<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
------------------ ------------------
Commission file Number 0-21292
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Wisconsin 39-1413328
- --------------------------------------- ---------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
14100 West National Avenue, PO Box 511160
New Berlin, Wisconsin 53151-1160
- --------------------------------------------------------------------------------
(Address of principal executive office)
(414) 827-6713
- --------------------------------------------------------------------------------
Registrant's telephone number, including area code:
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports) and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
----- -----
Applicable Only to Corporate Issuers
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
<TABLE>
<CAPTION>
<S> <C>
Common Stock, par value $1.00 per share 1,489,754 Shares
- --------------------------------------------------------- ------------------------------------------------------
Class Outstanding at May 1, 1999
</TABLE>
<PAGE> 2
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE NUMBER
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Consolidated Statements of Financial Condition as of March 31,
1999 and December 31, 1998 3
Unaudited Consolidated Statements of Income for the Three Months ended
March 31, 1999 and 1998 4
Unaudited Consolidated Statements of Cash Flows for the Three Months
ended March 31, 1999 and 1998 5
Notes to Unaudited Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations 9
Item 3. Quantitative and Qualitative Disclosure About Market Risk 17
PART II. OTHER INFORMATION
Items 1-6 18
Signatures 19
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
---------- ------------
(In Thousands)
<S> <C> <C>
ASSETS
Cash and due from banks $ 10,576 $ 9,946
Interest-bearing deposits at other banks 888 10,095
Federal funds sold 5,513 8,587
----------- ------------
Cash and cash equivalents 16,977 28,628
Securities available-for-sale at fair value:
Investment securities 16,406 15,721
Mortgage-related securities 18,967 22,850
Loans receivable 261,597 251,815
Accrued interest receivable 1,672 1,674
Federal Home Loan Bank stock 1,057 1,057
Premises and equipment 10,188 10,130
Other assets 3,035 2,628
----------- ------------
Total assets $ 329,899 $ 334,503
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 292,136 $ 289,230
Borrowings 5,490 13,260
Accrued interest payable 345 421
Advance payments by borrowers for taxes and insurance 430 52
Other liabilities 728 543
----------- ------------
Total liabilities 299,129 303,506
Stockholders' equity
Common stock $1.00 par value; 3,000,000 authorized;
1,507,788 shares issued; shares outstanding:
1,489,754--1999; 1,490,331--1998 1,508 1,508
Additional paid in capital 10,824 10,820
Net unrealized loss on securities available-for-sale (245) (88)
Retained earnings 19,357 19,391
Treasury stock, at cost (18,035 shares--1999;
17,457 shares--1998) (674) (634)
----------- ------------
Total stockholders' equity 30,770 30,997
----------- ------------
Total liabilities and stockholders' equity $ 329,899 $ 334,503
=========== ============
</TABLE>
See notes to unaudited consolidated financial statements.
3
<PAGE> 4
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, MARCH 31,
1999 1998
--------------------- --------------------
(In Thousands, Except Per Share Amounts)
<S> <C> <C>
Interest income:
Loans, including fees $5,152 $4,837
Investment securities:
Taxable 129 195
Exempt from federal income taxes 102 11
Mortgage-related securities 304 479
Other 62 109
--------------------- --------------------
Total interest income 5,749 5,631
Interest expense:
Deposits 2,460 2,487
Borrowings 116 25
--------------------- --------------------
Total interest expense 2,576 2,512
Net interest income 3,173 3,119
Provision for loan losses 50 75
--------------------- --------------------
Net interest income after provision for
loan losses 3,123 3,044
Noninterest income:
Service charges on deposit 171 187
Service charges on loans 42 22
Net gain on securities sales 9 0
Other 212 241
--------------------- --------------------
434 450
Noninterest expenses:
Salaries and employee benefits 2,069 1,806
Premises and equipment 469 421
Data processing fees 157 157
Federal deposit insurance premiums 30 19
Other 581 562
--------------------- --------------------
3,306 2,965
Income before income taxes 251 529
Income taxes 61 180
--------------------- --------------------
Net income $ 190 $ 349
===================== ====================
Basic earnings per share $ 0.13 $ 0.23
===================== ====================
Diluted earnings per share $ 0.12 $ 0.23
===================== ====================
Dividends per share $ 0.15 $ 0.12
===================== ====================
</TABLE>
See notes to unaudited consolidated financial statements.
4
<PAGE> 5
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
1999 1998
------------ ------------
(In Thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 190 $ 349
Adjustments to reconcile net income to cash
provided by operating activities
Provision for loan losses 50 75
Provision for depreciation 160 135
Net amortization of investments securities premiums and discounts 14 24
Net realized investment security gains (9) 0
Decrease (increase) in accrued interest receivable 2 (103)
Increase (decrease) in accrued interest payable (76) 30
Other (135) (233)
----------- -----------
Net cash provided by operating activities 196 277
INVESTING ACTIVITIES
Purchase of securities available-for-sale (814) (6,163)
Proceeds from sales of securities available-for-sale 2,704 0
Proceeds from redemptions and maturities of securities available-for-sale 1,066 1,299
Net decrease (increase) in loans (9,839) 5,044
Purchase of premises and equipment (218) (182)
----------- -----------
Net cash (used) by investing activities (7,101) (2)
FINANCING ACTIVITIES
Net increase in deposits 2,906 9,940
Net decrease in borrowings (7,770) (250)
Increase in advance payments by borrowers for taxes and insurance 378 259
Payment of cash dividends to stockholders (224) (181)
Purchase of treasury stock (107) (158)
Proceeds from sale of treasury stock 67 71
Proceeds from issuing additional common stock 4 299
----------- -----------
Net cash provided or (used) by financing activities (4,746) 9,980
Increase (decrease) in cash and cash equivalents (11,651) 10,255
Cash and cash equivalents at beginning of period 28,628 15,358
----------- -----------
Cash and cash equivalents at end of period $ 16,977 $ 25,613
=========== ===========
Supplemental cash flow information:
Interest paid $ 2,587 $ 2,481
Income taxes paid 383 257
</TABLE>
See notes to unaudited consolidated financial statements
5
<PAGE> 6
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC.
Notes to Unaudited Consolidated Financial Statements
March 31, 1999
NOTE A -- BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include the
accounts of Merchants and Manufacturers Bancorporation, Inc. (the Corporation)
and its wholly owned subsidiaries, Lincoln State Bank, Franklin State Bank,
Lincoln Community Bank (collectively, the Banks), Achieve Mortgage Corporation
and M&M Services, Inc. Lincoln State Bank also includes the accounts of its
wholly owned subsidiary, M&M Lincoln Investment Corporation. Lincoln Community
Bank also includes the accounts of its wholly owned subsidiary, Lincoln
Investment Management Corporation. All significant intercompany balances and
transactions have been eliminated.
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three-month period ended March 31, 1999
are not necessarily indicative of the results that may be expected for the year
ended December 31, 1999. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Corporation's Form
10-K for the year ended December 31, 1998.
This 10-Q contains various forward-looking statements concerning the Company's
prospects that are based on the current expectations and beliefs of management.
Forward-looking statements may also be made by the Corporation from time to time
in other reports and documents as well as oral presentations. When used in
written documents or oral statements, the words anticipate, believe, estimate,
expect, objective and similar expressions are intended to identify
forward-looking statements. The statements contained herein and such future
statements involve or may involve certain assumptions, risks and uncertainties,
many of which are beyond the Corporation's control, that could cause the
Corporation's actual results and performance to differ materially from what is
expected. In addition to the assumptions and other factors referenced
specifically in connection with such statements, the following factors could
impact the business and financial prospects of the Corporation: general economic
conditions; legislative and regulatory initiatives; monetary and fiscal policies
of the federal government; deposit flows; disintermidiation; the cost of funds;
general market rates of interest; interest rates or investment returns on
competing investments; demand for loan products; demand for financial services;
changes in accounting policies or guidelines; and changes in the quality or
composition of the Corporation's loan and investment portfolio.
NOTE B -- EARNINGS PER SHARE INFORMATION
On March 27, 1998 the Board of Directors of the Corporation declared a
three-for-two stock split that was distributed on April 10, 1998 to shareholders
of record on April 1, 1998. All prior periods share data have been adjusted to
reflect the effect of the three-for-two split.
6
<PAGE> 7
On August 27, 1998 the Board of Directors of the Corporation declared a 10%
common stock dividend that was distributed on October 15, 1998 to shareholders
of record on October 1, 1998. All prior periods share data have been adjusted to
reflect the 10% stock dividend.
Presented below are the calculations for basic and diluted earnings per share:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
Basic 1999 1998
-------------------------------------------------------------------------------
<S> <C> <C>
Net income $ 189,680 $ 349,204
Weighted average shares outstanding 1,489,637 1,493,772
Basic earnings per share $ 0.13 $ 0.23
=========================
Diluted:
-------------------------------------------------------------------------------
Net income $ 189,680 $ 349,204
Weighted average shares outstanding 1,489,637 1,493,772
Effect of dilutive stock options outstanding 30,793 10,502
-------------------------
Diluted weighted average shares outstanding 1,520,430 1,504,274
Diluted earnings per share $ 0.12 $ 0.23
=========================
</TABLE>
NOTE C - COMPREHENSIVE INCOME
The following table presents the Corporation's comprehensive income.
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
-------------------------
<S> <C> <C>
Net income $ 189,680 $ 349,204
Other comprehensive income
Net change in unrealized securities gains
(losses), net of tax (156,945) 42,872
-------------------------
Total comprehensive income $ 32,735 $ 392,076
=========================
</TABLE>
NOTE D -- LOANS RECEIVABLE
Loans are comprised of the following categories:
<TABLE>
<CAPTION>
March 31
1999 1998
--------------------------
(In Thousands)
<S> <C> <C>
Commercial business loans $ 70,026 $ 53,818
Commercial real estate 116,968 82,720
Real estate mortgages 63,521 75,922
Installments 12,464 10,848
Other 997 975
--------------------------
Total loans 263,976 224,283
Unearned income (41) (54)
Allowance for loan losses (2,338) (2,170)
==========================
Loans, net $ 261,597 $ 222,059
==========================
</TABLE>
7
<PAGE> 8
The following table presents changes in the allowance for loan losses:
<TABLE>
<CAPTION>
March 31
1999 1998
------------------------------
(In Thousands)
<S> <C> <C>
Balance at January 1 $ 2,302 $ 2,093
Provisions 50 75
Charge-offs (14) (1)
Recoveries 0 3
========= =========
Balance at March 31 $ 2,338 $ 2,170
========= =========
</TABLE>
NOTE E -- STOCKHOLDERS' EQUITY
Under federal law and regulations, the Corporation is required to meet certain
capital requirements. The Banks are required to meet leverage and risk-based
capital requirements. The leverage ratio, in general, is stockholders' equity as
a percentage of total assets. The risk-based capital ratio, in general, is
stockholders' equity plus general loan loss allowances (within certain
limitations) as a percentage of risk adjusted assets.
As of March 31, 1999, the most recent notification from Federal Deposit
Insurance Corporation categorized the Banks as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Banks must maintain minimum total risk-based, Tier I risk-based
and Tier I leverage ratios as set forth in the table. There are no conditions or
events since that notification that management believes have changed the banks'
category.
<TABLE>
<CAPTION>
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
-------------------------- ---------------------------- --------------------------
Amount Ratio Amount Ratio Amount Ratio
--------------------------- --------------------------- --------------------------
AS OF MARCH 31, 1999 (Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Total Capital (to Risk-
Weighted Assets):
Lincoln State Bank $15,956 10.69% $11,943 >8.00% $14,929 >10.00%
Lincoln Community 9,360 12.04% 6,219 >8.00% 7,774 >10.00%
Franklin State Bank 4,896 10.73% 3,651 >8.00% 4,564 >10.00%
Tier 1 Capital (to Risk-
Weighted Assets):
Lincoln State Bank 14,783 9.90% 5,972 >4.00% 8,957 >6.00%
Lincoln Community 8,573 11.03% 3,109 >4.00% 4,664 >6.00%
Franklin State Bank 4,518 9.90% 1,826 >4.00% 2,738 >6.00%
Tier 1 Capital (to Average
Assets):
Lincoln State Bank 14,783 8.64% 6,847 >4.00% 8,559 >5.00%
Lincoln Community 8,573 8.96% 3,825 >4.00% 4,782 >5.00%
Franklin State Bank 4,518 8.53% 2,119 >4.00% 2,649 >5.00%
</TABLE>
8
<PAGE> 9
NOTE F -- PENDING ACQUISITION
On March 9, 1999, the Corporation entered into a definitive agreement to acquire
Pyramid Bancorp., Inc. (PBI) by exchanging nine shares of the Corporation's
stock for each outstanding common share of PBI. Upon closing, PBI will be merged
into the Corporation. The transaction is expected to close in the third quarter
of 1999, and will be accounted for as a pooling of interests. At December 31,
1998, PBI had total assets and shareholder's equity of $106,909 and $8,441,
respectively.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Financial Condition
At March 31, 1999, the Corporation's consolidated total assets were $329.9
million as compared to $334.5 million at December 31, 1998. This decrease was
primarily due to a $12.3 million decline in short-term investments.
Investment securities available-for-sale increased $685,000 from December 31,
1998 to March 31, 1999. Purchases of investment securities in this category
caused the increase.
Mortgage-related securities available-for-sale decreased $3.9 million, or 17.0%
from $22.9 million at December 31, 1998, to $19.0 million at March 31, 1999.
Proceeds from the sales and redepemtions of these types of securities were used
to fund new loan demand and reduce short-term borrowings.
Loans receivable increased $9.8 million, or 3.9%, from $251.8 million at
December 31, 1998 compared to $261.6 million at March 31, 1999. This increase
was primarily due to new commercial loan relationships. This movement
corresponds to the Corporation's strategic plan of emphasizing commercial
business. Currently, loans receivable consists mainly of commercial loans
secured by business assets, real estate, and guarantees as well as mortgages
secured by residential properties located in the Corporation's primary market
area. At March 31, 1999 the Corporation has not designated any as loans held for
sale.
Stockholders' equity at March 31, 1999 was $30.8 million compared to $31.0
million at December 31, 1998, a decrease of $227,000. The change in
stockholders' equity consists of net income of $190,000, $4,000 from the
issuance of additional common stock, less the net purchase of treasury stock of
$40,000, payments of dividends to shareholders of $224,000 and the $157,000 net
decrease in the market value of securities categorized as available for sale.
The Banks continue to exceed their regulatory capital requirements.
Nonperforming Assets and Allowance for Losses
Generally a loan is classified as nonaccrual and the accrual of interest on such
loan is discontinued when the contractual payment of principal or interest has
become 90 days past due or management has serious doubts about further
collectibility of principal or interest. Generally, loans are restored to
accrual status when the obligation is brought current, has performed in
accordance with the contractual terms for a reasonable period of time and the
ultimate collectibility of the total contractual principal and interest is no
longer in doubt.
9
<PAGE> 10
Nonperforming assets are summarized, for the dates indicated, as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
----------- ------------
(dollars in thousands)
<S> <C> <C>
Non-accrual loans:
Mortgage loans
One-to-four family $ 675 $ 505
Commercial real estate 12 7
----------- -----------
Total mortgage loans 687 512
Commercial business 457 391
Consumer and other 92 118
----------- -----------
Total non-accrual loans 1,236 1,021
Other real estate owned 0 0
----------- -----------
Total nonperforming assets $ 1,236 $ 1,021
=========== ===========
RATIOS:
Non-accrual loans to total loans 0.47% 0.40%
Nonperforming assets to total assets 0.37 0.31
Loan loss allowance to non-accrual loans 189.16 225.47
Loan loss allowance to total loans 0.89 0.91
</TABLE>
Nonperforming assets increased by $215,000 from $1.0 million at December 31,
1998 to $1.2 million at March 31, 1999, an increase of 21.1%. Management
believes that losses will be minimal on the remaining balances, due to the
collateral position in each situation.
Results of Operations
Net interest income for the three months ended March 31, 1999 was $3.17 million,
an increase of 1.7% from the $3.12 million reported for the same period in 1998.
The increased volume of interest-earning assets accounted for the higher net
interest income. The net interest income generated by additional volume was
partially offset by the reduced net interest spread. The weighted average yield
on interest-earning assets decreased from 8.03% for the three months ended March
31, 1998 to 7.59% for the same period in 1999. Competitive pressures forced
lower loan rates and decreased market rates on investments caused the weighted
average yield on interest earning assets to decline. Reductions in assets yields
were partially offset by lower deposit rates. The average rate paid on deposits
and borrowings declined from 3.73% for the three months ended March 31, 1998 to
3.52% for the three months ended March 31, 1999.
10
<PAGE> 11
The following table sets forth the weighted average yield earned on the
Corporation's consolidated loan and investment portfolios, the weighted average
interest paid on deposits and borrowings, the net spread between yield earned
and rates paid and the net interest margin during the three months ended March
31, 1999 and 1998.
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
1999 1998
-----------------------------
<S> <C> <C>
Weighted average yield on
Interest-earning assets 7.59% 8.03%
Weighted average rate paid on
Deposit and borrowings 3.52 3.73
----------------------------
Net interest spread 4.07% 4.30%
============================
Net interest margin (net interest
Income divided by average
Earning assets) 4.19% 4.45%
============================
</TABLE>
The provision for loan losses for the three month period ended March 31, 1999
was $50,000 compared to $75,000 for the three months ended March 31, 1998. The
Corporation uses a risk-based assessment of its loan portfolio to determine the
level of the loan loss allowance. This procedure is based on internal reviews
intended to determine the adequacy of the loan loss allowance in view of
presently known factors. However, changes in economic conditions in the future
financial conditions of borrowers cannot be predicted and may result in
increased future provisions to the loan loss allowance.
Total noninterest income for the three months ended March 31, 1999 was $434,000
compared to $450,000 for the three months ended March 31, 1998, a decrease of
$16,000, or 3.6%. The decrease is due to a reduction in traditional bank service
charges such as overdraft fees and maintenance fees while service charges
collected on ATMs declined due to the relocation of existing machines and the
fewer number of transaction performed by non-customers.
Noninterest expense for the three months ended March 31, 1999 was $3.31 million
compared to $2.97 million for the three months ended March 31, 1998, an increase
of $341,000, or 11.5%. Salaries and employee benefits increased $263,000 or
14.6% from $1.81 million for the three-month period ended March 31, 1998
compared to $2.07 million for the three-month period in 1999. Employee bonus
payments, higher benefit costs and the hiring of new commercial business
developers accounted for this increase. Premises and equipment expense increased
$48,000 or 11.4% from $421,000 for the three month period ended March 31, 1998
compared to $469,000 for the three month period ended March 31, 1999. The
increase in occupancy expense can be attributed to maintenance and repairs made
on the Corporation's properties and the opening of a new branch of the Franklin
State Bank. Other expenses increased $19,000 in the first quarter of 1999. The
increases in other operating expenses can be attributed to loan processing
expense, courier services and telephone usage.
11
<PAGE> 12
Income before taxes for the three month period ended March 31, 1999 was $251,000
compared to $529,000 for the three months ended March 31, 1998, a decrease of
$278,000 or 52.6%. Income tax expense for the three months ended March 31, 1999
decreased $119,000 over the 1998 first quarter tax expense. The effective tax
rate for the three months ended March 31, 1999 was 24.3% compared to 34.0% for
the three months ended March 31, 1998. The decrease in the tax rate can be
attributed to the reduction in income, the purchase of tax-exempt investment
securities held by the Corporation and a reallocation of expenses throughout the
Corporation's subsidiaries. On an after tax basis, the Corporation reported net
income of $190,000 for the three month period ended March 31, 1999 compared to
$349,000 for the same period in 1998.
Liquidity and Capital Resources
Liquidity management involves the ability to meet the cash flow requirements of
customers who may be either depositors wanting to withdraw funds or borrowers
needing assurance that sufficient funds will be available to meet their credit
needs. The Corporation had liquid assets of $17.0 million and $28.6 million at
March 31, 1999 and December 31, 1998, respectively.
Management believes liquidity and capital levels are adequate at March 31, 1999.
For a discussion of regulatory capital requirements, see Note E to the Unaudited
Consolidated Financial Statements.
Asset/Liability Management
Financial institutions are subject to interest rate risk to the extent their
interest-bearing liabilities (primarily deposits) mature or reprice at different
times and on a different basis than their interest-earning assets (consisting
primarily of loans and securities). Interest rate sensitivity management seeks
to match maturities on assets and liabilities and avoid fluctuating net interest
margins while enhancing net interest income during periods of changing interest
rates. The difference between the amount of interest-earning assets maturing or
repricing within a specific time period and the amount of interest-bearing
liabilities maturing or repricing within the same time period is referred to as
an interest rate gap. A gap is considered positive when the amount of interest
rate sensitive assets exceeds the amount of interest rate sensitive liabilities.
A gap is considered negative when the amount of interest rate sensitive
liabilities exceeds the amount of interest rate sensitive assets. During periods
of rising interest rates, a negative gap tends to adversely affect net interest
income while a positive gap tends to result in an increase in net interest
income. During a period of falling interest rates, a negative gap tends to
result in an increase in net interest income while a positive gap tends to
adversely affect net interest income.
12
<PAGE> 13
The following table shows the interest rate sensitivity gap for four different
time intervals as of March 31, 1999. Certain assumptions regarding prepayment
and withdrawal rates made are based upon the Corporation's historical experience
and management believes such assumptions are reasonable.
<TABLE>
<CAPTION>
AMOUNTS MATURING OR REPRICING AS OF MARCH 31, 1999
-------------------------------------------------------------------------
WITHIN SIX TO TWELVE ONE TO FIVE OVER
SIX MONTHS MONTHS YEARS FIVE YEARS TOTAL
-------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Fixed-rate mortgage loans $ 29,901 $ 13,773 $ 82,243 $ 14,791 $ 140,708
Adjustable-rate mortgage loans 16,124 5,159 16,503 260 38,046
-------------------------------------------------------------------------
Total mortgage loans 46,025 18,932 98,746 15,051 178,754
Commercial business loans 36,583 3,875 27,152 582 68,192
Consumer loans 5,338 1,614 6,113 659 13,724
Other loans 343 546 1,228 1,148 3,265
Mortgage-related securities 12,426 326 4,792 1,423 18,967
Fixed rate investment securities and other 0 0 2,302 10,452 12,754
Variable rate investment securities and
other 10,053 1,057 0 0 11,110
-------------------------------------------------------------------------
Total interest-earning assets $ 110,768 $ 26,350 $140,333 $ 29,315 $ 306,766
=========================================================================
Interest-bearing liabilities:
Deposits
Time deposits $ 118,487 $ 32,412 $ 13,644 $ 1 $ 164,544
NOW accounts 1,513 1,513 15,133 7,062 25,221
Savings accounts 3,484 3,484 34,844 16,260 58,072
Money market accounts 393 393 3,930 1,834 6,550
Advance payments for taxes and insurance 0 430 0 0 430
Borrowings 5,490 0 0 0 5,490
-------------------------------------------------------------------------
Total interest-bearing liabilities $ 129,367 $ 38,232 $ 67,551 $ 25,157 $ 260,307
=========================================================================
Interest-earning assets less
interest-bearing
Liabilities ($18,599) ($11,882) $ 72,782 $ 4,158 $ 46,459
=========================================================================
Cumulative interest rate sensitivity gap ($18,599) ($30,481) $ 42,301 $ 46,459
============================================================
Cumulative interest rate sensitivity gap as
a Percentage of total assets (5.64%) (9.24%) 12.82% 14.08%
============================================================
</TABLE>
At March 31, 1999, the Corporation's cumulative interest-rate sensitive gap as a
percentage of total assets was a negative 5.64% for six months and a negative
9.24% for one-year maturities. Therefore, the Corporation is negatively gapped
and may benefit from falling interest rates.
Certain shortcomings are inherent in the method of analysis presented in the
above schedule. For example, although certain assets and liabilities may have
similar maturities or periods of repricing, they may react in different degrees
to changes in market interest rates. Also, the interest rates on certain types
of assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag behind changes in market
rates. Additionally, certain assets, such as adjustable rate mortgage loans,
have features that restrict changes in interest rates, on a short term basis
over the life of the asset. Further, in the event of a change in interest rates,
prepayment and early withdrawal levels would likely deviate significantly from
those assumed in calculating the schedule.
13
<PAGE> 14
YEAR 2000 PREPAREDNESS
The Year 2000 poses a potential risk to normal operations of both Information
Technology (IT) and non-IT systems. The Year 2000 problem is pervasive and
complex. The majority of computer operating systems and programs currently in
use have been developed utilizing six digit date fields (YYMMDD). For example,
December 31st, 1999, would be represented by "991231" in computer code. The two
digit field for the year (in example "99") is the basis for all calculation
formulas within most computer systems, particularly those processed through
mainframe computers.
Up until now, this two-digit field has sufficed, using a subtraction of current
date from some future date (up to 12-31-99). As the industry enters the year
2000, the digit-field "00" will not permit accurate calculations based on the
current formulas. January 1, 2000 would be read as the year 000101. Many
computer systems will recognize this date as the year 1900 or other erroneous
dates. The potential impact is that data could cause system failures. This could
affect all forms of financial accounts, pensions, personnel benefits,
investments, legal commitments, record keeping, inventories, maintenance, and
file retention.
Systems that work independently of IT equipment have the same potential for
failure due to the prevalence of embedded computer chips. These "hidden" chips
have forced the Corporation to review all of it's environmental, security, and
communication systems.
Year 2000 Project Status
The Corporation has taken the Year 2000 issue very seriously. The Corporation
sees the Year 2000 as an opportunity to help increase service, functionality,
and performance to its customers. Outdated systems, procedures, and products are
being replaced or renovated with those that will meet the challenges of the new
millennium.
A Year 2000 project team was assembled early in 1997 to assess the scope of the
project as it relates to all of the Corporation's banks and subsidiaries. Once
this assessment was completed, an aggressive project plan was put into place
that consists of renovating or replacing affected systems, validation and
testing of any changes, effective risk management and employee and consumer
awareness.
In developing it's Year 2000 Project Plan, the Corporation defined the Year 2000
problem in 5 stages:
Awareness: The need to define the scope of the Year 2000 problem.
Assessment: Identify all systems and components which are affected.
Renovation: The problem should be "fixed" by the appropriate means.
Validation: Year 2000 compliance must be tested.
Implementation: Final confirmation of Year 2000 compliance.
The Corporation began working on its Year 2000 project in the spring of 1997.
The project plan was written, personnel recruited and timetables established.
Awareness: Completed Summer-Fall 1997
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<PAGE> 15
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 June 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.
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.
15
<PAGE> 16
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 June 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 June - 1999
Credit Card Processing: Currently Completed
Asset Liability Management: Currently Completed
Other Third Party Vendors
Other third party vendors are suppliers that provide services or products to the
Corporation. All vendors have been queried as to their Year 2000 readiness.
Approximately 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.
16
<PAGE> 17
The Corporation anticipates that it will incur expenses, both internal and
external for 1999 in the range of $30,000 to $50,000. Most of these costs will
be incurred due to staff time being allocated to the project and for contingency
planning preparation. The Corporation intends to fund these costs out of normal
operating sources.
The estimated costs of, and timetable for, becoming Year 2000 compliant
constitute "forward looking statements" as defined in the Private Securities
Litigation Reform Act of 1995. Investors are cautioned that such estimates are
based on numerous assumptions by management, including assumptions regarding the
continued availability of certain resources, the accuracy of representations
made by third parties concerning their compliance with Year 2000 issues, and
other factors. The estimated costs of Year 2000 compliance also do not give
effect to any future corporate acquisitions made by the Corporation or its
subsidiaries.
Risk of Non-Compliance and Contingency Plans
Management of the Corporation believes it has an effective program in place to
resolve the Year 2000 issue in a timely manner. The major applications which
pose the greatest Year 2000 risk if the implementation of the Year 2000
Compliance Program is not successful are the Corporation's data processing
system (which processes various documents to allow for accurate record keeping
of transactional data), teller system and transaction interfaces (which provide
customer access to accounts), loan system (which monitors and transacts loan
payments by customers), and internal network system (which supports the computer
components throughout the Corporation). Most of these systems are supported by
external vendors. Failure by any of these systems could have a negative impact
on the Corporation's ability to process its customers' transactions.
Although the Corporation intends to complete all Year 2000 activities in a
timely fashion, and although the Corporation has initiated Year 2000
Communications with significant customers, vendors and other important parties,
and is monitoring the progress of such communications, such third parties
nonetheless represent a risk that cannot be assessed with precision nor
absolutely controlled despite the Corporation's best efforts. For that reason,
the Corporation is modifying its existing a business resumption contingency plan
to address alternatives in the event of some kind of a Year 2000 failure. A
completed tested contingency plan is targeted for June 30, 1999.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not Applicable
17
<PAGE> 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
As of March 31, 1999 there were no material pending legal
proceedings, other than ordinary routine litigation incidental
to the business of the Corporation, to which the Corporation or
any of its subsidiaries was a party or to which any of their
property was subject.
Item 2. Changes in Securities - NONE
Item 3 Defaults upon Senior Securities - NONE
Item 4 Submission of Matters to Vote of Security Holders - NONE
Item 5 Other Information - NONE
Item 6 Exhibits and Reports on Form 8-K
The Corporation did not file any reports on Form 8-K during the
three months ended March 31, 1999. Required exhibits are
incorporated by reference to previously filed Securities Act
registration statements.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed by on its behalf by the
undersigned thereunto duly authorized.
MERCHANTS AND MANUFACTURERS
BANCORPORATION, INC.
-----------------------------------------
(Registrant)
Date May 14, 1999 /s/ James F. Bomberg
------------------------- ------------------------------------------
James F. Bomberg
President & Chief Executive Officer
Date May 14, 1999 /s/ James C. Mroczkowski
------------------------- ------------------------------------------
James C. Mroczkowski
Vice President & Chief Financial Officer
Principal Financial Officer
19
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