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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 2002
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _________________ to _____________________
Commission file number 0-21292
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Wisconsin 39-1413328
- --------------------------------------------- ----------------------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification Number)
19105 West Capitol Drive, Suite 200
Brookfield, Wisconsin 53045
---------------------------
(Address of principal executive office)
Registrant's telephone number, including area code: (262) 790-2120
Securities registered pursuant to Section 12(b) of the Act: Not Applicable
Securities registered pursuant to section 12(g) of the Act:
COMMON STOCK, PAR VALUE $1.00 PER SHARE
---------------------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports) and (2) has been subject to such filing requirements for
the past 90 days.
Yes [X] No [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
form 10-K [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2)
Yes [ ] No [X].
As of June 28, 2002 (the last business day of the Registrant's most recently
completed second fiscal quarter) the aggregate market value of the shares (based
upon the average bid/ask price) held by non-affiliates was approximately
$66,916,000.
As of March 1, 2003, 2,875,115 shares of Common Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 2003 Annual Meeting of Shareholders of
the Registrant are incorporated by reference into Part III of this report.
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC.
*****
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2002
Page
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PART I
Item 1. Business 3
Item 2. Properties 8
Item 3. Legal Proceedings 9
Item 4. Submission of Matters to a Vote of Security Holders 9
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder's Matters 10
Item 6. Selected Financial Data 11
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 12
Item 7a. Quantitative and Qualitative Disclosures About Market Risk 26
Item 8. Financial Statements and Supplementary Data 27
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 27
PART III
Item 10. Directors and Executive Officers of the Registrant 28
Item 11. Executive Compensation 28
Item 12 Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters 28
Item 13. Certain Relationships and Related Transactions 28
Item 14. Controls and Procedures 28
PART IV
Item 15. Exhibits, Financial Statements Schedules and Reports on Form 8-K 29
Signatures
Certifications
2
PART I
ITEM 1. BUSINESS
GENERAL
Merchants & Manufacturers Bancorporation, Inc. ("Merchants") was
incorporated in Wisconsin in 1983 and is a registered bank holding company under
the Bank Holding Company Act of 1956. As of December 31, 2002, we had total
consolidated assets of $909.1 million, consolidated loans of $665.4 million and
consolidated deposits of $729.4 million. Our executive offices are located at
19105 West Capitol Drive, Brookfield, Wisconsin 53045 (telephone number (262)
790-2120).
We are engaged in the community banking business through our Community
BancGroup(TM), which includes our seven bank subsidiaries. We operate five bank
subsidiaries in Wisconsin including; Lincoln State Bank; Grafton State Bank;
Franklin State Bank; Community Bank of Oconto County and Fortress Bank of
Westby. We also operate two additional bank subsidiaries, Fortress Bank of
Cresco and Fortress Bank, N.A., which operate in Iowa and Minnesota,
respectively.
Through our banks, we provide a broad range of services to individual
and commercial customers. Collectively, our subsidiary banks enjoy the
competitive advantages of being able to offer the products, services,
operational capacity and the lending limit of a larger institution with the
timely personal customer service typically offered by a community bank.
In addition to traditional bank products, we offer our customers a
broad range of residential mortgage services through CBG Mortgage, Inc., a
subsidiary of Grafton State Bank, and a full range of investment and life
insurance products through CBG Financial Services, Inc. Each of these
subsidiaries enable our member banks to provide a full range of financial
products to their customers as well as contribute non-interest income to us.
We also operate three additional non-bank operating subsidiaries:
Lincoln Neighborhood Redevelopment Corporation, which was organized in 1988 for
the purpose of redeveloping and rehabilitating certain areas located primarily
on the near south side of Milwaukee; CBG Services, Inc., which was formed in
1994 to provide operational services to our banks; and Merchants Merger
Corporation which was formed in 1999 to facilitate bank acquisitions.
GROWTH STRATEGY
Over the last three years, our total assets have increased from $533
million as of December 31, 1999 to $909 million as of December 31, 2002. During
the same three-year period, our earnings per share has increased from $1.58 to
$2.53. The substantial increase in both total assets and earnings per share is a
direct result of the implementation of our growth strategy. The key elements of
our growth strategy include acquisitions, internal growth and a focus on
expanding our non-interest income.
ACQUISITIONS. We believe there are significant opportunities to
establish our presence in additional markets through the acquisition of selected
community banks, individual branches and other financial service businesses,
primarily in Wisconsin. We generally look at four things when analyzing a
potential acquisition:
- the profitability of the institution on a historical and
forward looking basis;
- the stability and experience of the management team and board
of directors;
- the growth potential of the geographical markets in which the
institution operates; and
- the asset quality track record of the institution and
management.
INTERNAL GROWTH. While we made acquisitions in 1999, 2001 and 2002,
significant opportunities exist to expand through internal growth by delivering
quality products and by providing personal service to individuals and small to
mid-sized businesses. By focusing on customer service and convenience, we
provide the opportunity for customers to receive the personalized service that
they find attractive in smaller organizations and still realize many of the
efficiencies available to larger organizations.
In addition, we intend to expand through internal growth with the
addition of quality employees and through de novo branching into new markets by
our existing bank subsidiaries. Throughout 2002, Merchants made a significant
investment in recruiting and developing highly qualified and productive loan
officers. Merchants also entered new, high growth markets through branching. For
instance, Community Bank of Oconto County opened a branch in Little Suamico,
during 2002. The branch is located in a key growth corridor along a major
highway approximately 15 miles North of downtown Green Bay.
NON-INTEREST INCOME. Through CBG Financial Services, Inc., and its Link
Community Financial Services, LLC subsidiary, we have significantly enhanced our
ability to provide investment and insurance products to our current customer
base. For example, as of December 31, 2002, Link had seven representatives
strategically located and dedicated to providing customers with a full range of
financial services. Over time, we expect this line of business to significantly
enhance our relationships with current bank customers and also provide the
subsidiary banks with additional opportunities for deposit and loan growth as
our investment and insurance customer base expands over time.
3
RECENT ACQUISITIONS
During 2002, we expanded our operations into seven new markets, all of
which are located in a 90-mile radius of La Crosse, Wisconsin, through an
acquisition. On November 30, 2002, we acquired Fortress Bancshares, Inc.
("Fortress") and its wholly-owned subsidiaries, Fortress Bank of Westby,
Wisconsin, Fortress Bank of Cresco, Iowa and Fortress Bank, N.A. headquartered
in Houston, Minnesota ("Fortress Banks"). The purchase price for Fortress was
$21.5 million including $9.5 million in cash and 390,000 shares of common stock
valued at $11.7 million based on the average price over the contractual pricing
period. At the date of the acquisition Fortress had consolidated assets of
$222.5 million, consolidated loans of $144.8 million and consolidated deposits
of $175.2 million.
OUR BANK SUBSIDIARIES
We currently provide community-oriented, commercial and retail banking
services to individuals as well as to small to mid-size businesses in our
communities through 34 banking facilities in Wisconsin, Iowa & Minnesota. The
Banks have consistent products, services and delivery systems and comply with
similar regulatory guidance. As such they are not segments as that term is
defined in Financial Accounting Standards Board Statement 131. The table below
provides information regarding each of our banks and their respective markets.
TOTAL ASSETS AT NUMBER OF
BANK YEAR ORGANIZED YEAR ACQUIRED DECEMBER 31, 2002 COMMUNITIES SERVED FACILITIES
---- -------------- ------------- ----------------- ------------------ ----------
(DOLLARS IN THOUSANDS)
Lincoln State Bank 1919 1983 $351,442 Milwaukee, WI 7
Muskego, WI 2
Brookfield, WI 1
Greenfield, WI 2
Hales Corners, WI 1
New Berlin, WI 2
Pewaukee, WI 1
West Allis, WI 1
Grafton State Bank 1906 1999 $158,131 Grafton, WI 2
Saukville, WI 1
Franklin State Bank 1982 1984 $85,772 Franklin, WI 3
Community Bank of Oconto 1989 2001 $75,557 Oconto Falls, WI 1
County Gillett, WI 1
Little Suamico, WI 1
Fortress Bank of Westby 1992 2002 $112,657 Westby, WI 2
Coon Valley, WI 1
West Salem, WI 1
Chaseburg, WI 1
Fortress Bank of Cresco 1996 2002 $63,366 Cresco, IA 1
Fortress Bank, N.A. 1993 2002 $56,539 Houston, MN 1
Winona, WI 1
OUR BANKS
Through our banks, we provide 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, savings accounts, certificates of deposit, individual retirement
accounts and club accounts. Our banks also make secured and unsecured
commercial, mortgage, construction and consumer term loans on both a fixed and
variable rate basis. The terms on the loans retained in the banks' portfolios
generally range from one month to five years. Our banks also provide lines of
credit to commercial borrowers and to individuals through home equity loans.
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 seven
full service branch offices in the southeastern Wisconsin communities of
Milwaukee, Muskego, New Berlin, Brookfield and Pewaukee. In addition it operates
ten limited hours facilities in Milwaukee and Waukesha Counties. At December 31,
2002, Lincoln State Bank comprised 38.7% of our consolidated assets.
Grafton State Bank. Grafton State Bank was organized as a state banking
association under the laws of the State of Wisconsin in 1907. Its principal
office and a branch office are located in Grafton, Wisconsin and another branch
office is located in Saukville, Wisconsin. At December 31, 2002, Grafton State
Bank comprised 17.4% of our consolidated assets.
4
Franklin State Bank. Franklin State Bank was organized as a state
banking association under the laws of the State of Wisconsin in 1982. Its
principal office and a branch office are located in Franklin, Wisconsin. At
December 31, 2002, Franklin State Bank comprised 9.4% of our consolidated
assets. In addition it also operates a limited hours facility in Franklin.
Community Bank of Oconto County. Community Bank of Oconto County is a
full service commercial bank serving all of Oconto County and the eastern
portion of Shawano County. In addition to the main office in the city of Oconto
Falls, which is located approximately 25 miles north of Green Bay, Wisconsin,
Community Bank of Oconto County operates two branch offices, one located in the
city of Gillett and another located in the town of Little Suamico. At December
31, 2002, Community Bank of Oconto County comprised 8.3% of our consolidated
assets.
Fortress Bank of Westby. The Fortress Bank of Westby is a full service
commercial bank serving the banking needs of LaCrosse County, southeastern
Monroe County and northern Vernon County, Wisconsin. The Fortress Bank of Westby
has offices in the southwestern Wisconsin communities of Westby, Coon Valley,
Chaseburg, and West Salem. At December 31, 2002, The Fortress Bank of Westby
comprised 12.4% of our consolidated assets.
Fortress Bank of Cresco. The Fortress Bank of Cresco is a full service
commercial bank serving the banking needs of eastern Howard County and western
Winneshiek County, Iowa from its office in Cresco, Iowa. At December 31, 2002,
The Fortress Bank of Cresco comprised 7.0% of our consolidated assets.
Fortress Bank, N.A. Fortress Bank, N.A., Houston, Minnesota is a full
service commercial bank serving the customers in Houston, Minnesota and
northeast Winona Counties in Minnesota from offices in Houston and Winona. At
December 31, 2002, The Fortress Bank, N.A. comprised 6.2% of our consolidated
assets.
OUR OPERATING SUBSIDIARIES
CBG Financial Services, Inc. was formed in 2002 to provide non-insured
investment and insurance products to customers of the Banks. For the twelve
months ended December 31, 2002, CBG Financial Services had revenues of $215,000.
CBG Mortgage, Inc. was formed in 2002 to act as our mortgage broker. As
of December 31, 2002, CBG Mortgage services $135.0 million of residential
mortgages.
Fortress Mortgage Services Company acts as the mortgage broker for the
Fortress Banks. As of December 31, 2002, Fortress Mortgage services $52.1
million of residential mortgages.
Lincoln Neighborhood Redevelopment Corporation. The Lincoln
Neighborhood Redevelopment Corporation was formed in June 1988. The
Redevelopment Corporation was established to redevelop and rehabilitate certain
areas located on the south-side of Milwaukee by, among other things:
- providing home mortgage loans to customers with low to
moderate income;
- working with local businesses to keep commercial areas strong
and attractive;
- pursuing means to preserve and create jobs; o encouraging
appropriate land-use;
- involving community residents in economic planning; and
- retaining and attracting businesses.
As of December 31, 2002, the Redevelopment Corporation had assets of
$901,000, $574,000 in liabilities and equity of $327,000.
CBG Services, Inc. M&M Services was formed in January 1994 and changed
its name to CBG Services, Inc. in 2002. CBG Services provides operational
services to our banks. These services include, but are not limited to:
- human resources;
- auditing;
- marketing;
- financial analysis;
- loan document preparation;
- loan credit analysis;
- item processing;
- compliance;
- training; and
- operations.
Merchants Merger Corp. Merchants Merger Corp. was formed in 1999 to
facilitate mergers and future acquisitions.
5
OTHER SUBSIDIARIES
Lincoln State Bank, Grafton State Bank, Community Bank of Oconto County
and Fortress Bank of Westby 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 1992 an investment subsidiary known as Westby Investment
Company, Inc. was formed to manage the majority of the Fortress Bank of Westby's
investment portfolio and to enhance the overall return of the portfolio. The
subsidiary received a capital contribution of approximately $10 million of
municipal and other investment securities from the Fortress Bank of Westby in
exchange for 100% of the stock of the subsidiary. In 1996 an investment
subsidiary known as GSB Investments, Inc. was formed to manage the majority of
Grafton State Bank's investment portfolio and to enhance the overall return of
the portfolio. The subsidiary received a capital contribution of approximately
$10 million of mortgage-backed and other investment securities from Grafton
State Bank in exchange for 100% of the stock of the subsidiary. In 2001 an
investment subsidiary known as CBOC Investments, Inc. was formed to manage the
majority of the Community Bank of Oconto County's investment portfolio and to
enhance the overall return of the portfolio. The subsidiary received a capital
contribution of approximately $11 million of municipal and other investment
securities from Community Bank of Oconto County in exchange for 100% of the
stock of the subsidiary. These subsidiaries are an intrinsic component of their
respective parent banks and assets thereof are included in the total assets of
the respective Banks above.
COMPETITION
Our banks serve their surrounding communities in their respective
markets located in Wisconsin, Iowa and Minnesota. There are presently in excess
of one hundred other financial institutions in our service areas that directly
compete with one or more of our banks. Our banks compete with other commercial
banks, savings banks, credit unions, mortgage brokers, small-loan companies,
insurance companies, investment banking firms and large retail companies.
The principal methods of competition include, interest rates paid on
deposits and charged on loans, personal contacts and efforts to obtain deposits
and loans and types and quality of services provided and convenience of the
locations.
EMPLOYEES
At December 31, 2002, we (along with our subsidiaries) employed 281
full-time and 122 part-time employees. We provide a wide range of benefits to
employees, including educational activities, and consider our employee relations
to be excellent. We conduct extensive training programs in order to enhance
job-related knowledge and skills of our people and to train our employees with a
sales-oriented approach to customers. Eligible employees participate in a 401(k)
plan as well as group life and major medical insurance programs. None of our
employees are represented by a labor union.
SUPERVISION AND REGULATION
We are extensively regulated under both federal and state laws. Laws
and regulations to which Merchants and Manufacturers and our banks are subject
govern, among other things, the scope of business, investments, reserve levels,
capital levels relative to operations, the nature and amount of collateral for
loans, the establishment of branches, mergers and consolidations and the payment
of dividends. These laws and regulations are intended to protect our depositors.
Any change in applicable laws or regulations may have a material effect on our
business and prospects, and legislative and policy changes may affect our
operations. We cannot predict the nature or the extent of the effects on our
business and earnings that fiscal or monetary policies, economic controls or new
federal or state legislation may have in the future.
The following references to statutes and regulations affecting us and
the banks are brief summaries only and do not claim to be complete and are
qualified in their entirety by reference to the statutes and regulations.
RECENT LEGISLATION
In 2001, Congress enacted the Uniting and Strengthening America by
Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of
2001 (the "USA PATRIOT Act"). The USA PATRIOT Act is designed to deny terrorists
and criminals the ability to obtain access to the United States financial
system, and has significant implications for depository institutions, brokers,
dealers and other businesses involved in the transfer of money. The USA PATRIOT
Act mandates or will require financial services companies to implement
additional policies and procedures with respect to, or additional measures
designed to address, any or all of the following matters, among others: money
laundering, terrorist financing, identifying and reporting suspicious activities
and currency transactions, and currency crimes.
6
On July 30, 2002, President Bush signed the Sarbanes-Oxley Act of 2002
(the "Sarbanes-Oxley Act"). This legislation impacts corporate governance of
public companies, affecting their officers and directors, their audit
committees, their relationships with their accountants and the audit function
itself. Certain provisions of the Act became effective on July 30, 2002. Others
will become effective as the SEC adopts appropriate rules. The Sarbanes-Oxley
Act implements a broad range of corporate governance and accounting measures for
public companies designed to promote honesty and transparency in corporate
America and better protect investors from corporate wrongdoing. The
Sarbanes-Oxley Act's principal legislation includes: a) The creation of an
independent accounting oversight board to oversee the audit of public companies
and auditors who perform such audits; b) Auditor independence provisions which
restrict non-audit services that independent accountants may provide to their
audit clients; c) Additional corporate governance and responsibility measures,
including: (i) requiring chief executive officer and chief financial officer to
certify financial statements; (ii) prohibiting trading of securities by officers
and directors during periods in which certain employee benefit plans are
prohibited from trading; (iii) requiring a company's chief executive officer and
chief financial officer to forfeit salary and bonuses, including profits on the
sale of company securities, in certain situations; and (iv) protecting
whistleblowers and informants; d) Expansion of power of the audit committee,
including the requirements that the audit committee: (i) have direct control of
the engagement of the outside auditor; (ii) be able to hire and fire the
auditor, and (iii) approve all non-audit services; e) Expanded disclosure
requirements, including accelerated reporting of stock transactions by insiders
and the prohibition of most loans to directors and executive officers of
non-financial institutions; mandatory disclosure by analysts of potential
conflicts of interest; and a range of enhanced penalties for fraud and other
violations.
The earnings and business of Merchants and Manufacturers Bancorporation
and its bank subsidiaries also are affected by the general economic and
political conditions in the United States and abroad and by monetary and fiscal
policies of various federal agencies. The Federal Reserve Board impacts the
competitive conditions under which we operate by determining the cost of funds
obtained from money market sources for lending and investing and by exerting
influence on interest rates and credit conditions. In addition, legislative and
economic factors can be expected to have an ongoing impact on the competitive
environment within the financial services industry. The impact of fluctuating
economic conditions and federal regulatory policies on the future profitability
of our organization cannot be predicted with certainty.
BANK HOLDING COMPANY REGULATION
We are a bank holding company registered under the Bank Holding Company
Act of 1956, as amended. Under the Bank Holding Company Act, we are subject to
periodic examination by the Federal Reserve and are required to file periodic
reports of our operations and such additional information as the Federal Reserve
may require.
Investments and Activities. A bank holding company must obtain approval
from the Federal Reserve before:
- acquiring, directly or indirectly, ownership or control of any
voting shares of another bank or bank holding company if, after the acquisition,
it would own or control more than 5% of the shares of the bank or bank holding
company (unless it already owns or controls the majority of the shares);
- acquiring all or substantially all of the assets of another
bank or bank holding company; or
- merging or consolidating with another bank holding company.
The Federal Reserve will not approve any acquisition, merger or
consolidation that would have a substantially anticompetitive result unless the
anticompetitive effects of the proposed transaction are clearly outweighed by a
greater public interest in meeting the convenience and needs of the community to
be served. The Federal Reserve also considers capital adequacy and other
financial and managerial factors in reviewing acquisitions or mergers.
With certain exceptions, a bank holding company is also prohibited
from:
- acquiring or retaining direct or indirect ownership or control
of more than 5% of the voting shares of any company that is not a bank or bank
holding company; and
- engaging, directly or indirectly, in any business other than
that of banking, managing and controlling banks or furnishing services to banks
and their subsidiaries.
Bank holding companies may, however, engage in businesses found by the
Federal Reserve to be closely related to the business of banking or of managing
or controlling banks. These activities include:
- making or servicing loans and certain types of leases;
- engaging in certain insurance and discount brokerage
activities;
- performing certain data processing services;
- acting in certain circumstances as a fiduciary or investment
or financial advisor;
- owning savings associations; and
- making investments in corporations or projects designed to
promote community welfare.
7
We are also authorized to engage in the expanded activities permitted
under the Gramm-Leach-Bliley Act since we elected to become a "financial holding
company" and to otherwise qualify for financial holding company status.
Finally, subject to certain exceptions, the Bank Holding Company Act
and the Change in Bank Control Act, and the Federal Reserve's implementing
regulations, require Federal Reserve approval prior to any acquisition of
"control" of a bank holding company, such as Merchants and Manufacturers. In
general, a person or company is presumed to have acquired control if it acquires
as little as 5% of the outstanding shares of a bank or bank holding company and
is conclusively determined to have acquired control if it acquires 25% or more
of the outstanding shares of a bank or bank holding company.
Source of Strength. The Federal Reserve expects us to act as a source
of financial strength and support for our bank subsidiaries and to take measures
to preserve and protect the banks in situations where additional investments in
the banks may not otherwise be warranted. The Federal Reserve may require a bank
holding company to terminate any activity or relinquish control of a non-bank
subsidiary (other than a non-bank subsidiary of a bank) upon the Federal
Reserve's determination that the activity or control constitutes a serious risk
to the financial soundness or stability of any subsidiary depository institution
of the bank holding company. Further, federal bank regulatory authorities have
additional discretion to require a bank holding company to divest itself of any
bank or non-bank subsidiary if the agency determines that divestiture may aid
the depository institution's financial condition.
Capital Requirements. The Federal Reserve uses capital adequacy
guidelines in its examination and regulation of bank holding companies and
banks. If the capital falls below minimum guideline levels, a bank holding
company, among other things, may be denied approval to acquire or establish
additional banks or non-bank businesses. The Federal Reserve's capital
guidelines establish a risk-based requirement expressed as a percentage of total
risk-weighted assets and a leverage requirement expressed as a percentage of
total assets. The risk-based requirement consists of a minimum ratio of total
capital to total risk-weighted assets of 8%, of which at least one-half must be
Tier 1 capital (which consists principally of shareholders' equity). The
leverage requirement consists of a minimum ratio of Tier 1 capital to total
assets of 3% for strong bank holding companies and for bank holding companies
that have implemented the Federal Reserve's risk based capital measure for
market risk (otherwise the minimum ratio is 4%).
The risk-based and leverage standards presently used by the Federal
Reserve are minimum requirements, and higher capital levels may be required if
warranted by the particular circumstances or risk profiles of individual banking
organizations. Further, any banking organization experiencing or anticipating
significant growth would be expected to maintain capital ratios, including
tangible capital positions, which is Tier 1 capital less all intangible assets,
well above the minimum levels.
Dividends. The Federal Reserve has issued a policy statement concerning
the payment of cash dividends by bank holding companies. The policy statement
provides that a bank holding company experiencing earnings weaknesses should not
pay cash dividends exceeding its net income or which could only be funded in
ways that weakened the bank holding company's financial health, such as by
borrowing. Also, the Federal Reserve possesses enforcement powers over bank
holding companies and their non-bank subsidiaries to prevent or remedy actions
that represent unsafe or unsound practices or violations of applicable statutes
and regulations. Among these powers is the ability to proscribe the payment of
dividends by banks and bank holding companies.
BANK REGULATIONS
The Wisconsin banks operate under Wisconsin state bank charters and the
four are subject to regulation by the Wisconsin Department of Financial
Institutions Division of Banking and the FDIC. The Fortress Bank of Westby,
however operates as a member of the Federal Reserve Bank and is therefore
regulated by that agency and the Wisconsin Department of Financial Institutions
Division of Banking. The Fortress Bank of Cresco, Iowa operates under an Iowa
state bank charter and is a member of the Federal Reserve Bank and is subject to
regulation by that agency and the Iowa Division of Banking. Fortress Bank, N.A.,
operates as a national banking association and is subject to regulation by the
Office of the Comptroller of the Currency. The state banking regulators detailed
above, the FDIC, the Comptroller of the Currency, and the Federal Reserve Bank
regulate or monitor all areas of the banks' operations, including capital
requirements, issuance of stock, declaration of dividends, interest rates,
deposits, record keeping, establishment of branches, acquisitions, mergers,
loans, investments, borrowing, security devices and procedures and employee
responsibility and conduct. The regulators place limitations on activities of
the banks including the issuance of capital notes or debentures and the holding
of real estate and personal property and require the banks to maintain a certain
ratio of reserves against deposits. The regulators also require the banks to
file reports annually showing receipts and disbursements of the banks, in
addition to any periodic reports requested.
ITEM 2. PROPERTIES
In 2002 our corporate headquarters relocated to an office building
located in Brookfield, Wisconsin. We lease approximately 5,000 square feet from
the building's owner. At this location, we maintain our corporate operations and
personnel.
8
The main office of Lincoln State Bank is at located at 3131 South 13th
Street, Milwaukee, Wisconsin in a one-story building. Lincoln State Bank also
operates branch offices at 2266 South 13th Street and 5400 West Forest Home
Avenue. Both of theses offices are located in Milwaukee. Another branch of
Lincoln State Bank is located in a one-story, 1,700 square foot building at
13510 Janesville Road, Muskego, Wisconsin. While another branch of Lincoln State
Bank is located at 14000 West National Avenue, New Berlin, Wisconsin. The New
Berlin branch is approximately 7,000 square feet. In 1995 Lincoln State Bank
opened two other full-service branches one located Brookfield, Wisconsin and the
other in Pewaukee, Wisconsin. Lincoln State Bank owns all of its facilities
except the New Berlin branch and Brookfield branch which it leases from the
building's owners.
In addition, Lincoln State Bank operates limited hour facilities at
Villa St. Francis located at South 20th and Ohio Streets in Milwaukee, at
Clement Manor located at South 92nd Street and West Howard Avenue in Milwaukee,
at Friendship Village located at North 73rd and West Dean Road in Milwaukee, at
Stoney Creek Adult Community in Muskego, at the Milwaukee Protestant Home
located on North Downer Avenue in Milwaukee, at Forest Ridge located in Hales
Corners, Wisconsin, at the Landmark located in West Allis, Wisconsin at Deer
Creek located in New Berlin, Wisconsin and at Lexington Village located in the
City of Greenfield, Wisconsin. Lincoln State Bank leases facilities at all of
the limited hour locations.
Grafton State Bank's main office is located at 101 Falls Road, Grafton,
Wisconsin in a seven-story building. Portions of the building that are not used
by Grafton State Bank are leased to various tenants. Grafton State Bank owns the
facility. Grafton State Bank also operates two branch facilities. One branch of
Grafton State Bank is located at 112 North Port Washington Road in Grafton,
while the other is located at 524 East Green Bay Avenue in Saukville, Wisconsin.
Grafton State Bank owns the Saukville location while it leases the other branch
facility.
Franklin State Bank's main office is located in a three-story building
at 7000 South 76th Street in Franklin, Wisconsin. The bank leases 5,700 square
feet from the building's owner. The building was sold in 1999 to a group of
investors and subsequently sub-leased back to Merchants and Manufacturers.
Portions of the building that are not used by Franklin State Bank are leased to
various tenants. In 1998 Franklin State Bank opened a branch facility at 9719
South Franklin Drive in the Franklin Business Park, Franklin, Wisconsin.
Franklin State Bank owns the facility. In addition, Franklin State Bank operates
a limited hour facility at Brenwood Park, also located in Franklin. Franklin
State Bank leases its limited hour facility.
The Community Bank of Oconto County's main office is located in a
one-story building at 500 Cherry Avenue, Oconto Falls, Wisconsin. Community Bank
of Oconto County operates branch facilities at 202 East Main Street, Gillett,
Wisconsin and at 1288 East Frontage Road, in the town of Little Suamico,
Wisconsin. The Community Bank of Oconto County owns all of its facilities.
The Fortress Bank of Westby's main office is located in a two-story
building at 100 North Main Street, Westby, Wisconsin. The Fortress Bank of
Westby also operates branch offices in the Wisconsin communities of Coon Valley,
Chaseburg and West Salem. The Fortress Bank of Westby owns all of its
properties.
The Fortress Bank of Cresco's main office is located in a one-story
building at 130 North Park Place, Cresco, Iowa. The Fortress Bank of Cresco owns
its facility.
The Fortress Bank, N.A. main office is located in a two-story building
at 225 Lafayette, Houston, Minnesota. Fortress Bank, N.A. also operates a branch
office in the Minnesota community of Winona. The Fortress Bank, N.A. owns both
facilities.
ITEM 3. LEGAL PROCEEDINGS
From time to time, we and our subsidiaries are party to legal
proceedings arising out of our general lending activities and other operations.
However, as of the date of this report, there are no pending legal proceedings
to which we or our subsidiaries are a party, or to which their property is
subject, which, if determined adversely to us, would individually or in the
aggregate have a material adverse effect on our consolidated financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of 2002.
9
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS
Our stock is not listed on any stock exchange or quoted on the National
Association of Securities Dealers Quotation Automated Quotation System. Our
stock has been quoted on "Pink Sheets", an inter-broker quotation medium, since
April 1993, and in the Over The Counter Bulletin Board, an electronic quotation
service. Robert W. Baird & Co., Incorporated, a regional securities and
investment banking firm headquartered in Milwaukee, Wisconsin, and Howe Barnes
Investments, Incorporated, headquartered in Chicago, Illinois, act as the market
makers for the Corporation's stock. Our stock is quoted in the "Other Stocks"
section of the Milwaukee Journal/Sentinel. Our common stock trading symbol is
"MMBI."
The following table sets forth the quarterly high and low bid prices
for the period indicated. The quotations below reflect inter-dealer prices,
without retail mark-ups, mark-downs or commissions.
Quotation or Price
Quarter Ended Low Bid High Bid
- ---------------------------------------------------------------
March 31, 2001 $ 19.00 $ 29.00
June 30, 2001 22.00 23.90
September 30, 2001 22.50 28.75
December 31, 2001 26.75 28.00
MARCH 31, 2002 $ 26.75 $ 29.00
JUNE 30, 2002 27.50 33.90
SEPTEMBER 30, 2002 30.00 32.00
DECEMBER 31, 2002 29.10 30.40
The approximate number of holders of record of our common stock is 868
as of December 31, 2002.
Holders of the our 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. Our ability to pay cash dividends is dependent
primarily on the ability of its subsidiaries to pay dividends to us. The ability
of each subsidiary to pay dividends depends on its earnings and financial
condition and on compliance with banking statutes and regulations.
Quarterly dividends for the years ended December 31, 2002 and 2001 are
shown in Item 6 "Selected Financial Data."
On November 12, 2002, Merchants and Manufacturers Statutory Trust I
(the "Trust"), a Connecticut statutory trust wholly owned by the Corporation,
issued $10,000,000 of floating rate capital securities (the "Capital
Securities") to one accredited investor. The Trust used the proceeds from the
Capital Securities to purchase a like amount of floating rate junior
subordinated debentures (the "Debentures") of the Corporation. The Capital
Securities accrue and pay dividends quarterly at a variable rate, reset
quarterly, equal to 3-month LIBOR plus 3.35%. The Corporation has fully and
unconditionally guaranteed all of the obligations of the Trust. The Capital
Securities are mandatorily redeemable upon maturity of the Debentures on
November 12, 2032 or earlier as provided in the indenture with respect to the
Debentures. The Corporation has the right to redeem the Debentures on or after
November 12, 2007. The Corporation believes it has satisfied the exemption from
the securities registration requirement provided by section 4(2) of the
Securities Act of 1933 and Regulation D promulgated thereunder in this offering
since the securities were sold in a private placement to an accredited investor,
who provided representations which Merchants deemed necessary to satisfy itself
that it was an accredited investor and was purchasing for investment and not
with a view to resale in connection with a public offering.
10
ITEM 6. SELECTED FINANCIAL DATA
The following table summarizes our certain historical financial data.
This information is derived in part from, and should be read in conjunction
with, the our Consolidated Financial Statements presented elsewhere herein
(dollars in thousands, except per share data):
AT OR FOR THE YEAR ENDED DECEMBER 31,
2002(1) 2001(2) 2000 1999(2) 1998
----------- ------------- ----------- ----------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
INCOME STATEMENT DATA:
Interest income (taxable equivalent) (3).......... $ 40,421 $ 43,782 $ 43,256 $ 36,092 $ 34,534
Interest expense.................................. 13,106 19,798 21,718 15,863 15,978
-------- -------- -------- -------- --------
Net interest income............................... 27,315 23,984 21,538 20,229 18,556
Provision for loan losses......................... 1,156 1,125 1,239 974 348
-------- -------- -------- -------- --------
Net interest income after provision for loan losses 26,159 22,859 20,299 19,255 18,208
Noninterest income................................ 6,127 4,682 4,395 3,815 3,689
Merger related expenses........................... -- -- 296 490 --
Noninterest expense............................... 22,139 18,554 16,757 15,793 14,707
-------- -------- -------- -------- --------
Income before provision for income taxes.......... 10,147 8,987 7,641 6,787 7,190
Provision for income taxes........................ 3,244 2,733 2,267 2,129 2,240
Less taxable equivalent adjustment................ 518 546 606 594 469
-------- -------- -------- -------- --------
Net income........................................ $ 6,385 $ 5,708 $ 4,768 $ 4,064 $ 4,481
======== ======== ======== ======== ========
DIVIDENDS:
Common stock...................................... $ 1,790 $ 1,802 $ 1,599 $ 1,432 $ 1,216
Dividend payout ratio............................. 28.03% 31.57% 33.54% 35.24% 27.14%
PER SHARE DATA:
Net income-Basic ................................. $ 2.53 $ 2.25 $ 1.87 $ 1.58 $ 1.77
Net income-Diluted ............................... 2.52 2.24 1.86 1.55 1.72
Book value........................................ 23.95 20.97 19.24 17.80 17.60
BALANCE SHEET DATA:
Investment securities............................. $130,125 $ 66,143 $ 78,847 $ 83,997 $ 78,744
Loans, net........................................ 657,775 477,332 473,161 395,533 344,585
Total assets...................................... 909,095 608,020 600,460 533,268 494,802
Total deposits.................................... 729,456 477,785 458,051 430,225 419,858
Short-term borrowings............................. 18,088 17,046 43,928 14,879 29,836
Long-term borrowings.............................. 72,322 55,800 44,700 38,900 12,100
Company-obligated mandatorily redeemable preferred
securities........................................ 10,000 -- -- -- --
Total stockholders' equity........................ 69,329 52,929 48,515 45,735 44,581
EARNINGS RATIOS:
Return on average total assets ................... 0.99% 0.95% 0.84% 0.81% 0.97%
Return on average total stockholder' equity ...... 11.55 11.15 10.18 9.00 10.40
Net interest margin (4)........................... 4.48 4.21 4.05 4.34 4.29
Efficiency ratio (5).............................. 67.24 65.98 67.33 69.44 67.54
ASSET QUALITY RATIOS:
Allowance for loan losses to loans................ 1.15 1.15 1.05 1.01 1.00
Nonaccrual loans to loans (6)..................... 0.48 0.92 0.38 0.56 0.45
Allowance for loan losses to nonperforming loans (6) 239.24 125.60 276.03 179.79 222.75
Nonperforming assets to total assets (7).......... 0.61 0.75 0.32 0.44 0.32
Net loan charge-offs to average loans............. 0.21 0.12 0.06 0.11 0.02
CAPITAL RATIOS:
Total stockholders' equity to total assets........ 7.63 8.71 8.08 8.58 9.01
Total capital to risk-weighted assets ratio....... 10.71 11.53 11.19 12.42 12.85
Tier 1 capital to risk-weighted assets ratio...... 9.63 10.43 10.14 11.44 11.91
Tier 1 capital to average assets ratio............ 9.41 8.72 8.25 9.44 9.60
(1) Year-end data for 2002 includes Fortress Bancshares, Inc. and subsidiaries
acquired by Merchants on November 30, 2002.
(2) Restated to reflect the January 16, 2001 acquisition of CBOC, Inc. and the
December 31, 1999 acquisition of Pyramid Bancorp; both acquisitions were
accounted for as pooling-of-interests.
(3) 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 our historical experience, is used in the conversion
of tax-exempt interest income to a tax-equivalent basis.
(4) Net interest margin is the ratio of net interest income (expressed on a
tax-equivalent basis) to average interest-earning assets.
(5) Efficiency ratio is the ratio of noninterest expense to the sum of net
interest income and noninterest income.
(6) Nonperforming loans consist of nonaccrual loans and certain loans with
restructured terms.
(7) Nonperforming assets consist of nonperforming loans and other real estate.
11
Effective January 1, 2002, Merchants adopted Statement of Financial
Accounting Standards ("SFAS") No. 142 "Goodwill and Other Intangible Assets".
SFAS No. 142 changed the accounting for goodwill from a model that required
amortization of goodwill, supplemented by impairment tests, to an accounting
model that is based solely upon impairment tests.
A reconciliation of Merchants Consolidated Statements of Earnings for
each of the five years ending December 31, 2001 from amounts reported to amounts
exclusive of goodwill amortization is shown below.
2001(1) 2000 1999(1) 1998 1997
------------ ----------- ------------ ----------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income as reported ........................... $ 5,708 $ 4,768 $ 4,064 $ 4,481 $ 3,944
Add: goodwill amortization, net of tax............ 46 46 46 46 46
------------ ----------- ------------ ----------- ----------
Pro forma net income.............................. $ 5,754 $ 4,814 $ 4,018 $ 4,527 $ 3,990
============ =========== ============ =========== ==========
Basic earnings per share as reported.............. $ 2.25 $ 1.87 $ 1.58 $ 1.77 $ 1.60
Add: goodwill amortization, net of tax............ 0.02 0.02 0.02 0.02 0.02
------------ ----------- ------------ ----------- ----------
Pro forma basic earnings per share................ $ 2.27 $ 1.89 $ 1.60 $ 1.79 $ 1.62
============ =========== ============ =========== ==========
Diluted earnings per share as reported............ $ 2.24 $ 1.86 $ 1.55 $ 1.72 $ 1.56
Add: goodwill amortization, net of tax............ 0.02 0.02 0.02 0.02 0.02
------------ ----------- ------------ ----------- ----------
Pro forma diluted earnings per share.............. $ 2.26 $ 1.88 $ 1.57 $ 1.74 $ 1.58
============ =========== ============ =========== ==========
(1) Restated to reflect the January 16, 2001 acquisition of CBOC, Inc. and the
December 31, 1999 acquisition of Pyramid Bancorp both acquisitions were
accounted for as pooling-of-interests.
QUARTERLY FINANCIAL DATA
The following table sets forth our selected quarterly financial data.
The fourth quarter 2002 data includes Fortress Bancshares, Inc. and subsidiaries
acquired by Merchants on November 30, 2002.
THREE MONTHS ENDED 2002 THREE MONTHS ENDED 2001
DECEMBER SEPTEMBER JUNE MARCH DECEMBER SEPTEMBER JUNE MARCH
------------------------------------------- --------------------------------------------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
Interest income
(taxable-equivalent) (1) $ 11,106 $ 9,849 $ 9,753 $ 9,713 $ 10,292 $ 10,917 $ 11,136 $11,437
Interest expense 3,488 3,094 3,140 3,384 3,954 4,710 5,198 5,936
------------------------------------------- --------------------------------------------
Net interest income 7,618 6,755 6,613 6,329 6,338 6,207 5,938 5,501
Provision for loan losses 312 282 282 280 259 306 306 254
Noninterest income 2,092 1,401 1,455 1,179 1,355 1,094 1,210 1,023
Noninterest expense 6,550 5,157 5,144 5,288 4,952 4,534 4,538 4,530
------------------------------------------- --------------------------------------------
Income before taxes 2,848 2,717 2,642 1,940 2,482 2,461 2,304 1,740
Provision for income taxes 956 863 844 581 785 773 702 473
Less taxable-equivalent
adjustment 147 116 124 131 135 131 139 141
------------------------------------------- --------------------------------------------
Net income $ 1,745 $ 1,738 $ 1,674 $ 1,228 $ 1,562 $ 1,557 $ 1,463 $ 1,126
=========================================== ============================================
Basic earnings per share $ 0.67 $ 0.70 $ 0.67 $ 0.49 $ 0.62 $ 0.61 $ 0.58 $ 0.44
Diluted earnings per share $ 0.66 $ 0.70 $ 0.67 $ 0.49 $ 0.62 $ 0.61 $ 0.57 $ 0.44
Dividends per share $ 0.19 $ 0.19 $ 0.17 $ 0.17 $ 0.17 $ 0.17 $ 0.22 $ 0.15
- ------------------
(1) Taxable-equivalent adjustments to interest loans 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 our 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 presents management's discussion and analysis of our
financial condition and results of operations as of the dates and for the
periods indicated. You should read this discussion in conjunction with our
"Selected Consolidated Financial Data", our consolidated financial statements
and the accompanying notes, and the other financial data contained elsewhere in
this report.
12
On November 30, 2002, we acquired Fortress Bancshares, Inc.
("Fortress") and its wholly-owned subsidiaries, Fortress Bank of Westby,
Wisconsin, Fortress Bank of Cresco, Iowa and Fortress Bank, N.A. headquartered
in Houston, Minnesota ("Fortress Banks"). The purchase price for Fortress was
$21.5 million including $9.5 million in cash and 390,000 shares of common stock
valued at $11.7 million based on the average price over the contractual pricing
period. The transaction was recorded as a purchase. Application of purchase
accounting requires the inclusion of Fortress and the Fortress Banks' operating
results in the consolidated financial statements from the date of the
acquisition. Accordingly Fortress and the Fortress Banks' operating results are
included in the consolidation results of operations since November 30, 2002.
This discussion contains forward-looking statements that involve risks
and uncertainties. Our actual results could differ significantly from those
anticipated in these forward-looking statements as a result of various factors.
Important factors that could cause actual results to differ materially from the
results anticipated or projected include, but are not limited to, the following:
(1) expected cost savings and synergies from our recently completed merger of
Fortress Bancshares, Inc. might not be realized within the expected time frame;
(2) the credit risks of lending activities, including changes in the level and
direction of loan delinquencies and write-offs; (3) changes in management's
estimate of the adequacy of the allowance for loan losses; (4) competitive
pressures among depository institutions; (5) interest rate movements and their
impact on customer behavior and our net interest margin; (6) the impact of
repricing and competitors' pricing initiatives on loan and deposit products; (7)
our ability to adapt successfully to technological changes to meet customers'
needs and developments in the market place; (8) our ability to access
cost-effective funding; (9) changes in financial markets and general economic
conditions; (10) new legislation or regulatory changes; and (11) changes in
accounting principles, policies or guidelines.
Certain statements contained in or incorporated by reference into this
report constitute forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934. We intend such forward-looking statements to be covered by the safe harbor
provisions for forward-looking statements contained in the Private Securities
Litigation Reform Act of 1995, and are including this statement for purposes of
invoking these safe harbor provisions. You can identify these statements from
our use of the words "may," "will," "should," "expect," "plan," "intend,"
"anticipate," "could," "believe," "estimate," "predict," "objective,"
"potential," "projection," "forecast," "goal," "project," "anticipate," "target"
and similar expressions. These forward-looking statements may include, among
other things:
- statements relating to projected growth, anticipated
improvements in earnings, earnings per share and other financial performance
measures, and management's long term performance goals;
- statements relating to the anticipated effects on results of
operations or financial condition from expected developments or events;
- statements relating to our business and growth strategies,
including potential acquisitions; and
- any other statements which are not historical facts.
Such forward-looking statements involve known and unknown risks,
uncertainties and other important factors that could cause our actual results,
performance or achievements, or industry results, to differ materially from our
expectations of future results, performance or achievements expressed or implied
by such forward-looking statements. Although we believe that the expectations
reflected in any forward-looking statements are reasonable, we cannot guarantee
future events or results. Except as may be required under federal law, we
undertake no obligation to update publicly any forward-looking statements for
any reason, even if new information becomes available or other events occur. In
addition, our past results of operations do not necessarily indicate our future
results.
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 our interest rate sensitive assets and
liabilities. Net interest income is the most significant component of earnings.
Taxable-equivalent adjustments to interest income involve the conversion of
tax-exempt sources of interest income to the equivalent amounts of interest
income that would be necessary to derive the same net return if the investments
had been subject to income taxes on a fully tax equivalent basis. A 34%
incremental income tax rate, consistent with our historical experience, is used
in the conversion of tax-exempt interest income to a taxable-equivalent basis.
Net interest income on a fully tax equivalent basis increased to $27.3
million in 2002, compared with $24.0 million in 2001 and $21.5 million in 2000.
This increase of $3.3 million in net interest income in 2002 was due primarily
to an increase in the net interest margin from 4.21% in 2001 to 4.48% in 2002.
The total increase in average earning assets was primarily due to an
increase in average loans of $29.7 million. The majority of the loan growth was
internally generated. Interest bearing liabilities increased $36.6 million in
2002. Our entrance into new markets, introduction of new products and the
pricing of money market deposits were contributing factors to the growth in
deposits.
13
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,
-------------------------------------
2002 2001 2000
---- ---- ----
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
----------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
ASSETS
Loans, net (1)(2) $507,142 $ 35,637 7.03% $ 477,412 $ 38,402 8.04% $ 440,573 $ 37,227 8.45%
Loans exempt from federal income
taxes (3) 1,573 120 7.63% 1,656 150 9.06% 2,041 177 8.67%
Taxable investment securities (4) 20,240 893 4.41% 21,653 1,259 5.81% 28,001 1,757 6.27%
Mortgage-related securities (4) 39,226 2,050 5.23% 31,638 1,985 6.27% 32,978 2,150 6.52%
Investment securities exempt from
federal income taxes (3)(4) 21,201 1,403 6.62% 21,311 1,455 6.83% 22,297 1,605 7.20%
Other securities 19,816 318 1.60% 15,377 531 3.45% 5,816 340 5.85%
-------- -------- --------- -------- --------- --------
Interest earning assets 609,198 40,421 6.64% 569,047 43,782 7.69% 531,706 43,256 8.14%
-------- -------- --------
Non interest earning assets 38,600 31,791 33,349
-------- --------- ---------
Average assets $647,798 $ 600,838 $ 565,055
======== ========= =========
LIABILITIES AND STOCKHOLDERS'
EQUITY
NOW deposits $ 37,849 334 0.88% $ 32,715 585 1.79% $ 35,854 708 1.97%
Money market deposits 108,247 1,857 1.72% 87,213 3,168 3.63% 62,677 3,153 5.03%
Savings deposits 78,357 843 1.08% 72,209 1,224 1.70% 73,751 1,587 2.15%
Time deposits 213,791 7,261 3.40% 209,297 10,715 5.12% 201,513 11,174 5.55%
Short-term borrowings 20,802 502 2.41% 24,723 1,260 5.10% 31,520 2,197 6.97%
Long-term borrowings 55,692 2,244 4.03% 53,296 2,846 5.34% 45,051 2,899 6.43%
Company-obligated mandatorily
redeemable preferred securities 1,361 65 4.78% -- -- -- -- -- --
-------- -------- --------- -------- --------- --------
Interest bearing liabilities 516,099 13,106 2.54% 479,453 19,798 4.13% 450,366 21,718 4.82%
-------- -------- --------- -------- --------- --------
Demand deposits and other non
interest bearing liabilities 76,400 70,197 67,855
Stockholders' equity 55,299 51,188 46,834
-------- --------- ---------
Average liabilities and
stockholders' equity $647,798 $ 600,838 $ 565,055
======== ========= =========
Net interest spread (5) $ 27,315 4.10% $ 23,984 3.56% $ 21,538 3.31%
Net interest earning assets $ 93,099 $ 89,594 $ 81,340
Net interest margin on a fully
tax equivalent basis (6) 4.48% 4.21% 4.05%
Net interest margin (6) 4.40% 4.12% 3.94%
Ratio of average interest-earning
assets to average interest-
bearing liabilities 1.18 1.19 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) Average balances of securities available-for-sale are based on amortized
cost.
(5) Interest rate spread represents the difference between the average yield on
interest earning assets and the average cost of interest bearing
liabilities and is represented on a fully tax equivalent basis.
(6) Net interest margin represents net interest income as a percentage of
average interest earning assets.
14
The following table sets forth the effects of changing interest rates
and volumes of interest earning assets and interest bearing liabilities on our
net interest income. 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:
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
2002 VS. 2001 2001 VS. 2000
------------- -------------
INCREASE/(DECREASE) INCREASE/(DECREASE)
DUE TO DUE TO
------ ------
TOTAL TOTAL
VOLUME INCREASE VOLUME INCREASE
VOLUME RATE & RATE (DECREASE) VOLUME RATE & RATE (DECREASE)
------ ---- ------ ---------- ------ ---- ------ ----------
(DOLLARS IN THOUSANDS)
Interest-Earning Assets:
Loans, net (1) $ 2,391 ($ 4,854) ($ 302) ($ 2,765) $3,113 ($ 1,788) ($ 150) $ 1,175
Loans exempt from federal income
taxes (2) (7) (24) 1 (30) (33) 8 (2) (27)
Taxable investment securities (82) (304) 20 (366) (398) (129) 29 (498)
Mortgage-related securities 477 (332) (80) 65 (87) (81) 3 (165)
Investment securities exempt from
federal income taxes (2) (7) (45) -- (52) (71) (83) 4 (150)
Other securities 153 (284) (82) (213) 559 (139) (229) 191
-------- -------- ------- ---------- ------- -------- ------- ----------
Total interest-earning assets $ 2,925 ($ 5,843) ($ 443) ($ 3,361) $3,083 ($ 2,212) ($ 345) $ 526
======== ======== ======= ========== ======= ======== ======= ==========
Interest-Bearing Liabilities:
NOW deposits $ 91 ($ 296) ($ 46) ($ 251) ($ 62) ($ 67) $ 6 $ (123)
Money market deposits 764 (1,672) (403) (1,311) 1,234 (876) (343) 15
Savings deposits 104 (447) (38) (381) (33) (337) 7 (363)
Time deposits 230 (3,607) (77) (3,454) 432 (858) (33) (459)
Short-term borrowings (200) (663) 105 (758) 530 (493) (90) (53)
Long-term borrowings 128 (699) (31) (602) (473) (591) 127 (937)
Company-obligated mandatorily
redeemable preferred securities -- -- 65 65 -- -- -- --
-------- -------- ------- ---------- ------- -------- ------- ----------
Total interest-bearing liabilities $ 1,117 ($ 7,384) ($ 425) ($ 6,692) $1,628 ($ 3,224) ($ 326) ($ 1,920)
======== ======== ======= ========== ======= ======== ======= ==========
Net change in net interest income $ 3,331 $ 2,446
======== ==========
- ------------------------------
(1) Interest earned on loans includes loan fees (which are not material in
amount) and interest income which has been received from borrowers whose
loans were removed from nonaccrual during the period indicated.
(2) Taxable-equivalent adjustments were made using a 34% corporate tax rate for
all years presented in calculating interest income and yields.
PROVISION FOR LOAN LOSSES
During 2002, we made a provision of $1.2 million to the allowance for
loan losses, as compared to a provision of $1.1 million in 2001 and $1.2 million
in 2000. The increased 2002 provision reflects the growth in the overall loan
portfolio especially in higher risk categories of commercial and consumer
(primarily automobile) loans and management's assessment of general economic
conditions. Net loan charge-offs for 2002 increased by $492,000, over 2001 to
$1.1 million. This compares to charge-offs of $276,000 in 2000. Although we
consider 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.
15
NON-INTEREST INCOME
Non-interest income increased $1.4 million in 2002 and $287,000 in
2001. The composition of non-interest income is shown in the following table
(dollars in thousands).
For the Year Ended December 31,
2002 2001 2000
--------------- --------------- ----------------
Service charges on deposit accounts $1,625 $1,302 $1,162
Service charges on loans 1,260 722 523
Securities gains, net 111 88 2
Gain on sale of loans, net 695 332 33
Net gain on sale of premises 360 557 1,053
Other 2,076 1,681 1,622
----------- ----------- -----------
Total noninterest income $6,127 $4,682 $4,395
=========== =========== ===========
Service charge income on deposit accounts increased $323,000 in 2002
and $140,000 in 2001. The increases in both years can be attributed to growth in
accounts subject to service charges as well as growth in overdraft fees
collected in those years.
Service charges on loans increased $538,000 from $722,000 in 2001 to
$1.3 million in 2002. The increase is due directly to the amount of mortgage and
commercial loans refinanced in 2002. The increase in loan fees from 2000 to 2001
can be attributed to the high volume of new loans generated and refinanced in
2001.
We recorded a net gain of $111,000 on the sale of $7.7 million of
securities in 2002, a gain of $88,000 on the sale of $4.2 million of securities
in 2001 and a gain of $2,000 on the sale of $1.0 million of securities in 2000.
The proceeds from the sale of the investments were used to fund loan demand or
pay off debt.
We recorded $695,000 in gains on the sale of loans in 2002, compared to
$332,000 in 2001 and $33,000 in 2000. All-time low market interest rates led to
higher secondary market sales of 15 and 30 year residential mortgage loans in
2002 and 2001. Higher interest rates in 2000 resulted in reduced opportunities
to sell loans.
In each year, 2000 and 1999, we sold a banking facility and
subsequently leased it back from the new owners. The 2000 transaction resulted
in an immediate gain of $786,000 while the 1999 transaction resulted in an
immediate gain of $566,000 at the time of the sale. The remaining portion of the
gains have been recognized monthly over the terms of the leases. During 2002,
$360,000 was accreted into income related to the 2000 transaction. During 2001,
$201,000 was accreted into income related to the 1999 transaction and $356,000
was accreted into income related to the 2000 transaction. During 2000, $267,000
was accreted into income related to the 1999 transaction.
NON-INTEREST EXPENSE
Non-interest expense increased $3.6 million (19.3%) for the year ended
December 31, 2002, and increased $1.5 million (8.8%) for the year ended December
31, 2001. The major components of non-interest expense are shown in the
following table (dollars in thousands).
For the Year Ended December 31,
2002 2001 2000
-------------- ---------------- ---------------
Salaries and employee benefits $12,439 $10,533 $9,739
Premises and equipment 3,419 3,075 2,679
Data processing fees 1,261 951 1,002
Marketing and business development 894 878 764
Federal deposit insurance premiums 102 99 95
Other 4,024 3,018 2,774
----------- ------------ ------------
Total noninterest expense $22,139 $18,554 $17,053
=========== ============ ============
Salaries and employee benefits increased $1.9 million in 2002,
reflecting additional staff hires particularly in the business development and
acquisition support staff areas, higher benefit costs, changes in personnel and
normal pay raises. Salaries and employee benefits increased $794,000 in 2001.
The increase was due to normal pay increases and staff additions in the loan
generation and loan services area.
Premises and equipment expense increased $344,000 in 2002 and $396,000
in 2001. The lease payments associated with the facilities sold in 2000 and 1999
and maintenance of our facilities contributed to the increase.
16
Data processing fees increased $310,000 in 2002 and decreased $51,000
in 2001. The 2002 increase was due to the increased reliance on outside
consultants for information technology issues as well as equipment and software
upgrades. The 2001 decrease was due to the negotiating a new contract with our
data processing service provider and efficiencies gained from a larger
organization.
Marketing and business development costs increased $16,000 in 2002, and
increased $114,000 in 2001. The increase in 2001 can be attributed to the
development of a marketing program associated with the non-insured investment
products now being offered at our banks.
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 2002 the premiums we paid amounted to $102,000 compared to
$99,000 in 2001 and $95,000 in 2000.
Other expenses increased $1.0 million in 2002 and $244,000 in 2001. The
increases in 2002 are the result of developing our strategic plan, training our
employees new sales techniques, introducing our internet banking program,
various consulting fees and legal fees.
INCOME TAXES
Our consolidated income tax rate varies from statutory rates
principally due to interest income from tax-exempt securities and loans and
interest income on assets held in the portfolios of M&M Lincoln Investment
Corporation, GSB Investments, CBOC Investments and Westby Investment Company for
which state taxes are not imposed. Our recorded provisions for income taxes
totaled $3.2 million in 2002, $2.7 million in 2001 and $2.3 million in 2000. The
corresponding effective tax rate for the same years were 33.7%, 32.4% and 32.2%.
The increased effective tax rate for 2002 is the result of higher merger related
expenses during the year.
NET INCOME
For the years ended December 31, 2002, 2001 and 2000, we posted net
income of $6.4 million, $5.7 million and $4.8 million, respectively. The 2000
earnings were affected by one-time merger-related expenses associated with the
acquisition of CBOC, Inc offset by the gain on sales of premises in that year.
17
LOANS RECEIVABLE
Loans receivable (net of allowance) increased $180.4 million, or 37.8%,
from $477.3 million at December 31, 2001, to $657.8 million at December 31,
2002. Approximately $145.6 million of loan growth was due to the Fortress
acquisition. Excluding the acquisition, total loan growth amounted to $34.8
million which was driven by commercial business loans and commercial real estate
loans. Low market interest rates offered on single-family residential loans
resulted in customers refinancing their adjustable rate mortgages. These
adjustable rate mortgages were replaced with lower rate fifteen and thirty-year
mortgages. We do not retain the long-term mortgages, choosing to sell these
loans on the secondary market. During 2002 we sold $109.0 million of
single-family residential loans compared to $81.0 million in 2001. Loans
receivable consist mainly of commercial business loans secured by business
assets, real estate and guarantees as well as mortgages secured by residential
properties located in our primary market area. The following table shows the
composition of our loan portfolio on the dates indicated:
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
First mortgage:
Conventional single-family residential $ 98,075 $ 78,377 $ 98,730 $ 78,278 $ 69,473
Commercial and multifamily residential 198,250 180,102 173,107 148,856 131,474
Construction 32,995 34,744 47,767 32,882 21,100
Farmland 20,847 7,312 7,027 6,363 5,896
-------- -------- -------- -------- --------
350,167 300,535 326,631 266,379 227,943
Commercial business loans 246,787 140,671 110,291 97,835 88,310
Consumer and installment loans 51,883 32,401 33,327 23,487 19,465
Home equity loans 9,492 6,140 4,545 7,094 6,653
Other 7,109 3,148 3,377 3,788 5,700
-------- -------- -------- -------- --------
315,271 182,360 151,540 133,200 120,128
Less:
Allowance for loan losses 7,663 5,563 5,010 4,046 3,486
-------- -------- -------- -------- --------
$657,775 $477,332 $473,161 $395,533 $344,585
======== ======== ======== ======== ========
The following table presents information as of December 31, 2002
regarding first mortgage and commercial business loan maturities and contractual
principal repayments of loans during the periods indicated. Loans with
adjustable interest rates are shown maturing in the year of their contractual
maturity. Also provided are the amounts due after one year classified according
to the sensitivity to changes in interest rates.
AFTER ONE BUT
WITHIN FIVE AFTER FIVE
WITHIN ONE YEAR YEARS YEARS TOTAL
--------------- ----- ----- -----
(DOLLARS IN THOUSANDS)
Commercial business loans $145,248 $ 93,916 $ 7,623 $ 246,787
First mortgage loans 151,335 172,889 25,943 350,167
-------- --------- -------- ---------
$296,583 $ 266,805 $ 33,566 $ 596,954
======== ========= ======== =========
Loans maturing after one year with:
Fixed interest rates $ 250,892 $ 33,404
Variable interest rates 15,913 162
--------- --------
$ 266,805 $ 33,566
========= ========
ALLOWANCE FOR LOAN LOSSES
Management believes the allowance for loan losses accounting policy is
critical to the portrayal and understanding of our financial condition and
results of operations. As such, selection and application of this "critical
accounting policy" involves judgments, estimates, and uncertainties that are
susceptible to change. In the event that different assumptions or conditions
were to prevail, and depending upon the severity of such changes, the
possibility of materially different financial condition or results of operations
is a reasonable likelihood.
18
The allowance for loan losses is maintained at an amount that we
believe will be adequate to absorb probable losses on existing loans, based on
an evaluation of the collectibility of loans and prior loss experience. This
evaluation also takes into consideration such factors as changes in the nature
and volume of the loan portfolio, the value of underlying collateral, overall
portfolio quality, review of specific problem loans, and current economic
conditions that may affect the borrower's ability to pay. While management uses
the best information available to make its evaluation, future adjustments to the
allowance may be necessary if there are significant changes in economic
conditions. In addition, as an integral part of their examination process
regulatory agencies periodically review our allowance for loan losses and may
require us to make additions to the allowance based on their evaluation of
information available at the time of their examinations. The allowance for loan
losses increased from $5.6 million at December 31, 2001, to $7.7 million at
December 31, 2002. Approximately $2.0 million of the growth in the allowance for
loan loss was due to the Fortress acquisition. The remaining increase was due to
the growth in the loan portfolio, the general uncertainty regarding economic
conditions and the increase in non-performing loans and charge-offs recorded in
2002 and 2001. The ratio of the allowance for loan losses to total loans was
1.15% for 2002 and 2001. Based on the present economic environment and our
analysis of the financial condition of the borrowers, we consider the present
allowance to be appropriate and adequate to cover probable losses inherent in
the loan portfolio, however, changes in future economic conditions and in the
financial condition of borrowers cannot be predicted at this time. Deterioration
in such conditions could result in increases in charge-offs or adversely
classified loans and accordingly, in additional provisions for loan losses.
The balance of the allowance for loan losses and actual loss experience
for the last five years is summarized in the following table:
AT OR FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
Balance at beginning of year $5,563 $5,010 $4,047 $3,486 $3,204
Charge-offs:
Conventional single-family mortgage
residential 1 6 91 48 --
Commercial and multifamily residential 647 -- -- -- --
Commercial business loans 99 210 107 290 44
Consumer and installment loans 429 379 92 94 41
------ ------ ------ ------ ------
Total charge-offs 1,176 595 290 432 85
Recoveries (112) (23) (14) (19) (19)
------ ------ ------ ------ ------
Net charge-offs 1,064 572 276 413 66
Increase due to acquisition 2,008 -- -- -- --
Provisions charged to operations 1,156 1,125 1,239 974 348
------ ------ ------ ------ ------
Balance at end of year $7,663 $5,563 $5,010 $4,047 $3,486
====== ====== ====== ====== ======
Ratios:
Net charge-offs to average loans outstanding 0.21% 0.11% 0.06% 0.11% 0.02%
Net charge-offs to total allowance 13.88% 10.28% 5.51% 10.21% 1.89%
Allowance to year end gross loans outstanding 1.15% 1.15% 1.05% 1.01% 1.00%
NON-PERFORMING AND DELINQUENT LOANS
When in the opinion of management, serious doubt exists as to the
collectability of a loan, the loan is placed on non-accrual status and interest
previously accrued but unpaid is deducted from interest income. We do not
recognize income on any loans past due 90 days or more. In 2002, $311,000 of
additional income on nonaccrual loans would have been reported if the loans had
been current in accordance with their original terms and had been outstanding
throughout the year. Additionally, in 2002 we recorded $350,000 of interest
income on non-accrual loans.
Nonperforming assets increased by $1.0 million from $4.6 million at
December 31, 2001 to $5.6 million at December 31, 2002. The increase in
non-performing assets can be attributed to the $2.2 million growth in other real
estate owned. Other real estate owned is principally comprised of commercial
properties acquired in partial or total satisfaction of problem loans.
Management believes that losses on non-performing assets will be minimal due to
the collateral position in each situation.
19
The following table summarizes non-performing assets on the dates
indicated (dollars in thousands):
AT DECEMBER 31,
---------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
Nonaccrual loans $ 3,203 $ 4,429 $ 1,815 $ 2,251 $ 1,565
Other real estate owned 2,382 139 117 107 --
-------- ------- ------- ------- -------
Total non-performing assets $ 5,585 $ 4,568 $ 1,932 $ 2,358 $ 1,565
======== ======= ======= ======= =======
Ratios:
Non-accrual loans to total loans 0.48% 0.92% 0.38% 0.56% 0.45%
Allowance to non-accrual loans 239.24% 125.60% 276.03% 179.79% 222.75%
Non-performing assets to total assets 0.61% 0.75% 0.32% 0.44% 0.32%
POTENTIAL PROBLEM LOANS
We utilize an internal asset classification system as a means of
reporting problem and potential problem assets. At every third subsidiary bank
Board of Directors meeting, a watch list is presented, showing all loans listed
as "Management Attention," "Substandard," "Doubtful" and "Loss." An asset is
classified Substandard if it is inadequately protected by the current net worth
and paying capacity of the obligor or of the collateral pledged, if any.
Substandard assets include those characterized by the distinct possibility that
we will sustain some loss if the deficiencies are not corrected. Assets
classified as Doubtful have all the weaknesses inherent in those classified
Substandard with the added characteristic that the weaknesses present make
collection or liquidation in full, on the basis of currently existing facts,
conditions and values, highly questionable and improbable. Assets classified as
Loss are those considered uncollectible and viewed as non-bankable assets,
worthy of charge-off. Assets that do not currently expose us to sufficient risk
to warrant classification in one of the aforementioned categories, but possess
weaknesses that may or may not be within the control of the customer are deemed
to be Management Attention. As of December 31, 2002 the loans classified as
Management Attention were $22.3 million compared to $14.6 million as of December
31, 2001. Approximately $4.1 million of Management Attention loan growth was due
to the Fortress acquisition. Excluding the acquisition, total Management
Attention loans grew $3.6 million or 24.7%. The increase can be attributed to
the economic downturn currently being experienced by our commercial loan
customers.
Our determination as to the classification of our assets and the amount
of our valuation allowances is subject to review by the Banks' primary
regulators, which can order the establishment of additional general or specific
loss allowances. The FDIC, in conjunction with the other federal banking
agencies, has adopted an interagency policy statement on the allowance for loan
losses. The policy statement provides guidance for financial institutions on
both the responsibilities of management for the assessment and establishment of
adequate allowances and guidance for banking agency examiners to use in
determining the adequacy of general valuation guidelines. Generally, the policy
statement recommends that (i) institutions have effective systems and controls
to identify, monitor and address asset quality problems; (ii) management has
analyzed all significant factors that affect the collectibility of the portfolio
in a reasonable manner; and (iii) management has established acceptable
allowance evaluation processes that meet the objectives set forth in the policy
statement. We have established an adequate allowance for probable loan losses.
We analyze the process regularly, with modifications made if needed, and report
those results four times per year at Board of Directors meetings. However, there
can be no assurance that regulators, in reviewing our loan portfolio, will not
request us to materially increase our allowance for loan losses at the time.
Although management believes that adequate specific and general loan loss
allowances have been established, actual losses are dependent upon future events
and, as such, further additions to the level of specific and general loan loss
allowances may become necessary.
INVESTMENT SECURITIES
The investment portfolio is intended to provide us with adequate
liquidity, flexibility in asset/liability management and lastly earnings
potential. Investment securities at December 31, 2002 were $130.1 million
compared to $66.1 million at December 31, 2001. Approximately $54.9 million of
investment security growth was due to the Fortress acquisition. Excluding the
acquisition, total investment security growth amounted to $9.1 million. This
compares to a $12.7 million decrease in 2001. The 2002 growth in investment
securities was primarily due to excess funds created through deposit growth.
Management determines the appropriate classification of securities
(including mortgage-related securities) at the time of purchase.
Available-for-sale securities are stated at fair value, with the unrealized
gains and losses, net of tax, reported as a separate component of stockholder's
equity. See Notes 1 and 4 to Consolidated Financial Statements for further
details.
20
The amortized cost of debt securities is adjusted for amortization of
premiums and accretion of discounts to maturity, or in the case of
mortgage-related securities, over the estimated life of the security. Such
amortization is included in interest income from the related security. Interest
and dividends are included in interest income from the related securities.
Realized gains and losses, and declines in value judged to be
other-than-temporary are included in securities gains (losses). The cost of
securities sold is based on the specific identification method.
The following table sets forth our estimated fair value of investment
securities available-for-sale at the dates indicated:
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
2002 2001 2000
---- ---- ----
(DOLLARS IN THOUSANDS)
U.S. Treasury and other U.S.
government securities $ 24,064 $ 4,494 $ 14,337
State and political subdivision securities 39,901 24,178 24,742
Corporate bonds 75 1,614 2,243
Mutual funds 3,069 3,066 3,044
Collateralized mortgage obligations 28,611 14,116 12,852
Mortgage-backed securities 34,405 17,575 20,629
-------- -------- --------
$ 130,125 $ 66,143 $ 78,847
========= ======== ========
The maturity distribution (based upon the average life) and weighted
average yield of our securities portfolio as of December 31, 2002 are summarized
in the following table:
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
------- --------- -------- -------- ------- -------- -------- --------
U.S. TREASURY AND OTHER
GOVERNMENT AGENCY SECURITIES $ 2,718 4.69% $ 10,271 5.42% $ 5,710 5.80% $ 4,955 6.23%
STATE AND POLITICAL SUBDIVISION
CERTIFICATES 2,769 4.05 11,453 4.87 17,268 4.36 7,156 4.57
CORPORATE BONDS -- -- 50 6.82 25 3.25 -- --
MUTUAL FUNDS 3,069 2.01 -- -- -- -- -- --
COLLATERALIZED MORTGAGE OBLIGATIONS 10,954 5.81 15,759 4.68 1,561 4.56 -- --
MORTGAGE-BACKED SECURITIES 701 5.81 27,535 4.75 4,029 4.41 1,588 4.57
------- ------- -------- ------ -------- ------ -------- ----
$20,211 4.84% $ 65,068 4.86% $ 28,953 4.66% $ 13,699 5.17%
======= ======= ======== ====== ======== ====== ======== ====
Weighted average yield is calculated by dividing income within each
maturity range by the outstanding amount of the related investment based on
carrying value.
TOTAL DEPOSITS
We continue to stress core deposit accumulation and retention as a
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.
21
Total deposits increased $251.7 million to $729.5 million on December
31, 2002, from $477.8 million on December 31, 2001. Approximately $177.3 million
of deposit growth was due to the Fortress acquisition. Excluding the
acquisition, total deposit growth amounted to $74.4 million. This compares to a
$19.7 million increase in 2001. The average increase in time deposits occurred
via increases in retail certificates of deposits and retail jumbo certificates
of deposits, while the increase in NOW and money market deposits can be
attributed to depositors desiring to stay liquid as market interest rates
declined in 2002. The following table sets forth the average amount of and the
average rate paid by the banks on deposits by deposit category:
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
2002 2001 2000
---- ---- ----
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE
------- ---- ------- ---- ------- ----
(DOLLARS IN THOUSANDS)
Non-interest-bearing demand
deposits $ 72,662 0.00% $ 67,165 0.00% $ 65,002 0.00%
NOW and money market deposits 146,096 1.50 119,928 3.13 98,531 2.82
Savings deposits 78,357 1.08 72,209 1.70 73,751 2.12
Time deposits 213,791 3.40 209,297 5.12 201,513 5.06
--------- ------- --------- ----- --------- ----
Total $ 510,906 2.02% $ 468,599 3.35% $ 438,797 3.39%
========= ======= ========= ===== ========= ====
Maturities of time deposits and certificate accounts with balances of
$100,000 or more, outstanding at December 31, 2002, are summarized as follows
(dollars in thousands):
3 MONTHS OR LESS $ 35,574
OVER 3 THROUGH 6 MONTHS 10,782
OVER 6 THROUGH 12 MONTHS 11,133
OVER 12 MONTHS 17,043
---------
TOTAL $ 74,532
=========
BORROWINGS
Although deposits are our primary source of funds, it has been our
policy to utilize borrowings as an alternative source of funds. We utilize both
short-term and long-term borrowings, as well as repurchase agreements as a part
of our asset/liability management strategy. Borrowings are secured when we
believe we can profitably re-invest those funds for our benefit. A significant
component of our borrowings are federal funds purchased and advances from the
Federal Home Loan Bank (FHLB). The FHLB advances are collateralized by the
capital stock of the FHLB that we hold and certain mortgage loans and mortgage
related securities. Such advances are made pursuant to several different credit
programs, each of which has its own interest rate and range of maturities.
The following table shows outstanding amounts of borrowings together
with the weighted average interest rates, at December 31, for each of the past
three years (dollars in thousands).
At December 31,
2002 2001 2000
-----------------------------------------------------------------
BALANCE RATE Balance Rate Balance Rate
-----------------------------------------------------------------
Federal Funds purchased $ -- --% $ 9,300 2.13% $ 33,450 6.79%
Securities sold under agreements to
repurchase 3,101 1.53 3,524 2.72 3,975 5.96
Other short-term borrowings 14,987 3.34 4,222 5.18 3,503 8.35
Long-term borrowings 72,322 3.96 55,800 4.77 47,700 6.80
Company-obligated mandatorily redeemable
preferred securities 10,000 4.75 -- -- -- --
-----------------------------------------------------------------
$ 100,410 3.87% $ 72,846 4.36% $ 88,628 6.82%
=================================================================
22
The following table shows the maximum amounts outstanding of borrowings
for each of the past three years (dollars in thousands).
At December 31,
2002 2001 2000
-------------------------------------------
Federal Funds purchased $ 19,313 $35,900 $ 33,450
Securities sold under agreements to
repurchase 9,894 7,326 8,164
Other short-term borrowings 14,987 4,222 5,854
Long-term borrowings 72,322 55,800 51,700
Company-obligated mandatorily redeemable
preferred securities 10,000 -- --
-------------------------------------------
$126,516 $103,248 $ 99,168
===========================================
The following table shows for the periods indicated the daily average
amount outstanding for the categories of borrowings, the interest paid and the
weighted average rates (dollars in thousands).
At December 31,
2002 2001 2000
---------------------------------------------------------------------------
BALANCE RATE Balance Rate Balance Rate
---------------------------------------------------------------------------
Federal Funds purchased $ 8,474 2.07% $ 15,756 5.24% $ 23,971 7.00%
Securities sold under agreements to
repurchase 7,273 1.88 5,516 3.93 4,646 5.51
Other short-term borrowings 6,189 3.44 3,451 6.29 2,903 9.03
Long-term borrowings 55,692 4.03 53,296 5.34 45,051 6.43
Company-obligated mandatorily redeemable
preferred securities 1,361 4.75 -- -- -- --
---------------------------------------------------------------------------
$ 78,989 3.59% $ 78,019 5.26% $ 76,571 6.66%
===========================================================================
CAPITAL RESOURCES AND ADEQUACY
Stockholders' equity increased from $52.9 million at December 31, 2001
to $68.9 million at December 31, 2002. Approximately $10.6 million of capital
growth was due to the Fortress acquisition. The $6.4 million increase from
earnings retention and the $1.8 million increase in the investment portfolio
market value were offset by the payment of $1.8 million in cash dividends to
shareholders and $1.1 million used to repurchase our stock.
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 our individual
banking subsidiaries. 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, 2002, we had a total capital
to risk weighted assets ratio of 10.71%, and Lincoln State Bank, Franklin State
Bank, Grafton State Bank, Community Bank of Oconto County, Fortress Bank of
Westby, Fortress Bank of Cresco and Fortress Bank, N.A. had total capital to
risk weighted assets ratios of 11.91%, 10.17%, 12.62%, 13.32%, 12.57%, 15.16%,
and 13.15%, respectively. These ratios are above the 2002 minimum requirements
established by regulatory agencies to be well-capitalized.
For a summary of the banks' regulatory capital ratios at December 31,
2002, please see Note 17 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 us and for
each of our subsidiaries to ensure that capital levels are appropriate based on
perceived business risks, growth and regulatory standards.
23
LIQUIDITY AND CAPITAL RESOURCES
Liquidity management involves the ability to meet the cash flow
requirements of customers who may be either depositors wanting to withdraw funds
or borrowers needing assurance that sufficient funds will be available to meet
their credit needs. We had liquid assets of $61.8 million and $37.5 million on
December 31, 2002 and December 31, 2001 respectively. The increase in liquid
assets from December 31, 2001 to December 31, 2002 can be attributed to an
increase in federal funds sold as well as the Fortress acquisition. Management
believes liquidity and capital levels are adequate at December 31, 2002.
Our liquidity, represented by cash and cash equivalents, is a product
of our operating activities, investing activities and financing activities.
These activities are summarized below:
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
2002 2001 2000
---- ---- ----
(DOLLARS IN THOUSANDS)
Cash and cash equivalents at beginning of
period $ 37,468 $ 23,133 $ 29,771
Operating activities:
Net income 6,385 5,708 4,768
Adjustments to reconcile net income to net cash
provided (used) by operating
activities 4,033 (2,102) (633)
-------- -------- ---------
Net cash provided by operating activities 10,418 3,606 4,135
Net cash provided (used in) by investing
activities (57,473) 8,705 (70,236)
Net cash provided by financing activities 71,342 2,024 59,463
-------- -------- ---------
Increase (decrease) in cash equivalents $ 24,287 $ 14,335 ($ 6,638)
======== ======== =========
Cash and cash equivalents at end of period $ 61,755 $ 37,468 $ 23,133
======== ======== =========
Net cash was provided by operating activities during the years ended
December 31, 2002, 2001 and 2000 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 $3.5 million, $3.3 million and $2.2
million for the years ended December 31, 2002, 2001 and 2000 respectively, and
will continue to be the parent company's main source of long-term liquidity. The
dividends from our banks were sufficient to pay cash dividends to our
shareholders of $1.8 million, $1.8 million and $1.6 million for the years ended
December 31, 2002, 2001 and 2000 respectively. At December 31, 2002, the parent
company had $36.5 in million lines of credit with unaffiliated banks available,
with $14.1 million balance outstanding.
The following table summarizes our significant contractual obligations
and other potential funding needs at December 31, 2002 (dollars in thousands).
Time deposits Long-term debt (1) Operating leases Total
-------------------------------------------------------------------
2003 $219,590 $29,150 $ 344 $249,084
2004 46,966 21,675 291 68,932
2005 21,165 9,754 291 31,210
2006 5,985 -- 219 6,204
2007 4,947 -- 219 5,166
Thereafter -- 21,743 -- 12,743
----------------------------------------------------------------
Total $298,653 $82,322 $1,364 $382,339
Commitments to originate mortgage loans $ 23,845
(1) Long-term debt includes company-obligated mandatorily redeemable preferred
securities.
24
ASSET/LIABILITY MANAGEMENT
Financial institutions are subject to interest rate risk to the extent
their interest-bearing liabilities (primarily deposits) mature or reprice at
different times and on a different basis than their interest-earning assets
(consisting primarily of loans and securities). Interest rate sensitivity
management seeks to match maturities on assets and liabilities and avoid
fluctuating net interest margins while enhancing net interest income during
periods of changing interest rates. The difference between the amount of
interest-earning assets maturing or repricing within a specific time period and
the amount of interest-bearing liabilities maturing or repricing within the same
time period is referred to as an interest rate gap. A gap is considered positive
when the amount of interest rate sensitive assets exceeds the amount of interest
rate sensitive liabilities. A gap is considered negative when the amount of
interest rate sensitive liabilities exceeds the amount of interest rate
sensitive assets. During periods of rising interest rates, a negative gap tends
to adversely affect net interest income while a positive gap tends to result in
an increase in net interest income. During a period of falling interest rates, a
negative gap tends to result in an increase in net interest income while a
positive gap tends to adversely affect net interest income.
The following table shows the interest rate sensitivity gap for four
different time intervals as of December 31, 2002. Certain assumptions regarding
prepayment and withdrawal rates are based upon our historical experience, and
management believes such assumptions are reasonable.
AMOUNTS MATURING OR REPRICING AS OF DECEMBER 31, 2002
--------------------------------------------------------------------
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 $ 44,735 $ 45,265 $157,074 $ 25,921 $272,995
Adjustable-rate mortgage loans 51,737 9,598 15,815 22 77,172
--------------------------------------------------------------------
Total mortgage loans 96,472 54,863 172,889 25,943 350,167
Commercial business loans 116,712 28,536 93,916 7,623 246,787
Consumer loans 18,679 5,985 25,267 5,617 55,548
Home equity loans 8,591 177 500 224 9,492
Tax-exempt loans 1,160 168 540 1,576 3,444
Mortgage-related securities 16,221 18,464 10,035 18,296 63,016
Fixed rate investment securities and other 1,202 3,278 22,671 35,772 62,923
Variable rate investment securities and other 49,287 0 50 0 49,337
--------------------------------------------------------------------
Total interest-earning assets $308,324 $111,471 $325,868 $ 95,051 $840,714
====================================================================
Interest-bearing liabilities:
Deposits
Time deposits $123,608 $ 81,771 $ 91,307 $ 1,967 $298,653
NOW accounts 3,361 3,365 33,648 15,706 56,080
Savings accounts 3,814 5,152 50,696 23,577 83,239
Money market accounts 14,973 15,027 114,775 49,421 194,196
Company-obligated mandatorily redeemable
preferred securities 10,000 0 0 0 10,000
Borrowings 32,850 14,462 31,373 11,725 90,410
--------------------------------------------------------------------
Total interest-bearing liabilities $188,606 $119,777 $321,799 $102,396 $732,578
====================================================================
Interest-earning assets less interest-bearing
liabilities $119,718 ($ 8,306) $ 4,069 ($ 7,345) $108,136
====================================================================
Cumulative interest rate sensitivity gap $119,718 $111,412 $115,481 $108,136
======================================================
Cumulative interest rate sensitivity gap as a
percentage of total assets 13.17% 12.26% 12.70% 11.89%
======================================================
At December 31, 2002, our cumulative interest-rate sensitive gap as a
percentage of total assets was a positive 13.17% for six months and a positive
12.26% for one-year maturities. Therefore, we are positively gapped and may
benefit from rising interest rates.
25
Certain shortcomings are inherent in the method of analysis presented
in the above 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.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our financial performance is impacted by, among other factors, interest
rate risk and credit risk. We utilize no derivatives to mitigate our interest
rate risk. To control credit risk we rely instead on loan review and an adequate
loan loss reserve.
Interest rate risk is the risk of loss of net interest income due to
changes in interest rates. This risk is addressed by our Asset Liability
Management Committee, which includes senior management representatives. The
Asset Liability Management Committee monitors and considers methods of managing
interest rate risk by monitoring changes in net interest income under various
interest rate scenarios. The Asset Liability Management Committee attempts to
manage various components of our balance sheet to minimize the impact of sudden
and sustained changes in interest rate on net interest income.
Our exposure to interest rate risk is reviewed on at least a quarterly
basis by the Asset Liability Management Committee. Interest rate risk exposure
is measured using interest rate sensitivity analysis to determine our change in
net interest income in the event of hypothetical changes in interest rates and
interest liabilities. If potential changes to net interest income resulting from
hypothetical interest rate swings are not within the limits established by the
Asset Liability Management Committee, the asset and liability mix may be
adjusted to bring interest rate risk within approved limits.
In order to reduce the exposure to interest rate fluctuations, we have
developed strategies to manage our liquidity, shorten the effective maturities
of certain interest-earning assets, and increase the effective maturities of
certain interest-bearing liabilities. One strategy used is focusing our
residential lending on adjustable rate mortgages, which generally reprice within
one to three years. Another strategy used is concentrating our non-residential
lending on adjustable or floating rate and/or short-term loans. We have also
focused our investment activities on short and medium-term securities, while
attempting to maintain and increase our savings account and transaction deposit
accounts, which are considered to be relatively resistant to changes in interest
rates.
Along with the analysis of the interest rate sensitivity gap,
determining the sensitivity of future earnings to a hypothetical plus 200 basis
point rate change or minus 100 basis point change can be accomplished through
the use of simulation modeling. In addition to the assumptions used to measure
the interest rate sensitivity gap, simulation of earnings includes the modeling
of the balance sheet as an ongoing entity. Future business assumptions involving
administered rate products, prepayments for future rate sensitive balances, and
the reinvestment of maturing assets and liabilities are included. These items
are then modeled to project income based on a hypothetical change in interest
rates. The resulting pretax income for the next 12-month period is compared to
the pretax income calculated using flat rates. This difference represents our
earning sensitivity to a plus 200 basis point rate change or minus 100 basis
point change. The table below illustrates these amounts as of December 31, 2002.
PERCENT CHANGE IN NET INTEREST INCOME
-------------------------------------
CHANGE IN INTEREST RATES 2002 2001
- ------------------------ -------------------------------------
+ 200 basis points 9.51% 0.57%
+ 150 basis points 6.65% (0.17)%
+ 100 basis points 3.79% (0.91)%
+ 50 basis points 0.85% (1.71)%
Base Scenario 0.00% 0.00%
- 50 basis points (5.10)% (3.39)%
- 100 basis points (7.26)% (4.27)%
These results are based solely on immediate and sustained parallel
changes in market rates and do not reflect the earnings sensitivity that may
arise from other factors such as changes in the shape of the yield curve, the
change in spread between key market rates, or accounting recognition for
impairment of certain intangibles. The above results also do not include any
management action to mitigate potential income variances within the simulation
process. This action would include, but would not be limited to, adjustments to
the repricing characteristics of any on or off balance sheet item with regard to
short-term rate projections and current market value assessments.
26
We determine another component of interest rate risk, fair value at
risk, through the technique of simulating the fair value of equity in changing
rate environment. This technique involves determining the present value of all
contractual asset liability cash flows (adjusted for prepayments) based on a
predetermined discount rate. The net result of all these balance sheet items
determine the fair value of equity. The fair value of equity resulting from the
current flat rate scenario is compared to the fair value of equity calculated
using discount rates plus 200 basis point rate change or minus 100 basis point
change to determine the fair value of equity at risk. Currently, fair value of
equity at risk is less than 1.0% of our market value as of December 31, 2002.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated balance sheets of the Corporation and its subsidiaries
as of December 31, 2002 and 2001 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, 2002 are attached. Selected quarterly financial
data is included in Item 6.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
27
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information in response to this item is incorporated herein by
reference to the Corporation's proxy statement, which shall be filed with the
Securities and Exchange Commission no later than 120 days after the
Corporation's fiscal year end covered by this report.
ITEM 11. EXECUTIVE COMPENSATION
The information in response to this item is incorporated herein by
reference to the Corporation's proxy statement, which shall be filed with the
Securities and Exchange Commission no later than 120 days after the
Corporation's fiscal year end covered by this report.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information in response to this item is incorporated herein by
reference to the Corporation's proxy statement, which shall be filed with the
Securities and Exchange Commission no later than 120 days after the
Corporation's fiscal year end covered by this report.
EQUITY COMPENSATION PLAN INFORMATION
The following table summarizes share information, as of December 31,
2002, for the Corporation's equity compensation plan, the 1996 Incentive Stock
Option Plan. This plan has been approved by the Corporation's shareholders.
NUMBER OF NUMBER OF
COMMON SHARES TO BE COMMON SHARES
ISSUED UPON EXERCISE WEIGHTED-AVERAGE AVAILABLE FOR FUTURE
OF OUTSTANDING EXERCISE PRICE OF ISSUANCE UNDER
OPTIONS, OUTSTANDING OPTIONS, EQUITY
PLAN CATEGORY WARRANTS, AND RIGHTS WARRANTS, AND RIGHTS COMPENSATION PLANS
------------- -------------------- -------------------- ------------------
Equity compensation plans approved by
stockholders 68,582 $26.24 141,418
Equity compensation plans not approved
by stockholders N/A N/A N/A
------ ------ -------
Total 68,582 $26.24 141,148
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information in response to this item is incorporated herein by
reference to the Corporation's proxy statement, which shall be filed with the
Securities and Exchange Commission no later than 120 days after the
Corporation's fiscal year end covered by this report.
ITEM 14. CONTROLS AND PROCEDURES
Within the 90 days prior to the date of this report, the Corporation's
Chairman of the Board and Principal Executive Officer and Chief Financial
Officer carried out an evaluation, with the participation of other members of
management as they deemed appropriate, of the effectiveness of the design and
operation of the Corporation's disclosure controls and procedures as
contemplated by Exchange Act Rule 13a-14. Based upon, and as of the date of that
evaluation, the Chairman of the Board and Principal Executive Officer and Chief
Financial Officer concluded that the Corporation's disclosure controls and
procedures are effective, in all material respects, in timely alerting them to
material information relating to the Corporation (and its consolidated
subsidiaries) required to be included in the periodic reports the Corporation is
required to file and submit to the SEC under the Exchange Act. It should be
noted that in designing and evaluating the disclosure controls and procedures,
management recognized that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving the
desired control objectives, and management necessarily was required to apply its
judgment in evaluating the cost-benefit relationship of possible controls and
procedures.
There have been no significant changes to the Corporation's internal
controls or in other factors that could significantly affect these controls
subsequent to the date that the internal controls were most recently evaluated.
There were no significant deficiencies or material weaknesses identified in that
evaluation and, therefore, no corrective actions were taken.
28
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) DOCUMENTS FILED:
1 and 2. Financial Statements and Financial Statement Schedules. The
following financial statements of Merchants and Manufacturers
Bancorporation, Inc. and subsidiaries are filed as a part of
this report under Item 8. "Financial Statements and
Supplementary Data":
Report of Independent Auditors
Consolidated Statements of Financial Condition as of
December 31, 2002 and 2001
Consolidated Statements of Income for the years ended
December 31, 2002, 2001, and 2000
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 2002, 2001, and 2000
Consolidated Statements of Cash Flows for the years ended
December 31, 2002, 2001 and 2000
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:
The Corporation filed on a report Form 8-K on December 12,
2002, reporting pursuant to Item 2 its acquisition of Fortress
Bancshares, Inc. and incorporating by reference the required
historical financial information of Fortress Bancshares, Inc.
and the required pro forma financial information into Item 7.
29
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC.
By: /s/ Michael J. Murry
--------------------------
Michael J. Murry
Chairman President & Chief Executive Officer
Director
Date: March 28, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the registrant
and in the capacities and on the dates indicated. The Registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
PRINCIPAL EXECUTIVE OFFICERS
/s/ Michael J. Murry Chairman of the Board of Directors March 28, 2003
- ------------------------------------ & Principal Executive Officer
Michael J. Murry
/s/ James C. Mroczkowski Executive Vice President & Chief March 28, 2003
- ------------------------------------ Financial Officer
James C. Mroczkowski
DIRECTORS
/s/ Michael J. Murry Chairman of the Board of Directors March 28, 2003
- ------------------------------------
Michael J. Murry
/s/ James F. Bomberg Director March 28, 2003
- ------------------------------------
James F. Bomberg
/s/ Nicholas S. Logarakis Director March 28, 2003
- ------------------------------------
Nicholas S. Logarakis
/s/ Conrad C. Kaminski Director March 28, 2003
- ------------------------------------
Conrad C. Kaminski
/s/ Keith C. Winters Director March 28, 2003
- ------------------------------------
Keith C. Winters
/s/ Rodney T. Goodell Director March 28, 2003
- ------------------------------------
Rodney Goodell
/s/ Donald A. Zellmer Director March 28, 2003
- ------------------------------------
Donald Zellmer
/s/ Duane H. Bluemke Director March 28, 2003
- ------------------------------------
Duane Bluemke
/s/ Duane P. Cherek Director March 28, 2003
- ------------------------------------
Duane P. Cherek
/s/ James A. Sass Director March 28, 2003
- ------------------------------------
James A. Sass
30
/s/ Thomas J. Sheehan Director March 28, 2003
- ------------------------------------
Thomas J. Sheehan
/s/ Jerome T. Sarnowski Director March 28, 2003
- ------------------------------------
Jerome T. Sarnowski
/s/ James F. Kacmarcik Director March 28, 2003
- ------------------------------------
James F. Kacmarcik
/s/ J. Michael Bartels Director March 28, 2003
- ------------------------------------
J. Michael Bartels
/s/ Michael T. Judge Director March 28, 2003
- ------------------------------------
Michael T. Judge
/s/ Casimir S. Janiszewski Director March 28, 2003
- ------------------------------------
Casimir S. Janiszewski
31
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
I, Michael J. Murray, Chairman of the Board of Directors and Principal Executive
Officer, certify that:
1) I have reviewed this annual report of Form 10-K of Merchant and Manufacturers
Bancorporation, Inc.;
2) Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3) Based on my knowledge, the financial statements, and other financial
information include in this annual report, fairly present in all material
respects the financial condition, results of operation and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4) The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedure (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entitles,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluations as of
the Evaluation Date;
5) The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial date and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6) The registrant's other certifying officer and I have indicated in this annual
report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective sections with
regard to significant deficiencies and material weaknesses.
Date: March 28, 2003
/s/ Michael J. Murry
------------------------------
Michael J. Murry
Chairman of the Board of Directors and Principal Executive Officer
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
I, James C. Mroczkowski, Chief Financial Officer, certify that:
1) I have reviewed this annual report of Form 10-K of Merchant and Manufacturers
Bancorporation, Inc.;
2) Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3) Based on my knowledge, the financial statements, and other financial
information include in this annual report, fairly present in all material
respects the financial condition, results of operation and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4) The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedure (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entitles,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluations as of
the Evaluation Date;
5) The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial date and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6) The registrant's other certifying officer and I have indicated in this annual
report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective sections with
regard to significant deficiencies and material weaknesses.
Date: March 28, 2003
/s/ James C. Mroczkowski
-----------------------------------
James C. Mroczkowski
Chief Financial Officer
MERCHANTS AND MANUFACTURERS
BANCORPORATION, INC. AND SUBSIDIARIES
- -----------------------------------------------------------------------------------------
CONTENTS PAGE
- -----------------------------------------------------------------------------------------
INDEPENDENT AUDITOR'S REPORT 1
- -----------------------------------------------------------------------------------------
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated balance sheets 2
Consolidated statements of income 3
Consolidated statements of changes in stockholders' equity 4
Consolidated statements of cash flows 5-6
Notes to consolidated financial statements 7-36
- -----------------------------------------------------------------------------------------
[MCGLADREY & PULLEN LOGO]
Certified Public Accounts
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries
New Berlin, Wisconsin
We have audited the accompanying consolidated balance sheets of Merchants and
Manufacturers Bancorporation, Inc. and subsidiaries as of December 31, 2002 and
2001, and the related consolidated statements of income, changes in
stockholders' equity, and cash flows for each of the years in the period ended
December 31, 2002. These consolidated financial statements are the
responsibility of the Corporation's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Merchants and
Manufacturers Bancorporation, Inc. and subsidiaries as of December 31, 2002 and
2001, and the results of its operations and its cash flows for each of the years
in the period ended December 31, 2002 in conformity with accounting principles
generally accepted in the United States of America.
By: /s/ McGladrey & Pullen, LLP
----------------------------------
Madison, Wisconsin
February 14, 2003
McGladrey & Pullen, LLP is an independent member firm of
RSM International, an affiliation of independent accounting
and consulting firms
1
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2002 AND 2001
ASSETS 2002 2001
- ---------------------------------------------------------------------------------------------------------
(Amounts In Thousands, Except
Share and Per Share Amounts)
Cash and due from banks $ 31,539 $ 26,013
Interest bearing deposits in banks 3,825 4,912
Federal funds sold 26,391 6,543
------------------------------
Cash and cash equivalents 61,755 37,468
Available-for-sale securities 130,125 66,143
Loans, less allowance for loan losses of $7,663 and $5,563
at 2002 and 2001, respectively 657,775 477,332
Accrued interest receivable 4,248 2,950
FHLB stock 14,935 3,574
Premises and equipment 15,406 10,278
Intangible assets 9,681 396
Other assets 15,170 9,879
------------------------------
TOTAL ASSETS $ 909,095 $ 608,020
==============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits:
Non-interest bearing $ 97,288 $ 79,171
Interest bearing 632,168 398,614
------------------------------
Total deposits 729,456 477,785
Short-term borrowings 18,088 17,046
Long-term borrowings 72,322 55,800
Accrued interest payable 1,403 1,028
Company Obligated Mandatorily Redeemable Preferred Securities
of subsidiary trust holding solely subordinated debentures 10,000 -
Other liabilities 8,497 3,432
------------------------------
TOTAL LIABILITIES 839,766 555,091
------------------------------
Stockholders' equity
Common stock $1.00 par value; 6,000,000 shares
authorized; shares issued: 2,977,231;
shares outstanding: 2,875,155-2002; 2,523,845-2001 2,977 2,588
Additional paid-in capital 26,308 14,955
Retained earnings 41,489 36,894
Accumulated other comprehensive income 1,448 330
Treasury stock, at cost (102,076 shares-2002; 63,664 shares-2001) (2,893) (1,838)
------------------------------
TOTAL STOCKHOLDERS' EQUITY 69,329 52,929
------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 909,095 $ 608,020
==============================
See Notes to Consolidated Financial Statements.
2
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000
2002 2001 2000
- -------------------------------------------------------------------------------------------------------------
(Amounts In Thousands, Except Per Share Amounts)
Interest income:
Interest and fees on loans $35,716 $38,501 $37,344
Interest and dividends on securities:
Taxable 893 1,259 1,757
Tax-exempt 926 960 1,059
Interest on mortgage-backed securities 2,050 1,985 2,150
Interest on interest bearing deposits in banks and
federal funds sold 318 531 340
-------------------------------------------
TOTAL INTEREST INCOME 39,903 43,236 42,650
-------------------------------------------
Interest expense:
Interest on deposits 10,295 15,692 16,622
Interest on short-term borrowings 502 1,260 2,197
Interest on long-term borrowings 2,244 2,846 2,899
Interest on Company Obligated Mandatorily Redeemable
Preferred Securities 65 - -
-------------------------------------------
TOTAL INTEREST EXPENSE 13,106 19,798 21,718
-------------------------------------------
NET INTEREST INCOME 26,797 23,438 20,932
Provision for loan losses 1,156 1,125 1,239
-------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 25,641 22,313 19,693
-------------------------------------------
Noninterest income:
Service charges on deposit accounts 1,625 1,302 1,162
Service charges on loans 1,260 722 523
Securities gains, net 111 88 2
Gain on sale of loans, net 695 332 33
Net gain on sale of premises and equipment 360 557 1,053
Other 2,076 1,681 1,622
-------------------------------------------
TOTAL NONINTEREST INCOME 6,127 4,682 4,395
-------------------------------------------
Noninterest expenses:
Salaries and employee benefits 12,439 10,533 9,739
Premises and equipment 3,419 3,075 2,679
Data processing fees 1,261 951 1,002
Marketing and business development 894 878 764
Federal deposit insurance premiums 102 99 95
Other 4,024 3,018 2,774
-------------------------------------------
TOTAL NONINTEREST EXPENSES 22,139 18,554 17,053
-------------------------------------------
INCOME BEFORE INCOME TAXES 9,629 8,441 7,035
Income taxes 3,244 2,733 2,267
-------------------------------------------
NET INCOME $ 6,385 $ 5,708 $ 4,768
===========================================
Basic earnings per share $ 2.53 $ 2.25 $ 1.87
===========================================
Diluted earnings per share $ 2.52 $ 2.24 $ 1.86
===========================================
See Notes to Consolidated Financial Statements.
3
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000
Accumulated
Additional Other
Common Paid-in Retained Comprehensive Treasury
Stock Capital Earnings Income (Loss) Stock Total
- -----------------------------------------------------------------------------------------------------------------------------
(Amounts In Thousands, Except Share and Per Share Amounts)
Balance at December 31, 1999 $ 2,588 $ 15,540 $ 29,819 $ (1,528) $ (684) $ 45,735
--------
Comprehensive income:
Net income - - 4,768 - - 4,768
Change in net unrealized gains on
available-for-sale securities - - - 1,871 - 1,871
Reclassification adjustment for gains
included in net income - - - (2) - (2)
Income tax effect - - - (645) - (645)
--------
TOTAL COMPREHENSIVE INCOME 5,992
--------
Sale of common stock in connection
with dividend reinvestment program - - - - 65 65
Purchase of 54,483 shares of treasury stock - - - - (1,715) (1,715)
Cash dividends paid - $0.65 per share - - (1,599) - - (1,599)
Exercise of stock options - (88) - - 125 37
-----------------------------------------------------------------------------
Balance at December 31, 2000 2,588 15,452 32,988 (304) (2,209) 48,515
--------
Comprehensive income:
Net income - - 5,708 - - 5,708
Change in net unrealized gains on
available-for-sale securities - - - 1,101 - 1,101
Reclassification adjustment for gains
included in net income - - - (88) - (88)
Income tax effect - - - (379) - (379)
--------
TOTAL COMPREHENSIVE INCOME 6,342
--------
Sale of 10,550 shares of treasury stock - - - - 336 336
Purchase of 29,092 shares of treasury stock - - - - (795) (795)
Cash dividends paid - $0.71 per share - - (1,802) - - (1,802)
Exercise of stock options - (497) - - 830 333
-----------------------------------------------------------------------------
Balance at December 31, 2001 2,588 14,955 36,894 330 (1,838) 52,929
--------
Comprehensive income:
Net income - - 6,385 - - 6,385
Change in net unrealized gains on
available-for-sale securities - - - 1,799 - 1,799
Reclassification adjustment for gains
included in net income - - - (111) - (111)
Income tax effect - - - (570) - (570)
--------
TOTAL COMPREHENSIVE INCOME 7,503
--------
Issuance of 389,722 shares of stock
for acquisition 389 11,356 - - - 11,745
Sale of 525 shares of treasury stock - (3) - - 18 15
Purchase of 38,937 shares of treasury stock - - - - (1,073) (1,073)
Cash dividends paid - $0.72 per share - - (1,790) - - (1,790)
-----------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2002 $ 2,977 $ 26,308 $ 41,489 $ 1,448 $ (2,893) $ 69,329
=============================================================================
See Notes to Consolidated Financial Statements.
4
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000
2002 2001 2000
- ------------------------------------------------------------------------------------------------------------------------
(Amounts In Thousands)
Cash Flows From Operating Activities
Net income $ 6,385 $ 5,708 $ 4,768
Adjustments to reconcile net income to cash
provided by operating activities:
Provision for loan losses 1,156 1,125 1,239
Depreciation 1,073 889 927
Amortization and accretion of premiums
and discounts, net 232 43 51
Deferred income taxes (361) (475) (932)
Securities gains, net (111) (88) (2)
Gain on sale of loans, net (695) (332) (33)
Net gain on sale of premises and equipment (360) (557) (1,053)
Decrease (increase) in accrued interest receivable 743 745 (813)
Increase (decrease) in accrued interest payable (209) (131) 275
Other, net 2,227 (928) (73)
--------------------------------------------------
NET CASH PROVIDED BY OPERATIONS BEFORE LOAN
ORIGINATIONS AND SALES 10,080 5,999 4,354
Loans originated for sale (108,441) (83,419) (6,211)
Proceeds from sales of loans 108,779 81,026 5,992
--------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 10,418 3,606 4,135
--------------------------------------------------
Cash Flows From Investing Activities
Purchase of available-for-sale securities (40,190) (51,865) (16,023)
Proceeds from sales of available-for-sale securities 7,666 4,174 998
Proceeds from redemptions and maturities of
available-for-sale securities 23,057 61,422 21,974
Net increase in loans (37,135) (2,708) (79,545)
Purchases of premises and equipment (1,852) (1,915) (1,622)
Proceeds from sale of premises and equipment - - 3,595
Proceeds from sales of other real estate - - 887
Cash received from acquisition 663 - -
Purchases of FHLB stock (9,682) (403) (500)
--------------------------------------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (57,473) 8,705 (70,236)
--------------------------------------------------
Cash Flows From Financing activities
Net increase in deposits 75,851 19,734 27,826
Net increase (decrease) in short-term borrowings 1,042 (26,882) 25,649
Dividends paid (1,790) (1,802) (1,599)
Proceeds from long-term borrowings 6,500 47,500 40,900
Repayment of long-term borrowings (19,203) (36,400) (31,700)
Issuance of Company Obligated Mandatorily Redeemable
Preferred Securities 10,000 - -
Purchase of treasury stock (1,073) (795) (1,715)
Proceeds from sale of treasury stock 15 1,166 190
Proceeds from issuance of common stock - (497) (88)
--------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 71,342 2,024 59,463
--------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 24,287 14,335 (6,638)
Cash and cash equivalents at beginning of year 37,468 23,133 29,771
--------------------------------------------------
Cash and cash equivalents at end of year $ 61,755 $ 37,468 $ 23,133
==================================================
(Continued)
5
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000
2002 2001 2000
- ------------------------------------------------------------------------------------------------------------------------
(Amounts In Thousands)
Supplemental Cash Flow Information and Noncash Transactions:
Interest paid $ 13,315 $ 19,929 $ 21,477
Income taxes paid 3,209 2,872 2,364
Loans transferred to other real estate owned 2,234 22 897
Supplemental Schedules of Noncash Investing Activities:
Change in accumulated other comprehensive income, unrealized
gains on available-for-sale securities, net $ 1,118 $ 634 $ 1,224
Acquisition of Fortress Bancshares, Inc. (Note 2)
Assets acquired:
Cash and cash equivalents $ 10,449
Investments available for sale 53,634
Accrued interest receivable 2,041
Loans, net 146,338
FHLB stock 1,679
Premises and equipment, net 4,349
Other 4,334
Excess of cost over fair value of net assets acquired 7,232
----------
230,056
----------
Liabilities assumed:
Deposits 175,820
Accrued interest payable 584
Short-term borrowings 22,825
Long-term borrowings 6,400
Other expenses 2,896
----------
208,525
----------
Net assets acquired $ 21,531
==========
Cash paid 9,786
Stock issued 11,745
----------
Total price paid $ 21,531
==========
See Notes to Consolidated Financial Statements.
6
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Banking Activities: The consolidated income of Merchants and
Manufacturers Bancorporation, Inc. (the Corporation) is principally from the
income of its wholly owned subsidiaries. The Banks, as defined in the following
paragraph, provide a full range of personal and commercial financial services to
customers. The Corporation and the Banks are subject to competition from other
financial institutions. Merchants and Manufacturers Statutory Trust I, also a
wholly-owned subsidiary, was capitalized November 2002 for the purpose of
issuing Trust Preferred securities. The Corporation and the Banks are also
subject to the regulations of certain federal and state agencies and undergo
periodic examinations by those regulatory agencies.
Consolidation: The consolidated financial statements of the Corporation include
the accounts of its wholly owned subsidiaries, Lincoln State Bank (Lincoln),
Franklin State Bank (Franklin), Grafton State Bank (Grafton), Community Bank of
Oconto County (Oconto), Fortress Bank of Cresco (Cresco), Fortress Bank of
Westby (Westby), and Fortress Bank N.A. (Houston) - collectively referred to as
"the Banks," CBG Services, Inc., which provides management services for the
Banks, Lincoln Neighborhood Redevelopment Corporation, which provides
redevelopment and rehabilitation to certain areas located primarily on the near
south side of Milwaukee, Merchants Merger Corp., which is used to facilitate
acquisitions, CBG Financial Services, Inc., which provides non-insured
investment and insurance products to customers of the Banks and Lincoln's wholly
owned subsidiary, M&M Lincoln Investment Corp., Grafton's wholly owned
subsidiary, GSB Investments Inc., Oconto's wholly owned subsidiary, CBOC
Investments Inc., and Westby's wholly owned subsidiary, Westby Investment
Company, Inc., which manage the investment portfolio for the Banks and CBG
Mortgage, Inc., which acts as the Corporation's mortgage broker. The
consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America and
conform to general practices within the banking industry. All significant
intercompany accounts and transactions have been eliminated in the consolidated
financial statements.
Use of Estimates: In preparing the consolidated financial statements in
conformity with accounting principles generally accepted in the United States of
America, management is required to make estimates and assumptions that affect
the reported amounts of assets and liabilities as of the date of the balance
sheet and reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Material estimates that are
particularly susceptible to significant change in the near term relate to the
determination of the allowance for loan losses, and the valuation of foreclosed
real estate and deferred tax assets. The fair value disclosure of financial
instruments is an estimate that can be computed within a range.
Presentation of Cash Flows: For purposes of reporting cash flows, cash and due
from banks include cash on hand and amounts due from banks and federal funds
sold. Cash flows from loans, deposits, and short-term borrowings are treated as
net increases or decreases.
Cash and Due From Banks: The Banks maintain amounts due from banks which, at
times, may exceed federally insured limits. Management monitors these
correspondent relationships. The Banks have not experienced any losses in such
accounts.
7
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Available-for-Sale Securities: Securities classified as available-for-sale are
those debt securities that the Banks intend to hold for an indefinite period of
time, but not necessarily to maturity. Any decision to sell a security
classified as available-for-sale would be based on various factors, including
significant movements in interest rates, changes in the maturity mix of the
Banks' assets and liabilities, liquidity needs, regulatory capital
consideration, and other similar factors. Securities classified as
available-for-sale are carried at fair value. Unrealized gains or losses are
reported as increases or decreases in accumulated other comprehensive income,
net of the related deferred tax effect. Realized gains or losses, determined on
the basis of the cost of specific securities sold, are included in earnings.
Loans: Loans are stated at the amount of unpaid principal, reduced by an
allowance for loan losses. Interest income is accrued on the unpaid principal
balance. The accrual of interest income on loans is discontinued at the time the
loan is 90 days delinquent unless the credit is well-secured and in the process
of collection. When interest accrual is discontinued, all unpaid accrued
interest is reversed against interest income. Accrual of interest is generally
resumed when the customer is current on all principal and interest payments and
has been paying on a timely basis for a period of time.
Mortgage Loans Held for Sale: Mortgage loans originated and intended for sale in
the secondary market are carried at the lower of cost or estimated market value
in the aggregate. All sales are made without recourse. The balance of mortgage
loans held for sale are included in the loan balance in the financial
statements.
Allowance for Loan Losses: The allowance for loan losses is established through
a provision for loan losses charged to expense. Loans are charged against the
allowance for loan losses when management believes that the collectibility of
the principal is unlikely. Subsequent recoveries, if any, are credited to the
allowance. The allowance for loan losses is adequate to cover probable credit
losses relating to specifically identified loans, as well as probable credit
losses inherent in the balance of the loan portfolio. The allowance is based on
past events and current economic conditions, and does not include the effects of
expected losses on specific loans or groups of loans that are related to future
events or expected changes in economic conditions. While management uses the
best information available to make its evaluation, future adjustments to the
allowance may be necessary if there are significant changes in economic
conditions.
Impaired loans are measured based on 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. A loan is impaired when it is
probable the creditor will be unable to collect all contractual principal and
interest payments due in accordance with the terms of the loan agreement. Cash
collections on impaired loans are credited to the loan receivable balance and no
interest income is recognized on those loans until the principal balance is
current.
In addition, various regulatory agencies periodically review the allowance for
loan losses. These agencies may require the Banks to make additions to the
allowance for loan losses based on their judgments of collectibility based on
information available to them at the time of their examination.
Credit Related Financial Instruments: In the ordinary course of business the
Banks have entered into off-balance-sheet financial instruments consisting of
commitments to extend credit and standby letters of credit. Such financial
instruments are recorded in the financial statements when they are funded.
8
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Transfers of Financial Assets: Transfers of financial assets are accounted for
as sales only when control over the assets has been surrendered. Control over
transferred assets is deemed to be surrendered when (1) the assets have been
isolated from the Corporation, (2) the transferee obtains the right (free of
conditions that constrain it from taking advantage of the right) to pledge or
exchange the transferred assets, and (3) the Corporation does not maintain
effective control over the transferred assets through an agreement to repurchase
them before their maturity or the ability to unilaterally cause the holder to
return specific assets.
Premises and Equipment: Premises and equipment are stated at cost, less
accumulated depreciation. Provisions for depreciation are computed using the
straight-line or double-declining-balance methods, over the estimated useful
lives of the assets.
Intangible Assets: The Corporation's intangible assets include the value of
ongoing customer relationships (core deposits), the excess of cost over the fair
value of net assets acquired (goodwill) arising from the purchase of certain
assets and the assumption of certain liabilities from unrelated entities. Core
deposit intangibles are amortized over a 10-year period and goodwill is
evaluated on an annual basis to determine impairment, if any. Any impairment in
the intangibles would be recorded against income in the period of impairment.
Other Real Estate Owned: Other real estate owned, acquired through partial or
total satisfaction of loans, is carried at the lower of cost or fair value, less
cost to sell. At the date of acquisition losses are charged to the allowance for
loan losses. Revenue and expenses from operations and changes in the valuation
allowance are included in loss on foreclosed real estate. The balance of other
real estate owned is included in other assets in the financial statements.
9
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Stock-Based Compensation Plan: At December 31, 2002, the Corporation had a
stock-based key officer and employee compensation plan, which is described more
fully in Note 11. The Corporation accounts for this plan under the recognitions
and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related Interpretations. No stock-based employee compensation
cost is reflected in the income, as all options granted under this plan had an
exercise price equal to the market value of the underlying common stock on the
date of grant. The following table illustrates the effect on net income and
earnings per share if the Corporation had applied the fair value recognition
provisions of the Financial Accounting Standards Board (FASB) Statement No. 123,
Accounting for Stock-Based Compensation, to stock-based employee compensation.
Year Ended December 31,
--------------------------------------------------
2002 2001 2000
--------------------------------------------------
(Amounts In Thousands, Except Per Share Data)
Net income, as reported $ 6,385 $ 5,708 $ 4,768
Deduct total stock-based employee
compensation expense determined
under fair value based method for all
awards, net of related tax effects 389 306 319
--------------------------------------------------
Pro forma net income $ 5,996 $ 5,402 $ 4,449
==================================================
Earnings per share:
Basic:
As reported $ 2.53 $ 2.25 $ 1.87
Pro forma 2.38 2.13 1.74
Diluted:
As reported $ 2.52 $ 2.24 $ 1.86
Pro forma 2.37 2.12 1.74
In determining compensation cost using the fair value method prescribed in
Statement No. 123, the value of each grant is estimated at the grant date with
the following weighted-average assumptions used for grants in 2002, 2001, and
2000, respectively: dividend yield of 2.44 percent, 2.65 percent, and 2.32
percent; expected price volatility of 14.78 percent, 15.08 percent, and 13.87
percent; blended risk-free interest rates of 3.95 percent, 4.96 percent, and 5.1
percent; and expected lives of 10 years, respectively.
Income Taxes: The Corporation files a consolidated federal income tax return and
individual subsidiary state income tax returns. Accordingly, amounts equal to
tax benefits of those companies having taxable federal losses or credits are
reimbursed by the other companies that incur federal tax liabilities.
10
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Amounts provided for income tax expense are based on income reported for
financial statement purposes, and do not necessarily represent amounts currently
payable under tax laws. Deferred income tax assets and liabilities are computed
annually for differences between the financial statement and tax bases of assets
and liabilities that will result in taxable or deductible amounts in the future
based on enacted tax laws and rates applicable to the periods in which the
differences are expected to affect taxable income. As changes in tax laws or
rates are enacted, deferred tax assets and liabilities are adjusted through the
provision for income taxes. Valuation allowances are established when necessary
to reduce deferred tax assets to the amount expected to be realized.
Trust Assets: Property held for customers in fiduciary or agency capacities,
other than cash on deposit at the Banks, is not included in the accompanying
balance sheets, since such items are not assets of the Corporation.
Earnings Per Share: Earnings per share of common stock have been computed based
on the weighted-average number of common stock and common stock equivalents, if
dilutive, outstanding during each year. In the computation of diluted earnings
per share, all dilutive stock options are assumed to be exercised at the
beginning of each year and the proceeds are used to purchase shares of the
Corporation's common stock at the average market price during the year.
Earnings per common share have been computed for the years ended December 31,
2002, 2001, and 2000 based on the following:
2002 2001 2000
--------------------------------------------------
(Amounts In Thousands,
Except Share Amounts)
Net income $ 6,385 $ 5,708 $ 4,768
--------------------------------------------------
Weighted average common shares
outstanding 2,522,507 2,539,418 2,553,014
Effect of dilutive options 16,134 9,124 16,643
--------------------------------------------------
Weighted average common shares
outstanding used to calculate diluted
earnings per common share 2,538,641 2,548,542 2,569,657
==================================================
Comprehensive Income: Accounting principles generally require that recognized
revenue, expenses, gains, and losses be included in net income. Although certain
changes in assets and liabilities, such as unrealized gains and losses on
available-for-sale securities, are reported as a separate component of the
equity section of the balance sheet, such items, along with net income, are
components of comprehensive income.
Segment Reporting: The Corporation is managed as one unit and does not have
separate operating segments. The Corporation's chief operating decision-makers
use consolidated results to make operating and strategic decisions.
11
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Adoption of Statement of Financial Accounting Standards (SFAS) No. 142: On
January 1, 2002, the Corporation implemented SFAS No. 142, Goodwill and Other
Intangible Assets. Under the provisions of SFAS No. 142, goodwill is no longer
subject to amortization over its useful life, but instead will be subject to at
least annual assessments for impairment by applying a fair value based test.
SFAS No. 142 also requires that an acquired intangible asset should be
separately recognized if the benefit of the intangible asset is obtained through
contractual or other legal rights, or if the asset can be sold, transferred,
licensed, rented, or exchanged, regardless of the acquirer's intent to do so.
The Corporation determined that no transitional impairment loss was required at
January 1, 2002. In addition, no impairment loss was required for the year ended
December 31, 2002.
Had provisions of SFAS No. 142 been applied in fiscal years 2001 and 2000, the
Corporation's net income and net income per share would have been as follows:
Year Ended December 31, 2001 Year Ended December 31, 2000
-------------------------------------------------------------------------------------
Basic Diluted Basic Diluted
Net Earnings Earnings Net Earnings Earnings
Income Per Share Per Share Income Per Share Per Share
-------------------------------------------------------------------------------------
(Amounts In Thousands, Except Per Share Data)
Net income:
As reported $ 5,708 $ 2.25 $ 2.24 $ 4,768 $ 1.87 $ 1.86
Add: Goodwill amortization,
net of tax 46 0.02 0.02 46 0.02 0.02
-------------------------------------------------------------------------------------
PRO FORMA NET INCOME $ 5,754 $ 2.27 $ 2.26 $ 4,814 $ 1.89 $ 1.88
=====================================================================================
Current Accounting Developments: The FASB has issued Interpretation No. 45,
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others - an interpretation of FASB
Statement Nos. 5, 57 and 107 and rescission of FASB Interpretation No. 34.
Interpretation No. 45 elaborates on the disclosures to be made by a guarantor in
its interim and annual financial statements about its obligations under certain
guarantees that it has issued. It also clarifies that a guarantor is required to
recognize, at the inception of a guarantee, a liability for the fair value of
the obligation undertaken in issuing the guarantee. The initial recognition and
measurement provision of Interpretation No. 45 are applicable on a prospective
basis to guarantees issued or modified after December 31, 2002. Implementation
of these provisions of Interpretation No. 45 is not expected to have a material
impact on the Corporation's consolidated financial statements. The disclosure
requirements of Interpretation No. 45 are effective for financial statements of
interim or annual periods ending after December 15, 2002, and have been adopted
in the consolidated financial statements for December 31, 2002.
12
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. BUSINESS COMBINATIONS
On November 30, 2002, the Corporation acquired Fortress Bancshares, Inc.
(Fortress), a multi-bank holding company that owns three separately chartered
community banks in Wisconsin, Minnesota, and Iowa. The acquisition was a
combination of 45 percent cash and 55 percent common stock. Each shareholder of
Fortress was paid $30 for each share of common stock held by such shareholders
or received 1.0153 shares of common stock for each one share of Fortress common
stock. The transaction was accounted for under the purchase method of
accounting. Accordingly, the results of operations have been included in the
Corporation's results of operations since the date of acquisition. Under this
method of accounting, the purchase price is allocated to the respective assets
acquired and liabilities assumed based on their estimated fair values, net of
applicable income tax effects. The excess cost over fair value of net assets
acquired of approximately $7.3 million has been recorded as goodwill.
The unaudited pro forma results of operations, which follow, assume that the
acquisition had occurred on January 1, 2000. In addition to combining the
historical results of operations, the pro forma calculations include purchase
accounting adjustments related to the acquisition. The pro forma calculations do
not include any anticipated cost savings as a result of the acquisition.
Unaudited pro forma consolidated results of operations for the years ended
December 31, 2002, 2001, and 2000 as though Fortress had been acquired January
1, 2000 are as follows:
2002 2001 2000
-------------------------------------------
(Amounts In Thousands,
Except Per Share Amounts)
Net interest income $ 34,777 $ 30,967 $ 27,526
===========================================
Net income $ 8,090 $ 7,187 $ 5,920
===========================================
Basic earnings per common share $ 2.81 $ 2.45 $ 2.03
===========================================
Diluted earnings per common share $ 2.80 $ 2.45 $ 2.00
===========================================
The pro forma results of operations are not necessarily indicative of the actual
results of operation that would have occurred had the Fortress acquisition
actually taken place at the beginning of the year ended December 31, 2002, or
results that may occur in the future.
On January 16, 2001, the Corporation completed its merger with CBOC, Inc., a
one-bank holding corporation that provides financial services to businesses and
individuals in Oconto Falls and the surrounding area. Under the terms of the
merger agreement the Corporation issued 459,680 shares of Merchants &
Manufacturers Bancorporation, Inc. stock (with a fair market value of $28 per
share on such date) in exchange for all of CBOC's common stock. The number of
the Corporation's shares was calculated using an exchange ratio of 5.746 shares
of the Corporation's stock for each share of CBOC common stock. The transaction
was accounted for as a pooling of interest and, accordingly, the historical
consolidated financial statements of the Corporation have been restated to
include the financial position, results of operations, and cash flows of CBOC
for all periods presented.
13
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. BUSINESS COMBINATIONS (CONTINUED)
There were no adjustments made of net assets of the combining corporations to
adopt the same accounting practices and there were no effects on the net income
reported previously by the separate corporations now presented in the
comparative financial statements. There were no significant intercompany
transactions requiring elimination in any period presented.
The following table shows the historical results of the Corporation and CBOC for
the period prior to the consummation of the merger of the entities (dollars in
thousands):
Year Ended
December 31,
2000
------------
Revenues:
Corporation $ 38,427
CBOC 4,252
------------
$ 42,679
============
Net Income:
Corporation $ 4,240
CBOC 528
------------
$ 4,768
============
NOTE 3. CASH AND DUE FROM BANKS
The Banks are required to maintain vault cash and reserve balances with the
Federal Reserve Bank based upon a percentage of deposits. These requirements
approximated $3,076,000 and $2,016,000 at December 31, 2002 and 2001,
respectively.
14
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. AVAILABLE-FOR-SALE SECURITIES
Amortized costs and fair values of available-for-sale securities as of December
31, 2002 and 2001 are summarized as follows:
December 31, 2002
---------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
---------------------------------------------------------------
(Amounts In Thousands)
U.S. treasury and other U.S.
government agency securities $ 23,654 $ 410 $ - $ 24,064
State and political subdivisions 39,006 970 (75) 39,901
Corporate bonds 75 - - 75
Mutual funds 3,069 - - 3,069
Collateralized mortgage obligations 28,274 357 (20) 28,611
Mortgage-backed securities 33,853 568 (16) 34,405
---------------------------------------------------------------
$ 127,931 $ 2,305 $ (111) $ 130,125
===============================================================
December 31, 2002
---------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
---------------------------------------------------------------
(Amounts In Thousands)
U.S. treasury and other U.S.
government agency securities $ 4,401 $ 93 $ - $ 4,494
State and political subdivisions 24,143 278 (243) 24,178
Corporate bonds 1,576 38 - 1,614
Commercial paper 1,100 - - 1,100
Mutual funds 3,173 - (107) 3,066
Collateralized mortgage obligations 13,897 260 (41) 14,116
Mortgage-backed securities 17,347 280 (52) 17,575
---------------------------------------------------------------
$ 65,637 $ 949 $ (443) $ 66,143
===============================================================
Securities with a fair value of $50,548,000 and $28,742,000 at December 31, 2002
and 2001, respectively, were pledged as collateral on public deposits and for
other purposes as required or permitted by law.
15
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. AVAILABLE-FOR-SALE SECURITIES (CONTINUED)
The amortized cost and fair value of available-for-sale securities at December
31, 2002, by contractual maturity, are shown below. Expected maturities will
differ from contractual maturities in mortgage-related securities, mutual funds,
and collateralized mortgage obligations since the anticipated maturities are not
readily determinable. Therefore, these securities are not included in the
maturity categories in the following summary:
Amortized Fair
Cost Value
-----------------------------
(Amounts In Thousands)
Due in one year or less $ 4,989 $ 5,045
Due after one year through five years 22,583 22,969
Due after five years through ten years 22,691 23,416
Due after ten years 12,472 12,610
-----------------------------
62,735 64,040
Mutual funds 3,069 3,069
Collateralized mortgage obligations 28,274 28,611
Mortgage-related securities 33,853 34,405
-----------------------------
$ 127,931 $ 130,125
=============================
Proceeds from sales of available-for-sale securities during the years ended
December 31, 2002, 2001, and 2000, were $7,666,000, $4,174,000, and $998,000,
respectively. Gross gains of $215,000, $96,000, and $8,000 were recorded on
those sales for the years ended December 31, 2002, 2001, and 2000, respectively.
Gross losses of $104,000, $8,000, and $6,000 were also recorded in the years
ended December 31, 2002, 2001, and 2000, respectively.
16
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5. LOANS
Major classifications of loans are as follows:
December 31,
----------------------------
2002 2001
----------------------------
(Amounts In Thousands)
First mortgage:
Conventional single-family residential $ 98,075 $ 78,377
Commercial and multi-family residential 198,250 180,102
Construction 32,995 34,744
Farmland 20,847 7,312
----------------------------
350,167 300,535
----------------------------
Commercial business loans 246,787 140,671
Consumer and installment loans 51,883 32,401
Home equity loans 9,492 6,140
Other 7,109 3,148
----------------------------
315,271 182,360
----------------------------
Less allowance for loan losses 7,663 5,563
----------------------------
$ 657,775 $ 477,332
============================
Changes in the allowance for loan losses for the years ended December 31, 2002,
2001, and 2000 are presented as follows:
December 31,
------------------------------------
2002 2001 2000
------------------------------------
(Amounts In Thousands)
Balance at beginning of year $ 5,563 $ 5,010 $ 4,047
Increase due to acquisition 2,008 - -
Provisions charged to expense 1,156 1,125 1,239
Recoveries 112 23 14
Charge-offs (1,176) (595) (290)
------------------------------------
Balance at end of year $ 7,663 $ 5,563 $ 5,010
====================================
17
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5. LOANS (CONTINUED)
The following is a summary of information pertaining to impaired loans:
December 31,
----------------------
2002 2001
----------------------
(Amounts In Thousands)
Impaired loans for which an allowance
has been provided $ 3,203 $ 4,429
Impaired loans for which no allowance
has been provided - -
----------------------
Total loans determined to be impaired $ 3,203 $ 4,429
======================
Allowance provided for impaired loans,
included in the allowance for loan losses $ 745 $ 995
======================
Year Ended December 31,
--------------------------------
2002 2001 2000
--------------------------------
(Amounts In Thousands)
Average investment in impaired loans $ 3,397 $ 3,276 $ 1,764
================================
Nonaccruing loans totaled $3,203,000 and $4,429,000 as of December 31, 2002 and
2001, respectively. Interest income in the amount of $311,000, $48,000, and
$65,000 would have been earned on the nonaccrual loans had they been performing
in accordance with their original terms during the years ended December 31,
2002, 2001, and 2000, respectively. The interest collected on nonaccrual loans
and impaired loans included in income for the years ended December 31, 2002,
2001, and 2000 was $350,000, $104,000, and $9,000, respectively.
Certain directors and executive officers of the Corporation, and their related
interests, had loans outstanding in the aggregate amounts of $25,100,000 and
$21,800,000 at December 2002 and 2001, respectively. During 2002, $13,250,000 of
new loans were made and repayments totaled $9,950,000. These loans were made on
substantially the same terms, including interest rates and collateral, as those
prevailing at the same time for comparable transactions with other persons, and
did not involve more than normal risks of collectibility or present other
unfavorable features.
The unpaid principal balance of mortgage loans serviced for others, which are
not included on the consolidated balance sheet, were approximately $187,121,000
at December 31, 2002. The carrying value of the mortgage servicing rights
approximates fair market value at December 31, 2002.
18
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. PREMISES AND EQUIPMENT
Premises and equipment are stated at cost, less accumulated depreciation, and
are summarized as follows:
DECEMBER 31,
-------------------------
2002 2001
-------------------------
(Amounts In Thousands)
Land $ 2,290 $ 1,912
Office buildings and improvements 14,893 10,117
Furniture and equipment 13,814 9,168
-------------------------
30,997 21,197
Less accumulated depreciation 15,591 10,919
-------------------------
$ 15,406 $ 10,278
=========================
During the year ended December 31, 2000, the Corporation sold certain land and
buildings and, subsequently, leased a portion of the buildings back from the new
owners. The total gain on the sales was $1,498,000, of which $786,000 was
immediately recognized in income, during the year of the transaction. The
remaining gain is being accreted into income over the remaining lease terms. The
gains recognized during the years ended December 31, 2002, 2001, and 2000 were
$356,000, $557,000, and $267,000, respectively.
` NOTE 7. INTANGIBLE ASSETS
Intangible assets consisted of the following at December 31, 2002 and 2001:
2002 2001
-------------------------
(Amounts In Thousands)
Goodwill $ 8,250 $ 1,018
Core deposit intangibles 2,152 -
-------------------------
10,402 1,018
Less accumulated amortization 721 622
-------------------------
Intangibles assets, net $ 9,681 $ 396
=========================
The Corporation's intangible assets include the excess of cost over fair value
of net assets acquired (goodwill), the value of ongoing customer relationships
(core deposit intangibles) arising from the purchase of certain assets and the
assumption of certain liabilities from unrelated entities, and mortgage
servicing rights. In accordance with the provisions of SFAS No. 142, goodwill of
$8,250 related to the acquisition is not being amortized, but is evaluated
annually for impairment. Core deposit intangibles of $2,152 are being amortized
over a 10-year period. Core deposit intangible assets are periodically reviewed
for impairment. Any impairment in the core deposit intangibles or goodwill would
be recognized against income in the period of impairment.
19
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8. DEPOSITS
Deposits consisted of the following as of December 31:
2002 2001
-------------------------
(Amounts In Thousands)
Negotiable Order of Withdrawal accounts:
Non-interest bearing $ 97,288 $ 79,171
Interest-bearing 56,080 36,483
Savings deposits 83,239 69,893
Money market investment accounts 194,196 87,014
Time deposits and certificate accounts 298,653 205,224
-------------------------
$ 729,456 $ 477,785
=========================
The scheduled maturities of time deposits and certificate accounts at December
31, 2002 are as follows (amounts in thousands):
Years Ending December 31,
- -------------------------
2003 $ 219,590
2004 46,966
2005 21,165
2006 5,985
2007 4,947
-----------
$ 298,653
===========
At December 31, 2002 and 2001, time deposits and certificate accounts with
balances greater than $100,000 amounted to $74,532,000 and $48,721,000,
respectively.
20
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. BORROWINGS
Borrowings consisted of the following at December 31:
2002 2001
-------------------------
(Amounts In Thousands)
Short-term borrowings:
Federal funds purchased, 2.125% $ - $ 9,300
Securities sold under agreements to repurchase
with rates ranging from 1% to 2.72% 3,101 3,524
Lines of credit with unaffiliated banks with rates
ranging from 3.34% to 5.18% 14,100 3,802
Treasury, tax, and loan accounts with the Federal
Home Loan Bank (FHLB) of Chicago 887 420
-------------------------
Total short-term borrowings $ 18,088 $ 17,046
=========================
Securities sold under agreements to repurchase generally mature within 120 days.
Information concerning securities sold under agreements to repurchase is
summarized as follows:
2002 2001
-----------------------
(Amounts In Thousands)
Average daily balance during the year $ 7,273 $ 5,516
Average daily interest rate during the year 1.88% 3.93%
Maximum month-end balance during the year $ 9,894 $ 7,326
Weighted average rate as of December 31 1.53% 2.72%
Securities underlying the agreements at year-end:
Carrying value $ 3,698 $ 3,776
Estimated fair value 3,698 3,776
21
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. BORROWINGS (CONTINUED)
2002 2001
-------------------------
(Amounts In Thousands)
Long-term borrowings:
Notes payable to FHLB, maturing during fiscal year
2002 with rates ranging from 2.39% to 6.99% $ - $ 38,900
Notes payable to FHLB, maturing during fiscal year
2003 with rates ranging from 1.85% to 6.5% 29,150 8,400
Notes payable to FHLB, maturing during fiscal year
2004 with rates ranging from 2.4% to 5.12% 21,675 1,500
Notes payable to FHLB, maturing during fiscal year
2005 with rates ranging from 2.86% to 6.53% 9,754 500
Notes payable to FHLB, maturing during fiscal year
2008 with rates ranging from 4.35% to 5.34% 7,058 4,500
Notes payable to FHLB, maturing thereafter
with rates ranging from 4.33% to 5.95% 4,685 2,000
-------------------------
Total long-term borrowings $ 72,322 $ 55,800
=========================
At December 31, 2002, FHLB borrowings are collateralized by securities with a
fair value of $24,825,000 and loans receivable with an outstanding balance of
$89,763,000. At December 31, 2001, FHLB borrowings were collateralized by
securities with a fair value of $17,717,000 and loans receivable with an
outstanding balance of $64,570,000.
Of the borrowings due in 2005, $1,000 is callable quarterly, all of the
borrowings in 2008 and 2010 are callable quarterly, $500 of the borrowings due
thereafter is callable in 2006 while the remaining borrowings due thereafter are
callable quarterly.
NOTE 10. COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF
SUBSIDIARY TRUST HOLDING SOLELY SUBORDINATED DEBENTURES
The Corporation issued all of the 10,000 authorized shares of Company Obligated
Mandatorily Redeemable Preferred Securities of Merchants & Manufacturers
Statutory Trust I Holding Solely Subordinated Debentures. Distributions are paid
quarterly. Cumulative cash distributions are calculated at three-month LIBOR
plus 3.35 percent, adjusted quarterly. The Corporation may, at one or more
times, defer interest payments on the capital securities for up to 20
consecutive quarters, but not beyond November 11, 2032. At the end of any
deferral period, all accumulated and unpaid distributions will be paid. The
capital securities will be redeemed on November 11, 2032; however, the
Corporation has the option to shorten the maturity date to a date not earlier
than November 11, 2007. The trust preferred securities are redeemable, in whole
or in part, plus any accrued and unpaid distribution to the date of redemption.
22
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10. COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF
SUBSIDIARY TRUST HOLDING SOLELY SUBORDINATED DEBENTURES (CONTINUED)
Holders of the capital securities have no voting rights, are unsecured and rank
junior in priority of payment to all of the Corporation's indebtedness and
senior to the Corporation's capital stock.
The debentures are included on the balance sheet as liabilities; however for
regulatory purposes they are allowed in the calculation of Tier 1 capital as of
December 31, 2002.
NOTE 11. STOCK BASED COMPENSATION
The Corporation has an Incentive Stock Option Plan under which 66,000 shares of
common stock are reserved for the grant of options to officers and key employees
at a price not less than the fair market value of the stock on the date of the
grant. The Incentive Stock Option Plan limits the options that may be granted to
each employee to $100,000 (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.
Activity in the Incentive Stock Option Plan is summarized in the following
table:
Weighted- Weighted-
Average Average
Number Exercise Price Remaining
of Shares Per Share Contractual Life
--------------------------------------------
Total outstanding at
December 31, 2000 68,265 $ 25.11 6.04
Granted 4,000 28.00
Exercised (21,450) 18.50
-------
Total outstanding at
December 31, 2001 50,815 29.60 7.15
Acquisition 17,767 16.62
Granted -
Exercised -
Total outstanding at -------
December 31, 2002 68,582 26.24 4.82
=======
23
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11. STOCK BASED COMPENSATION (CONTINUED)
The following table summarizes information about stock options outstanding and
exercisable as of December 31, 2002.
Options Outstanding Options Exercisable
------------------------------------------ -----------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Range Of Number Contractual Life Exercise Number Exercise
Exercise Price Outstanding (In Years) Price Exercisable Price
- ----------------------------------------------------------------------------------------------
$15.15 to $16.62 21,407 5.7 $ 16.37 21,407 $ 16.37
$28.00 to $31.14 47,175 6.6 30.71 47,175 30.71
-------- --------
68,582 68,582
======== ========
NOTE 12. INCOME TAXES
The provision for income taxes consisted of the following:
December 31,
--------------------------------
2002 2001 2000
--------------------------------
(Amounts In Thousands)
Current $ 3,605 $ 3,208 $ 3,199
Deferred (361) (475) (932)
-------- -------- --------
$ 3,244 $ 2,733 $ 2,267
======== ======== ========
24
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12. INCOME TAXES (CONTINUED)
The provision for income taxes differs from that computed at the federal
statutory corporate tax rate as follows:
2002 2001 2000
------------------- ---------------------- -------------------
% Of % Of % Of
Pretax Pretax Pretax
Amount Income Amount Income Amount Income
-----------------------------------------------------------------
(Amounts In Thousands)
Computed "expected" tax
expense $ 3,370 35.0% $ 2,954 35.0% $ 2,462 35.0%
Effect of graduated tax
rates (96) (1.0) (84) (1.0) (70) (1.0)
Tax-exempt income, net (384) (4.0) (351) (4.2) (352) (5.0)
State income taxes, net
of federal benefit 323 3.4 187 2.2 174 2.4
Other, net 31 0.3 27 0.3 53 0.7
-----------------------------------------------------------------
$ 3,244 33.7% $ 2,733 32.3% $ 2,267 32.1%
=================================================================
The net deferred tax assets included with other assets in the accompanying
consolidated balance sheets include the following amounts:
December 31,
----------------------
2002 2001
----------------------
(Amounts In Thousands)
Deferred tax assets:
Allowance for loan losses $ 2,553 $ 1,983
Net operating loss carryforwards 1,149 937
Deferred compensation 700 600
Other assets 650 219
----------------------
Total deferred tax assets 5,052 3,739
Valuation allowance (1,149) (937)
----------------------
3,903 2,802
----------------------
Deferred tax liabilities:
Depreciation 312 169
Purchase accounting 904 -
Unrealized gain on available-for-sale securities 746 176
Other liabilities 615 200
----------------------
Total deferred tax liabilities 2,577 545
----------------------
Net deferred tax asset $ 1,326 $ 2,257
======================
25
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12. INCOME TAXES (CONTINUED)
Lincoln Community Bank qualified under provisions of the Internal Revenue Code
which previously permitted it to deduct from taxable income an allowance for bad
debts that differs from the provision for such losses charged to income for
financial reporting purposes. At December 31, 2000, retained earnings included
approximately $3,606,000 for which no provision for income taxes has been made.
Income taxes of approximately $1,414,000 would be imposed if Lincoln Community
Bank were to use these retained earnings for any other purpose other than to
absorb bad debt losses.
NOTE 13. PROFIT-SHARING PLAN
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 percent of their pretax compensation. The Corporation's
annual contribution consists of a discretionary matching percentage, limited to
1 percent of employee compensation, and an additional discretionary amount which
is determined annually by the Board of Directors. The Corporation's
contributions for 2002, 2001, and 2000, were $319,000, $288,000, and $250,000,
respectively.
NOTE 14. SALARY CONTINUATION AGREEMENT
The Corporation has entered into salary continuation agreements with various
executive officers. The agreements provide for the payment of specified amounts
upon the employee's retirement or death which is being accrued over the
anticipated remaining period of employment. Expense recognized for future
benefits under these agreements totaled $153,000, $174,000, and $161,000 during
2002, 2001, and 2000, respectively.
Although not part of the agreement, the Corporation purchased insurance on the
lives of the officers which could provide funding for the payment of benefits.
Included in other assets is $2,648,000 and $2,505,000 of related cash surrender
value of the life insurance as of December 31, 2002 and 2001, respectively.
NOTE 15. COMMITMENTS AND CONTINGENT LIABILITIES
In the normal course of business, the Corporation is involved in various legal
proceedings. In the opinion of management, any liability resulting from such
proceedings would not have a material adverse effect on the consolidated
financial statements.
The Corporation is party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit, financial
guarantees, and standby letters of credit. They involve, to varying degrees,
elements of credit risk in excess of amounts recognized on the consolidated
balance sheets.
26
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15. COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
The Corporation's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual notional amount of
those instruments. The Corporation uses the same credit policies in making
commitments and issuing letters of credit as they do for on-balance-sheet
instruments.
Off-balance-sheet financial instruments whose contracts represented credit
and/or interest rate risk at December 31, 2002 and 2001, are as follows:
December 31,
-------------------------
2002 2001
-------------------------
(Amounts In Thousands)
Commitments to originate mortgage loans $ 23,845 $ 10,482
Unused lines of credit:
Commercial business 71,074 45,860
Home equity 11,088 5,607
Credit cards 10,832 7,576
Other 97 -
Standby letters of credit 9,346 4,721
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. Standby letters of credit are conditional
commitments issued to guarantee the performance of a customer to a third party.
Those guarantees are primarily issued to support public and private borrowing
arrangements. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to customers.
The Corporation evaluates each customer's credit worthiness on a case-by-case
basis. The amount of collateral obtained, if deemed necessary by the Corporation
upon extension of credit, is based on management's credit evaluation of the
counterparty. Collateral held varies but may include accounts receivable,
inventory, property and equipment, and income-producing commercial properties.
Credit card commitments are unsecured.
27
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15. COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to support public and private borrowing arrangements and,
generally, have terms of one year or less. The credit risk involved in issuing
letters of credit is essentially the same as that involved in extending loan
facilities to customers. The Bank holds collateral, which may include accounts
receivable, inventory, property, equipment, and income-producing properties,
supporting those commitments if deemed necessary. In the event the customer does
not perform in accordance with the terms of the agreement with the third party,
the Bank would be required to fund the commitment. The maximum potential amount
of future payments the Bank could be required to make is represented by the
contractual amount shown in the summary above. If the commitment is funded the
Bank would be entitled to seek recovery from the customer. At December 31, 2002
and 2001, no amounts have been recorded as liabilities for the Bank's potential
obligations under these guarantees.
Except for the above-noted commitments to originate loans in the normal course
of business, the Corporation and the Banks have not undertaken the use of
off-balance-sheet derivative financial instruments for any purpose.
Various subsidiary banks of the Corporation have entered into noncancelable
leases for certain branch facilities. The following is a schedule of future
minimum rental payments required under the noncancelable lease agreements
(dollars in thousands):
Years Ending December 31,
- -------------------------
2003 $ 344
2004 291
2005 291
2006 219
2007 219
-------
$ 1,364
=======
NOTE 16. CONCENTRATION OF CREDIT RISK
The Corporation and the Banks do not engage in the use of interest-rate swaps,
futures, or option contracts as of December 31, 2002.
Practically all of the Banks' loans, commitments, and standby letters of credit
have been granted to customers in the Banks' market areas. Although the Banks
have a diversified loan portfolio, the ability of their debtors to honor their
contracts is dependent on the economic conditions of the counties surrounding
the Banks. The concentration of credit by type of loan is set forth in Note 5.
Investment securities issued by state and political subdivisions (see Note 4)
also involve governmental entities within the Banks' market areas.
28
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17. REGULATORY CAPITAL REQUIREMENTS AND RESTRICTIONS OF DIVIDENDS
The Corporation (on a consolidated basis) and 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
capital amounts and classification are also subject to qualitative judgments by
the regulators about components, risk weightings, and other factors. Prompt
corrective action provisions are not applicable to bank holding companies.
Quantitative measures established by regulation to ensure capital adequacy
require the Corporation and Banks to maintain minimum amounts and ratios (set
forth in the table on the following page) of total and Tier I capital (as
defined in the regulations), to risk-weighted assets (as defined), and Tier 1
capital (as defined), to average assets (as defined). Management believes, as of
December 31, 2002 and 2001, that the Corporation and Banks meet all capital
adequacy requirements to which they are subject.
As of December 31, 2002, the most recent notification from the Federal Deposit
Insurance Corporation categorized all the Banks as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Banks must maintain minimum total risk-based, Tier I
risk-based, and Tier I leverage ratios as set forth in the table on the
following page. There are no conditions or events since that notification that
management believes have changed the Corporation's or Banks' classification as
of December 31, 2002.
29
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17. REGULATORY CAPITAL REQUIREMENTS AND RESTRICTIONS OF DIVIDENDS
(CONTINUED)
The Corporation's and Banks' actual capital amounts and ratios as of December
31, 2002 and 2001 are presented in the following table.
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
-------------------- ------------------- ---------------------
Amount Ratio Amount Ratio Amount Ratio
--------------------------------------------------------------------
(Amounts In Thousands)
AS OF DECEMBER 31, 2002
Total capital (to risk-
weighted assets):
Consolidated $ 76,003 10.71% $ 56,755 8.00% $ 70,944 N/A
Lincoln State Bank 36,104 11.91 24,248 8.00 30,310 10.00%
Franklin State Bank 7,583 10.17 5,962 8.00 7,453 10.00
Grafton State Bank 14,236 12.62 9,022 8.00 11,278 10.00
Community Bank Oconto County 7,446 13.32 4,471 8.00 5,589 10.00
Fortress Bank of Westby 10,346 12.57 6,583 8.00 8,229 10.00
Fortress Bank of Cresco 5,766 15.16 3,043 8.00 3,803 10.00
Fortress Bank N.A 4,961 13.15 3,018 8.00 3,772 10.00
Tier 1 capital (to risk-
weighted assets):
Consolidated $ 68,340 9.63% $ 28,378 4.00% $ 42,566 N/A
Lincoln State Bank 32,938 10.87 12,124 4.00 18,186 6.00%
Franklin State Bank 6,699 8.99 2,981 4.00 4,472 6.00
Grafton State Bank 13,192 11.70 4,511 4.00 6,767 6.00
Community Bank Oconto County 6,918 12.38 2,235 4.00 3,353 6.00
Fortress Bank of Westby 9,332 11.34 3,292 4.00 4,937 6.00
Fortress Bank of Cresco 5,290 13.91 1,521 4.00 2,282 6.00
Fortress Bank N.A 4,489 11.90 1,509 4.00 2,263 6.00
Tier 1 capital (to average assets):
Consolidated $ 68,340 9.41% $ 29,440 4.00% $ 36,801 N/A
Lincoln State Bank 32,938 9.54 13,813 4.00 17,267 5.00%
Franklin State Bank 6,699 7.91 3,387 4.00 4,234 5.00
Grafton State Bank 13,192 8.73 6,042 4.00 7,553 5.00
Community Bank Oconto County 6,918 9.51 2,910 4.00 3,637 5.00
Fortress Bank of Westby 9,332 8.60 4,342 4.00 5,427 5.00
Fortress Bank of Cresco 5,290 8.92 2,372 4.00 2,966 5.00
Fortress Bank N.A 4,489 8.26 2,173 4.00 2,717 5.00
30
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17. REGULATORY CAPITAL REQUIREMENTS AND RESTRICTIONS OF DIVIDENDS
(CONTINUED)
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
-------------------- -------------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
----------------------------------------------------------------------
(Amounts In Thousands)
AS OF DECEMBER 31, 2001
Total capital (to risk -
weighted assets):
Consolidated $ 58,055 11.53% $ 40,266 8.00% $ 50,333 N/A
Lincoln State Bank 23,074 11.91 15,503 8.00 19,378 10.00%
Lincoln Community Bank 6,975 10.03 5,564 8.00 6,955 10.00
Franklin State Bank 10,469 12.09 6,926 8.00 8,657 10.00
Grafton State Bank 12,284 12.34 7,962 8.00 9,953 10.00
Community Bank Oconto County 6,794 13.21 4,113 8.00 5,142 10.00
Tier 1 capital (to risk-
weighted assets):
Consolidated $ 52,492 10.43% $ 20,133 4.00% $ 30,200 N/A
Lincoln State Bank 20,651 10.66 7,751 4.00 11,627 6.00%
Lincoln Community Bank 6,206 8.92 2,782 4.00 4,173 6.00
Franklin State Bank 9,636 11.13 3,463 4.00 5,194 6.00
Grafton State Bank 11,332 11.39 3,981 4.00 5,972 6.00
Community Bank Oconto County 6,298 12.25 2,057 4.00 3,085 6.00
Tier 1 capital (to average assets):
Consolidated $ 52,492 8.72% $ 24,081 4.00% $ 30,101 N/A
Lincoln State Bank 20,651 9.82 8,414 4.00 10,518 5.00%
Lincoln Community Bank 6,206 8.11 3,061 4.00 3,827 5.00
Franklin State Bank 9,636 8.72 4,422 4.00 5,528 5.00
Grafton State Bank 11,332 8.23 5,505 4.00 6,882 5.00
Community Bank Oconto County 6,298 9.74 2,588 4.00 3,234 5.00
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, 2002, the subsidiary banks collectively had equity of
approximately $89,519,000 of which approximately $9,264,000 was available for
distribution to the Corporation as dividends without prior regulatory approval.
31
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18. FAIR VALUES OF FINANCIAL INSTRUMENTS
FASB Statement No. 107, Disclosures About Fair Value of Financial Instruments
(SFAS No. 107), requires disclosure of fair value information about financial
instruments, whether recognized or not recognized in the balance sheet, for
which it is practicable to estimate that value. The fair value of a financial
instrument is the current amount that would be exchanged between willing
parties, other than a forced liquidation. Fair value is best-determined base
upon quoted market prices. However, in many instances, there are no quoted
market prices for the Corporation's various financial instruments. 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 assumptions used, including the discount rate and
estimates of future cash flows. Accordingly, the fair value estimates may not be
realized in an immediate settlement of the instrument. SFAS No. 107 excludes
certain financial instruments and all nonfinancial instruments from its
disclosure requirements. Accordingly, the aggregate fair value amounts presented
may not necessarily represent the underlying fair value of the Corporation.
The following methods and assumptions were used by the Corporation in estimating
fair value disclosures for financial instruments:
Cash and due from banks: The carrying amounts of cash and due from banks
equal their fair values.
Interest bearing deposits in banks: The carrying amounts of interest
bearing deposits in banks equal their fair values.
Federal funds sold: The carrying amounts of federal funds sold equal their
fair values.
Available-for-sale securities: Fair values for securities are based on
quoted market prices.
Loans: For variable-rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on carrying
values. Fair values for all other loans are estimated by discounting
contractual cash flows using estimated market discount rates which reflect
the credit and interest rate risk inherent in the loan.
Cash surrender value of life insurance: Life insurance agreements reprice
periodically with no significant change in credit risk. Fair values
approximate carrying values for these agreements.
FHLB 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 demand deposits (interest and
non-interest checking, passbook savings, and certain types of money market
accounts) are, by definition, equal to the amount payable on demand at the
reporting date. Fair values for fixed-rate certificates of deposit are
estimated using a discounted cash flow calculation that applies interest
rates currently being offered on certificates within the marketplace.
Short-term borrowings: The carrying amounts of short-term borrowings
approximate their fair values.
32
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
Other borrowings: The fair values of other borrowings are estimated using
discounted cash flow analysis based on current interest rates being offered
on instruments with similar terms and credit quality.
Company Obligated Mandatorily Redeemable Preferred Securities: The carrying
amount of the Company Obligated Mandatorily Redeemable Preferred Securities
equals its fair value.
Off-balance-sheet instruments: The estimated fair value of fee income on
letters of credit at December 31, 2002 and 2001 is insignificant. Loan
commitments on which the committed interest rate is less that the current
market rate are also insignificant at December 31, 2002 and 2001.
Accrued interest receivable and payable: The carrying amounts of accrued
interest receivable and payable equal their fair values.
The estimated fair values of the Corporation's financial instruments are as
follows:
2002 2001
----------------------- ----------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------------------------------------------------
(Amounts In Thousands)
Financial assets:
Cash and due from banks $ 31,539 $ 31,539 $ 26,013 $ 26,013
Interest bearing deposits in banks 3,825 3,825 4,912 4,912
Federal funds sold 26,391 26,391 6,543 6,543
Available-for-sale securities 130,125 130,125 66,143 66,143
Loans, net 657,775 674,395 477,332 487,578
Cash surrender value of life
insurance 2,648 2,648 2,505 2,505
Accrued interest receivable 4,248 4,248 2,950 2,950
FHLB stock 14,935 14,935 3,574 3,574
Financial liabilities:
Deposits 729,456 731,641 477,785 478,581
Short-term borrowings 18,088 18,088 17,046 17,046
Long-term borrowings 72,322 73,266 55,800 55,770
Company Obligated Mandatorily
Redeemable Preferred Securities 10,000 10,000 - -
Accrued interest payable 1,403 1,403 1,028 1,028
33
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19. PARENT COMPANY ONLY FINANCIAL INFORMATION
CONDENSED BALANCE SHEETS
(PARENT COMPANY ONLY)
December 31,
--------------------
2002 2001
--------------------
(Amounts In Thousands)
ASSETS
Cash and cash equivalents $ 223 $ 15
Loans receivable 500 -
Investment in subsidiaries 83,873 55,387
Premises and equipment 569 479
Other assets 3,732 1,545
--------------------
TOTAL ASSETS $ 88,897 $ 57,426
====================
LIABILITIES
Short-term borrowings $ 7,700 $ 3,802
Subordinated debentures 10,310 -
Other liabilities 1,558 695
--------------------
Total liabilities 19,568 4,497
====================
STOCKHOLDERS' EQUITY
Common stock 2,977 2,588
Additional paid-in capital 26,308 14,955
Retained earnings 41,489 36,894
Accumulated other comprehensive income 1,448 330
Treasury stock (2,893) (1,838)
--------------------
TOTAL STOCKHOLDERS' EQUITY 69,329 52,929
--------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 88,897 $ 57,426
====================
34
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19. PARENT COMPANY ONLY FINANCIAL INFORMATION (CONTINUED)
CONDENSED STATEMENTS OF INCOME
(PARENT COMPANY ONLY)
Years Ended December 31,
----------------------------
2002 2001 2000
----------------------------
(Amounts In Thousands)
Income:
Interest on loans, including fees $ - $ 11 $ 28
Dividends from subsidiaries 3,459 3,307 2,241
Other 2,273 2,210 1,939
----------------------------
5,732 5,528 4,208
----------------------------
Expenses:
Salaries and employee benefits 3,663 2,990 2,696
Occupancy 1,225 1,146 771
Interest 257 198 220
Other 1,100 1,073 881
----------------------------
6,245 5,407 4,568
----------------------------
Income (loss) before income tax benefit and equity
in undistributed net income of subsidiaries (513) 121 (360)
Income tax benefit 1,371 1,094 831
----------------------------
Income before equity in undistributed net income
of subsidiaries 858 1,215 471
Equity in undistributed net income of subsidiaries 5,527 4,493 4,297
----------------------------
NET INCOME $ 6,385 $ 5,708 $ 4,768
============================
35
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19. PARENT COMPANY ONLY FINANCIAL INFORMATION (CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
(PARENT COMPANY ONLY)
Years Ended December 31,
--------------------------------
2002 2001 2000
--------------------------------
(Amounts In Thousands)
Cash Flows From Operating Activities
Net income $ 6,385 $ 5,708 $ 4,768
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Equity in undistributed net income of subsidiaries (5,527) (4,493) (4,297)
Depreciation 131 77 94
Gain on sale of premises and equipment (69) (178) (153)
Other, net (1,255) (714) (1,715)
--------------------------------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES (335) 400 (1,303)
--------------------------------
Cash Flows From Investing Activities
Payment for acquisition (9,786) - -
Net change in loans (500) 311 95
Proceeds from sales of premises and equipment - - 1,610
Investment in Merchants and Manufacturers
Statutory Trust I (310) - -
Purchases of equipment (221) (204) (292)
--------------------------------
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES (10,817) 107 1,413
--------------------------------
Cash Flows From Financing Activities
Net increase in short-term borrowings 3,898 1,090 2,712
Dividends paid (1,790) (1,802) (1,599)
Purchase of treasury stock (1,073) (795) (1,715)
Issuance of subordinated debentures 10,310 - -
Proceeds from the sale of treasury stock 15 1,166 190
Proceeds from issuance of common stock - (497) (88)
--------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES 11,360 (838) (500)
--------------------------------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 208 (331) (390)
Cash and cash equivalents at beginning of year 15 346 736
--------------------------------
Cash and cash equivalents at end of year $ 223 $ 15 $ 346
================================
36
10.K EXHIBIT LIST
EXHIBIT NO. DESCRIPTION
EXHIBIT 99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
EXHIBIT 99.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002