ended December 31, 1998;
and the aggregate dollar value of in-the-money unexercised options held at the
end of the fiscal year ended December 31, 1998. Value realized upon exercise is
the difference between fair market value of the underlying stock on the
<PAGE> 15
exercise date and the exercise price of the option. Value of unexercised
in-the-money options at the fiscal year-end is the difference between exercise
price and the fair market value of the underlying stock on December 31, 1998,
which was $39.50 per share. These values, unlike any amount which may be set
forth in the column headed "Value Realized" have not been, and may never be,
realized. The underlying options have not been, and may never be, exercised; the
actual gains, if any, on exercise will depend on the value of Merchants' stock
on the date of exercise. As of December 31, 1998, all unexercised options were
exercisable.
<TABLE>
<CAPTION>
AGGREGATED OPTION EXERCISES IN FISCAL YEAR 1998
AND FISCAL YEAR-END OPTION VALUES
======================= ===================== =============== ======================= =======================
Number of Value of Unexercised
Shares Acquired Value Unexercised Options In-the-Money Options
on Exercise Realized on December 31, 1998 On December 31, 1998
Name (#) $ (#) ($)
- ----------------------- --------------------- --------------- ----------------------- -----------------------
<S> <C> <C> <C> <C>
Michael Murry 2,250 $47,025 11,000 $ 91,960
- ----------------------- --------------------- --------------- ----------------------- -----------------------
Robert Blonski --- --- 2,475 $ 21,260
- ----------------------- --------------------- --------------- ----------------------- -----------------------
Conrad Kaminski --- --- 6,600 $ 117,967
- ----------------------- --------------------- --------------- ----------------------- -----------------------
James Bomberg --- --- 6,000 $ 87,606
- ----------------------- --------------------- --------------- ----------------------- -----------------------
John Krawczyk --- --- 8,250 $ 158,872
======================= ===================== =============== ======================= =======================
</TABLE>
BENEFIT PLANS
Merchants maintains a 401k Profit Sharing Plan for the benefit of all employees
who have attained the age of 20-1/2 years and have completed six months of
service as of the 401k Profit Sharing Plan anniversary date, June 1st. A
participating employee may elect to defer a portion of his or her compensation
(between 1% and 12% of base compensation, subject to certain limitations, in 1%
increments) and contribute this amount to the 401k Profit Sharing Plan.
Deferrals of up to 6% of compensation which are contributed to a trust set up
pursuant to the 401k Profit Sharing Plan may be deducted by Merchants for
federal income tax purposes. Merchants may make either or both of the following
types of contributions out of its net profits to the 401k Profit Sharing Plan
(I) matching contributions up to 1% of base compensation; (ii) discretionary
contributions which are based on consolidated earnings of Merchants. Employees
of Merchants are fully vested in all amounts contributed to their account under
matching and discretionary contributions made by Merchants. Total contributions
amounted to $193,187 in 1998, contributions for Messrs. Murry, Blonski,
Kaminski, Bomberg and Krawczyk (the persons listed in the Compensation Table)
were $6,800, $5,508, $5,906, $6,589 and $4,266 respectively. With respect to the
investment of individual accounts, a participant may direct the Trustee in
writing to invest the vested portion of his/her account in specific assets,
including Merchants' securities.
Merchants has established a Salary Continuation Plan to provide retirement
income for President James Bomberg, Chief Financial Officer James Mroczkowski
and Lincoln State Bank President Cynthia Loew. The Salary Continuation Plan is a
non-qualified executive benefit plan in which Merchants agrees to pay the
executive additional benefits at retirement in return for continued satisfactory
performance. The Merchants Continuation Agreement provides for annual retirement
benefits of $60,700 for Mr. Bomberg, $35,800 for Mr. Mroczkowski and $30,700 for
Ms. Loew, commencing at age 65 and continuing for a period of 15 years. The
Salary Continuation Plan is unfunded (no specific assets are set aside by
Merchants in connection with the Plan). If the covered executive leaves the
bank's employ, either
<PAGE> 16
voluntarily or involuntarily, the agreement under the Salary Continuation Plan
terminates and the executive receives no benefits unless obligations under the
Plan are assumed by a subsidiary of Merchants, because of the executive's
employment status with such subsidiary. The Salary Continuation Plan is
informally linked with a single premium universal life insurance policy. The
executive is the insured under the policy, but Merchants is the owner and
beneficiary of the policy. The executive has no claim on the insurance policy,
its cash value or the proceeds thereof.
Franklin State Bank has adopted a Deferred Compensation Plan. Directors of
Franklin State Bank may elect to defer the directors' fees paid to them until
retirement with no income tax payable by the director until retirement benefits
are received. The deferral agreement provides for full vesting since the covered
director is setting aside his current compensation. Payments begin in the first
year following retirement.
COMPENSATION COMMITTEE REPORT ON
EXECUTIVE COMPENSATION
THE COMMITTEE
The Executive Personnel/Compensation Committee meets periodically to review the
performance and compensation of certain senior officers of Merchants and its
subsidiaries, including all executive officers of Merchants. The Executive
Personnel/Compensation Committee is comprised of Messrs. James Sass, Gervase
Rose, and Nicholas Logarakis. No member of the Committee is an employee or
officer of the Corporation or its subsidiaries. The committee is aware of the
limitations imposed by Section 162(m) of the Internal Revenue Code of 1986, as
amended, on the deductibility of compensation paid to certain senior executives
to the extent it exceeds $1.0 million per executive. The Committee's recommended
compensation amounts meet the requirements for deductibility. The Executive
Personnel/Compensation Committee held one meeting during 1998.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Corporations of which Messrs. Sass, Rose and Logarakis are executive officers
had loans with subsidiary banks of Merchants. See "Election of Directors -
Certain Transactions." There are no other interlocking relationships as defined
by the Securities and Exchange Commission, and no Merchants officer is a member
of the Committee.
GENERAL POLICY
The compensation objective of Merchants and its subsidiaries is to link
compensation with corporate and individual performance in a manner which will
attract and retain competent personnel with leadership qualities. The process
gives recognition to the compensation practices of competing organizations.
In an effort to achieve the long-term goals of shareholders, the compensation
program ties a significant portion of total compensation to the financial
performance of the Corporation compared to peer group performance. The Executive
Personnel/Compensation Committee makes recommendations on the compensation of
the Corporation's officers to the Board of Directors. The Compensation
Committee's recommendations reflect its assessment of the contributions to the
long-term profitability and financial performance made by individual officers.
In this connection, the Committee considers, among other things, the type of the
officer's responsibilities, the officer's long-term performance and tenure,
compensation relative to peer group and the officer's role in ensuring the
future financial success of the
<PAGE> 17
Corporation. Financial goals considered by the Committee include earnings per
share, return on assets, return on equity, asset quality, growth and expense
control.
In addition to measuring performance in light of these financial factors, the
Committee considers the subjective judgment of the Chairman of the Board in
evaluating performance and establishing salary, bonus, and long-term incentive
compensation for individual officers, other than the Chairman. The Committee
independently evaluates the performance of the Chairman, taking into
consideration such subjective factors as leadership, innovation and
entrepreneurship in addition to the described financial goals.
BASE SALARY
In determining officer salaries, the Committee considers surveys and data
regarding compensation practices of similar sized financial institutions with
comparable products in similar markets. The Committee also considers the
Chairman's assessment of the performance, the nature of the position and the
contribution and experience of individual officers (other than the Chairman of
the Board). The Committee independently evaluates the Chairman's performance and
compares his compensation to peer group data.
ANNUAL BONUSES
Officers of the Corporation and its subsidiaries are awarded annual bonuses in
January based on the previous year's financial performance at the discretion of
the Committee. The amount of the bonus is recommended to the Committee by the
Chairman, based on his and the officer's immediate supervisor's evaluation of
the achievement of corporate and individual goals and assessment of subjective
factors such as leadership, innovation and commitment to corporate advancement.
The Corporation annual incentive bonus is based on the overall consolidated
financial performance of the Corporation.
CHAIRMAN OF THE BOARD COMPENSATION
The compensation of the Chairman was established at a level which the Committee
believed would approximate compensation of the Chairmen with comparable
responsibilities of similar organizations and would reflect prevailing market
conditions. The Committee took into consideration a variety of factors,
including the achievement of corporate financial goals and individual goals. The
financial goals included increased earnings, return on assets, return on equity
and asset quality. No formula assigning weights to particular goals was used,
and achievement of other corporate performance goals was considered in general.
The Committee believes that the total compensation awarded to the Chairman of
the Board for 1998 is fair and appropriate under the circumstances.
In 1998 the Chairman of the Board reduced his participation in the Corporation's
day to day activities. He remains as the Corporation's chief commercial lender,
new business developer, and strategic planner. The Chairman's 1998 salary was
decreased to reflect the reduced time spent and the delegation of certain duties
to the Chief Executive Officer and other executive officers.
STOCK OPTIONS
The Committee administers the 1996 Incentive Stock Option Plan. Stock options
are designed to furnish long-term incentives to the officers of the Corporation
to build shareholder value and to provide a link between officer compensation
and shareholder interest. The Committee made awards under the Stock
<PAGE> 18
Option Plan to the officers of the Corporation and its subsidiaries in 1998.
Awards were based upon performance, responsibilities and the officer's relative
position and ability to contribute to future performance of the Corporation. In
determining the size of the option grants, the Committee considered information
and evaluations provided by the Chairman of the Board. The award of option
grants to the Chairman is based on the overall performance of the Corporation
and on the Committee's assessment of the Chairman's contribution to the
performance and his leadership.
The Executive Personnel Compensation Committee: Nicholas Logarakis, Gervase
Rose, James Sass
SHAREHOLDER RETURN AND PERFORMANCE PRESENTATION
STOCK PRICE PERFORMANCE GRAPH
Set forth below is a line graph comparing the yearly change in the cumulative
total shareholder return (change in year-end stock price plus reinvested
dividends) on Merchants' Common Stock with the cumulative total return of the
Nasdaq Bank Index and the S&P 500 for the period of five fiscal years commencing
on December 31, 1993, and ending December 31, 1998. The Nasdaq Bank Index is
prepared for Nasdaq by the center for Research in Securities Prices at the
University of Chicago. The graph assumes that the value of the investment in
Merchants stock and for each index was $100 on December 31, 1993.
<TABLE>
<CAPTION>
12/31/93 12/31/94 12/31/95 12/31/96 12/31/97 12/31/98
<S> <C> <C> <C> <C> <C> <C>
Merchants 100.00 106.32 115.52 134.28 215.24 303.76
Nasdaq Bank 100.00 99.64 148.38 195.91 328.02 324.90
S&P 500 100.00 101.23 139.28 171.23 228.34 293.60
</TABLE>
Historical stock price performance shown on the graph is not necessarily
indicative of the future price performance.
<PAGE> 19
PROPOSAL 2
PROPOSAL TO AMEND MERCHANTS' ARTICLES OF
INCORPORATION TO INCREASE AUTHORIZED COMMON STOCK.
DESCRIPTION OF AMENDMENT:
The Merchants' Board of Directors unanimously approved and recommended that
Merchants' shareholders approve an amendment to Article IV of the Articles which
will increase the number of authorized shares of Common Stock of Merchants from
3,000,000 shares to 6,000,000 shares. If the proposal is adopted by Merchants'
shareholders, it is expected that the amendment will become effective on May 25,
1999, or as soon as practicable thereafter. No holder of the Common Stock of
Merchants has any preemptive rights. The complete text of the amendment is
attached to this Proxy Statement as Exhibit A.
Under the current Articles, Merchants is authorized to issue up to 3,000,000
shares of Common Stock, par value $1.00. As of April 19, 1999, 1,489,754 shares
were outstanding. If the amendment is adopted, Merchants would be authorized to
issue up to 6,000,000 shares of Common Stock, par value $1.00.
REASONS FOR AND EFFECT OF AMENDMENT:
The Board of Directors believes that it is desirable to have additional
authorized shares of Common Stock available for stock dividends and splits,
possible acquisitions and other general corporate purposes. As previously
announced, Merchants has entered into a merger agreement pursuant to which
additional shares of Common Stock would be issued, if the transaction is
consummated. While Merchants cannot predict when and if stock dividends or stock
splits or acquisitions will occur, having the additional authorized shares
available for issuance in the future will provide greater flexibility and will
avoid the delay and expense of a special shareholders meeting, unless such
meeting is required by applicable law.
The increase in the number of authorized shares is not designed to deter or
prevent a change in control; however, under certain circumstances, Merchants
could use additional shares to avoid a takeover or change in control of
Merchants which the Board of Directors deems not to be in the best interest of
the Shareholders of Merchants. Merchants is not aware of any attempt to effect
such a takeover or change in control. With the exception of the aforementioned
merger, as of this date there are no plans or commitments with respect to the
issuance of additional shares of Common Stock of Merchants.
The authorization of additional shares of Common Stock pursuant to this proposal
will have no dilutive effect upon proportionate voting power of present
shareholders of Merchants. However, to the extent that shares are subsequently
issued to persons other than present shareholders and/or in proportions other
than the proportion that presently exists, such issuance could have a dilutive
effect on present shareholders.
If a quorum exists, the proposed amendment to the Articles of Incorporation is
approved if the votes cast favoring the amendment exceed the votes opposing the
amendment. A majority of the votes entitled to be cast on the amendment
constitutes a quorum. The Board of Directors recommends that the shareholders
vote FOR the amendment. Proxies solicited by the Board of Directors will be so
voted unless shareholders specify to the contrary in their proxies or abstain
from voting on this matter. The complete text of the proposed amendment is
attached to this proxy statement as Exhibit A.
<PAGE> 20
INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors has selected Ernst & Young LLP as Merchants' independent
auditors for the fiscal year ending December 31, 1999. Representatives of Ernst
& Young will be present at the Annual Meeting to make any statement they may
desire and to respond to questions from shareholders.
OTHER MATTERS
Although management is not aware of any other matters that may come before the
meeting, if any such matters should be presented, the persons named in the
accompanying proxy intend to vote such proxy in accordance with their best
judgment.
SHAREHOLDERS MAY OBTAIN A COPY OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K AS
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION AT NO COST BY WRITING TO THE
OFFICE OF THE SECRETARY, MERCHANTS AND MANUFACTURERS BANCORPORATION, INC., 14100
WEST NATIONAL AVENUE, P.O.BOX 511160, NEW BERLIN, WISCONSIN, 53151.
By Order of the Board of Directors,
By: /s/ Michael J. Murry
---------------------------------
Michael J. Murry
Chairman of the Board
May 5, 1999
<PAGE> 21
EXHIBIT A
RESOLVED, that the Articles of Incorporation of Merchants and
Manufacturers Bancorporation, Inc. be amended by striking out amended
Article IV, relating to Capital, reading as follows:
"The aggregate number of shares of stock which this Corporation
shall have authority to issue shall be three million (3,000,000)
shares of Common Stock of the par value of One Dollar ($1.00) per
share."
and inserting in lieu thereof the following:
"The aggregate number of shares of stock which this Corporation
shall have authority to issue shall be six million (6,000,000)
shares of Common Stock of the par value of One Dollar ($1.00) per
share."
<PAGE> 22
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC.
14100 WEST NATIONAL AVENUE
NEW BERLIN, WISCONSIN
PROXY FOR ANNUAL MEETING
This Proxy is solicited by the Board of Directors of Merchants and Manufacturers
Bancorporation, Inc. ("Merchants") for the Annual Meeting of shareholders on May
25, 1999.
The undersigned hereby constitutes and appoints Keith Winters and Casimir
Janiszewski, and each of them, with full power to act alone and with power of
substitution, to be the true and lawful attorney and proxy of the undersigned to
vote at the Annual Meeting of Shareholders of Merchants, to be held at Alverno
College, 3401 South 39th Street, Milwaukee, Wisconsin 53215 on May 25, 1999 at
4:00 p.m. (or at any adjournment(s) thereof), the shares of stock which the
undersigned would be entitled to vote on the election of Directors and the
proposal to amend the Articles of Incorporation and in their discretion on such
other business as may properly come before the meeting or adjournment(s). The
undersigned hereby revokes any proxy heretofore given and ratifies all that said
attorneys and proxies or their substitutes may do by virtue hereof.
1. ELECTION OF DIRECTORS
To elect the six persons listed below as Class I Directors as discussed in
the Proxy Statement dated May 5, 1999 attached hereto.
Thomas Gapinski Gervase Rose
J. Michael Bartels Robert Donaj
John Krawczyk James Sass
[ ] Elect as Directors the six nominees listed above.
[ ] Withhold authority to vote for the six nominees listed above.
[ ] Withhold authority to vote for individual nominees (to
withhold authority to vote for any individual nominee, check
this box and draw a line through that nominee's name above).
2. ADOPTION OF RESOLUTION AMENDING THE CORPORATION'S ARTICLES OF
INCORPORATION
Adoption of the resolution amending the Corporation's Articles of
Incorporation to increase the number of authorized shares of $1.00 par
value common stock from 3,000,000 to 6,000,000 shares.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
<PAGE> 23
The Board of Directors recommends a vote FOR the election of the six persons
listed above, and FOR adoption of Proposal 2, as described in the Proxy
Statement.
If any additional matters are properly presented, the persons named in the proxy
will have the discretion to vote in accordance with their own judgment in such
matters. This proxy is solicited on behalf of the Board of Directors and may be
revoked prior to its exercise by written notice to the Secretary of the
Corporation, or by submitting a later-dated proxy, or by attending the annual
meeting. This Proxy will be voted in accordance with instructions given by the
stockholder, but if no instructions are given, this Proxy will be voted to elect
the persons listed above and FOR adoption of the listed proposal.
The undersigned hereby acknowledges receipt of the Notice of Annual Meeting
dated May 5, 1999, and the Proxy Statement enclosed herewith.
Dated , 1999
---------------------------
Number of Shares:
----------------
- --------------------------------- ---------------------------------
Signature of Stockholder Stockholder's Name (Please print)
- --------------------------------- ---------------------------------
Signature of Stockholder Stockholder's Name (Please print)
(Please sign your name exactly as it appears on the stock
certificate. In signing as Executor, Administrator, Personal
Representative, Guardian, Trustee, or Attorney, please add your title
as such. All joint owners should sign.)
<PAGE> 24
1998 ANNUAL REPORT
TABLE OF CONTENTS
PAGE
Chairman's Letter 2
Selected Consolidated Financial Data 4
Selected Quarterly Financial Data 5
Management's Discussion and Analysis of Financial
Conditions and Results of Operations 5
Business of The Corporation 20
Report of Management 24
Report of Independent Auditors 25
Consolidated Statements of Financial Condition 26
Consolidated Statements of Income 27
Consolidated Statements of Stockholders' Equity 28
Consolidated Statements of Cash Flows 29
Notes to Consolidated Financial Statements 31
Directors and Officers 51
Investor Information 55
1
<PAGE> 25
Dear Stockholders:
1998 was a year of progress for Merchants & Manufacturers BanCorp. For the
fourth consecutive year, MMBC realized steady growth in earnings and in 1998 the
stock outperformed the Standard & Poors 500 Index. This, in turn, has caused the
stock price to increase steadily over the last few years. In April, the
directors declared a 3 for 2 stock split, and in October, a 10% stock dividend.
MMBC's strategy for growth as an independent community banking resource is
continuing as planned. We have opened a new Senior Service Center in West Allis,
bringing the total number of Senior Service Centers to eight. The addition of
two new experienced commercial lenders, Thomas Wangerin and Perfecto Rivera has
produced marked growth in that area. In the fall of 1998, we opened the Franklin
Business Park Branch and Conference Center. In addition to full banking
facilities, the center offers state-of-the-art technology for business and other
meetings, including teleconferencing, for customers in the Franklin Business
Park and elsewhere. We expect the Center to be of great use to existing
customers, as well as a vehicle to attract new business.
In order to realize our goal of building a network of community banks in
strategic locations, MMBC is pursuing representation in one of the most rapidly
evolving areas of Wisconsin. I am happy to report that we are in final
negotiations with Pyramid Bancorp and its subsidiary Grafton State Bank.
Regulatory approval should be completed by July of 1999. Grafton's philosophy,
like ours, is based on Community Banking. Their retail experience will make them
an exceptional partner, and we look forward to working with them.
In line with our philosophy of expanding on fee income products, we have
developed a joint venture with Dana Investment Advisors, Inc. to provide custom
retirement solutions to our business customers. In the near future, we will be
introducing alternative investment options in conjunction with Robert W. Baird,
as well as Internet banking.
We have all received information in recent months regarding the Year 2000. MMBC
recognized the need to address this issue several years ago. As always, our main
concern is to deliver the highest level of customer service. With this thought
in mind, our Year 2000 team has developed a plan to ensure continued access to
all of the services that you have come to rely on. Recently, we mailed to our
customers, information which explains our plan. MMBC, as your bank, will be
prepared to assist you in January 2000, whether you need to cash a check, make a
deposit, use a TYME machine, charge on your credit card, or access any other
service that we offer.
2
<PAGE> 26
This year, we noted with deep regret the passing of Adrian Choinski and Dr.
Thomas Kozina. Both gentlemen were original directors of MMBC and who greatly
contributed to the growth of the Corporation. We extend condolences to their
families and friends. They will be missed.
I would like to thank our employees and directors for their efforts in making us
a more prominent presence in our communities. We have provided continued support
to the Lincoln Neighborhood Redevelopment Corporation, The St. Josaphat Basilica
Foundation, the new Polish Cultural Center, and many other civic and charitable
groups. Our employees continue their involvement with the Milwaukee Symphony,
Polish Fest, St. Francis Hospital, the American Cancer Society, and other
community organizations.
We believe our commitment to stockholders, customers, community, and to each
other will help us continue our plan for increased growth and profitability.
More importantly, we look forward to having you join us in "Growing A Stronger
Community."
Sincerely,
By: /s/ Michael J. Murry
---------------------------------
Michael Murry
Chairman of the Board
3
<PAGE> 27
SELECTED FINANCIAL DATA
The following table summarizes certain historical financial data
regarding the Corporation. This information is derived in part from, and should
be read in conjunction with, the Consolidated Financial Statements of the
Corporation presented elsewhere herein (dollars in thousands, except per share
data):
<TABLE>
<CAPTION>
At or For the Year Ended December 31,
--------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
SELECTED BALANCE SHEET DATA
Total assets $ 334,503 $ 296,678 $ 267,723 $ 264,247 $ 248,181
Loans receivable, net 251,815 227,178 189,791 163,650 149,925
Investment securities held to maturity 0 0 0 0 4,326
Investment securities available for sale 15,721 12,649 15,499 15,833 9,464
Mortgage-related securities available for sale 22,850 28,169 27,154 44,251 54,634
Deposits 289,230 264,669 232,933 233,083 223,446
Short-term borrowings 13,260 1,500 6,850 3,000 0
Stockholders' equity 30,997 29,496 26,380 26,543 23,573
Realized stockholders' equity(2) 31,631 29,505 26,583 26,724 25,512
SELECTED INCOME STATEMENT DATA
Total interest income (taxable-equivalent)(1) $23,336 $21,126 $19,401 $ 18,479 $ 16,212
Total interest expense 10,589 9,090 8,362 7,921 6,155
--------------------------------------------------------------------
Net interest income 12,747 12,036 11,039 10,558 10,057
Provision for loan losses 250 192 460 132 43
--------------------------------------------------------------------
Net interest income after provision for
loan losses 12,497 11,844 10,579 10,426 10,014
Net gain (loss) on security sales 217 78 70 61 (244)
Other noninterest income 2,113 1,578 1,485 1,267 1,185
--------------------------------------------------------------------
Total noninterest income 2,330 1,656 1,555 1,328 941
Noninterest expense 10,532 9,620 10,021 9,040 8,484
--------------------------------------------------------------------
Income before income taxes 4,295 3,880 2,113 2,714 2,471
Income taxes 1,468 1,439 730 917 874
Less taxable equivalent adjustment 121 32 73 96 73
--------------------------------------------------------------------
Net income $ 2,706 $ 2,409 $ 1,310 $ 1,701 $ 1,524
====================================================================
PER SHARE DATA(3)
Net income - basic $ 1.81 $ 1.67 $ 0.91 $ 1.16 $ 1.04
Net income - diluted $ 1.78 $ 1.65 $ 0.90 $ 1.15 $ 1.03
Cash dividend declared $ 0.59 $ 0.48 $ 0.48 $ 0.39 $ 0.31
Book value $ 20.80 $ 19.78 $ 18.48 $ 18.06 $ 16.10
Average shares outstanding 1,497,763 1,442,723 1,439,560 1,467,967 1,469,581
OTHER DATA
Net interest margin 3.64% 3.95% 3.87% 3.86% 3.93%
Allowance for loan losses to non-accrual loans 225.47% 299.42% 206.87% 232.92% 189.64%
Nonperforming assets to total assets 0.31% 0.24% 0.35% 0.25% 0.35%
Stockholders' equity to total assets 9.27% 9.94% 9.85% 10.04% 9.50%
Average stockholders' equity to average assets 9.69% 9.77% 9.94% 10.01% 9.87%
Return on assets (ratio of net income to
average total assets) 0.86% 0.86% 0.50% 0.67% 0.62%
Return on stockholders' equity (ratio of net
income to average equity) 8.92% 8.82% 5.00% 6.71% 6.27%
Dividend payout ratio 32.85% 29.18% 52.75% 33.45% 29.79%
Facilities:
Number of full-service offices 9 8 8 8 6
Number of limited services offices 8 6 6 6 4
</TABLE>
(1) Taxable-equivalent adjustments to interest income involve the conversion of
tax-exempt sources of interest income to the equivalent amounts of interest
income that would be necessary to derive the same net return if the
investments had been subject to income taxes. A 34% incremental income tax
rate, consistent with the Corporation's historical experience, is used in
the conversion of tax-exempt interest income to a tax-equivalent basis.
(2) Excludes SFAS 115 mark-to-market equity adjustment.
(3) All per share information presented in this report has been retroactively
restated to give effect to the 3 for 2 stock split, declared in April 1998
and the 10% stock dividend declared in October 1998, as if each occurred as
of January 1, 1994.
4
<PAGE> 28
The following table sets forth certain unaudited income and expense
data on a quarterly basis for the periods indicated (dollars in thousands,
except per share data):
<TABLE>
<CAPTION>
1998 1997
---------------------------------------------------------------------------------------------------
3/31 6/30 9/30 12/31 3/31 6/30 9/30 12/31
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income
(taxable-equivalent) (1) $5,643 $5,709 $5,940 $6,044 $4,952 $5,173 $5,386 $5,615
Interest expense 2,512 2,606 2,719 2,752 2,168 2,201 2,321 2,400
---------------------------------------------------------------------------------------------------
Net interest income 3,131 3,103 3,221 3,292 2,784 2,972 3,065 3,215
Provision for loan losses 75 75 50 50 48 48 48 48
Noninterest income 450 559 529 792 396 390 433 437
Noninterest expense 2,965 2,546 2,545 2,476 2,625 2,318 2,343 2,334
---------------------------------------------------------------------------------------------------
Income before taxes 541 1,041 1,155 1,558 507 996 1,107 1,270
Income taxes 180 367 382 539 196 366 408 469
Less taxable equivalent
adjustment 12 16 50 43 6 6 8 12
===================================================================================================
Net income $349 $658 $723 $976 $305 $624 $691 $789
===================================================================================================
Basic earnings per share $0.24 $0.44 $0.48 $0.65 $0.21 $0.44 $0.48 $0.54
===================================================================================================
Diluted earnings per share $0.23 $0.44 $0.47 $0.64 $0.21 $0.43 $0.48 $0.53
===================================================================================================
Dividends per share $0.12 $0.13 $0.15 $0.20 $0.12 $0.12 $0.12 $0.12
===================================================================================================
</TABLE>
(1) Taxable-equivalent adjustments to interest income involve the conversion of
tax-exempt sources of interest income to the equivalent amounts of interest
income that would be necessary to derive the same net return if the
investments had been subject to income taxes. A 34% incremental income tax
rate, consistent with the Corporation's historical experience, is used in
the conversion of tax-exempt interest income to a tax-equivalent basis.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The following discussion is intended as a review of significant factors
affecting the Corporation's financial condition and results of operations as of
and for the period ended December 31, 1998, as well as providing comparisons
with previous years. This discussion should be read in conjunction with the
Consolidated Financial Statements and accompanying notes and the selected
financial data presented elsewhere in this report.
NET INTEREST INCOME
Net interest income equals the difference between interest earned on
assets and the interest paid on liabilities and is a measure of how effectively
management has balanced and allocated the Corporation's interest rate sensitive
assets and liabilities. Net interest income is the most significant component of
earnings. Taxable-equivalent adjustments to interest income involve the
conversion of tax-exempt sources of interest income to the equivalent amounts of
interest income that would be necessary to derive the same net return if the
investments had been subject to income taxes on a fully tax equivalent basis. A
34% incremental income tax rate, consistent with the Corporation's historical
experience, is used in the conversion of tax-exempt interest income to a
taxable-equivalent basis.
Net interest income on a fully tax equivalent basis increased to $12.7
million in 1998, compared with $12.0 million in 1997 and $11.0 million in 1996.
This increase of $711,000 in net interest income in 1998 was due primarily to an
increase in the volume of earning assets in 1998 (a $2.8 million increase). This
gain was partially offset by an increase in the volume of interest bearing
liabilities (a $1.4 million increase).
The total increase in average earning assets was primarily due to an
increase in average loans of $29.2 million. All of the loan growth was
internally generated. Interest bearing deposits increased $27.6 million in 1998.
The Corporation's entrance into new markets, introduction of new products and
its pricing of time deposits were contributing factors to the growth in
deposits.
5
<PAGE> 29
The following table sets forth, for the periods indicated, information
regarding the average balances of assets and liabilities and the total dollar
amount of interest income from average interest-earning assets and interest
expense on average interest-bearing liabilities, resulting yields, interest rate
spread, ratio of interest-earning assets to interest-bearing liabilities, and
net interest margin. Average balances have been calculated using average daily
balances during such periods (dollars in thousands):
<TABLE>
<CAPTION>
At or for the Year Ended December 31,
-------------------------------- -------------------------------- -------------------------------
1998 1997 1996
-------------------------------- -------------------------------- -------------------------------
AVERAGE AVERAGE Average Average Average Average
BALANCE INTEREST RATE Balance Interest Rate Balance Interest Rate
------- -------- ------- ------- -------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Loans(1),(2) $237,977 $19,985 8.40% $208,807 $17,972 8.61% $176,790 $15,230 8.61%
Loans exempt from federal
income taxes(3) 600 71 11.83% 683 77 11.27% 753 88 11.69%
Taxable investment 11,896 715 6.01% 16,043 967 6.03% 17,260 1,028 5.96%
securities(4)
Mortgage-related securities(4) 28,350 1,761 6.21% 23,629 1,508 6.38% 38,475 2,407 6.26%
Investment securities exempt
from federal income taxes(3),(4) 4,194 285 6.80% 233 18 7.73% 2,003 126 6.29%
Other securities 10,079 519 5.15% 11,091 584 5.27% 10,139 522 5.15%
------------------- -------------------- --------------------
Interest earning assets 293,096 23,336 7.96% 260,486 21,126 8.11% 245,420 19,401 7.91%
Non interest earning assets 20,258 19,082 18,238
-------- --------- ---------
Average Assets $313,354 $279,568 $263,658
======== ========= =========
LIABILITIES AND STOCKHOLDERS'
EQUITY
NOW deposits $23,656 592 2.50% $21,466 405 1.89% $23,011 479 2.08%
Money market deposits 7,407 176 2.38% 6,448 155 2.40% 6,291 158 2.51%
Savings deposits 60,032 1,318 2.20% 61,575 1,327 2.16% 64,345 1,400 2.18%
Time deposits 151,590 8,363 5.52% 125,600 7,010 5.58% 109,862 6,109 5.56%
Other borrowings 2,454 140 5.70% 3,425 193 5.64% 3,564 216 6.06%
------------------ -------------------- --------------------
Interest bearing liabilities 245,139 10,589 4.32% 218,514 9,090 4.16% 207,073 8,362 4.04%
-------- -------- ---------
Demand deposits and other non
interest bearing 37,846 33,745 30,369
liabilities
Stockholders' equity 30,369 27,309 26,216
------- --------- ---------
Average Liabilities and
stockholders' Equity $313,354 $279,568 $263,658
======== ========= =========
Net interest income/spread $12,747 3.64% $12,036 3.95% $11,039 3.87%
================= ================= ===================
Net interest earning assets $47,957 $41,972 $38,347
======== ========= =========
Net yield on interest earning
assets 4.35% 4.62% 4.50%
======== ======== ========
Ratio of average
interest-earning
assets to average interest-
bearing liabilities 1.20 1.19 1.19
======== ========= =========
</TABLE>
(1) For the purpose of these computations, nonaccrual loans are included in the
daily average loan amounts outstanding.
(2) Interest earned on loans includes loan fees (which are not material in
amount) and interest income which has been received from borrowers whose
loans were removed from nonaccrual status during the period indicated.
(3) Taxable-equivalent adjustments were made using a 34% corporate tax rate for
all years presented in calculating interest income and yields.
(4) Average balances of securities available-for-sale are based on amortized
cost.
6
<PAGE> 30
The following table sets forth the effects of changing interest rates
and volumes of interest earning assets and interest bearing liabilities on net
interest income of the Corporation. Information is provided with respect to (i)
effect on net interest income attributable to changes in volume (changes in
volume multiplied by prior rate), (ii) effects on net interest income
attributable to changes in rate (changes in rate multiplied by prior volume),
(iii) changes in a combination of rate and volume (changes in rate multiplied by
changes in volume), and (iv) net change (in thousands):
<TABLE>
<CAPTION>
For the Year Ended December 31,
--------------------------------------------- ---------------------------------------------
1998 vs. 1997 1997 vs. 1996
--------------------------------------------- ---------------------------------------------
INCREASE/(DECREASE) INCREASE/(DECREASE)
DUE TO TOTAL DUE TO TOTAL
---------------------------------- ---------------------------------
VOLUME INCREASE VOLUME INCREASE
VOLUME RATE & RATE (DECREASE) VOLUME RATE & RATE (DECREASE)
------ ---- ------ ---------- ------ ---- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Loans receivable(1) $2,511 ($437) ($61) $2,013 $2,758 ($14) ($2) $2,742
Loans exempt from federal
income taxes(2) (10) 4 0 (6) (8) (3) 0 (11)
Taxable investment securities(3) (250) (3) 1 (252) (74) 12 1 (61)
Mortgage-related securities(3) 301 (40) (8) 253 (928) 48 (19) (899)
Investment securities exempt
from federal income taxes(2),(3) 306 (2) (37) 267 (112) 29 (25) (108)
Other securities (53) (13) 1 (65) 49 12 1 62
------------------------------------------ ------------------------------------------
Total interest-earning assets $2,805 ($491) ($104) 2,210 $1,685 $84 ($44) 1,725
========================================== ==========================================
Interest-Bearing Liabilities:
NOW deposits $42 $132 $13 $187 ($32) ($45) $3 ($74)
Money market deposits 23 (2) 0 21 4 (7) 0 (3)
Savings deposits (33) 25 (1) (9) (61) (13) 1 (73)
Time deposits 1,451 (81) (17) 1,353 875 23 3 901
Other borrowings (54) 2 (1) (53) (9) (15) 1 (23)
------------------------------------------ -------------------------------------------
Total interest-bearing liabilities $1,429 $76 ($6) $1,499 $777 ($57) $8 $728
========================================== ===========================================
Net change in net interest income $711 $997
======== =========
</TABLE>
(1) Interest earned on loans includes loan fees (which are not material in
amount) and interest income which has been received from borrowers whose
loans were removed from nonaccrual during the period indicated.
(2) Taxable-equivalent adjustments were made using a 34% corporate tax rate for
all years presented in calculating interest income and yields.
PROVISION FOR LOAN LOSSES
During 1998, the Corporation made a provision of $250,000 to the
allowance for loan losses, as compared to a provision of $192,000 in 1997 and
$460,000 in 1996. The 1996 increase did not reflect deteriorating quality in the
loan portfolio but primarily reflected an increase in loan volume and
management's assessment of general economic conditions. Loan charge-offs for
1998 increased by $10,000, over 1997 to $48,000. This compares to charge-offs of
$82,000 in 1996. Although management considers the allowance for loan losses to
be adequate to provide for potential losses in the loan portfolio, there can be
no assurance that losses will not exceed estimated amounts or that the
subsidiary banks will not be required to make further and possibly larger
additions to their allowance in the future.
NON-INTEREST INCOME
Non-interest income increased $674,000 in 1998 and $101,000 in 1997.
The composition of non-interest income is shown in the following table (in
thousands).
<TABLE>
<CAPTION>
For the Year Ended December 31,
1998 1997 1996
--------- -------- -------
<S> <C> <C> <C>
Service charges on deposit accounts $743 $746 $725
Service charges on loans 255 141 172
Net gain on securities sales 217 78 70
Other 1,115 691 588
======= ======= =======
Total noninterest income $2,330 $1,656 $1,555
======= ======= =======
</TABLE>
7
<PAGE> 31
Service charge income on deposit accounts decreased $3,000 in 1998 and
increased $21,000 from 1996 to 1997. The decrease in the charges on eligible
accounts caused the change in 1998 income, while the 1997 increase can be
attributed to raising of fees assessed on deposit accounts.
Service charges on loans increased $114,000 from $141,000 in 1997 to
$255,000 in 1998. The 1998 increase can be attributed to the high volume of loan
refinancing and the sizable increase in new loans generated.
The Corporation recorded a net gain of $217,000 on the sale of $26.8
million of securities in 1998, $78,000 on the sale of $12.3 million of
securities in 1997 and $70,000 on the sale of $15.8 million of securities in
1996. The proceeds from the sale of the investments were used to purchase short
term variable rate securities and to meet existing loan demand.
Other non-interest income increased $424,000 in 1998 and increased
$103,000 in 1997. Two items were primarily responsible for the 1998 increase.
The first was a $124,000 gain on the sale of $9.7 million of residential
mortgage loans. The proceeds from the sale of these loans were used to fund new
commercial loans and to meet the liquidity needs of the banks. The other
component of increased fee income is the charge assessed non-customers for the
use of the Corporation's automated teller machines. The Corporation initiated a
surcharge in late 1997 that charged non-customers $1.00 per ATM transaction.
This new source of income generated $309,000 of additional income in 1998 over
1997. The Corporation anticipates this income may decline in the future as
consumers adjust their ATM use habits and as the Corporation shares these
revenues with merchants that allow the banks to place machines in their
businesses.
NON-INTEREST EXPENSE
Non-interest expense increased $912,000 (9.5%) for the year ended
December 31, 1998, and decreased $401,000 (4.0%) for the year ended December 31,
1997. The major components of non-interest expense are shown in the following
table (in thousands).
<TABLE>
<CAPTION>
For the Year Ended December 31,
1998 1997 1996
--------------------------------------------
<S> <C> <C> <C>
Salaries and employee benefits $6,099 $5,453 $5,223
Premises and equipment 1,580 1,412 1,340
Data processing fees 623 612 561
SAIF Assessment 0 0 604
Federal deposit insurance premiums 95 75 159
Other 2,135 2,068 2,134
-------- ------- --------
Total noninterest expense $10,532 $9,620 $10,021
======== ======= ========
</TABLE>
Salaries and employee benefits increased $646,000 in 1998, reflecting
additional staff hires, higher benefit costs, changes in personnel and normal
pay raises. The 1998 increase in the cost of employee benefits, particularly
medical insurance amounted to $75,000.
Premises and equipment expense increased $168,000 in 1998. The increase
was due to the first full year operation of the corporate headquarters completed
in May 1997 and the construction of the Franklin State Bank branch office that
was completed in October 1998. The $72,000 increase in 1997 was the result of
the construction of the corporate headquarters and increase in regular occupancy
expenses.
Data processing fees increased $11,000 in 1998 and $51,000 in 1997.
The increases were due to increased volume and new services being provided by
the service bureau.
During the third quarter of 1996 Lincoln Community Bank incurred a
$604,000 charge from the FDIC which represented its share of the
recapitalization of the Savings Association Insurance Fund (SAIF). This charge
was set at 0.657% of Lincoln Community Bank's deposit liabilities as of March
31, 1995. Although this charge adversely impacted results of operations, it is
expected to provide long-term benefits to the Corporation in the form of lower
federal insurance premiums.
Federal deposit insurance fees represent premiums paid for FDIC
insurance on the banks' deposits. The FDIC assesses the banks based on the level
of deposits. The 1998 insurance premium increased $22,000, due to the higher
level of deposits. In 1995 the Bank Insurance Fund (BIF) reached its prescribed
capitalization level mandated by Congress as part of FDIC Institutions
Improvement Act of 1991. As a result the bank's premium was reduced by $84,000
in 1997.
8
<PAGE> 32
Other expenses increased $67,000 in 1998. These increases are the
result of changes in operating expenses such as consulting fees, examination
costs, insurance costs, robberies and check losses. In 1997 other expenses
decreased $66,000. The decrease was primarily due to a reduction in service
charges being paid to the Corporation's corespondent bank and a decrease in the
Corporation's annual fee to the Lincoln Neighborhood Redevelopment Corporation.
INCOME TAXES
The Corporation's consolidated income tax rate varies from statutory
rates principally due to interest income from tax-exempt securities and loans
and interest income on securities in the M&M Lincoln Investment Corporation
portfolio and Lincoln Investment Management Corporation for which state taxes
are not imposed. The Corporation recorded provisions for income taxes totaling
$1.4 million in 1998, $1.4 million in 1997 and $730,000 in 1996. Although the
1998 tax expense increased $29,000, the effective tax rate declined from 37.4%
in 1997 to 35.2% in 1998. This was achieved by increasing the balance of
tax-exempt securities. The increase in 1997 income taxes is a result of higher
taxable income.
NET INCOME
For the years ended December 31, 1998, 1997 and 1996, the Corporation
posted net income of $2.706 million, $2.409 million and $1.310 million,
respectively.
LOANS RECEIVABLE
Net loans receivable increased $24.6 million, or 10.8%, from $227.2
million at December 31, 1997, to $251.8 million at December 31, 1998. Loans
receivable consist mainly of mortgages secured by residential properties located
in the Corporation's primary market area and commercial loans secured by
business assets, real estate, and guarantees. The following table shows the
composition of the Corporation's loan portfolio on the dates indicated (in
thousands):
<TABLE>
<CAPTION>
At December 31,
1998 1997 1996 1995 1994
------------------------------------------------------------------------------------
First Mortgage:
<S> <C> <C> <C> <C> <C>
Conventional single-family residential $43,912 $58,821 $58,358 $57,629 $55,478
Commercial and multifamily residential 112,015 78,365 61,707 44,594 42,046
Construction and land 15,853 18,191 12,872 12,619 8,254
------------------------------------------------------------------------------------
171,780 155,377 132,937 114,842 105,778
Commercial business loans 64,094 56,846 45,036 36,605 35,118
Consumer and installment loans 13,578 12,220 10,984 10,810 7,377
Leases 2,599 2,311 599 0 0
Home equity loans 1,346 1,496 1,367 1,695 1,577
Other 763 1,081 883 1,326 1,644
------------------------------------------------------------------------------------
82,380 73,954 58,869 50,436 45,716
Less:
Deferred loan fees 43 60 76 95 105
Allowance for loan losses 2,302 2,093 1,939 1,533 1,464
====================================================================================
$251,815 $227,178 $189,791 $163,650 $149,925
====================================================================================
</TABLE>
9
<PAGE> 33
The following table presents information as of December 31, 1998
regarding first mortgage and commercial business loan maturities and contractual
principal repayments of loans during the periods indicated. Loans with
adjustable interest rates are shown maturing in the year of their contractual
maturity. Also provided are the amounts due after one year classified according
to the sensitivity to changes in interest rates.
<TABLE>
<CAPTION>
AFTER ONE BUT
WITHIN ONE WITHIN FIVE AFTER FIVE
YEAR YEARS YEARS TOTAL
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMERCIAL BUSINESS LOANS $34,829 $ 29,042 $ 223 $ 64,094
FIRST MORTGAGE LOANS 56,281 81,478 34,021 171,780
---------------------------------------------------------------------
$91,110 $110,520 $34,244 $235,874
=====================================================================
LOANS MATURING AFTER ONE YEAR WITH:
FIXED INTEREST RATES $103,506 $11,337
VARIABLE INTEREST RATES 7,013 22,907
=================================
$110,519 $34,244
=================================
</TABLE>
ALLOWANCE FOR LOAN LOSSES
The Corporation maintains an allowance for loan losses to absorb
estimated losses in its loan portfolio. Management's determination of the
adequacy of the allowance is based on review of specific loans, past loan loss
experience, general economic conditions and other pertinent factors. If, as a
result of charge-offs or increases in the risk factors of the loan portfolio,
the allowance is below the level considered to be adequate to absorb estimated
losses, the periodic provision to the allowance is increased. Loans deemed
uncollectible are charged off and deducted from the allowance. The allowance for
loan losses increased from $2.093 million at December 31, 1997, to $2.302
million at December 31, 1998. This increase was because of growth in loan volume
in general, and growth in commercial business loans specifically, and the
Corporation's decision to maintain or increase its allowance for loan losses as
a percentage of outstanding loans because of growing uncertainty regarding
economic conditions. The ratio of the allowance for loan losses to total loans
was 0.91% for 1998 and 0.91% in 1997. Based on the present economic environment
and its present analysis of the financial condition of the borrowers, the
Corporation considers the present allowance to be appropriate and adequate to
cover potential losses inherent in the loan portfolio, however, changes in
future economic conditions and in the financial condition of borrowers cannot be
predicted at this time. Deterioration in such conditions could result in
increases in charge-offs or adversely classified loans and accordingly, in
additional provisions for loan losses.
The balance of the allowance for loan losses and actual loss experience
for the last five years is summarized in the following table (dollars in
thousands):
<TABLE>
<CAPTION>
At or for the Year Ended At December 31,
1998 1997 1996 1995 1994
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $2,093 $1,939 $1,533 $1,464 $1,356
Charge-offs:
Conventional single-family mortgage
Residential 0 0 70 20 0
Commercial business loans 21 4 5 27 6
Consumer and installment loans 27 34 8 16 6
-------------------------------------------------------------------------------------
Total charge-offs 48 38 83 63 12
Recoveries (7) 0 (29) 0 (77)
-------------------------------------------------------------------------------------
Net charge-offs (recoveries) 41 38 54 63 (65)
Provisions charged to operations 250 192 460 132 43
=====================================================================================
Balance at end of year $2,302 $2,093 $1,939 $1,533 $1,464
=====================================================================================
Ratios:
Net charge-offs (recoveries) to
Average loans outstanding 0.02% 0.02% 0.03% 0.04% (0.05)%
Net charge-offs (recoveries) to total
Allowance 1.78% 1.81% 2.78% 4.11% (4.44)%
Allowance to year end gross loans
Outstanding 0.91% 0.91% 1.01% 0.93% 0.97%
</TABLE>
10
<PAGE> 34
NON-PERFORMING AND DELINQUENT LOANS
When in the opinion of management, serious doubt exists as to the
collectibility of a loan, the loan is placed on non-accrual status and interest
previously accrued but unpaid is deducted from interest income. The Corporation
does not recognize income on any loans past due 90 days or more. In 1998,
$24,000 of additional income on nonaccrual loans would have been reported if the
loans had been current in accordance with their original terms and had been
outstanding throughout the year. Additionally in 1998 the Corporation recorded
$68,000 of interest income on non-accrual loans that was included in net income
for the year. The following table summarizes non-performing assets on the dates
indicated (dollars in thousands):
<TABLE>
<CAPTION>
At December 31,
1998 1997 1996 1995 1994
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $ 1,021 $699 $938 $658 $772
Real estate in judgment 0 0 0 0 24
Other real estate owned 0 0 0 0 73
-------------------------------------------------------------------------------------
Total non-performing assets $ 1,021 $699 $938 $658 $869
=====================================================================================
Ratios:
Non-accrual loans to total loans 0.40% 0.30% 0.49% 0.40% 0.51%
Allowance to non-accrual loans 225.47% 299.42% 206.72% 232.98% 189.64%
Non-performing assets to total assets 0.31% 0.24% 0.35% 0.25% 0.35%
</TABLE>
INVESTMENT SECURITIES
Investment securities at December 31, 1998, are made up of U.S.
Treasury and agency securities of $1.517 million, government agency
mortgage-backed securities of $20.659 million, SBA certificates of $628,000,
state and political subdivision certificates of $10.517 million, collateralized
mortgage obligations of $2.191 million and mutual funds of $3.059 million. Total
investment securities equaled $38.571 million. This compares to $40.818 million
on December 31, 1997.
Management determines the appropriate classification of securities
(including mortgage-related securities) at the time of purchase.
Held-to-maturity securities are stated at amortized cost where as available for
sale securities are stated at fair value with changes in fair value reflected as
a component of net income, net of tax . See notes one and two to Consolidated
Financial Statements for further details.
Securities not classified as held-to-maturity are classified as
available-for-sale. Available-for-sale securities are stated at fair value, with
the unrealized gains and losses, net of tax, reported as a separate component of
stockholders' equity.
The amortized cost of debt securities are adjusted for amortization of
premiums and accretion of discounts to maturity, or in the case of
mortgage-related securities, over the estimated life of the security. Such
amortization is included in interest income from the related security. Interest
and dividends are included in interest income from the related securities.
Realized gains and losses, and declines in value judged to be
other-than-temporary are included in net securities gains (losses). The cost of
securities sold is based on the specific identification method.
11
<PAGE> 35
The reason for the decrease in investment securities is the increase in
demand for funds for lending purposes. Funding for additional loans came
primarily from government agency mortgage-backed securities which either matured
or prepaid. The following table sets forth the Corporations estimated fair value
of investment securities available-for-sale at the dates indicated (in
thousands):
<TABLE>
<CAPTION>
At December 31,
1998 1997 1996
--------------------------------------------------
<S> <C> <C> <C>
Mutual funds $3,059 $3,104 $3,098
U.S. Treasury and other U.S.
government securities 1,517 7,801 11,321
Small Business Administration
Certificates 628 930 1,080
State and political subdivision securities 10,517 814 0
Collateralized mortgage obligations 2,191 1,488 2,943
Government agency mortgage-backed
Securities 20,659 26,681 24,211
--------------------------------------------------
$38,571 $40,818 $42,653
==================================================
</TABLE>
The maturity distribution (based upon the average life), and weighted
average yield of the securities portfolio of the Corporation as of December 31,
1998 are summarized in the following table (dollars in thousands):
<TABLE>
<CAPTION>
WITHIN ONE YEAR ONE TO FIVE YEARS FIVE TO TEN YEARS OVER TEN YEARS
------------------------------------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
MUTUAL FUNDS $3,059 5.43% $ -- --% $ -- --% $ -- --%
U.S. TREASURY AND OTHER U.S.
GOVERNMENT SECURITIES -- -- 1,517 5.18 -- -- -- --
SMALL BUSINESS ADMINISTRATION
CERTIFICATES 628 8.20 -- -- -- -- -- --
STATE AND POLITICAL SUBDIVISION
CERTIFICATES -- -- 814 5.25 4,343 5.42 5,360 4.29
COLLATERALIZED MORTGAGE OBLIGATIONS 1,204 6.00 492 5.96 495 6.32 -- --
GOVERNMENT AGENCY MORTGAGE-BACKED
SECURITIES 846 6.59 12,539 6.41 5,598 5.97 1,676 6.77
------------------------------------------------------------------------------------------------
$5,737 6.02% $15,362 6.21% $10,436 5.76% $7,036 4.88%
================================================================================================
</TABLE>
Weighted average yield is calculated by dividing income within each
maturity range by the outstanding amount of the related investment based on
carrying value.
TOTAL DEPOSITS
The Corporation continues to stress its philosophy of core deposit
accumulation and retention as the fundamental basis for sound growth and
profitability. Core deposits consist of all deposits other than public funds and
certificates of deposit in excess of $100,000.
12
<PAGE> 36
Total deposits increased $24.6 million to $289.2 million on December
31, 1998, from $264.7 million on December 31, 1997. This compares to a $31.7
million increase in 1997. The average increase in time deposits occurred via
increases in retail certificates of deposits and retail jumbo certificates of
deposits, while the increase in non-interest bearing demand deposits can be
attributed to the additional commercial account relationships being established
by the Banks. The following table sets forth the average amount of and the
average rate paid by the Banks on deposits by deposit category (dollars in
thousands):
<TABLE>
<CAPTION>
At December 31,
1998 1997 1996
------------------------------------------------------------------------------------
AVERAGE AVERAGE RATE Average Average Rate Average Average Rate
AMOUNT Amount Amount
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Non-interest-bearing demand deposits $ 37,184 0.00% $ 32,749 0.00% $ 29,362 0.00%
NOW and money market deposits 31,063 2.47 27,914 2.01 29,302 2.17
Savings deposits 60,032 2.20 61,575 2.16 64,345 2.18
Time deposits 151,590 5.52 125,600 5.58 109,862 5.51
------------------------------------------------------------------------------------
Total $ 279,869 3.74% $ 247,838 3.59% $ 232,871 3.46%
====================================================================================
</TABLE>
Maturities of time deposits and certificate accounts with balances of
$100,000 or more, outstanding at December 31, 1998, are summarized as follows
(in thousands):
<TABLE>
<S> <C>
3 MONTHS OR LESS $22,702
OVER 3 THROUGH 6 MONTHS 4,917
OVER 6 THROUGH 12 MONTHS 4,445
OVER 12 MONTHS 1,202
----------
TOTAL $33,266
==========
</TABLE>
CAPITAL RESOURCES AND ADEQUACY
Stockholders' equity increased from $29.496 million at December 31,
1997 to $30.997 million at December 31, 1998. The $2.706 million increase from
net earnings retention was primarily offset by the net purchase of 21,311 shares
of treasury stock and the payment of $889,000 in cash dividends to shareholders.
Pursuant to regulations promulgated by the Federal Reserve Board, bank
holding companies are required to maintain minimum levels of core capital as a
percent of total assets and total capital as a percent of risk-based assets. The
minimum core capital requirement ranges from 3% to 5% of total assets, depending
upon the Federal Reserve Board's determination of the financial institution's
strength. Similar capital guidelines are also established for the individual
banking subsidiaries of the Corporation. Most financial institutions are
required to meet a minimum core capital requirement of 4% or more of total
assets. The regulations assign risk weightings to assets and off-balance sheet
items and require minimum risk-based capital ratios. Bank holding companies
generally are required to have total capital equal to not less than 8% of risk
weighted assets. Core capital consists principally of shareholders' equity less
intangibles, while qualifying total capital consists of core capital, certain
debt instruments and a portion of the reserve for loan losses. As of December
31, 1998, the Corporation had a core-capital to total assets ratio of 9.27%, and
Lincoln State Bank, Franklin State Bank and Lincoln Community Bank had
risk-based capital ratios of 9.27%, 10.42% and 12.10%, respectively. These
ratios are above the 1998 minimum requirements established by regulatory
agencies.
For a summary of the Banks' regulatory capital ratios at December 31,
1998, please see Note Seven to Consolidated Financial Statements.
Management strives to maintain a strong capital position to take
advantage of opportunities for profitable geographic and product expansion and
to maintain depositor and investor confidence. Conversely, management believes
that capital must be maintained at levels that provide adequate returns on the
capital employed. Management actively reviews capital strategies for the
Corporation and for each of its subsidiaries to ensure that capital levels are
appropriate based on perceived business risks, growth and regulatory standards.
LIQUIDITY
Liquidity is the ability to meet withdrawal requirements on deposit
accounts and satisfy loan demand. The principal sources of liquidity for the
subsidiary banks include additional deposits, repayments on loans and investment
securities, collections of interest, sales of investments, borrowings and the
retention of earnings.
13
<PAGE> 37
The Corporation's liquidity, represented by cash and cash equivalents,
is a product of its operating activities, investing activities and financing
activities. These activities are summarized below (dollars in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
----------------------------------------------------
<S> <C> <C> <C>
Cash and cash equivalents at beginning of period $15,358 $22,272 $28,447
Operating Activities:
Net income 2,706 2,409 1,310
Adjustments to reconcile net income to net cash
provided by operating activities (143) 661 1,074
----------------------------------------------------
Net cash provided by operating activities 2,563 3,070 2,384
Net cash used by investing activities (24,389) (36,967) (10,511)
Net cash provided by financing activities 35,096 26,983 1,952
----------------------------------------------------
Increase (decrease) in cash equivalents 13,270 (6,914) (6,175)
----------------------------------------------------
Cash and cash equivalents at end of period $28,628 $15,358 $22,272
====================================================
</TABLE>
Net cash was provided by operating activities during the year ended
December 31, 1998, 1997 and 1996 primarily as a result of normal ongoing
business operations. The non-cash items, such as the provisions for loan losses
and depreciation and the net amortization of premiums, also contributed to net
cash provided by operating activities during these periods.
Liquidity is also necessary at the parent company level. The parent
company's primary source of funds are dividends from subsidiaries, borrowings
and proceeds from issuance of equity. The parent company manages its liquidity
position to provide the funds necessary to pay dividends to shareholders,
service debt, invest in subsidiaries and satisfy other operating requirements.
Dividends received from subsidiaries totaled $4.8 million, $1.9 million and $1.9
million for the years ended December 31, 1998, 1997 and 1996 respectively, and
will continue to be the parent's main source of long-term liquidity. The
dividends from the Banks were sufficient to pay cash dividends to the
Corporation's shareholders of $889,000, $703,000 and $691,000 for the years
ended December 31, 1998, 1997 and 1996, respectively. At December 31, 1998, the
parent company had a $2.0 million line of credit with an unaffiliated bank,
which had a $260,000 outstanding balance.
INTEREST RATE SENSITIVITY MANAGEMENT
Financial institutions are subject to interest rate risk to the extent
their interest-bearing liabilities (primarily deposits) mature or reprice at
different times and on a different basis than their interest-earning assets
(consisting primarily of loans and securities). Interest rate sensitivity
management seeks to match maturities on assets and liabilities and avoid
fluctuating net interest margins while enhancing net interest income during
periods of changing interest rates. The difference between the amount of
interest-earning assets maturing or repricing within a specific time period and
the amount of interest-bearing liabilities maturing or repricing within the same
time period is referred to as an interest rate gap. A gap is considered positive
when the amount of interest rate sensitive assets exceeds the amount of interest
rate sensitive liabilities. A gap is considered negative when the amount of
interest rate sensitive liabilities exceeds the amount of interest rate
sensitive assets. During periods of rising interest rates, a negative gap tends
to adversely affect net interest income while a positive gap tends to result in
an increase in net interest income. During a period of falling interest rates, a
negative gap tends to result in an increase in net interest income while a
positive gap tends to adversely affect net interest income.
14
<PAGE> 38
The following table shows the interest rate sensitivity gap for four
different time intervals as of December 31, 1998. Assumptions regarding
prepayment and withdrawal rates are based upon the Corporation's historical
experience, and management believes such assumptions are reasonable.
<TABLE>
<CAPTION>
AMOUNT MATURING OR REPRICING
---------------------------------------------------------------------------
WITHIN SIX TO TWELVE ONE TO FIVE OVER
SIX MONTHS MONTHS YEARS FIVE YEARS TOTAL
---------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
FIXED-RATE MORTGAGE LOANS $24,785 $22,269 $76,929 $11,187 $135,170
ADJUSTABLE-RATE MORTGAGE LOANS 13,185 7,116 15,753 556 36,610
--------------------------------------------------------------------------
TOTAL MORTGAGE LOANS 37,970 29,385 92,682 11,743 171,780
COMMERCIAL BUSINESS LOANS 33,375 3,788 26,781 150 64,094
CONSUMER LOANS 6,054 1,435 5,686 523 13,698
LEASES 0 0 2,599 0 2,599
HOME EQUITY LOANS 1,346 0 0 0 1,346
TAX-EXEMPT LOANS 600 0 0 0 600
MORTGAGE-RELATED SECURITIES 13,729 386 6,414 2,321 22,850
FIXED RATE INVESTMENT SECURITIES AND OTHER 500 0 2,382 9,704 12,586
VARIABLE RATE INVESTMENT SECURITIES AND OTHER 21,817 1,057 0 0 22,874
--------------------------------------------------------------------------
TOTAL INTEREST-EARNING ASSETS $115,391 $36,051 $136,544 $24,441 $312,427
==========================================================================
INTEREST-BEARING LIABILITIES:
DEPOSITS
TIME DEPOSITS $113,572 $33,869 $12,456 $6 $159,903
NOW ACCOUNTS 1,274 1,274 12,745 5,946 21,239
SAVINGS ACCOUNTS 3,463 3,463 34,631 15,999 57,556
MONEY MARKET ACCOUNTS 503 503 5,032 2,509 8,547
ADVANCE PAYMENTS FOR TAXES AND INSURANCE 0 52 0 0 52
BORROWINGS 13,260 0 0 0 13,260
--------------------------------------------------------------------------
TOTAL INTEREST-BEARING LIABILITIES $132,072 $39,161 $64,864 $24,460 $260,557
==========================================================================
INTEREST-EARNING ASSETS LESS
INTEREST-BEARING LIABILITIES ($16,681) ($3,110) $71,680 ($19) $51,870
==========================================================================
CUMULATIVE INTEREST RATE SENSITIVITY GAP ($16,681) ($19,791) $51,889 $51,870
============================================================
CUMULATIVE INTEREST RATE SENSITIVITY GAP AS
A PERCENTAGE OF TOTAL ASSETS (4.99%) (5.92%) 15.51% 15.51%
============================================================
</TABLE>
At December 31, 1998, the Corporation's cumulative ratio of
interest-rate sensitive assets to interest-rate sensitive liabilities was a
negative 4.99% for six months and a negative 5.92% for one year maturities.
Therefore the Corporation is negatively gapped and may benefit from falling
interest rates.
Certain shortcomings are inherent in the method of analysis presented
in the table above. For example, although certain assets and liabilities have
similar maturities or periods of repricing, they may react in different degrees
to changes in market interest rates. Also, the interest rates on certain types
of assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag behind changes in market
rates. Additionally, certain assets, such as adjustable rate mortgage loans,
have features that restrict changes in interest rates on a short term basis over
the life of the asset. Further, in the event of a change in interest rates,
prepayment and early withdrawal levels would likely deviate significantly from
those assumed in calculating the schedule. Finally, the ability of many
borrowers to service their debt may decrease in the event of an interest rate
increase.
YEAR 2000 PREPAREDNESS
The Year 2000 poses a potential risk to normal operations of both
Information Technology (IT) and non-IT systems. The Year 2000 problem is
pervasive and complex. The majority of computer operating systems and programs
currently in use have been developed utilizing six digit date fields (YYMMDD).
For example, December 31st, 1999, would be represented by "991231" in computer
code. The two digit field for the year (in example "99") is the basis for all
calculation formulas within most computer systems, particularly those processed
through mainframe computers.
15
<PAGE> 39
Up until now, this two-digit field has sufficed, using a subtraction of
current date from some future date (up to 12-31-99). As the industry enters the
year 2000, the digit-field "00" will not permit accurate calculations based on
the current formulas. January 1, 2000 would be read as the year 000101. Many
computer systems will recognize this date as the year 1900 or other erroneous
dates. The potential impact is that data could cause system failures. This could
affect all forms of financial accounts, pensions, personnel benefits,
investments, legal commitments, record keeping, inventories, maintenance, and
file retention.
Systems that work independently of IT equipment have the same potential
for failure due to the prevalence of embedded computer chips. These "hidden"
chips have forced the Corporation to review all of it's environmental, security,
and communication systems.
YEAR 2000 PROJECT STATUS
The Corporation has taken the Year 2000 issue very seriously. The
Corporation sees the Year 2000 as an opportunity to help increase service,
functionality, and performance to its customers. Outdated systems, procedures,
and products are being replaced or renovated with those that will meet the
challenges of the new millennium.
A Year 2000 project team was assembled early in 1997 to assess the
scope of the project as it relates to all of the Corporation's banks and
subsidiaries. Once this assessment was completed, an aggressive project plan was
put into place that consists of renovating or replacing affected systems,
validation and testing of any changes, effective risk management and employee
and consumer awareness.
In developing it's Year 2000 Project Plan, the Corporation defined the
Year 2000 problem in 5 stages:
<TABLE>
<S> <C>
Awareness: The need to define the scope of the Year 2000 problem.
Assessment: Identify all systems and components which are affected.
Renovation: The problem should be "fixed" by the appropriate means.
Validation: Year 2000 compliance must be tested.
Implementation: Final confirmation of Year 2000 compliance.
</TABLE>
The Corporation began working on its Year 2000 project in the spring of
1997. The project plan was written, personnel recruited and timetables
established.
AWARENESS: Completed Summer-Fall 1997
The awareness phase consisted of analyzing the effects that the Year
2000 posed to the Corporation. It was during this phase that the project plan
was written, our company consultant was retained, the project time-lines
established and introductory information was sent to our employees.
ASSESSMENT: Completed Fall 1997 - Spring 1998
The assessment phase consisted of a complete inventory of all the
Corporation's facilities. This inventory was used to prioritize those systems
considered mission-critical and to assign project team members to determine
their Year 2000 compliance.
RENOVATION: 95% Completed
The renovation phase consisted of replacing or upgrading those systems
that had been found non-Year 2000 compliant. Based on the type of systems in
place, the renovation phase is projected to be completed by May 1, 1999.
VALIDATION: 95% Completed
For those systems being renovated, they must be tested to ensure Year
2000 compliance. Each system is tested by individuals familiar with its
operation and all tests are documented for support purposes. Validation will be
completed along with renovation and implementation. No apparent problems
inherent to the Year 2000 have been observed in the completed testing. During
the first week of March 1999, the Corporation concluded its proxy testing and
validation of its outside service bureau.
IMPLEMENTATION: 90% Completed
The implementation phase consists of implementing those renovated and
validated systems. Based on the type of systems in place, the implementation
phase is estimated to be completed in the 2nd quarter of 1999.
16
<PAGE> 40
CORPORATE CUSTOMERS
The Corporation and its subsidiary banks have prepared a corporate
contingency plan for addressing the Year 2000 problem and implementing the
necessary changes. One of the facets of this contingency plan is to ensure that
its customers are made aware of this problem and that they are involved at some
level in reviewing their company's ability to handle and effectively deal with
the year 2000. Each of the lending officers within the Corporation is aware of
the Year 2000 Problem and has or will be reviewing those businesses to which
funds have been borrowed to assure that they are also becoming Year 2000 ready.
The same review process is being used with all new applicants. The Corporation
is currently revisiting businesses to review their state of Year 2000 readiness
and efforts.
PUBLIC AWARENESS
The Corporation fully realizes the impact that the media has on public
perception regarding the Year 2000. A campaign of public awareness has been
implemented that consists of informational pieces directly mailed to customers
or available throughout the Corporation. These, in addition to lobby displays
are intended to assure customers of the Corporation's efforts. Employees of the
Corporation have been trained on answering questions and where to direct
customers for additional information. The Corporation's web site also contains
information regarding this topic.
THIRD PARTY VENDORS
A third party vendor is a supplier, processor, or governmental agency
that has material interfaces directly with the Corporation.
SIGNIFICANT VENDORS
The Corporation is working directly with all vendors with material
interfaces. It is the Corporation's goal that these interfaces be ready by April
1st, 1999. Currently, 90% of all interfaces have been tested and no apparent
problems have been discovered. Below are several key interfaces and their
project status:
Deposit and Loan Processing: Currently Completed
Loan Preparation: Currently Completed
Payroll: Target March - 1999
Credit Card Processing: Currently Completed
Asset Liability Management: Target March - 1999
OTHER THIRD PARTY VENDORS
Other third party vendors are suppliers that provide services or
products to the Corporation. All vendors have been queried as to their Year 2000
readiness. Approximately 95% of all vendors currently supply Year 2000 ready
products or services. The remaining 5% have indicated that their products or
services will be ready during the first half of 1999. To date, the Corporation
is not aware of any vendor with a Year 2000 issue that would significantly
impact the Corporation's operations, liquidity or capital resources. The
Corporation has tested for readiness wherever possible and feels comfortable
with the results. Should a vendor be unable to supply a Year 2000 ready product
or services, the Corporation will follow the guidelines set forth in it's Year
2000 contingency plan.
COSTS
Managing the Year 2000 issue will result in direct and indirect costs
to the Corporation. Based on the program to date the Corporation has incurred
$12,000 in fees to an external consultant. In addition, over the past months
nearly all-existing hardware has been replaced and financed out of regular
operating sources. These items of equipment would normally have been replaced
irrespective of the Year 2000 issue. Internal staff costs incurred due to the
project have amounted to approximately $20,000 to $30,000.
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.
17
<PAGE> 41
The estimated costs of, and timetable for, becoming Year 2000 compliant
constitute "forward looking statements" as defined in the Private Securities
Litigation Reform Act of 1995. Investors are cautioned that such estimates are
based on numerous assumptions by management, including assumptions regarding the
continued availability of certain resources, the accuracy of representations
made by third parties concerning their compliance with Year 2000 issues, and
other factors. The estimated costs of Year 2000 compliance also do not give
effect to any future corporate acquisitions made by the Corporation or its
subsidiaries.
RISK OF NON-COMPLIANCE AND CONTINGENCY PLANS
Management of the Corporation believes it has an effective program in
place to resolve the Year 2000 issue in a timely manner. The major applications
which pose the greatest Year 2000 risk if the implementation of the Year 2000
Compliance Program is not successful are the Corporation's data processing
system (which processes various documents to allow for accurate record keeping
of transactional data), teller system and transaction interfaces (which provide
customer access to accounts), loan system (which monitors and transacts loan
payments by customers), and internal network system (which supports the computer
components throughout the Corporation). Most of these systems are supported by
external vendors. Failure by any of these systems could have a negative impact
on the Corporation's ability to process its customers' transactions.
Although the Corporation intends to complete all Year 2000 activities
in a timely fashion, and although the Corporation has initiated Year 2000
Communications with significant customers, vendors and other important parties,
and is monitoring the progress of such communications, such third parties
nonetheless represent a risk that cannot be assessed with precision nor
absolutely controlled despite the Corporation's best efforts. For that reason,
the Corporation is modifying its existing a business resumption contingency plan
to address alternatives in the event of some kind of a Year 2000 failure. A
completed contingency plan is targeted for May 1, 1999. Once finalized, the
contingency plan will be thoroughly tested throughout the second and third
quarters of 1999.
PENDING ACQUISITION
On March 9, 1999, the Corporation entered into a definitive agreement
to acquire Pyramid Bancorp., Inc. (PBI) through the exchange of nine shares of
the Corporation's stock for each outstanding common share of PBI. Upon closing,
PBI will be merged into the Corporation. The transaction is expected to close in
the second quarter of 1999, and will be accounted for as a pooling of interests.
At December 31, 1998, PBI had total assets and shareholder's equity of $106.9
million and $8.4 million, respectively.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Corporation's financial performance is impacted by, among other
factors, interest rate risk and credit risk. The Corporation utilizes no
derivatives to mitigate its credit risk, relying instead on loan review and an
adequate loan loss reserve (see Management's Discussion and Analysis of
Financial Condition and Results of Operation).
Interest rate risk is the risk of loss of net interest income due to
changes in interest rates. This risk is addressed by the Corporation's Asset
Liability Management Committee ("ALCO"), which includes senior management
representatives. The ALCO monitors and considers methods of managing interest
rate risk by monitoring changes in net interest income under various interest
rate scenarios. The ALCO attempts to manage various components of the
Corporation's balance sheet to minimize the impact of sudden and sustained
changes in interest rate on net interest income.
The Corporation's exposure to interest rate risk is reviewed on at
least a quarterly basis by the ALCO. Interest rate risk exposure is measured
using interest rate sensitivity analysis to determine the Corporation's change
in net interest income in the event of hypothetical changes in interest rates
and interest liabilities. If potential changes to net interest income resulting
from hypothetical interest rate swings are not within the limits established by
the ALCO, the asset and liability mix may be adjusted to bring interest rate
risk within approved limits.
18
<PAGE> 42
In order to reduce the exposure to interest rate fluctuations, the
Corporation has developed strategies to manage its liquidity, shorten the
effective maturities of certain interest-earning assets, and increase the
effective maturities of certain interest-bearing liabilities. One strategy used
is focusing its residential lending on adjustable rate mortgages, which
generally reprice within one to three years. Another strategy used is
concentrating its non-residential lending on adjustable or floating rate and/or
short-term loans. The Corporation has also focused its investment activities on
short and medium-term securities, while attempting to maintain and increase its
savings account and transaction deposit accounts, which are considered to be
relatively resistant to changes in interest rates.
Along with the analysis of the interest rate sensitivity gap,
determining the sensitivity of future earnings to a hypothetical +/- 200 basis
parallel rate shock can be accomplished through the use of simulation modeling.
In addition to the assumptions used to measure the interest rate sensitivity
gap, simulation of earnings includes the modeling of the balance sheet as an
ongoing entity. Future business assumptions involving administered rate
products, prepayments for future rate sensitive balances, and the reinvestment
of maturing assets and liabilities are included. These items are then modeled to
project income based on a hypothetical change in interest rates. The resulting
pretax income for the next 12 month period is compared to the pretax income
calculated using flat rates. This difference represents the Corporation's
earning sensitivity to a +/- 200 basis point parallel rate shock. The table
below illustrates these amounts as of December 31, 1998.
<TABLE>
<CAPTION>
ESTIMATED
1999 PRETAX NET INTEREST
INCOME PERCENT CHANGE IN NET
CHANGE IN INTEREST RATES (DOLLARS IN THOUSANDS) ACTUAL CHANGE INTEREST INCOME
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
200 BASIS POINT RISE $12,981 $ 422 3.36%
150 BASIS POINT RISE 12,886 327 2.61%
100 BASIS POINT RISE 12,772 213 1.70%
50 BASIS POINT RISE 12,660 101 0.81%
BASE SCENARIO 12,559 0 0.00%
50 BASIS POINT DECLINE 12,465 (94) (0.75%)
100 BASIS POINT DECLINE 12,352 (207) (1.65%)
150 BASIS POINT DECLINE 12,266 (293) (2.33%)
200 BASIS POINT DECLINE 12,143 (416) (3.31%)
</TABLE>
These results are based solely on immediate and sustained parallel
changes in market rates and do not reflect the earnings sensitivity that may
arise from other factors such as changes in the shape of the yield curve, the
change in spread between key market rates, or accounting recognition for
impairment of certain intangibles. The above results are also considered to be
conservative estimates due to the fact that no management action to mitigate
potential income variances are included within the simulation process. This
action would include, but would no be limited to, adjustments to the repricing
characteristics of any on or off balance sheet item with regard to short-term
rate projections and current market value assessments.
Another component of interest rate risk, fair value at risk, is
determined by the Corporation through the technique of simulating the fair value
of equity in changing rate environment. This technique involves determining the
present value of all contractual asset liability cash flows (adjusted for
prepayments) based on predetermined discount rate. The net result of all these
balance sheet items determine the fair value of equity. The fair value of equity
resulting from the current flat rate scenario is compared to the fair value of
equity calculated using discount rates +/- 200 basis points from flat rates to
determine the fair value of equity at risk. Currently, fair value of equity at
risk is less than 1.0% of the market value of the Corporation as of December 31,
1998.
19
<PAGE> 43
BUSINESS OF THE CORPORATION
GENERAL
Merchants and Manufacturers Bancorporation, Inc. (the Corporation), is
a registered multi-bank holding company under the Bank Holding Company Act of
1956, as amended. The Corporation was organized in 1982, and in 1983 and 1984
acquired all of the outstanding stock of Lincoln State Bank, Milwaukee,
Wisconsin and Franklin State Bank, Franklin, Wisconsin, respectively. In 1993,
the Corporation acquired all of the outstanding shares of Lincoln Savings Bank,
S.A., Milwaukee, Wisconsin. Lincoln State Bank and Franklin State Bank were
chartered as commercial banks under the Wisconsin Banking Statutes, while
Lincoln Savings Bank operated as a stock savings bank until 1997. In 1997
Lincoln Savings Bank converted from a Wisconsin stock savings bank to a
Wisconsin commercial bank. Upon conversion Lincoln Savings Bank changed its name
to Lincoln Community Bank.
The Corporation operates seventeen banking facilities in Milwaukee and
Waukesha counties. In addition to its subsidiary banks (Lincoln State Bank,
Franklin State Bank and Lincoln Community Bank), the Corporation owns three
non-bank subsidiaries, the Lincoln Neighborhood Redevelopment Corporation, which
was organized for the purpose of redeveloping and rejuvenating certain areas
located primarily on the near south side of Milwaukee, M&M Services, Inc., which
was formed in 1994 to provide operational services to the Corporation's
subsidiary banks and Achieve Mortgage Corporation, which was formed in 1997 to
act as the Corporation's mortgage broker.
This report contains various forward-looking statements concerning the
Corporation's prospects that are based on the current expectations and beliefs
of management. Forward-looking statements may also be made by the Corporation
from time to time in other reports and documents as well as oral presentations.
When used in written documents or oral statements, the words anticipate,
believe, estimate, expect, objective and similar expressions are intended to
identify forward-looking statements. The statements contained herein and such
future statements involve or may involve certain assumptions, risks and
uncertainties, many of which are beyond the Corporation's control, that could
cause the Corporation's actual results and performance to differ materially from
what is expected. In addition to the assumptions and other factors referenced
specifically in connection with such statements, the following factors could
impact the business and financial prospects of the Corporation: general economic
conditions; legislative and regulatory initiatives; monetary and fiscal policies
of the federal government; deposit flows; disintermidiation; the cost of funds;
general market rates of interest; interest rates or investment returns on
competing investments; demand for loan products; demand for financial services;
changes in accounting policies or guidelines; and changes in the quality or
composition of the Corporation's loan and investment portfolio.
PRODUCTS AND SERVICES
Through the banking subsidiaries, the Corporation provides a broad
range of services to individual and commercial customers. These services include
accepting demand, savings, and time deposits, including regular checking
accounts, NOW accounts, money market accounts, certificates of deposit,
individual retirement accounts, and club accounts. The subsidiary banks also
make secured and unsecured commercial, mortgage, construction, and consumer term
loans on both a fixed and variable rate basis. Historically, the terms on these
loans range from one month to five years and are retained in the Bank's
portfolios. The subsidiary banks also provide lines of credit to commercial
borrowers and to individuals through home equity loans.
COMPETITION
The subsidiary banks primarily serve the southern half of Milwaukee
County and the southeastern portion of Waukesha County, including suburbs
located to the south and west of the City of Milwaukee. There are presently in
excess of one hundred other financial institutions in the primary service area
that directly compete with Lincoln State Bank, Franklin State Bank and Lincoln
Community Bank. In addition to competing with other commercial banks, the
subsidiaries compete with savings and loan associations, credit unions, mortgage
brokers, small-loan companies, insurance companies, investment banking firms and
large retail companies. The principal methods of competition include interest
rates paid on deposits and charged on loans, personal contacts and efforts to
obtain deposits and loans, types and quality of services provided and
convenience of the locations. Many of the Corporation's competitors are larger
and have significantly greater financial resources than the Corporation and its
subsidiaries.
20
<PAGE> 44
EMPLOYEES
At December 31, 1998, the Corporation and its subsidiaries employed 141
full-time and 55 part-time employees. The Corporation provides a wide range of
benefits to employees, including educational activities, and considers its
employee relations to be excellent. The Corporation conducts extensive training
programs in order to enhance job-related knowledge and skills of its people and
to train its employees with a sales-orientated approach to customers. Eligible
employees participate in a 401K plan as well as group life and major medical
insurance programs.
THE BANKS AND OTHER SUBSIDIARIES
At or for the year ended December 31, 1998, the subsidiary banks (each
consolidated with its appropriate subsidiaries; see "Other Subsidiaries") had
total assets, total loans, total deposits, stockholder's equity, net income, and
return on assets as follows (dollars in thousands):
<TABLE>
<CAPTION>
LINCOLN STATE BANK LINCOLN COMMUNITY BANK FRANKLIN STATE BANK
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Total assets $ 182,027 $ 97,061 $ 52,065
Total loans 150,650 61,038 42,428
Total deposits 154,141 88,161 47,561
Stockholders' equity 14,533 8,639 4,464
Net income 1,770 1,191 458
Return on average assets 1.07% 1.20% 0.99%
</TABLE>
The Banks have consistent products, services and delivery systems and
comply with similar regulatory guidance. As such they are not segments as that
term is defined in Financial Accounting Standards Board Statement 131.
LINCOLN STATE BANK
Lincoln State Bank was organized as a state banking association under
the laws of the State of Wisconsin in 1919. It operates full service branch
offices in the southeastern Wisconsin communities of Muskego, New Berlin,
Brookfield and Pewaukee. In addition it operates eight limited hours facilities
in Milwaukee County. At December 31, 1998, Lincoln State Bank comprised 54.4% of
the consolidated assets of the Corporation.
LINCOLN COMMUNITY BANK
Lincoln Community Bank was organized as a state chartered mutual
savings and loan association under the laws of the State of Wisconsin in 1910.
It operates two full service branch offices in the city of Milwaukee. In April
1993, it converted from the mutual to stock form of organization, and all of the
shares of stock issued by the converted association were acquired by the
Corporation. In 1997 Lincoln Community Bank converted from a Wisconsin stock
savings bank to a Wisconsin commercial bank. Its principal office and a branch
office are located in Milwaukee, Wisconsin. At December 31, 1998, Lincoln
Community Bank comprised 29.0% of the consolidated assets of the Corporation.
FRANKLIN STATE BANK
Franklin State Bank was organized as a state banking association under
the laws of the State of Wisconsin in 1982. Its principal office and a branch
office are located in Franklin, Wisconsin. At December 31, 1998, Franklin State
Bank comprised 15.6% of the consolidated assets of the Corporation.
LINCOLN NEIGHBORHOOD REDEVELOPMENT CORPORATION
The Lincoln Neighborhood Redevelopment Corporation (the Redevelopment
Corporation) was formed in June of 1988 and is a wholly owned subsidiary of the
Corporation. The Redevelopment Corporation was established to redevelop and
rejuvenate certain areas located on the south-side of Milwaukee by, among other
things, arresting decay and deterioration, working with local businesses to keep
commercial areas strong and attractive, pursuing means to preserve and create
jobs, encouraging appropriate land-use, involving community residents in
economic planning and retaining and attracting businesses. As of December 31,
1998, Lincoln Neighborhood Redevelopment Corporation had assets of $103,000,
$68,000 in liabilities and equity of $35,000.
21
<PAGE> 45
M&M SERVICES, INC.
M&M Services was formed in January of 1994 and is a wholly owned
subsidiary of the Corporation. M&M Services provides operational activities to
the Corporation's subsidiary banks. These activities include: human resources,
auditing, marketing, financial analysis, loan document preparation, loan credit
analysis and check processing.
ACHIEVE MORTGAGE CORPORATION
Achieve Mortgage Corporation was formed in January of 1997 and is a
wholly owned subsidiary of the Corporation. The subsidiary was formed to expand
the origination of secondary market real estate mortgages on behalf of the
Corporation and the Banks.
OTHER SUBSIDIARIES
Lincoln State Bank and Lincoln Community Bank each have a wholly owned
subsidiary. In 1991 an investment subsidiary known as M&M - Lincoln Investment
Corporation was formed to manage the majority of Lincoln State Bank's investment
portfolio and to enhance the overall return of the portfolio. The subsidiary
received a capital contribution of approximately $13 million of mortgage-backed
and other investment securities from Lincoln State Bank in exchange for 100% of
the stock of the subsidiary. In 1995 an investment subsidiary known as Lincoln
Investment Management Corporation was formed to manage the majority of Lincoln
Community Bank's investment portfolio and to enhance the overall return of the
portfolio. The subsidiary received a capital contribution of approximately $21
million of mortgage-backed and other investment securities from Lincoln
Community Bank in exchange for 100% of the stock of the subsidiary. These
subsidiaries are an intrinsic component of their respective parent banks and
assets there of are included in the total assets of the respective Bank above.
SUPERVISION AND REGULATION
The operations of financial institutions, including bank holding
companies, commercial banks and savings banks, are highly regulated, both at
federal and state levels. Numerous statutes and regulations affect the
businesses of the Corporation and its financial service subsidiaries.
The Corporation's own activities are regulated by the federal Bank
Holding Company Act (the "Act"), which requires each holding company to obtain
the prior approval of the Federal Reserve Board (the "Board") before acquiring
direct or indirect ownership or control of more than five percent of the voting
shares of any bank or before engaging, directly or indirectly, in certain
enumerated activities. While the act, with certain exceptions, previously
prohibited the acquisition of banks located in other states, recently enacted
legislation now generally authorizes such interstate acquisitions, subject to
regulatory approval.
The Act also prohibits, with certain exceptions acquisition of more
than five percent of the voting shares of any company (directly or indirectly)
doing business other than banking or performing services for its subsidiaries,
without prior approval of the Board. Pursuant to the Act, the Corporation is
supervised and regularly examined by the Board.
Lincoln State Bank, Franklin State Bank and Lincoln Community Bank are
subject to extensive regulation and supervision by the Wisconsin Department of
Financial Institutions. Because the deposits of all three banks are insured by
the Federal Deposit Insurance Corporation (FDIC), they are also subject to
supervision by the FDIC. In that connection, the banks must comply with
applicable state and federal statutes and a wide range of rules and regulations
promulgated by bank regulatory agencies under such statutes. To assure
compliance with such laws and to ascertain their safety and soundness, the banks
are periodically examined by the FDIC and the Wisconsin Department of Financial
Institutions. In addition, the Corporation itself is periodically examined by
the Federal Reserve Bank of Chicago. Such supervision and regulation is intended
primarily to ensure the safety of deposits accepted by the banks.
PROPERTIES
The Corporation's offices are located in a two-story building at 14100
West National Avenue in New Berlin, Wisconsin. The building constructed in 1997,
contains 20,000 square feet, of which the majority is used by the Corporation
and the remainder leased to a tenant. At this location, the Corporation
maintains its corporate operations and personnel.
22
<PAGE> 46
The main office of Lincoln State Bank is at 2266 South 13th Street,
Milwaukee, Wisconsin. The South 13th Street location consists of a one-story
building containing approximately 11,000 square feet. An adjacent building of
approximately 750 square feet contains the two walk-up facilities operated by
Lincoln State Bank. In addition, there are three drive-up facilities, and the
parking lot provides space for 51 cars. One branch of Lincoln State Bank is
located in a one-story, 1,700 square foot building at 13500 Janesville Road,
Muskego, Wisconsin. The Muskego branch has three drive-up windows and parking
facilities for 25 vehicles. Another branch of Lincoln State Bank was opened in
May 1990 at 14000 West National Avenue, New Berlin, Wisconsin. The New Berlin
branch contains approximately 7,000 square feet and has 4 drive-up facilities, 4
walk-up windows and parking for 27 vehicles. During 1995 Lincoln State Bank
opened two other full-service branch locations one located at 17600 West Capitol
Drive, Brookfield, Wisconsin and at 585 Ryan Street, Pewaukee, Wisconsin. Both
facilities offer drive-up and walk-up facilities along with parking for both
customers and employees. In addition, Lincoln State Bank operates customer
facilities at Villa St. Francis located at South 20th and Ohio Streets in
Milwaukee, at Clement Manor located at South 92nd Street and West Howard Avenue
in Milwaukee, at Friendship Village located at North 73rd and West Dean Road in
Milwaukee, at Stoney Creek Adult Community in Muskego, at the Milwaukee
Protestant Home located on North Downer Avenue in Milwaukee and at Forest Ridge
located in Hales Corners, Wisconsin. In 1998 Lincoln State Bank opened two new
limited hour facilities. These offices are located in Landmark of West Allis and
Lexington Village in the City of Greenfield.
Franklin State Bank's main office is located in a three-story building
at 7000 South 76th Street in Franklin, Wisconsin. The building contains 21,308
square feet, has five drive-up lanes and three automatic tellers. The parking
lot accommodates 165 cars. The building is owned by the Corporation and leases
space to Franklin State Bank. Portions of the building that are not used by
Franklin State Bank are leased to various tenants. In 1998 Franklin State Bank
opened a branch facility at 9719 South Franklin Drive in the Franklin Business
Park, Franklin, Wisconsin. Franklin State Bank owns the facility.
Lincoln Community Bank's main office is located at 3131 South 13th
Street, Milwaukee, Wisconsin in a one-story building. Lincoln Community Bank
also operates a branch facility at 5400 West Forest Home Avenue, Milwaukee,
Wisconsin. Lincoln Community Bank owns both facilities. Achieve Mortgage
Corporation leases office space at the Forest Home Avenue location.
M&M Services is located in the New Berlin corporate headquarters. At
that location, M&M Services maintains its subsidiary service support facilities
and personnel.
LEGAL PROCEEDINGS
From time to time, the Corporation and its subsidiaries are party to
legal proceedings arising out of their general lending activities and other
operations. However, there are no pending legal proceedings to which the
Corporation or its subsidiaries are a party, or to which their property is
subject, which, if determined adversely to the Corporation, would individually
or in the aggregate have a material adverse effect on its consolidated financial
position.
23
<PAGE> 47
Report of Management
The management of Merchants and Manufacturers Bancorporation, Inc. is
responsible for the preparation and integrity of the Consolidated Financial
Statements and other financial information included in this annual report. The
financial statements have been prepared in accordance with generally accepted
accounting principles and include amounts that are based upon informed
judgements and estimates by management. The other financial information in this
annual report is consistent with the financial statements.
The Corporation maintains a system of internal accounting controls.
Management believes that the internal accounting controls provide reasonable
assurance that transactions are executed and recorded in accordance with the
Corporation's policies and procedures and that the accounting records may be
relied on as a basis for preparation of the financial statements and other
financial information.
Merchants and Manufacturers Bancorporation's independent auditors were
engaged to perform an audit of the Consolidated Financial Statements, and the
auditor's report expresses their opinion as to the fair presentation of the
financial statements in conformity with generally accepted accounting
principles.
The Audit Committee of the Board of Directors meets periodically with
management, the internal auditors, and the independent auditors to discuss the
adequacy of the internal accounting controls. Both the independent auditors and
the internal auditors have full and free access to the Audit Committee.
By: /s/ Michael J. Murry
----------------------------------
Michael J. Murry
Chairman of the Board of Directors
By: /s/ James C. Mroczkowski
----------------------------------
James Mroczkowski
Vice President and Chief Financial Officer
24
<PAGE> 48
Report of Independent Auditors
The Board of Directors and Stockholders
Merchants and Manufacturers Bancorporation, Inc. and subsidiaries
We have audited the accompanying consolidated statements of financial
condition of Merchants and Manufacturers Bancorporation, Inc. and subsidiaries
as of December 31, 1998 and 1997, and the related consolidated statements of
income, stockholders' equity and cash flows for each of the three years in the
period ended December 31, 1998. These financial statements are the
responsibility of the Corporation's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Merchants and
Manufacturers Bancorporation, Inc. and subsidiaries at December 31, 1998 and
1997, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles.
By: /s/ Ernst & Young LLP
-------------------------------
Ernst & Young LLP
February 26, 1999
Milwaukee, Wisconsin
25
<PAGE> 49
Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries
Consolidated Statements of Financial Condition
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
------------------------------------
(Dollars In Thousands)
<S> <C> <C>
ASSETS
Cash and due from banks $ 9,946 $ 10,694
Interest-bearing deposits at other banks 10,095 821
Federal funds sold 8,587 3,843
------------------------------------
Cash and cash equivalents 28,628 15,358
Securities available-for-sale at fair value:
Investment securities 15,721 12,649
Mortgage-related securities 22,850 28,169
Loans receivable 251,815 227,178
Accrued interest receivable 1,674 1,553
Federal Home Loan Bank stock 1,057 1,050
Premises and equipment 10,130 8,891
Other assets 2,628 1,830
------------------------------------
Total assets $334,503 $296,678
====================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $289,230 $264,669
Borrowings 13,260 1,500
Accrued interest payable 421 332
Advance payments by borrowers for taxes and insurance 52 179
Other liabilities 543 502
------------------------------------
Total liabilities 303,506 267,182
Stockholders' equity:
Common stock $1.00 par value; 3,000,000 shares authorized;
shares issued: 1,507,788--1998; 1,491,241--1997; shares
outstanding: 1,490,331--1998; 1,490,812--1997
1,508 1,491
Additional paid-in capital 10,820 10,421
Net unrealized gain (loss) on securities available-for-sale (88) 19
Retained earnings 19,391 17,574
Treasury stock, at cost (17,457 shares--1998; 429 shares--1997)
(634) (9)
-------------------------------------
Total stockholders' equity 30,997 29,496
-------------------------------------
Total liabilities and stockholders' equity $334,503 $296,678
=====================================
</TABLE>
26
<PAGE> 50
Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries
Consolidated Statements of Income
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
------------------------------------------------------
(In Thousands, Except Per Share Amounts)
<S> <C> <C> <C>
Interest income:
Loans, including fees $20,032 $18,023 $15,288
Investment securities:
Taxable 715 967 1,028
Exempt from federal income taxes 188 12 83
Mortgage-related securities 1,761 1,508 2,407
Other 519 584 522
------------------------------------------------------
Total interest income 23,215 21,094 19,328
Interest expense:
Deposits 10,449 8,896 8,146
Borrowings 140 194 216
------------------------------------------------------
Total interest expense 10,589 9,090 8,362
Net interest income 12,626 12,004 10,966
Provision for loan losses 250 192 460
------------------------------------------------------
Net interest income after provision for
loan losses 12,376 11,812 10,506
Noninterest income:
Service charges on deposits 743 746 725
Service charges on loans 255 141 172
Net gain on securities sales 217 78 70
Other 1,115 691 588
------------------------------------------------------
2,330 1,656 1,555
Noninterest expenses:
Salaries and employee benefits 6,099 5,453 5,223
Premises and equipment 1,580 1,412 1,340
Data processing fees 623 612 561
SAIF special assessment - - 604
Federal deposit insurance premiums 95 75 159
Other 2,135 2,068 2,134
------------------------------------------------------
10,532 9,620 10,021
------------------------------------------------------
Income before income taxes 4,174 3,848 2,040
Income taxes 1,468 1,439 730
------------------------------------------------------
Net income $ 2,706 $ 2,409 $ 1,310
======================================================
Basic earnings per share $ 1.81 $ 1.67 $ .91
======================================================
Diluted earnings per share $ 1.78 $ 1.65 $ .90
======================================================
Dividends per share $ .59 $ .48 $ .48
======================================================
</TABLE>
See accompanying notes.
27
<PAGE> 51
Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Common
Stock Unrealized
And Gain (Loss)
Additional on Securities
Paid-in Available- Retained Treasury
Capital for-Sale Earnings Stock Total
----------------------------------------------------------
(In Thousands, Except Per Share Amounts)
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1996 $11,657 $(181) $15,249 $(182) $26,543
Comprehensive income:
Net income - - 1,310 - 1,310
Other comprehensive income -
Change in unrealized loss on securities
available-for-sale, net of deferred income
taxes of $7 - (22) - - (22)
----------------------------------------------------------
Total comprehensive income 1,288
Sale of 16,988 shares of treasury stock - - - 186 186
Purchase of 87,316 shares of treasury stock - - - (946) (946)
Cash dividends declared - $.48 per share - - (691) - (691)
----------------------------------------------------------
Balance at December 31, 1996 11,657 (203) 15,868 (942) 26,380
Comprehensive income:
Net income - - 2,409 - 2,409
Other comprehensive income -
Change in unrealized loss on securities
available-for-sale, net of deferred income
taxes of $118 - 222 - - 222
----------------------------------------------------------
Total comprehensive income 2,631
Sale of 8,595 shares of common stock in connection
with dividend reinvestment program 123 - - - 123
Sale of 110,986 shares of treasury stock 72 - - 1,184 1,256
Purchase of 22,273 shares of treasury stock - - - (251) (251)
Cash dividends declared--$.48 per share - - (703) - (703)
Exercise of stock options 60 - - - 60
----------------------------------------------------------
Balance at December 31, 1997 11,912 19 17,574 (9) 29,496
Comprehensive income:
Net income - - 2,706 - 2,706
Other comprehensive income -
Change in unrealized loss on securities
available-for-sale, net of deferred income
taxes of $68 - (107) - - (107)
----------------------------------------------------------
Total comprehensive income 2,599
Issuance of new shares 349 - - (12) 337
Fractional shares issued due to stock split and stock
dividend (10) - - - (10)
Sale of 4,088 shares of common stock in connection
with dividend reinvestment program 132 - - - 132
Sale of 1,544 shares of treasury stock 6 - - 104 110
Purchase of 22,855 shares of treasury stock - - - (845) (845)
Cash dividends declared - $.59 per share - - (889) - (889)
Exercise of stock options (61) - - 128 67
----------------------------------------------------------
Balance at December 31, 1998 $12,328 $ (88) $19,391 $(634) $30,997
==========================================================
</TABLE>
See accompanying notes.
28
<PAGE> 52
Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
----------------------------------------
(In Thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 2,706 $ 2,409 $ 1,310
Adjustments to reconcile net income to cash provided by
operating activities:
Provision for loan losses 250 192 460
Provision for depreciation 577 511 484
Net amortization of investment securities premiums
and discounts 92 112 287
Net realized gains on investment securities (217) (78) (70)
Decrease (increase) in accrued interest receivable (121) (83) 62
Increase (decrease) in accrued interest payable 89 (63) (180)
Other (813) 70 31
----------------------------------------
Net cash provided by operating activities 2,563 3,070 2,384
INVESTING ACTIVITIES
Purchases of securities available-for-sale (30,735) (20,733) (12,718)
Proceeds from sales of securities available-for-sale 26,779 12,308 15,848
Proceeds from redemption and maturities of securities
available-for-sale 6,153 10,566 14,054
Net increase in loans (24,763) (37,627) (26,700)
Purchases of premises and equipment (1,816) (1,602) (679)
Proceeds from sales of real estate - 53 100
Redemption (purchases) of Federal Home Loan Bank stock
(7) 68 (416)
----------------------------------------
Net cash used in investing activities (24,389) (36,967) (10,511)
</TABLE>
(continued)
29
<PAGE> 53
Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
-----------------------------------------
(In Thousands)
<S> <C> <C> <C>
FINANCING ACTIVITIES
Net increase (decrease) in deposits $24,561 $31,736 $ (150)
Net increase (decrease) in borrowings 11,760 (5,350) 3,850
Increase (decrease) in advance payments by borrowers for
taxes and insurance (127) 112 (297)
Payments of cash dividends to stockholders (889) (703) (691)
Purchase of treasury stock (845) (251) (946)
Proceeds from the sale of treasury stock 110 1,256 186
Proceeds from issuing additional common stock 394 60 -
Proceeds from dividend reinvestment plan 132 123 -
-----------------------------------------
Net cash provided by financing activities 35,096 26,983 1,952
-----------------------------------------
Increase (decrease) in cash and cash equivalents 13,270 (6,914) (6,175)
Cash and cash equivalents at beginning of year 15,358 22,272 28,447
-----------------------------------------
Cash and cash equivalents at end of year $28,628 $15,358 $22,272
=========================================
Supplemental cash flow information and non-cash transactions:
Interest paid $10,566 $ 9,169 $ 8,521
Income taxes paid 1,483 1,232 759
</TABLE>
See accompanying notes.
30
<PAGE> 54
Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 1998
(Dollars In Thousands, Except Share Amounts)
1. ACCOUNTING POLICIES
BUSINESS
Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries (the
Corporation) provides a full range of personal and commercial financial services
to customers through its subsidiaries. The Corporation and its subsidiaries are
subject to competition from other financial institutions. They are also subject
to the regulations of certain federal and state agencies and undergo periodic
examinations by those regulatory agencies.
BASIS OF FINANCIAL STATEMENT PRESENTATION
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles and include the accounts of the
Corporation, its wholly owned subsidiaries, Lincoln State Bank (Lincoln),
Franklin State Bank (Franklin) and Lincoln Community Bank (Lincoln
Community)--collectively, "the Banks," M&M Services, which provides management
services for the Banks, Achieve Mortgage Corporation, which provides mortgage
banking services for the Banks and Lincoln's wholly owned subsidiary, Lincoln
Investment Corp., and Lincoln Community's wholly owned subsidiary, Lincoln
Investment Management Corporation, which manage an investment portfolio for the
Banks. All significant intercompany accounts and transactions have been
eliminated.
In preparing the consolidated financial statements in conformity with generally
accepted accounting principles, management is required to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include amounts due from banks (both interest-bearing
and noninterest-bearing) and federal funds sold.
31
<PAGE> 55
Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
INVESTMENT AND MORTGAGE-RELATED SECURITIES
All of the Corporation's investment and mortgage-related securities are
classified as available-for-sale and are stated at fair value, with the
unrealized gains and losses, net of tax, reported as a separate component of
stockholders' equity.
The amortized cost of debt securities is adjusted for amortization of premiums
and accretion of discounts to maturity, or in the case of mortgage-related
securities, over the estimated life of the security. Such amortization is
included in interest income from the related security.
Interest and dividends are included in interest income from the related
securities. Realized gains and losses and declines in value judged to be
other-than-temporary are included in net securities gains (losses). The cost of
securities sold is based on the specific identification method.
INTEREST AND FEES ON LOANS
Interest on loans is recorded as income when earned. Loans are placed on
non-accrual status, generally recognizing interest as income when received, when
in the opinion of management, the collectibility of principal or interest
becomes doubtful.
Loan origination and commitment fees and certain direct loan origination costs
are being deferred and the net amount amortized as an adjustment of the related
loans' yields. The Corporation is amortizing these amounts, using the
level-yield method, adjusted for prepayments, over the contractual life of the
related loans.
ALLOWANCE FOR LOAN LOSSES
A provision for loan losses is made when a loss is probable and can be
reasonably estimated. The provision is based on past experience and on
prevailing market conditions. Management's evaluation of loss considers various
factors including, but not limited to, general economic conditions, loan
portfolio composition, and prior loss experience.
32
<PAGE> 56
Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
The Corporation had no impaired loans in 1998 or 1997.
A substantial portion of the Banks' loans are collateralized by real estate in
metropolitan Milwaukee, Wisconsin. Accordingly, the ultimate collectibility of a
substantial portion of the Banks' loan portfolio and the recovery of a
substantial portion of the carrying amount of real estate owned are susceptible
to changes in market conditions in metropolitan Milwaukee, Wisconsin.
Management believes that the allowance for loan losses is adequate. While
management uses available information to recognize losses, future additions to
the allowance may be necessary based on changes in economic conditions.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost, less accumulated depreciation.
Expenditures for normal repairs and maintenance are charged to operations as
incurred. The cost of premises and equipment is depreciated, using the
straight-line or double-declining-balance methods, over the estimated useful
lives of the assets (five to thirty-two years).
STOCK SPLITS
Share data and equity amounts have been adjusted to recognize a three-for-two
stock split on April 10, 1998, and a 10% stock dividend on October 15, 1998.
EARNINGS PER SHARE INFORMATION
Earnings per share of common stock have been computed based on the weighted
average number of common stock and common stock equivalents, if dilutive,
outstanding during each year. The resulting number of shares used in computing
basic earnings per share is 1,497,763, 1,442,723 and 1,439,560 for the years
ended December 31, 1998, 1997 and 1996, respectively. The number of shares used
in computing diluted earnings per share is 1,517,605, 1,459,117 and 1,455,555,
for the years ended December 31, 1998, 1997 and 1996, respectively.
33
<PAGE> 57
Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
ACCOUNTING CHANGES
Statement No. 131, "Disclosures About Segments of an Enterprise and Related
Information," requires public companies to report financial and descriptive
information about their operating segments using a "management approach."
Operating segments are defined as revenue-producing components of the enterprise
for which separate financial information is produced internally and are subject
to evaluation the chief operating decision maker in deciding how to allocate
resources to segments. Statement No. 131 is effective for 1998; however, the
Corporation has determined that its only operating and reportable segment is
community banking and therefore it is not required to present any further
information under Statement No. 131.
2. INVESTMENT AND MORTGAGE-BACKED SECURITIES
The following is a summary of securities:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
--------------------------------------------------------
<S> <C> <C> <C> <C>
At December 31, 1998:
Mutual funds $ 3,173 $ - $114 $ 3,059
U.S. treasury and other U.S. government
securities 1,521 8 12 1,517
Small Business Administration certificates 597 31 - 628
State and political subdivision certificates 10,580 33 96 10,517
Collateralized mortgage obligations 2,195 2 6 2,191
Government agency mortgage-backed securities
20,653 129 123 20,659
--------------------------------------------------------
$38,719 $203 $351 $38,571
========================================================
At December 31, 1997:
Mutual funds $ 3,173 $ - $ 69 $ 3,104
U.S. treasury and other U.S. government
securities 7,789 29 17 7,801
Small Business Administration certificates 886 44 - 930
State and political subdivision certificates 800 14 - 814
Collateralized mortgage obligations 1,498 3 13 1,488
Government agency mortgage-backed securities 26,644 117 80 26,681
--------------------------------------------------------
$40,790 $207 $179 $40,818
========================================================
</TABLE>
34
<PAGE> 58
Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. INVESTMENT AND MORTGAGE-BACKED SECURITIES (CONTINUED)
Securities carried at $1,100 at December 31, 1998 were pledged principally to
secure liabilities to the Federal Reserve Bank.
The amortized cost and market value of securities at December 31, 1998, by
contractual maturity, are shown below. Expected maturities may differ from
contractual maturities because borrowers may have the right to call or prepay
obligations.
<TABLE>
<CAPTION>
Amortized
Cost Fair Value
-----------------------------
<S> <C> <C>
Due in one year or less $ 492 $ 500
Due after one year through five years 2,005 2,012
Due after five years through ten years 9,122 9,067
Due after ten years 1,079 1,083
Mutual funds 3,173 3,059
Mortgage-related securities 22,848 22,850
-----------------------------
$38,719 $38,571
=============================
</TABLE>
Proceeds from sales of securities available-for-sale during the years ended
December 31, 1998, 1997 and 1996, were $26,779, $12,308 and $15,848,
respectively. Gross gains of $217, $83 and $87 were recorded on those sales for
the years ended December 31, 1998, 1997 and 1996, respectively. Gross losses of
$0, $5 and $17 were also recorded in the years ended December 31, 1998, 1997 and
1996, respectively.
35
<PAGE> 59
Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. LOANS RECEIVABLE
Loans receivable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
------------------------------------
<S> <C> <C>
First mortgage:
Conventional single-family residential $ 43,912 $ 58,821
Commercial and multifamily residential 112,015 78,365
Construction 15,853 18,191
------------------------------------
171,780 155,377
Commercial business loans 64,094 56,846
Consumer and installment loans 13,578 12,220
Leases 2,599 2,311
Home equity loans 1,346 1,496
Other 763 1,081
------------------------------------
82,380 73,954
Less:
Deferred loan fees 43 60
Allowance for loan losses 2,302 2,093
------------------------------------
$251,815 $227,178
====================================
</TABLE>
Transactions in the allowance for loan losses are summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
-----------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $2,093 $1,939 $1,533
Provisions charged to operations 250 192 460
Recoveries 7 - 29
Charge-offs (48) (38) (83)
-----------------------------------------
Balance at end of year $2,302 $2,093 $1,939
=========================================
</TABLE>
Total nonaccrual loans were $1,021 and $498 at December 31, 1998 and 1997,
respectively.
36
<PAGE> 60
Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. PREMISES AND EQUIPMENT
Premises and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
--------------------------------
<S> <C> <C>
Land $ 2,351 $ 2,353
Office buildings and improvements 9,085 7,858
Furniture and equipment 4,402 3,807
--------------------------------
15,838 14,018
Less accumulated depreciation (5,708) (5,127)
--------------------------------
$10,130 $ 8,891
================================
</TABLE>
5.
DEPOSITS
<TABLE>
Deposits consist of the following:
<CAPTION>
DECEMBER 31
1998 1997
--------------------------------
Negotiable Order of Withdrawal accounts:
<S> <C> <C>
Noninterest-bearing $ 41,985 $ 39,405
Interest-bearing 21,239 20,137
Savings deposits 57,556 58,177
Money market investment accounts 8,547 8,425
Time deposits and certificate accounts 159,903 138,525
--------------------------------
$289,230 $264,669
================================
</TABLE>
The scheduled maturities of time deposits and certificate accounts at December
31, 1998 are as follows:
<TABLE>
<CAPTION>
Maturities during the year ending December 31:
----------------------------------------------
<S> <C>
1999 $147,451
2000 6,187
2001 2,881
2002 1,541
2003 1,837
Thereafter 6
----------------
$159,903
================
</TABLE>
At December 31, 1998 and 1997, time deposits and certificate accounts with
balances greater than $100 amounted to $33,266 and $28,527, respectively.
37
<PAGE> 61
Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. BORROWINGS
At December 31, 1998 and 1997, the Banks have overnight federal funds purchased
of $9,500 and $1,500, respectively, with weighted-average interest of 5.40% and
6.00%, respectively.
Lincoln also had a short-term advance of $3,500 from the Federal Home Loan Bank
at December 31, 1998, which bears interest at 5.13%. Lincoln is required to
maintain unencumbered mortgage loans in its portfolio aggregating at least 167%
of the amount of outstanding advances from the Federal Home Loan Bank as
collateral. In addition, these advances are collateralized by Federal Home Loan
Bank stock.
At December 31, 1998 and 1997, the Corporation had $260 and $0 outstanding,
respectively, on a line of credit with an unaffiliated bank with a total
available balance of $2,000. The line bears interest at the lender's prime rate
(7.75% at December 31, 1998), and is collateralized by 100% of the capital stock
of Franklin State Bank.
7. STOCKHOLDERS' EQUITY
The Banks are subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory--and possibly additional discretionary--actions by
regulators that, if undertaken, could have a direct material effect on the
Banks' financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Banks must meet specific
capital guidelines that involve quantitative measures of the Banks' assets,
liabilities and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Banks' capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Banks to maintain minimum amounts and ratios (set forth in the table
that follows) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined) and of Tier 1 capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1998 and 1997, that
the Banks meet all capital adequacy requirements to which they are subject.
38
<PAGE> 62
Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. STOCKHOLDERS' EQUITY (CONTINUED)
As of December 31, 1998, the most recent notification from the Federal Deposit
Insurance Corporation categorized all the Banks as well capitalized under the
regulatory framework for prompt corrective action. As of December 31, 1997,
Lincoln Community Bank and Franklin State Bank were categorized as well
capitalized and Lincoln State Bank as adequately capitalized. To be categorized
as well capitalized, the Banks must maintain minimum total risk-based, Tier I
risk-based, Tier I leverage ratios as set forth in the table. There are no
conditions or events since that notification that management believes have
changed the Banks' classifications as of December 31, 1998.
<TABLE>
<CAPTION>
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
----------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
AS OF DECEMBER 31, 1998
Total Capital (to Risk-
Weighted Assets):
Lincoln State Bank $15,721 10.01% $12,570 8.00% $15,713 10.00%
Lincoln Community Bank 9,326 13.20 5,652 8.00 7,065 10.00
Franklin State Bank 4,866 11.27 3,454 8.00 4,317 10.00
Tier 1 Capital (to Risk-
Weighted Assets):
Lincoln State Bank 14,567 9.27 6,285 4.00 9,428 6.00
Lincoln Community Bank 8,546 12.10 2,826 4.00 4,239 6.00
Franklin State Bank 4,498 10.42 1,727 4.00 2,590 6.00
Tier 1 Capital (to Average
Assets):
Lincoln State Bank 14,567 8.41 6,925 4.00 8,656 5.00
Lincoln Community Bank 8,546 8.34 4,097 4.00 5,121 5.00
Franklin State Bank 4,498 8.96 2,008 4.00 2,510 5.00
</TABLE>
8. RESTRICTIONS ON SUBSIDIARY DIVIDENDS, LOANS OR ADVANCES
Dividends are paid by the Corporation from funds which are mainly provided by
dividends from the Banks. However, certain restrictions exist regarding the
ability of the Banks to transfer funds to the Corporation in the form of cash
dividends, loans or advances. Approval of the regulatory authorities is required
to pay dividends in excess of certain levels of the Banks' retained earnings.
39
<PAGE> 63
Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. RESTRICTIONS ON SUBSIDIARY DIVIDENDS, LOANS OR ADVANCES (CONTINUED)
As of December 31, 1998, the subsidiary banks collectively had equity of
$27,635,649 of which $3,419,574 was available for distribution to the
Corporation as dividends without prior regulatory approval.
Under Federal Reserve Board regulations, the Banks are limited as to the amount
they may loan to their affiliates, including the Corporation, unless such loans
are collateralized by specific obligations. At December 31, 1998, the maximum
amount available for transfer from any one of these Banks to the Corporation in
the form of loans approximates 8.6% of consolidated stockholders' equity.
9. EMPLOYEE BENEFIT PLANS
The Corporation has an Incentive Stock Option Plan under which 23,100 shares of
common stock are reserved for the grant of options to officers and key employees
at a price not less than the fair market value of the stock on the date of the
grant. The plan limits the options that may be granted to each employee to $100
(based on aggregate fair market value at the date of the grant) per calendar
year, on a cumulative basis. Options must be exercised within ten years of the
date of grant and can be regranted if forfeited.
A summary of stock option transactions follows:
<TABLE>
<CAPTION>
Weighted Weighted Average
Exercise Average Remaining
Number Price Exercise Price Contractual Life
of Shares Per Share Per Share
-------------- --------------------- ------------------ -------------------
<S> <C> <C> <C> <C>
Total outstanding at
December 31, 1996 41,250 $9.86 - $15.15 $12.35 4.54 years
Expired (1,013) 9.86
Exercised (12,187) 9.86 - 12.12
--------------
Total outstanding at
December 31, 1997 28,050 12.18 - 15.15 13.13 4.83 years
Granted 49,775 30.91 - 31.14 30.98 10 years
Exercised (4,620) 12.18 - 15.15 12.68
--------------
Total outstanding at
December 31, 1998 73,205 12.12 - 31.14 25.29 7.20 years
==============
</TABLE>
At December 31, 1998, all outstanding options are exercisable.
40
<PAGE> 64
Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. EMPLOYEE BENEFIT PLANS (CONTINUED)
The Corporation has a 401(k) Profit Sharing Plan and Trust which covers
substantially all employees with at least six months of service who have
attained age twenty and one-half. Participating employees may annually
contribute up to 12% of their pre-tax compensation. The Corporation's annual
contribution consists of a discretionary matching percentage, limited to 1% of
employee compensation, and an additional discretionary amount, which is
determined annually by the Board of Directors. The Corporation's contributions
for 1998, 1997 and 1996, were $193, $180 and $164, respectively.
10. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $1,341 $1,157 $718
State 255 231 168
------------------------------------------------------
1,596 1,388 886
------------------------------------------------------
Deferred (benefit):
Federal (73) 36 (124)
State (55) 15 (32)
------------------------------------------------------
(128) 51 (156)
------------------------------------------------------
$1,468 $1,439 $730
======================================================
</TABLE>
The provision for income taxes differs from that computed at the federal
statutory corporate tax rate as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
-----------------------------------------
<S> <C> <C> <C>
Income tax at statutory rate $1,419 $1,309 $694
Increase (reduction) resulting from:
Tax-exempt interest income (76) (21) (49)
State income taxes, net of federal tax benefit 132 163 89
Other (7) (12) (4)
-----------------------------------------
$1,468 $1,439 $730
=========================================
</TABLE>
41
<PAGE> 65
Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
10. INCOME TAXES (CONTINUED)
The components of deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
---------------------------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 692 $ 594
Unrealized loss on securities 59 -
Net operating loss carryforwards 546 509
Other assets 91 83
---------------------------
Total deferred tax assets 1,388 1,186
Valuation allowance (557) (509)
---------------------------
831 677
Deferred tax liabilities:
Unrealized gain on securities - 9
Depreciation 298 293
Other liabilities 35 39
---------------------------
Total deferred tax liabilities 333 341
---------------------------
Net deferred tax asset $ 498 $ 336
===========================
</TABLE>
At December 31, 1998, the Corporation and its subsidiaries, which file separate
state income tax returns, have state net operating loss carryforwards of
approximately $10,462 which expire at various dates through 2013. Due to the
unlikelihood of realizing these benefits, a valuation allowance of $546 has been
established to offset the deferred tax assets relating to these carryforwards.
Lincoln Community qualified under provisions of the Internal Revenue Code, which
previously permitted it to deduct from taxable income an allowance for bad debts
that differs from the provision for such losses charged to income for financial
reporting purposes. At December 31, 1998, retained earnings included
approximately $3,606 for which no provision for income taxes has been made.
Income taxes of approximately $1,414 would be imposed if Lincoln Community Bank
were to use these retained earnings for any other purpose other than to absorb
bad debt losses.
42
<PAGE> 66
Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
11. LOANS TO RELATED PARTIES
In the ordinary course of business, loans are granted to related parties, which
include management personnel, directors and entities in which such persons are
principal stockholders. Activity in loans to related parties is as follows:
<TABLE>
<S> <C>
Balance at December 31, 1996 $ 16,984
Loans originated 13,852
Repayments (8,021)
----------------
Balance at December 31, 1997 22,815
Loans originated 16,155
Repayments (16,249)
----------------
Balance at December 31, 1998 $ 22,721
================
</TABLE>
12. COMMITMENTS AND CONTINGENT LIABILITIES
Off-balance-sheet financial instruments whose contracts represent credit and/or
interest rate risk at December 31, 1998 and 1997, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
------------------------------------
<S> <C> <C>
Commitments to originate mortgage loans (expiring
within three months):
Fixed rates $ 4,172 $ 3,008
Adjustable rates 3,541 1,018
Unused lines of credit:
Commercial business 29,957 24,384
Home equity (adjustable rate) 1,279 1,278
Credit cards (fixed rate) 3,148 2,599
Standby letters of credit 2,941 1,975
</TABLE>
Loan commitments and line-of-credit loans are made to accommodate the financial
needs of the Banks' customers. Standby letters of credit commit the Banks to
make payments on behalf of customers when certain specified future events occur.
These arrangements have credit risk essentially the same as that involved in
extending loans to customers and are subject to the Banks' normal credit
policies. Collateral is obtained based on management's credit assessment of the
customer.
43
<PAGE> 67
Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
12. COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
Except for the above-noted commitments to originate loans in the normal course
of business, the Corporation and the Banks have not undertaken the use of
off-balance-sheet derivative financial instruments for any purpose.
13. FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement No. 107, "Disclosures About Fair Value of Financial Instruments,"
requires disclosure of fair value information about financial instruments,
whether or not recognized in the statement of financial condition, for which it
is practicable to estimate that value. In cases where quoted market prices are
not available, fair values are based on estimates using present value or other
valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. In that regard, the derived fair value estimates cannot be substantiated
by comparison to independent markets and, in many cases, could not be realized
in immediate settlement of the instrument. Statement No. 107 excludes certain
financial instruments and all nonfinancial instruments from its disclosure
requirements. Accordingly, the aggregate fair value amounts presented do not
necessarily represent the underlying value of the Corporation. The Corporation
does not routinely measure the market value of financial instruments because
such measurements represent point-in-time estimates of value. It is generally
not the intent of the Corporation to liquidate and therefore realize the
difference between market value and carrying value and even if it were, there is
no assurance that the estimated market values could be realized. Thus, the
information presented is not particularly relevant to predicting the
Corporation's future earnings or cash flows.
The following methods and assumptions were used by the Corporation in estimating
its fair value disclosures for financial instruments:
CASH AND CASH EQUIVALENTS
The carrying amounts for cash and cash equivalents approximate those assets'
fair values.
INVESTMENT AND MORTGAGE-RELATED SECURITIES
Fair values for investment and mortgage-related securities are based on quoted
market prices, where available. If quoted market prices are not available, fair
values are based on quoted market prices of comparable instruments.
44
<PAGE> 68
Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
13. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
ACCRUED INTEREST INCOME AND EXPENSE
The fair value of accrued interest income and expense approximates the
respective book value.
LOANS RECEIVABLE
For variable-rate loans that reprice frequently and with no significant change
in credit risk, fair values are based on carrying values. The fair values for
residential mortgage loans are based on quoted market prices of similar loans
sold in conjunction with securitization transactions, adjusted for differences
in loan characteristics. The fair values for commercial real estate loans,
rental property mortgage loans, commercial business loans and consumer and other
loans are estimated using discounted cash flow analyses, using interest rates
currently being offered for loans with similar terms to borrowers of similar
credit quality.
FEDERAL HOME LOAN BANK STOCK
FHLB stock is carried at cost which is its redeemable value since the market for
this stock is restricted.
DEPOSITS
The fair values disclosed for noninterest-bearing checking accounts, negotiable
order of withdrawal accounts, passbook accounts and savings deposits and money
market investment accounts are, by definition, equal to the amount payable on
demand at the reporting date (i.e., their carrying amounts). The carrying
amounts for variable-rate, fixed term certificate accounts approximate their
fair values at the reporting date. The fair values of fixed-rate certificates of
deposit are estimated using a discounted cash flow calculation that applies
interest rates currently being offered on certificates to a schedule of
aggregated expected monthly maturities on time deposits.
BORROWINGS
The fair values of the Corporation's borrowings are estimated using discounted
cash flow analyses, based on the Corporation's current incremental borrowing
rates for similar types of borrowing arrangements.
45
<PAGE> 69
Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
13. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
OFF-BALANCE-SHEET INSTRUMENTS
Fair values for the Corporation's off-balance-sheet instruments (lending
commitments and standby letters of credit) are based on fees currently charged
to enter into similar agreements, taking into account the remaining terms of the
agreements, the counterparties' credit standing and discounted cash flow
analyses. The fair value of these off-balance-sheet items approximates the
recorded amounts of the related fees and is not material at December 31, 1998 or
1997.
The carrying amounts and fair values of the Corporation's financial instruments
consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
------------------------------- -------------------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
------------------------------- -------------------------------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 28,628 $ 28,628 $ 15,358 $ 15,358
Securities available-for-sale:
Investment securities 15,721 15,721 12,649 12,649
Mortgage-related securities 22,850 22,850 28,169 28,169
Loans receivable 254,160 254,964 229,331 229,779
Accrued interest receivable 1,674 1,674 1,553 1,553
Federal Home Loan Bank stock 1,057 1,057 1,050 1,050
Deposits 289,230 289,357 264,669 264,624
Accrued interest payable 421 421 332 332
Borrowings 13,260 13,260 1,500 1,500
</TABLE>
46
<PAGE> 70
Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
14. MERCHANTS AND MANUFACTURERS BANCORPORATION, INC. AND SUBSIDIARIES PARENT
COMPANY ONLY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
DECEMBER 31
STATEMENTS OF FINANCIAL CONDITION 1998 1997
------------------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 30 $ 212
Investment in subsidiaries 28,213 26,307
Premises and equipment 2,915 2,989
Other assets 1,086 959
------------------------------------
Total assets $32,244 $30,467
====================================
LIABILITIES
Other liabilities $ 987 $ 971
Borrowings 260 -
------------------------------------
Total liabilities 1,247 971
STOCKHOLDERS' EQUITY
Common stock 1,508 904
Additional paid-in capital 10,820 11,008
Unrealized gain (loss) on available for sale securities (88) 19
Retained earnings 19,391 17,574
Less treasury stock (634) (9)
------------------------------------
Total stockholders' equity 30,997 29,496
------------------------------------
Total liabilities and stockholders' equity $32,244 $30,467
====================================
</TABLE>
47
<PAGE> 71
Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
14. MERCHANTS AND MANUFACTURERS BANCORPORATION, INC. AND SUBSIDIARIES PARENT
COMPANY ONLY FINANCIAL INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
------------------------------------
<S> <C> <C> <C>
STATEMENTS OF INCOME
Income:
Interest on loans, including fees $ - $ - $ 26
Interest on investments - - 25
Dividends from subsidiaries 4,783 1,943 1,876
Other 1,227 280 244
------------------------------------
6,010 2,223 2,171
Expenses:
Salaries and employee benefits 1,511 1,268 847
Occupancy 476 391 281
Interest 12 16 3
Other 517 547 544
------------------------------------
2,516 2,222 1,675
------------------------------------
Income before income tax benefit and equity in undistributed
net income of subsidiaries 3,494 1 496
Income tax benefit 448 670 478
------------------------------------
Income before equity in undistributed net income of
subsidiaries 3,942 671 974
Equity in undistributed net income of subsidiaries (1,236) 1,738 336
------------------------------------
Net income $ 2,706 $2,409 $1,310
====================================
</TABLE>
48
<PAGE> 72
Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
14. MERCHANTS AND MANUFACTURERS BANCORPORATION, INC. AND SUBSIDIARIES PARENT
COMPANY ONLY FINANCIAL INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
-------------------------------------
<S> <C> <C> <C>
CONDENSED STATEMENTS OF CASH FLOWS
OPERATING ACTIVITIES
Net income $ 2,706 $ 2,409 $ 1,310
Adjustments to reconcile net income to net cash provided by
operating activities:
Equity in undistributed net income of subsidiaries 1,236 (1,738) (336)
Provision for depreciation 153 116 80
Other (110) (593) 266
-------------------------------------
Net cash provided by operating activities 3,985 194 1,320
INVESTING ACTIVITIES
Sales of mortgage-backed securities - - 693
Proceeds from repayments of mortgage-related securities - - 27
Proceeds from sales of furniture and equipment - 250 -
Purchases of furniture and equipment (79) (1,400) (226)
-------------------------------------
Net cash provided (used) by investing activities (79) (1,150) 494
FINANCING ACTIVITIES
Net increase in notes payable 260 - -
Capital contribution to subsidiary (3,250) - -
Payment of cash dividends (889) (703) (691)
Purchase of treasury stock (845) (251) (946)
Proceeds from the sale of treasury stock 110 1,256 186
Proceeds from issuing additional common stock 394 60 -
Proceeds from dividend reimbursement plan 132 123 -
-------------------------------------
Net cash provided (used) by financing activities (4,088) 485 (1,451)
-------------------------------------
Increase (decrease) in cash and cash equivalents (182) (471) 363
Cash and cash equivalents at beginning of year 212 683 320
-------------------------------------
Cash and cash equivalents at end of year $ 30 $ 212 $ 683
=====================================
</TABLE>
49
<PAGE> 73
Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
15. PENDING ACQUISITION
On March 9, 1999, the Corporation entered into a definitive agreement to acquire
Pyramid Bancorp., Inc. (PBI) by exchanging nine shares of the Corporation's
stock for each outstanding common share of PBI. Upon closing, PBI will be merged
into the Corporation. The transaction is expected to close in the second quarter
of 1999, and will be accounted for as a pooling of interests. At December 31,
1998, PBI had total assets and shareholder's equity of $106,909 and $8,441,
respectively.
50
<PAGE> 74
DIRECTORS AND OFFICERS
<TABLE>
<S> <C>
MERCHANTS AND MANUFACTURERS BANCORPORATION
DIRECTORS
Michael J. Murry Gerald Fusek
Chairman of the Board President - West Allis Region
James F. Bomberg Thomas Loew
President, and Chief Executive Officer President - Franklin Region
J. Michael Bartels Conrad C. Kaminski
President, Bartels Management Services, Inc. President - Milwaukee Region
Duane P. Cherek Thomas Wangerin
President, Cherek Lincoln-Mercury, Inc. President - Southeast Region
Robert V. Donaj Linda Anderson
President Achieve Mortgage Corp. Executive Administrative Assistant
Thomas F. Gapinski Donald Bray
Insurance Executive Assistant Vice President - Information Services
Casimir S. Janiszewski Cynthia M. Congemi
President, Superior Die Set Corporation Vice President - Training Director
David A. Kaczynski Debra L. Kapetanich
President, Cardinal Fabricating Corporation Vice President-Marketing Director
Conrad C. Kaminski John M. Krawczyk
President, M&M Bancorp - Milwaukee Region Executive Vice President and Chief Operating Officer
John M. Krawczyk Kathryn N. Lazzaro
Executive Vice President Executive Administrative Assistant
Nicholas S. Logarakis Susan McClure
President, General Automotive Manufacturing Co. Vice President Operations
Longin C. Prazynski James C. Mroczkowski
Retired Building Inspector Vice President and Chief Financial Officer
Gervase R. Rose Mark A. Ohlert
President, Roman Electric Co. Vice President - Credit Analyst Supervisor
James A. Sass Perfecto Rivera
President, Max A. Sass Funeral Homes Vice President
Keith C. Winters Steven Rutt
President, Keith C. Winters & Associates, Ltd. Vice President - Special Loans
MERCHANTS AND MANUFACTURERS BANCORPORATION Christine Schueller
OFFICERS Executive Administrative Assistant
Michael J. Murry
Chairman of the Board Anthony R. Smyczek
Vice President - Consumer Credit Administrator
James F. Bomberg
President and Chief Executive Officer
</TABLE>
51
<PAGE> 75
<TABLE>
<S> <C>
LINCOLN STATE BANK
DIRECTORS Gerald Fusek
Nicholas S. Logarakis Vice President Commercial Lending Officer
Chairman of the Board
Debra Jeske
Conrad C. Kaminski Executive Administrative Assistant
Vice Chairman of the Board
Diane Johnson
Dr. Francisco Aguilar Assistant Vice President - Branch Manager
Physician
Karolyn Kirkwood
Michael L. Dana Assistant Branch Manager
Chairman, Dana Investment Advisors, Inc.
Pamela M. Kurudza
Michael J. Duginski Vice President & Cashier
Attorney, Krawczyk & Duginski, S.C.
Robert A. Kurudza
Michael D. Dunham Assistant Vice President - Branch Manager
President, Effective Management Systems, Inc.
Mary La Grange
Thomas F. Gapinski Consumer Banking Officer
Casimir S. Janiszewski Thomas G. Loew
Vice President Commercial Lending Officer
Sr. Mary Jendras
Administrator, Felician Health Care Michael J. Murry
Vice President Commercial Lending Officer
William E. La Macchia
President & CEO Mark Travel Corporation Vincent Paduano
Assistant Vice President - Branch Manager
Cynthia Loew
President and Chief Executive Officer Kathleen Potter
Assistant Branch Manager
Michael J. Murry
Jean A. Pollnow
LINCOLN STATE BANK Executive Vice President
OFFICERS
Nicholas S. Logarakis Steven J. Rutt
Chairman of the Board Vice President Commercial Lending Officer
Cynthia Loew Nicole Schultz-Thomas
President and Chief Executive Officer Assistant Branch Manager
Conrad C. Kaminski Thomas Wangerin
Vice Chairman of the Board & Commercial Lending Officer Vice President - Commercial Lending Officer
James F. Bomberg
Vice President Commercial Lending Officer
Rosalind E. Cesarz
Assistant Vice President - Convenience Centers Manager
Cynthia Cullinan
Vice President and Loan Officer
Richard L. Dennis
Vice President - Branch Manager
</TABLE>
52
<PAGE> 76
<TABLE>
<S> <C>
FRANKLIN STATE BANK
DIRECTORS Steven J. Rutt
Keith C. Winters Vice President Commercial Lending Officer
Chairman of the Board
Patricia A. Urban
Thomas G. Loew Consumer Lending Officer
Vice Chairman of the Board
LINCOLN COMMUNITY BANK
J. Michael Bartels DIRECTORS
James A. Sass
Donna L. Kleinschmidt Chairman of the Board
President and Chief Executive Officer
Conrad C. Kaminski
John P. Klose Vice Chairman of the Board
Realtor, Dwyer/Klose Realty
Robert J. Blonski
Gary J. Krawczyk
Attorney, Krawczyk & Duginski, S.C. Maria Monreal-Cameron
Executive Director Hispanic Chamber of Commerce
Michael J. Murry
Duane P. Cherek
Gervase R. Rose
Robert V. Donaj
FRANKLIN STATE BANK
OFFICERS David A. Kaczynski
Keith C. Winters
Chairman of the Board John M. Krawczyk
Thomas G. Loew Mary Jo Krawczyk
Vice Chairman of the Board President and Chief Executive Officer
Donna L. Kleinschmidt Michael J. Murry
President and Chief Executive Officer
Longin C. Prazynski
Cheryl Andrews
Assistant Vice President & Cashier LINCOLN COMMUNITY BANK
OFFICERS
James F. Bomberg James A. Sass
Vice President Commercial Lending Officer Chairman of the Board
Walter D. Bringardner Conrad C. Kaminski
Vice President Lending Officer Vice Chairman of the Board
James Crowley Mary Jo Krawczyk
Assistant Vice President Branch Manager President and Chief Executive Officer
Gerald Fusek James F. Bomberg
Vice President Commercial Lending Officer Vice President Commercial Lending Officer
Conrad K. Kaminski Judith M. Donaj
Vice President Commercial Lending Officer Assistant Vice President - Branch Manager
Michael J. Murry Gerald Fusek
Vice President Commercial Lending Officer Vice President Commercial Lending Officer
Erin Nowakowski Shelly Gardner
Assistant Branch Manager Consumer Banking Officer
</TABLE>
53
<PAGE> 77
<TABLE>
<S> <C>
LINCOLN COMMUNITY BANK
OFFICERS (CONTINUED) Tims H. Petersons
Thomas G. Loew Internal Auditor
Vice President Commercial Lending Officer
Jeannette R. Pinkowski
Michael J. Murry Assistant Vice President
Vice President Commercial Lending Officer
Marsha M. Sczerzen
Steven J. Rutt Human Resource Director
Vice President Commercial Lending Officer
Gregory B. Stengel
Beverly Sustache Executive Vice President - Comptroller
Vice President & Cashier
Barbara J. Wagner
Sharon Tocco Loan Services Administrator
Executive Vice President
LINCOLN NEIGHBORHOOD
Thomas Wangerin REDEVELOPMENT CORPORATION
Vice President Commercial Lending Officer DIRECTORS
Conrad C. Kaminski
Bernadine M. Ziemba Director and Chairman of the Board
Assistant Vice President
Richard W. Heine
M&M SERVICES, INC. Director and President
DIRECTORS
Michael J. Murry Robert J. Blonski
Chairman of the Board Director and Vice President
Robert J. Blonski Steve Rutt
Director and Secretary
Duane P. Cherek
Thomas G. Loew
Michael Duginski Director and Treasurer
Gary Krawczyk Robert Nicol
Director
M&M SERVICES, INC.
OFFICERS OFFICERS
Robert J. Blonski Michael D. Gapinski
President and Chief Executive Officer Vice President and Executive Director
Rosemary Chojnacki Hide Dewulf
Deposit Services Officer Project Manager
Peter G. Eggers ACHIEVE MORTGAGE CORPORATION
Assistant Comptroller OFFICERS
Robert V. Donaj
Helen A. Groshek President
Assistant Customer Service Supervisor
Rosemary Blonski
Anne Marie Grulkowski Assistant Vice President - Chief Lending Administrator
Credit Review Officer
Mary Ann O'Bara
Nancy Knapp Assistant Secretary
Assistant Loan Services Administrator
Ann Smessaert
Assistant Vice President
</TABLE>
54
<PAGE> 78
MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS
The stock of the Corporation is not listed on any stock exchange or
quoted on the National Association of Securities Dealers Quotation Automated
Quotation System. The Corporation's stock has been quoted on "Pink Sheets", an
inter-broker quotation medium, since April 1993, and in the Over The Counter
Bulletin Board, an electronic quotation service. Robert W. Baird & Co.,
Incorporated, a regional securities and investment banking firm headquartered in
Milwaukee, Wisconsin, acts as a market maker for the Corporation's stock. The
Corporation's stock is quoted in the "Other Stocks" section of the Milwaukee
Journal/Sentinel. The Corporation's common stock trading symbol is "MMBI."
Holders of the Corporation's stock are entitled to receive such
dividends as may be declared from time to time by the Board of Directors from
funds legally available for such payments. The Corporation's ability to pay cash
dividends is dependent primarily on the ability of its subsidiaries to pay
dividends to the Corporation. The ability of each subsidiary to pay dividends
depends on its earnings and financial condition and on compliance with banking
statutes and regulations.
The following table sets forth the quarterly "bid/ask" range for the
period indicated.
<TABLE>
<CAPTION>
Quotation or Price
Quarter Ended Bid Ask
------------------------------------------------------------
<S> <C> <C>
March 31, 1997 $18.79 $19.39
June 30, 1997 19.55 19.55
September 30, 1997 20.15 20.15
December 31, 1997 28.03 28.33
MARCH 31, 1998 $30.30 $30.30
JUNE 30, 1998 31.25 31.25
SEPTEMBER 30, 1998 40.00 39.00
DECEMBER 31, 1998 39.50 39.50
</TABLE>
55
