10-K405 1 c61291e10-k405.txt FORM 10-K 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, 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 ------- 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 incorporation or organization) 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, 2001, 2,542,387 shares of Common Stock were outstanding, and the aggregate market value of the shares (based upon the average bid/ask price) held by non-affiliates was approximately $49,561,000. 2 MERCHANTS AND MANUFACTURERS BANCORPORATION, INC. ***** ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2000
PART I Page ---- Item 1. Business 3 Item 2. Properties 6 Item 3. Legal Proceedings 7 Item 4. Submission of Matters to a Vote of Security Holders 7 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 20 Item 8. Financial Statements and Supplementary Data 21 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 21 PART III Item 10. Directors and Executive Officers of the Registrant 22 Item 11. Executive Compensation 22 Item 12. Security Ownership of Certain Beneficial Owners and Management 22 Item 13. Certain Relationships and Related Transactions 22 PART IV Item 14. Exhibits, Financial Statements Schedules and Reports on Form 8-K 22 SIGNATURES 23
2 3 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 the Corporation exchanging nine shares of its common stock for each outstanding share of Pyramid. The Corporation operates twenty banking facilities in Milwaukee, Ozaukee and Waukesha counties. In addition to its subsidiary banks (Lincoln State Bank, Lincoln Community Bank, Grafton State Bank and Franklin State Bank), the Corporation owns three non-bank subsidiaries, the Lincoln Neighborhood Redevelopment Corporation, which was organized for the purpose of redeveloping and rejuvenating certain areas located primarily on the near south side of Milwaukee, M&M Services, Inc., which was formed in 1994 to provide operational services to the Corporation's subsidiary banks and Merchants Merger Corp which was formed in 1999 to facilitate the acquisition of Pyramid. On December 31, 2000 the Corporation had an outstanding agreement to merge with and acquire CBOC, Inc. (CBOC) and its subsidiary bank Community Bank of Oconto County with the Corporation exchanging 5.746 shares of its common stock for each outstanding share of CBOC common stock. The transaction is to be accounted for as a pooling of interests. The merger became effective on January 16, 2001. The following financial statements have not been restated to reflect this transaction. At December 31, 2000 CBOC had total assets of $62,612 and stockholders equity of $5,714. CBOC's net income for 2000 was $528 and earnings per share were $6.00. 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; disintermediation; 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 As of December 31, 2000 the four 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 4 EMPLOYEES At December 31, 2000, the Corporation and its subsidiaries employed 173 full-time and 79 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, 2000, 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):
LINCOLN STATE BANK LINCOLN COMMUNITY BANK GRAFTON STATE BANK FRANKLIN STATE BANK ------------------------------ ---------------------- ----------------------------- ---------------------- ----------------------- Total assets $ 222,678 $ 112,963 $ 129,294 $ 70,970 Total loans 195,717 87,384 92,447 62,707 Total deposits 163,246 82,589 100,283 56,564 Stockholders' equity 18,739 9,127 10,145 5,666 Net income 2,905 1,115 1,422 567 Return on average assets 1.41% 1.00% 1.17% 0.88%
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. Its main office is located in the city of Milwaukee while it also 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, 2000, Lincoln State Bank comprised 41.4% of the consolidated assets of the Corporation. LINCOLN COMMUNITY BANK Lincoln Community Bank was organized as a state chartered mutual savings and loan association under the laws of the State of Wisconsin in 1910. It operates two full service branch offices in the city of Milwaukee. In April 1993, it converted from the mutual to stock form of organization, and all of the shares of stock issued by the converted association were acquired by the Corporation. In 1997 Lincoln Community Bank converted from a Wisconsin stock savings bank to a Wisconsin commercial bank. Its principal office and a branch office are located in Milwaukee, Wisconsin. At December 31, 2000, Lincoln Community Bank comprised 21.0% 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 and a branch office are located in Grafton, Wisconsin while it also operates another full service branch office in the Wisconsin community of Saukville. At December 31, 2000, Grafton State Bank comprised 24.0% of the consolidated assets of the Corporation. FRANKLIN STATE BANK Franklin State Bank was organized as a state banking association under the laws of the State of Wisconsin in 1982. Its principal office and a branch office are located in Franklin, Wisconsin. At December 31, 2000, Franklin State Bank comprised 13.2% 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, 2000, Lincoln Neighborhood Redevelopment Corporation had assets of $166,000, $61,000 in liabilities and equity of $105,000. 4 5 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. 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 thereof 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, Lincoln Community Bank, Grafton State Bank and Franklin State 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. 5 6 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 "GLB 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. The GLB Act makes significant changes in U.S. banking law, principally by repealing certain restrictive provisions of the 1933 Glass-Steagall Act. The GLB 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 GLB 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 least a "satisfactory" rating under the Community Reinvestment Act. In addition, the GLB Act permits certain non-banking financial and financially-related activities to be conducted by subsidiaries of national banks. The GLB 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 March 13, 2000, the Corporation received written declaration from the Board of Governors of the Federal Reserve System to become a financial holding company. At this time, no predictions can be made regarding the impact the GLB Act 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 Corporation leases approximately 18,000 square feet from the building's owner. The building was sold in 2000 to a group of investors and subsequently leased back to the Corporation. 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 is located in a 7,000 square foot building at 14000 West National Avenue, New Berlin, Wisconsin. 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. Lincoln State Bank owns all of its facilities except the New Berlin branch which it leases from the building's owner. In addition to its full-service branches, 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. The bank leases office space at each one of these locations. 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. 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. Grafton State Bank also leases space for two other branch offices in the cities of Grafton and Saukville, Wisconsin. 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. M&M Services, Inc. leases office space at the Forest Home Avenue location. 6 7 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 2000. 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, and Howe Barnes Investments, Incorporated, headquartered in Chicago, Illinois, act as the market makers 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." The following table sets forth the quarterly high and low bid prices for the period indicated.
Quotation or Price Quarter Ended Low Bid High Bid --------------------------- ---------------- ----------------- March 31, 1999 $ 38.00 $ 43.00 June 30, 1999 41.50 43.00 September 30, 1999 41.00 44.00 December 31, 1999 35.50 42.50 MARCH 31, 2000 $ 34.00 $ 38.50 JUNE 30, 2000 35.00 38.00 SEPTEMBER 30, 2000 28.38 34.50 DECEMBER 31, 2000 23.13 29.75
The approximate number of holders of record of the Corporation's common stock is 698 as of December 31, 2000. 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. Quarterly dividends for the years ended December 31, 2000 and 1999 are shown in Item 6 "Selected Financial Data." 7 8 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):
At or For the Year Ended December 31, ------------------------------------------------------------------- 2000 1999 1998(4) 1997(4) 1996(4) SELECTED BALANCE SHEET DATA Total assets $ 537,908 $ 474,383 $ 441,486 $ 391,685 $ 358,694 Loans receivable, net 434,056 363,435 312,761 281,058 241,515 Investment securities held to maturity 0 0 5,794 4,591 2,857 Investment securities available for sale 28,525 32,787 22,121 20,080 25,218 Mortgage-related securities held to maturity 0 0 1,165 2,078 2,417 Mortgage-related securities available for sale 33,087 33,342 38,672 40,078 32,956 Deposits 401,836 377,333 372,118 337,249 302,387 Borrowings 88,415 53,398 27,333 15,392 21,017 Stockholders' equity 42,776 40,426 39,437 36,772 32,691 Realized stockholders' equity(2) 43,090 41,823 39,447 36,723 32,881 SELECTED INCOME STATEMENT DATA Total interest income (taxable-equivalent)(1) $ 38,810 $ 32,118 $ 30,712 $ 27,947 $ 25,781 Total interest expense 19,405 13,999 14,117 12,495 11,600 ------------------------------------------------------------------- Net interest income 19,405 18,119 16,595 15,452 14,181 Provision for loan losses 1,203 956 314 227 605 ------------------------------------------------------------------- Net interest income after provision for loan losses 18,202 17,163 16,281 15,225 13,576 Net gain on security sales 2 9 219 78 70 Other noninterest income 4,029 3,482 3,088 2,429 2,300 ------------------------------------------------------------------- Total noninterest income 4,031 3,491 3,307 2,507 2,370 Merger-related expenses 170 510 0 0 0 Other noninterest expense 15,370 14,446 13,433 12,270 12,566 ------------------------------------------------------------------- Total noninterest expense 15,540 14,956 13,433 12,270 12,566 ------------------------------------------------------------------- Income before income taxes 6,693 5,698 6,155 5,462 3,380 Income taxes 2,070 1,905 2,042 1,955 1,090 Less taxable equivalent adjustment 383 390 263 127 142 ------------------------------------------------------------------- Net income $ 4,240 $ 3,403 $ 3,850 $ 3,380 $ 2,148 =================================================================== PER SHARE DATA(3) Net income - basic $ 2.03 $ 1.62 $ 1.86 $ 1.69 $ 1.07 Net income - diluted $ 2.01 $ 1.58 $ 1.80 $ 1.64 $ 1.05 Cash dividends declared $ 0.65 $ 0.57 $ 0.49 $ 0.38 $ 0.35 Book value $ 20.75 $ 19.16 $ 19.02 $ 17.90 $ 16.44 Average shares outstanding 2,093,393 2,106,579 2,071,214 2,004,809 2,001,160 OTHER DATA Net interest margin 4.06% 4.36% 4.29% 4.46% 4.36% Allowance for loan losses to non-accrual loans 256.19% 159.08% 200.13% 217.18% 168.50% Nonperforming assets to total assets 0.35% 0.50% 0.34% 0.38% 0.43% Stockholders' equity to total assets, 7.95% 8.52% 8.93% 9.39% 9.11% Average stockholders' equity to average assets 8.16% 8.76% 9.25% 9.17% 9.19% Return on assets (ratio of net income to average total assets) 0.84% 0.76% 0.93% 0.91% 0.61% Return on stockholders' equity (ratio of net income to average equity) 10.24% 8.73% 10.07% 9.91% 6.69% Dividend payout ratio 32.08% 35.06% 26.39% 22.66% 32.17% Facilities: Number of full-service offices 12 11 11 9 9 Number of limited services offices 8 8 8 6 6
(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 and the issuance of shares in connection with the merger of Pyramid Bancorp, Inc. in 1999, as if each occurred as of January 1, 1996. (4) Restated to reflect the December 31, 1999 acquisition of Pyramid Bancorp which was accounted for as a pooling-of-interests. 8 9 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):
2000 1999 ------------------------------------------------------------------------------------------------- 3/31 6/30 9/30 12/31 3/31 6/30 9/30 12/31 ------------------------------------------------------------------------------------------------- Interest income (taxable-equivalent) (1) $8,859 $9,541 $10,073 $10,337 $7,670 $7,853 $8,119 $8,476 Interest expense 4,092 4,694 5,210 5,409 3,434 3,421 3,457 3,687 ------------------------------------------------ --------------------------------------------- Net interest income 4,767 4,847 4,863 4,928 4,236 4,432 4,662 4,789 Provision for loan losses 166 178 131 728 68 68 660 160 Noninterest income 759 816 808 1,648 677 757 1,264 792 Noninterest expense 3,943 3,609 3,604 4,384 4,101 3,267 3,334 4,253 ------------------------------------------------ --------------------------------------------- Income before taxes 1,417 1,876 1,936 1,464 744 1,854 1,932 1,168 Income taxes 403 576 582 509 184 599 600 522 Less taxable equivalent adjustment 102 94 96 91 97 96 98 99 ================================================================================================= Net income $912 $1,206 $1,258 $864 $463 $1,159 $1,234 $547 ================================================================================================= Basic earnings per share $0.43 $0.57 $0.60 $0.43 $0.23 $0.55 $0.58 $0.26 ================================================================================================= Diluted earnings per share $0.42 $0.57 $0.60 $0.42 $0.22 $0.54 $0.57 $0.25 ================================================================================================= Dividends per share $0.15 $0.20 $0.15 $0.15 $0.14 $0.14 $0.14 $0.15 =================================================================================================
(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, 2000, 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 $19.4 million in 2000, compared with $18.1 million in 1999 and $16.6 million in 1998. This increase of $1.3 million in net interest income in 2000 was due primarily to an increase in the volume of earning assets in 2000 (a $5.2 million increase). This gain was partially offset by an increase in the volume of interest bearing liabilities (a $2.8 million increase) and the higher interest rates paid on deposits and borrowings (a $1.8 million increase). The total increase in average earning assets was primarily due to an increase in average loans of $70.5 million. All of the loan growth was internally generated. Interest bearing liabilities increased $56.4 million in 2000. 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 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):
At or for the Year Ended December 31, ---------------------------------------------------------------------------------------------------- 2000 1999 1998 -------------------------------- -------------------------------- ------------------------------- AVERAGE AVERAGE Average Average Average Average BALANCE INTEREST RATE Balance Interest Rate Balance Interest Rate ------- -------- ---- ------- -------- ---- ------- -------- ---- ASSETS Loans(1),(2) $406,542 $34,146 8.40% $336,079 $27,296 8.12% $295,157 $25,142 8.52% Loans exempt from federal income taxes(3) 450 53 11.78% 526 56 10.65% 600 71 11.83% Taxable investment securities 18,000 1,112 6.18% 16,140 1,019 6.31% 17,825 1,112 6.24% Mortgage-related securities 32,978 2,149 6.52% 36,688 2,083 5.68% 43,794 2,629 6.00% Investment securities exempt from federal income taxes(3) 15,020 1,074 7.15% 15,483 1,091 7.05% 9,542 703 7.37% Other securities 4,767 276 5.79% 11,074 573 5.17% 19,612 1,055 5.38% ---------------------- ---------------------- --------------------- Interest earning assets 477,757 38,810 8.12% 415,990 32,118 7.72% 386,530 30,712 7.95% Non interest earning assets 29,741 28,991 26,686 ----------- ----------- ---------- Average assets $507,498 $444,981 $413,216 =========== =========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY NOW deposits $33,405 684 2.05% $32,149 546 1.70% $31,464 740 2.35% Money market deposits 47,680 2,452 5.14% 31,698 1,159 3.66% 26,888 1,000 3.72% Savings deposits 70,411 1,521 2.16% 71,082 1,506 2.12% 70,889 1,641 2.31% Time deposits 176,073 9,686 5.50% 185,185 9,306 5.03% 176,039 9,778 5.55% Borrowings 76,087 5,062 6.65% 27,177 1,482 5.45% 17,165 958 5.58% ---------------------- ---------------------- --------------------- Interest bearing liabilities 403,656 19,405 4.81% 347,291 13,999 4.03% 322,445 14,117 4.38% --------- ----------- ----------- Demand deposits and other non interest bearing liabilities 62,454 57,701 52,544 Stockholders' equity 41,388 39,989 38,227 ----------- ----------- ---------- Average liabilities and stockholders' equity $507,498 $444,981 $413,216 =========== =========== ========== Net interest income/spread $19,405 3.31% $18,119 3.69% $16,595 3.57% =================== ===================== ====================== Net interest earning assets $74,101 $68,699 $64,085 =========== =========== ========== Net interest margin 4.06% 4.36% 4.29% ========== ========== =========== Ratio of average interest-earning assets to average interest-bearing liabilities 1.18 1.20 1.20 =========== =========== ==========
(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. The amount of taxable-equivalent adjustments were $383 for 2000, $390 for 1999 and $263 for 1998. 10 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):
For the Year Ended December 31, -------------------------------------------------------------------------------------------- 2000 VS. 1999 1999 vs. 1998 --------------------------------------------- --------------------------------------------- INCREASE/(DECREASE) Increase/(Decrease) DUE TO Due to ---------------------------------- TOTAL --------------------------------- Total VOLUME INCREASE Volume Increase VOLUME RATE & RATE (DECREASE) Volume Rate & Rate (Decrease) ------ ---- ------ ---------- ------ ---- ------ ---------- Interest-Earning Assets: Loans receivable(1) $5,723 $932 $195 $6,850 $3,486 ($1,170) ($162) $2,154 Loans exempt from federal income taxes(2) (8) 6 (1) (3) (9) (7) 1 (15) Taxable investment securities 118 (22) (3) 93 (105) 13 (1) (93) Mortgage-related securities (211) 308 (31) 66 (427) (143) 24 (546) Investment securities exempt from federal income taxes(2) (33) 16 0 (17) 438 (31) (19) 388 Other securities (326) 68 (39) (297) (460) (40) 18 (482) ------------------------------------------ --------------------------------------------- Total interest-earning assets $5,262 $1,185 $245 6,692 $2,923 ($1,378) ($139) 1,406 ===============================----------- =================================------------ Interest-Bearing Liabilities: NOW deposits $21 $112 $5 $138 $16 ($206) ($4) ($194) Money market deposits 584 471 238 1,293 179 (17) (3) 159 Savings deposits (14) 29 0 15 4 (139) 0 (135) Time deposits (458) 881 (43) 380 508 (932) (48) (472) Other borrowings 2,667 326 587 3,580 559 (22) (13) 524 ------------------------------------------ --------------------------------------------- Total interest-bearing liabilities $2,800 $1,819 $787 5,406 $1,266 ($1,316) ($68) (118) =================================--------- ===================================---------- Net change in net interest income $1,286 $1,524 ========= ==========
(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. The amount of taxable-equivalent adjustments were $383 for 2000, $390 for 1999 and $263 for 1998. PROVISION FOR LOAN LOSSES During 2000, the Corporation made a provision of $1.2 million to the allowance for loan losses, as compared to a provision of $956,000 in 1999 and $314,000 in 1998. The 2000 increase reflected the growth in the overall loan portfolio especially in higher risk categories of commercial and consumer (primarily automobile) loans and management's assessment of general economic conditions. Net loan charge-offs for 2000 decreased by $116,000, over 1999 to $276,000. This compares to charge-offs of $65,000 in 1998. 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 12 NON-INTEREST INCOME Non-interest income increased $540,000 in 2000 and $184,000 in 1998. The composition of non-interest income is shown in the following table (in thousands).
For the Year Ended December 31, 2000 1999 1998 ---------------------------------------------------- Service charges on deposit accounts $1,030 $1,009 $982 Service charges on loans 488 419 451 Net gain on securities sales 2 9 219 Net gain on loan sales 0 18 226 Net gain on sale of premises 1,053 633 0 Other 1,458 1,403 1,429 ---------------------------------------------------- Total noninterest income $4,031 $3,491 $3,307 ====================================================
Service charge income on deposit accounts increased $21,000 in 2000 and $27,000 in 1999. 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 increased $69,000 from $419,000 in 1999 to $488,000 in 2000. The 2000 increase is due directly to the increase in loans closed during the year. The decrease in loan fees from 1998 to 1999 can be attributed to the high volume of loan refinancing that occurred in 1998. The Corporation recorded a net gain of $2,000 on the sale of $998,000 of securities in 2000, $9,000 on the sale of $2.7 million of securities in 1999 and $219,000 on the sale of $27.8 million of securities in 1998. The proceeds from the sale of the investments were used to fund loan demand. The Corporation did not record any gains on the sale of loans in 2000, compared to $18,000 in 1999 and $226,000 in 1998. 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 2000 resulted in reduced opportunities to sell loans. In each of the years 2000 and 1999, the Corporation sold one of its banking facilities and subsequently leased it backed from the new owners. The 2000 transaction resulted in an immediate gain of $786,000 while the 1999 transaction resulted in an immediate gain of $537,000 at the time of the sale. The remaining portion of the gains will be recognized monthly over the terms of the leases. During 1999, $96,000 was accreted into income related to the 1999 transaction. During 2000, $267,000 was accreted into income related to the 1999 transaction No income has yet been accreted on the 2000 transaction. NON-INTEREST EXPENSE Non-interest expense increased $584,000 (3.9%) for the year ended December 31, 2000, and increased $1.5 million (11.3%) for the year ended December 31, 1999. The major components of non-interest expense are shown in the following table (in thousands).
For the Year Ended December 31, 2000 1999 1998 ---------------------------------------------------- Salaries and employee benefits $8,893 $8,406 $7,685 Premises and equipment 2,524 2,231 2,097 Data processing fees 873 921 915 Federal deposit insurance premiums 83 116 115 Merger-related expenses 170 510 0 Other 2,997 2,772 2,621 ---------------------------------------------------- Total noninterest expense $15,540 $14,956 $13,433 ====================================================
Salaries and employee benefits increased $487,000 in 2000, reflecting additional staff hires particularly in the loan generation and loan services area, higher benefit costs, changes in personnel and normal pay raises. Salaries and employee benefits increased $721,000 in 1999. Besides normal pay increases and staff additions in 1999 the Corporation expensed $290,000 associated with employee bonuses that were paid in the year 2000 based on 1999 performance. The 1999 increase also reflected the higher cost of employee benefits, particularly medical insurance which increased $131,000. Premises and equipment expense increased $293,000 in 2000 and $134,000 in 1999. The lease payments associated with the facilities sold in 2000 and 1999 and maintenance of the Corporation's facilities contributed to the increase. Data processing fees decreased $48,000 in 2000 and increased $6,000 in 1999. The decrease in 2000 was due the negotiating a new contract with the Corporation's data processing service provider. 12 13 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 2000 the premiums paid by the Corporation amounted to $83,000 compared to $116,000 in 1999 and $115,000 in 1998. The decrease in the 2000 insurance premium was due to the reduced charge levied against financial institutions paying into the Savings Association Insurance Fund. In 2000, the Corporation expensed $170,000 of costs associated the pending acquisition of CBOC, Inc. 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 $225,000 in 2000 compared to 1999. Other expenses increased $151,000 in 1999. The increases are the result of changes in operating expenses such as consulting fees, examination costs, accounting fees, and employee training. 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 assets held 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 $2.1 million in 2000, $1.9 million in 1999 and $2.0 million in 1998. The corresponding effective tax rate for the same years were 32.8%, 35.9% and 34.7%. The increased effective tax rate in 1999 is the result of merger related expenses of $510,000 which were not tax deductible. NET INCOME For the years ended December 31, 2000, 1999 and 1998, the Corporation posted net income of $4.2 million, $3.4 million and $3.9 million, respectively. The 2000 and 1999 earnings were effected by one-time merger-related expenses associated with the pending acquisition of CBOC, Inc and the completed acquisition of Pyramid Bancorp offset by the gain on sales of premises in those years. LOANS RECEIVABLE Net loans receivable increased $70.6 million, or 19.4%, from $363.4 million at December 31, 1999, to $434.1 million at December 31, 2000. Loans receivable consist mainly of commercial loans secured by business assets, real estate and guarantees and mortgages secured by residential properties located in the Corporation's primary market area. The following table shows the composition of the Corporation's loan portfolio on the dates indicated (in thousands):
At December 31, 2000 1999 1998 1997 1996 -------------------------------------------------------------------------------------- First Mortgage: Conventional single-family residential $90,244 $70,836 $61,685 $72,538 $73,829 Commercial and multifamily residential 160,482 145,241 127,034 93,673 75,420 Construction and land 47,039 32,618 20,194 22,246 16,635 Farmland 307 296 326 139 252 -------------------------------------------------------------------------------------- 298,072 248,991 209,239 188,596 166,136 Commercial business loans 105,367 88,332 80,238 71,262 57,764 Consumer and installment loans 28,766 19,729 16,250 14,624 13,493 Lease financing 1,606 2,017 2,599 2,311 599 Home equity loans 4,457 6,960 6,576 6,013 5,325 Other 321 1,031 930 1,086 838 -------------------------------------------------------------------------------------- 140,517 118,069 106,593 95,296 78,019 Less: Deferred loan fees 24 43 53 65 30 Allowance for loan losses 4,509 3,582 3,018 2,769 2,610 -------------------------------------------------------------------------------------- $434,056 $363,435 $312,761 $281,058 $241,515 ======================================================================================
13 14 The following table presents information as of December 31, 2000 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. (dollars in thousands)
AFTER ONE BUT WITHIN FIVE WITHIN ONE YEAR YEARS AFTER FIVE YEARS TOTAL ---------------------------------------------------------------------- COMMERCIAL BUSINESS LOANS $55,518 $46,153 $ 3,696 $ 105,367 FIRST MORTGAGE LOANS 69,140 142,302 86,630 298,072 ---------------------------------------------------------------------- $124,658 $188,455 $90,326 $403,439 ====================================================================== LOANS MATURING AFTER ONE YEAR WITH: FIXED INTEREST RATES $177,529 $35,739 VARIABLE INTEREST RATES 10,926 54,587 ---------------------------------- $188,455 $90,326 ==================================
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 $3.6 million at December 31, 1999, to $4.5 million at December 31, 1999. This increase was primarily due to the growth in loan portfolio and the general uncertainty regarding economic conditions, and to a lesser extent the increase in non-performing loans and charge-offs recorded in 2000 and 1999. The ratio of the allowance for loan losses to total loans was 1.04% for 2000 and 0.99% in 1999. 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):
At or for the Year Ended At December 31, 2000 1999 1998 1997 1996 -------------------------------------------------------------------------------------- Balance at beginning of year $3,582 $3,018 $2,769 $2,610 $2,191 Charge-offs: Conventional single-family mortgage Residential 89 25 0 0 70 Commercial business loans 107 290 42 25 141 Consumer and installment loans 92 94 41 50 10 -------------------------------------------------------------------------------------- Total charge-offs 288 409 83 75 221 Recoveries (12) (17) (18) (7) (35) -------------------------------------------------------------------------------------- Net charge-offs 276 392 65 68 186 Provisions charged to operations 1,203 956 314 227 605 -------------------------------------------------------------------------------------- Balance at end of year $4,509 $3,582 $3,018 $2,769 $2,610 ====================================================================================== Ratios: Net charge-offs to average loans outstanding 0.07% 0.12% 0.02% 0.03% 0.08% Net charge-offs to total allowance 6.12% 10.97% 2.15% 2.46% 7.13% Allowance to year end gross loans outstanding 1.04% 0.98% 0.96% 0.98% 1.07%
14 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 2000, $42,000 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 2000 the Corporation recorded $56,000 of interest income on non-accrual loans. The following table summarizes non-performing assets on the dates indicated (dollars in thousands):
At December 31, 2000 1999 1998 1997 1996 -------------------------------------------------------------------------------------- Nonaccrual loans $ 1,760 $ 2,251 $ 1,508 $ 1,275 $ 1,549 Other real estate owned 117 107 0 228 0 -------------------------------------------------------------------------------------- Total non-performing assets $ 1,877 $ 2,358 $ 1,508 $ 1,275 $ 1,549 ====================================================================================== Ratios: Non-accrual loans to total loans 0.40% 0.61% 0.48% 0.45% 0.63% Allowance to non-accrual loans 256.19% 159.08% 200.13% 217.18% 168.50% Non-performing assets to total assets 0.35% 0.50% 0.34% 0.38% 0.43%
INVESTMENT AND MORTGAGE RELATED SECURITIES The investment portfolio is intended to provide the Corporation with adequate liquidity, flexibility in asset/liability management and lastly its earning potential. Investment securities at December 31, 2000 were $61.6 million compared to $66.1 million on December 31, 1999. The balance of investment securities decreased primarily as a result of the additional funding needed to support the loan portfolio growth. 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 equity, net of tax. See notes one and two to Consolidated Financial Statements for further details. 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):
At December 31, 2000 1999 1998 --------------------------------------------------- Mutual funds $3,044 $3,038 $3,059 U.S. Treasury and other government agency securities 8,331 11,687 7,765 Small Business Administration certificates 393 444 628 State and political subdivision securities 16,707 17,618 10,668 Corporate bonds 50 -- -- Collateralized mortgage obligations 12,458 9,264 8,401 Government agency mortgage-backed securities 20,629 24,078 30,272 --------------------------------------------------- $61,612 $66,129 $60,793 ===================================================
15 16 The following table sets forth the Corporation's amortized cost of investment securities held-to-maturity at the dates indicated (in thousands):
At December 31, 2000 1999 1998 --------------------------------------------------- State and political subdivision securities $ 0 $ 0 $ 5,794 Government agency mortgage-backed securities 0 0 1,165 --------------------------------------------------- $0 $0 $ 6,959 ===================================================
The maturity distribution (based upon the average life), and weighted average yield of the securities portfolio of the Corporation as of December 31, 2000 are summarized in the following table (dollars in thousands):
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 ---------------------------------------------------------------------------------------------- MUTUAL FUNDS $3,173 6.53% $ -- -- % $ -- -- % $ -- -- % U.S. TREASURY AND OTHER GOVERNMENT AGENCY SECURITIES 2,873 5.21 4,513 5.75 1,008 6.47 -- -- SMALL BUSINESS ADMINISTRATION CERTIFICATES --- -- 113 7.69 82 11.37 184 8.61 STATE AND POLITICAL SUBDIVISION CERTIFICATES 15 5.60 2,342 5.12 10,435 4.81 4,151 4.45 CORPORATE BONDS 50 6.33 -- -- -- -- -- -- COLLATERALIZED MORTGAGE OBLIGATIONS 978 6.63 9,325 6.67 1,950 6.41 200 6.44 GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES 292 6.49 9,115 6.30 8,125 6.46 3,182 6.34 --------------------------------------------------------------------------------------------- $7,381 6.66% $ 25,408 6.23% $21,600 5.68% $7,717 5.38% ============================================================================================
Weighted average yield is calculated by dividing income within each maturity range by the outstanding amount of the related investment based on amortized costs. 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. Deposits increased $24.5 million to $401.8 million on December 31, 2000, from $377.3 million on December 31, 1999. This compares to a $5.2 million increase in 1999. 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):
At December 31, 2000 1999 1998 ------------------------------------------------------------------------------------ AVERAGE AVERAGE Average Average Average Average AMOUNT RATE Amount Rate Amount Rate ------------------------------------------------------------------------------------ Non-interest-bearing demand deposits $ 60,004 0.00% $ 55,933 0.00% $ 50,518 0.00% NOW and money market deposits 81,085 3.87 63,847 2.67 58,352 2.98 Savings deposits 70,411 2.16 71,082 2.12 70,889 2.31 Time deposits 176,073 5.50 185,185 5.03 176,039 5.55 ------------------------------------------------------------------------------------ $ 387,573 3.70% $ 376,047 3.33% $ 355,798 3.69% ====================================================================================
Maturities of time deposits and certificate accounts with balances of $100,000 or more, outstanding at December 31, 2000, are summarized as follows (in thousands): 3 MONTHS OR LESS $21,008 OVER 3 THROUGH 6 MONTHS 5,014 OVER 6 THROUGH 12 MONTHS 9,217 OVER 12 MONTHS 2,705 ------------- TOTAL $37,944 =============
16 17 SHORT-TERM BORROWINGS Although deposits are the Corporation's primary source of funds, the Corporation's policy has been to utilize short-term borrowings as an alternative for less costly source of funds. The Corporation utilizes short-term borrowings as a part of its asset/liability management strategy. Borrowings are secured when management believes it can profitably re-invest those funds for the benefit of the Corporation. A significant component of the Corporation's short-term borrowings are federal funds purchased and advances from the Federal Home Loan Bank (FHLB) of Chicago. The FHLB advances are collateralized by the capital stock of the FHLB-Chicago held by the Corporation and certain mortgage loans and mortgage related securities. Such advances are made pursuant to several different credit programs, each of which has its own interest rate and range of maturities. The following table shows outstanding amounts of short-term borrowings together with the weighted average interest rates, at December 31, for each of the past three years (dollars in thousands).
At December 31, 2000 1999 1998 ------------------------------------------------------------------------------------ BALANCE RATE Balance Rate Balance Rate ------------------------------------------------------------------------------------ Federal Funds purchased $ 33,450 6.92% $ 7,450 5.74% $ 9,500 5.24% Federal Home Loan Bank borrowings 39,400 6.80 31,700 5.84 5,900 5.20 ------------------------------------------------------------------------------------ $ 72,850 6.86% $ 39,150 5.82% $15,400 5.22% ====================================================================================
The following table shows the maximum amounts outstanding of short-term borrowings, together with the weighted average interest rates, at December 31, for each of the past three years (dollars in thousands).
At December 31, 2000 1999 1998 --------------------------------------------------- Federal Funds purchased $ 33,450 $7,450 $9,500 Federal Home Loan Bank borrowings 43,400 31,700 5,900 --------------------------------------------------- $76,850 $39,150 $15,400 ===================================================
The following table shows for the periods indicated the daily average amount outstanding for the categories of short-term borrowings, the interest paid and the weighted average rates (dollars in thousands).
At December 31, 2000 1999 1998 ------------------------------------------------------------------------------------ BALANCE RATE Balance Rate Balance Rate ------------------------------------------------------------------------------------ Federal Funds purchased $ 24,519 6.77% $ 6,172 5.44% $ 1,919 5.74% Federal Home Loan Bank borrowings 38,302 6.62 7,573 5.82 3,189 5.55 ------------------------------------------------------------------------------------ $ 62,821 6.68% $13,745 5.65% $ 5,108 5.62% ====================================================================================
CAPITAL RESOURCES AND ADEQUACY Stockholders' equity increased from $40.4 million at December 31, 1999 to $42.8 million at December 31, 2000. The $4.2 million increase from net income and the $1.1 million decrease in the unrealized loss on securities available-for-sale was offset by the payment of $1.4 million in cash dividends to shareholders and the net purchase of treasury shares of $1.5 million. 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 stockholders' 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, 2000, the Corporation had a core-capital to total assets ratio of 7.95%, and Lincoln State Bank, Franklin State Bank, Grafton State Bank and Lincoln Community Bank had risk-based capital ratios of 9.50%, 9.09%, 10.99% and 10.27%, respectively. These ratios are above the 2000 minimum requirements established by regulatory agencies. For a summary of the Banks' regulatory capital ratios at December 31, 2000, please see Note Seven to the Consolidated Financial Statements. 17 18 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):
Year Ended December 31, 2000 1999 1998 ---------------------------------------------------- Cash and cash equivalents at beginning of period $22,791 $40,562 $26,050 Operating Activities: Net income 4,240 3,403 3,850 Adjustments to reconcile net income to net cash provided by operating activities (584) (427) 552 ---------------------------------------------------- Net cash provided by operating activities 3,856 3,656 5,020 Net cash used by investing activities (64,439) (51,765) (36,180) Net cash provided by financing activities 56,593 30,338 45,672 ---------------------------------------------------- Increase (decrease) in cash and cash equivalents (3,990) (17,771) 14,512 ---------------------------------------------------- Cash and cash equivalents at end of period $18,801 $22,791 $40,562 ====================================================
Net cash was provided by operating activities during the years ended December 31, 2000, 1999 and 1998 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 $2.2 million, $1.7 million and $4.8 million for the years ended December 31, 2000, 1999 and 1998 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 $1.4 million, $1.2 million and $1.0 million for the years ended December 31, 2000, 1999 and 1998, respectively. At December 31, 2000, the parent company had two $10.0 million lines of credit with unaffiliated banks, with an outstanding balance of $2.7 million. 18 19 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, 2000. Assumptions regarding prepayment and withdrawal rates are based upon the Corporation's historical experience, and management believes such assumptions are reasonable.
AMOUNT MATURING OR REPRICING --------------------------------------------------------------------------- WITHIN SIX TO TWELVE ONE TO FIVE OVER SIX MONTHS MONTHS YEARS FIVE YEARS TOTAL -------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) INTEREST-EARNING ASSETS: FIXED-RATE MORTGAGE LOANS $28,948 $17,957 $129,004 $30,890 $206,799 ADJUSTABLE-RATE MORTGAGE LOANS 28,628 13,169 39,278 121 81,196 -------------------------------------------------------------------------- TOTAL MORTGAGE LOANS 57,576 31,126 168,282 31,011 287,995 COMMERCIAL BUSINESS LOANS 52,871 8,616 46,815 3,740 112,042 CONSUMER LOANS 7,464 3,239 18,691 2,619 32,013 LEASE FINANCING 0 0 1,606 0 1,606 HOME EQUITY LOANS 4,356 6 97 0 4,459 TAX-EXEMPT LOANS 450 0 0 0 450 MORTGAGE-RELATED SECURITIES 15,957 974 9,370 6,786 33,087 FIXED RATE INVESTMENT SECURITIES AND OTHER 3,476 3,492 3,777 14,293 25,038 VARIABLE RATE INVESTMENT SECURITIES AND OTHER 5,511 3,022 25 25 8,583 -------------------------------------------------------------------------- TOTAL INTEREST-EARNING ASSETS $147,661 $50,475 $248,663 $58,474 $505,273 ========================================================================== INTEREST-BEARING LIABILITIES: DEPOSITS TIME DEPOSITS $76,187 $50,588 $45,916 $0 $172,691 NOW ACCOUNTS 1,767 1,767 17,669 8,245 29,448 SAVINGS ACCOUNTS 3,895 4,598 38,947 17,471 64,911 MONEY MARKET ACCOUNTS 26,261 2,293 22,929 10,840 62,323 ADVANCE PAYMENTS FOR TAXES AND INSURANCE 0 346 0 0 346 BORROWINGS 77,715 6,400 4,300 0 88,415 -------------------------------------------------------------------------- TOTAL INTEREST-BEARING LIABILITIES $185,825 $65,992 $129,761 $36,556 $418,134 ========================================================================== INTEREST-EARNING ASSETS LESS INTEREST-BEARING LIABILITIES ($38,164) ($15,517) $118,902 $21,918 $87,139 ========================================================================== CUMULATIVE INTEREST RATE SENSITIVITY GAP ($38,164) ($53,681) $65,221 $87,139 ============================================================ CUMULATIVE INTEREST RATE SENSITIVITY GAP AS A PERCENTAGE OF TOTAL ASSETS (7.09%) (9.98%) 12.12% 16.20% ============================================================
At December 31, 2000, the Corporation's cumulative ratio of interest-rate sensitive assets to interest-rate sensitive liabilities was a negative 7.1% for six months and a negative 10.0% for one year maturities. Therefore the Corporation is negatively gapped and may benefit from falling interest rates. 19 20 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. 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. 20 21 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, 2000.
ESTIMATED 2001 PRETAX NET INTEREST INCOME PERCENT CHANGE IN NET CHANGE IN INTEREST RATES (DOLLARS IN THOUSANDS) ACTUAL CHANGE INTEREST INCOME ------------------------------ --------------------------- -------------------------- ------------------------- 200 BASIS POINT RISE $19,049 $(1,152) (5.70%) 150 BASIS POINT RISE 19,351 (850) (4.21%) 100 BASIS POINT RISE 19,622 (579) (2.87%) 50 BASIS POINT RISE 19,919 (282) (1.40%) BASE SCENARIO 20,201 0 0.00% 50 BASIS POINT DECLINE 20,491 290 1.44% 100 BASIS POINT DECLINE 20,787 586 2.90% 150 BASIS POINT DECLINE 21,088 887 4.39% 200 BASIS POINT DECLINE 21,380 1,179 5.84%
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 and the change in spread between key market rates. 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, 2000. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated statements of financial condition of the Corporation and its subsidiaries as of December 31, 2000 and 1999 and the related consolidated statements of income, stockholders' equity and cash flows for each of the years in period ended December 31, 2000, 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. 21 22 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 Condition as of December 31, 2000 and 1999 Consolidated Statements of Income for the years ended December 31, 2000, 1999, and 1998 Consolidated Statements of Stockholders' Equity for the years ended December 31, 2000, 1999, and 1998 Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998 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 2000. The Corporation filed on a report Form 8-K on January 29, 2001 and Amendment No. 1 thereto on March 28, 2001 in regards to its acquisition of CBOC., Inc. 22 23 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, 2001 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.
PRINCIPAL EXECUTIVE OFFICERS /s/ James F. Bomberg President & Chief Executive Officer March 29, 2001 ------------------------------------ James F. Bomberg /s/ James C. Mroczkowski Vice President & Chief Financial Officer March 29, 2001 ------------------------------------ James C. Mroczkowski DIRECTORS /s/ Michael J. Murry Chairman of the Board of Directors March 29, 2001 ------------------------------------ Michael J. Murry /s/ James F. Bomberg Director March 29, 2001 ------------------------------------ James F. Bomberg /s/ Thomas F. Gapinski Director March 29, 2001 ------------------------------------ Thomas F. Gapinski /s/ Nicholas S. Logarakis Director March 29, 2001 ------------------------------------ Nicholas S. Logarakis /s/ Conrad C. Kaminski Director March 29, 2001 ------------------------------------ Conrad C. Kaminski /s/ David A. Kaczynski Director March 29, 2001 ------------------------------------ David A. Kaczynski /s/ Keith C. Winters Director March 29, 2001 ------------------------------------ Keith C. Winters /s/ Duane P. Cherek Director March 29, 2001 ------------------------------------ Duane P. Cherek Director March 29, 2001 ------------------------------------ James A. Sass
23 24 /s/ Thomas J. Sheehan Director March 29, 2001 ------------------------------------ Thomas Sheehan /s/ Jerome T. Sarnowski Director March 29, 2001 ------------------------------------ Jerome Sarnowski /s/ James F. Kacmarcik Director March 29, 2001 ------------------------------------ James Kacmarcik Director March 29, 2001 ------------------------------------ Gervase Rose /s/ J. Michael Bartels Director March 29, 2001 ------------------------------------ J. Michael Bartels /s/ Casimir S. Janiszewski Director March 29, 2001 ------------------------------------ Casimir S. Janiszewski
24 25 Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries Consolidated Financial Statements Years ended December 31, 2000 and 1999 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
26 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, 2000 and 1999, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2000. 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, 2000 and 1999, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States. /s/Ernst & Young LLP -------------------- Ernst & Young LLP Milwaukee, Wisconsin March 2, 2001 27 Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries Consolidated Statements of Financial Condition
DECEMBER 31 2000 1999 ------------------------------- (Dollars In Thousands) ASSETS Cash and due from banks $ 16,727 $ 15,674 Interest-bearing deposits at other banks 996 4,907 Federal funds sold 1,078 2,210 --------------------------- Cash and cash equivalents 18,801 22,791 Securities available-for-sale at fair value: Investment securities 28,525 32,787 Mortgage-related securities 33,087 33,342 Loans receivable, net 434,056 363,435 Accrued interest receivable 3,209 2,426 Federal Home Loan Bank stock 3,002 2,511 Premises and equipment 8,283 9,613 Other assets 8,945 7,478 --------------------------- Total assets $ 537,908 $ 474,383 =========================== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Deposits $ 401,836 $ 377,333 Borrowings 88,415 53,398 Accrued interest payable 1,016 777 Advance payments by borrowers for taxes and insurance 346 300 Other liabilities 3,519 2,149 --------------------------- Total liabilities 495,132 433,957 Stockholders' equity: Common stock $1.00 par value; 6,000,000 shares authorized; shares issued: 2,127,888--2000 and 1999; shares outstanding: 2,061,316--2000; 2,109,773--1999 2,128 2,128 Additional paid-in capital 13,857 13,945 Net unrealized loss on securities available-for-sale (314) (1,397) Retained earnings 29,314 26,434 Treasury stock, at cost (66,572 shares--2000; 18,115 shares--1999) (2,209) (684) --------------------------- Total stockholders' equity 42,776 40,426 --------------------------- Total liabilities and stockholders' equity $ 537,908 $ 474,383 ===========================
See accompanying notes. 2 28 Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries Consolidated Statements of Income
YEAR ENDED DECEMBER 31 2000 1999 1998 ---------------------------------------------- (In Thousands, Except Per Share Amounts) Interest income: Loans, including fees $ 34,181 $ 27,333 $ 25,189 Investment securities: Taxable 1,112 1,019 1,112 Exempt from federal income taxes 709 720 464 Mortgage-related securities 2,149 2,083 2,629 Other 276 573 1,055 -------------------------------------------- Total interest income 38,427 31,728 30,449 Interest expense: Deposits 14,343 12,517 13,159 Borrowings 5,062 1,482 958 -------------------------------------------- Total interest expense 19,405 13,999 14,117 -------------------------------------------- Net interest income 19,022 17,729 16,332 Provision for loan losses 1,203 956 314 -------------------------------------------- Net interest income after provision for loan 17,819 16,773 16,018 losses Noninterest income: Service charges on deposits 1,030 1,009 982 Service charges on loans 488 419 451 Net gain on securities sales 2 9 219 Net gain on loan sales - 18 226 Net gain on sale of premises 1,053 633 - Other 1,458 1,403 1,429 -------------------------------------------- Total noninterest income 4,031 3,491 3,307 Noninterest expenses: Salaries and employee benefits 8,893 8,406 7,685 Premises and equipment 2,524 2,231 2,097 Data processing fees 873 921 915 Federal deposit insurance premiums 83 116 115 Merger-related expenses 170 510 - Other 2,997 2,772 2,621 -------------------------------------------- Total noninterest expenses 15,540 14,956 13,433 -------------------------------------------- Income before income taxes 6,310 5,308 5,892 Income taxes 2,070 1,905 2,042 -------------------------------------------- Net income $ 4,240 $ 3,403 $ 3,850 ============================================ Basic earnings per share $ 2.03 $ 1.62 $ 1.86 ============================================ Diluted earnings per share $ 2.01 $ 1.58 $ 1.80 ============================================ Dividends per share $ 0.65 $ 0.57 $ 0.49 ============================================
See accompanying notes. 3 29 Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries Consolidated Statements of Stockholders' Equity
Common Stock Unrealized and Gain (Loss) Additional on Securities Paid-in Available- Retained Treasury Capital for-Sale Earnings Stock Total ---------------------------------------------------------- (Dollars In Thousands) Balance at December 31, 1997 $15,315 $ 77 $21,389 $ (9) $36,772 Comprehensive income: Net income - - 3,850 - 3,850 Other comprehensive income - Change in unrealized loss on securities available-for- sale, net of deferred income taxes - (87) - - (87) ------- Total comprehensive income 3,763 Issuance of new shares 349 - - (12) 337 Fractional shares issued due to stock split and (10) - - - (10) stock dividend Sale of common stock in connection with dividend reinvestment program 132 - - - 132 Sale of treasury stock 6 - - 104 110 Purchase of treasury stock - - - (845) (845) Cash dividends declared - - (1,016) - (1,016) 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 loss on securities available-for- sale, net of deferred income taxes - (1,387) - - (1,387) ------- Total comprehensive income 2,016 Sale of common stock in connection with dividend reinvestment program 4 - - 67 71 Purchase of treasury stock - - - (181) (181) Cash dividends declared - - (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 Comprehensive income: Net income - - 4,240 - 4,240 Other comprehensive income - Change in unrealized loss on securities available-for- sale, net of deferred income taxes - 1,083 - - 1,083 ------- Total comprehensive income 5,323 Sale of common stock in connection with dividend reinvestment program (3) - - 65 62 Purchase of treasury stock - - - (1,715) (1,715) Cash dividends declared - - (1,360) - (1,360) Exercise of Stock Options (85) - - 125 40 ------------------------------------------------------ Balance at December 31, 2000 $15,985 $ (314) $29,314 $(2,209) $42,776 ======================================================
See accompanying notes. 4 30 Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries Consolidated Statements of Cash Flows
YEAR ENDED DECEMBER 31 2000 1999 1998 -------------------------------------- (In Thousands) OPERATING ACTIVITIES Net income $ 4,240 $ 3,403 $ 3,850 Adjustments to reconcile net income to cash provided by operating activities: Provision for loan losses 1,203 956 314 Provision for depreciation 842 872 803 Net amortization of investment securities premiums and discounts 50 164 153 Net realized gains on investment securities (2) (9) (219) Proceeds from sale of loans 200 680 680 Net (gain) on sale of loans - (18) (226) Net (gain) on sale of premises (1,053) (633) - Net decrease in mortgage loans held for sale - - 152 Increase in accrued interest receivable (783) (131) (137) Increase (decrease) in accrued interest payable 239 (138) 131 Other (1,080) (1,490) (419) ------------------------------------ Net cash provided by operating activities 3,856 3,656 5,020 INVESTING ACTIVITIES Purchases of securities available-for-sale (6,696) (17,995) (46,311) Proceeds from sales of securities available-for-sale 998 2,704 27,791 Proceeds from redemption and maturities of securities available-for-sale 11,798 14,637 16,896 Net increase in loans (72,921) (52,293) (32,511) Purchases of premises and equipment (1,609) (634) (2,038) Proceeds from sale of premises 3,595 2,839 - Proceeds from sales of real estate 887 - - Purchases of Federal Home Loan Bank stock (491) (1,023) (7) ------------------------------------ Net cash used in investing activities (64,439) (51,765) (36,180)
5 31 Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries Consolidated Statements of Cash Flows (continued)
YEAR ENDED DECEMBER 31 2000 1999 1998 -------------------------------------- (In Thousands) FINANCING ACTIVITIES Net increase in deposits $24,503 $ 5,215 $34,955 Net increase (decrease) in short-term borrowings 33,917 (25,065) 7,191 Increase (decrease) in advance payments by borrowers for taxes and insurance 46 87 (127) Payments of cash dividends to stockholders (1,360) (1,192) (1,016) Proceeds from long-term Federal Home Loan Bank advances 1,500 5,500 5,000 Repayment of long-term Federal Home Loan Bank advances (400) (4,500) (250) Purchase of treasury stock (1,715) (181) (845) Proceeds from sale of treasury stock 125 131 110 Proceeds from issuance of common stock (23) 213 654 --------------------------------- Net cash provided by financing activities 56,593 30,338 45,672 --------------------------------- Increase (decrease) in cash and cash equivalents (3,990) (17,771) 14,512 Cash and cash equivalents at beginning of year 22,791 40,562 26,050 --------------------------------- Cash and cash equivalents at end of year $18,801 $ 22,791 $40,562 ================================= Supplemental cash flow information and noncash transactions: Interest paid $19,160 $ 13,378 $10,566 Income taxes paid 2,153 2,004 1,273 Loans transferred to other real estate owned 897 107 -
See accompanying notes. 6 32 Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2000 (Dollars in Thousands, Except Share Amounts) 1. ACCOUNTING POLICIES BUSINESS Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries (the Corporation) provides a full range of personal and commercial financial services to customers through its subsidiaries. The Corporation and its subsidiaries are subject to competition from other financial institutions. They are also subject to the regulations of certain federal and state agencies and undergo periodic examinations by those regulatory agencies. BASIS OF FINANCIAL STATEMENT PRESENTATION The consolidated financial statements have been prepared in accordance with generally accepted accounting principles and include the accounts of the Corporation, its wholly owned subsidiaries, Lincoln State Bank (Lincoln), Franklin State Bank (Franklin), Lincoln Community Bank (Lincoln Community) and Grafton State Bank (Grafton)--collectively, "the Banks," M&M Services, which provides management 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 an investment portfolio for the Banks. All significant intercompany accounts and transactions have been eliminated. In preparing the consolidated financial statements in conformity with accounting principles generally accepted in the United States, 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 non-interest-bearing) and federal funds sold. 7 33 Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (Dollars in Thousands, Except Share Amounts) 1. ACCOUNTING POLICIES (CONTINUED) INVESTMENT AND MORTGAGE-RELATED SECURITIES All of the Corporation's investment and mortgage-related securities are classified as available-for-sale and are stated at fair value, with the unrealized gains and losses, net of tax, reported as a separate component of stockholders' equity. The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity, or in the case of mortgage-related securities, over the estimated life of the security. Such amortization is included in interest income from the related security. Interest and dividends are included in interest income from the related securities. Realized gains and losses and declines in value judged to be other-than-temporary are included in net securities gains (losses). The cost of securities sold is based on the specific identification method. INTEREST AND FEES ON LOANS Interest on loans is recorded as income when earned. Loans are placed on nonaccrual 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 34 Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (Dollars in Thousands, Except Share Amounts) 1. ACCOUNTING POLICIES (CONTINUED) The Corporation had no impaired loans in 2000, 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. 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 2,093,393, 2,106,579 and 2,071,214, for the years ended December 31, 2000, 1999 and 1998, respectively. The number of shares used in computing diluted earnings per share is 2,110,036, 2,153,310 and 2,134,012, for the years ended December 31, 2000, 1999 and 1998, respectively. RECLASSIFICATION Certain 1998 and 1999 amounts have been reclassified to conform to the 2000 presentation. 9 35 Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (Dollars in Thousands, Except Share Amounts) 1. ACCOUNTING POLICIES (CONTINUED) ACCOUNTING CHANGES Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended, provides a comprehensive and consistent standard for the recognition of derivatives and hedging activities. SFAS 133 requires all derivatives to be recorded on the balance sheet at fair value. However, special accounting is provided for certain derivatives that meet the definition of hedges. Changes in the fair value of derivatives that do not meet the definition of hedges are required to be reported in earnings in the period of change. The Company and Banks do not use derivative financial instruments such as futures, swaps, caps, floors, options or interest or principal-only strips of similar instruments. Therefore, SFAS No. 133 is not expected to have a significant impact on the Company. The Company will implement this statement on January 1, 2001. In September 2000, the Financial Accounting Standards Board (FASB) issued Statement 140, "Accounting for Transfers and Servicing Financial Assets and Extinguishments of Liabilities - a replacement of FASB Statement 125." Statement 140 revised Statement 125 by requiring separate presentation in the statement of financial condition of assets pledged as collateral. Statement 140 further revises and clarifies rules regarding recognition and measurement for security transactions. The rules for recognition and measurement of security transactions are not effective until April 1, 2001. In contrast, separate presentation of assets pledged as collateral in the statement of financial condition and additional disclosures were effective for the Company's fiscal year ended December 31, 2000. Management does not anticipate the full adoption of this statement to have a material effect on the Company's financial statements. Additionally, SFAS No. 140, requires changes in accounting principles for mortgage banking activities, such as those of the Company. Because mortgage servicing assets of the Company are not significant, this statement is not expected to noticeably impact the Company. 10 36 Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (Dollars in Thousands, Except Share Amounts) 2. INVESTMENT AND MORTGAGE-BACKED SECURITIES The following is a summary of securities:
Gross Gross Amortized Unrealized Unrealized Cost Gains Losses Fair Value ------------------------------------------------------ At December 31, 2000: Mutual funds $ 3,173 $ - $ 129 $ 3,044 U.S. treasury and other U.S. government agency securities 8,394 - 63 8,331 Small Business Administration certificates 379 14 - 393 State and political subdivision securities 16,943 71 307 16,707 Corporate bonds 50 - - 50 ---------------------------------------------------- Investment securities 28,939 85 499 28,525 Collateralized mortgage obligations 12,453 108 103 12,458 Government agency mortgage-backed securities 20,714 128 213 20,629 ---------------------------------------------------- Mortgage-related securities 33,167 236 316 33,087 ---------------------------------------------------- $ 62,106 $321 $815 $61,612 ==================================================== Gross Gross Amortized Unrealized Unrealized Cost Gains Losses Fair Value ----------------------------------------------------- At December 31, 1999: Mutual funds $ 3,173 $ - $ 135 $ 3,038 U.S. treasury and other U.S. government agency securities 12,078 - 391 11,687 Small Business Administration certificates 430 14 - 444 State and political subdivision securities 18,557 34 973 17,618 --------------------------------------------------- Investment securities 34,238 48 1,499 32,787 Collateralized mortgage obligations 9,481 5 222 9,264 Government agency mortgage-backed securities 24,536 69 527 24,078 --------------------------------------------------- Mortgage-related securities 34,017 74 749 33,342 =================================================== $ 68,255 $ 122 $2,248 $ 66,129 ===================================================
11 37 Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (Dollars in Thousands, Except Share Amounts) 2. INVESTMENT AND MORTGAGE-BACKED SECURITIES (CONTINUED) Securities with a fair value of $21,769 at December 31, 2000 were pledged principally to secure borrowings. The amortized cost and market value of securities at December 31, 2000, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations.
Amortized Fair Cost Value --------------------------------- Due in one year or less $ 2,892 $ 2,886 Due after one year through five years 6,129 6,065 Due after five years through ten years 9,331 9,411 Due after ten years 7,414 7,119 Mutual funds 3,173 3,044 Collateralized mortgage obligations 12,453 12,458 Government agency mortgage-related securities 20,714 20,629 ----------------------------- $ 62,106 $ 61,612 =============================
Proceeds from sales of securities available-for-sale during the years ended December 31, 2000, 1999 and 1998, were $998, $2,704 and $27,791, respectively. Gross gains of $8, $9 and $219 were recorded on those sales for the years ended December 31, 2000, 1999 and 1998, respectively. Gross losses of $6, $0 and $0 were also recorded in the years ended December 31, 2000, 1999 and 1998, respectively. 12 38 Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (Dollars in Thousands, Except Share Amounts) 3. LOANS RECEIVABLE Loans receivable consist of the following:
DECEMBER 31 2000 1999 ---------------------------- First mortgage: Conventional single-family residential $ 90,244 $ 70,836 Commercial and multifamily residential 160,482 145,241 Construction 47,039 32,618 Farmland 307 296 -------------------------- 298,072 248,991 Commercial business loans 105,367 88,332 Consumer and installment loans 28,766 19,729 Lease financing 1,606 2,017 Home equity loans 4,457 6,960 Other 321 1,031 -------------------------- 140,517 118,069 Less: Deferred loan fees (24) (43) Allowance for loan losses (4,509) (3,582) -------------------------- $ 434,056 $ 363,435 ==========================
Transactions in the allowance for loan losses are summarized as follows:
YEAR ENDED DECEMBER 31 2000 1999 1998 ------------------------------- Balance at beginning of year $ 3,582 $ 3,018 $ 2,769 Provisions charged to operations 1,203 956 314 Recoveries 12 17 18 Charge-offs (288) (409) (83) ----------------------------- Balance at end of year $ 4,509 $ 3,582 $ 3,018 =============================
Total nonaccrual loans were $1,760 and $2,252 at December 31, 2000 and 1999, respectively. At December 31, 2000, loans with an outstanding balance of $82,199 were pledged to secure borrowings from the Federal Home Loan Bank. 13 39 Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (Dollars in Thousands, Except Share Amounts) 4. PREMISES AND EQUIPMENT Premises and equipment consist of the following:
DECEMBER 31 2000 1999 -------------------------- Land $ 1,880 $ 2,183 Office buildings and improvements 8,140 9,571 Furniture and equipment 7,287 7,008 ----------------------- 17,307 18,762 Less accumulated depreciation (9,024) (9,149) ----------------------- $ 8,283 $ 9,613 =======================
During the years ended December 31, 2000 and 1999, the Corporation sold certain land and buildings and, subsequently, leased a portion of the buildings back from the new owners. The total gains on the sales were $1,498 and $1,103, of which $786 and $633 was recognized in income, respectively, during the year of the transaction. The remaining gain is being accreted into income over the remaining lease term. 5. DEPOSITS Deposits consist of the following:
DECEMBER 31 2000 1999 -------------------------- Negotiable Order of Withdrawal accounts: Non-interest-bearing $ 72,457 $ 67,646 Interest-bearing 29,448 31,335 Savings deposits 64,911 65,755 Money market investment accounts 62,323 33,431 Time deposits and certificate accounts 172,697 179,166 ----------------------- $401,836 $377,333 =======================
14 40 Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (Dollars in Thousands, Except Share Amounts) 5. DEPOSITS (CONTINUED) The scheduled maturities of time deposits and certificate accounts at December 31, 2000 are as follows:
Maturities during the year ending December 31: ----------------------------------------------------------- 2001 $146,771 2002 19,605 2003 2,653 2004 2,407 Thereafter 1,261 -------- $172,697 ======== At December 31, 2000 and 1999, time deposits and certificate accounts with balances greater than $100 amounted to $37,944 and $33,604, respectively. 6. BORROWINGS Borrowings, with interest rates as of December 31, 2000, consists of the following at December 31: 2000 1999 ------------ ------------ Federal funds purchased, 6.92% $33,450 $ 7,450 Notes payable to FHLB, maturing 2010, 5.87% 500 - Notes payable to FHLB, maturing 2008, 4.92% 4,500 4,500 Notes payable to FHLB, maturing 2003, 6.08% 400 400 Notes payable to FHLB, maturing 2002, 6.51% 2,900 1,900 Notes payable to FHLB, maturing 2001, 6.77% 36,400 400 Notes payable to FHLB, maturing 2000 - 31,700 Line of credit with FHLB, 6.24% 3,000 - Repurchase agreements with four counterparties, 5.74%, due January 2001 3,975 6,054 Line of credit with unaffiliated banks, 8.35% 2,712 300 Treasury, tax and loan accounts with the Federal Home Loan bank of Chicago 578 694 ----------------------- $88,415 $ 53,398 =======================
15 41 Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (Dollars in Thousands, Except Share Amounts) 6. BORROWINGS (CONTINUED) FHLB borrowings are collateralized by securities with a fair value of $16,308 and loans receivable with an outstanding balance of $82,199. Repurchase agreements are collateralized by $5,461 of securities. 7. STOCKHOLDERS' EQUITY The Banks are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory--and possibly additional discretionary--actions by regulators that, if undertaken, could have a direct material effect on the Banks' financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Banks must meet specific capital guidelines that involve quantitative measures of the Banks' assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Banks' capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Banks to maintain minimum amounts and ratios (set forth in the table that follows) of total and Tier I capital, as defined in the regulations, to risk-weighted assets, as defined, and of Tier 1 capital, as defined, to average assets, as defined. Management believes, as of December 31, 2000 and 1999, that the Banks meet all capital adequacy requirements to which they are subject. 16 42 Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (Dollars in Thousands, Except Share Amounts) 7. STOCKHOLDERS' EQUITY (CONTINUED) As of December 31, 2000, 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. To be categorized as well capitalized, the Banks must maintain minimum total risk-based, Tier I risk-based, Tier I leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the Banks' classifications as of December 31, 2000.
To Be Well Capitalized For Capital Under Prompt Corrective Actual Adequacy Purposes Action Provisions ---------------------------------------------------------------------------- Amount Ratio Amount Ratio Amount Ratio ---------------------------------------------------------------------------- AS OF DECEMBER 31, 2000 Total Capital (to Risk- Weighted Assets): Lincoln State Bank $20,978 10.55% $15,907 >8.00% $19,884 >10.00% Lincoln Community Bank 10,023 11.24% 7,136 >8.00% 8,920 >10.00% Franklin State Bank 6,386 10.18% 5,018 >8.00% 6,273 >10.00% Grafton State Bank 10,984 11.93% 7,367 >8.00% 9,208 >10.00% Tier 1 Capital (to Risk- Weighted Assets): Lincoln State Bank 18,882 9.50% 7,953 >4.00% 11,930 >6.00% Lincoln Community Bank 9,161 10.27% 3,568 >4.00% 5,352 >6.00% Franklin State Bank 5,700 9.09% 2,509 >4.00% 3,764 >6.00% Grafton State Bank 10,119 10.99% 3,683 >4.00% 5,525 >6.00% Tier 1 Capital (to Average Assets): Lincoln State Bank 18,882 8.63% 8,751 >4.00% 10,939 >5.00% Lincoln Community Bank 9,161 8.15% 4,497 >4.00% 5,622 >5.00% Franklin State Bank 5,700 8.32% 2,742 >4.00% 3,427 >5.00% Grafton State Bank 10,119 7.98% 5,069 >4.00% 6,337 >5.00%
17 43 Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (Dollars in Thousands, Except Share Amounts) 7. STOCKHOLDERS' EQUITY (CONTINUED)
To Be Well Capitalized For Capital Under Prompt Corrective Actual Adequacy Purposes Action Provisions ---------------------------------------------------------------------------- Amount Ratio Amount Ratio Amount Ratio ---------------------------------------------------------------------------- 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%
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, 2000, the subsidiary banks collectively had equity of $43,678 of which $6,009 was available for distribution to the Corporation as dividends without prior regulatory approval. 18 44 Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (Dollars in Thousands, Except Share Amounts) 8. RESTRICTIONS ON SUBSIDIARY DIVIDENDS, LOANS OR ADVANCES (CONTINUED) 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, 2000, the maximum amount available for transfer from any one of these Banks to the Corporation in the form of loans approximates 10.28% of consolidated stockholders' equity. 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:
Weighted-Average Weighted-Average Exercise Exercise Price Remaining Number Price Per Share Contractual Life of Shares Per Share -------------- --------------------- ------------------ ------------------- Total outstanding at December 31, 1998 110,735 $6.67 - 31.14 $18.48 5.0 years Exercised (39,170) 6.67 - 31.14 6.97 - ---------- Total outstanding at December 31, 1999 71,565 6.67 - 31.14 25.56 6.42 Exercised (3,300) 12.18 12.18 - ---------- Total outstanding at December 31, 2000 68,265 12.12 - 31.14 25.11 6.04 ==========
At December 31, 2000, all outstanding options are exercisable. 19 45 Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (Dollars in Thousands, Except Share Amounts) 9. EMPLOYEE BENEFIT PLANS (CONTINUED) The Corporation has a 401(k) Profit Sharing Plan and Trust which covers substantially all employees with at least six months of service who have attained age twenty and one-half. Participating employees may annually contribute up to 12% of their pretax 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 2000, 1999 and 1998, were $241, $234 and $216, respectively. 10. COMPREHENSIVE INCOME The related income tax effect and reclassification adjustments to the components of other comprehensive income for the years ended December 31, 2000, 1999 and 1998, is as follows:
2000 1999 1998 ------------------------------------------- Unrealized holding gains (losses) arising during the period $1,632 $(2,086) $ 75 Related tax (expense) benefit (547) 705 (17) ---------------------------------------- Net 1,085 (1,381) 58 Less reclassification adjustment for net gains realized during the period 2 9 219 Related tax expense - (3) (74) ---------------------------------------- Net 2 6 145 ---------------------------------------- Total other comprehensive income $1,083 $(1,387) $ (87) ========================================
20 46 Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (Dollars in Thousands, Except Share Amounts) 11. INCOME TAXES The provision for income taxes consists of the following:
YEAR ENDED DECEMBER 31 2000 1999 1998 -------------------------------------------- Current: Federal $2,555 $2,269 $1,865 State 441 424 359 ----------------------------------------- 2,996 2,693 2,224 ----------------------------------------- Deferred (benefit): Federal (680) (649) (120) State (246) (139) (62) ----------------------------------------- (926) (788) (182) ----------------------------------------- $2,070 $1,905 $2,042 =========================================
The provision for income taxes differs from that computed at the federal statutory corporate tax rate as follows:
YEAR ENDED DECEMBER 31 2000 1999 1998 ------------------------------------- Income tax at statutory rate $2,145 $2,223 $2,003 Increase (reduction) resulting from: Tax-exempt interest income (224) (265) (164) State income taxes, net of federal tax benefit 129 124 195 Other 20 (177) 8 --------------------------------- $2,070 $1,905 $2,042 =================================
21 47 Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (Dollars in Thousands, Except Share Amounts) 11. INCOME TAXES (CONTINUED) The components of deferred tax assets and liabilities are as follows:
DECEMBER 31 2000 1999 ---------------------- Deferred tax assets: Allowance for loan losses $ 1,508 $ 975 Unrealized loss on securities 180 727 Net operating loss carryforwards 773 657 Deferred Compensation 150 336 Other assets 429 229 -------------------- Total deferred tax assets 3,040 2,924 Valuation allowance (952) (1,121) -------------------- 2,088 1,803 Deferred tax liabilities: Depreciation 49 130 Other liabilities 22 35 -------------------- Total deferred tax liabilities 71 165 -------------------- Net deferred tax asset $ 2,017 $ 1,638 ====================
At December 31, 2000, the Corporation and its subsidiaries, which file separate state income tax returns, have state net operating loss carryforwards of approximately $14,821 which expire at various dates through 2014. Due to the uncertainty of realizing these benefits, a valuation allowance 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, 2000, 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. 22 48 Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (Dollars in Thousands, Except Share Amounts) 12. 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: Balance at December 31, 1998 $23,732 Loans originated 6,472 Repayments (4,119) ------- Balance at December 31, 1999 26,085 Loans originated 10,958 Repayments (7,259) ------- Balance at December 31, 2000 $29,784 =======
13. COMMITMENTS AND CONTINGENT LIABILITIES Off-balance-sheet financial instruments whose contracts represent credit and/or interest rate risk at December 31, 2000 and 1999, are as follows:
DECEMBER 31 2000 1999 ---------------------------- Commitments to originate mortgage loans (expiring within three months): Fixed rates (8.13% to 10.00% - 2000; 7.50% to 9.00% - 1999) $ 125 $ 147 Adjustable rates 372 222 Construction loan commitments 22,890 21,697 Unused lines of credit: Commercial business 44,160 34,441 Home equity (adjustable rate) 4,504 4,339 Credit cards (fixed rate) 5,939 4,808 Standby letters of credit 6,948 4,065
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. 23 49 Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (Dollars in Thousands, Except Share Amounts) 13. 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 noncancelable leases for certain branch facilities. The following is a schedule of future minimum rental payments required under the noncancelable lease agreements:
Year Amount ----------- ------------ 2001 $ 690 2002 397 2003 5 ------ Total $1,092 ======
14. FAIR VALUES OF FINANCIAL INSTRUMENTS 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 follows. 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. Certain financial instruments and all nonfinancial instruments are excluded from this disclosure. 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. 24 50 Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (Dollars in Thousands, Except Share Amounts) 14. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED) The following methods and assumptions were used by the Corporation in estimating its fair value disclosures for financial instruments: CASH AND CASH EQUIVALENTS The carrying amounts for cash and cash equivalents approximate those assets' fair values. INVESTMENT AND MORTGAGE-RELATED SECURITIES Fair values for investment and mortgage-related securities are based on quoted market prices where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. 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. ACCRUED INTEREST INCOME AND EXPENSE The fair value of accrued interest income and expense approximates the respective book value. 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 non-interest-bearing checking accounts, negotiable order of withdrawal accounts, passbook accounts and savings deposits and money market 25 51 Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (Dollars in Thousands, Except Share Amounts) 14. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED) investment accounts are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). The carrying amounts for variable-rate, fixed term certificate accounts approximate their fair values at the reporting date. The fair values of fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits. BORROWINGS The fair values of the Corporation's borrowings are estimated using discounted cash flow analyses based on the Corporation's current incremental borrowing rates for similar types of borrowing arrangements. 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, 2000 or 1999. The carrying amounts and fair values of the Corporation's financial instruments consist of the following:
DECEMBER 31, 2000 DECEMBER 31, 1999 --------------------------- --------------------------- Carrying Carrying Amount Fair Value Amount Fair Value --------------------------- --------------------------- Cash and cash equivalents $ 18,801 $ 18,801 $ 22,791 $ 22,791 Securities available-for-sale: Investment securities 28,525 28,525 32,787 32,787 Mortgage-related securities 33,087 33,087 33,342 33,342 Loans receivable 434,056 433,813 363,435 365,206 Accrued interest receivable 3,065 3,065 2,426 2,426 Federal Home Loan Bank stock 3,002 3,002 2,511 2,511 Deposits 401,836 402,259 377,333 377,039 Accrued interest payable 872 872 777 777 Borrowings 88,415 88,194 53,398 53,337
26 52 Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (Dollars in Thousands, Except Share Amounts) 15. SUBSEQUENT EVENT On December 31, 2000, the Company had an outstanding agreement to merge with CBOC, Inc. (CBOC). The transaction is to be accounted for as a pooling of interests. The merger became effective on January 16, 2001. At December 31, 2000, CBOC had total assets of $62,612 and stockholder's equity of $5,714. CBOC's net income for 2000 was $528 and earnings per share was $6.60. 16. MERCHANTS AND MANUFACTURERS BANCORPORATION, INC. AND SUBSIDIARIES PARENT COMPANY ONLY FINANCIAL INFORMATION
DECEMBER 31 STATEMENTS OF FINANCIAL CONDITION 2000 1999 --------------------------- ASSETS Cash and cash equivalents $ 346 $ 736 Loans receivable 311 406 Investment in subsidiaries 44,521 38,340 Premises and equipment 352 1,473 Other assets 1,492 1,148 ------------------------- Total assets $ 47,022 $ 42,103 ========================= LIABILITIES Other liabilities $ 1,534 $ 1,677 Borrowings 2,712 - ------------------------- Total liabilities 4,246 1,677 STOCKHOLDERS' EQUITY Common stock 2,128 2,128 Additional paid-in capital 13,857 13,945 Unrealized gain (loss) on available for sale securities (314) (1,397) Retained earnings 29,314 26,434 Treasury stock (2,209) (684) ------------------------- Total stockholders' equity 42,776 40,426 ------------------------- Total liabilities and stockholders' equity $ 47,022 $ 42,103 =========================
27 53 Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (Dollars in Thousands, Except Share Amounts) 16. MERCHANTS AND MANUFACTURERS BANCORPORATION, INC. AND SUBSIDIARIES PARENT COMPANY ONLY FINANCIAL INFORMATION (CONTINUED)
YEAR ENDED DECEMBER 31 2000 1999 1998 -------------------------------- STATEMENTS OF INCOME Income: Interest on loans, including fees $ 28 $ 30 $ - Dividends from subsidiaries 2,227 1,708 4,783 Other 1,954 1,733 1,227 ------------------------------ 4,209 3,471 6,010 Expenses: Salaries and employee benefits 2,696 2,004 1,511 Occupancy 771 564 476 Interest 220 65 12 Other 882 1,089 517 ------------------------------ 4,569 3,722 2,516 ------------------------------ Income (loss) before income tax benefit and equity in undistributed net income of subsidiaries (360) (251) 3,494 Income tax benefit 831 534 448 ------------------------------ Income before equity in undistributed net income of subsidiaries 471 283 3,942 Equity in undistributed net income of subsidiaries 3,769 3,120 (92) ------------------------------ Net income $ 4,240 $ 3,403 $ 3,850 ==============================
28 54 Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (Dollars in Thousands, Except Share Amounts) 16. MERCHANTS AND MANUFACTURERS BANCORPORATION, INC. AND SUBSIDIARIES PARENT COMPANY ONLY FINANCIAL INFORMATION (CONTINUED)
YEAR ENDED DECEMBER 31 2000 1999 1998 ------------------------------------- CONDENSED STATEMENTS OF CASH FLOWS OPERATING ACTIVITIES Net income $ 4,240 $ 3,403 $ 3,850 Adjustments to reconcile net income to net cash provided (used) by operating activities: Equity in undistributed net income of subsidiaries (3,769) (3,120) 92 Provision for depreciation 94 143 153 Gain on sale of premises (153) Other (1,954) 676 17 ------------------------------- Net cash provided (used) by operating activities (1,542) 1,102 4,112 INVESTING ACTIVITIES Net change in loans 95 (406) - Proceeds from sales of premises 1,610 1,349 - Purchases of equipment (292) (50) (79) ------------------------------- Net cash provided (used) by investing activities 1,413 893 (79) FINANCING ACTIVITIES Net increase (decrease) in notes payable 2,712 (260) 260 Capital contribution to subsidiary - (3,250) Payment of cash dividends (1,360) (1,192) (1,016) Purchase of treasury stock (1,715) (181) (845) Proceeds from the sale of treasury stock 125 131 110 Proceeds from issuance of common stock (23) 213 526 ------------------------------- Net cash used by financing activities (261) (1,289) (4,215) ------------------------------- Increase (decrease) in cash and cash equivalents (390) 706 (182) Cash and cash equivalents at beginning of year 736 30 212 ------------------------------- Cash and cash equivalents at end of year $ 346 $ 736 $ 30 ===============================
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