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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 September 30, 2002
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the transition period from to
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Commission file Number 0-21292
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MERCHANTS AND MANUFACTURERS BANCORPORATION, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Wisconsin 39-1413328
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(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
19105 West Capitol Drive, Suite 200
Brookfield, Wisconsin 53045
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(Address of principal executive office)
(262) 790-2127
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Registrant's telephone number, including area code:
14100 West National Avenue, PO Box 511160
New Berlin, Wisconsin 53151-1160
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(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 November 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
September 30, 2002, December 31, 2001, and September 30, 2001 3
Unaudited Consolidated Statements of Income for the Three Months and the
Nine Months ended September 30, 2002 and 2001 4
Unaudited Consolidated Statements of Cash Flows for the Nine Months ended
September 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 10
Item 3. Quantitative and Qualitative Disclosure About Market Risk 21
Item 4. Controls and Procedures 22
PART II. OTHER INFORMATION
Items 1-6 23
Signatures 24
2
PART I. FINANCIAL INFORMATION
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
2002 2001 2001
-------------------------------------------------
(Dollars In Thousands)
ASSETS
Cash and due from banks $ 19,479 $ 26,013 $ 16,003
Interest bearing deposits in banks 2,905 4,912 6,293
Federal funds sold 18,483 6,543 15,304
-------------------------------------------------
Cash and cash equivalents 40,867 37,468 37,600
Available-for-sale securities 74,161 66,143 67,894
Loans (net of allowance for loan losses of $6,100 at
September 30, 2002, $5,563 at December 31, 2001
and $5,612 at September 30, 2001) 495,392 474,939 473,035
Loans held for sale 3,043 2,393 1,051
Accrued interest receivable 2,826 2,950 3,397
Federal Home Loan Bank stock 3,715 3,574 3,520
Premises and equipment 10,808 10,278 10,291
Other real estate owned 2,877 139 230
Other assets 10,704 10,136 9,844
-------------------------------------------------
Total assets $644,393 $608,020 $606,862
=================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Non-interest bearing $ 69,670 $ 79,171 $ 71,334
Interest bearing 448,406 398,614 409,824
-------------------------------------------------
Total deposits 518,076 477,785 481,158
Short-term borrowings 9,046 17,046 12,589
Long-term borrowings 53,900 55,800 53,300
Accrued interest payable 775 1,028 1,309
Other liabilities 6,769 3,432 5,728
-------------------------------------------------
Total liabilities 588,566 555,091 554,084
Stockholders' equity
Common stock ($1.00 par value; 6,000,000 shares authorized;
2,587,509 shares issued; shares outstanding: 2,485,433 at
September 30, 2002, 2,523,845 at December 31, 2001
and 2,543,386 at September 30, 2001) 2,588 2,588 2,588
Additional paid-in capital 14,952 14,955 15,013
Retained earnings 40,216 36,894 35,760
Accumulated other comprehensive income 964 330 772
Treasury stock, at cost (102,076 shares at September 30, 2002,
63,664 shares at December 31, 2001 and 44,123 shares
at September 30, 2001) (2,893) (1,838) (1,355)
-------------------------------------------------
Total stockholders' equity 55,827 52,929 52,778
-------------------------------------------------
Total liabilities and stockholders' equity $644,393 $608,020 $606,862
=================================================
See notes to unaudited consolidated financial statements.
3
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2002 2001 2002 2001
------- ------- ------- -------
(In Thousands, except per share data)
Interest income:
Interest and fees on loans $ 8,799 $ 9,620 $26,059 $29,374
Interest and dividends on securities:
Taxable 138 281 474 890
Tax-exempt 210 231 671 723
Interest on mortgage-backed securities 484 476 1,427 1,517
Interest on interest bearing deposits in
banks and federal funds sold 102 178 313 575
------- ------- ------- -------
Total interest income 9,733 10,786 28,944 33,079
Interest expense:
Interest on deposits 2,475 3,874 7,531 12,514
Interest on short-term borrowings 96 140 424 1,154
Interest on long-term borrowings 523 696 1,663 2,176
------- ------- ------- -------
Total interest expense 3,094 4,710 9,618 15,844
Net interest income 6,639 6,076 19,326 17,235
Provision for loan losses 282 306 844 866
------- ------- ------- -------
Net interest income after provision for
loan losses 6,357 5,770 18,482 16,369
Non-interest income:
Service charges on deposit accounts 440 342 1,146 937
Service charges on loans 180 160 625 477
Securities gains, net 0 0 210 88
Gain on sale of loans, net 227 37 360 77
Net gain on sale of premises 89 156 267 468
Other 465 399 1,427 1,280
------- ------- ------- -------
Total noninterest income 1,401 1,094 4,035 3,327
Noninterest expenses:
Salaries and employee benefits 2,932 2,563 8,803 7,717
Premises and equipment 842 762 2,465 2,337
Data processing fees 276 235 948 689
Marketing and business development 270 224 711 598
Federal deposit insurance premiums 24 25 75 73
Other 813 725 2,587 2,188
------- ------- ------- -------
Total noninterest expense 5,157 4,534 15,589 13,602
Income before income taxes 2,601 2,330 6,928 6,094
Income taxes 863 773 2,288 1,948
------- ------- ------- -------
Net income $ 1,738 $ 1,557 $ 4,640 $ 4,146
======= ======= ======= =======
Basic earnings per share $ 0.70 $ 0.61 $ 1.86 $ 1.63
======= ======= ======= =======
Diluted earnings per share $ 0.70 $ 0.61 $ 1.86 $ 1.63
======= ======= ======= =======
See notes to unaudited consolidated financial statements.
4
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30,
2002 2001
---- ----
(In Thousands)
Cash Flows From Operating Activities
Net income $ 4,640 $ 4,146
Adjustments to reconcile net income to cash
provided by operating activities:
Provision for loan losses 844 866
Depreciation 736 664
Amortization and accretion of premiums and discounts, net 117 29
Security gains, net (210) (88)
Gain on sale of loans, net (360) (77)
Gain on sale of premises and equipment, net (267) (468)
Decrease in accrued interest receivable 124 299
Increase (decrease) in accrued interest payable (253) 150
Other 1,595 (448)
-------- --------
Net cash provided by operations before loan originations and sales 6,966 5,073
Loans originated for sale (58,715) (40,909)
Proceeds from sales of loans 58,066 40,077
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 6,317 4,241
Cash Flows From Investing Activities
Purchase of available-for-sale securities (30,386) (44,063)
Proceeds from sales of available-for-sale securities 7,008 4,259
Proceeds from redemptions and maturities of available-for-sale securities 16,416 52,488
Net (increase) decrease in loans (23,675) (995)
Purchase of premises and equipment (1,266) (1,703)
Purchase of Federal Home Loan Bank stock (141) (349)
-------- --------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (32,044) 9,637
Cash Flows From Financing Activities
Net increase in deposits 40,292 23,043
Net increase (decrease) in short-term borrowings (8,000) (22,240)
Dividends paid (1,318) (1,373)
Proceeds from long-term borrowings 6,500 1,000
Repayment of long-term borrowings (8,400) (1,500)
Increase in advance payments by borrowers for taxes and insurance 1,110 1,181
Purchase of treasury stock (1,072) 0
Proceeds from sale of treasury stock 14 415
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 29,126 526
INCREASE IN CASH AND CASH EQUIVALENTS 3,399 14,404
Cash and cash equivalents at beginning of period 37,468 23,196
-------- --------
Cash and cash equivalents at end of period $ 40,867 $ 37,600
======== ========
Supplemental Cash Flow Information and Noncash Transactions:
Interest paid $ 9,882 $ 15,816
Income taxes paid 2,358 1,934
Loans transferred to other real estate owned 2,897 139
Supplemental Schedules of Noncash Investing Activities,
change in accumulated other comprehensive income, unrealized
gains on available-for-sale securities, net $ 634 $ 14
See notes to unaudited consolidated financial statements
5
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC.
Notes to Unaudited Consolidated Financial Statements
September 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., CBG Services, Inc. and Lincoln Neighborhood
Redevelopment Corporation. 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 Neighborhood Redevelopment Corporation was
organized for the purpose of redeveloping and rehabilitating certain areas
located primarily on the near south side of Milwaukee. 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 nine-month periods ended
September 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 Nine Months Ended
September 30, September 30,
Basic: 2002 2001 2002 2001
- ---------------------------------------------------------------------------------------------------------------------
(In Thousands, except per share data)
Net income $ 1,738 $ 1,557 $ 4,640 $ 4,146
Weighted average shares outstanding 2,485 2,544 2,491 2,543
Basic earnings per share $ 0.70 $ 0.61 $ 1.86 $ 1.63
=====================================================================
Diluted:
- ---------------------------------------------------------------------------------------------------------------------
(In Thousands, except per share data)
Net income $ 1,738 $ 1,557 $ 4,640 $ 4,146
Weighted average shares outstanding 2,485 2,544 2,491 2,543
Effect of dilutive stock options outstanding 2 9 0 8
---------------------------------------------------------------------
Diluted weighted average shares outstanding 2,487 2,553 2,491 2,551
Diluted earnings per share $ 0.70 $ 0.61 $ 1.86 $ 1.63
=====================================================================
NOTE C -- COMPREHENSIVE INCOME
The following table presents our comprehensive income.
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
- ---------------------------------------------------------------------------------------------------------------------
(In Thousands)
Net income $ 1,738 $ 1,557 $ 4,640 $ 4,146
Other comprehensive income
Net change in unrealized securities gains 498 149 815 1,081
Reclassification adjustment for gains
included in net income 0 0 210 88
Income tax effect (169) (40) (391) (430)
---------------------------------------------------------------------
Total comprehensive income $ 2,067 $ 1,666 $ 5,274 $ 4,885
=====================================================================
7
NOTE D -- LOANS RECEIVABLE
Loans are comprised of the following categories (dollars in thousands):
September 30, December 31, September 30,
2002 2001 2001
-----------------------------------------------
First Mortgage:
Conventional single-family residential $ 71,084 $ 75,984 $ 85,502
Commercial and multifamily residential 176,228 180,102 164,635
Construction 35,348 34,744 49,125
Farmland 8,853 7,312 7,395
-----------------------------------------------
291,513 298,142 306,657
Commercial business loans 169,739 140,671 131,191
Consumer and installment loans 31,183 32,401 31,780
Lease financing 123 1,170 1,263
Home equity loans 7,445 6,140 5,182
Other 1,489 1,978 2,574
-----------------------------------------------
209,979 182,360 171,990
-----------------------------------------------
Total loans 501,492 480,502 478,627
Less allowance for loan losses 6,100 5,563 5,612
-----------------------------------------------
Loans, net $495,392 $474,939 $473,035
===============================================
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 fourth quarter of 2002. At September 30,
2002, Fortress had total assets and shareholder's equity of $217.0 million and
$16.0 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.
NOTE H -- RECENT REGULATORY DEVELOPMENTS
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:
9
(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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Financial Condition
TOTAL ASSETS
At September 30, 2002 our consolidated total assets were $644.4 million as
compared to $608.0 million at December 31, 2001. The growth in loans and
short-term investments caused the majority of the increase.
INVESTMENT SECURITIES
Investment securities available-for-sale increased $8.0 million, or 12.1%, from
$66.1 million at December 31, 2001, to $74.2 million at September 30, 2002.
Purchases of investment securities offset the amounts repaid or maturing during
the period.
LOANS RECEIVABLE
Loans receivable and loans held for sale, net of allowance for loan losses
increased $21.1 million from $477.3 million at December 31, 2001 compared to
$498.4 million at September 30, 2002. The growth in loans can be attributed to
the growth in 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 September 30, 2002 we designated $3.0 million of loans
as held for sale.
10
TOTAL DEPOSITS AND BORROWINGS
Total deposits increased $40.3 million, or 8.4%, from $477.8 million on December
31, 2001 to $518.1 million on September 30, 2002. The increase in deposits can
be attributed to the growth in retail money market accounts and savings accounts
currently offered by our subsidiary banks. Uncertainties in the stock market
also contributed to the deposit increase. Short-term borrowings decreased by
$8.0 million, or 46.9% from $17.0 million on December 31, 2001 to $9.0 million
on September 30, 2002. The funds acquired through deposit growth were used to
reduce short-term borrowings. Short-term borrowings consist of federal funds
borrowed from correspondent banks and repurchase agreements. Long-term debt
decreased by $1.9 million, or 3.4%, from $55.8 million on December 31, 2001 to
$53.9 million on September 30, 2002. Long-term debt consists of Federal Home
Loan Bank advances.
CAPITAL RESOURCES
Stockholders' equity at September 30, 2002 was $55.8 million compared to $52.9
million at December 31, 2001, an increase of $2.9 million. The change in
stockholders' equity consists of net income of $4.6 million, less payments of
dividends to shareholders of $1.3 million, the net cost from the purchase of
treasury stock of $1.1 million and a $634,000 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 10.2% at
September 30, 2002, well above the 4.0% minimum required. Total capital to
risk-adjusted assets was 11.4%; 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 be required to add to
our capital via a trust preferred securities offering in order to maintain our
"well capitalized" classification. As 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.
11
Nonperforming assets are summarized, for the dates indicated, as follows
(dollars in thousands):
September 30, December 31, September 30,
2002 2001 2001
--------------- -------------- -------------
Non-accrual loans:
Conventional single-family residential $ 564 $ 723 $ 893
Commercial and multifamily residential 858 2,717 1,266
Commercial business loans 715 558 591
Consumer and installment loans 522 431 405
------- ------- -------
Total non-accrual loans 2,659 4,429 3,155
Other real estate owned 2,877 139 230
------- ------- -------
Total nonperforming assets $5,536 $4,568 $3,385
======= ======= =======
RATIOS:
Non-accrual loans to total loans 0.54% 0.93% 0.67%
Nonperforming assets to total assets 0.86 0.75 0.56
Loan loss allowance to non-accrual loans 229.41 125.60 177.88
Loan loss allowance to total loans 1.22 1.16 1.17
Nonperforming assets increased by $968,000 from $4.6 million at December 31,
2001 to $5.5 million at September 30, 2002, an increase of 21.2%. The growth in
other real estate owned lead to the increase. Currently there are three
properties that constitute the other real estate owned. We believe that any
losses on current non-accrual loans balances will be negligible, due to the
collateral position in each situation. However, additional charge offs may occur
upon sale of the other real estate.
The following table presents changes in the allowance for loan losses (dollars
in thousands):
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
2002 2001 2002 2001
--------------------------------- -------------------------------------
Balance at beginning of period $5,927 $5,350 $5,563 $5,010
Provision for loan losses 282 306 844 866
Charge-offs:
Commercial and multifamily residential 0 0 0 0
Commercial business loans 1 1 90 104
Consumer and installment loans 120 45 307 169
--------------------------------- -------------------------------------
Total charge-offs 121 46 397 273
--------------------------------- -------------------------------------
Recoveries:
Commercial and multifamily residential 0 1 17 1
Commercial business loans 0 0 5 0
Consumer and installment loans 12 1 68 8
--------------------------------- -------------------------------------
Total recoveries 12 2 90 9
--------------------------------- -------------------------------------
Net charge-offs 109 44 307 264
--------------------------------- -------------------------------------
Balance at September 30, $6,100 $5,612 $6,100 $5,612
================================= =====================================
12
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.
The allowance for loan losses is based on estimates, and ultimate losses will
vary from current estimates. These estimates are reviewed quarterly, and as
adjustments, either positive or negative, become necessary, a corresponding
increase or decrease is made in the provision for loan losses. The methodology
used to determine the adequacy of the allowance for loan losses for the third
quarter 2002 is consistent with prior periods.
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. As
of September 30, 2002 the loans classified as Management Attention were $21.5
million compared to $14.6 million as of December 31, 2001, an increase of $6.9
million or 47.3%. The increase can be attributed to the economic downturn
currently being experienced by our commercial loan customers.
13
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 NINE MONTHS ENDED SEPTEMBER 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 September 30, 2002 was $6.6 million, an increase of 9.3%
from the $6.1 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 3.91%
for the three months ended September 30, 2001 to 2.45% for the three month
period ending September 30, 2002. Net interest income for the nine months ended
September 30, 2002 was $19.3 million, an increase of 12.1% from the $17.2
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.
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 THREE MONTHS ENDED SEPTEMBER 30,
----------------------------------------
2002 2001
---- ----
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE
--------------------------------------------------------------------
ASSETS
Loans,net (1)(2) $500,561 $8,783 6.96% $476,777 $9,596 7.99%
Loans exempt from federal income taxes (3) 1,362 24 6.99% 1,594 36 8.96%
Taxable investment securities (4) 13,701 138 4.00% 20,849 281 5.35%
Mortgage-related securities (4) 42,223 484 4.55% 30,156 476 6.26%
Investment securities exempt from federal
income taxes (3)(4) 19,295 318 6.54% 20,551 350 6.76%
Other securities 18,141 102 2.23% 19,855 178 3.56%
-------- ------ -------- ------
Interest earning assets 595,283 9,849 6.56% 569,782 10,917 7.60%
------
Non interest earning assets 35,841 31,957
-------- --------
Average assets $631,124 $601,739
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
NOW deposits $36,150 76 0.83% $31,126 119 1.52%
Money market deposits 108,842 470 1.71% 91,067 756 3.29%
Savings deposits 79,095 228 1.14% 73,381 291 1.57%
Time deposits 206,865 1,701 3.26% 216,233 2,708 4.97%
Short-term borrowings 15,212 96 2.50% 14,002 140 3.97%
Long-term borrowings 54,141 523 3.83% 53,549 696 5.16%
-------- ------ -------- ------
Interest bearing liabilities 500,305 3,094 2.45% 479,358 4,710 3.90%
-------- ------ -------- ------
Demand deposits and other non interest
bearing liabilities 75,948 70,623
Stockholders' equity 54,871 51,758
-------- --------
Average liabilities and stockholders' equity $631,124 $601,739
======== ========
Net interest spread (5) $6,755 4.11% $6,207 3.70%
Net interest earning assets $94,978 $90,424
Net interest margin on a fully tax
equivalent basis (6) 4.50% 4.32%
Net interest margin (6) 4.42% 4.23%
Ratio of average interest-earning assets to
average interest-bearing liabilities 1.19 1.19
- -------------------------
(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 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 SEPTEMBER 30,
----------------------------------------
2002 2001
---- ----
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE
--------------------------------------------------------------------
ASSETS
Loans, net (1)(2) $491,233 $26,008 7.08% $476,881 $29,298 8.21%
Loans exempt from federal income taxes (3) 1,432 79 7.38% 1,709 115 9.00%
Taxable investment securities (4) 14,859 474 4.26% 22,730 890 5.24%
Mortgage-related securities (4) 37,553 1,427 5.08% 31,695 1,517 6.40%
Investment securities exempt from
federal income taxes (3)(4) 20,272 1,017 6.71% 21,282 1,095 6.88%
Other securities 18,524 313 2.26% 14,506 575 5.30%
-------- ------- -------- -------
Interest earning assets 583,873 29,318 6.71% 568,803 33,490 7.87%
------- -------
Non interest earning assets 35,507 31,661
-------- --------
Average assets $619,380 $600,464
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
NOW deposits $35,801 247 0.92% $32,084 483 2.01%
Money market deposits 94,689 1,172 1.65% 86,173 2,648 4.11%
Savings deposits 77,340 654 1.13% 71,465 981 1.84%
Time deposits 206,927 5,458 3.53% 209,465 8,402 5.36%
Short-term borrowings 24,265 424 2.34% 29,508 1,154 5.23%
Long-term borrowings 54,439 1,663 4.08% 52,943 2,176 5.50%
-------- ------- -------- -------
Interest bearing liabilities 493,461 9,618 2.61% 481,638 15,844 4.40%
-------- ------- -------- -------
Demand deposits and other non interest
bearing liabilities 72,340 68,191
Stockholders' equity 53,579 50,635
-------- --------
Average liabilities and stockholders' equity $619,380 $600,464
======== ========
Net interest spread (5) $19,700 4.11% $17,646 3.47%
Net interest earning assets $90,412 $87,165
Net interest margin on a fully tax
equivalent basis (6) 4.51% 4.15%
Net interest margin (6) 4.43% 4.05%
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.
16
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 SEPTEMBER 30, 2002 NINE MONTHS ENDED SEPTEMBER 30, 2002
COMPARED TO SEPTEMBER 30, 2001 COMPARED TO SEPTEMBER 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) $478 ($1,230) ($61) ($813) $882 ($4,050) ($122) ($3,290)
Loans exempt from federal income
taxes (2) (5) (8) 1 (12) (18) (21) 3 (36)
Taxable investment securities (96) (71) 24 (143) (308) (165) 57 (416)
Mortgage-related securities 190 (130) (52) 8 280 (312) (58) (90)
Investment securities exempt from
federal income taxes (2) (22) (11) 1 (32) (52) (27) 1 (78)
Other securities (16) (66) 6 (76) 159 (330) (91) (262)
---- ------- ------- -------- ----- ------- ------- --------
Total interest-earning assets $529 ($1,516) ($81) ($1,068) $943 ($4,905) ($210) ($4,172)
==== ======= ======= ======== ===== ======= ======= ========
Interest-Bearing Liabilities:
NOW deposits $ 20 ($54) ($9) ($43) $56 ($262) ($30) ($236)
Money market deposits 148 (363) (71) (286) 262 (1,582) (156) (1,476)
Savings deposits 23 (79) (7) (63) 81 (377) (31) (327)
Time deposits (117) (930) 40 (1,007) (102) (2,877) 35 (2,944)
Short-term borrowings 12 (52) (4) (44) (205) (638) 113 (730)
Long-term borrowings 8 (179) (2) (173) 61 (559) (15) (513)
---- ------- ------- -------- ----- ------- ------- --------
Total interest-bearing liabilities $ 94 ($1,657) ($53) ($1,616) $ 153 ($6,295) ($ 84) ($ 6,226)
==== ======= ======= ======== ===== ======= ======= ========
Net change in net interest income $548 $ 2,054
======== ========
- ------------------------------
(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 September 30, 2002, the provision for loan losses was
$282,000 compared to $306,000 for the same period in 2001. For the nine months
ended September 30, 2002, the provision for loan losses was $844,000 compared to
$866,000 for the same period in 2001. The 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.
17
NON-INTEREST INCOME
Non-interest income for the three months ended September 30, 2002 was $1.4
million compared to $1.1 million for the three months ended September 30, 2001,
an increase of $307,000, or 28.1%. Non-interest income for the nine months ended
September 30, 2002 was $4.0 million compared to $3.3 million for the nine months
ended September 30, 2001, an increase of $708,000, or 21.3%. The increase was
due to the increased service charges collected on deposit accounts, gains on the
sales of investment securities and gains on the sale of loans.
NON-INTEREST EXPENSE
Non-interest expense for the three months ended September 30, 2002 was $5.2
million compared to $4.5 million for the three months ended September 30, 2001,
an increase of $623,000, or 13.7%. Non-interest expense for the nine months
ended September 30, 2002 was $15.6 million compared to $13.6 million for the
nine months ended September 30, 2001, an increase of $1.9 million, or 14.6%.
Salaries and employee benefits increased $369,000 or 14.4% from $2.6 million for
the three-month period ended September 30, 2001 to $2.9 million for the 2002
three-month period. Salaries and employee benefits increased $1.1 million or
14.1% from $7.7 million for the nine-month period ended September 30, 2001 to
$8.8 million for the nine-month period ended September 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 $41,000 or 17.4% from $235,000 for the three months ended
September 30, 2001 to $276,000 for the 2002 three-month period. Data processing
fees increased $259,000 or 37.6% from $689,000 for the nine months ended
September 30, 2001 to $948,000 for the 2002 nine-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 change for the nine-month period. Marketing and business development
expenses increased $46,000 or 20.5% from $224,000 for the three months ended
September 30, 2001 to $270,000 for the 2002 three-month period. Marketing and
business development expenses increased $113,000 or 18.9% from $598,000 for the
nine months ended September 30, 2001 to $711,000 for the 2002 nine-month period.
The introduction of our Link Financial Services products caused the increase.
INCOME TAXES
Income before taxes for the three-month period ended September 30, 2002 was $2.6
million compared to $2.3 million for the three months ended September 30, 2001,
an increase of $271,000, or 11.6%. Income before taxes for the nine-month period
ended September 30, 2002 was $6.9 million compared to $6.1 million for the nine
months ended September 30, 2001, an increase of $834,000, or 13.7%. The income
tax expense for the three months ended September 30, 2002 increased $90,000 over
the same period in 2001, while the income tax expense for the nine months ended
September 30, 2002 increased $340,000 over the nine-month period in 2001. The
effective tax rate for the three months ended September 30, 2002 and September
30, 2001 was 33.2%. The effective tax rate for the nine months ended September
30, 2002 was 33.0% compared to 32.0% for the nine months ended September 30,
2001.
18
NET INCOME
On an after tax basis, for the three month period ended September 30, 2002, we
reported net income of $1.7 million compared to $1.6 million for the same period
in 2001 an increase of 11.6% and for the nine month period ended September 30,
2002, we reported net income of $4.6 million compared to $4.1 million for the
same time period in 2001 an increase of 11.9%.
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 $6.3 million and $4.2
million for the nine months ended September 30, 2002 and 2001, respectively, an
increase of $2.1 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 $41.7 million, to $32.0 million used in for the nine
months ended September 30, 2002 from $9.6 million provided by in the same period
in 2001. Our lending activities for the first nine months of 2002 compared to
2001 used additional cash flows of $23.7 million due primarily to an increase in
loans, net of principal collections in the 2002 period, compared to using
$995,000 in the 2001 period. Net cash provided by financing activities was $29.1
million for the nine months ended September 30, 2002 while $526,000 was used in
the nine month period of 2001. The $28.6 million increase in net cash provided
by financing activities was primarily due to a $40.3 million increase in
deposits in the 2002 period compared to a $23.0 million increase 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.
19
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 September 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 SEPTEMBER 30, 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 $32,167 $22,462 $136,656 $17,955 $209,240
Adjustable-rate mortgage loans 39,863 8,478 19,747 0 68,088
-----------------------------------------------------------------------
Total mortgage loans 72,030 30,940 156,403 17,955 277,328
Commercial business loans 89,377 17,662 75,396 3,347 185,782
Consumer loans 9,503 3,726 17,685 1,758 32,672
Home equity loans 6,748 44 653 0 7,445
Tax-exempt loans 300 13 354 518 1,185
Lease financing 0 123 0 0 123
Mortgage-related securities 13,491 13,522 0 16,838 43,851
Fixed rate investment securities and other 2,127 2,833 8,484 13,596 27,040
Variable rate investment securities and other 24,608 3,715 50 0 28,373
-----------------------------------------------------------------------
Total interest-earning assets $218,184 $72,578 $259,025 $54,012 $603,799
=======================================================================
Interest-bearing liabilities:
Deposits
Time deposits $118,888 $44,786 $41,892 $0 $205,566
NOW accounts 2,257 2,257 22,568 10,531 37,613
Savings accounts 5,011 4,541 45,413 21,193 76,158
Money market accounts 23,330 6,749 67,493 31,497 129,069
Borrowings 25,546 5,400 25,500 6,500 62,946
-----------------------------------------------------------------------
Total interest-bearing liabilities $175,032 $63,733 $202,866 $69,721 $511,352
=======================================================================
Interest-earning assets less
interest-bearing liabilities $43,152 $8,845 $56,159 ($15,709) $92,447
=======================================================================
Cumulative interest rate sensitivity gap $43,152 $51,997 $108,156 $92,447
========================================================
Cumulative interest rate sensitivity gap as a
percentage of total assets 6.70% 8.07% 16.78% 14.35%
========================================================
20
At September 30, 2002, the Corporation's cumulative interest-rate sensitive gap
as a percentage of total assets was a positive 6.70% for six months and a
positive 8.07% 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.
21
ITEM 4. 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.
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.
22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
As of September 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 - NONE
Item 5 Other Information -- NONE
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits -- The following exhibits are either filed as part
of this report:
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 from the Corporation's Chairman of the Board of
Directors and Principal Executive Officer.
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 from the Corporation's Chief Financial Officer.
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 November 13, 2002 /s/ Michael J. Murry
---------------------- --------------------------------------
Michael J. Murry
Chairman of the Board of Directors
and Principal Executive Officer
Date November 13, 2002 /s/ James C. Mroczkowski
---------------------- --------------------------------------
James C. Mroczkowski
Executive Vice President & Chief
Financial Officer
Principal Financial Officer
24
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
I, Michael J. Murry, Chairman of the Board of Directors and Principal Executive
Officer, certify that:
1) I have reviewed this quarterly report on Form 10-Q of Merchant and
Manufacturers Bancorporation, Inc.;
2) Based on my knowledge, this quarterly 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 quarterly
report;
3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (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 entities,
particularly during the period in which this quarterly 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
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5) The registrant's other certifying officers 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 data 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 officers and I have indicated in this
quarterly 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
actions with regard to significant deficiencies and material weaknesses.
Date: November 13, 2002
/s/ Michael J. Murry
-------------------------------------
Michael J. Murry
Chairman of the Board of Directors and Principal Executive Officer
25
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
I, James C. Mroczkowski, Executive Vice President and Chief Financial Officer,
certify that:
1) I have reviewed this quarterly report on Form 10-Q of Merchants and
Manufacturers Bancorporation, Inc.;
2) Based on my knowledge, this quarterly 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 quarterly
report;
3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (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 entities,
particularly during the period in which this quarterly 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
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5) The registrant's other certifying officers 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 data 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 officers and I have indicated in this
quarterly 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
actions with regard to significant deficiencies and material weaknesses.
Date: November 13, 2002
/s/ James C. Mroczkowski
-------------------------------------------------
James C. Mroczkowski
Executive Vice President and Chief Financial Officer
26