<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2000
------------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
----------------- -----------------
Commission file Number 0-21292
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MERCHANTS AND MANUFACTURERS BANCORPORATION, INC.
--------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Wisconsin 39-1413328
------------------------------- ---------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
14100 West National Avenue, PO Box 511160
New Berlin, Wisconsin 53151-1160
--------------------------------------------------------------------------------
(Address of principal executive office)
(262) 827-6713
--------------------------------------------------------------------------------
Registrant's telephone number, including area code:
--------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the Registrant (1) has filed all reports required
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports) and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No .
----- -----
Applicable Only to Corporate Issuers
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Common Stock, par value $1.00 per share 2,074,589 Shares
--------------------------------------- -------------------------------
Class Outstanding at November 1, 2000
<PAGE> 2
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE NUMBER
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<S> <C>
Unaudited Consolidated Statements of Financial Condition as of September
30, 2000 and December 31, 1999 3
Unaudited Consolidated Statements of Income for the Three Months and
the Nine Months ended September 30, 2000 and 1999
4
Unaudited Consolidated Statements of Cash Flows for the Nine Months ended
September 30, 2000 and 1999 5
Notes to Unaudited Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations 10
Item 3. Quantitative and Qualitative Disclosure About Market Risk 15
PART II. OTHER INFORMATION
Items 1-6 16
Signatures 17
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
--------------------- --------------------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash and due from banks $13,412 $ 15,674
Interest-bearing deposits at other banks 1,357 4,907
Federal funds sold 160 2,210
--------------------- --------------------
Cash and cash equivalents 14,929 22,791
Securities available-for-sale at fair value:
Investment securities 30,317 32,787
Mortgage-related securities 31,751 33,342
Loans receivable (net of allowance for loan losses) 422,018 363,435
Accrued interest receivable 2,980 2,426
Federal Home Loan Bank stock 2,986 2,511
Premises and equipment 9,995 9,613
Other assets 9,937 7,478
--------------------- --------------------
Total assets $524,913 $474,383
===================== ====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $404,451 $377,333
Borrowings 72,849 53,398
Accrued interest payable 942 777
Advance payments by borrowers for taxes and insurance 1,545 300
Other liabilities 3,086 2,149
--------------------- --------------------
Total liabilities 482,873 433,957
Stockholders' equity
Common stock $1.00 par value; 6,000,000 shares authorized;
Shares issued: 2,127,888; shares outstanding:
2,074,698--2000; 2,109,773--1999 2,128 2,128
Additional paid-in capital 13,856 13,945
Net unrealized loss on securities available-for-sale (885) (1,397)
Retained earnings 28,759 26,434
Treasury stock, at cost (53,190 shares--2000;
18,115 shares--1999) (1,818) (684)
--------------------- --------------------
Total stockholders' equity 42,040 40,426
--------------------- --------------------
Total liabilities and stockholders' equity $524,913 $474,383
===================== ====================
</TABLE>
See notes to unaudited consolidated financial statements.
3
<PAGE> 4
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
----------------- ----------------- ----------------- -----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Interest income:
Loans, including fees $8,939 $6,969 $24,975 $20,105
Investment securities:
Taxable 289 202 833 662
Exempt from federal income taxes 175 183 544 536
Mortgage-related securities 526 537 1,624 1,638
Other 48 147 205 459
----------------- ----------------- ----------------- -----------------
Total interest income 9,977 8,038 28,181 23,400
Interest expense:
Deposits 3,847 3,096 10,304 9,362
Borrowings 1,363 361 3,692 950
----------------- ----------------- ----------------- -----------------
Total interest expense 5,210 3,457 13,996 10,312
Net interest income 4,767 4,581 14,185 13,088
Provision for loan losses 131 660 475 796
----------------- ----------------- ----------------- -----------------
Net interest income after provision for
loan losses 4,636 3,921 13,710 12,292
Non-interest income:
Service charges on deposit accounts 256 255 763 748
Service charges on loans 111 122 348 321
Net gain on securities sales 0 0 2 9
Net gain (loss) on loan sales 1 (4) (8) 17
Net gain on sales of premises 67 566 200 566
Other 373 308 1,078 989
----------------- ----------------- ----------------- -----------------
808 1,247 2,383 2,650
Non-interest expenses:
Salaries and employee benefits 2,070 1,855 6,543 6,214
Premises and equipment 619 541 1,829 1,648
Data processing 196 226 649 694
Federal deposit insurance premiums 22 24 65 93
Other 697 688 2,070 2,053
----------------- ----------------- ----------------- -----------------
3,604 3,334 11,156 10,702
Income before income taxes 1,840 1,834 4,937 4,240
Income taxes 582 600 1,561 1,383
----------------- ----------------- ----------------- -----------------
Net income $ 1,258 $ 1,234 $3,376 $2,857
================= ================= ================= =================
Basic earnings per share $ 0.60 $ 0.58 $ 1.61 $ 1.36
================= ================= ================= =================
Diluted earnings per share $ 0.60 $ 0.57 $ 1.59 $ 1.33
================= ================= ================= =================
Dividends per share $ 0.15 $ 0.14 $ 0.50 $ 0.42
================= ================= ================= =================
</TABLE>
See notes to unaudited consolidated financial statements.
4
<PAGE> 5
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
2000 1999
----------------- -----------------
(IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $3,376 $2,857
Adjustments to reconcile net income to cash
provided by operating activities
Provision for loan losses 475 796
Provision for depreciation 610 666
Net amortization of investments securities premiums and discounts 64 101
Net realized investment security gains (2) (9)
Increase in accrued interest receivable (554) (904)
Decrease in accrued interest payable 165 40
Other (1,815) (2,257)
----------------- -----------------
Net cash provided by operating activities 2,319 1,290
INVESTING ACTIVITIES
Purchase of securities available-for-sale (3,519) (11,801)
Proceeds from sales of securities available-for-sale 2,651 2,704
Proceeds from redemptions and maturities of securities available-for-sale 5,688 8,400
Net increase in loans (59,075) (31,486)
Redemption (purchase) of Federal Home Loan Bank stock (475) 62
Proceeds from sale of premises 0 2,839
Purchase of premises and equipment (993) (647)
----------------- -----------------
Net cash used in investing activities (55,723) (29,929)
FINANCING ACTIVITIES
Net increase in deposits 27,117 10,722
Net increase (decrease) in borrowings 19,451 (5,986)
Increase in advance payments by borrowers for taxes and insurance 1,245 1,292
Payment of cash dividends to stockholders (1,051) (874)
Purchase of treasury stock (1,324) (107)
Proceeds from sale of treasury stock 102 131
Proceeds from issuing additional common stock 0 (37)
----------------- -----------------
Net cash provided by financing activities 45,540 5,141
Decrease in cash and cash equivalents (7,864) (23,498)
Cash and cash equivalents at beginning of period 22,791 40,562
----------------- -----------------
Cash and cash equivalents at end of period $14,927 $17,064
================= =================
Supplemental cash flow information:
Interest paid $ 13,529 $ 7,818
Income taxes paid 1,546 895
Loans transferred to other real estate owned 116 25
</TABLE>
See notes to unaudited consolidated financial statements
5
<PAGE> 6
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC.
Notes to Unaudited Consolidated Financial Statements
September 30, 2000
NOTE A -- BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include the
accounts of Merchants and Manufacturers Bancorporation, Inc. (the Corporation)
and its wholly owned subsidiaries, Lincoln State Bank, Franklin State Bank,
Grafton State Bank, Lincoln Community Bank (collectively, the Banks), Merchants
Merger Corp. and M&M Services, Inc. Lincoln State Bank also includes the
accounts of its wholly owned subsidiary, M&M Lincoln Investment Corporation.
Lincoln Community Bank also includes the accounts of its wholly owned
subsidiary, Lincoln Investment Management Corporation. Grafton State Bank also
includes the accounts of its wholly owned subsidiary, GSB Investments, Inc. All
significant intercompany balances and transactions have been eliminated.
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three-month and nine-month periods
ended September 30, 2000 are not necessarily indicative of the results that may
be expected for the year ended December 31, 2000. For further information, refer
to the consolidated financial statements and footnotes thereto included in the
Corporation's Form 10-K for the year ended December 31, 1999.
This Form 10-Q contains various forward-looking statements concerning the
Company's prospects that are based on the current expectations and beliefs of
management. Forward-looking statements may also be made by the Corporation from
time to time in other reports and documents as well as oral presentations. When
used in written documents or oral statements, the words anticipate, believe,
estimate, expect, objective and similar expressions are intended to identify
forward-looking statements. The statements contained herein and such future
statements involve or may involve certain assumptions, risks and uncertainties,
many of which are beyond the Corporation's control, that could cause the
Corporation's actual results and performance to differ materially from what is
expected. In addition to the assumptions and other factors referenced
specifically in connection with such statements, the following factors could
impact the business and financial prospects of the Corporation: general economic
conditions; the Corporation's ability to complete its pending acquisition of
CBOC, Inc. as planned, risks relating to the Corporation's ability to
successfully integrate future acquisitions, legislative and regulatory
initiatives; monetary and fiscal policies of the federal government; deposit
flows; disintermidiation; the cost of funds; general market rates of interest;
interest rates or investment returns on competing investments; demand for loan
products; demand for financial services; changes in accounting policies or
guidelines; and changes in the quality or composition of the Corporation's loan
and investment portfolio.
6
<PAGE> 7
NOTE B -- ACQUISITION
On December 31, 1999 the Corporation completed a merger with Pyramid
Bancorporation, Inc. (Pyramid) and its wholly owned subsidiary, Grafton State
Bank. The transaction was accounted for as a pooling of interests, and,
accordingly, all financial statements and information have been restated to
incorporate Pyramid's results on a historical basis. Each share of Pyramid
common stock was exchanged for 9 shares of the Corporation's $1 par value common
stock. This resulted in the issuance of 620,100 shares of the Corporation's
common stock.
NOTE C -- EARNINGS PER SHARE
Presented below are the calculations for basic and diluted earnings per share:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
Basic 2000 1999 2000 1999
------------------------------------------------- ---------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Net income $ 1,257,615 $ 1,234,536 $ 3,375,524 $ 2,857,100
Weighted average shares outstanding 2,097,471 2,111,222 2,101,903 2,105,503
Basic earnings per share $ 0.60 $ 0.58 $ 1.61 $ 1.36
================ ================= ================ =================
Diluted:
------------------------------------------------- ---------------- ----------------- ---------------- -----------------
Net income $ 1,257,615 $ 1,234,536 $ 3,375,524 $ 2,857,100
Weighted average shares outstanding 2,097,471 2,111,222 2,101,903 2,105,503
Effect of dilutive stock options outstanding 14,948 42,720 19,068 42,472
---------------- ----------------- ---------------- -----------------
Diluted weighted average shares outstanding 2,112,419 2,153,942 2,120,971 2,147,975
Diluted earnings per share $ 0.60 $ 0.57 $ 1.59 $ 1.33
================ ================= ================ =================
</TABLE>
NOTE D - COMPREHENSIVE INCOME
The following table presents the Corporation's comprehensive income.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
---------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Net income $ 1,257,615 $ 1,234,536 $ 3,375,524 $ 2,857,100
Other comprehensive income
Net change in unrealized securities gains
(losses), net 452,165 (326,031) 511,962 (1,035,526)
---------------- ----------------- ---------------- -----------------
Total comprehensive income $ 1,709,780 $ 908,505 $ 3,887,486 $ 1,821,574
================ ================= ================ =================
</TABLE>
7
<PAGE> 8
NOTE E -- LOANS RECEIVABLE
Loans are comprised of the following categories:
<TABLE>
<CAPTION>
September 30
2000 1999
--------------------- ---------------------
(In Thousands)
<S> <C> <C>
Commercial business loans $ 102,328 $ 85,146
Commercial real estate 154,183 141,455
Real estate mortgages 140,737 101,621
Installments 27,786 17,940
Other 834 827
--------------------- ---------------------
Total loans 425,868 346,989
Unearned income (23) (43)
Allowance for loan losses (3,827) (3,502)
--------------------- ---------------------
Loans, net $422,018 $343,444
===================== =====================
</TABLE>
The following table presents changes in the allowance for loan losses:
<TABLE>
<CAPTION>
September 30
2000 1999
----------------- -----------------
(In Thousands)
<S> <C> <C>
Balance at January 1 $3,582 $3,018
Provisions 475 796
Charge-offs (232) (328)
Recoveries 2 16
----------------- -----------------
Balance at September 30 $3,827 $3,502
================= =================
</TABLE>
NOTE F -- STOCKHOLDERS' EQUITY
Under federal law and regulations, the Corporation is required to meet certain
capital requirements. Under the Federal Reserve Board's risk-based guidelines
the Corporation is considered to be "well capitalized." The Banks are required
to meet leverage and risk-based capital requirements. The leverage ratio, in
general, is stockholders' equity as a percentage of total assets. The risk-based
capital ratio, in general, is stockholders' equity plus general loan loss
allowances (within certain limitations) as a percentage of risk adjusted assets.
8
<PAGE> 9
As of September 30, 2000, the most recent notification from Federal Deposit
Insurance Corporation categorized Lincoln Community Bank, Franklin State Bank,
Lincoln State Bank and Grafton State Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Banks must maintain minimum total risk-based, Tier I risk-based
and Tier I leverage ratios as set forth in the table. There are no conditions or
events since that notification that management believes have changed the banks'
category.
<TABLE>
<CAPTION>
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------------------------------------------ --------------------------
Amount Ratio Amount Ratio Amount Ratio
------------------------------------------------------ --------------------------
AS OF SEPTEMBER 30, 2000 (Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Total Capital (to Risk-
Weighted Assets):
Lincoln State Bank $19,817 10.35% $15,321 >8.00% $19,151 >10.00%
Lincoln Community 9,909 11.04% 7,183 >8.00% 8,979 >10.00%
Grafton State Bank 10,680 11.83% 7,223 >8.00% 9,029 >10.00%
Franklin State Bank 6,250 10.60% 4,718 >8.00% 5,898 >10.00%
Tier 1 Capital (to Risk-
Weighted Assets):
Lincoln State Bank 18,304 9.56% 7,660 >4.00% 11,491 >6.00%
Lincoln Community 9,072 10.10% 3,591 >4.00% 5,387 >6.00%
Grafton State Bank 9,843 10.90% 3,612 >4.00% 5,418 >6.00%
Franklin State Bank 5,610 9.51% 2,359 >4.00% 3,539 >6.00%
Tier 1 Capital (to Average
Assets):
Lincoln State Bank 18,304 8.96% 8,171 >4.00% 10,214 >5.00%
Lincoln Community 9,072 7.96% 4,558 >4.00% 5,698 >5.00%
Grafton State Bank 9,843 7.88% 3,612 >4.00% 4,515 >5.00%
Franklin State Bank 5,610 8.48% 2,648 >4.00% 3,310 >5.00%
</TABLE>
NOTE F -- PENDING ACQUISITION
On August 9, 2000, the Corporation entered into a definitive agreement to
acquire CBOC, Inc. (CBOC) and its subsidiary bank, Community Bank of Oconto
County by exchanging the Corporation's stock for each outstanding common share
of CBOC. Upon closing, CBOC will be merged into the Corporation. The transaction
is expected to close in the first quarter of 2001, and will be accounted for as
a pooling of interests. At September 30, 2000, CBOC had total assets and
shareholder's equity of $61.7 million and $5.6 million respectively.
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Financial Condition
At September 30, 2000, the Corporation's consolidated total assets were $524.9
million as compared to $474.4 million at December 31, 1999. This increase was
primarily due to a $58.6 million increase in loans receivable.
Investment securities available-for-sale decreased $2.5 million, or 7.5%, from
$32.8 million at December 31, 1999, to $30.3 million at September 30, 2000. The
Corporation used proceeds from maturities and repayments of investment
securities to fund new loans and purchase other types of securities rather than
purchase additional investment securities.
Mortgage-related securities available-for-sale decreased $1.6 million, or 4.8%,
from $33.3 million at December 31, 1999, to $31.8 million at September 30, 2000.
Purchases of mortgage-related securities were offset by sales, redemptions and
maturities of this type of security.
Loans receivable increased $58.6 million, or 16.1%, from $363.4 million at
December 31, 1999 compared to $422.0 million at September 30, 2000. This
increase was primarily due to new commercial loan relationships. This movement
corresponds to the Corporation's strategic plan of emphasizing commercial
business. Currently, loans receivable consists mainly of commercial loans
secured by business assets, real estate, and guarantees as well as mortgages
secured by residential properties located in the Corporation's primary market
area. At September 30, 2000 the Corporation has not designated any as loans held
for sale.
Total deposits increased $27.1 million, or 7.2%, from $377.3 million on December
31, 1999 to $404.5 million on September 30, 2000. The increase in deposits can
be attributed to the growth in retail certificate of deposits and commercial
money market accounts currently offered by the Banks. The Corporation
supplemented the deposit growth by increasing the amount of borrowed funds.
Total borrowings increased by $19.5 million, or 36.4%, from $53.4 million on
December 31, 1999 to $72.9 million on September 30, 2000. Borrowings consist of
$46.2 million in Federal Home Loan Bank advances, $22.1 million in fed funds
borrowed from correspondent banks, $3.4 million borrowed on a $20.0 million line
of credit from other financial institutions and $1.1 million in repurchase
agreements and other borrowings.
Stockholders' equity at September 30, 2000 was $42.0 million compared to $40.4
million at December 31, 1999, an increase of $1.6 million. The change in
stockholders' equity consists of net income of $3.4 million, less the net
purchase of treasury stock of $1.2 million, payments of dividends to
shareholders of $1.1 million and the $512,000 net increase in the market value
of securities categorized as available for sale. The Corporation and the Banks
continue to exceed their regulatory capital requirements.
10
<PAGE> 11
NONPERFORMING ASSETS AND ALLOWANCE FOR LOSSES
Generally a loan is classified as nonaccrual and the accrual of interest on such
loan is discontinued when the contractual payment of principal or interest has
become 90 days past due or management has serious doubts about further
collectibility of principal or interest. Generally, loans are restored to
accrual status when the obligation is brought current, has performed in
accordance with the contractual terms for a reasonable period of time and the
ultimate collectibility of the total contractual principal and interest is no
longer in doubt.
Nonperforming assets are summarized, for the dates indicated, as follows:
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
----------------- ----------------
(dollars in thousands)
<S> <C> <C>
Non-accrual loans:
Mortgage loans
One-to-four family $ 1,322 $ 1,693
Commercial real estate 0 291
----------------- ----------------
Total mortgage loans 1,322 1,984
Commercial business 329 187
Consumer and other 163 80
----------------- ----------------
Total non-accrual loans 1,814 2,251
Other real estate owned 116 107
----------------- ----------------
Total nonperforming assets $ 1,930 $ 2,358
================= ================
RATIOS:
Non-accrual loans to total loans 0.43% 0.61%
Nonperforming assets to total assets 0.37 0.50
Loan loss allowance to non-accrual loans 210.97 159.08
Loan loss allowance to total loans 0.90 0.98
</TABLE>
Nonperforming assets decreased by $428,000 from $2.4 million at December 31,
1999 to $1.9 million at September 30, 2000, a decrease of 18.1%. Payments
received on past due loans lead to the decline. Management believes that losses
will be minimal on the remaining balances, due to the collateral position in
each situation.
11
<PAGE> 12
Results of Operations
Net interest income for the three months ended September 30, 2000 was $4.8
million, an increase of 4.1% from the $4.6 million reported for the same period
in 1999. The increased volume of interest-earning assets accounted for the
higher net interest income. The weighted average yield on interest-earning
assets increased from 7.71% for the three months ended September 30, 1999 to
8.15% for the same period in 2000. The increase in market interest rates caused
the improvement. The change in market interest rates and the increased level of
borrowings also caused the weighted average rate paid on deposits and borrowings
to increase from 3.42% for the three months ended September 30, 1999 to 4.40%
for the three months ended September 30, 2000. Net interest income for the nine
months ended September 30, 2000 was $14.2 million, an increase of 8.5% from the
$13.1 million reported for the same period in 1999. The increased volume of
interest-earning assets was the primary reason for the improvement in the
year-to-date net interest income.
The following table sets forth the weighted average yield earned on the
Corporation's consolidated loan and investment portfolios, the weighted average
interest paid on deposits and borrowings, the net spread between yield earned
and rates paid and the net interest margin during the nine and three months
ended September 30, 2000 and 1999.
<TABLE>
<CAPTION>
During the During the
Three Months Nine Months
Ended Sept. 30, Ended Sept 30,
2000 1999 2000 1999
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Weighted average yield on
interest-earning assets 8.15% 7.71% 7.99% 7.60%
Weighted average rate paid on
deposit accounts and borrowings 4.40 3.42 4.14 3.46
----------- ----------- ------------ -----------
Net interest spread 3.75% 4.29% 3.85% 4.14%
=========== =========== ============ ===========
Net interest margin (net interest
income divided by average
earning assets) 3.89% 4.40% 4.02% 4.25%
=========== =========== ============ ===========
</TABLE>
The provision for loan losses increased for the three-month period ended
September 30, 2000 by $131,000 compared to an increase of $660,000 for the three
months ended September 30, 1999. For the nine months ended September 30, 2000,
the provision for loan losses increased by $475,000 compared to an increase of
$796,000 for the same period in 1999. The increased provision was made to
support the rapid growth in the loan portfolio that began in 1999. The
Corporation uses a risk-based assessment of its loan portfolio to determine the
level of the loan loss allowance. This procedure is based on internal reviews
intended to determine the adequacy of the loan loss allowance in view of
presently known factors. However, changes in economic conditions in the future
financial conditions of borrowers cannot be predicted and may result in
increased future provisions to the loan loss allowance.
12
<PAGE> 13
Non-interest income for the three months ended September 30, 2000 was $808,000
compared to $1.2 million for the three months ended September 30, 1999, a
decrease of $439,000, or 35.2%. Non-interest income for the nine months ended
September 30, 2000 was $2.4 million compared to $2.7 million for the nine months
ended September 30, 1999, a decrease of $172,000, or 10.1%. The decrease is
primarily due to the recognition of $566,000 gain on the sale and leaseback of
one of the Corporation's banking facilities that occurred on September 30, 1999.
Non-interest expense for the three months ended September 30, 2000 was $3.6
million compared to $3.3 million for the three months ended September 30, 1999,
an increase of $270,000, or 8.1%. Non-interest expense for the nine months ended
September 30, 2000 was $11.2 million compared to $10.7 million for the nine
months ended September 30, 1999, an increase of $454,000, or 4.2%. Salaries and
employee benefits increased $215,000 or 11.6% from $1.9 million for the
three-month period ended September 30, 1999 to $2.1 million for the 2000
three-month period. Salaries and employee benefits increased $329,000 or 5.3%
from $6.2 million for the nine-month period ended September 30, 1999 to $6.5
million for the nine-month period ended September 30, 2000. Premises and
equipment expense increased $78,000 from $541,000 for the three-month period
ended September 30, 1999 compared to $619,000 for the three-month period ended
September 30, 2000. Premises and equipment expense increased $181,000 or 11.0%
from $1.6 million for the nine-month period ended September 30, 1999 compared to
$1.8 million for the nine-month period ended September 30, 2000. The increase in
occupancy expense can be attributed to maintenance and repairs made on the
Corporation's properties and lease payments made on sold banking facility.
Federal deposit insurance premiums decreased $2,000 from $24,000 for the
three-month period ended September 30, 1999 to $22,000 for the three-month
period ending September 30, 2000 and also decreased $28,000 for the nine-month
period ended September 30, 1999 compared to 2000. The insurance premiums
decreased in 2000 due to the reduced assessment rate charged to savings
institutions. Other expenses increased $9,000 or 1.3% in the third quarter and
$17,000 or 0.8% for the nine-month period ended September 30, 2000. These
increases can be attributed to minimal changes in operating expenses such as
office supplies, examination costs and human resource expenses.
Income before taxes for the three-month period ended September 30, 2000 was
unchanged at $1.8 million from the three months ended September 30, 1999. Income
before taxes for the nine-month period ended September 30, 2000 was $4.9 million
compared to $4.2 million for the nine months ended September 30, 1999, an
increase of $697,000 or 16.4%. The income tax expense for the three months ended
September 30, 2000 decreased $18,000 over the 1999 third quarter tax expense.
The effective tax rate for the three months ended September 30, 2000 was 31.6%
compared to 32.7% for the three months ended September 30, 1999. The income tax
expense for the nine months ended September 30, 2000 increased $178,000 over the
same period in 1999. The effective tax rate for the nine months ended September
30, 2000 was 31.6% compared to 32.6% for the nine months ended September 30,
1999. The decrease in the tax rate can be attributed to the purchase of
tax-exempt investment securities held by the Corporation and a reallocation of
expenses throughout the Corporation's subsidiaries. On an after tax basis, the
Corporation reported net income of $1.3 million for the three month period ended
September 30, 2000 compared to $1.2 million for the same period in 1999; and for
the nine month period ended September 30, 2000, the Corporation reported net
income of $3.4 million compared to $2.9 million for the same period in 1999.
13
<PAGE> 14
Liquidity and Capital Resources
Liquidity management involves the ability to meet the cash flow requirements of
customers who may be either depositors wanting to withdraw funds or borrowers
needing assurance that sufficient funds will be available to meet their credit
needs. The Corporation had liquid assets of $14.9 million and $22.8 million at
September 30, 2000 and December 31, 1999, respectively. The decline in liquid
assets from December 31, 1999 to September 30, 2000 can be attributed to a
reduction in federal funds sold and interest-bearing deposits at other banks.
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 and $1.3 million for the
nine-months ended September 30, 2000 and 1999 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 $1.1
million and $874,000 for the nine-months ended September 30, 2000 and 1999,
respectively. At September 30, 2000, the parent company had a $20.0 million line
of credit available, with $3.4 million outstanding.
Management believes liquidity and capital levels are adequate at September 30,
2000. For a discussion of regulatory requirements, see Note F to the Unaudited
Consolidated Financial Statements.
Asset/Liability Management
Financial institutions are subject to interest rate risk to the extent their
interest-bearing liabilities (primarily deposits) mature or reprice at different
times and on a different basis than their interest-earning assets (consisting
primarily of loans and securities). Interest rate sensitivity management seeks
to match maturities on assets and liabilities and avoid fluctuating net interest
margins while enhancing net interest income during periods of changing interest
rates. The difference between the amount of interest-earning assets maturing or
repricing within a specific time period and the amount of interest-bearing
liabilities maturing or repricing within the same time period is referred to as
an interest rate gap. A gap is considered positive when the amount of interest
rate sensitive assets exceeds the amount of interest rate sensitive liabilities.
A gap is considered negative when the amount of interest rate sensitive
liabilities exceeds the amount of interest rate sensitive assets. During periods
of rising interest rates, a negative gap tends to adversely affect net interest
income while a positive gap tends to result in an increase in net interest
income. During a period of falling interest rates, a negative gap tends to
result in an increase in net interest income while a positive gap tends to
adversely affect net interest income.
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<PAGE> 15
The following table shows the interest rate sensitivity gap for four different
time intervals as of September 30, 2000. Certain assumptions regarding
prepayment and withdrawal rates are based upon the Corporation's historical
experience, and management believes such assumptions are reasonable.
<TABLE>
<CAPTION>
AMOUNTS MATURING OR REPRICING AS OF SEPTEMBER 30, 2000
---------------------------------------------------------------------------
WITHIN SIX TO TWELVE ONE TO FIVE OVER
SIX MONTHS MONTHS YEARS FIVE YEARS TOTAL
---------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Fixed-rate mortgage loans $29,936 $19,893 $125,523 $28,007 $203,359
Adjustable-rate mortgage loans 32,491 14,127 40,811 101 87,530
--------------------------------------------------------------------------
Total mortgage loans 62,427 34,020 166,334 28,108 290,889
Commercial business loans 52,513 5,980 41,692 2,408 102,593
Consumer loans 6,582 3,239 18,792 2,880 31,493
Other loans 870 0 0 0 870
Mortgage-related securities 8,522 8,601 268 14,360 31,751
Fixed rate investment securities and other 1,751 2,002 7,409 15,718 26,880
Variable rate investment securities and 4,954 2,986 0 0 7,940
other
--------------------------------------------------------------------------
Total interest-earning assets $137,619 $56,828 $234,495 $63,474 $492,416
==========================================================================
Interest-bearing liabilities:
Deposits
Time deposits $83,930 $55,242 $39,631 $0 $178,803
NOW accounts 2,044 2,044 20,444 9,540 34,072
Savings accounts 5,384 4,076 40,757 17,711 67,928
Money market accounts 23,682 2,408 24,078 11,236 61,404
Advance payments for taxes and insurance 1,545 0 0 0 1,545
Borrowings 65,149 4,400 3,300 0 72,849
--------------------------------------------------------------------------
Total interest-bearing liabilities $181,734 $68,170 $128,210 $38,487 $416,601
==========================================================================
Interest-earning assets less
interest-bearing
Liabilities ($44,115) ($11,342) $106,285 $24,987 $75,815
==========================================================================
Cumulative interest rate sensitivity gap ($44,115) ($55,457) $50,828 $75,815
============================================================
Cumulative interest rate sensitivity gap as a
Percentage of total assets (8.40%) (10.56%) 9.68% 14.44%
============================================================
</TABLE>
At September 30, 2000, the Corporation's cumulative interest-rate sensitive gap
as a percentage of total assets was a negative 8.4% for six months and a
negative 10.6% for one-year maturities. Therefore, the Corporation is negatively
gapped and may benefit from falling interest rates.
Certain shortcomings are inherent in the method of analysis presented in the
above schedule. For example, although certain assets and liabilities may have
similar maturities or periods of repricing, they may react in different degrees
to changes in market interest rates. Also, the interest rates on certain types
of assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag behind changes in market
rates. Additionally, certain assets, such as adjustable rate mortgage loans,
have features that restrict changes in interest rates, on a short-term basis
over the life of the asset. Further, in the event of a change in interest rates,
prepayment and early withdrawal levels would likely deviate significantly from
those assumed in calculating the schedule.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Corporation has not experienced any material changes to its market risk
position since December 31, 1999, from that disclosed in the Corporation's 1999
Form 10-K Annual Report.
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<PAGE> 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
As of September 30, 2000 there were no material pending legal
proceedings, other than ordinary routine litigation incidental to the
business of the Corporation, to which the Corporation or any of its
subsidiaries was a party or to which any of their property was subject.
Item 2. Changes in Securities - NONE
Item 3 Defaults upon Senior Securities - NONE
Item 4 Submission of Matters to Vote of Security Holders - NONE
Item 5 Other Information - NONE
Item 6 Exhibits and Reports on Form 8-K
The Corporation did not file any reports on Form 8-K during the three
months ended September 30, 2000. Required exhibits are incorporated by
reference to previously filed Securities Act registration statements.
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<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed by on its behalf by the
undersigned thereunto duly authorized.
MERCHANTS AND MANUFACTURERS
BANCORPORATION, INC.
-------------------------------------
(Registrant)
Date November 13, 2000 /s/ James F. Bomberg
------------------------------- --------------------------------
James F. Bomberg
President & Chief Executive Officer
Date November 13, 2000 /s/ James C. Mroczkowski
------------------------------- --------------------------------
James C. Mroczkowski
Executive Vice President & Chief
Financial Officer
Principal Financial Officer
17
