-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AJVv5Qng6OwZ0Bx3Qsnpdsu17YzD1JAydqcnnIl7Vdpc1JEZh/mugziSHt/iB/Ha e8ln33f772yRqJrzHjLm6A== 0000950137-97-001277.txt : 19970401 0000950137-97-001277.hdr.sgml : 19970401 ACCESSION NUMBER: 0000950137-97-001277 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MERCHANTS & MANUFACTURERS BANCORPORATION INC CENTRAL INDEX KEY: 0000753682 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 391413328 STATE OF INCORPORATION: WI FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-21292 FILM NUMBER: 97568811 BUSINESS ADDRESS: STREET 1: 573 W LINCOLN AVE CITY: MILWAUKEE STATE: WI ZIP: 53207 BUSINESS PHONE: 4146492073 MAIL ADDRESS: STREET 1: 573 W LINCOLN AVE CITY: MILWAUKEE STATE: WI ZIP: 53207 10-K 1 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 [Fee Required] Special report which contains only financial statements pursuant to Exchange Act Rule 15(d)-2 For the fiscal year ended December 31, 1996 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [Fee required] 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 incorporation (I.R.S. Employer Identification Number) or organization)
573 West Lincoln Avenue Milwaukee, Wisconsin 53207 -------------------------- (Address of principal executive office) Registrant's telephone number, including area code: (414) 649-2073 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 [ ] As of March 1, 1997, 860,582 shares of Common Stock were outstanding, and the aggregate market value of the shares (based upon the closing price) held by non affiliates was approximately $21,503,000. 2 MERCHANTS AND MANUFACTURERS BANCORPORATION, INC. ***** ANNUAL REPORT ON FORM 10-K FOR FISCAL YEAR ENDED DECEMBER 31, 1996 PART I Page Item 1. Business 3 Item 2. Properties 5 Item 3. Legal Proceedings 5 Item 4. Submission of Matters to a Vote of Security Holders 6 PART II Item 5. Market for Registrant's Common Equity and Related Stockholders Matters 6 Item 6. Selected Financial Data 7 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 Item 8. Financial Statements and Supplementary Data 18 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 18 PART III Item 10. Directors and Executive Officers of the Registrant 18 Item 11. Executive Compensation 18 Item 12 Security Ownership of Certain Beneficial Owners and Management 18 Item 13. Certain Relationships and Related Transactions 18 PART IV Item 14. Exhibits, Financial Statements Schedules and Reports on Form 8-K 18 SIGNATURES 19 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, and a savings bank holding company under the Home Owners' Loan Act of 1933, 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 in a business combination accounted for as a pooling-of-interests. Lincoln Savings Bank, S.A. converted from a mutual to stock form of organization and simultaneously merged with the Corporation. In connection with the conversion, the Corporation sold 330,625 shares of its common stock in a subscription and community offering. Gross proceeds from the stock sale amounted to $6,612,500. The net proceeds, after conversion costs, were used to inject additional capital into Lincoln Savings Bank, to repay short-term borrowings of the Corporation and for general working-capital purposes. Lincoln State Bank and Franklin State Bank are commercial banks chartered under the Wisconsin Banking Statutes; Lincoln Savings Bank, S.A. is a Wisconsin chartered savings bank. The Corporation operates ten banking facilities in Milwaukee and Waukesha counties. In addition to its subsidiary banks (Lincoln State Bank, Franklin State Bank and Lincoln Savings Bank, S.A.), the Corporation owns two 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, and M&M Services, Inc., which was formed in 1994 to provide operational services to the Corporation's subsidiary banks. PRODUCTS AND SERVICES Through the banking subsidiaries, the Corporation provides a broad range of services to individual and commercial customers. These services include accepting demand, savings, and time deposits, including regular checking accounts, NOW accounts, money market accounts, certificates of deposit, individual retirement accounts, and club accounts. The subsidiary banks also make secured and unsecured commercial, mortgage, construction, and consumer term loans on both a fixed and variable rate basis. Historically, the terms on these loans range from one month to five years and are retained in the Bank's portfolios. The subsidiary banks also provide lines of credit to commercial borrowers and to individuals through home equity loans. COMPETITION The subsidiary banks primarily serve the southern half of Milwaukee County and the southeastern portion of Waukesha County, including suburbs located to the south and west of the City of Milwaukee. There are presently in excess of one hundred other financial institutions in the primary service area that directly compete with Lincoln State Bank, Franklin State Bank and Lincoln Savings Bank, S.A. In addition to competing with other commercial banks, the subsidiaries compete with savings and loan associations, credit unions, 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. EMPLOYEES At December 31, 1996, the Corporation and the subsidiary banks employed 138 full-time and 56 part-time employees. The Corporation provides a wide range of benefits to employees, including educational activities, and considers its employee relations to be excellent. The Corporation conducts extensive training programs in order to enhance job-related knowledge and skills of its people and to train its employees with a sales-orientated approach to customers. Eligible employees participate in a 401k plan as well as group life and major medical insurance programs. THE BANKS AND OTHER SUBSIDIARIES At or for the year ended December 31, 1996, 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 SAVINGS BANK FRANKLIN STATE BANK Total assets $130,015 $102,712 $33,563 Total loans 97,829 67,054 24,932 Total deposits 115,653 88,902 30,923 Stockholders' equity 10,666 10,119 2,452 Net income 1,463 604 347 Return on average assets 1.19% 0.58% 1.06%
3 4 LINCOLN STATE BANK Lincoln State Bank was organized as a state banking association under the laws of the State of Wisconsin in 1919. It operates full service branch offices in the southeastern Wisconsin communities of Muskego, New Berlin, Brookfield and Pewaukee. In addition it operates six limited hours facilities in Milwaukee County. It is engaged in the general commercial and consumer banking business and provides full-service banking to individuals and businesses, including checking and savings accounts, commercial loans, consumer loans, real estate loans, safe deposit facilities, transmitting of funds, and such other banking services as are usual and customary for commercial banks. At December 31, 1996, Lincoln State Bank comprised 48.6% 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 office is located in Franklin, Wisconsin. It is engaged in the general commercial and consumer banking business and provides full-service banking to individuals and businesses, including checking and savings accounts, commercial loans, consumer loans, real estate loans, safe deposit facilities, transmitting of funds, and such other banking services as are usual and customary for commercial banks. At December 31, 1996, Franklin State Bank comprised 12.5% of the consolidated assets of the Corporation. LINCOLN SAVINGS BANK Lincoln Savings Bank was organized as a state chartered mutual savings and loan association under the laws of the State of Wisconsin in 1910. 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 (See Business of the Corporation - General and Recent Acquisition). Its principal office is presently located in Milwaukee, Wisconsin. It also operates a branch office in Milwaukee, Wisconsin. Lincoln Savings Bank's principal business consists of attracting deposits from the general public, and investing such funds in securities, including mortgage-backed securities, and mortgage loans, principally to finance the purchase or construction of residential dwellings and, to a lesser extent, to finance the purchase or construction of multi-family properties. Lincoln Savings Bank also originates consumer loans and commercial loans. At December 31, 1996, Lincoln Savings Bank comprised 38.4% of the consolidated assets of the Corporation. LINCOLN NEIGHBORHOOD REDEVELOPMENT CORPORATION The Lincoln Neighborhood 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, 1996, Lincoln Neighborhood Redevelopment Corporation had assets of $539,000, liabilities of $463,000 and equity of $76,000. M&M SERVICES, INC. M&M Services was formed in January of 1994 and is a wholly owned subsidiary of the Corporation. The company 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. Prior to 1994 these services were provided by employees of Merchants and Manufacturers Bancorporation. OTHER SUBSIDIARIES Lincoln State Bank and Lincoln Savings 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 Savings 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 Savings Bank in exchange for 100% of the stock of the subsidiary. SUPERVISION AND REGULATION The operations of financial institutions, including bank 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. 4 5 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. The Act prohibits acquisition of shares of any bank located outside the state in which the operations of the Corporation's banking subsidiaries are principally conducted, unless specifically authorized by statute of the other state. Since 1987, Wisconsin law has permitted interstate bank acquisitions within those states in a nine-state region which have adopted similar legislation. Laws reciprocal to the Wisconsin law have been enacted by Illinois, Indiana, Iowa, Kentucky, Michigan, Minnesota and Ohio. A Wisconsin-based holding company, such as the Corporation, may also acquire banks in certain other states which expressly permit nationwide acquisitions, with no requirement for reciprocal legislation. The Act also prohibits, with certain exceptions for savings associations and other entities engaged in bank related activities, acquisition of more than five percent of the voting shares of any company (directly or through its subsidiaries) 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. As a state chartered, SAIF-insured savings institution, Lincoln Savings Bank is subject to extensive supervision and regulation by the Federal Deposit Insurance Corporation (FDIC) and the Wisconsin Department of Financial Institutions, Division of Savings Institutions. The lending activities and other investments of Lincoln Savings Bank, S.A. must comply with certain federal and state regulatory requirements. In addition, the FDIC and the Wisconsin Department of Financial Institutions periodically examine Lincoln Savings Bank, S.A. for compliance with various regulatory requirements, and the savings bank must file reports describing its activities and financial condition. Lincoln Savings Bank, S.A. is also subject to certain reserve requirements promulgated by the Federal Reserve. This supervision and regulation is intended primarily for the protection of depositors. The commercial banks are supervised by the Office of the Commissioner of Banking and regularly examined by that agency and the FDIC. The deposits of each bank are insured by the Bank Insurance Fund (BIF) administered by the FDIC. ITEM 2. PROPERTIES The Corporation's offices are located at 573 West Lincoln Avenue in Milwaukee, Wisconsin. At that 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. An adjacent building of approximately 750 square feet contains the two walk-up facilities operated by Lincoln State Bank. In addition, there are three drive-up facilities, and the parking lot provides space for 51 cars. One branch of Lincoln State Bank is located in a one-story, 1,700 square foot building at 13500 Janesville Road, Muskego, Wisconsin. The Muskego branch has three drive-up windows and parking facilities for 25 vehicles. Another branch of Lincoln State Bank was opened in May 1990 at 14000 West National Avenue, New Berlin, Wisconsin. The New Berlin branch contains approximately 7,000 square feet and has 4 drive-up facilities, 4 walk-up windows and parking for 27 vehicles. During 1995 Lincoln State Bank opened two other full-service branch locations one located at 17600 West Capitol Drive, Brookfield, Wisconsin and at 585 Ryan Street, Pewaukee, Wisconsin. Both facilities offer drive-up and walk-up facilities along with parking for both customers and employees. In addition, Lincoln State Bank operates customer facilities at Villa St. Francis located at South 20th and Ohio Streets in Milwaukee, at Clement Manor located at South 92nd Street and West Howard Avenue in Milwaukee, at Friendship Village located at North 73rd and West Dean Road in Milwaukee, at Stoney Creek Adult Community in Muskego, at the Milwaukee Protestant Home located on North Downer Avenue in Milwaukee and at Forest Ridge located in Hales Corners, Wisconsin Franklin State Bank is located in a modern three-story building at 7000 South 76th Street in the City of Franklin, Wisconsin. The building contains 21,308 square feet, has five drive-up lanes and three automatic tellers. The parking lot accommodates 165 cars. The building is owned by the Corporation and leases space to Franklin State Bank. Portions of the building that are not used by Franklin State Bank are leased to various tenants. Lincoln Savings Bank's main office is located at 3131 South 13th Street, Milwaukee, Wisconsin in a modern one-story building. Lincoln Savings Bank also operates a branch facility at 5400 West Forest Home Avenue, Milwaukee, Wisconsin. Lincoln Savings Bank owns both facilities. M&M Services is located at 6170 Industrial Court in the Greendale Industrial Park. At that location, the Corporation maintains its subsidiary service support facilities and personnel. ITEM 3. LEGAL PROCEEDINGS From time to time, the Corporation and the subsidiary banks 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 the subsidiary banks 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. 5 6 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 1996. 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 the "Pink Sheets", an inter-broker quotation medium, since April 1993, and in the Over The Counter Bulletin Board, an electronic quotation service. Robert W. Baird & Co., Incorporated, a regional securities and investment banking firm headquartered in Milwaukee, Wisconsin, acts as a market maker for the Corporation's stock. In connection with the acquisition of Lincoln Savings Bank on April 2, 1993, the Corporation sold 330,625 shares of stock at $20 per share. The $20 price was established through an independent appraisal in conformity with regulatory requirements. Following the acquisition of Lincoln Savings Bank by the Corporation in April 1993, Robert W. Baird has caused the Corporation's stock to be quoted in the "Other Stocks" section of the Milwaukee Journal/Sentinel. Prior to that time the Corporation's stock was not publicly listed. (Referred to in the following table as n/a.) 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 bank to pay dividends depends on its earnings and financial condition and on compliance with banking statutes and regulations. The following table sets forth the quarterly "bid/ask" range for the period indicated.
Quotation or Price Quarter Ended Bid Ask ------------------------------------------------- March 31, 1995 $25.00 $25.75 June 30, 1995 25.00 n/a September 30, 1995 26.50 n/a December 31, 1995 26.50 n/a MARCH 31, 1996 $28.00 $28.00 JUNE 30, 1996 29.25 29.25 SEPTEMBER 30, 1996 29.50 29.50 DECEMBER 31, 1996 30.00 30.00
6 7 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, ------------------------------------------------------ 1996 1995 1994 1993 1992(2) ---- ---- ---- ---- ---- SELECTED BALANCE SHEET DATA Total assets $267,723 $264,247 $248,181 $239,944 $238,324 Loans receivable, net 189,791 163,650 149,925 137,715 125,076 Investment securities held to maturity 0 0 4,326 4,451 11,060 Investment securities available for sale(5) 15,499 15,833 9,464 12,097 1,548 Mortgage-related securities available for sale(5) 27,154 44,251 54,634 52,185 0 Mortgage-related securities held to maturity 0 0 0 0 73,644 Deposits 232,933 233,083 223,446 214,631 216,485 Short-term borrowings 6,850 3,000 0 0 2,161 Stockholders' equity, substantially restricted 26,380 26,543 23,573 24,741 17,767 Realized stockholders' equity, substantially restricted(6) 26,583 26,724 25,512 24,612 17,767 SELECTED INCOME STATEMENT DATA Total interest income (taxable-equivalent)(1) $ 19,401 $ 18,479 $ 16,212 $ 15,543 $ 17,340 Total interest expense 8,362 7,921 6,155 6,476 9,140 ---------------------------------------------------------- Net interest income 11,039 10,558 10,057 9,067 8,200 Provision for loan losses 460 132 43 211 311 ---------------------------------------------------------- Net interest income after provision for loan losses 10,579 10,426 10,014 8,856 7,889 Net gain (loss) on security sales 70 61 (244) (8) 114 Other noninterest income 1,485 1,267 1,185 1,391 1,432 ---------------------------------------------------------- Total noninterest income 1,555 1,328 941 1,383 1,546 Noninterest expense 10,021 9,040 8,484 8,268 7,676 ---------------------------------------------------------- Income before income taxes 2,113 2,714 2,471 1,971 1,759 Income taxes 730 917 874 651 495 Less taxable equivalent adjustment 73 96 73 101 138 ---------------------------------------------------------- Net income $ 1,310 $ 1,701 $ 1,524 $ 1,219 $ 1,126 ========================================================== PER SHARE DATA Net income(3) $ 1.50 $ 1.91 $ 1.71 $ 1.37 $ 1.27 Cash dividend declared $ 0.79 $ 0.64 $ 0.51 $ 0.50 $ 0.40 Book value(3),(5) $ 30.50 $ 29.80 $ 26.48 $ 27.82 $ 27.59 Average shares outstanding(3) 875,082 889,677 890,655 889,363 883,686 OTHER DATA Net interest margin 3.87% 3.86% 3.93% 3.81% 3.40% Allowance for loan losses to non-accrual loans 206.87% 232.92% 189.64% 157.49% 77.60% Nonperforming assets to total assets 0.35% 0.25% 0.35% 0.41% 0.69% Stockholders' equity to total assets(3),(5) 9.85% 10.04% 9.50% 10.31% 10.23% Average stockholders' equity to average assets(5) 9.94% 10.01% 9.87% 10.91% 10.02% Return on assets (ratio of net income to average total assets) 0.50% 0.67% 0.62% 0.51% 0.48% Return on stockholders' equity (ratio of net income to average equity) 5.00% 6.71% 6.27% 4.87% 4.75% Dividend payout ratio 52.75% 33.45% 29.79% 33.22% (4) Facilities: Number of full-service offices 8 8 6 6 6 Number of limited services offices 6 6 4 5 4
(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) Restated to reflect the April 2, 1993 merger conversion of Lincoln Savings Bank which was accounted for as a pooling-of-interests. Operating results for the year indicated includes the year ended December 31 for Lincoln State Bank and Franklin State Bank and for the year ended September 30 for Lincoln Savings Bank. (3) Computed assuming that the 330,625 shares of common stock issued in connection with the April 2, 1993 merger conversion of Lincoln Savings Bank were issued and outstanding for all periods presented. No adjustment for the additional income that could have been earned had the net proceeds from the issuance been available for prior periods had been made. (4) Dividend payout information irrelevant prior to merger conversion with Lincoln Savings Bank. (5) The Corporation adopted Statement of Financial Accounting Standards No. 115, "Accounting for Certain Debt and Equity Securities" as of December 31, 1993. As a result, investment securities available-for-sale are carried at fair value and stockholders' equity is adjusted for the unrealized holding (loss) gain, net of applicable income taxes. See Note 1 to the Audited Financial Statements. (6) Excludes SFAS 115 mark-to-market equity adjustment. 7 8 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):
1996 1995 ------------------------------------------------------------------------------------------ 3/31 6/30 9/30 12/31 3/31 6/30 9/30 12/31 ------------------------------------------------------------------------------------------ Interest income (taxable-equivalent) (1) $4,696 $4,750 $4,950 $5,005 $4,355 $4,536 $4,735 $4,853 Interest expense 2,024 2,044 2,138 2,156 1,727 1,938 2,136 2,120 ------------------------------------------------------------------------------------------ Net interest income 2,672 2,706 2,812 2,849 2,628 2,598 2,599 2,733 Provision for loan losses 36 36 388 0 60 60 6 6 Noninterest income 368 366 405 416 301 334 321 372 Noninterest expense 2,592 2,183 2,989 2,257 2,288 2,270 2,202 2,280 ------------------------------------------------------------------------------------------ Income (loss) before taxes 412 853 (160) 1,008 581 602 712 819 Income taxes (benefit) 133 290 (62) 369 201 195 240 281 Less taxable equivalent adjustment 22 22 21 8 25 24 23 24 ========================================================================================== Net income (loss) $ 257 $ 541 ($119) $ 631 $ 355 $ 383 $ 449 $ 514 ========================================================================================== Net income (loss) per share $ 0.29 $ 0.62 ($0.14) $ 0.73 $ 0.40 $ 0.43 $ 0.50 $ 0.58 ========================================================================================== Dividends per share $ 0.17 $ 0.17 $ 0.20 $ 0.25 $ 0.15 $ 0.15 $ 0.17 $ 0.17 ==========================================================================================
(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, 1996, 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. It should be noted that the financial statements are restated to reflect the April 2, 1993 merger conversion of Lincoln Savings Bank S.A. which was accounted for as a pooling-of-interests. Operating results presented for years prior to 1993 include the year ended December 31 for Lincoln State Bank and Franklin State Bank and for the year ended September 30 for Lincoln Savings Bank. 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. 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 FTE basis increased to $11.0 million in 1996, compared with $10.6 million in 1995 and $10.1 million in 1994. This increase of $501,000 in net interest income in 1996 was due primarily to an increase in the volume of earning assets in 1996 (a $1.2 million increase). This gain was partially offset by an increase in the volume of interest bearing liabilities (a $589,000 increase). The total increase in average earning assets was primarily due to an increase in average loans of $22.1 million. All of the loan growth was internally generated. Interest bearing deposits increased $7.7 million in 1996. 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. 8 9 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, ---------------------------- ---------------------------- --------------------------- 1996 1995 1994 ---------------------------- ---------------------------- --------------------------- AVERAGE AVERAGE Average Average Average Average BALANCE INTEREST RATE Balance Interest Rate Balance Interest Rate ASSETS Loans(1),(2) $176,790 $15,230 8.61% $154,696 $13,502 8.73% $141,347 $11,337 8.02% Loans exempt from federal income taxes(3) 753 88 11.69% 825 97 11.76% 905 74 8.18% Taxable investment securities(4) 17,260 1,018 5.96% 13,796 800 5.80% 10,827 648 5.99% Mortgage-related securities(4) 38,475 2,407 6.26% 49,031 3,043 6.21% 56,249 3,205 5.70% Investment securities exempt from federal income taxes(3),(4) 2,003 126 6.29% 2,643 186 7.04% 1,678 141 8.40% Other securities 10,139 522 5.15% 14,812 851 5.75% 17,541 807 4.60% ------------------ ------------------ ------------------ Interest earning assets 245,420 19,401 7.91% 235,803 18,479 7.84% 228,547 16,212 7.09% Non interest earning assets 18,238 17,289 17,852 -------- -------- -------- Average Assets $263,658 $253,092 $246,399 ======== ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY NOW deposits $ 23,011 479 2.08% $ 22,451 483 2.15% $ 24,938 518 2.08% Money Market deposits 6,291 158 2.51% 7,514 187 2.49% 11,241 278 2.47% Savings deposits 64,345 1,400 2.18% 68,860 1,694 2.46% 74,659 1,847 2.47% Time deposits 109,862 6,109 5.56% 96,987 5,345 5.51% 83,315 3,495 4.19% Other borrowings 3,564 216 6.06% 3,432 212 6.18% 329 17 5.17% ------------------ ------------------ ------------------ Interest bearing liabilities 207,073 8,362 4.04% 199,244 7,921 3.98% 194,482 6,155 3.16% Demand deposits and other non ----- ----- ------ interest bearing liabilities 30,369 28,505 27,595 Stockholders' equity 26,216 25,343 24,322 -------- -------- -------- Average Liabilities and Stockholders' Equity $263,658 $253,092 $246,399 ======== ======== ======== Net interest income/spread $11,039 3.87% $10,558 3.86% $10,057 3.93% ================= ================= ================= Net interest earning assets $ 38,347 $ 36,559 $ 34,065 ======== ======== ======== Net yield on interest earning assets 4.50% 4.48% 4.40% ==== ==== ==== Ratio of average interest-earning assets to average interest- bearing liabilities 1.19 1.18 1.18 ======== ======== ========
(1) For the purpose of these computations, nonaccrual loans are included in the daily average loan amounts outstanding. (2) Interest earned on loans includes loan fees (which are not material in amount) and interest income which has been received from borrowers whose loans were removed from nonaccrual status during the period indicated. (3) Taxable-equivalent adjustments were made using a 34% corporate tax rate for all years presented in calculating interest income and yields. (4) Includes securities available for sale. 9 10 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, ---------------------------------------- ---------------------------------------- 1996 VS. 1995 1995 vs. 1994 ---------------------------------------- ---------------------------------------- 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) $1,928 ($175) ($25) $1,728 $1,071 $1,000 $ 94 $2,165 Loans exempt from federal income taxes(2) (8) (1) 0 (9) (7) 32 (2) 23 Taxable investment securities(3) 201 22 5 228 178 (20) (6) 152 Mortgage-related securities(3) (45) (20) 5 (60) 81 (23) (13) 45 Investment securities exempt from federal income taxes(2),(3) (655) 24 (5) (636) (411) 286 (37) (162) Other securities (268) (88) 27 (329) (126) 201 (31) 44 ---------------------------------------- -------------------------------------- Total interest-earning assets $1,153 ($238) $ 7 922 $ 786 $1,476 $5 2,267 ======================================== ====================================== Interest-Bearing Liabilities: NOW deposits $ 12 ($16) $ 0 ($4) ($52) $ 19 ($2) ($35) Money market deposits (30) 1 0 (29) (92) 2 (1) (91) Savings deposits (111) (196) 13 (294) (143) (10) 0 (153) Time deposits 710 48 6 764 574 1,096 180 1,850 Other borrowings 8 (4) 0 4 160 3 32 195 ---------------------------------------- -------------------------------------- Total interest-bearing liabilities $ 589 ($167) $19 $ 441 $ 447 $1,110 $209 $1,766 ======================================== ====================================== Net change in net interest income $ 481 $ 501 ====== ======
(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. (3) Includes securities available for sale. PROVISION FOR LOAN LOSSES During 1996, the Corporation made a provision of $460,000 to the allowance for loan losses, as compared to a provision of $132,000 in 1995 and $43,000 in 1994. This increase did not reflect deteriorating quality in the loan portfolio but primarily reflected an increase in loan volume and an assessment regarding general economic conditions. Loan charge-offs for 1996 increased by $20,000, over 1995 to $83,000. This compares to charge-offs of $12,000 in 1994. 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. 10 11 NON-INTEREST INCOME Non-interest income increased $227,000 in 1996 and $387,000 in 1995. The composition of non-interest income is shown in the following table (in thousands).
For the Year Ended December 31, 1996 1995 1994 ---------------------------------------- Service charges on deposit accounts $ 725 $ 726 $ 706 Service charges on loans 172 75 42 Net gain (loss) on securities sales 70 61 (244) Other 588 466 437 ---------------------------------------- Total noninterest income $1,555 $1,328 $ 941 ========================================
Service charge income on deposit accounts decreased $1,000 in 1996 and increased $20,000 in 1995. The increase in the number of no-charge accounts caused the decline in 1996 income, while the 1995 increase can be attributed to the increase in service charges. The Corporation recorded a net gain of $70,000 on the sale of $15.8 million of securities in 1996 and $61,000 on the sale of $ 13.7 million of securities in 1995 and a loss of $244,000 on the sale of $12.6 million of securities in 1994. The sales in 1994 were made to reduce the future volatility of the investment portfolio as interest rates began to increase. The proceeds from the sale of the investments were used to purchase short term variable rate securities and to meet existing loan demand. Service charges on loans increased $97,000 from $75,000 in 1995 to $172,000 in 1996. The 1996 increase can be attributed directly to the volume of new loans generated. Other non-interest income increased $122,000 in 1996 and increased $29,000 in 1995. Other non-interest income consists of rents of safe deposit boxes, lock box fees, TYME machine income, lease income and miscellaneous fees. NON-INTEREST EXPENSE Non-interest expense increased $981,000 (10.8%) for the year ended December 31, 1996, and $556,000 (6.6%) for the year ended December 31, 1995. The major components of non-interest expense are shown in the following table (in thousands).
For the Year Ended December 31, 1996 1995 1994 ----------------------------------------- Salaries and employee benefits $ 5,223 $4,706 $4,396 Bank premises and equipment 1,340 1,208 1,160 Data processing fees 561 540 578 Federal deposit insurance premiums 159 362 490 SAIF Assessment 604 0 0 Other 2,134 2,224 1,860 ----------------------------------------- Total noninterest expense $10,021 $9,040 $8,484 =========================================
Salaries and employee benefits increased $517,000 in 1996, reflecting additional staff hires, higher benefit costs, changes in personnel and normal pay raises. The 1996 increase in the cost of employee benefits, particularly medical insurance amounted to $101,000. The 11.0% increase in salaries and employee benefits in 1996 compares with the 7.0% increase in 1995. Premises and equipment expense increased $132,000 in 1996. The increase was due to the entire year operations of the two new branches of Lincoln State Bank. The branches in Pewaukee and Brookfield were opened in October 1995. The $48,000 increase in 1995 was the result of start-up expenses associated with the branches. Data processing fees increased $21,000 in 1996 and decreased $38,000 in 1995. The 1996 increase was due to increased volume and new services being provided by the service bureau. The 1995 decrease was a result of a fixed fee contract signed between the Corporation and the outside service provider. During the third quarter of 1996 Lincoln Savings Bank incurred a $604,000 charge from the FDIC which represented its share of the recapitalization of the Savings Association Insurance Fund (SAIF). This charge was set at 0.657% of Lincoln Savings Bank's deposit liabilities as of March 31, 1995. Although this charge adversely impacted results of operations, it is expected to provide long-term benefits to the Corporation in the form of lower federal insurance premiums. Federal deposit insurance fees represent premiums paid for FDIC insurance on the banks' deposits. The FDIC assesses the banks based on the level of deposits. In 1995 the Bank Insurance Fund (BIF) reached its prescribed capitalization level mandated by Congress as part of FDIC Institutions Improvement Act of 1991. As a result the bank's premium was reduced by $203,000 in 1996 and $128,000 in 1995. 11 12 Other expenses decreased $90,000 in 1996. The decrease was primarily due to a reduction in service charges being paid to the Corporation's corespondent bank and a decrease in the Corporation's annual fee to the Lincoln Neighborhood Redevelopment Corporation. In 1995 other expenses increased $364,000 because of higher professional fees and other uncontrollable volume related costs such as office supplies, postage and insurance. INCOME TAXES The Corporation's consolidated income tax rate varies from statutory rates principally due to interest income from tax-exempt securities and loans and interest income on securities in the M&M Lincoln Investment Corporation portfolio and Lincoln Investment Management Corporation for which state taxes are not imposed. The Corporation recorded provisions for income taxes totaling $730,000 in 1996, $917,000 in 1995 and $874,000 in 1994. The 1996 decrease was due to a reduction in taxable income and the 1995 increase was due to additional taxable income and the reduction of tax exempt investments and loans. NET INCOME For the years ended December 31, 1996, 1995 and 1994, the Corporation posted net income of $1.310 million, $1.701 million and $1.524 million, respectively. LOANS RECEIVABLE Net loans receivable increased $26.1 million, or 16.0%, from $163.7 million at December 31, 1995, to $189.8 million at December 31, 1996. Currently, loans receivable consist mainly of mortgages secured by residential properties located in the Corporation's primary market area and commercial loans secured by business assets, real estate, and guarantees. The following table shows the composition of the Corporation's loan portfolio on the dates indicated (in thousands):
At December 31, 1996 1995 1994 1993 1992 ---------------------------------------------------------------- First Mortgage: Conventional single-family residential $ 58,358 $ 57,629 $ 55,478 $ 53,006 $ 55,165 Commercial and multifamily residential 61,707 44,594 42,046 32,197 25,208 Construction and land 12,872 12,619 8,254 6,514 7,945 ---------------------------------------------------------------- 132,937 114,842 105,778 91,717 88,318 Commercial business loans 45,635 36,605 35,118 39,926 30,797 Home equity loans 1,367 1,695 1,577 1,620 1,605 Consumer and installment loans 10,984 10,810 7,377 5,222 4,094 Other 883 1,326 1,644 1,406 2,034 ---------------------------------------------------------------- 58,869 50,436 45,716 48,174 38,530 Less: Undisbursed portion of loan proceeds 0 0 0 708 505 Deferred loan fees 76 95 105 112 148 Allowance for loan losses 1,939 1,533 1,464 1,356 1,119 ---------------------------------------------------------------- $189,791 $163,650 $149,925 $137,715 $125,076 ================================================================
ALLOWANCE FOR LOAN LOSSES The Corporation maintains an allowance for loan losses to absorb potential 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 future 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 $1.533 million at December 31, 1995, to $1.939 million on December 31, 1996. Because of the Corporation's relatively low loss experience, this increase was not required to absorb currently known losses but was effected because of growth in loan volume in general, and growth in commercial business loans specifically, and the Corporation's decision to maintain or increase its allowance for loan losses as a percentage of outstanding loans because of growing uncertainty regarding future economic conditions. The ratio of the allowance for loan losses to total loans was 1.01% for 1996 and 0.93% in 1995. 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. Based on their review procedures, management of the Corporation's subsidiary banks estimated charge-offs for the twelve months ended December 31, 1997 to be as follows: commercial loans - $25,000, real estate mortgage loans - $60,000 and installment loans - $5,000. 12 13 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, 1996 1995 1994 1993 1992 --------------------------------------------------------------------------- Balance at beginning of year $1,533 $1,464 $1,356 $1,119 $ 917 Charge-offs: Conventional single-family mortgage residential 70 20 0 46 9 Commercial and multifamily residential 0 0 0 0 30 Construction and land 0 0 0 0 0 Commercial business loans 5 27 6 46 83 Home equity loans 0 0 0 0 0 Consumer and installment loans 8 16 6 1 0 --------------------------------------------------------------------------- Total charge-offs 83 63 12 93 122 Recoveries (29) 0 (77) (20) (13) --------------------------------------------------------------------------- Net charge-offs (recoveries) 54 63 (65) 73 109 Provisions charged to operations 460 132 43 211 311 Adjustments to conform pooled companies' year-ends 0 0 0 99 0 --------------------------------------------------------------------------- Balance at end of year $1,939 $1,533 $1,464 $1,356 $1,119 =========================================================================== Ratios: Net charge-offs (recoveries) to average loans outstanding 0.03% 0.04% (0.05)% 0.05% 0.09% Net charge-offs (recoveries) to total allowance 2.78% 4.11% (4.44)% 5.38% 9.74% Allowance to year end gross loans outstanding 1.01% 0.93% 0.97% 0.97% 0.88%
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 1996, $23,000 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 since origination. The following table summarizes non-performing assets on the dates indicated (dollars in thousands):
December 31, 1996 1995 1994 1993 1992 --------------------------------------------------------------------------- Nonaccrual loans: Nonaccrual loans $ 938 $ 658 $ 772 $ 861 $1,442 Accruing loans past due 90 days or more 0 0 0 0 0 Restructured loans 0 0 0 0 0 --------------------------------------------------------------------------- Total nonaccrual loans 938 658 772 861 1,442 Real estate in judgment 0 0 24 43 181 Other real estate owned 0 0 73 75 31 --------------------------------------------------------------------------- Total non-performing assets $ 938 $ 658 $ 869 $ 979 $1,654 =========================================================================== Ratios: Non-accrual loans to total loans 0.49% 0.40% 0.51% 0.62% 1.14% Allowance to non-accrual loans 206.72% 232.98% 189.64% 157.49% 77.60% Non-performing assets to total assets 0.35% 0.25% 0.35% 0.41% 0.69%
INVESTMENT SECURITIES Investment securities at December 31, 1996, are made up of U.S. Treasury and agency securities of $11.321 million, government agency mortgage-backed securities of $24.211 million, SBA certificates of $1.080 million, collateralized mortgage obligations of $2.943 million and mutual funds of $3.098 million. Total investment securities equaled $42.653 million. This compares to $60.084 million on December 31, 1995. 13 14 Management determines the appropriate classification of debt securities (including mortgage-related securities) at the time of purchase. Beginning December 31, 1993, debt securities are classified as held-for-investment when the Corporation has the intent and ability to hold the security on a long term basis or until maturity. Held-for-investment securities are stated at amortized cost. See notes one and three to Consolidated Financial Statements for further details. Beginning December 31, 1993, debt securities not classified as held-for-investment are classified as available-for-sale. Available-for-sale securities are stated at fair value, with the unrealized gains and losses, net of tax, reported as a separate component of stockholders' equity. The amortized cost of debt securities classified as held-to-maturity or available-for-sale 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 and were not sold. The following table sets forth the Corporations aggregate amortized cost of investment securities held-to-maturity and the estimated fair value of investment securities available-for-sale at the dates indicated (in thousands):
At December 31, 1996 1995 1994 ----------------------------------------- Mutual funds $ 3,098 $ 3,086 $ 3,012 U.S. Treasury and other U.S. Government securities 11,321 8,749 6,628 Small Business Administration certificates 1,080 1,257 1,404 State and political subdivision securities 0 2,741 2,746 Collateralized mortgage obligations 2,943 3,772 6,652 Government agency mortgage-backed securities 24,211 40,479 47,982 ----------------------------------------- $42,653 $60,084 $68,424 =========================================
The maturity distribution (based upon assumed maturities), and weighted average yield of the investment portfolio of the Corporation as of December 31, 1996 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 $ 3,098 6.08% $ -- -- % $ -- -- % $ -- -- % U.S. TREASURY AND OTHER U.S. GOVERNMENT SECURITIES 6,869 6.22 4,452 5.27 -- -- -- -- SMALL BUSINESS ADMINISTRATION CERTIFICATES 1,080 7.91 -- -- -- -- -- -- COLLATERALIZED MORTGAGE OBLIGATIONS 1,790 5.35 306 6.40 847 6.09 -- -- GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES 68 6.21 8,092 6.57 14,306 6.65 1,805 6.80 ---------------------------------------------------------------------------------------- $12,905 6.21% $12,790 6.27% $15,153 6.62% $1,805 6.80% ========================================================================================
Weighted average yield is calculated by dividing income within each maturity range by the outstanding amount of the related investment. 14 15 TOTAL DEPOSITS The Corporation continues to stress its philosophy of core deposit accumulation and retention as the fundamental basis for sound growth and profitability. Core deposits consist of all deposits other than public funds and certificates of deposit in excess of $100,000. Total deposits decreased $150,000 to $232.933 million on December 31, 1996, from $233.083 million on December 31, 1995. This compares to a $9.637 million increase in 1995. 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, 1996 1995 1994 ------------------------------------------------------------------------ AVERAGE AVERAGE Average Average Average Average AMOUNT RATE Amount Rate Amount Rate ------------------------------------------------------------------------ Non-interest-bearing demand deposits $ 29,362 0.00% $ 27,707 0.00% $ 26,476 0.00% NOW and money market deposits 29,302 2.17 29,965 2.24 36,179 2.20 Savings deposits 64,345 2.18 68,860 2.47 74,659 2.47 Time deposits 109,862 5.51 96,987 5.51 83,315 4.19 ------------------------------------------------------------------------ Total $232,871 3.46% $222,519 3.46% $220,628 2.78% ========================================================================
Maturities of time deposits and certificate accounts with balances of $100,000 or more, outstanding at December 31, 1996, are summarized as follows (in thousands): 3 MONTHS OR LESS $ 8,323 OVER 3 THROUGH 6 MONTHS 2,463 OVER 6 THROUGH 12 MONTHS 3,86 OVER 12 MONTHS 741 ------- TOTAL $15,313 =======
CAPITAL RESOURCES AND ADEQUACY Stockholders' equity decreased from $26.543 million at December 31, 1995 to $26.380 million at December 31, 1996. The $1.310 million increase from net earnings retention was offset by the net repurchase of 25,832 shares of treasury stock and the payment of $691,000 in cash dividends to shareholders. Pursuant to regulations promulgated by the Federal Reserve Board, bank holding companies are required to maintain minimum levels of core capital as a percent of total assets and total capital as a percent of risk-based assets. The minimum core capital requirement ranges from 3% to 5% of total assets, depending upon the Federal Reserve Board's determination of the financial institution's strength. Similar capital guidelines are also established for the individual banking subsidiaries of the Corporation. Most financial institutions are required to meet a minimum core capital requirement of 4% or more of total assets. The regulations assign risk weightings to assets and off-balance sheet items and require minimum risk-based capital ratios. Bank holding companies generally are required to have total capital equal to not less than 8% of risk weighted assets. Core capital consists principally of shareholders' equity less intangibles, while qualifying total capital consists of core capital, certain debt instruments and a portion of the reserve for loan losses. As of December 31, 1996, the Corporation had a core-capital to total assets ratio of 9.85%, and Lincoln State Bank, Franklin State Bank and Lincoln Savings Bank had risk-based capital ratios of 10.88%, 10.11% and 17.00%, respectively. These ratios are well above the 1996 minimum requirements established by regulatory agencies. For a summary of the Banks' regulatory capital ratios at December 31, 1996, please see Note seven to Consolidated Financial Statements. Management strives to maintain a strong capital position to take advantage of opportunities for profitable geographic and product expansion and to maintain depositor and investor confidence. Conversely, management believes that capital must be maintained at levels that provide adequate returns on the capital employed. Management actively reviews capital strategies for the Corporation and for each of its subsidiaries to ensure that capital levels are appropriate based on perceived business risks, growth and regulatory standards. 15 16 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, 1996 1995 1994 ---------------------------------------- Cash and cash equivalents at beginning of period $28,447 $17,694 $23,183 Operating Activities: Net Income 1,310 1,701 1,524 Adjustments to reconcile net income to net cash provided by operating activities 1,074 1,065 822 ---------------------------------------- Net cash provided by operating activities 2,384 2,766 2,346 Net cash used by investing activities (10,511) (4,426) (16,118) Net cash provided by financing activities 1,952 12,413 8,283 ---------------------------------------- Increase (decrease) in cash equivalents (6,175) 10,753 (5,489) ---------------------------------------- Cash and cash equivalents at end of period $22,272 $28,447 $17,694 ========================================
Net cash was provided by operating activities during the year ended December 31, 1996, 1995 and 1994 primarily as a result of normal ongoing business operations. The non-cash items, such as the provisions for loan losses and depreciation and the net amortization of premiums, also contributed to net cash provided by operating activities during these periods. Liquidity is also necessary at the parent company level. The parent company's primary source of funds are dividends from subsidiaries, borrowings and proceeds from issuance of equity. The parent company manages its liquidity position to provide the funds necessary to pay dividends to shareholders, service debt, invest in subsidiaries and satisfy other operating requirements. Dividends received from subsidiaries totaled $1.9 million, $1.2 million and $938,000 for the years ended December 31, 1996, 1995 and 1994 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 $691,000, $569,000 and $454,000 for the years ended December 31, 1996, 1995 and 1994, respectively. At December 31, 1996, the parent company had a $500,000 line of credit with an unaffiliated bank, which had no outstanding balance. INTEREST RATE SENSITIVITY MANAGEMENT Financial institutions are subject to interest rate risk to the extent their interest-bearing liabilities (primarily deposits) mature or reprice at different times and on a different basis than their interest-earning assets (consisting primarily of loans and securities). Interest rate sensitivity management seeks to match maturities on assets and liabilities and avoid fluctuating net interest margins while enhancing net interest income during periods of changing interest rates. The difference between the amount of interest-earning assets maturing or repricing within a specific time period and the amount of interest-bearing liabilities maturing or repricing within the same time period is referred to as an interest rate gap. A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities. A gap is considered negative when the amount of interest rate sensitive liabilities exceeds the amount of interest rate sensitive assets. During periods of rising interest rates, a negative gap tends to adversely affect net interest income while a positive gap tends to result in an increase in net interest income. During a period of falling interest rates, a negative gap tends to result in an increase in net interest income while a positive gap tends to adversely affect net interest income. 16 17 The following table shows the interest rate sensitivity gap for four different time intervals as of December 31, 1996. Due to limitations in the Corporation's data processing system, individual loan categories do not agree with previously presented balances. The primary difference occurs in the allocation between adjustable-rate mortgage loans and commercial business loans. Total loans agree to audited financial statements. 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 $14,054 $12,863 $ 57,204 $ 6,641 $ 90,762 ADJUSTABLE-RATE MORTGAGE LOANS 16,645 11,011 15,886 0 43,542 ----------------------------------------------------------------- TOTAL MORTGAGE LOANS 30,699 23,874 73,090 6,641 134,304 COMMERCIAL BUSINESS LOANS 30,224 1,975 13,290 146 45,635 CONSUMER LOANS 5,584 1,171 4,220 9 10,984 TAX-EXEMPT LOANS 750 0 0 0 750 MORTGAGE-RELATED SECURITIES 11,313 4,125 5,794 5,922 27,154 FIXED RATE INVESTMENT SECURITIES AND OTHER 301 501 9,062 1,457 11,321 VARIABLE RATE INVESTMENT SECURITIES AND OTHER 17,203 1,118 0 0 18,321 ----------------------------------------------------------------- TOTAL INTEREST-EARNING ASSETS $96,074 $32,764 $105,456 $14,175 $248,469 ================================================================= INTEREST-BEARING LIABILITIES: DEPOSITS TIME DEPOSITS $69,310 $32,085 $ 12,578 $ 4 $113,977 NOW ACCOUNTS 1,188 1,188 11,876 5,541 19,793 SAVINGS ACCOUNTS 3,653 3,586 35,861 16,469 59,569 MONEY MARKET ACCOUNTS 438 438 4,380 2,244 7,500 BORROWINGS 3,850 3,000 0 0 6,850 ================================================================= TOTAL INTEREST-BEARING LIABILITIES $78,439 $40,297 $ 64,695 $24,325 $207,689 ================================================================= INTEREST-EARNING ASSETS LESS INTEREST-BEARING LIABILITIES $17,635 ($7,533) $ 40,761 ($10,083) $ 40,780 ================================================================= CUMULATIVE INTEREST RATE SENSITIVITY GAP $17,635 $10,102 $ 50,863 $40,780 ================================================== CUMULATIVE INTEREST RATE SENSITIVITY GAP AS A PERCENTAGE OF TOTAL ASSETS 6.59% 3.77% 19.00% 15.23% ==================================================
At December 31, 1996, the Corporation's cumulative ratio of interest-rate sensitive assets to interest-rate sensitive liabilities was 6.59% for six months and 3.77% for one year maturities. Therefore the Corporation is positively gapped and may benefit from rising interest rates. Certain shortcomings are inherent in the method of analysis presented in the Schedule. 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. 17 18 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated statements of financial condition of the Corporation and its subsidiaries as of December 31, 1996 and 1995 and the related consolidated statements of income, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1996, 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. 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 or three (3) weeks prior to the Corporation's Annual Meeting which shall be held on May 27, 1997, which ever comes first. 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 or three (3) weeks prior to the Corporation's Annual Meeting which shall be held on May 27, 1997, which ever comes first. 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 or three (3) weeks prior to the Corporation's Annual Meeting which shall be held on May 27, 1997, which ever comes first. 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 or three (3) weeks prior to the Corporation's Annual Meeting which shall be held on May 27, 1997, which ever comes first. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (A) DOCUMENTS FILED: 1 and 2. Financial Statements and Financial Statement Schedules. The following financial statements of Merchants and Manufacturers Bancorporation, Inc. and subsidiaries are filed as a part of this report under Item 8. "Financial Statements and Supplementary Data": Report of Independent Auditors Consolidated Statements of Financial Position as of December 31, 1996 and 1995 Consolidated Statements of Income for the years ended December 31, 1996, 1995, and 1994 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1996, 1995, and 1994 Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994 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 during the last quarter of the period covered by this report. 18 19 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: __________________________________ Michael J. Murry Chief Executive Officer & Chairman of the Board of Directors Director Date: March 31, 1997 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. By: __________________________________ James F. Bomberg President Director Date: March 31, 1997 By: __________________________________ James C. Mroczkowski Vice President and Chief Financial Officer Date: March 31, 1997 By: ______________________________ By: ______________________________ Leonard Helminiak Thomas F. Gapinski Director Director Date: March 31, 1997 Date: March 31, 1997 By: ______________________________ By: ______________________________ Nicholas S. Logarakis Thomas J. Kozina Director Director Date: March 31, 1997 Date: March 31, 1997 By: ______________________________ By: ______________________________ Conrad C. Kaminski David A. Kaczynski Director Director Date: March 31, 1997 Date: March 31, 1997
19 20 By: ______________________________ By: ______________________________ Jack P. Schwellinger Keith C. Winters Director Director Date: March 31, 1997 Date: March 31, 1997 By: ______________________________ By: ______________________________ Duane P. Cherek Robert J. Blonski Director Director Date: March 31, 1997 Date: March 31, 1997 By: ______________________________ By: ______________________________ John M. Krawczyk Robert V. Donaj Director Director Date: March 31, 1997 Date: March 31, 1997 By: ______________________________ By: ______________________________ Longin C. Prazynski Gervase Rose Director Director Date: March 31, 1997 Date: March 31, 1997 By: ______________________________ By: ______________________________ J. Michael Bartels Casimir S. Janiszewski Director Director Date: March 31, 1997 Date: March 31, 1997 By: ______________________________ James A. Sass Director Date: March 31, 1997
20 21 Merchants and Manufacturers Bancorporation, Inc. Consolidated Financial Statements Years ended December 31, 1996 and 1995 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 22 [ERNST & YOUNG LLP LETTERHEAD] Report of Independent Auditors The Board of Directors and Stockholders Merchants and Manufacturers Bancorporation, Inc. We have audited the accompanying consolidated statements of financial condition of Merchants and Manufacturers Bancorporation, Inc. as of December 31, 1996 and 1995, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Merchants and Manufacturers Bancorporation, Inc. at December 31, 1996 and 1995, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. Ernst & Young LLP February 21, 1997 Milwaukee, Wisconsin 1 23 Merchants and Manufacturers Bancorporation, Inc. Consolidated Statements of Financial Condition
DECEMBER 31 1996 1995 ------------------ (In thousands) ASSETS Cash and due from banks $ 9,247 $ 11,164 Interest-bearing deposits at other banks 9,667 8,737 Federal funds sold 3,358 8,546 ------------------ Cash and cash equivalents 22,272 28,447 Securities available-for-sale: Investment securities 15,499 15,833 Mortgage-related securities 27,154 44,251 Loans receivable 189,791 163,650 Accrued interest receivable 1,470 1,532 Federal Home Loan Bank stock, at cost 1,118 702 Premises and equipment 7,800 7,605 Other assets 2,619 2,227 ------------------ Total assets $267,723 $264,247 ================== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Deposits $232,933 $233,083 Accrued interest payable 395 575 Borrowings 6,850 3,000 Advance payments by borrowers for taxes and insurance 67 365 Other liabilities 1,098 681 ------------------ Total liabilities 241,343 237,704 Stockholders' equity: Common stock, par value $1.00 per share; authorized-- 1,500,000 shares; issued 897,812 shares and 893,873 shares, respectively 898 898 Additional paid-in capital 10,759 10,759 Unrealized loss on securities available-for-sale (203) (181) Retained earnings, substantially restricted 15,868 15,249 Less treasury stock, at cost--32,845 shares and 7,013 shares, respectively (942) (182) ------------------ Total stockholders' equity 26,380 26,543 ------------------ Total liabilities and stockholders' equity $267,723 $264,247 ==================
See accompanying notes. 2 24 Merchants and Manufacturers Bancorporation, Inc. Consolidated Statements of Income
YEAR ENDED DECEMBER 31 1996 1995 1994 --------------------------------------- (In thousands, except per share amounts) Interest income: Loans, including fees $15,288 $13,566 $11,435 Investment securities: Taxable 1,028 800 648 Exempt from federal income taxes 83 123 93 Mortgage-related securities 2,407 3,043 3,205 Other 522 851 758 --------------------------------------- Total interest income 19,328 18,383 16,139 Interest expense: Deposits 8,146 7,709 6,138 Borrowings 216 212 17 --------------------------------------- Total interest expense 8,362 7,921 6,155 Net interest income 10,966 10,462 9,984 Provision for loan losses 460 132 43 --------------------------------------- Net interest income after provision for loan losses 10,506 10,330 9,941 Noninterest income: Service charges on deposits 725 726 706 Service charges on loans 172 75 42 Net gain (loss) on securities sales 70 61 (244) Other 588 466 437 --------------------------------------- 1,555 1,328 941 Noninterest expenses: Salaries and employee benefits 5,223 4,706 4,396 Premises and equipment 1,340 1,208 1,160 Data processing fees 561 540 578 SAIF special assessment 604 - - Federal deposit insurance premiums 159 362 490 Other 2,134 2,224 1,860 --------------------------------------- 10,021 9,040 8,484 --------------------------------------- Income before income taxes 2,040 2,618 2,398 Income taxes 730 917 874 --------------------------------------- Net income $ 1,310 $ 1,701 $ 1,524 ======================================= Earnings per share $ 1.50 $ 1.91 $ 1.71 ======================================= Dividends per share $ .79 $ .64 $ .51 =======================================
See accompanying notes. 3 25 Merchants and Manufacturers Bancorporation, Inc. Consolidated Statements of Stockholders' Equity
Unrealized Additional Gain (Loss) Paid-in on Securities Treasury Common Stock Capital Available-for-Sale Retained Earnings Stock Total ------------------------------------------------------------------------------------- (In thousands, except per share amounts) Balance at December 31, 1994 $894 $10,671 $ 129 $13,047 $ - $24,741 Net income - - - 1,524 - 1,524 Cash dividends declared--$.51 per share - - - (454) - (454) Purchase of 13,200 shares of treasury stock - - - - (332) (332) Sale of 6,900 shares of treasury stock - 3 - - 173 176 Additional expenses associated with offering of common stock - (14) - - - (14) Unrealized loss on securities available- for-sale, net of deferred income taxes of $1,292 - - (2,068) - - (2,068) ------------------------------------------------------------------------------------- Balance at December 31, 1994 894 10,660 (1,939) 14,117 (159) 23,573 Net income - - - 1,701 - 1,701 Sale of 3,939 shares of common stock in connection with dividend reinvestment program 4 96 - - - 100 Sale of 5,934 shares of treasury stock - 3 - - 155 158 Purchase of 6,647 shares of treasury stock - - - - (178) (178) Cash dividends declared - $.64 per share - - - (569) - (569) Unrealized gain on securities available- for-sale, net of deferred income taxes of $1,118 - - 1,758 - - 1,758 ------------------------------------------------------------------------------------- Balance at December 31, 1995 898 10,759 (181) 15,249 (182) 26,543 Net income - - - 1,310 - 1,310 Purchase of 32,072 shares of treasury stock - - - - (946) (946) Sale of 6,240 shares of treasury stock - - - - 186 186 Cash dividends declared - $.79 per share - - - (691) - (691) Unrealized loss on securities available- for-sale, net of deferred income taxes of $7 - - (22) - - (22) ------------------------------------------------------------------------------------- Balance at December 31, 1996 $898 $10,759 $ (203) $15,868 $(942) $26,380 =====================================================================================
See accompanying notes. 4 26 Merchants and Manufacturers Bancorporation, Inc. Consolidated Statements of Cash Flows
YEAR ENDED DECEMBER 31 1996 1995 1994 ------------------------------ (In thousands) OPERATING ACTIVITIES Net income $ 1,310 $ 1,701 $ 1,524 Adjustments to reconcile net income to cash provided by operating activities: Provision for loan losses 460 132 43 Provision for depreciation 484 405 392 Net amortization of investment securities premiums and discounts 287 339 370 Net realized (gains) losses on investment securities (70) (61) 244 Decrease (increase) in accrued interest receivable 62 (185) 11 Increase (decrease) in accrued interest payable (180) 241 129 Other 31 194 (367) ------------------------------ Net cash provided by operating activities 2,384 2,766 2,346 INVESTING ACTIVITIES Proceeds from redemption and maturities of investment securities held to maturity - 2,525 4,440 Purchases of investment securities held to maturity - (992) (4,820) Purchases of securities available-for-sale (12,718) (15,264) (28,708) Proceeds from sales of securities available-for-sale 15,848 13,724 12,637 Proceeds from redemption and maturities of securities available-for-sale 14,054 10,977 12,786 Net increase in loans (26,700) (14,012) (12,242) Purchases of premises and equipment (679) (1,852) (454) Proceeds from sales of real estate 100 496 - Purchases of Federal Home Loan Bank stock (416) (28) - Proceeds from sales of Federal Home Loan Bank stock - - 243 ------------------------------ Net cash used in investing activities (10,511) (4,426) (16,118)
(continued) 5 27 Merchants and Manufacturers Bancorporation, Inc. Consolidated Statements of Cash Flows (continued)
YEAR ENDED DECEMBER 31 1996 1995 1994 --------------------------- (In thousands) FINANCING ACTIVITIES Net increase (decrease) in deposits $ (150) $ 9,637 $ 8,815 Payments of cash dividends to stockholders (691) (569) (454) Net increase in borrowings 3,850 3,000 - Increase (decrease) in advance payments by borrowers for taxes and insurance (297) 265 78 Purchase of treasury stock (946) (178) (332) Proceeds from the sale of treasury stock 186 158 176 Proceeds from dividend reinvestment plan - 100 - --------------------------- Net cash provided by financing activities 1,952 12,413 8,283 --------------------------- Increase (decrease) in cash and cash equivalents (6,175) 10,753 (5,489) Cash and cash equivalents at beginning of year 28,447 17,694 23,183 --------------------------- Cash and cash equivalents at end of year $22,272 $28,447 $17,694 =========================== Supplemental cash flow information and non-cash transactions: Interest paid $ 8,521 $ 7,680 $ 6,026 Income taxes paid 759 839 948 Investment securities transferred to available- for-sale portfolio (at amortized cost) - 2,800 501
See accompanying notes. 6 28 Merchants and Manufacturers Bancorporation, Inc. Notes to Consolidated Financial Statements December 31, 1996 (Dollars in thousands, except per share amounts) 1. ACCOUNTING POLICIES BUSINESS Merchants and Manufacturers Bancorporation, Inc. (the Corporation) provides a full range of personal and commercial financial services to customers through its subsidiaries. The Corporation and its subsidiaries are subject to competition from other financial institutions. They are also subject to the regulations of certain federal and state agencies and undergo periodic examinations by those regulatory agencies. BASIS OF FINANCIAL STATEMENT PRESENTATION The consolidated financial statements have been prepared in accordance with generally accepted accounting principles and include the accounts of the Corporation, its wholly owned subsidiaries, Lincoln State Bank (Lincoln), Franklin State Bank (Franklin) and Lincoln Savings Bank, S.A. (Lincoln Savings)--collectively, "the Banks," M&M Services, which provides management services for the Banks, Achieve Mortgage Corporation, a wholly owned subsidiary of Lincoln Savings, which provides mortgage banking services for the Banks and Lincoln's wholly owned subsidiary, Lincoln Investment Corp., and Lincoln Savings' wholly owned subsidiary, Lincoln Investment Management Corporation, which manage an investment portfolio for the Banks. All significant intercompany accounts and transactions have been eliminated. In preparing the consolidated financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS Cash and cash equivalents include amounts due from banks (both interest-bearing and noninterest-bearing) and federal funds sold. 7 29 Merchants and Manufacturers Bancorporation, Inc. Notes to Consolidated Financial Statements (continued) 1. ACCOUNTING POLICIES (CONTINUED) INVESTMENT AND MORTGAGE-RELATED SECURITIES All of the Corporation's investment and mortgage-related securities are classified as available-for-sale and are stated at fair value, with the unrealized gains and losses, net of tax, reported as a separate component of stockholders' equity. On October 31, 1995, the Corporation chose to reclassify all remaining investment securities that were classified as held-to-maturity to available-for-sale. At the date of the transfer, the amortized cost of the investment securities was $2,800. The unrealized gain on those securities was $17, which is included in stockholders' equity net of income tax effect of $7. The amortized cost of securities classified as available-for-sale 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. An allowance for interest on loans is provided when management considers the collection of these accounts 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. 8 30 Merchants and Manufacturers Bancorporation, Inc. Notes to Consolidated Financial Statements (continued) 1. ACCOUNTING POLICIES (CONTINUED) 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. The Corporation considers loans secured by one- to four-family residential properties and all consumer loans as homogeneous loans and therefore exempt for purposes of measuring impairment as defined by Statement of Financial Accounting Standards (SFAS or Statement) No. 114, "Accounting by Creditors for Impairment of a Loan," which requires that impaired loans be measured at the present value of expected future cash flows discounted at the loan's effective interest rate or, as a practical expedient, at the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. The Corporation had no impaired loans in 1996 or 1995. A substantial portion of the Banks' loans are collateralized by real estate in metropolitan Milwaukee, Wisconsin. Accordingly, the ultimate collectibility of a substantial portion of the Banks' loan portfolio and the recovery of a substantial portion of the carrying amount of real estate owned are susceptible to changes in market conditions in metropolitan Milwaukee, Wisconsin. Management believes that the allowance for loan losses is adequate. While management uses available information to recognize losses, future additions to the allowance may be necessary based on changes in economic conditions. PREMISES AND EQUIPMENT Premises and equipment are stated at cost, less accumulated depreciation. Expenditures for normal repairs and maintenance are charged to operations as incurred. The cost of premises and equipment is depreciated, using the straight-line or double-declining-balance methods, over the estimated useful lives of the assets. 9 31 Merchants and Manufacturers Bancorporation, Inc. Notes to Consolidated Financial Statements (continued) 1. ACCOUNTING POLICIES (CONTINUED) INCOME TAXES The Corporation and its subsidiaries file a consolidated federal income tax return and separate state income tax returns. Provisions are made for deferred taxes applicable to income and expense items reported in different periods than for income tax purposes. EARNINGS PER SHARE INFORMATION Earnings per share of common stock have been computed based on the weighted average number of common shares outstanding during each year. Weighted average shares outstanding were 875,082, 889,677 and 890,655 in 1996, 1995 and 1994, respectively. PENDING ACCOUNTING CHANGE In June 1996, the Financial Accounting Standards Board (FASB) issued Statement No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," which provides new accounting and reporting standards for sales, securitization, and servicing of receivables and other financial assets and extinguishments of liabilities. The provisions of the Statement are to be applied to transactions occurring after December 31, 1996. Management does not believe the Company will be significantly impacted by the adoption of Statement No. 125 or the amendment of Statement No. 125 by Statement No. 127. 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, 1996 Mutual funds $ 3,173 $ - $ 75 $ 3,098 U.S. treasury and other U.S. government securities 11,404 16 99 11,321 Small Business Administration certificates 1,047 36 3 1,080 Collateralized mortgage obligations 2,962 3 22 2,943 Government agency mortgage-backed securities 24,380 46 215 24,211 ---------------------------------------- $42,966 $101 $414 $42,653 ========================================
10 32 Merchants and Manufacturers Bancorporation, Inc. Notes to Consolidated Financial Statements (continued) 2. INVESTMENT AND MORTGAGE-BACKED SECURITIES (CONTINUED)
Gross Gross Amortized Unrealized Unrealized Cost Gains Losses Fair Value ------------------------------------------------------ At December 31, 1995 Mutual funds $ 3,173 $ - $ 87 $ 3,086 U.S. treasury and other U.S. government securities 8,705 46 2 8,749 Small Business Administration certificates 1,224 35 2 1,257 State and political subdivision securities 2,741 2 2 2,741 Collateralized mortgage obligations 3,813 3 44 3,772 Government agency mortgage-backed securities 40,710 117 348 40,479 ------------------------------------------------------ $60,366 $203 $485 $60,084 ======================================================
Securities carried at $1,100 at December 31, 1996 were pledged principally to secure liabilities to the U.S. Treasury. The amortized cost and market value of securities at December 31, 1996, 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 Cost Fair Value ------------------- Due in one year or less $ 800 $ 802 Due after one year through five years 10,604 10,519 Mutual funds 3,173 3,098 Small Business Administration certificates 1,047 1,080 Collateralized mortgage obligations 2,962 2,943 Government agency mortgage-backed securities 24,380 24,211 ------------------- $42,966 $42,653 ===================
Proceeds from sales of securities available-for-sale during the years ended December 31, 1996, 1995 and 1994, were $15,848, $13,724 and $12,637, respectively. Gross gains of $87, $65 and $27 were recorded on those sales for the years ended December 31, 1996, 1995 and 1994, respectively. Gross losses of $17, $4 and $271 were also recorded in the years ended December 31, 1996, 1995 and 1994, respectively. 11 33 Merchants and Manufacturers Bancorporation, Inc. Notes to Consolidated Financial Statements (continued) 3. LOANS RECEIVABLE Loans receivable consist of the following:
DECEMBER 31 1996 1995 ------------------- First mortgage: Conventional single-family residential $ 58,358 $ 57,629 Commercial and multifamily residential 61,707 44,594 Construction 12,872 12,619 ------------------- 132,937 114,842 Commercial business loans 45,635 36,605 Home equity loans 1,367 1,695 Consumer and installment loans 10,984 10,810 Other 883 1,326 ------------------- 58,869 50,436 Less: Deferred loan fees 76 95 Allowance for loan losses 1,939 1,533 ------------------- $189,791 $163,650 ===================
Transactions in the allowance for loan losses are summarized as follows:
YEAR ENDED DECEMBER 31 1996 1995 1994 -------------------------- Balance at beginning of year $1,533 $1,464 $1,356 Provisions charged to operations 460 132 43 Recoveries 29 - 77 Charge-offs (83) (63) (12) -------------------------- Balance at end of year $1,939 $1,533 $1,464 ==========================
Total nonaccrual loans were $937 and $658 at December 31, 1996 and 1995, respectively. 12 34 Merchants and Manufacturers Bancorporation, Inc. Notes to Consolidated Financial Statements (continued) 4. PREMISES AND EQUIPMENT Premises and equipment consist of the following:
DECEMBER 31 1996 1995 --------------------- Land $ 2,248 $ 2,248 Office buildings and improvements 6,646 6,374 Furniture and equipment 3,566 3,160 --------------------- 12,460 11,782 Less accumulated depreciation (4,660) (4,177) --------------------- $ 7,800 $ 7,605 =====================
5. DEPOSITS Deposits consist of the following: DECEMBER 31 1996 1995 ---------------------- Noninterest-bearing checking accounts $ 32,095 $ 32,575 Negotiable order of withdrawal accounts 19,793 22,989 Passbook accounts 59,569 63,420 Savings deposits and money market investment accounts 7,500 7,509 Time deposits and certificate accounts 113,976 106,590 ---------------------- 232,933 233,083 Accrued interest on deposits 395 575 ---------------------- $233,328 $233,658 ======================
The scheduled maturities of time deposits and certificate accounts at December 31, 1996 are as follows: One year or less $101,395 Over one, through two years 6,170 Over two, through three years 3,010 Thereafter 3,401 -------- $113,976 ========
At December 31, 1996 and 1995, time deposits and certificate accounts with balances greater than or equal to $100 amounted to $15,313 and $18,862, respectively. 13 35 Merchants and Manufacturers Bancorporation, Inc. Notes to Consolidated Financial Statements (continued) 6. BORROWINGS At December 31, 1996, the Corporation had an unused line of credit with an unaffiliated bank with a total available balance of $500. The line bears interest at the lender's prime rate (8.25% at December 31, 1996) and is collateralized by 100% of the capital stock of Franklin State Bank. Lincoln Savings also has an advance of $3,000 from the Federal Home Loan Bank. The advance bears interest of 6.04% and matures in July 1997. Lincoln Savings is required to maintain unencumbered mortgage loans in its portfolio aggregating at least 167% of the amount of outstanding advances from the Federal Home Loan Bank as collateral. In addition, these advances are collateralized by Lincoln Savings' Federal Home Loan Bank stock. Lincoln State and Lincoln Savings have $3,500 and $350, respectively, of overnight federal funds purchased at December 31, 1996, which bear interest at 7.75%. 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, 1996, that the Banks meet all capital adequacy requirements to which they are subject. 14 36 Merchants and Manufacturers Bancorporation, Inc. Notes to Consolidated Financial Statements (continued) 7. STOCKHOLDERS' EQUITY (CONTINUED) As of December 31, 1996, the most recent notification from Federal Deposit Insurance Corporation categorized the Banks as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Banks must maintain minimum total risk-based, Tier I risk-based, 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 institutions' category.
To Be Well Capitalized For Capital Under Prompt Corrective Actual Adequacy Purposes Action Provisions --------------- ------------------ -------------------- Amount Ratio Amount Ratio Amount Ratio --------------- ------------------ -------------------- AS OF DECEMBER 31, 1996 Total Capital (to Risk- Weighted Assets): Lincoln State Bank $11,733 11.92% $7,871 >8.00% $9,839 >10.00% Franklin State Bank 2,740 11.27% 1,945 >8.00% 2,431 >10.00% Lincoln Savings Bank 10,837 18.05% 4,803 >8.00% 6,003 >10.00% Tier 1 Capital (to Risk- Weighted Assets): Lincoln State Bank 10,703 10.88% 3,936 >4.00% 5,903 >6.00% Franklin State Bank 2,458 10.11% 972 >4.00% 1,458 >6.00% Lincoln Savings Bank 10,205 17.00% 2,401 >4.00% 3,602 >6.00% Tier 1 Capital (to Average Assets): Lincoln State Bank 10,703 8.39% 5,101 >4.00% 6,376 >5.00% Franklin State Bank 2,458 7.33% 1,342 >4.00% 1,677 >5.00% Lincoln Savings Bank 10,205 9.70% 4,207 >4.00% 5,258 >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, 1996, the subsidiary banks collectively had equity of $23,237 of which $2,415 was available for distribution to the Corporation as dividends without prior regulatory approval. 15 37 Merchants and Manufacturers Bancorporation, Inc. Notes to Consolidated Financial Statements (continued) 8. RESTRICTIONS ON SUBSIDIARY DIVIDENDS, LOANS OR ADVANCES (CONTINUED) Under FRB 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, 1996, the maximum amount available for transfer from any one of these Banks to the Corporation in the form of loans approximates 8.6% of consolidated stockholders' equity. 9. EMPLOYEE BENEFIT PLANS The Corporation has an Incentive Stock Option Plan under which 45,000 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:
Number Option Price of Shares Per Share --------- ------------- Total outstanding at December 31, 1993 20,000 $16.27-$20.64 Granted during 1994 5,000 $25.00 ------ Total outstanding at December 31, 1996, 1995 and 1994 25,000 $16.27-$25.00 ====== =============
At December 31, 1996, all outstanding options are exercisable. The Corporation has a 401(k) Profit Sharing Plan and Trust which covers substantially all employees with at least six months of service who have attained age twenty and one-half. Participating employees may annually contribute up to 12% of their pre-tax compensation. The Corporation's annual contribution consists of a discretionary matching percentage, limited to 1% of employee compensation, and an additional discretionary amount, which is determined annually by the Board of Directors. The Corporation's contributions for 1996, 1995 and 1994, were $164, $149 and $144, respectively. 16 38 Merchants and Manufacturers Bancorporation, Inc. Notes to Consolidated Financial Statements (continued) 9. EMPLOYEE BENEFIT PLANS (CONTINUED) The Corporation has a Management Recognition Plan (MRP) in order to provide Lincoln Savings employees in management positions a proprietary interest in the Corporation in a manner designed to encourage such key persons to remain with the Corporation. The Corporation awarded 9,918 shares of common stock of the Corporation at a price of $20 per share during the year ended December 31, 1993. All shares awarded became vested at December 31, 1993. 10. INCOME TAXES The provision for income taxes consists of the following:
YEAR ENDED DECEMBER 31 1996 1995 1994 ------------------------- Current: Federal $ 718 $769 $644 State 168 124 158 ------------------------- 886 893 802 ------------------------- Deferred: Federal (124) 4 48 State (32) 20 24 ------------------------- (156) 24 72 ------------------------- $ 730 $917 $874 =========================
The provision for income taxes differs from that computed at the federal statutory corporate tax rate as follows:
YEAR ENDED DECEMBER 31 1996 1995 1994 ------------------------ Income tax at statutory rate $694 $890 $815 Increase (reduction) resulting from: Tax-exempt interest income (49) (58) (46) State income taxes, net of federal tax benefit 89 100 127 Other (4) (15) (22) ------------------------ $730 $917 $874 ========================
17 39 Merchants and Manufacturers Bancorporation, Inc. Notes to Consolidated Financial Statements (continued) 10. INCOME TAXES (CONTINUED) The components of deferred tax assets and liabilities are as follows:
DECEMBER 31 1996 1995 ------------- Deferred tax assets: Allowance for loan losses $ 533 $ 370 Unrealized loss on securities 103 101 Net operating loss carryforwards 440 334 Other assets 69 161 --------------- Total deferred tax assets 1,145 966 Valuation allowance (441) (334) --------------- 704 632 Deferred tax liabilities: Depreciation 271 250 Other liabilities 30 32 --------------- Total deferred tax liabilities 301 282 --------------- Net deferred tax asset $ 403 $ 350 ===============
At December 31, 1996, the Corporation has state net operating loss carryforwards of approximately $8,245 which expire at various dates through 2011. Due to the unlikelihood of realizing these benefits, a valuation allowance of $441 has been established to offset the deferred tax assets relating to these carryforwards. Lincoln Savings qualifies under provisions of the Internal Revenue Code, that 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. Such amounts accumulated prior to 1988 are considered permanently deferred and, accordingly, no provision for federal income taxes has been made for approximately $3,606 of retained income as of December 31, 1996. If Lincoln Savings no longer qualified as a bank for tax purposes, income taxes of approximately $1,486 would be imposed. 18 40 Merchants and Manufacturers Bancorporation, Inc. Notes to Consolidated Financial Statements (continued) 11. LOANS TO RELATED PARTIES In the ordinary course of business, loans are granted to related parties, which include management personnel, directors and entities in which such persons are principal stockholders. Activity in loans to related parties is as follows: Balance at December 31, 1994 $12,152 Loans originated 4,791 Repayments (2,325) ------- Balance at December 31, 1995 14,618 Loans originated 7,136 Repayments (4,770) ------- Balance at December 31, 1996 $16,984 =======
12. COMMITMENTS AND CONTINGENT LIABILITIES Off-balance-sheet financial instruments whose contracts represent credit and/or interest rate risk at December 31, 1996 and 1995, are as follows:
DECEMBER 31 1996 1995 ------------------ Commitments to originate mortgage loans (expiring within three months): Fixed rates $ 5,977 $ 4,699 Adjustable rates 194 364 Unused lines of credit: Commercial business 22,002 19,213 Home equity (adjustable rate) 1,710 1,890 Credit cards (fixed rate) 2,317 1,455 Standby letters of credit 2,152 1,584
19 41 Merchants and Manufacturers Bancorporation, Inc. Notes to Consolidated Financial Statements (continued) 12. COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED) 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. Except for the above-noted commitments to originate loans in the normal course of business, the Corporation and the Banks have not undertaken the use of off-balance-sheet derivative financial instruments for any purpose. 13. FAIR VALUES OF FINANCIAL INSTRUMENTS Statement No. 107, "Disclosures About Fair Value of Financial Instruments," requires disclosure of fair value information about financial instruments, whether or not recognized in the statement of financial condition, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. Statement No. 107 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not necessarily represent the underlying value of the Corporation. The Corporation does not routinely measure the market value of financial instruments because such measurements represent point-in-time estimates of value. It is generally not the intent of the Corporation to liquidate and therefore realize the difference between market value and carrying value and even if it were, there is no assurance that the estimated market values could be realized. Thus, the information presented is not particularly relevant to predicting the Corporation's future earnings or cash flows. The following methods and assumptions were used by the Corporation in estimating its fair value disclosures for financial instruments: CASH AND CASH EQUIVALENTS The carrying amounts for cash and cash equivalents approximate those assets' fair values. 20 42 Merchants and Manufacturers Bancorporation, Inc. Notes to Consolidated Financial Statements (continued) 13. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED) INVESTMENT AND MORTGAGE-RELATED SECURITIES Fair values for investment and mortgage-related securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. ACCRUED INTEREST INCOME AND EXPENSE The fair value of accrued interest income and expense approximates the respective book value. LOANS RECEIVABLE For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. The fair values for residential mortgage loans are based on quoted market prices of similar loans sold in conjunction with securitization transactions, adjusted for differences in loan characteristics. The fair values for commercial real estate loans, rental property mortgage loans, commercial business loans and consumer and other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. FEDERAL HOME LOAN BANK STOCK FHLB stock is carried at cost which is its redeemable value since the market for this stock is restricted. DEPOSITS The fair values disclosed for noninterest-bearing checking accounts, negotiable order of withdrawal accounts, passbook accounts and savings deposits and money market investment accounts are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). The carrying amounts for variable-rate, fixed term certificate accounts approximate their fair values at the reporting date. The fair values of fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits. 21 43 Merchants and Manufacturers Bancorporation, Inc. Notes to Consolidated Financial Statements (continued) 13. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED) 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, 1996. The carrying amounts and fair values of the Corporation's financial instruments consist of the following:
DECEMBER 31, 1996 DECEMBER 31, 1995 --------------------- --------------------- Carrying Carrying Amount Fair Value Amount Fair Value --------------------- --------------------- Cash and cash equivalents $ 22,272 $ 22,272 $ 28,447 $ 28,447 Securities available-for-sale: Investment securities 15,499 15,499 15,833 15,833 Mortgage-related securities 27,154 27,154 44,251 44,251 Loans receivable 191,806 192,395 165,278 165,541 Accrued interest receivable 1,470 1,470 1,532 1,532 Federal Home Loan Bank stock 1,118 1,118 702 702 Deposits 232,933 232,865 233,083 233,231 Accrued interest payable 395 395 575 575 Borrowings 6,850 6,850 3,000 2,973
22 44 Merchants and Manufacturers Bancorporation, Inc. Notes to Consolidated Financial Statements (continued) 14. SUBSEQUENT EVENT On January 1, 1997, Lincoln Savings was converted from a Wisconsin stock savings bank to a Wisconsin commercial bank to obtain increased flexibility in structuring its investments and operations, thereby achieving certain improvements in operating income, while maintaining financial soundness. 15. MERCHANTS AND MANUFACTURERS BANCORPORATION, INC. PARENT COMPANY ONLY FINANCIAL INFORMATION
DECEMBER 31 STATEMENTS OF FINANCIAL CONDITION 1996 1995 ------------------ ASSETS Cash and cash equivalents $ 683 $ 320 Mortgage-related securities available-for-sale, at fair value - 713 Investment in subsidiaries 23,697 22,963 Premises and equipment 1,955 1,809 Other assets 925 998 ------------------ Total assets $27,260 $26,803 ================== LIABILITIES Other liabilities $ 880 $ 260 STOCKHOLDERS' EQUITY Common stock 898 898 Additional paid-in capital 10,759 10,759 Retained earnings 15,665 15,068 Less treasury stock (942) (182) ------------------ Total stockholders' equity 26,380 26,543 ------------------ Total liabilities and stockholders' equity $27,260 $26,803 ==================
23 45 Merchants and Manufacturers Bancorporation, Inc. Notes to Consolidated Financial Statements (continued) 15. MERCHANTS AND MANUFACTURERS BANCORPORATION, INC. PARENT COMPANY ONLY FINANCIAL INFORMATION (CONTINUED)
YEAR ENDED DECEMBER 31 1996 1995 1994 -------------------------- STATEMENTS OF INCOME Income: Interest on loans, including fees $ 26 $ - $ - Interest on investments 25 64 72 Dividends 1,876 1,198 938 Other 244 251 234 -------------------------- 2,171 1,513 1,244 Expenses: Salaries and employee benefits 847 503 482 Occupancy 281 272 268 Interest 3 - - Other 544 656 310 -------------------------- 1,675 1,431 1,060 -------------------------- Income before income taxes and equity in undistributed net income of subsidiary banks 496 82 184 Income taxes 478 389 262 -------------------------- Income before equity in undistributed net income of subsidiary banks 974 471 446 Equity in undistributed net income of subsidiary banks 336 1,230 1,078 -------------------------- Net income $1,310 $1,701 $1,524 ==========================
24 46 Merchants and Manufacturers Bancorporation, Inc. Notes to Consolidated Financial Statements (continued) 15. MERCHANTS AND MANUFACTURERS BANCORPORATION, INC. PARENT COMPANY ONLY FINANCIAL INFORMATION (CONTINUED)
YEAR ENDED DECEMBER 31 -------------------------- 1996 1995 1994 CONDENSED STATEMENTS OF CASH FLOWS OPERATING ACTIVITIES Net income $1,310 $1,701 $1,524 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed net income of subsidiaries (336) (1,230) (1,078) Provision for depreciation 80 73 62 Amortization of premiums on mortgage-backed securities 2 5 11 Decrease (increase) in other assets 73 (439) 267 Increase (decrease) in accrued liabilities 620 (40) 130 Other (429) - (14) -------------------------- Net cash provided by operating activities 1,320 70 902 INVESTING ACTIVITIES Sales of mortgage-backed securities 693 - - Proceeds from repayments of mortgage-related securities 27 48 99 Proceeds from sales of furniture and equipment - - 186 Purchases of furniture and equipment (226) (56) (93) -------------------------- Net cash provided by (used in) investing activities 494 (8) 192 FINANCING ACTIVITIES Payment of cash dividends (691) (569) (454) Capital contribution to subsidiary - - (300) Purchase of treasury stock (946) (178) (332) Proceeds from the sale of treasury stock 186 158 176 Proceeds from dividend reimbursement plan - 100 - -------------------------- Net cash used in financing activities (1,451) (489) (910) -------------------------- Increase (decrease) in cash and cash equivalents 363 (427) 184 Cash and cash equivalents at beginning of year 320 747 563 -------------------------- Cash and cash equivalents at end of year $ 683 $ 320 $ 747 ==========================
25 EX-27 2 FDS
9 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 9,247 9,667 3,358 0 42,653 0 0 191,730 1,939 267,723 232,933 6,850 1,560 0 0 0 898 25,482 267,723 15,228 3,518 522 19,328 8,146 8,362 10,966 460 70 10,020 2,041 2,041 0 0 1,311 1.50 1.50 7.91 938 0 0 0 1,533 85 29 1,939 1,939 0 0
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