<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 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
incorporation organization) Identification Number)
14100 West National Avenue, PO Box 511160
New Berlin, Wisconsin 53151-1160
(Address of principal executive office)
Registrant's telephone number, including area code: (262) 827-6713
Securities registered pursuant to Section 12(b) of the Act: Not Applicable
Securities registered pursuant to section 12(g) of the Act:
COMMON STOCK, PAR VALUE $1.00 PER SHARE
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports) and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No .
------------ ------------
Indicate by check mark if disclosure of delinquent filers pursuant to item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
form 10-K [X]
As of March 1, 2000, 2,102,174 shares of Common Stock were outstanding, and the
aggregate market value of the shares (based upon the closing price) held by
non-affiliates was approximately $66,782,000.
<PAGE> 2
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC.
*****
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
PART I
Page
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<S> <C> <C> <C>
Item 1. Business 3
Item 2. Properties 5
Item 3. Legal Proceedings 6
Item 4. Submission of Matters to a Vote of Security Holders 6
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder's Matters 7
Item 6. Selected Financial Data 8
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
9
Item 7a. Quantitative and Qualitative Disclosures About Market Risk 19
Item 8. Financial Statements and Supplementary Data 20
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
20
PART III
Item 10. Directors and Executive Officers of the Registrant 21
Item 11. Executive Compensation 21
Item 12 Security Ownership of Certain Beneficial Owners and Management 21
Item 13. Certain Relationships and Related Transactions 21
PART IV
Item 14. Exhibits, Financial Statements Schedules and Reports on Form 8-K 21
SIGNATURES 22
</TABLE>
2
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PART I
ITEM 1. BUSINESS
GENERAL
Merchants and Manufacturers Bancorporation, Inc. (the Corporation), is
a registered multi-bank holding company under the Bank Holding Company Act of
1956, as amended. The Corporation was organized in 1982, and in 1983 and 1984
acquired all of the outstanding stock of Lincoln State Bank, Milwaukee,
Wisconsin and Franklin State Bank, Franklin, Wisconsin, respectively. In 1993,
the Corporation acquired all of the outstanding shares of Lincoln Savings Bank,
S.A., Milwaukee, Wisconsin. Lincoln State Bank and Franklin State Bank were
chartered as commercial banks under the Wisconsin Banking Statutes, while
Lincoln Savings Bank operated as a stock savings bank until 1997. In 1997
Lincoln Savings Bank converted from a Wisconsin stock savings bank to a
Wisconsin commercial bank. Upon conversion Lincoln Savings Bank changed its name
to Lincoln Community Bank. In 1999, the Corporation acquired Pyramid Bancorp
Inc. (Pyramid) and its subsidiary Grafton State Bank, in a pooling of interests
combination. The combined company retains the name of Merchants and
Manufacturers Bancorporation, Inc. The merger was consummated on December 31,
1999, with Merchants exchanging nine shares of its common stock for each
outstanding share of Pyramid.
The Corporation operates eighteen banking facilities in Milwaukee,
Ozaukee and Waukesha counties. In addition to its subsidiary banks (Lincoln
State Bank, Grafton State Bank, Franklin State Bank and Lincoln Community Bank),
the Corporation owns four 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, Achieve Mortgage Corporation,
which was formed in 1997 to act as the Corporation's mortgage broker and
Merchants Merger Corp which was formed in 1999 to facilitate the acquisition of
Pyramid.
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, Ozaukee 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, Grafton
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.
3
<PAGE> 4
EMPLOYEES
At December 31, 1999, the Corporation and its subsidiaries employed 173
full-time and 77 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-oriented 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, 1999, 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 GRAFTON STATE BANK FRANKLIN STATE BANK
---------------------------- ---------------------- ----------------------------- ---------------------- -----------------------
<S> <C> <C> <C> <C>
Total assets $ 191,242 $ 103,227 $ 117,726 $ 59,695
Total loans 164,320 79,781 71,012 51,497
Total deposits 150,041 82,622 91,905 54,101
Stockholders' equity 15,279 8,497 9,038 4,780
Net income 1,949 1,057 1,391 590
Return on average assets 1.11% 1.08% 1.28% 1.04%
</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, 1999, Lincoln State Bank comprised 40.3% 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, 1999, Lincoln
Community Bank comprised 21.8% of the consolidated assets of the Corporation.
GRAFTON STATE BANK
Grafton State Bank was organized as a state banking association under
the laws of the State of Wisconsin in 1907. Its principal office is located in
Grafton, Wisconsin. At December 31, 1999, Grafton State Bank comprised 24.8% 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, 1999, Franklin State
Bank comprised 12.6% 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,
1999, Lincoln Neighborhood Redevelopment Corporation had assets of $137,000,
$75,000 in liabilities and equity of $62,000.
M&M SERVICES, INC.
M&M Services was formed in January of 1994 and is a wholly owned
subsidiary of the Corporation. M&M Services provides operational activities to
the Corporation's subsidiary banks. These activities include: human resources,
auditing, marketing, financial analysis, loan document preparation, loan credit
analysis and check processing.
4
<PAGE> 5
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.
MERCHANTS MERGER CORP.
Merchants Merger Corp. was formed in 1999 to facilitate the merger with
Pyramid Bancorp.
OTHER SUBSIDIARIES
Lincoln State Bank, Lincoln Community Bank and Grafton State 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. In 1996 an investment subsidiary known as GSB
Investments, Inc. was formed to manage the majority of Grafton State Bank's
investment portfolio and to enhance the overall return of the portfolio. The
subsidiary received a capital contribution of approximately $10 million of
mortgage-backed and other investment securities from Grafton State 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 Banks 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, Grafton 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 four
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.
RECENT LEGISLATION
On November 12, 1999, President Clinton signed into law legislation
that allows bank holding companies to engage in a wider range of non-banking
activities, including greater authority to engage in securities and insurance
activities. Under the Gramm-Leach-Bliley Act (the "Act"), a bank holding company
that elects to become a "financial holding company" may engage in any activity
that the Federal Reserve Board, in consultation with the Secretary of the
Treasury, determines by regulation or order is (i) financial in nature, (ii)
incidental to any such financial activity, or (iii) complementary to any such
financial activity and does not pose a substantial risk to the safety or
soundness of depository institutions or the financial system generally. This Act
makes significant changes in U.S. banking law, principally by repealing certain
restrictive provisions of the 1933 Glass-Steagall Act. The Act specifies certain
activities that are deemed to be financial in nature, including lending,
exchanging, transferring, investing for others, or safeguarding money or
securities; underwriting and selling insurance; providing financial, investment,
or economic advisory services; underwriting, dealing in or making a market in,
securities; and any activity currently permitted for bank holding companies by
the Federal Reserve Board under Section 4 (c)(8) of the Holding Company Act. The
Act does not authorize banks or their affiliates to engage in commercial
activities that are not financial in nature. A bank holding company may elect to
be treated as a financial holding company only if all depository institution
subsidiaries of the holding company are well-capitalized, well-managed and have
at
5
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least a "satisfactory" rating under the Community Reinvestment Act. In addition,
the Act permits certain non-banking financial and financially-related activities
to be conducted by subsidiaries of national banks.
The Act also contains a number of other provisions that will affect the
Corporation's operations and the operations of all financial institutions. One
of the new provisions relates to the financial privacy of consumers, authorizing
federal banking regulators to adopt rules that will limit the ability of banks
and other financial entities to disclose non-public information about consumers
to non-affiliated entities. These limitations will likely require more
disclosure to consumers, and in some circumstances, will require consent by the
consumer before information is allowed to be provided to a third party. On
January 27, 2000, the Corporation filed a written declaration with the Board of
Governors of the Federal Reserve System to become a financial holding company.
It is expected that the declaration will be effective on April 10, 2000.
At this time, no predictions can be made regarding the impact the Act
or the Corporation's written declaration may have upon the Corporation's future
financial condition or results of operations.
ITEM 2. PROPERTIES
The Corporation's offices are located in a two-story building at 14100
West National Avenue in New Berlin, Wisconsin. The building was constructed in
1997, contains 20,000 square feet, of which the majority is used by the
Corporation and the remainder leased to a tenant. At this location, the
Corporation maintains its corporate operations and personnel.
The main office of Lincoln State Bank is at 2266 South 13th Street,
Milwaukee, Wisconsin. The South 13th Street location consists of a one-story
building containing approximately 11,000 square feet. One branch of Lincoln
State Bank is located in a one-story, 1,700 square foot building at 13500
Janesville Road, Muskego, Wisconsin. Another branch of Lincoln State Bank was
opened in May 1990 at 14000 West National Avenue, New Berlin, Wisconsin. The New
Berlin branch is approximately 7,000 square feet. 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. 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, at Forest Ridge located in Hales Corners, Wisconsin, at the
Landmark located in West Allis, Wisconsin and at Lexington Village located in
the City of Greenfield, Wisconsin.
Franklin State Bank's main office is located in a three-story building
at 7000 South 76th Street in Franklin, Wisconsin. The bank leases 5,700 square
feet from the building's owner. The building was sold in 1999 to a group of
investors and subsequently leased back to the Corporation. 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.
Grafton State Bank's main office is located at 101 Falls Road, Grafton,
Wisconsin in a seven-story building. Portions of the building that are not used
by Grafton State Bank are leased to various tenants. Grafton State Bank owns the
facility.
Lincoln Community Bank's main office is located at 3131 South 13th
Street, Milwaukee, Wisconsin in a one-story building. Lincoln Community Bank
also operates a branch facility at 5400 West Forest Home Avenue, Milwaukee,
Wisconsin. Lincoln Community Bank owns both facilities. Achieve Mortgage
Corporation leases office space at the Forest Home Avenue location.
M&M Services is located in the New Berlin corporate headquarters. At
that location, M&M Services maintains its subsidiary service support facilities
and personnel.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Corporation and its subsidiaries are party to
legal proceedings arising out of their general lending activities and other
operations. However, there are no pending legal proceedings to which the
Corporation or its subsidiaries are a party, or to which their property is
subject, which, if determined adversely to the Corporation, would individually
or in the aggregate have a material adverse effect on its consolidated financial
position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of 1999.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS
The stock of the Corporation is not listed on any stock exchange or
quoted on the National Association of Securities Dealers Quotation Automated
Quotation System. The Corporation's stock has been quoted on "Pink Sheets", an
inter-broker quotation medium, since April 1993, and in the Over The Counter
Bulletin Board, an electronic quotation service. Robert W. Baird & Co.,
Incorporated, a regional securities and investment banking firm headquartered in
Milwaukee, Wisconsin, acts as a market maker for the Corporation's stock. The
Corporation's stock is quoted in the "Other Stocks" section of the Milwaukee
Journal/Sentinel. The Corporation's common stock trading symbol is "MMBI."
Holders of the Corporation's stock are entitled to receive such
dividends as may be declared from time to time by the Board of Directors from
funds legally available for such payments. The Corporation's ability to pay cash
dividends is dependent primarily on the ability of its subsidiaries to pay
dividends to the Corporation. The ability of each subsidiary to pay dividends
depends on its earnings and financial condition and on compliance with banking
statutes and regulations.
The following table sets forth the quarterly "bid/ask" range for the
period indicated.
<TABLE>
<CAPTION>
Quotation or Price
Quarter Ended Bid Ask
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<S> <C> <C>
March 31, 1998 $ 30.30 $ 30.30
June 30, 1998 31.25 31.25
September 30, 1998 39.00 40.00
December 31, 1998 39.50 39.50
MARCH 31, 1999 $ 38.00 $ 43.00
JUNE 30, 1999 41.50 43.00
SEPTEMBER 30, 1999 41.00 43.50
DECEMBER 31, 1999 35.50 42.50
</TABLE>
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ITEM 6. SELECTED FINANCIAL DATA
The following table summarizes certain historical financial data
regarding the Corporation. This information is derived in part from, and should
be read in conjunction with, the Consolidated Financial Statements of the
Corporation presented elsewhere herein (dollars in thousands, except per share
data):
<TABLE>
<CAPTION>
At or For the Year Ended December 31,
-----------------------------------------------------------------
1999 1998(4) 1997(4) 1996(4) 1995(4)
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
SELECTED BALANCE SHEET DATA
Total assets $ 474,383 $ 441,486 $ 391,685 $ 358,694 $ 347,991
Loans receivable, net 363,435 312,761 281,058 241,515 215,409
Investment securities held to maturity 0 5,794 4,591 2,857 2,178
Investment securities available for sale 32,787 22,121 20,080 25,218 22,643
Mortgage-related securities held to maturity 0 1,165 2,078 2,417 2,665
Mortgage-related securities available for sale 33,342 38,672 40,078 32,956 47,209
Deposits 377,333 372,118 337,249 302,387 296,489
Borrowings 53,398 27,333 15,392 21,017 16,597
Stockholders' equity 40,426 39,437 36,772 32,691 32,055
Realized stockholders' equity(2) 41,823 39,447 36,723 32,881 32,183
SELECTED INCOME STATEMENT DATA
Total interest income (taxable-equivalent)(1) $ 32,118 $ 30,712 $ 27,947 $ 25,781 $ 24,623
Total interest expense 13,999 14,117 12,495 11,600 11,042
----------------------------------------------------------------
Net interest income 18,119 16,595 15,452 14,181 13,581
Provision for loan losses 956 314 227 605 156
----------------------------------------------------------------
Net interest income after provision for
loan losses 17,163 16,281 15,225 13,576 13,425
Net gain on security sales 9 219 78 70 46
Other noninterest income 3,482 3,088 2,429 2,300 2,033
----------------------------------------------------------------
Total noninterest income 3,491 3,307 2,507 2,370 2,079
Merger-related expenses 510 0 0 0 0
Other noninterest expense 14,446 13,433 12,270 12,566 11,534
----------------------------------------------------------------
Total noninterest expense 14,956 13,433 12,270 12,566 11,534
----------------------------------------------------------------
Income before income taxes 5,698 6,155 5,462 3,380 3,970
Income taxes 1,905 2,042 1,955 1,090 1,373
Less taxable equivalent adjustment 390 263 127 142 164
================================================================
Net income $ 3,403 $ 3,850 $ 3,380 $ 2,148 $ 2,433
================================================================
PER SHARE DATA(3)
Net income - basic $ 1.62 $ 1.86 $ 1.69 $ 1.07 $ 1.20
Net income - diluted $ 1.58 $ 1.80 $ 1.64 $ 1.05 $ 1.17
Cash dividend declared $ 0.57 $ 0.49 $ 0.38 $ 0.35 $ 0.28
Book value $ 19.16 $ 19.02 $ 17.90 $ 16.44 $ 15.83
Average shares outstanding 2,106,579 2,071,214 2,004,809 2,001,160 2,029,567
OTHER DATA
Net interest margin 3.69% 3.57% 3.77% 3.67% 3.71%
Allowance for loan losses to non-accrual loans 159.08% 200.13% 217.18% 168.50% 184.27%
Nonperforming assets to total assets 0.50% 0.34% 0.38% 0.43% 0.34%
Stockholders' equity to total assets, 8.52% 8.93% 9.39% 9.11% 9.21%
Average stockholders' equity to average assets 8.76% 9.25% 9.17% 9.19% 9.07%
Return on assets (ratio of net income to
average total assets) 0.76% 0.93% 0.91% 0.61% 0.73%
Return on stockholders' equity (ratio of net
income to average equity) 8.73% 10.07% 9.91% 6.69% 8.00%
Dividend payout ratio 35.06% 26.39% 22.66% 32.17% 23.39%
Facilities:
Number of full-service offices 10 10 9 9 9
Number of limited services offices 8 8 6 6 6
</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, 1995.
(4) Restated to reflect the December 31, 1999 acquisition of Pyramid
Bancorp which was accounted for as a pooling-of-interests.
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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>
1999 1998
--------------------------------------------------------------------------------------------------
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) $7,670 $7,853 $8,119 $8,476 $7,431 $7,530 $7,814 $7,937
Interest expense 3,434 3,421 3,457 3,687 3,380 3,495 3,604 3,638
--------------------------------------------------------------------------------------------------
Net interest income 4,236 4,432 4,662 4,789 4,051 4,035 4,210 4,299
Provision for loan losses 68 68 660 160 81 81 56 96
Noninterest income 677 757 1,264 792 652 816 715 1,124
Noninterest expense 4,101 3,267 3,334 4,253 3,665 3,253 3,247 3,268
--------------------------------------------------------------------------------------------------
Income before taxes 744 1,854 1,932 1,168 957 1,517 1,622 2,059
Income taxes 184 599 600 522 306 516 512 708
Less taxable equivalent
adjustment 97 96 98 99 45 49 88 81
==================================================================================================
Net income $463 $1,159 $1,234 $547 $606 $952 $1,022 $1,270
==================================================================================================
Basic earnings per share $0.23 $0.55 $0.58 $0.26 $0.30 $0.46 $0.49 $0.61
==================================================================================================
Diluted earnings per share $0.22 $0.54 $0.57 $0.25 $0.29 $0.45 $0.47 $0.59
==================================================================================================
Dividends per share $0.14 $0.14 $0.14 $0.15 $0.09 $0.12 $0.11 $0.17
==================================================================================================
</TABLE>
(1) Taxable-equivalent adjustments to interest income involve the conversion of
tax-exempt sources of interest income to the equivalent amounts of interest
income that would be necessary to derive the same net return if the
investments had been subject to income taxes. A 34% incremental income tax
rate, consistent with the Corporation's historical experience, is used in
the conversion of tax-exempt interest income to a tax-equivalent basis.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The following discussion is intended as a review of significant factors
affecting the Corporation's financial condition and results of operations as of
and for the period ended December 31, 1999, 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 $18.1
million in 1999, compared with $16.6 million in 1998 and $15.5 million in 1997.
This increase of $1.5 million in net interest income in 1999 was due primarily
to an increase in the volume of earning assets in 1999 (a $2.9 million
increase). This gain was partially offset by an increase in the volume of
interest bearing liabilities (a $1.3 million increase).
The total increase in average earning assets was primarily due to an
increase in average loans of $40.9 million. All of the loan growth was
internally generated. Interest bearing deposits increased $24.8 million in 1999.
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.
9
<PAGE> 10
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,
-------------------------------- -------------------------------- -------------------------------
1999 1998 1997
-------------------------------- -------------------------------- -------------------------------
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) $336,079 $27,296 8.12% $295,157 $25,142 8.52% $260,915 $22,650 8.68%
Loans exempt from federal
income taxes(3) 526 56 10.65% 600 71 11.83% 683 77 11.27%
Taxable investment 16,140 1,019 6.31% 17,825 1,112 6.24% 22,033 1,348 6.12%
securities(4)
Mortgage-related securities(4) 36,688 2,083 5.68% 43,794 2,629 6.00% 37,221 2,403 6.46%
Investment securities exempt
from federal income 15,483 1,091 7.05% 9,542 703 7.37% 3,572 298 8.34%
taxes(3),(4)
Other securities 11,074 573 5.17% 19,612 1,055 5.38% 21,810 1,171 5.37%
---------------------- ---------------------- ---------------------
Interest earning assets 415,990 32,118 7.72% 386,530 30,712 7.95% 346,234 27,947 8.07%
Non interest earning assets 28,991 26,686 25,492
----------- ----------- ----------
Average assets $444,981 $413,216 $371,726
=========== =========== ==========
LIABILITIES AND STOCKHOLDERS'
EQUITY
NOW deposits $32,149 546 1.70% $31,464 740 2.35% $28,755 567 1.97%
Money market deposits 31,698 1,159 3.66% 26,888 1,000 3.72% 23,274 890 3.82%
Savings deposits 71,082 1,506 2.12% 70,889 1,641 2.31% 72,151 1,644 2.28%
Time deposits 185,185 9,306 5.03% 176,039 9,778 5.55% 147,923 8,352 5.65%
Borrowings 27,177 1,482 5.45% 17,165 958 5.58% 18,149 1,042 5.74%
---------------------- ---------------------- ---------------------
Interest bearing liabilities 347,291 13,999 4.03% 322,445 14,117 4.38% 290,252 12,495 4.30%
----------- ----------- -----------
Demand deposits and other non
interest bearing 57,701 52,544 47,372
liabilities
Stockholders' equity 39,989 38,227 34,102
----------- ----------- ----------
Average liabilities and
stockholders' equity $444,981 $413,216 $371,726
=========== =========== ==========
Net interest income/spread $18,119 3.69% $16,595 3.57% $15,452 3.77%
===================== ===================== =====================
Net interest earning assets $68,699 $64,085 $55,982
=========== =========== ==========
Net yield on interest earning
assets 4.36% 4.29% 4.46%
========== ========== ==========
Ratio of average
interest-earning
assets to average interest-
bearing liabilities 1.20 1.20 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.
10
<PAGE> 11
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,
--------------------------------------------- ---------------------------------------------
1999 VS. 1998 1998 vs. 1997
--------------------------------------------- ---------------------------------------------
INCREASE/(DECREASE) Increase/(Decrease)
DUE TO TOTAL Due to
---------------------------------- ---------------------------------
VOLUME INCREASE Volume Increase
VOLUME RATE & RATE (DECREASE) Volume Rate & Rate (Decrease)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Loans receivable(1) $3,486 ($1,170) ($162) $2,154 $2,973 ($425) ($56) $2,492
Loans exempt from federal
income taxes(2) (9) (7) 1 (15) (10) 4 0 (6)
Taxable investment securities(3) (105) 13 (1) (93) (258) 27 (5) (236)
Mortgage-related securities(3) (427) (143) 24 (546) 425 (169) (30) 226
Investment securities exempt
from federal income taxes(2),(3) 438 (31) (19) 388 498 (35) (58) 405
Other securities (460) (40) 18 (482) (118) 2 0 (116)
--------------------------------------------- ---------------------------------------------
Total interest-earning assets $2,923 ($1,378) ($139) 1,406 $3,510 ($596) ($149) 2,765
==================================----------- =================================------------
Interest-Bearing Liabilities:
NOW deposits $16 ($206) ($4) ($194) $53 $110 $10 $173
Money market deposits 179 (17) (3) 159 138 (24) (4) 110
Savings deposits 4 (139) 0 (135) (29) 26 0 (3)
Time deposits 508 (932) (48) (472) 1,588 (136) (26) 1,426
Other borrowings 559 (22) (13) 524 (57) (29) 2 (84)
--------------------------------------------- ---------------------------------------------
Total interest-bearing liabilities $1,266 ($1,316) ($68) ($118) $1,693 ($53) ($18) $1,622
==================================----------- =================================------------
Net change in net interest income $1,524 $1,143
=========== ============
</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 1999, the Corporation made a provision of $956,000 to the
allowance for loan losses, as compared to a provision of $314,000 in 1998 and
$227,000 in 1997. The 1999 increase reflected the growth in the overall loan
portfolio as well as an increase in non-performing loans, loan charge-offs and
management's assessment of general economic conditions. Net loan charge-offs for
1999 increased by $327,000, over 1998 to $392,000. This compares to charge-offs
of $68,000 in 1997. 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.
11
<PAGE> 12
NON-INTEREST INCOME
Non-interest income increased $184,000 in 1999 and $800,000 in 1998.
The composition of non-interest income is shown in the following table (in
thousands).
<TABLE>
<CAPTION>
For the Year Ended December 31,
1999 1998 1997
---------------- ----------------- -----------------
<S> <C> <C> <C>
Service charges on deposit accounts $1,009 $982 $ 980
Service charges on loans 419 451 325
Net gain on securities sales 9 219 78
Net gain on loan sales 18 226 35
Net gain on sale of building 633 0 0
Other 1,403 1,429 1,089
================ ================= =================
Total noninterest income $3,491 $3,307 $2,507
================ ================= =================
</TABLE>
Service charge income on deposit accounts increased $27,000 in 1999 and
$2,000 from 1997 to 1998. The increases in both years can be attributed to
growth in accounts subject to service charges as well as growth in overdraft
fees collected in those years.
Service charges on loans decreased $32,000 from $451,000 in 1998 to
$419,000 in 1999. The 1999 decrease and the increase in loan fees from 1997 to
1998 can be attributed to the high volume of loan refinancing that occurred in
1998.
The Corporation recorded a net gain of $9,000 on the sale of $2.7
million of securities in 1999, $219,000 on the sale of $27.8 million of
securities in 1998 and $78,000 on the sale of $12.3 million of securities in
1997. The proceeds from the sale of the investments were used to fund loan
demand.
The Corporation recorded a net gain of $18,000 on the sale of loans in
1999, compared to $226,000 in 1998 and $35,000 in 1997. Lower market interest
rates led to higher loan prices in 1998. The Corporation took advantage of the
higher prices and sold a portion of the residential loan portfolio in 1998.
Higher interest rates in 1999 and 1997 resulted in lower loan prices.
In 1999 the Corporation sold one of its banking facilities and
subsequently leased it backed from the new owners. This transaction resulted in
a $633,000 gain, of which $537,000 was recognized at the time of the sale and
the remaining portion of the gain will be recognized monthly over the term of
the lease.
Other non-interest income decreased $26,000 in 1999 and increased
$340,000 in 1998 over 1997. The primary reason for the 1998 increase in fee
income was the charge assessed to 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 ATM service
charge income declined in 1999 as consumers adjusted their ATM use habits and as
the Corporation shared these revenues with merchants that allow the banks to
place machines in their businesses.
NON-INTEREST EXPENSE
Non-interest expense increased $1.5 million (11.3%) for the year ended
December 31, 1999, and increased $1.2 million (9.5%) for the year ended December
31, 1998. The major components of non-interest expense are shown in the
following table (in thousands).
<TABLE>
<CAPTION>
For the Year Ended December 31,
1999 1998 1997
---------------- ----------------- -----------------
<S> <C> <C> <C>
Salaries and employee benefits $ 8,406 $ 7,685 $ 6,856
Premises and equipment 2,231 2,097 1,883
Data processing fees 921 915 853
Federal deposit insurance premiums 116 115 95
Merger-related expenses 510 0 0
Other 2,772 2,621 2,583
================ ================= =================
Total noninterest expense $14,956 $13,433 $12,270
================ ================= =================
</TABLE>
Salaries and employee benefits increased $721,000 in 1999, reflecting
additional staff hires, higher benefit costs, changes in personnel and normal
pay raises. In addition the Corporation expensed $290,000 associated with
employee bonuses that will be paid in the year 2000 based on 1999 performance.
The 1999 increase in the cost of employee benefits, particularly medical
insurance amounted to $131,000.
Premises and equipment expense increased $134,000 in 1999. The increase
was due to the first full year operation of the Franklin State Bank branch
office that was completed in October 1998. The $214,000 increase in 1998 was the
result of the construction of the corporate headquarters and increase in regular
occupancy expenses.
12
<PAGE> 13
Data processing fees increased $6,000 in 1999 and $62,000 in 1998. The
increases were due to higher volume, scheduled fee increases and new services
being provided by the service bureau.
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. In 1999 the premiums paid by the Corporation amounted to $116,000
compared to $115,000 in 1998 and $95,000 in 1997. The 1998 insurance premium
increase was due to the higher level of deposits.
In 1999 the Corporation incurred $510,000 in expenses related to the
Pyramid Bancorp acquisition. These expenses consisted of legal fees, accounting
fees, printing costs and consulting fees.
Other expenses increased $151,000 in 1999 compared to 1998. Other
expenses increased $38,000 in 1998. The increases are the result of changes in
operating expenses such as consulting fees, examination costs, insurance costs,
robberies and check losses.
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 portfolios of M&M Lincoln Investment
Corporation, Lincoln Investment Management Corporation and GSB Investments for
which state taxes are not imposed. The Corporation recorded provisions for
income taxes totaling $1.9 million in 1999, $2.0 million in 1998 and $2.0
million in 1997. Although the 1999 tax expense decreased $137,000, the effective
tax rate increased from 34.7% in 1998 to 35.9% in 1999. The reason for the
increased effective tax rate in 1999 is the $510,000 of merger related expenses
which were not tax deductible. The increase in 1998 income taxes is a result of
higher taxable income.
NET INCOME
For the years ended December 31, 1999, 1998 and 1997, the Corporation
posted net income of $3.4 million, $3.9 million and $3.4 million, respectively.
The 1999 earnings were effected by one-time merger-related expenses associated
with the acquisition of Pyramid Bancorp.
LOANS RECEIVABLE
Net loans receivable increased $50.7 million, or 16.2%, from $312.8
million at December 31, 1998, to $363.4 million at December 31, 1999. 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,
1999 1998 1997 1996 1995
---------------- ----------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C> <C>
First Mortgage:
Conventional single-family residential $70,836 $61,685 $72,538 $73,829 $75,387
Commercial and multifamily residential 145,241 127,034 93,673 75,420 58,767
Construction and land 32,618 20,194 22,246 16,635 15,912
Farmland 296 326 139 252 574
---------------- ----------------- ---------------- ----------------- ----------------
248,991 209,239 188,596 166,136 150,640
Commercial business loans 88,332 80,238 71,262 57,764 46,956
Consumer and installment loans 19,729 16,250 14,624 13,493 13,309
Leases 2,017 2,599 2,311 599 0
Home equity loans 6,960 6,576 6,013 5,325 5,465
Other 1,031 930 1,086 838 1,264
---------------- ----------------- ---------------- ----------------- ----------------
118,069 106,593 95,296 78,019 66,994
Less:
Deferred loan fees 43 53 65 30 34
Allowance for loan losses 3,582 3,018 2,769 2,610 2,191
================ ================= ================ ================= ================
$363,435 $312,761 $281,058 $241,515 $215,409
================ ================= ================ ================= ================
</TABLE>
13
<PAGE> 14
The following table presents information as of December 31, 1999
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 $48,000 $40,025 $ 307 $88,332
FIRST MORTGAGE LOANS 81,578 118,100 49,313 248,991
================= ================ ================= =================
$129,578 $158,125 $49,620 $337,323
================= ================ ================= =================
LOANS MATURING AFTER ONE YEAR WITH:
FIXED INTEREST RATES $148,091 $16,427
VARIABLE INTEREST RATES 10,034 33,193
================ =================
$158,125 $49,620
================ =================
</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 $3.0 million at December 31, 1998, to $3.6 million at
December 31, 1999. This increase was because of growth in loan volume in
general, the increase in non performing loans, charge-offs recorded in 1999, 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 0.98% for 1999 and 0.96% in 1998. 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,
1999 1998 1997 1996 1995
---------------- ----------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $3,018 $2,769 $2,610 $2,191 $2,105
Charge-offs:
Conventional single-family mortgage
Residential 25 0 0 70 20
Commercial business loans 290 42 25 141 27
Consumer and installment loans 94 41 50 10 36
---------------- ----------------- ---------------- ----------------- ----------------
Total charge-offs 409 83 75 221 83
Recoveries (17) (18) (7) (35) (13)
---------------- ----------------- ---------------- ----------------- ----------------
Net charge-offs 392 65 68 186 70
Provisions charged to operations 956 314 227 605 156
================ ================= ================ ================= ================
Balance at end of year $3,582 $3,018 $2,769 $2,610 $2,191
================ ================= ================ ================= ================
Ratios:
Net charge-offs to average
loans outstanding 0.12% 0.02% 0.03% 0.08% 0.03%
Net charge-offs to total allowance 10.97% 2.15% 2.46% 7.13% 3.19%
Allowance to year end gross loans
outstanding 0.98% 0.96% 0.98% 1.07% 1.00%
</TABLE>
14
<PAGE> 15
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 1999,
$53,000 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 1999 the Corporation recorded
$20,000 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,
1999 1998 1997 1996 1995
---------------- ----------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $ 2,251 $ 1,508 $ 1,275 $ 1,549 $ 1,189
Other real estate owned 107 0 228 0 73
================ ================= ================ ================= ================
Total non-performing assets $ 2,358 $ 1,508 $ 1,275 $ 1,549 $ 1,189
================ ================= ================ ================= ================
Ratios:
Non-accrual loans to total loans 0.40% 0.30% 0.49% 0.40% 0.51%
Allowance to non-accrual loans 159.08% 200.13% 217.18% 168.50% 184.27%
Non-performing assets to total assets 0.50% 0.34% 0.38% 0.43% 0.34%
</TABLE>
INVESTMENT AND MORTGAGE RELATED SECURITIES
Investment securities at December 31, 1999, are made up of U.S.
Treasury and agency securities of $11.7 million, government agency
mortgage-backed securities of $24.1 million, SBA certificates of $444,000, state
and political subdivision certificates of $17.6 million, collateralized mortgage
obligations of $9.3 million and mutual funds of $3.0 million. Total investment
securities equaled $66.1 million. This compares to $67.9 million on December 31,
1998.
Management determines the appropriate classification of securities
(including mortgage-related securities) at the time of purchase.
Held-to-maturity securities are stated at amortized cost where as available for
sale securities are stated at fair value with changes in fair value reflected as
a component of net income, net of tax.
See notes one and two to Consolidated Financial Statements for further details.
Securities not classified as held-to-maturity are classified as
available-for-sale. Available-for-sale securities are stated at fair value, with
the unrealized gains and losses, net of tax, reported as a separate component of
stockholders' equity.
The amortized cost of debt securities are adjusted for amortization of
premiums and accretion of discounts to maturity, or in the case of
mortgage-related securities, over the estimated life of the security. Such
amortization is included in interest income from the related security. Interest
and dividends are included in interest income from the related securities.
Realized gains and losses, and declines in value judged to be
other-than-temporary are included in net securities gains (losses). The cost of
securities sold is based on the specific identification method.
The reason for the decrease in investment securities is the increase in
demand for funds for lending purposes. Funding for additional loans came
primarily from government agency mortgage-backed securities which either matured
or prepaid. The following table sets forth the Corporations estimated fair value
of investment securities available-for-sale at the dates indicated (in
thousands):
<TABLE>
<CAPTION>
At December 31,
1999 1998 1997
---------------- ----------------- ----------------
<S> <C> <C> <C>
Mutual funds $3,038 $3,059 $3,104
U.S. Treasury and other U.S.
government securities 11,687 7,765 15,106
Small Business Administration
Certificates 444 628 930
State and political subdivision securities 17,618 10,668 940
Collateralized mortgage obligations 9,264 8,401 1,488
Government agency mortgage-backed
securities 24,078 30,272 38,590
================ ================= ================
$66,129 $60,793 $60,158
================ ================= ================
</TABLE>
15
<PAGE> 16
The following table sets forth the Corporations amortized cost of
investment securities held-to-maturity at the dates indicated (in thousands):
<TABLE>
<CAPTION>
At December 31,
1999 1998 1997
---------------- ----------------- ----------------
<S> <C> <C> <C>
U.S. Treasury and other U.S.
government securities $ 0 $ 0 $200
State and political subdivision securities 0 5,794 4,391
Government agency mortgage-backed
securities 0 1,165 2,078
================ ================= ================
$0 $6,959 $6,669
================ ================= ================
</TABLE>
The maturity distribution (based upon the average life), and weighted
average yield of the securities portfolio of the Corporation as of December 31,
1999 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 $3,038 5.50% $ -- -- % $ -- -- % $ -- -- %
U.S. TREASURY AND OTHER U.S.
GOVERNMENT SECURITIES 3,394 5.02 7,355 5.71 938 6.49 -- --
SMALL BUSINESS ADMINISTRATION
CERTIFICATES -- -- 141 7.48 103 10.12 200 8.12
STATE AND POLITICAL SUBDIVISION
CERTIFICATES 236 7.74 3,278 5.34 7,931 4.95 6,173 4.38
COLLATERALIZED MORTGAGE OBLIGATIONS 1,738 6.18 5,473 6.33 2,053 6.65 -- --
GOVERNMENT AGENCY MORTGAGE-BACKED
SECURITIES 400 6.46 18,255 6.31 3,917 5.94 1,506 5.98
=========== ============ =========== =========== ========= ======== ============ ===========
$8,806 5.55% $ 34,502 6.10% $ 14,942 5.58% $7,879 4.78%
=========== ============ =========== =========== ========= ======== ============ ===========
</TABLE>
Weighted average yield is calculated by dividing income within each
maturity range by the outstanding amount of the related investment based on
carrying value.
TOTAL DEPOSITS
The Corporation continues to stress its philosophy of core deposit
accumulation and retention as the fundamental basis for sound growth and
profitability. Core deposits consist of all deposits other than public funds and
certificates of deposit in excess of $100,000.
Total deposits increased $5.2 million to $377.3 million on December 31,
1999, from $372.1 million on December 31, 1998. This compares to a $34.9 million
increase in 1998. 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,
1999 1998 1997
---------------------------- --------------------------- ---------------------------
AVERAGE AVERAGE RATE Average Average Rate Average Average Rate
AMOUNT Amount Amount
------------- -------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Non-interest-bearing demand deposits $ 55,933 0.00% $ 50,518 0.00% $ 45,338 0.00%
NOW and money market deposits 63,847 2.67 58,352 2.98 52,029 2.80
Savings deposits 71,082 2.12 70,889 2.31 72,151 2.28
Time deposits 185,185 5.03 176,039 5.55 147,923 5.65
============= ============== ============= ============= ============= =============
Total $ 376,047 3.33% $ 355,798 3.69% $ 317,441 3.61%
============= ============== ============= ============= ============= =============
</TABLE>
Maturities of time deposits and certificate accounts with balances of
$100,000 or more, outstanding at December 31, 1999, are summarized as follows
(in thousands):
<TABLE>
<S> <C>
3 MONTHS OR LESS $20,341
OVER 3 THROUGH 6 MONTHS 7,153
OVER 6 THROUGH 12 MONTHS 4,443
OVER 12 MONTHS 1,667
==============
TOTAL $33,604
==============
</TABLE>
16
<PAGE> 17
CAPITAL RESOURCES AND ADEQUACY
Stockholders' equity increased from $39.4 million at December 31, 1998
to $40.4 million at December 31, 1999. The $3.4 million increase from net
earnings retention was primarily offset by the reduction in the investment
portfolio market value and the payment of $1.2 million 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, 1999, the Corporation had a core-capital to total assets ratio of 8.52%, and
Lincoln State Bank, Franklin State Bank, Grafton State Bank and Lincoln
Community Bank had risk-based capital ratios of 9.45%, 9.56%, 12.89% and 10.78%,
respectively. These ratios are above the 1999 minimum requirements established
by regulatory agencies.
For a summary of the Banks' regulatory capital ratios at December 31,
1999, please see Note Seven to Consolidated Financial Statements.
Management strives to maintain a strong capital position to take
advantage of opportunities for profitable geographic and product expansion and
to maintain depositor and investor confidence. Conversely, management believes
that capital must be maintained at levels that provide adequate returns on the
capital employed. Management actively reviews capital strategies for the
Corporation and for each of its subsidiaries to ensure that capital levels are
appropriate based on perceived business risks, growth and regulatory standards.
LIQUIDITY
Liquidity is the ability to meet withdrawal requirements on deposit
accounts and satisfy loan demand. The principal sources of liquidity for the
subsidiary banks include additional deposits, repayments on loans and investment
securities, collections of interest, sales of investments, borrowings and the
retention of earnings.
The Corporation's liquidity, represented by cash and cash equivalents,
is a product of its operating activities, investing activities and financing
activities. These activities are summarized below (dollars in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998 1997
----------------- ---------------- -----------------
<S> <C> <C> <C>
Cash and cash equivalents at beginning of period $40,562 $26,050 $36,164
Operating Activities:
Net income 3,403 3,850 3,380
Adjustments to reconcile net income to net cash
provided by operating activities (427) 552 1,615
----------------- ---------------- -----------------
Net cash provided by operating activities 2,976 4,402 4,995
Net cash used by investing activities (51,085) (35,562) (44,893)
Net cash provided by financing activities 30,338 45,672 29,784
----------------- ---------------- -----------------
Increase (decrease) in cash equivalents (17,771) 14,512 (10,114)
================= ================ =================
Cash and cash equivalents at end of period $22,791 $40,562 $26,050
================= ================ =================
</TABLE>
Net cash was provided by operating activities during the years ended
December 31, 1999, 1998 and 1997 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 $1.7 million, $4.8 million and $1.9
million for the years ended December 31, 1999, 1998 and 1997 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 $1.2 million, $1.0 million and $766,000 for the
years ended December 31, 1999, 1998 and 1997, respectively. At December 31,
1999, the parent company had a $10.0 million line of credit with an unaffiliated
bank, which no outstanding balance.
17
<PAGE> 18
INTEREST RATE SENSITIVITY MANAGEMENT
Financial institutions are subject to interest rate risk to the extent
their interest-bearing liabilities (primarily deposits) mature or reprice at
different times and on a different basis than their interest-earning assets
(consisting primarily of loans and securities). Interest rate sensitivity
management seeks to match maturities on assets and liabilities and avoid
fluctuating net interest margins while enhancing net interest income during
periods of changing interest rates. The difference between the amount of
interest-earning assets maturing or repricing within a specific time period and
the amount of interest-bearing liabilities maturing or repricing within the same
time period is referred to as an interest rate gap. A gap is considered positive
when the amount of interest rate sensitive assets exceeds the amount of interest
rate sensitive liabilities. A gap is considered negative when the amount of
interest rate sensitive liabilities exceeds the amount of interest rate
sensitive assets. During periods of rising interest rates, a negative gap tends
to adversely affect net interest income while a positive gap tends to result in
an increase in net interest income. During a period of falling interest rates, a
negative gap tends to result in an increase in net interest income while a
positive gap tends to adversely affect net interest income.
The following table shows the interest rate sensitivity gap for four
different time intervals as of December 31, 1999. 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 $27,934 $19,862 $109,088 $24,139 $181,023
ADJUSTABLE-RATE MORTGAGE LOANS 19,153 7,934 30,424 8,480 65,990
--------------------------------------------------------------------------
TOTAL MORTGAGE LOANS 47,087 27,796 139,512 32,619 247,013
COMMERCIAL BUSINESS LOANS 45,768 5,659 37,138 1,190 90,555
CONSUMER LOANS 7,837 2,426 10,614 1,718 22,595
LEASES 0 0 2,017 0 2,017
HOME EQUITY LOANS 1,611 177 2,524 0 4,312
TAX-EXEMPT LOANS 525 0 0 0 525
MORTGAGE-RELATED SECURITIES 18,236 221 690 14,196 33,343
FIXED RATE INVESTMENT SECURITIES AND OTHER 1,170 2,484 10,616 15,300 29,571
VARIABLE RATE INVESTMENT SECURITIES AND 10,333 2,511 0 0 12,844
OTHER
--------------------------------------------------------------------------
TOTAL INTEREST-EARNING ASSETS $132,568 $41,274 $203,111 $65,823 $442,775
==========================================================================
INTEREST-BEARING LIABILITIES:
DEPOSITS
TIME DEPOSITS $119,056 $40,265 $19,845 $0 $179,166
NOW ACCOUNTS 1,859 1,882 18,815 8,780 31,335
SAVINGS ACCOUNTS 3,791 3,955 39,551 18,457 65,755
MONEY MARKET ACCOUNTS 2,178 1,995 19,948 9,310 33,431
ADVANCE PAYMENTS FOR TAXES AND INSURANCE 300 0 0 0 300
BORROWINGS 53,398 0 0 0 53,398
--------------------------------------------------------------------------
TOTAL INTEREST-BEARING LIABILITIES $180,581 $48,097 $98,160 $36,547 $363,384
==========================================================================
INTEREST-EARNING ASSETS LESS
INTEREST-BEARING
LIABILITIES ($48,013) ($6,823) $104,951 $29,276 $79,390
==========================================================================
CUMULATIVE INTEREST RATE SENSITIVITY GAP ($48,013) ($54,836) $50,114 $79,390
============================================================
CUMULATIVE INTEREST RATE SENSITIVITY GAP AS
A PERCENTAGE OF TOTAL ASSETS (10.12%) (11.56%) 10.56% 16.74%
============================================================
</TABLE>
At December 31, 1999, the Corporation's cumulative ratio of
interest-rate sensitive assets to interest-rate sensitive liabilities was a
negative 10.1% for six months and a negative 11.6% for one year maturities.
Therefore the Corporation is negatively gapped and may benefit from falling
interest rates.
18
<PAGE> 19
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
The Corporation successfully completed its Year 2000 project including
all assessment, remediaition and testing of all internal systems by December 31,
1999. Subsequent to that date, no adverse developments have occurred which would
affect the Corporation's business, financial condition or results of operations.
All internal systems have functioned as planned in 2000, and no third party
vendors or counterparties have failed to provide the required levels of service.
The Corporation will continue to monitor both its systems and its transactions
with third parties and address any problems as needed.
The costs of the Year 2000 project were expensed as incurred. The total
cost of this project through the end of 1999 was approximately $75,000 of which
$40,000 was expensed in 1999, $20,000 in 1998 and $15,000 in 1997. Nominal
additional costs will be incurred in 2000 related to the shutting down of the
project and completing documentation.
Unanticipated issues associates with the year 2000 date change event
could still occur that may have an adverse impact on the financial condition and
results of operations of the Corporation, its customers, and service providers.
To the extent that customers' financial positions are weakened due to year 2000
issues, credit quality could be adversely affected. It is not possible to
predict with certainty all of the adverse effects that could result from a
failure of third parties to address year 2000 issues or whether such effects
could have a material adverse impact on the Corporation.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Corporation's financial performance is impacted by, among other
factors, interest rate risk and credit risk. The Corporation utilizes no
derivatives to mitigate its interest rate risk. To control credit risk the
Corporation relies instead on loan review and an adequate loan loss reserve (see
Management's Discussion and Analysis of Financial Condition and Results of
Operation).
Interest rate risk is the risk of loss of net interest income due to
changes in interest rates. This risk is addressed by the Corporation's Asset
Liability Management Committee ("ALCO"), which includes senior management
representatives. The ALCO monitors and considers methods of managing interest
rate risk by monitoring changes in net interest income under various interest
rate scenarios. The ALCO attempts to manage various components of the
Corporation's balance sheet to minimize the impact of sudden and sustained
changes in interest rate on net interest income.
The Corporation's exposure to interest rate risk is reviewed on at
least a quarterly basis by the ALCO. Interest rate risk exposure is measured
using interest rate sensitivity analysis to determine the Corporation's change
in net interest income in the event of hypothetical changes in interest rates
and interest liabilities. If potential changes to net interest income resulting
from hypothetical interest rate swings are not within the limits established by
the ALCO, the asset and liability mix may be adjusted to bring interest rate
risk within approved limits.
In order to reduce the exposure to interest rate fluctuations, the
Corporation has developed strategies to manage its liquidity, shorten the
effective maturities of certain interest-earning assets, and increase the
effective maturities of certain interest-bearing liabilities. One strategy used
is focusing its residential lending on adjustable rate mortgages, which
generally reprice within one to three years. Another strategy used is
concentrating its non-residential lending on adjustable or floating rate and/or
short-term loans. The Corporation has also focused its investment activities on
short and medium-term securities, while attempting to maintain and increase its
savings account and transaction deposit accounts, which are considered to be
relatively resistant to changes in interest rates.
19
<PAGE> 20
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, 1999.
<TABLE>
<CAPTION>
ESTIMATED
2000 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 $18,581 $(466) (2.45%)
150 BASIS POINT RISE 18,678 (369) (1.94%)
100 BASIS POINT RISE 18,809 (238) (1.25%)
50 BASIS POINT RISE 18,912 (135) (0.71%)
BASE SCENARIO 19,047 0 0.00%
50 BASIS POINT DECLINE 19,155 108 0.57%
100 BASIS POINT DECLINE 19,292 245 1.29%
150 BASIS POINT DECLINE 19,410 363 1.91%
200 BASIS POINT DECLINE 19,531 484 2.54%
</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 not 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,
1999.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated statements of financial condition of the Corporation
and its subsidiaries as of December 31, 1999 and 1998 and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the years in the three-year period ended December 31, 1999, along with the
related notes to the consolidated financial statements and the report of Ernst &
Young LLP, independent auditors are attached.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
20
<PAGE> 21
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information in response to this item is incorporated herein by
reference to the Corporation's proxy statement, which shall be filed with the
Securities and Exchange Commission no later than 120 days after the
Corporation's fiscal year end covered by this report.
ITEM 11. EXECUTIVE COMPENSATION
The information in response to this item is incorporated herein by
reference to the Corporation's proxy statement, which shall be filed with the
Securities and Exchange Commission no later than 120 days after the
Corporation's fiscal year end covered by this report.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information in response to this item is incorporated herein by
reference to the Corporation's proxy statement, which shall be filed with the
Securities and Exchange Commission no later than 120 days after the
Corporation's fiscal year end covered by this report.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information in response to this item is incorporated herein by
reference to the Corporation's proxy statement, which shall be filed with the
Securities and Exchange Commission no later than 120 days after the
Corporation's fiscal year end covered by this report.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) DOCUMENTS FILED:
1. and 2. Financial Statements and Financial Statement Schedules.
The following financial statements of Merchants and
Manufacturers Bancorporation, Inc. and subsidiaries are filed
as a part of this report under Item 8. "Financial Statements
and Supplementary Data":
Report of Independent Auditors
Consolidated Statements of Financial Position as of
December 31, 1999 and 1998
Consolidated Statements of Income for the years ended
December 31, 1999, 1998, and 1997
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1999, 1998, and 1997
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
All financial statement schedules have been omitted as they
are not applicable or because the information is included in
the financial statements or notes thereto.
3. Exhibits. All required exhibits have been furnished
in connection with and are incorporated by
reference to previous filings.
(B) REPORTS ON FORM 8-K:
No reports on Form 8-K were filed in the last quarter of 1999.
The Corporation filed on report Form 8-K on January 12, 2000
and Amendment No. 1 thereto on March 10, 2000 in regards to
its acquisition of Pyramid Bancorp., Inc.
21
<PAGE> 22
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC.
By: /s/ James F. Bomberg
---------------------------------------------
James F. Bomberg
President & Chief Executive Officer
Director
Date: March 29, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the registrant
and in the capacities and on the dates indicated. The Registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
<TABLE>
<CAPTION>
PRINCIPAL EXECUTIVE OFFICERS
<S> <C> <C>
/s/ James F. Bomberg President & Chief Executive Officer March 29, 2000
------------------------------------
James F. Bomberg
/s/ James C. Mroczkowski Vice President & Chief Financial Officer March 29, 2000
------------------------------------
James C. Mroczkowski
DIRECTORS
/s/ Michael J. Murry Chairman of the Board of Directors March 29, 2000
------------------------------------
Michael J. Murry
/s/ James F. Bomberg Director March 29, 2000
------------------------------------
James F. Bomberg
/s/ Thomas F. Gapinski Director March 29, 2000
------------------------------------
Thomas F. Gapinski
/s/ Nicholas S. Logarakis Director March 29, 2000
------------------------------------
Nicholas S. Logarakis
/s/ Conrad C. Kaminski Director March 29, 2000
------------------------------------
Conrad C. Kaminski
/s/ David A. Kaczynski Director March 29, 2000
------------------------------------
David A. Kaczynski
/s/ Keith C. Winters Director March 29, 2000
------------------------------------
Keith C. Winters
/s/ Duane P. Cherek Director March 29, 2000
------------------------------------
Duane P. Cherek
/s/ James A. Sass Director March 29, 2000
------------------------------------
James A. Sass
</TABLE>
22
<PAGE> 23
<TABLE>
<S> <C> <C>
/s/ John M. Krawczyk Director March 29, 2000
------------------------------------
John M. Krawczyk
/s/ Robert V. Donaj Director March 29, 2000
------------------------------------
Robert V. Donaj
/s/ Longin C. Prazynski Director March 29, 2000
------------------------------------
Longin C. Prazynski
/s/ Gervase Rose Director March 29, 2000
------------------------------------
Gervase Rose
/s/ J. Michael Bartels Director March 29, 2000
------------------------------------
J. Michael Bartels
/s/ Casimir S. Janiszewski Director March 29, 2000
------------------------------------
Casimir S. Janiszewski
</TABLE>
23
<PAGE> 24
Merchants and Manufacturers
Bancorporation, Inc. and Subsidiaries
Consolidated Financial Statements
Years ended December 31, 1999 and 1998
CONTENTS
Report of Independent Auditors ............................................1
Consolidated Financial Statements
Consolidated Statements of Financial Condition ............................2
Consolidated Statements of Income .........................................3
Consolidated Statements of Stockholders' Equity ...........................4
Consolidated Statements of Cash Flows .....................................5
Notes to Consolidated Financial Statements ................................7
<PAGE> 25
Report of Independent Auditors
The Board of Directors and Stockholders
Merchants and Manufacturers Bancorporation, Inc. and subsidiaries
We have audited the accompanying consolidated statements of financial condition
of Merchants and Manufacturers Bancorporation, Inc. and subsidiaries (the
Corporation) as of December 31, 1999 and 1998, and the related consolidated
statements of income, stockholders' equity and cash flows for each of the three
years in the period ended December 31, 1999. 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 auditing standards generally accepted
in the United States. 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, 1999 and
1998, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 1999, in conformity
with accounting principles generally accepted in the United States.
/s/Ernst & Young LLP
Ernst & Young LLP
February 29, 2000
Milwaukee, Wisconsin
1
<PAGE> 26
Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries
Consolidated Statements of Financial Condition
<TABLE>
<CAPTION>
DECEMBER 31
1999 1998
------------------------------------
(Dollars In Thousands)
ASSETS
<S> <C> <C>
Cash and due from banks $ 15,674 $ 13,501
Interest-bearing deposits at other banks 4,907 15,474
Federal funds sold 2,210 11,587
------------------------------------
Cash and cash equivalents 22,791 40,562
Securities available-for-sale at fair value:
Investment securities 32,787 22,121
Mortgage-related securities 33,342 38,672
Securities held to maturity (at amortized cost):
Investment securities - 5,794
Mortgage-related securities - 1,165
Loans receivable (net of allowance for loan losses) 363,435 312,761
Accrued interest receivable 2,426 2,295
Federal Home Loan Bank stock 2,511 1,488
Premises and equipment 9,613 11,499
Other assets 7,478 5,129
------------------------------------
Total assets $ 474,383 $ 441,486
====================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 377,333 $ 372,118
Borrowings 53,398 27,333
Accrued interest payable 777 915
Advance payments by borrowers for taxes and insurance 300 213
Other liabilities 2,149 1,470
------------------------------------
Total liabilities 433,957 402,049
Stockholders' equity:
Common stock $1.00 par value; 6,000,000 shares authorized;
shares issued: 2,127,888-1999; 2,090,403-1998; shares
outstanding: 2,109,773-1999; 2,073,271-1998 2,128 2,090
Additional paid-in capital 13,945 13,769
Net unrealized loss on securities available-for-sale (1,397) (10)
Retained earnings 26,434 24,222
Treasury stock, at cost (18,115 shares-1999; 17,132
shares-1998) (684) (634)
------------------------------------
Total stockholders' equity 40,426 39,437
------------------------------------
Total liabilities and stockholders' equity $474,383 $441,486
====================================
</TABLE>
See accompanying notes.
2
<PAGE> 27
Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries
Consolidated Statements of Income
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1999 1998 1997
------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Interest income:
Loans, including fees $ 27,333 $ 25,189 $ 22,701
Investment securities:
Taxable 1,019 1,112 1,348
Exempt from federal income taxes 720 464 197
Mortgage-related securities 2,083 2,629 2,403
Other 573 1,055 1,171
------------------------------------------------------
Total interest income 31,728 30,449 27,820
Interest expense:
Deposits 12,517 13,159 11,453
Borrowings 1,482 958 1,042
------------------------------------------------------
Total interest expense 13,999 14,117 12,495
Net interest income 17,729 16,332 15,325
Provision for loan losses 956 314 227
------------------------------------------------------
Net interest income after provision for
loan losses 16,773 16,018 15,098
Noninterest income:
Service charges on deposits 1,009 982 980
Service charges on loans 419 451 325
Net gain on securities sales 9 219 78
Net gain on loan sales 18 226 35
Net gain on sale of premises 633 - -
Other 1,403 1,429 1,089
------------------------------------------------------
3,491 3,307 2,507
Noninterest expenses:
Salaries and employee benefits 8,406 7,685 6,856
Premises and equipment 2,231 2,097 1,883
Data processing fees 921 915 853
Federal deposit insurance premiums 116 115 95
Merger related expenses 510 - -
Other 2,772 2,621 2,583
------------------------------------------------------
14,956 13,433 12,270
------------------------------------------------------
Income before income taxes 5,308 5,892 5,335
Income taxes 1,905 2,042 1,955
------------------------------------------------------
Net income $ 3,403 $ 3,850 $ 3,380
======================================================
Basic earnings per share $ 1.62 $ 1.86 $ 1.69
======================================================
Diluted earnings per share $ 1.58 $ 1.80 $ 1.64
======================================================
Dividends per share $ 0.57 $ 0.48 $ 0.38
======================================================
</TABLE>
See accompanying notes.
3
<PAGE> 28
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-for- Retained Treasury
Capital Sale Earnings Stock Total
------------------------------------------------------------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996 $15,048 $(190) $18,775 $ (942) $32,691
Comprehensive income:
Net income - - 3,380 - 3,380
Other comprehensive income -
Change in unrealized gain (loss) on
securities available-for-sale, net
of deferred income taxes of $118 - 267 - - 267
----------
Total comprehensive income 3,647
Sale of 8,595 shares of common stock in
connection with dividend reinvestment
program 123 - - - 123
Sale of 110,986 shares of treasury stock 72 - - 1,184 1,256
Purchase of 22,273 shares of treasury stock - - - (251) (251)
Cash dividends declared-$.48 per share - - (766) - (766)
Exercise of stock options 72 - - - 72
----------
Balance at December 31, 1997 15,315 77 21,369 (9) 36,772
Comprehensive income:
Net income - - 3,850 - 3,850
Other comprehensive income -
Change in unrealized gain (loss) on
securities available-for-sale, net of
deferred income taxes of $68 - (87) - - (87)
----------
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 - - (1016) - (1016)
Exercise of stock options (67) - - 128 195
------------------------------------------------------------
Balance at December 31, 1998 15,859 (10) 24,223 (634) 39,438
Comprehensive income:
Net income - - 3,403 - 3,403
Other comprehensive income -
Change in unrealized gain (loss) on
securities available-for-sale, net of
deferred income taxes of $604 - (1,387) - - (1,387)
------------------------------------------------------------
Total comprehensive income 2,016
Sale of 1,783 shares of common stock in
connection with dividend reinvestment
program 4 - - 67 71
Purchase of 4,449 shares of treasury stock - - - (181) (181)
Cash dividends declared - $.59 per share - - (1,192) - (1,192)
Exercise of Stock Options 210 - - 64 274
------------------------------------------------------------
Balance at December 31, 1999 $16,073 $(1,397) $26,434 $(684) $40,426
</TABLE>
See accompanying notes.
4
<PAGE> 29
Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries
Consolidated Statements of Cash Flow
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1999 1998 1997
----------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $3,403 $3,850 $3,380
Adjustments to reconcile net income to cash provided by
operating activities:
Provision for loan losses 956 314 227
Provision for depreciation 872 803 715
Provision (benefit) for deferred taxes - (54) (59)
Net amortization of investment securities premiums and 164 153 152
discounts
Net realized gains on investment securities (9) (218) (78)
Net gain on sale of loans (18) (226) (35)
Net gain on sale of premises (633) - -
Net decrease in mortgage loans held for sale - 152 262
Increase in accrued interest receivable (131) (137) (62)
Decrease/(increase) in accounts receivable 494 (416) -
Increase (decrease) in accrued interest payable (138) 131 (116)
Other (1,984) 50 609
----------------------------------------
Net cash provided by operating activities 2,976 4,402 4,995
INVESTING ACTIVITIES
Purchases of securities available-for-sale (17,995) (46,311) (34,323)
Proceeds from sales of securities available-for-sale 2,704 27,791 12,308
Proceeds from redemption and maturities of securities 14,637 16,896 18,796
available-for-sale
Net increase in loans (51,613) (31,893) (39,998)
Purchases of premises and equipment (634) (2,038) (1,797)
Proceeds from sale of premises 2,839 - -
Proceeds from sales of real estate - - 53
Redemption (purchases) of Federal Home Loan Bank stock (1,023) (7) 68
----------------------------------------
Net cash used in investing activities (51,085) (35,562) (44,893)
</TABLE>
5
<PAGE> 30
Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries
Consolidated Statements of Cash Flow
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1999 1998 1997
-----------------------------------------
(In Thousands)
<S> <C> <C> <C>
FINANCING ACTIVITIES
Net increase in deposits $5,215 $34,955 $34,863
Net increase (decrease) in securities sold under repurchase 1,245 (2,738) 326
Net increase (decrease) in borrowings (5,480) 10,669 (5,501)
Increase (decrease) in advance payments by borrowers for taxes 87 (127) 112
and insurance
Payments of cash dividends to stockholders (1,192) (1,016) (766)
Proceeds from Federal Home Loan Bank advances 30,300 4,010 (450)
Purchase of treasury stock (181) (845) (251)
Proceeds from the sale of treasury stock 131 110 1,256
Proceeds from issuing additional common stock 209 522 72
Proceeds from dividend reinvestment plan 4 132 123
-----------------------------------------
Net cash provided by financing activities 30,338 45,672 29,784
-----------------------------------------
Increase (decrease) in cash and cash equivalents (17,771) 14,512 (10,114)
Cash and cash equivalents at beginning of year 40,562 26,050 36,164
-----------------------------------------
Cash and cash equivalents at end of year $22,791 $40,562 $26,050
=========================================
Supplemental cash flow information and non-cash transactions:
Interest paid $13,378 $10,566 $10,566
Income taxes paid 2,004 1,273 1,273
Loans transferred to other real estate owned 107 - -
</TABLE>
6
<PAGE> 31
Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except for share information)
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), Lincoln Community Bank (Lincoln Community) and
Grafton State Bank (Grafton)-collectively, "the Corporations," 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., Lincoln Community's wholly owned
subsidiary, Lincoln Investment Management Corporation, and Grafton's wholly
owned subsidiary, GSB Investments, Inc. which manage investment portfolios for
the Banks. All significant intercompany accounts and transactions have been
eliminated.
In preparing the consolidated financial statements in conformity with generally
accepted accounting principles, management is required to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include amounts due from banks (both interest-bearing
and noninterest-bearing) and federal funds sold.
7
<PAGE> 32
Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except for share information)
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.
As part of the 1999 merger with Pyramid, Management reassessed the Bank's
interest rate risk position and subsequently reclassified certain securities
that had been classified on the books of Pyramid in the held-to-maturity
category to the available-for-sale category. No gain or loss was recognized on
the transfer.
The amortized cost of debt securities is adjusted for amortization of premiums
and accretion of discounts to maturity, or in the case of mortgage-related
securities, over the estimated life of the security. Such amortization is
included in interest income from the related security.
Interest and dividends are included in interest income from the related
securities. Realized gains and losses and declines in value judged to be
other-than-temporary are included in net securities gains (losses). The cost of
securities sold is based on the specific identification method.
INTEREST AND FEES ON LOANS
Interest on loans is recorded as income when earned. Loans are placed on
non-accrual status, generally recognizing interest as income when received, when
in the opinion of management, the collectibility of principal or interest
becomes doubtful.
Loan origination and commitment fees and certain direct loan origination costs
are being deferred and the net amount amortized as an adjustment of the related
loans' yields. The Corporation is amortizing these amounts, using the
level-yield method, adjusted for prepayments, over the contractual life of the
related loans.
ALLOWANCE FOR LOAN LOSSES
A provision for loan losses is made when a loss is probable and can be
reasonably estimated. The provision is based on past experience and on
prevailing market conditions. Management's evaluation of loss considers various
factors including, but not limited to, general economic conditions, loan
portfolio composition, and prior loss experience.
8
<PAGE> 33
Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except for share information)
The Corporation had no impaired loans in 1999 or 1998.
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 2,106,579, 2,071,214 and 2,004,809, for the years
ended December 31, 1999, 1998 and 1997, respectively. The number of shares used
in computing diluted earnings per share is 2,153,310, 2,134,012 and 2,059,098,
for the years ended December 31, 1999, 1998 and 1997, respectively.
9
<PAGE> 34
Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except for share information)
1. ACCOUNTING POLICIES (CONTINUED)
ACCOUNTING CHANGES
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities.
In June 1998, the Financial Accounting Standards Board issued Statement No. 133
Accounting for Derivative Instruments and Hedging Activities. Statement 133
provides a comprehensive and consistent standard for the recognition and
measurement of derivatives and hedging activities. The new Statement resolves
the inconsistencies that currently exist with respect to derivatives accounting,
and dramatically changes the way many derivatives transactions and hedged items
are reported.
Statement 133 requires all derivatives to be recorded on the balance sheet at
fair value and establishes "special accounting" for the following three
different types of hedges: hedges of changes in the fair value of assets,
liabilities or firm commitments (referred to as fair value hedges); hedges of
the variable cash flows of forecasted transactions (cash flow hedges); and
hedges of foreign currency exposures of net investments in foreign operations.
Though the accounting treatment and criteria for each of the three types of
hedges is unique, they all result in recognizing offsetting changes in value or
cash flows of both the hedge and the hedged item in earnings in the same period.
Changes in the fair value of derivatives that do not meet the criteria of one of
these three categories of hedges are included in earnings in the period of the
change.
Statement 133 is effective for years beginning after June 15, 2000. Management
does not expect the adoption of this statement to have a material impact on the
financial statements of the Corporation when adopted.
10
<PAGE> 35
Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except for share information)
2. INVESTMENT AND MORTGAGE-BACKED SECURITIES
AVAILABLE-FOR-SALE SECURITIES:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
--------------------------------------------------------
<S> <C> <C> <C> <C>
At December 31, 1999:
Mutual funds $ 3,173 $ - $ 135 $ 3,038
U.S. treasury and other U.S. government
securities 12,078 - 391 11,687
Small Business Administration certificates 430 14 - 444
State and political subdivision certificates 18,557 34 973 17,618
Collateralized mortgage obligations 9,481 5 222 9,264
Government agency mortgage-backed securities
24,536 69 527 24,078
--------------------------------------------------------
$ 68,255 $ 123 $ 2,248 $ 66,129
========================================================
At December 31, 1998:
Mutual funds $ 3,173 $ - $114 $ 3,059
U.S. treasury and other U.S. government
securities 7,735 45 15 7,765
Small Business Administration certificates 597 31 - 628
State and political subdivision certificates 10,730 35 96 10,669
Collateralized mortgage obligations 8,364 50 14 8,400
Government agency mortgage-backed securities
30,223 178 129 30,272
--------------------------------------------------------
$60,822 $340 $369 $60,793
========================================================
<CAPTION>
HELD-TO-MATURITY SECURITIES:
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
--------------------------------------------------------
<S> <C> <C> <C> <C>
At December 31, 1998:
State and political subdivision certificates 5,794 187 1 5,980
Government agency mortgage-backed securities 1,165 6 2 1,169
--------------------------------------------------------
6,959 193 3 7,149
========================================================
</TABLE>
11
<PAGE> 36
Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except for share information)
2. INVESTMENT AND MORTGAGE-BACKED SECURITIES (CONTINUED)
Securities carried at $24,226 at December 31, 1999 were pledged principally to
secure liabilities to the Federal Reserve Bank.
The amortized cost and market value of securities at December 31, 1999, 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 $ 3,651 $ 3,630
Due after one year through five years 10,931 10,630
Due after five years through ten years 9,268 8,872
Due after ten years 6,786 6,173
Mutual funds 3,173 3,038
Mortgage-related securities 24,535 24,078
Collateralized mortgage obligations 9,481 9,264
Small Business Administration Certificates 430 444
--------------------------------------------------
$68,255 $66,129
==================================================
</TABLE>
Proceeds from sales of securities available-for-sale during the years ended
December 31, 1999, 1998 and 1997, were $2,704, $27,791 and $12,308,
respectively. Gross gains of $9, $218 and $83 were recorded on those sales for
the years ended December 31, 1999, 1998 and 1997, respectively. Gross losses of
$0, $0 and $5 were also recorded in the years ended December 31, 1999, 1998 and
1997, respectively.
Investment and mortgage backed securities totaling $7,149 were reclassified from
the held-to-maturity classification to the available-for-sale classification for
the December 31, 1999 financial statements. This reclassification was performed
in as a result of management reassessing the overall interest rate risk profile
of the organization subsequent to the Pyramid merger. No gain or loss was
recognized on the transfer.
12
<PAGE> 37
Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except for share information)
3. LOANS RECEIVABLE
<TABLE>
<CAPTION>
Loans receivable consist of the following:
DECEMBER 31
1999 1998
------------------------------------
<S> <C> <C>
First mortgage:
Conventional single-family residential $ 70,836 $ 61,685
Commercial and multifamily residential 145,241 127,034
Construction 32,618 20,194
Farmland 296 326
------------------------------------
248,991 209,239
Commercial business loans 88,332 80,238
Consumer and installment loans 19,729 16,250
Leases 2,017 2,599
Home equity loans 6,960 6,576
Other 1,031 930
------------------------------------
118,069 106,593
Less:
Deferred loan fees 43 53
Allowance for loan losses 3,582 3,018
------------------------------------
$363,435 $312,761
====================================
</TABLE>
Transactions in the allowance for loan losses are summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1999 1998 1997
-----------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $3,018 $2,769 $2,610
Provisions charged to operations 956 314 227
Recoveries 17 18 7
Charge-offs (409) (83) (75)
-----------------------------------------
Balance at end of year $3,582 $3,018 $2,769
=========================================
</TABLE>
Total nonaccrual loans were $2,252 and $1,526 at December 31, 1999 and 1998,
respectively.
13
<PAGE> 38
Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except for share information)
4. PREMISES AND EQUIPMENT
Premises and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
1999 1998
--------------------------------
<S> <C> <C>
Land $ 2,183 $ 2,414
Office buildings and improvements 9,571 11,267
Furniture and equipment 7,008 6,744
--------------------------------
18,762 20,425
Less accumulated depreciation (9,149) (8,926)
--------------------------------
$ 9,613 $11,499
================================
</TABLE>
During 1999, the Corporation sold certain land and buildings and subsequently
leased a portion of the building back from the new owners. Total gain on the
sale was $1,103, of which $633 was recognized in current income and the balance
will be accreted to income over the remaining lease term.
5. DEPOSITS
Deposits consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
1999 1998
--------------------------------
<S> <C> <C>
Negotiable Order of Withdrawal accounts:
Noninterest-bearing $ 67,646 $ 57,045
Interest-bearing 31,335 30,415
Savings deposits 65,755 67,486
Money market investment accounts 33,431 30,333
Time deposits and certificate accounts 179,166 186,839
--------------------------------
$377,333 $372,118
================================
</TABLE>
14
<PAGE> 39
Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except for share information)
The scheduled maturities of time deposits and certificate accounts at December
31, 1999 are as follows:
Maturities during the year ending December 31, 1999:
<TABLE>
<S> <C>
2000 $159,322
2001 11,950
2002 3,266
2003 2,272
Thereafter 2,356
----------------
$179,166
================
</TABLE>
At December 31, 1999 and 1998, time deposits and certificate accounts with
balances greater than $100 amounted to $33,604 and $38,042, respectively.
6. BORROWINGS
At December 31, 1999 and 1998, the Banks have overnight federal funds purchased
of $7,450 and $9,500, respectively, with weighted-average interest rates of
5.58% and 5.40%, respectively.
Lincoln State, Lincoln Community and Grafton State also had short-term advances
of $18,400, $11,600 and $8,900, respectively, from the Federal Home Loan Bank at
December 31, 1999, bearing interest at 5.84% for Lincoln State and Lincoln
Community, respectively, and at an average rate of 5.16% for Grafton.
At December 31, 1999 and 1998, the Corporation had $300 and $710 outstanding,
respectively, on lines of credit with unaffiliated banks with a total available
balance of $10,300. The December 31, 1999 outstanding balance bears interest at
the lender's prime rate (7.75% at December 31, 1999).
15
<PAGE> 40
Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except for share information)
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 to average assets (as
defined). Management believes, as of December 31, 1999 and 1998, that the Banks
meet all capital adequacy requirements to which they are subject.
As of December 31, 1999, 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, 1998,
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, and Tier I leverage ratios as set forth in the table. There are no
conditions or events since the most recent notification that management believes
have changed the Banks' classifications as of December 31, 1999.
16
<PAGE> 41
Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except for share information)
<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, 1999
Total Capital (to Risk-
Weighted Assets):
Lincoln State Bank $ 17,256 10.34% $ 13,350 > 8.00% $ 16,688 > 10.00%
Lincoln Community Bank 9,668 11.79% 6,562 > 8.00% 8,203 > 10.00%
Franklin State Bank 5,394 10.58% 4,079 > 8.00% 5,099 > 10.00%
Grafton State Bank 10,138 13.91% 5,831 > 8.00% 7,289 > 10.00%
Tier 1 Capital (to Risk-
Weighted Assets):
Lincoln State Bank 15,765 9.45% 6,675 > 4.00% 10,013 > 6.00%
Lincoln Community Bank 8,841 10.78% 3,281 > 4.00% 4,922 > 6.00%
Franklin State Bank 4,872 9.56% 2,039 > 4.00% 3,059 > 6.00%
Grafton State Bank 9,397 12.89% 2,916 > 4.00% 4,374 > 6.00%
Tier 1 Capital (to Average
Assets):
Lincoln State Bank 15,765 8.51% 7,412 > 4.00% 9,266 > 5.00%
Lincoln Community Bank 8,841 8.60% 4,110 > 4.00% 5,137 > 5.00%
Franklin State Bank 4,872 8.16% 2,387 > 4.00% 2,984 > 5.00%
Grafton State Bank 9,397 8.39% 4,481 > 4.00% 5,601 > 5.00%
- -----------------------------------------------------------------------------------------------------------
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%
Grafton State Bank 8,952 14.00 5,127 > 8.00% 6,409 > 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%
Grafton State Bank 8,236 12.90 2,563 > 4.00% 3,845 > 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%
Grafton State Bank 8,236 8.30 2,972 > 4.00% 4,954 > 5.00%
</TABLE>
17
<PAGE> 42
Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except for share information)
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.
As of December 31, 1999, the subsidiary banks collectively had equity of $37,614
of which $4,988 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, 1999, the maximum
amount available for transfer from any one of these Banks to the Corporation in
the form of loans approximates 7.1% of consolidated stockholders' equity.
18
<PAGE> 43
Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except for share information)
9. EMPLOYEE BENEFIT PLANS
The Corporation has an Incentive Stock Option Plan under which 66,000 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, 1997 84,630 $ 6.67 - 15.15 $ 8.80 2.1 years
Granted 49,775 30.91 - 31.14 30.98 10.0 years
Exercised (23,670) 6.67 - 15.15 7.78 -
--------------
Total outstanding at
December 31, 1998 110,735 6.67 - 31.14 18.48 5.0 years
==============
Granted -0- - - -
Exercised 39,170 6.67 - 15.15 6.97 -
--------------
Total outstanding at
December 31, 1999 71,565 $ 6.67 - 31.14 $25.56 6.42
==============
</TABLE>
At December 31, 1999, all outstanding options are exercisable.
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 years of age. 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 1999, 1998 and 1997, were $234, $216 and $196, respectively.
19
<PAGE> 44
Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except for share information)
10. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1999 1998 1997
------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ 2,269 $ 1,865 $ 1,637
State 424 359 326
------------------------------------------------------
2,693 2,224 1,963
------------------------------------------------------
Deferred (benefit):
Federal (649) (120) 11
State (139) (62) (3)
-------------------------------------------------------
(788) (182) (8)
-------------------------------------------------------
$ 1,905 $ 2,042 $ 1,955
======================================================
</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
1999 1998 1997
-----------------------------------------
<S> <C> <C> <C>
Income tax at statutory rate $ 2,223 $ 2,003 $ 1,814
Increase (reduction) resulting from:
Tax-exempt interest income (265) (164) (79)
State income taxes, net of federal tax benefit 124 195 218
Other (177) 8 2
=========================================
$ 1,905 $ 2,042 $ 1,955
=========================================
</TABLE>
20
<PAGE> 45
Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except for share information)
10. INCOME TAXES (CONTINUED)
The components of deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1999 1998
---------------------------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 975 $ 864
Unrealized loss on securities 727 59
Net operating loss carryforwards 657 546
Deferred compensation 336 192
Other assets 229 117
---------------------------
Total deferred tax assets 2,924 1,778
Valuation allowance (1,121) (557)
---------------------------
1,803 1,221
Deferred tax liabilities:
Unrealized gain on securities - 22
Depreciation 130 298
Other liabilities 35 36
----------------------------
Total deferred tax liabilities 165 356
===========================
Net deferred tax asset $1,638 $ 865
===========================
</TABLE>
At December 31, 1999, the Corporation and its subsidiaries, which file separate
state income tax returns, have state net operating loss carryforwards of
approximately $12,588 which expire at various dates through 2013. Due to the
unlikelihood of realizing these benefits, a valuation allowance of $657 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, 1999, 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.
21
<PAGE> 46
Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except for share information)
11. LOANS TO RELATED PARTIES
In the ordinary course of business, loans are granted to related parties, which
include management personnel, directors and entities in which such persons are
principal stockholders. Activity in loans to related parties is as follows:
<TABLE>
<CAPTION>
<S> <C>
Balance at December 31, 1997 $ 23,560
Loans originated 16,778
Repayments (16,606)
----------------
Balance at December 31, 1998 23,732
Loans originated 6,472
Repayments (4,119)
================
Balance at December 31, 1999 $ 26,085
================
</TABLE>
12. COMMITMENTS AND CONTINGENT LIABILITIES
Off-balance-sheet financial instruments whose contracts represent credit and/or
interest rate risk at December 31, 1999 and 1998, are as follows:
<TABLE>
<CAPTION>
December 31
1999 1998
------------------------------------
<S> <C> <C>
Commitments to originate mortgage loans (expiring
within three months):
Fixed rates $20,620 $8,280
Adjustable rates 1,077 5,323
Unused lines of credit:
Commercial business 34,441 34,987
Home equity (adjustable rate) 4,339 7,139
Credit cards (fixed rate) 4,808 7,618
Standby letters of credit 4,065 6,077
</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.
22
<PAGE> 47
Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except for share information)
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.
Various subsidiary banks of the Corporation have entered into non-cancelable
leases for certain branch facilities. The following is a schedule of future
minimum rental payments required under the non-cancelable lease agreements:
<TABLE>
<CAPTION>
Year Amount
---- --------------
<S> <C>
2000 $ 298
2001 298
2002 5
2003 5
==============
Total $ 606
==============
</TABLE>
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:
23
<PAGE> 48
Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except for share information)
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.
ACCRUED INTEREST INCOME AND EXPENSE
The respective book value of accrued interest income and expense represents the
market value of those items.
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
24
<PAGE> 49
Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except for share information)
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.
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, 1999 or
1998.
The carrying amounts and fair values of the Corporation's financial instruments
consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31, 1998
------------------------------- -------------------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
------------------------------- -------------------------------
<S> <C> <C> <C> <C>
Cash and cash equivalents $22,791 $22,791 $ 40,562 $ 40,562
Securities available-for-sale:
Investment securities 32,787 32,787 27,915 28,604
Mortgage-related securities 33,342 33,342 39,837 39,751
Loans receivable 363,435 365,206 312,761 316,447
Accrued interest receivable 2,426 2,426 2,295 2,295
Federal Home Loan Bank stock 2,511 2,511 1,488 1,488
Deposits 377,333 377,039 372,118 372,380
Accrued interest payable 777 777 915 915
Borrowings 53,398 53,398 27,333 27,337
</TABLE>
25
<PAGE> 50
Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except for share information)
14. MERCHANTS AND MANUFACTURERS BANCORPORATION, INC. AND SUBSIDIARIES PARENT
COMPANY ONLY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
DECEMBER 31
STATEMENTS OF FINANCIAL CONDITION 1999 1998
------------------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 736 $ 30
Investment in subsidiaries 38,340 36,654
Premises and equipment 1,473 2,915
Other assets 1,554 1,086
-----------------------------------
Total assets $42,103 $40,685
====================================
LIABILITIES
Other liabilities $ 1,677 $ 988
Borrowings - 260
------------------------------------
Total liabilities 1,677 1,248
STOCKHOLDERS' EQUITY
Common stock 2,128 2,090
Additional paid-in capital 13,945 13,769
Unrealized gain (loss) on available for sale securities (1,397) (10)
Retained earnings 26,434 24,222
Less treasury stock (684) (634)
-------------------------------------
Total stockholders' equity 40,426 39,437
-------------------------------------
Total liabilities and stockholders' equity $ 42,103 $ 40,685
====================================
</TABLE>
26
<PAGE> 51
Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except for share information)
14. MERCHANTS AND MANUFACTURERS BANCORPORATION, INC. AND SUBSIDIARIES PARENT
COMPANY ONLY FINANCIAL INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
STATEMENTS OF INCOME 1999 1998 1997
------------------------------------
<S> <C> <C> <C>
Income:
Interest on loans, including fees $ 30 $ - $ -
Dividends from subsidiaries 1,708 4,783 1,943
Other 1,733 1,227 280
------------------------------------
3,471 6,010 2,223
Expenses:
Salaries and employee benefits 2,004 1,511 1,268
Occupancy 564 476 391
Interest 65 12 16
Other 1,089 517 547
------------------------------------
3,722 2,516 2,222
------------------------------------
Income (loss) before income tax benefit and equity in
undistributed net income of subsidiaries (251) 3,494 1
Income tax benefit 534 448 670
------------------------------------
Income before equity in undistributed net income of
subsidiaries 283 3,942 671
Equity in undistributed net income of subsidiaries 3,120 (92) 2,709
====================================
Net income $ 3,403 $ 3,850 $ 3,380
====================================
</TABLE>
26
<PAGE> 52
Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except for share information)
14. MERCHANTS AND MANUFACTURERS BANCORPORATION, INC. AND SUBSIDIARIES PARENT
COMPANY ONLY FINANCIAL INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
Year ended December 31
CONDENSED STATEMENTS OF CASH FLOWS 1999 1998 1997
-------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $3,403 $3,850 $ 3,380
Adjustments to reconcile net income to net cash provided by
operating activities:
Equity in undistributed net income of subsidiaries (3,120) 92 (2,709)
Provision for depreciation 143 153 116
Other 676 17 (530)
-------------------------------------
Net cash provided by operating activities 1,102 4,112 257
INVESTING ACTIVITIES
Net change in loans (406) - -
Proceeds from sale of premises 1,349 - 250
Purchases of furniture and equipment (50) (79) (1,400)
-------------------------------------
Net cash provided (used) by investing activities 893 (79) (1,150)
FINANCING ACTIVITIES
Net increase (decrease) in notes payable (260) 260 -
Capital contribution to subsidiary - (3,250) -
Payment of cash dividends (1,192) (1,016) (766)
Purchase of treasury stock (181) (845) (251)
Proceeds from the sale of treasury stock 131 110 1,256
Proceeds from issuing additional common stock 209 394 60
Proceeds from dividend reimbursement plan 4 132 123
-------------------------------------
Net cash provided (used) by financing activities (1,289) (4,215) 422
-------------------------------------
Increase (decrease) in cash and cash equivalents 706 (182) (471)
Cash and cash equivalents at beginning of year 30 212 683
=====================================
Cash and cash equivalents at end of year $ 736 $ 30 $ 212
=====================================
</TABLE>
28
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 15674
<INT-BEARING-DEPOSITS> 4907
<FED-FUNDS-SOLD> 2210
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 66129
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 367017
<ALLOWANCE> 3582
<TOTAL-ASSETS> 474383
<DEPOSITS> 377333
<SHORT-TERM> 53398
<LIABILITIES-OTHER> 3226
<LONG-TERM> 0
0
0
<COMMON> 2128
<OTHER-SE> 38298
<TOTAL-LIABILITIES-AND-EQUITY> 474383
<INTEREST-LOAN> 27333
<INTEREST-INVEST> 3822
<INTEREST-OTHER> 573
<INTEREST-TOTAL> 31728
<INTEREST-DEPOSIT> 12517
<INTEREST-EXPENSE> 1482
<INTEREST-INCOME-NET> 17729
<LOAN-LOSSES> 956
<SECURITIES-GAINS> 9
<EXPENSE-OTHER> 14956
<INCOME-PRETAX> 5308
<INCOME-PRE-EXTRAORDINARY> 5308
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3403
<EPS-BASIC> 1.62
<EPS-DILUTED> 1.58
<YIELD-ACTUAL> 7.72
<LOANS-NON> 2251
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3018
<CHARGE-OFFS> 409
<RECOVERIES> 17
<ALLOWANCE-CLOSE> 3582
<ALLOWANCE-DOMESTIC> 3582
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
