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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 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 (I.R.S. Employer
incorporation or organization) Identification Number)
14100 West National Avenue, PO Box 511160
New Berlin, Wisconsin 53151-1160
- --------------------------------------------------------------------------------
(Address of principal executive office)
(262) 827-6713
- --------------------------------------------------------------------------------
Registrant's telephone number, including area code:
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports) and (2) has been subject to such filing requirements for
the past 90 days.
Yes [X] No [ ].
Applicable Only to Corporate Issuers
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Common Stock, par value $1.00 per share 2,485,433 Shares
- --------------------------------------- -------------------------------
Class Outstanding at August 1, 2002
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC.
FORM 10-Q
INDEX
PAGE NUMBER
-----------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Consolidated Statements of Financial Condition as of June 30,
2002, December 31, 2001, and June 30, 2001 3
Unaudited Consolidated Statements of Income for the Three Months and the
Six Months ended June 30, 2002 and 2001 4
Unaudited Consolidated Statements of Cash Flows for the Six Months ended
June 30, 2002 and 2001 5
Notes to Unaudited Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations 9
Item 3. Quantitative and Qualitative Disclosure About Market Risk 20
PART II. OTHER INFORMATION
Items 1-6 21
Signatures 24
2
PART I. FINANCIAL INFORMATION
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
JUNE 30, DECEMBER 31, JUNE 30,
2002 2001 2001
--------- ------------ ---------
(Dollars In Thousands)
ASSETS
Cash and due from banks $ 17,508 $ 26,013 $ 18,197
Interest bearing deposits in banks 13,008 4,912 10,033
Federal funds sold 9,399 6,543 10,669
--------- --------- ---------
Cash and cash equivalents 39,915 37,468 38,899
Available-for-sale securities 68,531 66,143 66,574
Loans (net of allowance for loan losses of $5,927 at June 30, 2002,
$5,563 at December 31, 2001 and $5,350 at June 30, 2001) 491,893 477,332 469,211
Accrued interest receivable 2,794 2,950 3,396
Federal Home Loan Bank stock 3,690 3,574 3,464
Premises and equipment 10,470 10,278 9,864
Other assets 11,530 10,275 9,707
--------- --------- ---------
Total assets $ 628,824 $ 608,020 $ 601,115
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Non-interest bearing $ 70,139 $ 79,171 $ 67,853
Interest bearing 421,426 398,614 405,756
--------- --------- ---------
Total deposits 491,565 477,785 473,609
Short-term borrowings 22,431 17,046 16,791
Long-term borrowings 54,300 55,800 53,700
Accrued interest payable 861 1,028 1,443
Other liabilities 5,435 3,432 4,322
--------- --------- ---------
Total liabilities 574,592 555,091 549,865
Stockholders' equity
Common stock ($1.00 par value; 6,000,000 shares authorized; 2,587,509 shares
issued; shares outstanding: 2,485,433 at June 30, 2002, 2,523,845 at
December 31, 2001 and 2,544,386 at June 30, 2001) 2,588 2,588 2,588
Additional paid-in capital 14,952 14,955 15,013
Retained earnings 38,950 36,894 34,636
Accumulated other comprehensive income 635 330 344
Treasury stock, at cost (102,076 shares at June 30, 2002,
63,664 shares at December 31, 2001 and 43,123 shares
at June 30, 2001) (2,893) (1,838) (1,331)
--------- --------- ---------
Total stockholders' equity 54,232 52,929 51,250
--------- --------- ---------
Total liabilities and stockholders' equity $ 628,824 $ 608,020 $ 601,115
========= ========= =========
See notes to unaudited consolidated financial statements.
3
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
2002 2001 2002 2001
------- ------- ------- -------
(In Thousands, except per share data)
Interest income:
Interest and fees on loans $ 8,656 $ 9,791 $17,260 $19,754
Interest and dividends on securities:
Taxable 136 388 336 742
Tax-exempt 224 227 461 492
Interest on mortgage-backed securities 487 425 943 1,041
Interest on interest bearing deposits in
banks and federal funds sold 126 166 211 264
------- ------- ------- -------
Total interest income 9,629 10,997 19,211 22,293
Interest expense:
Interest on deposits 2,441 4,197 5,056 8,640
Interest on short-term borrowings 169 282 328 1,014
Interest on long-term borrowings 530 719 1,140 1,480
------- ------- ------- -------
Total interest expense 3,140 5,198 6,524 11,134
Net interest income 6,489 5,799 12,687 11,159
Provision for loan losses 282 306 562 560
------- ------- ------- -------
Net interest income after provision for
loan losses 6,207 5,493 12,125 10,599
Non-interest income:
Service charges on deposit accounts 367 308 706 595
Service charges on loans 234 133 445 260
Securities gains, net 210 86 210 88
Gain on sale of loans, net 76 56 133 96
Net gain on sale of premises 89 156 178 312
Other 479 471 962 882
------- ------- ------- -------
Total noninterest income 1,455 1,210 2,634 2,233
Noninterest expenses:
Salaries and employee benefits 3,025 2,579 6,262 5,154
Premises and equipment 814 756 1,633 1,575
Data processing fees 409 226 672 454
Marketing and business development 227 217 441 375
Federal deposit insurance premiums 25 24 51 48
Other 644 736 1,373 1,462
------- ------- ------- -------
Total noninterest expense 5,144 4,538 10,432 9,068
Income before income taxes 2,518 2,165 4,327 3,764
Income taxes 844 702 1,425 1,175
------- ------- ------- -------
Net income $ 1,674 $ 1,463 $ 2,902 $ 2,589
======= ======= ======= =======
Basic earnings per share $ 0.67 $ 0.58 $ 1.16 $ 1.02
======= ======= ======= =======
Diluted earnings per share $ 0.67 $ 0.57 $ 1.16 $ 1.02
======= ======= ======= =======
See notes to unaudited consolidated financial statements.
4
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30,
-------------------------
2002 2001
-------- --------
(In Thousands)
Cash Flows From Operating Activities
Net income $ 2,902 $ 2,589
Adjustments to reconcile net income to cash
provided by operating activities:
Provision for loan losses 562 560
Depreciation 476 434
Amortization and accretion of premiums and discounts, net 44 16
Security gains, net (210) (88)
Gain on sale of loans, net (133) (40)
Gain on sale of premises and equipment, net (178) (312)
Decrease in accrued interest receivable 156 300
Increase (decrease) in accrued interest payable (167) 285
Other 1,792 (329)
-------- --------
Net cash provided by operations before loan originations and sales 5,244 3,415
Loans originated for sale (26,136) (24,385)
Proceeds from sales of loans 27,249 23,995
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 6,357 3,025
Cash Flows From Investing Activities
Purchase of available-for-sale securities (20,667) (23,251)
Proceeds from sales of available-for-sale securities 7,008 4,259
Proceeds from redemptions and maturities of available-for-sale securities 11,904 32,325
Net (increase) decrease in loans (17,132) 3,829
Purchase of premises and equipment (668) (1,046)
Purchase of Federal Home Loan Bank stock (116) (293)
-------- --------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (19,671) 15,823
Cash Flows From Financing Activities
Net increase in deposits 13,779 15,494
Net increase (decrease) in short-term borrowings 5,385 (17,637)
Dividends paid (845) (941)
Proceeds from long-term borrowings 6,500 1,000
Repayment of long-term borrowings (8,000) (1,500)
Purchase of treasury stock (1,072) 0
Proceeds from sale of treasury stock 14 439
-------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 15,761 (3,145)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,447 15,703
Cash and cash equivalents at beginning of period 37,468 23,196
-------- --------
Cash and cash equivalents at end of period $ 39,915 $ 38,899
======== ========
Supplemental Cash Flow Information and Noncash Transactions:
Interest paid $ 6,706 $ 11,111
Income taxes paid 1,327 1,051
Loans transferred to other real estate owned 1,168 0
Supplemental Schedules of Noncash Investing Activities,
change in accumulated other comprehensive income, unrealized
gains on available-for-sale securities, net $ 305 $ 14
See notes to unaudited consolidated financial statements
5
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC.
Notes to Unaudited Consolidated Financial Statements
June 30, 2002
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include the
accounts of Merchants and Manufacturers Bancorporation, Inc. and its wholly
owned subsidiaries: Lincoln State Bank, Franklin State Bank, Grafton State Bank,
Community Bank of Oconto County (collectively, the Banks), Merchants Merger
Corp., CBG Financial Services, Inc. and CBG Services, Inc. CBG Financial
Services was formed in January 2002 to provide non-insured investment and
insurance products to the bank's customers. In March 2002 Lincoln Community Bank
and Lincoln State Bank merged, with Lincoln State Bank remaining as the
surviving entity. In 2002 M&M Services changed its name to CBG Services. Lincoln
State Bank also includes the accounts of its wholly owned subsidiary, M&M
Lincoln Investment Corporation. Grafton State Bank also includes the accounts of
its wholly owned subsidiary, GSB Investments, Inc. and CBG Mortgage, Inc. CBG
Mortgage was formed in January 2002 to act as the Corporation's mortgage broker.
Community Bank of Oconto County also includes the accounts of its wholly owned
subsidiary, CBOC Investments, Inc. All significant intercompany balances and
transactions have been eliminated.
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by accounting
principles generally accepted in the United States of America for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and six-month periods ended June
30, 2002 are not necessarily indicative of the results that may be expected for
the year ended December 31, 2002. For further information, refer to the
consolidated financial statements and footnotes thereto included in our Form
10-K for the year ended December 31, 2001.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions which affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities as of date of
the financial statements, as well as the reported amounts of income and expenses
during the reported periods. Actual results could differ from those estimates.
6
\
NOTE B - EARNINGS PER SHARE
Presented below are the calculations for basic and diluted earnings per share:
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ---------------------
Basic 2002 2001 2002 2001
- ----- ------ ------ ------ ------
(In Thousands, except per share data)
Net income $1,674 $1,463 $2,902 $2,589
Weighted average shares outstanding 2,486 2,544 2,493 2,542
Basic earnings per share $ 0.67 $ 0.58 $ 1.16 $ 1.02
====== ====== ====== ======
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ---------------------
Diluted: 2002 2001 2002 2001
- -------- ------ ------ ------ ------
(In Thousands, except per share data)
Net income $1,674 $1,463 $2,902 $2,589
Weighted average shares outstanding 2,486 2,544 2,493 2,542
Effect of dilutive stock options outstanding 0 4 0 7
------ ------ ------ ------
Diluted weighted average shares outstanding 2,486 2,548 2,493 2,549
Diluted earnings per share $ 0.67 $ 0.57 $ 1.16 $ 1.02
====== ====== ====== ======
NOTE C - COMPREHENSIVE INCOME
The following table presents our comprehensive income.
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
2002 2001 2002 2001
------- ------- ------- -------
(In Thousands)
Net income $ 1,674 $ 1,463 $ 2,902 $ 2,589
Other comprehensive income
Net change in unrealized securities gains
(losses), net of tax 449 (170) 317 415
Reclassification adjustment for gains
included in net income 210 86 210 88
Income tax effect (272) 72 (222) 145
------- ------- ------- -------
Total comprehensive income $ 2,061 $ 1,451 $ 3,207 $ 3,237
======= ======= ======= =======
7
NOTE D - LOANS RECEIVABLE
Loans are comprised of the following categories (dollars in thousands):
June 30, December 31, June 30,
2002 2001 2001
-------- ----------- --------
First Mortgage:
Conventional single-family residential $ 75,247 $ 78,377 $ 90,034
Commercial and multifamily residential 183,245 180,102 160,212
Construction 34,252 34,744 45,704
Farmland 8,609 7,312 7,401
-------- -------- --------
301,353 300,535 303,351
Commercial business loans 158,528 140,671 131,781
Consumer and installment loans 29,561 32,401 31,769
Lease financing 195 1,170 1,375
Home equity loans 7,194 6,140 4,744
Other 989 1,978 1,541
-------- -------- --------
197,467 182,360 171,210
-------- -------- --------
Total loans 497,820 482,895 474,561
Less allowance for loan losses 5,927 5,563 5,350
-------- -------- --------
Loans, net $491,893 $477,332 $469,211
======== ======== ========
NOTE E - PENDING ACQUISITION
On June 3, 2002, we announced that a Definitive Agreement was signed to acquire
Fortress Bancshares, Inc. ("Fortress") of Westby, WI. Fortress is a multi-bank
holding company that owns three separately chartered community banks located in
Wisconsin, Minnesota and Iowa. All seven of Fortress's branch locations are
located within a fifty-mile radius of La Crosse, Wisconsin. The purchase price
is $30.00 per share and will be payable in a combination of approximately 55% of
Merchants and Manufacturers Bancorporation, Inc. common stock and 45% cash. The
transaction is expected to close in the 4th quarter of 2002. At June 30, 2002,
Fortress had total assets and shareholder's equity of $213.0 million and $15.1
million respectively.
NOTE F - ADOPTION OF STATEMENT 142
On January 1, 2002, we implemented Statement of Financial Accounting Standards
No. 142, Goodwill and Other Intangible Assets. Under the provisions of SFAS 142,
goodwill is no longer subject to amortization over its estimated useful life,
but instead will be subject to at least annual assessments for impairment by
applying a fair-value based test. SFAS 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. Implementation of the Statement did not have a
material impact on our consolidated financial statements.
8
NOTE G - RECENT ACCOUNTING PRONOUNCEMENTS
SFAS No. 143, Accounting for Asset Retirement Obligations, addresses financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. The
statement requires that the fair value of a liability for an asset retirement
obligation be recognized in the period it is incurred if a reasonable estimate
of fair value can be made. The associated retirement costs are capitalized as a
component of the carrying amount of the long-lived asset and allocated to
expense over the useful life of the asset. The statement is effective for
financial statements issued for fiscal years beginning after June 15, 2002. We
do not believe the adoption of the statement will have a material impact on our
consolidated financial statements.
SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets,
establishes accounting and reporting standards for the impairment or disposal of
long-lived assets. This statement supercedes SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed. SFAS
No. 144 provides one accounting model to be used for long-lived assets to be
disposed of by sale, whether previously held for use or newly acquired and
broadens the presentation of discontinued operations to include more disposal
transactions. The provisions of SFAS No. 144 are effective for financial
statements issued for fiscal years beginning after December 15, 2001. We adopted
the statement as of January 1, 2002 and the implementation of this standard did
not have a material impact on our consolidated financial statements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Financial Condition
TOTAL ASSETS
At June 30, 2002 our consolidated total assets were $628.8 million as compared
to $608.0 million at December 31, 2001. The growth in loans caused the majority
of the increase.
INVESTMENT SECURITIES
Investment securities available-for-sale increased $2.4 million, or 3.6%, from
$66.1 million at December 31, 2001, to $68.5 million at June 30, 2002. Purchases
of investment securities offset the amounts repaid or maturing during the
period.
LOANS RECEIVABLE
Loans receivable, net of allowance for loan losses increased $14.6 million from
$477.3 million at December 31, 2001 compared to $491.9 million at June 30, 2002.
The growth in loans can be attributed to the growth in commercial real estate
and commercial business loans that were partially offset by the decrease in
single-family residential loans. In a low interest rate environment, consumers
tend to refinance the adjustable rate mortgages that the banks maintain in their
own loan portfolios with lower rate 15 and 30-year mortgages that are sold on
the secondary market. Currently, loans receivable consists mainly of commercial
loans secured by business assets, real estate and guarantees as well as
mortgages secured by residential properties located in our primary market areas.
At June 30, 2002 we designated $1.3 million of loans as held for sale.
9
TOTAL DEPOSITS AND BORROWINGS
Total deposits increased $13.8 million, or 2.9%, from $477.8 million on December
31, 2001 to $491.6 million on June 30, 2002. The increase in deposits can be
attributed to the growth in retail certificate of deposits, money market
accounts and savings accounts currently offered by our subsidiary banks.
Uncertainties in the stock market also contributed to the deposit increase. We
supplemented the deposit growth by increasing the amount of short-term
borrowings. Short-term borrowings increased by $5.4 million, or 31.6% from $17.0
million on December 31, 2001 to $22.4 million on June 30, 2002. Short-term
borrowings consist of federal funds borrowed from correspondent banks and
repurchase agreements. Long-term debt decreased by $1.5 million, or 2.7%, from
$55.8 million on December 31, 2001 to $54.3 million on June 30, 2002. Long-term
debt consists of Federal Home Loan Bank advances.
CAPITAL RESOURCES
Stockholders' equity at June 30, 2002 was $54.2 million compared to $52.9
million at December 31, 2001, an increase of $1.3 million. The change in
stockholders' equity consists of net income of $2.9 million, less payments of
dividends to shareholders of $845,000, the net cost from the purchase of
treasury stock of $1.1 million and a $305,000 net increase in accumulated other
comprehensive income. We and our banks continue to exceed our regulatory capital
requirements.
Under the Federal Reserve Board's risk-based guidelines capital is measured
against our subsidiary bank's risk-weighted assets. Our tier 1 capital (common
stockholders' equity less goodwill) to risk-weighted assets was 10.1% at June
30, 2002, well above the 4.0% minimum required. Total capital to risk-adjusted
assets was 11.2%; also well above the 8.0% minimum requirement. The leverage
ratio was at 8.7% compared to the 4.0% minimum requirement. According to FDIC
capital guidelines, our subsidiary banks are considered to be "well capitalized"
as well.
In light of our pending acquisition of Fortress, we will not be required to
add to our capital in order to maintain our "well capitalized" classification.
However, if our acquisition orientated growth strategy continues, we may be
required to add additional capital to maintain our current "well capitalized"
rating.
ASSET QUALITY
Generally a loan is classified as nonaccrual and the accrual of interest on such
loan is discontinued when the contractual payment of principal or interest has
become 90 days past due or management has serious doubts about further
collectibility of principal or interest. Generally, loans are restored to
accrual status when the obligation is brought current, has performed in
accordance with the contractual terms for a reasonable period of time and the
ultimate collectibility of the total contractual principal and interest is no
longer in doubt.
10
Nonperforming assets are summarized, for the dates indicated, as follows
(dollars in thousands):
June 30, December 31, June 30,
2002 2001 2001
-------- ------------ --------
Non-accrual loans:
Conventional single-family residential $ 701 $ 723 $ 855
Commercial and multifamily residential 2,283 2,717 1,147
Commercial business loans 499 558 741
Consumer and installment loans 363 431 421
------ ------ ------
Total non-accrual loans 3,846 4,429 3,146
Other real estate owned 1,168 139 107
------ ------ ------
Total nonperforming assets $5,014 $4,568 $3,271
====== ====== ======
RATIOS:
Non-accrual loans to total loans 0.77% 0.92% 0.66%
Nonperforming assets to total assets 0.80 0.75 0.54
Loan loss allowance to non-accrual loans 154.11 125.60 170.06
Loan loss allowance to total loans 1.19 1.15 1.13
Nonperforming assets increased by $446,000 from $4.6 million at December 31,
2001 to $5.0 million at June 30, 2002, an increase of 9.8%. The growth in other
real estate owned lead to the increase. We believe that any losses on the sale
of other real estate will be minimal and any losses on current non-accrual loans
balances will be negligible, due to the collateral position in each situation.
The following table presents changes in the allowance for loan losses (dollars
in thousands):
Three Months Ended Six Months Ended
------------------------------- --------------------------------
June 30, 2002 June 30, 2001 June 30, 2002 June 30, 2001
------------- ------------- ------------- -------------
Balance at beginning of period $5,667 $5,136 $5,563 $5,010
Provision for loan losses 282 306 562 560
Charge-offs:
Commercial and multifamily residential 0 0 0 0
Commercial business loans 21 58 91 103
Consumer and installment loans 37 36 187 124
------ ------ ------ ------
Total charge-offs 58 94 278 227
------ ------ ------ ------
Recoveries:
Commercial and multifamily residential 0 0 17 0
Commercial business loans 3 0 7 0
Consumer and installment loans 33 2 56 7
------ ------ ------ ------
Total Recoveries 36 2 80 7
------ ------ ------ ------
Net charge-offs 22 92 198 220
------ ------ ------ ------
Balance at June 30, $5,927 $5,350 $5,927 $5,350
====== ====== ====== ======
11
We believe 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 judgements, 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.
We maintain our allowance for loan losses at a level that management believes
will be adequate to absorb probable losses on existing loans based on an
evaluation of the collectibility of loans and prior loss experience. We also use
a risk rating system to evaluate the adequacy of the allowance for loan losses.
With this system, each loan is risk rated between one and seven by the
originating loan officer or loan committee, with one being the best case and
seven being a loss or the worst case. Loan loss reserve factors are multiplied
against the balances in each risk-rating category to determine an appropriate
level for the allowance for loan losses. Loans with risk ratings between four
and six are monitored much closer by the officers. Control of our loan quality
is continually monitored by management and is reviewed by the Board of Directors
and our credit quality committee on a quarterly basis. We consistently apply our
methodology for determining the adequacy of the allowance for loan losses, but
may make adjustments to its methodologies and assumptions based on historical
information related to charge-offs and management's evaluation of the current
loan portfolio.
POTENTIAL PROBLEM LOANS
We utilize an internal asset classification system as a means of reporting
problem and potential problem assets. At each scheduled 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.
12
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 believe 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.
COMPARISON OF THREE AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001
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 as
well being the most significant component of earnings. Net interest income for
the three months ended June 30, 2002 was $6.5 million, an increase of 12.1% from
the $5.8 million reported for the same period in 2001. An improved net interest
margin was the primary reason for the improvement in the second quarter net
interest income. The reduction in market interest rates during the quarter
caused the average rate paid on deposits and borrowings to decrease from 4.35%
for the three months ended June 30, 2001 to 2.55% for the three month period
ending June 30, 2002. Net interest income for the six months ended June 30, 2002
was $12.7 million, an increase of 13.4% from the $11.1 million reported for the
same period in 2001. The reduced interest expense on deposits and borrowings was
the primary reason for the improvement in the year-to-date net interest income.
13
The following table presents, for the periods indicated, the total dollar amount
of interest income from average interest earning assets and the resultant
yields, as well as the interest expense on average interest bearing liabilities,
and the resultant costs, expressed both in dollars and rates (dollars in
thousands):
AVERAGE BALANCES, INTEREST RATES AND YIELDS
FOR THE THREE MONTHS ENDED JUNE 30,
-----------------------------------------------------------------------------
2002 2001
------------------------------------- -----------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE
---------- -------- ------- --------- -------- -------
ASSETS
Loans,net (1)(2) $492,832 $ 8,638 7.03% $475,137 $ 9,765 8.24%
Loans exempt from federal income taxes (3) 1,418 27 7.64% 1,745 39 8.96%
Taxable investment securities (4) 14,727 136 3.70% 20,624 388 7.55%
Mortgage-related securities (4) 37,719 487 5.18% 31,785 425 5.36%
Investment securities exempt from federal
income taxes (3)(4) 20,239 339 6.72% 21,415 344 6.44%
Other securities 16,088 126 3.14% 16,158 166 4.12%
-------- -------- -------- --------
Interest earning assets 583,023 9,753 6.71% 566,864 11,127 7.87%
-------- --------
Non interest earning assets 35,042 31,471
-------- --------
Average assets $618,065 $598,335
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
NOW deposits $ 35,963 85 0.95% $ 32,557 165 2.03%
Money market deposits 88,280 344 1.56% 85,103 869 4.10%
Savings deposits 78,991 221 1.12% 71,644 339 1.90%
Time deposits 207,406 1,791 3.46% 209,376 2,824 5.41%
Short-term borrowings 29,493 169 2.30% 26,129 282 4.33%
Long-term borrowings 54,300 530 3.91% 54,700 719 5.27%
-------- -------- -------- --------
Interest bearing liabilities 494,433 3,140 2.55% 479,509 5,198 4.35%
-------- -------- -------- --------
Demand deposits and other non interest
bearing liabilities 70,425 68,164
Stockholders' equity 53,207 50,662
-------- --------
Average liabilities and stockholders' equity $618,065 $598,335
======== ========
Net interest spread (5) $ 6,613 4.16% $ 5,929 3.53%
Net interest earning assets $ 88,590 $ 87,355
Net interest margin on a fully tax
equivalent basis (6) 4.55% 4.20%
Net interest margin (6) 4.46% 4.10%
Ratio of average interest-earning assets
to average interest-bearing liabilities 1.18 1.18
- -------------------------------------
(1) For the purpose of these computations, nonaccrual loans are included in the
daily average loan amounts outstanding.
(2) Interest earned on loans includes loan fees (which are not material in
amount) and interest income which has been received from borrowers whose
loans were removed from nonaccrual status during the period indicated.
(3) Taxable-equivalent adjustments were made using a 34% corporate tax rate for
all years presented in calculating interest income and yields.
(4) 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 presents, for the periods indicated, the total dollar amount
of interest income from average interest earning assets and the resultant
yields, as well as the interest expense on average interest bearing liabilities,
and the resultant costs, expressed both in dollars and rates (dollars in
thousands):
AVERAGE BALANCES, INTEREST RATES AND YIELDS
FOR THE SIX MONTHS ENDED JUNE 30,
-----------------------------------------------------------------------------
2002 2001
------------------------------------- -----------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE
---------- -------- ------- --------- -------- -------
ASSETS
Loans,net (1)(2) $486,569 $ 17,224 7.14% $476,931 $ 19,702 8.33%
Loans exempt from federal income taxes (3) 1,467 55 7.56% 1,766 79 9.02%
Taxable investment securities (4) 15,438 336 4.39% 23,669 742 6.32%
Mortgage-related securities (4) 35,218 943 5.40% 32,466 1,041 6.47%
Investment securities exempt from
federal income taxes (3)(4) 20,760 698 6.78% 21,648 745 6.94%
Other securities 18,717 211 2.27% 11,832 264 4.50%
-------- -------- -------- --------
Interest earning assets 578,169 19,467 6.79% 568,312 22,573 8.01%
-------- --------
Non interest earning assets 35,340 31,514
-------- --------
Average assets $613,509 $599,826
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
NOW deposits $ 35,625 170 0.96% $ 32,564 363 2.25%
Money market deposits 87,614 701 1.61% 83,725 1,892 4.56%
Savings deposits 76,464 424 1.12% 70,506 691 1.98%
Time deposits 206,958 3,761 3.66% 206,081 5,694 5.57%
Short-term borrowings 28,789 328 2.30% 37,260 1,014 5.49%
Long-term borrowings 54,587 1,140 4.21% 52,641 1,480 5.67%
-------- -------- -------- --------
Interest bearing liabilities 490,037 6,524 2.68% 482,777 11,134 4.65%
-------- -------- -------- --------
Demand deposits and other non interest
bearing liabilities 70,539 66,975
Stockholders' equity 52,933 50,074
-------- --------
Average liabilities and stockholders'
equity $613,509 $599,826
======== ========
Net interest spread (5) $ 12,943 4.11% $ 11,439 3.36%
Net interest earning assets $ 88,132 $ 85,535
Net interest margin on a fully tax
equivalent basis (6) 4.51% 4.06%
Net interest margin (6) 4.43% 3.96%
Ratio of average interest-earning assets
to average interest-bearing
liabilities 1.18 1.18
- -----------------------------------
(1) For the purpose of these computations, nonaccrual loans are included in the
daily average loan amounts outstanding.
(2) Interest earned on loans includes loan fees (which are not material in
amount) and interest income which has been received from borrowers whose
loans were removed from nonaccrual status during the period indicated.
(3) Taxable-equivalent adjustments were made using a 34% corporate tax rate for
all years presented in calculating interest income and yields.
(4) 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.
15
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 attributable to
changes in mix (changes in rate multiplied by changes in volume), and (iv) net
change (dollars in thousands):
VOLUME, RATE AND MIX ANALYSIS OF NET INTEREST INCOME
THREE MONTHS ENDED JUNE 30, 2002 SIX MONTHS ENDED JUNE 30, 2002
COMPARED TO JUNE 30, 2001 COMPARED TO JUNE 30, 2001
----------------------------------------- -----------------------------------------
CHANGE CHANGE CHANGE CHANGE CHANGE CHANGE
DUE TO DUE TO DUE TO TOTAL DUE TO DUE TO DUE TO TOTAL
VOLUME RATE MIX CHANGE VOLUME RATE MIX CHANGE
-------- -------- -------- -------- -------- -------- -------- --------
Interest-Earning Assets:
Loans, net (1) $ 364 ($1,437) ($ 54) ($1,127) $ 398 ($2,819) ($ 57) ($2,478)
Loans exempt from federal income
taxes (2) (7) (6) 1 (12) (13) (13) 2 (24)
Taxable investment securities (110) (198) 56 (252) (258) (227) 79 (406)
Mortgage-related securities 80 (15) (3) 62 89 (172) (15) (98)
Investment securities exempt from
federal income taxes (2) (19) 15 (1) (5) (31) (17) 1 (47)
Other securities (1) (39) (0) (40) 154 (131) (76) (53)
------- ------- ------- ------- ------- ------- ------- -------
Total interest-earning assets $ 307 ($1,680) ($ 1) ($1,374) $ 339 ($3,379) ($ 66) ($3,106)
======= ======= ======= ======= ======= ======= ======= =======
Interest-Bearing Liabilities:
NOW deposits $ 17 ($ 88) ($ 9) ($ 80) $ 35 ($ 208) ($ 20) ($ 193)
Money market deposits 32 (537) (20) (525) 88 (1,222) (57) (1,191)
Savings deposits 35 (139) (14) (118) 58 (300) (25) (267)
Time deposits (27) (1,016) 10 (1,033) 24 (1,949) (8) (1,933)
Short-term borrowings 36 (132) (17) (113) (231) (589) 134 (686)
Long-term borrowings (5) (185) 1 (189) 55 (381) (14) (340)
------- ------- ------- ------- ------- ------- ------- -------
Total interest-bearing
liabilities $ 88 ($2,097) ($ 49) ($2,058) $ 29 ($4,649) $ 10 ($4,610)
======= ======= ======= ======= ======= ======= ======= =======
Net change in net interest income $ 684 $ 1,504
======= =======
- ---------------------------------
(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
For the three months ended June 30, 2002, the provision for loan losses was
$282,000 compared to $306,000 for the same period in 2001. For the six months
ended June 30, 2002, the provision for loan losses was $562,000 compared to
$560,000 for the same period in 2001. The increased provision was made to
support the growth in the loan portfolio that began in 1999 as well as the
increase in nonperforming assets in 2001 and 2002. We use a risk-based
assessment of our loan portfolio to determine the level of the loan loss
allowance. This procedure is based on internal reviews intended to determine the
adequacy of the loan loss allowance in view of presently known factors. However,
changes in economic conditions in the future financial conditions of borrowers
cannot be predicted and may result in increased future provisions to the loan
loss allowance.
16
NON-INTEREST INCOME
Non-interest income for the three months ended June 30, 2002 was $1.5 million
compared to $1.2 million for the three months ended June 30, 2001, an increase
of $245,000, or 20.2%. Non-interest income for the six months ended June 30,
2002 was $2.6 million compared to $2.2 million for the six months ended June 30,
2001, an increase of $401,000, or 18.0%. The increase was due to the increased
service charges collected on deposit accounts, gains on the sales of investment
securities and loan refinancing fees collected.
NON-INTEREST EXPENSE
Non-interest expense for the three months ended June 30, 2002 was $5.1 million
compared to $4.5 million for the three months ended June 30, 2001, an increase
of $606,000, or 13.4%. Non-interest expense for the six months ended June 30,
2002 was $10.4 million compared to $9.1 million for the six months ended June
30, 2001, an increase of $1.4 million, or 15.0%. Salaries and employee benefits
increased $446,000 or 17.3% from $2.6 million for the three-month period ended
June 30, 2001 to $3.0 million for the 2002 three-month period. Salaries and
employee benefits increased $1.1 million or 21.5% from $5.2 million for the
six-month period ended June 30, 2001 to $6.3 million for the six-month period
ended June 30, 2002. Employee bonus payments, higher benefit costs and additions
of new personnel accounted for the change. The increased employee bonus payments
can be attributed to higher than anticipated 2001 earnings on which the bonus
payment is based. Data processing fees increased $183,000 or 81.0% from
$226,000 for the three months ended June 30, 2001 to $409,000 for the 2002
three-month period. Data processing fees increased $218,000 or 48.0% from
$454,000 for the six months ended June 30, 2001 to $672,000 for the 2002
six-month period. The merger of Lincoln State Bank and Lincoln Community Bank
and the formation of CBG Mortgage, Inc. as well as a contractual adjustment to
our data processing agreement caused the changes for both periods. Marketing and
business development expenses increased $10,000 or 4.6% from $217,000 for the
three months ended June 30, 2001 to $227,000 for the 2002 three-month period.
Marketing and business development expenses increased $66,000 or 17.6% from
$375,000 for the six months ended June 30, 2001 to $441,000 for the 2002
six-month period. The introduction of our Link Financial Services products
caused the increase.
INCOME TAXES
Income before taxes for the three-month period ended June 30, 2002 was $2.5
million compared to $2.2 million for the three months ended June 30, 2001, an
increase of $353,000, or 16.3%. Income before taxes for the six-month period
ended June 30, 2002 was $4.3 million compared to $3.8 million for the six months
ended June 30, 2001, an increase of $563,000, or 15.0%. The income tax expense
for the three months ended June 30, 2002 increased $142,000 over the same period
in 2001, while the income tax expense for the six months ended June 30, 2002
increased $250,000 over the six-month period in 2001. The effective tax rate for
the three months ended June 30, 2002 was 33.5% compared to 32.4% for the three
months ended June 30, 2001. The effective tax rate for the six months ended June
30, 2002 was 32.9% compared to 31.2% for the six months ended June 30, 2001.
17
NET INCOME
On an after tax basis, for the three month period ended June 30, 2002, we
reported net income of $1.7 million compared to $1.5 million for the same period
in 2001 an increase of 14.4% and for the six month period ended June 30, 2002,
we reported net income of $2.9 million compared to $2.6 million for the same
time period in 2001 an increase of 12.1%.
LIQUIDITY
Our cash flows are composed of three classifications: cash flows from operating
activities, cash flows from investing activities, and cash flows from financing
activities. Net cash provided by operating activities was $6.4 million and $3.0
million for the three months ended June 30, 2002 and 2001, respectively, an
increase of $3.4 million, due primarily to a larger decrease in other
liabilities in the 2002 period. Net cash used in or provided by investing
activities increased by $35.5 million, to $19.7 million used in for the three
months ended June 30, 2002 from $15.8 million provided by in the same period in
2001. Our lending activities for the first six months of 2002 compared to 2001
used additional cash flows of $17.1 million due primarily to an increase in
loans, net of principal collections in the 2002 period, compared to providing
$3.8 million in the 2001 period. Net cash provided by financing activities was
$15.8 million for the six months ended June 30, 2002 while $3.1 million was used
in the first six months of 2001. The $18.9 million increase in net cash provided
by financing activities was primarily due to a $5.4 million increase in short
term borrowings in the 2002 period compared to a $17.6 million decrease in 2001.
The Company expects to have available cash to meet its liquidity needs.
Liquidity management is monitored by the Asset/Liability committee, which takes
into account the marketability of assets, the sources and stability of funding
and the level of unfunded commitments. In the event that additional short-term
liquidity is needed, the Banks have established relationships with our
correspondent banks to provide short-term borrowings in the form of federal
funds purchased. While there are no firm lending commitments in place, we
believes that Banks could borrow $77.6 million for a short time from these banks
on a collective basis. The Banks are members of the Federal Home Loan Bank
(FHLB) and each has the ability to borrow from the FHLB. As a contingency plan
for significant funding needs, the Asset/Liability Management committee may also
consider the sale of investment securities, selling securities under agreement
to repurchase or the temporary curtailment of lending activities.
18
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 falling interest rates, a negative gap tends to positively affect net
interest income while a positive gap tends to result in a decrease in net
interest income. During a period of rising interest rates, a positive gap tends
to result in an increase in net interest income while a negative gap tends to
adversely affect net interest income.
The following table shows the interest rate sensitivity gap for four different
time intervals as of June 30, 2002. Certain assumptions regarding prepayment and
withdrawal rates made are based upon the Corporation's historical experience and
management believes such assumptions are reasonable.
AMOUNTS MATURING OR REPRICING AS OF JUNE 30, 2002
------------------------------------------------------------------
WITHIN SIX TO ONE TO OVER
SIX TWELVE FIVE FIVE
MONTHS MONTHS YEARS YEARS TOTAL
---------- -------- --------- ---------- ---------
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Fixed-rate mortgage loans $ 32,934 $ 24,444 $138,467 $ 19,721 $215,566
Adjustable-rate mortgage loans 43,123 7,650 20,727 0 71,500
-------- -------- -------- -------- --------
Total mortgage loans 76,057 32,094 159,194 19,721 287,066
Commercial business loans 72,817 15,849 78,283 3,370 170,319
Consumer loans 7,391 3,743 18,868 1,746 31,748
Home equity loans 6,345 189 660 0 7,194
Tax-exempt loans 15 313 433 537 1,298
Lease financing 13 132 50 0 195
Mortgage-related securities 10,606 10,607 43 17,463 38,719
Fixed rate investment securities and other 1,562 2,363 9,440 13,126 26,491
Variable rate investment securities and other 25,678 3,690 50 0 29,418
-------- -------- -------- -------- --------
Total interest-earning assets $200,484 $ 68,980 $267,021 $ 55,963 $592,448
======== ======== ======== ======== ========
Interest-bearing liabilities:
Deposits
Time deposits $125,266 $ 52,800 $ 29,575 $ 983 $208,624
NOW accounts 2,257 2,257 22,568 10,532 37,614
Savings accounts 4,984 4,639 46,394 21,650 77,667
Money market accounts 29,354 4,351 43,511 20,305 97,521
Borrowings 25,831 13,500 30,900 6,500 76,731
-------- -------- -------- -------- --------
Total interest-bearing liabilities $187,692 $ 77,547 $172,948 $ 59,970 $498,157
======== ======== ======== ======== ========
Interest-earning assets less
interest-bearing liabilities $ 12,792 ($ 8,567) $ 94,073 ($ 4,007) $ 94,291
======== ======== ======== ======== ========
Cumulative interest rate sensitivity gap $ 12,792 $ 4,225 $ 98,298 $ 94,291
======== ======== ======== ========
Cumulative interest rate sensitivity gap as
a percentage of total assets 2.03% 0.67% 15.63% 14.99%
======== ======== ======== ========
19
At June 30, 2002, the Corporation's cumulative interest-rate sensitive gap as a
percentage of total assets was a positive 2.03% for six months and a positive
0.67% for one-year maturities. Therefore, the Corporation is positively gapped
at one year and may benefit from rising interest rates.
Certain shortcomings are inherent in the method of analysis presented in the
above schedule. For example, although certain assets and liabilities may have
similar maturities or periods of repricing, they may react in different degrees
to changes in market interest rates. Also, the interest rates on certain types
of assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag behind changes in market
rates. Additionally, certain assets, such as adjustable rate mortgage loans,
have features that restrict changes in interest rates, on a short-term basis
over the life of the asset. Further, in the event of a change in interest rates,
prepayment and early withdrawal levels would likely deviate significantly from
those assumed in calculating the schedule.
FORWARD-LOOKING STATEMENTS
When used in this Quarterly Report on Form 10-Q and in other filings with the
Securities and Exchange Commission, in press releases or other public
shareholder communications, or in oral statements made with the approval of an
authorized executive officer, the words or phrases "believe," "will likely
result," "are expected to," "will continue," "is anticipated," "estimate,"
"project," "plans," or similar expressions are intended to identify
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. You are cautioned not to place undue reliance on
any forward-looking statements, which speak only as of the date made. These
statements may relate to our future financial performance, strategic plans or
objectives, revenues or earnings projections, or other financial items. By their
nature, these statements are subject to numerous uncertainties that could cause
actual results to differ materially from those anticipated in the statements.
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) the credit risks of lending activities, including changes in the level and
direction of loan delinquencies and write-offs; (2) changes in management's
estimate of the adequacy of the allowance for loan losses; (3) competitive
pressures among depository institutions; (4) interest rate movements and their
impact on customer behavior and our net interest margin; (5) the impact of
repricing and competitors' pricing initiatives on loan and deposit products; (6)
our ability to adapt successfully to technological changes to meet customers'
needs and developments in the market place; (7) our ability to access
cost-effective funding; (8) changes in financial markets and general economic
conditions; (9) new legislation or regulatory changes; and (10) changes in
accounting principles, policies or guidelines.
We do not undertake any obligation to update any forward-looking statement to
reflect circumstances or events that occur after the date on which the
forward-looking statement is made.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Corporation has not experienced any material changes to its market risk
position since December 31, 2001, from that disclosed in the Corporation's 2001
Form 10-K Annual Report.
20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
As of June 30, 2002 there were no material pending legal
proceedings, other than ordinary routine litigation incidental
to the business of the Corporation, to which the Corporation or
any of its subsidiaries was a party or to which any of their
property was subject.
Item 2. Changes in Securities - NONE
Item 3 Defaults upon Senior Securities - NONE
Item 4 Submission of Matters to Vote of Security Holders
ANNUAL MEETING OF SHAREHOLDERS. On June 4, 2002, at the Annual Meeting of
the shareholders of the Corporation, the Corporation's shareholders
reelected Thomas Gapinski, J. Michael Bartels, Gervase Rose, James Sass,
Thomas Sheehan, Thomas Ebenreiter, Richard Pamperin and Michael Judge as
directors for three-year terms expiring on the date of the annual
shareholders meeting to be held in 2005.
SHAREHOLDER VOTE WITH RESPECT TO MATTERS ACTED UPON AT THE ANNUAL MEETING
ELECTION OF DIRECTORS. Under Wisconsin law, the number of persons
corresponding to the number of director positions to be filled at the
Annual Meeting who received the highest number of votes would be elected
as directors. Thomas Gapinski, J. Michael Bartels, Gervase Rose, James
Sass, Thomas Sheehan, Thomas Ebenreiter, Richard Pamperin and Michael
Judge were standing for reelection. The vote with respect to the
reelection of each was as follows:
THOMAS GAPINSKI
2,486,633 Total votes were eligible to be cast
2,014,482 Votes were represented in person or by proxy at the Annual
Meeting
1,988,381 Votes were cast "FOR" the reelection of Mr. Gapinski
0 Votes were cast "AGAINST" the reelection of Mr. Gapinski
26,101 Votes abstained or were broker non-votes
J. MICHAEL BARTELS
2,486,633 Total votes were eligible to be cast
2,014,482 Votes were represented in person or by proxy at the Annual
Meeting
1,987,435 Votes were cast "FOR" the reelection of Mr. Bartels
0 Votes were cast "AGAINST" the reelection of Mr. Bartels
27,047 Votes abstained or were broker non-votes
21
GERVASE ROSE
2,486,633 Total votes were eligible to be cast
2,014,482 Votes were represented in person or by proxy at the Annual
Meeting
1,985,906 Votes were cast "FOR" the reelection of Mr. Rose
0 Votes were cast "AGAINST" the reelection of Mr. Rose
28,576 Votes abstained or were broker non-votes
JAMES SASS
2,486,633 Total votes were eligible to be cast
2,014,482 Votes were represented in person or by proxy at the Annual
Meeting
1,985,906 Votes were cast "FOR" the reelection of Mr. Sass
0 Votes were cast "AGAINST" the reelection of Mr. Sass
28,576 Votes abstained or were broker non-votes
THOMAS SHEEHAN
2,486,633 Total votes were eligible to be cast
2,014,482 Votes were represented in person or by proxy at the Annual
Meeting
1,986,340 Votes were cast "FOR" the reelection of Mr. Sheehan
0 Votes were cast "AGAINST" the reelection of Mr. Sheehan
28,142 Votes abstained or were broker non-votes
THOMAS EBENREITER
2,486,633 Total votes were eligible to be cast
2,014,482 Votes were represented in person or by proxy at the Annual
Meeting
1,987,798 Votes were cast "FOR" the reelection of Mr. Ebenreiter
0 Votes were cast "AGAINST" the reelection of Mr. Ebenreiter
26,684 Votes abstained or were broker non-votes
RICHARD PAMPERIN
2,486,633 Total votes were eligible to be cast
2,014,482 Votes were represented in person or by proxy at the Annual
Meeting
1,989,044 Votes were cast "FOR" the reelection of Mr. Pamperin
0 Votes were cast "AGAINST" the reelection of Mr. Pamperin
25,438 Votes abstained or were broker non-votes
MICHAEL JUDGE
2,486,633 Total votes were eligible to be cast
2,014,482 Votes were represented in person or by proxy at the Annual
Meeting
1,980,411 Votes were cast "FOR" the reelection of Mr. Judge
0 Votes were cast "AGAINST" the reelection of Mr. Judge
39,071 Votes abstained or were broker non-votes
22
ADOPTION OF THE RESOLUTION TO AMEND THE CORPORATION'S 1996 INCENTIVE
STOCK OPTION PLAN. Under Wisconsin law, the resolution would be approved
if, at the Annual Meeting, a greater number of votes were cast "FOR" the
proposal than were cast "AGAINST" the proposal. Abstentions and broker
non-votes were not counted except for purposes of establishing a quorum.
The vote on the adoption of the resolution to amend the Corporation's 1996
Incentive Stock Option Plan to increase the number of Merchants' Common
Stock reserved for issuance upon the exercise of options granted from
60,000 shares to 210,000 shares are as follows:
2,486,633 Total votes were eligible to be cast
2,014,482 Votes were represented in person or by proxy at the
Annual Meeting
1,539,693 Votes were cast "FOR" the adoption of the resolution
to amend the Corporation's 1996 Incentive Stock
Option Plan to increase the number of Merchants'
Common Stock reserved for issuance upon the exercise
of options granted from 60,000 shares to 210,000
shares
189,289 Votes were cast "AGAINST" the adoption of the
resolution to amend the Corporation's 1996
Incentive Stock Option Plan to increase the number
of Merchants' Common Stock reserved for issuance
upon the exercise of options granted from 60,000
shares to 210,000 shares
285,500 Votes abstained or were broker non-votes
Item 5 Other Information - NONE
Item 6 Exhibits and Reports on Form 8-K
The Corporation filed on report Form 8-K on June 3, 2002 in regards
to its acquisition of Fortress Bancshares., Inc.
23
SIGNATURES
Pursuant to the requirements 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.
-----------------------------------------
(Registrant)
Date August 14, 2002 . /s/ Michael J. Murry
---------------------------- --------------------------------------
Michael J. Murry
Chairman of the Board of Directors and
Principal Executive Officer
Date August 14, 2002 . /s/ James C. Mroczkowski
---------------------------- --------------------------------------
James C. Mroczkowski
Executive Vice President & Chief
Financial Officer
Principal Financial Officer
24