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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 March 31, 2003
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________ to _____________________
Commission file Number 0-21292
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Wisconsin 39-1413328
- -------------------------------------- ---------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification 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
- --------------------------------------------------------------------------------
Registrant's telephone number, including area code:
Indicate by check mark whether the Registrant (1) has filed all reports required
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports) and (2) has been subject to such filing requirements for
the past 90 days.
Yes [X] No [ ].
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2)
Yes [ ] No [X].
As of May 1, 2003, 2,875,496 shares of Common Stock were outstanding.
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 March 31,
2003, December 31, 2002, and March 31, 2002 3
Unaudited Consolidated Statements of Income for the Three Months ended
March 31, 2003 and 2002 4
Unaudited Consolidated Statements of Cash Flows for the Three Months ended
March 31, 2003 and 2002 5
Notes to Unaudited Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations 11
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
MARCH 31, DECEMBER 31, MARCH 31,
2003 2002 2002
---------------------------------------------
(Amounts In Thousands, Except
Share and Per Share Amounts)
ASSETS
Cash and due from banks $ 26,272 $ 31,539 $ 16,476
Interest bearing deposits in banks 8,593 3,825 13,902
Federal funds sold 17,676 26,391 6,090
---------------------------------------------
Cash and cash equivalents 52,541 61,755 36,468
Available-for-sale securities 129,924 130,125 67,552
Loans, less allowance for loan losses of $7,939 at
March 31, 2003, $7,663 at December 31, 2002
and $5,667 at March 31, 2002 685,681 657,775 482,669
Accrued interest receivable 4,513 4,248 2,999
FHLB stock 14,900 14,935 3,626
Premises and equipment 14,896 15,406 10,318
Intangible assets 9,592 9,681 564
Other assets 14,521 15,170 9,616
---------------------------------------------
TOTAL ASSETS $ 926,568 $ 909,095 $ 613,812
=============================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Non-interest bearing $ 99,725 $ 97,288 $ 63,796
Interest bearing 634,455 632,168 409,493
---------------------------------------------
Total deposits 734,180 729,456 473,289
Short-term borrowings 34,329 18,088 28,658
Long-term borrowings 68,537 72,322 54,300
Accrued interest payable 1,368 1,403 936
Company Obligated Manadatorily Redeemable Preferred Securities 10,000 10,000 0
Other liabilities 8,080 8,497 3,987
---------------------------------------------
TOTAL LIABILITIES 856,494 839,766 561,170
Stockholders' equity
Common stock $1.00 par value; 6,000,000 shares authorized;
shares issued: 2,977,231, at March 31, 2003 and December 31,
2002, 2,587,509 at March 31, 2002; shares outstanding:
2,875,496 at March 31, 2003, 2,875,155 at December 31, 2002
and 2,487,113 at March 31, 2002 2,977 2,977 2,588
Additional paid-in capital 26,302 26,308 14,952
Retained earnings 42,939 41,489 37,699
Accumulated other comprehensive income 738 1,448 248
Treasury stock, at cost (101,735 shares at March 31, 2003,
102,076 shares at December 31, 2002 and 100,396 shares
at March 31, 2002) (2,882) (2,893) (2,845)
---------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 70,074 69,329 52,642
---------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 926,568 $ 909,095 $ 613,812
=============================================
See Notes to Unaudited Consolidated Financial Statements.
3
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
2003 2002
---------------- ----------------
(In Thousands, Except Per Share Amounts)
Interest income:
Interest and fees on loans $ 10,998 $ 8,604
Interest and dividends on securities:
Taxable 589 200
Tax-exempt 353 237
Interest on mortgage-backed securities 670 456
Interest on interest bearing deposits in banks and federal funds sold 88 85
--------- ----------
TOTAL INTEREST INCOME 12,698 9,582
Interest expense:
Interest on deposits 3,071 2,615
Interest on short-term borrowings 148 159
Interest on long-term borrowings 656 610
Interest on Company Obligated Manadatorily Redeemable
Preferred Securities 119 0
--------- ----------
TOTAL INTEREST EXPENSE 3,994 3,384
NET INTEREST INCOME 8,704 6,198
Provision for loan losses 302 280
--------- ----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 8,402 5,918
Noninterest income:
Service charges on deposit accounts 572 339
Service charges on loans 559 211
Securities gains, net 73 0
Gain on sale of loans, net 413 57
Net gain on sale of premises and equipment 6 89
Other 599 483
--------- ----------
TOTAL NONINTEREST INCOME: 2,222 1,179
Noninterest expenses:
Salaries and employee benefits 4,265 3,237
Premises and equipment 1,218 819
Data processing fees 310 263
Marketing and business development 358 214
Federal deposit insurance premiums 33 26
Other 1,415 729
--------- ----------
TOTAL NONINTEREST EXPENSES: 7,599 5,288
INCOME BEFORE INCOME TAXES 3,025 1,809
Income taxes 1,029 581
--------- ----------
NET INCOME $ 1,996 $ 1,228
========= ==========
Basic earnings per share $ 0.69 $ 0.49
========= ==========
Diluted earnings per share $ 0.69 $ 0.49
========= ==========
See Notes to Unaudited Consolidated Financial Statements.
4
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31,
2003 2002
----------- ----------
(In Thousands)
Cash Flows From Operating Activities
Net income $ 1,996 $ 1,228
Adjustments to reconcile net income to cash
provided by operating activities:
Provision for loan losses 302 280
Depreciation 396 232
Amortization and accretion of premiums and discounts, net 145 22
Security gains, net (73) 0
Gain on sale of loans, net (413) (57)
Gain on sale of premises and equipment, net (6) (89)
Decrease in accrued interest receivable (394) (49)
Decrease in accrued interest payable (35) (92)
Other 114 779
----------- ----------
Net cash provided by operations before loan originations and sales 2,032 2,254
Loans originated for sale (40,334) (15,879)
Proceeds from sales of loans 38,939 17,711
----------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 637 4,086
Cash Flows From Investing Activities
Purchase of available-for-sale securities (16,931) (7,861)
Proceeds from sales of available-for-sale securities 4,357 0
Proceeds from redemptions and maturities of available-for-sale securities 12,329 6,308
Net increase in loans (26,400) (7,392)
Purchase of premises and equipment 120 (272)
Redemption (purchase) of Federal Home Loan Bank stock 35 (52)
----------- ----------
NET CASH USED IN INVESTING ACTIVITIES (26,490) (9,269)
Cash Flows From Financing Activities
Net increase (decrease) in deposits 4,724 (4,496)
Net increase in short-term borrowings 16,241 11,612
Dividends paid (546) (423)
Proceeds from long-term borrowings 11,000 0
Repayment of long-term borrowings (14,785) (1,500)
Purchase of treasury stock 0 (1,024)
Proceeds from sale of treasury stock 5 14
----------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 16,639 4,183
DECREASE IN CASH AND CASH EQUIVALENTS (9,214) (1,000)
Cash and cash equivalents at beginning of period 61,755 37,468
----------- ----------
Cash and cash equivalents at end of period $ 52,541 $ 36,468
=========== ==========
Supplemental Cash Flow Information and Noncash Transactions:
Interest paid $ 4,029 $ 3,478
Income taxes paid 89 61
Supplemental Schedules of Noncash Investing Activities,
change in accumulated other comprehensive income, unrealized
losses on available-for-sale securities, net $ (710) $ (82)
See Notes to Unaudited Consolidated Financial Statements.
5
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC.
Notes to Unaudited Consolidated Financial Statements
March 31, 2003
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, Fortress Bank of Westby, Fortress Bank of
Cresco, Fortress Bank, N.A. (collectively, the Banks), Merchants Merger Corp.,
CBG Financial Services, Inc., CBG Services, Inc. and Lincoln Neighborhood
Redevelopment Corporation. 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 subsidiaries, GSB Investments,
Inc. and CBG Mortgage, Inc. Community Bank of Oconto County also includes the
accounts of its wholly owned subsidiary, CBOC Investments, Inc. Fortress Bank of
Westby also includes the accounts of its wholly owned subsidiaries, Westby
Investment Company, Inc. and Fortress Mortgage Services Company. 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-month period ended March 31, 2003
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2003. For further information, refer to the consolidated
financial statements and footnotes thereto included in our Form 10-K for the
year ended December 31, 2002.
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
March 31,
Basic 2003 2002
- -----------------------------------------------------------------------------------------------
(In Thousands, except per share data)
Net income $ 1,996 $ 1,228
Weighted average shares outstanding 2,875 2,504
Basic earnings per share $ 0.69 $ 0.49
=============================
Diluted:
- -----------------------------------------------------------------------------------------------
(In Thousands, except per share data)
Net income $ 1,996 $ 1,228
Weighted average shares outstanding 2,875 2,504
Effect of dilutive stock options outstanding 8 0
-----------------------------
Diluted weighted average shares outstanding 2,883 2,504
Diluted earnings per share $ 0.69 $ 0.49
=============================
NOTE C -- COMPREHENSIVE INCOME
The following table presents our comprehensive income.
Three Months Ended
March 31,
2003 2002
---------- ----------
(In Thousands)
Net income $ 1,996 $ 1,228
Other comprehensive income
Change in unrealized securities losses (1,162) (132)
Reclassification adjustment for gains included
in net income 73 0
Income tax effect 379 50
---------- ----------
Total comprehensive income $ 1,286 $ 1,146
========== ==========
7
NOTE D -- LOANS RECEIVABLE
Loans are comprised of the following categories (dollars in thousands):
March 31, December 31, March 31,
2003 2002 2002
--------------------------------------------
First Mortgage:
Conventional single-family residential $ 100,934 $ 98,075 $ 75,312
Commercial and multifamily residential 192,913 198,250 187,886
Construction 42,696 32,995 34,310
Farmland 23,082 20,847 7,762
-------------------------------------------
359,625 350,167 305,270
-------------------------------------------
Commercial business loans 272,139 246,787 146,005
Consumer and installment loans 45,294 51,883 28,645
Home equity loans 12,106 9,492 6,518
Other 4,456 7,109 1,898
-------------------------------------------
333,995 315,271 183,066
-------------------------------------------
Total loans 693,620 665,438 488,336
Less allowance for loan losses 7,939 7,663 5,667
-------------------------------------------
Loans, net $ 685,681 $ 657,775 $ 482,669
===========================================
NOTE E -- STOCK-BASED COMPENSATION PLAN
At March 31, 2003 we had a stock-based key officer and employee compensation
plan. We account for this plan under the recognitions and measurement principles
of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related
Interpretations. No stock-based employee compensation cost is reflected in the
income, as all options granted under this plan had an exercise price equal to
the market value of the underlying common stock on the date of grant. The
following table illustrates the effect on net income and earnings per share if
we had applied the fair value recognition provisions of the Financial Accounting
Standards Board (FASB) Statement No. 123, Accounting for Stock-Based
Compensation, to stock-based employee compensation.
Three Months Ended
March 31,
2003 2002
----------------------------
(Amounts In Thousands,
Except Per Share Data)
Net income, as reported $ 1,996 $ 1,228
Deduct total stock-based employee compensation expense
determined under fair value based method for all
awards, net of related tax effects 71 67
----------------------------
PRO FORMA NET INCOME $ 1,925 $ 1,161
============================
Earnings per share:
Basic:
As reported $ 0.69 $ 0.49
Pro forma $ 0.67 $ 0.46
Diluted:
As reported $ 0.69 $ 0.49
Pro forma $ 0.67 $ 0.46
8
In determining compensation cost using the fair value method prescribed in
Statement No. 123, the value of each grant is estimated at the grant date with
the following weighted-average assumptions used for grants at March 31, 2003 and
March 31, 2002, respectively: dividend yield of 2.50 percent and 2.34 percent;
expected price volatility of 14.65 percent and 14.97 percent; blended risk-free
interest rates of 3.81 percent and 5.28 percent; and expected lives of 10 years,
respectively.
NOTE F -- RECENT ACQUISITIONS
On November 30, 2002, we acquired Fortress Bancshares, Inc. ("Fortress") and its
wholly-owned subsidiaries, Fortress Bank of Westby, Wisconsin, Fortress Bank of
Cresco, Iowa and Fortress Bank, N.A. headquartered in Houston, Minnesota
("Fortress Banks"). The purchase price for Fortress was $21.0 million including
$9.4 million in cash and 389,722 shares of common stock valued at $11.7 million
based on the average price over the contractual pricing period. At the date of
the acquisition, Fortress had consolidated assets of $222.5 million,
consolidated loans of $144.8 million and consolidated deposits of $175.2
million. The year-to-year comparisons are significantly impacted by our
completion of the acquisition of Fortress. The acquisition was accounted for
using the purchase method of accounting, and accordingly, the assets and
liabilities of Fortress were recorded at their respective fair values on
November 30, 2002 and account balances acquired are included in our financial
results.
On April 28, 2003, we announced the signing of Definitive Agreements to acquire
Keith C. Winters & Associates, LTD. ("KCW") and Integrated Financial Services,
Inc. ("IFS"). KCW is a tax preparation and tax consulting firm with two offices
in Franklin, Wisconsin and has been in business for more than 30 years. IFS is
an insurance agency based in Mequon, Wisconsin and was organized in 1999. The
KCW transaction closed on May 1, 2003 and the IFS transaction closed on April
15, 2003.
NOTE G -- PENDING ACQUISITIONS
On April 24, 2003, we announced the signing of Definitive Agreements to acquire
Reedsburg Bancorporation, Inc. ("Reedsburg") and Random Lake Bancorp, Limited
("Random Lake"). Reedsburg serves as a one-bank holding company for The
Reedsburg Bank. The Reedsburg Bank has total assets of $137.0 million with four
locations in central Wisconsin. Random Lake serves as a one-bank holding company
for Wisconsin State Bank. Wisconsin State Bank has total assets of $93.9 million
with four locations in Wisconsin. The transactions are expected to close in the
3rd quarter of 2003, subject to shareholder and regulatory approvals and other
customary closing conditions.
NOTE H - RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has issued Statement 149, "Amendment of
Statement 133 on Derivative Instruments and Hedging". This Statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities under Statement 133. The Statement is effective for contracts
entered into or modified after June 30, 2003 and for hedging relationships
designated after June 30, 2003. Implementation of the Statement is not expected
to have a material impact on the financial statements.
9
NOTE I - COMMITMENTS AND CONTINGENT LIABILITIES
In the normal course of business, the Corporation is involved in various legal
proceedings. In the opinion of management, any liability resulting from such
proceedings would not have a material adverse effect on the consolidated
financial statements.
The Corporation is party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit, financial
guarantees, and standby letters of credit. They involve, to varying degrees,
elements of credit risk in excess of amounts recognized on the consolidated
balance sheets.
The Corporation's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual notional amount of
those instruments. The Corporation uses the same credit policies in making
commitments and issuing letters of credit as they do for on-balance-sheet
instruments.
Off-balance-sheet financial instruments whose contracts represented credit
and/or interest rate risk at March 31, 2003, December 31, 2002 and March 31,
2002, are as follows:
March 31, December 31, March 31,
2003 2002 2002
--------------------------------------
(Amounts In Thousand)
Commitments to originate mortgage loans $ 32,983 $ 23,845 $ 10,156
Unused lines of credit:
Commercial business 75,400 71,074 49,527
Home equity 11,426 11,088 6,653
Credit cards 11,142 10,832 7,165
Other -- 97 100
Standby letters of credit 10,825 9,346 4,249
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. Standby letters of credit are conditional
commitments issued by the Bank to guarantee the performance of a customer to a
third party. Those guarantees are primarily issued to support public and private
borrowing arrangements and, generally, have terms of one year or less. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers. The Bank holds
collateral, which may include accounts receivable, inventory, property,
equipment, and income-producing properties, supporting those commitments if
deemed necessary. In the event the customer does not perform in accordance with
the terms of the agreement with the third party, the Bank would be required to
fund the commitment. The maximum potential amount of future payments the Bank
could be required to make is represented by the contractual amount shown in the
summary above. If the commitment is funded the Bank would be entitled to seek
recovery from the customer. Credit card commitments are unsecured. At March 31,
2003 no amounts have been recorded as liabilities for the Bank's potential
obligations under these guarantees.
10
Except for the above-noted commitments to originate loans in the normal course
of business, the Corporation and the Banks have not undertaken the use of
off-balance-sheet derivative financial instruments for any purpose.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Financial Condition
TOTAL ASSETS
Total assets increased $17.5 million, or 1.9% to $926.6 million at March 31,
2003 compared to $909.1 million at December 31, 2002. The growth in loans caused
the majority of the increase.
INVESTMENT SECURITIES
Investment securities available-for-sale decreased $201,000, or 0.1%, from
$130.1 million at December 31, 2002, to $129.9 million at March 31, 2003. Sales
of investment securities and amounts repaid were partially offset by purchases
of investments during the period.
LOANS RECEIVABLE
Loans receivable, net of allowance for loan losses increased $27.9 million from
$657.8 million at December 31, 2002 compared to $685.7 million at March 31,
2003. The growth in loans can be attributed to the growth in commercial business
and construction loans that were partially offset by the decrease in consumer
and commercial real estate loans. 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 March 31, 2003 we designated $4.0 million of loans as held for sale.
TOTAL DEPOSITS AND BORROWINGS
Total deposits increased $4.7 million, or 0.6%, from $729.4 million on December
31, 2002 to $734.2 million on March 31, 2003. 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 increased by
$16.2 million, or 89.8% from $18.1 million on December 31, 2002 to $34.3 million
on March 31, 2003. Short-term borrowings consist of federal funds borrowed from
correspondent banks and repurchase agreements. Long-term debt decreased by $3.8
million, or 5.2%, from $72.3 million on December 31, 2002 to $68.5 million on
March 31, 2003. Long-term debt consists of Federal Home Loan Bank advances.
CAPITAL RESOURCES
Stockholders' equity at March 31, 2003 was $70.1 million compared to $69.3
million at December 31, 2002, an increase of $745,000. The change in
stockholders' equity consists of net income of $2.0 million, less payments of
dividends to shareholders of $546,000 and a $710,000 net decrease in accumulated
other comprehensive income. We and our banks continue to exceed our regulatory
capital requirements.
11
Under the Federal Reserve Board's risk-based guidelines capital is measured
against our subsidiary banks' risk-weighted assets. Our tier 1 capital (common
stockholders' equity less goodwill) to risk-weighted assets was 9.5% at March
31, 2003, well above the 4.0% minimum required. Total capital to risk-adjusted
assets was 10.6%; also well above the 8.0% minimum requirement. The leverage
ratio was at 7.9% 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 acquisitions, we will be required to add to our capital
via a trust preferred securities offering, a preferred stock offering or other
equity financing in order to maintain our "well capitalized" classification. As
our acquisition oriented growth strategy continues, we may be required to add
additional capital to maintain our current "well capitalized" rating.
NONPERFORMING ASSETS AND ALLOWANCE FOR LOSSES
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.
Nonperforming assets are summarized, for the dates indicated, as follows
(dollars in thousands):
March 31, December 31, March 31,
2003 2002 2002
--------- ------------ ---------
Non-accrual loans:
Conventional single-family residential $ 497 $ 613 $ 534
Commercial and multifamily residential 1,515 820 2,315
Commercial business loans 1,661 1,246 670
Consumer and installment loans 774 524 353
--------- ------------ ---------
Total non-accrual loans 4,447 3,203 3,872
Other real estate owned 1,911 2,382 139
--------- ------------ ---------
Total nonperforming assets $ 6,358 $ 5,585 $ 4,011
========= ============ =========
RATIOS:
Non-accrual loans to total loans 0.64% 0.48% 0.79%
Nonperforming assets to total assets 0.69 0.61 0.65
Loan loss allowance to non-accrual loans 178.52 239.24 146.36
Loan loss allowance to total loans 1.14 1.15 1.16
Nonperforming assets increased by $773,000 from $5.6 million at December 31,
2002 to $6.4 million at March 31, 2003, an increase of 13.8%. The growth in
non-accrual loans contributed to the increase. 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.
12
The following table presents changes in the allowance for loan losses (dollars
in thousands):
Three Months Ended
March 31, 2003 March 31, 2002
---------------------------------
Balance at beginning of period $7,663 $5,563
Provision for loan losses 302 280
Charge-offs:
Commercial and multifamily residential 28 0
Commercial business loans 7 70
Consumer and installment loans 25 151
-------------------------
Total charge-offs 60 221
-------------------------
Recoveries:
Commercial and multifamily residential 0 17
Commercial business loans 15 4
Consumer and installment loans 19 24
-------------------------
Total recoveries 34 45
-------------------------
Net charge-offs 27 176
-------------------------
Balance at March 31, $7,939 $5,667
=========================
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 judgments, estimates, and uncertainties that are susceptible to
change. In the event that different assumptions or conditions were to prevail,
and depending upon the severity of such changes, the possibility of materially
different financial condition or results of operations is a reasonable
likelihood.
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 first
quarter 2003 is consistent with prior periods.
13
POTENTIAL PROBLEM LOANS
We utilize an internal asset classification system as a means of reporting
problem and potential problem assets. Once a quarter at each bank's 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 March 31, 2003 the loans classified as
Management Attention were $26.3 million compared to $22.3 million as of December
31, 2002, an increase of $4.0 million or 17.9%. The increase can be attributed
to the economic downturn currently being experienced by our commercial loan
customers.
Our determination as to the classification of our assets and the amount of our
valuation allowances is subject to review by the Banks' primary regulators,
which can order the establishment of additional general or specific loss
allowances. The FDIC, in conjunction with the other federal banking agencies,
has adopted an interagency policy statement on the allowance for loan losses.
The policy statement provides guidance for financial institutions on both the
responsibilities of management for the assessment and establishment of adequate
allowances and guidance for banking agency examiners to use in determining the
adequacy of general valuation guidelines. Generally, the policy statement
recommends that (i) institutions have effective systems and controls to
identify, monitor and address asset quality problems; (ii) management has
analyzed all significant factors that affect the collectibility of the portfolio
in a reasonable manner; and (iii) management has established acceptable
allowance evaluation processes that meet the objectives set forth in the policy
statement. We 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.
14
COMPARISON OF THREE MONTHS ENDED MARCH 31, 2003 AND 2002
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 on a
fully taxable-equivalent basis for the three months ended March 31, 2003 was
$8.9 million, an increase of 40.8% from the $6.3 million reported for the same
period in 2002. The increase is due to revenue resulting from the acquisition of
Fortress as well as the increase in loan and investment volume made possible by
an increase in deposits. Net interest income for the three months ended March
31, 2003 included $2.3 million from the Fortress Banks. Our net interest margin
on a fully taxable-equivalent basis was 4.29% and 4.48% for the first quarters
of 2003 and 2002, respectively. The compression in the net interest margin has
been affected by the interest rate cuts made by the Federal Reserve during 2002.
Management believes that, should the Federal Reserve make additional rate
reductions, we could potentially experience further margin compression. The
reduction in market interest rates during the quarter caused the average rate on
a fully taxable-equivalent basis earned on interest earning assets to decrease
from 6.88% for the three months ended March 31, 2002 to 6.21% for the three
month period ended March 31, 2003.
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 MARCH 31,
------------------------------------
2003 2002
---- ----
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE
----------------------------------------------------------------
ASSETS
Loans,net (1)(2) $ 668,667 $ 10,949 6.64% $ 479,484 $ 8,585 7.26%
Loans exempt from federal income taxes (3) 3,617 74 8.30% 1,517 29 7.75%
Taxable investment securities (4) 37,636 589 6.35% 16,126 200 5.03%
Mortgage-related securities (4) 73,494 670 3.70% 32,718 456 5.65%
Investment securities exempt from federal
income taxes (3)(4) 34,043 535 6.37% 21,281 359 6.84%
Other securities 25,619 88 1.39% 21,346 85 1.61%
--------- -------- --------- ---------
Interest earning assets 843,086 12,905 6.21% 572,472 9,714 6.88%
-------- ---------
Non interest earning assets 58,947 35,642
--------- ---------
Average assets $ 902,033 $ 608,114
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
NOW deposits $ 57,818 107 0.75% $ 35,287 85 0.98%
Money market deposits 200,733 819 1.65% 86,948 357 1.67%
Savings deposits 84,599 143 0.69% 73,934 202 1.11%
Time deposits 286,096 2,002 2.84% 206,510 1,971 3.87%
Short-term borrowings 27,273 148 2.20% 27,467 159 2.35%
Long-term borrowings 70,219 656 3.79% 54,875 610 4.51%
Company-obligated mandatorily redeemable
preferred securities 10,000 119 4.83% -- -- --%
--------- -------- --------- ---------
Interest bearing liabilities 736,738 3,994 2.20% 485,021 3,384 2.83%
--------- -------- --------- ---------
Demand deposits and other non interest
bearing liabilities 95,864 70,433
Stockholders' equity 69,431 52,660
--------- ---------
Average liabilities and stockholders' equity $ 902,033 $ 608,114
========= =========
Net interest spread (5) $ 8,911 4.01% $ 6,330 4.05%
Net interest earning assets $ 106,348 $ 87,451
Net interest margin on a fully tax equivalent
basis (6) 4.29% 4.48%
Net interest margin (6) 4.19% 4.39%
Ratio of average interest-earning assets to
average interest-bearing liabilities 1.14 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 MARCH 31, 2003
COMPARED TO MARCH 31, 2002
---------------------------------
CHANGE CHANGE CHANGE
DUE TO DUE TO DUE TO TOTAL
VOLUME RATE MIX CHANGE
---------------------------------
Interest-Earning Assets:
Loans, net (1) $3,388 $ (734) $ (290) $2,364
Loans exempt from federal income
taxes (2) 40 2 3 45
Taxable investment securities 267 52 70 389
Mortgage-related securities 569 (158) (197) 214
Investment securities exempt from
federal income taxes (2) 216 (25) (15) 176
Other securities 17 (12) (2) 3
------ ------ ------ ------
Total interest-earning assets $4,497 $ (875) $ (431) $3,191
====== ====== ====== ======
Interest-Bearing Liabilities:
NOW deposits $ 55 $ (20) $ (13) $ 22
Money market deposits 467 (2) (3) 462
Savings deposits 29 (77) (11) (59)
Time deposits 760 (526) (203) 31
Short-term borrowings (1) (10) -- (11)
Long-term borrowings 170 (97) (27) 46
Company-obligated mandatorily
redeemable preferred securities -- -- 119 119
------ ------ ------ ------
Total interest-bearing liabilities $1,480 $ (732) $ (138) $ 610
====== ====== ====== ======
Net change in net interest income $2,581
======
- ------------------------------
(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 March 31, 2003, the provision for loan losses was
$302,000 compared to $280,000 for the same period in 2002 due to the inclusion
of Fortress in our consolidated operating results. 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 March 31, 2003 was $2.2 million
compared to $1.2 million for the three months ended March 31, 2002, an increase
of $1.0 million, or 88.5%. The increase was due to the inclusion of Fortress'
results, increased service charges collected on deposit accounts, gains on the
sales of investment securities and gains on the sale of loans. The Fortress
Banks added $644,000 of additional non-interest income during the three month
period ended March 31, 2003.
NON-INTEREST EXPENSE
Non-interest expense for the three months ended March 31, 2003 was $7.6 million
compared to $5.3 million for the three months ended March 31, 2002, an increase
of $2.3 million, or 43.7%. The increase in non-interest expense included $1.8
million in expenses related to the inclusion of the Fortress Banks' non-interest
expenses in our 2003 first quarter operating results. Salaries and employee
benefits increased $1.0 million or 31.8% from $3.2 million for the three-month
period ended March 31, 2002 to $4.3 million for the 2003 three-month period.
Exclusive of the Fortress Banks, salaries and employee benefits increased
$62,000 or 1.9%. Occupancy expense for the three months ended March 31, 2003 was
$1.2 million compared to $819,000 for the three months ended March 31, 2002, an
increase of $399,000, or 48.7%. Exclusive of the Fortress Banks, occupancy
expense increased $141,000 or 17.2%. Marketing and business development expenses
increased $144,000 or 67.3% from $214,000 for the three months ended March 31,
2002 to $358,000 for the 2003 three-month period. The inclusion of the Fortress
expenses as well as the marketing campaign announcing the Fortress acquisition
and the promotion of new products and services caused the increase. Other
operating expenses increased $686,000 or 94.1% from $729,000 for the three
months ended March 31, 2002 to $1.4 million for the 2003 three-month period.
Exclusive of the Fortress Banks, other operating expenses increased $286,000 or
39.2%.
INCOME TAXES
Income taxes for the three-month period ended March 31, 2003 was $1.0 million
compared to $581,000 for the three months ended March 31, 2002, an increase of
$448,000, or 77.1%. The effective tax rate for the three months ended March 31,
2003 was 34.0% compared to 32.1% for the same period in 2002.
18
NET INCOME
On an after tax basis, for the three month period ended March 31, 2003, we
reported net income of $2.0 million compared to $1.2 million for the same period
in 2002, an increase of 62.5%.
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 $637,000 and $4.1
million for the three months ended March 31, 2003 and 2002, respectively, a
decrease of $3.5 million, due primarily to the increase in mortgage loan
originations and sales. Net cash used in investing activities increased by $17.2
million, to $26.5 million used in for the three months ended March 31, 2003 from
$9.3 million used in the same period in 2002. Our lending activities for the
first three months of 2003 compared to 2002 used additional cash flows of $26.4
million due primarily to an increase in loans, net of principal collections in
the 2003 period, compared to using $7.4 million in the 2002 period. Net cash
provided by financing activities was $16.6 million for the three months ended
March 31, 2003 compared to $4.2 million provided by financing activities during
the three month period in 2002. The $12.5 million increase in net cash provided
by financing activities was primarily due to a $4.7 million increase in deposits
in the 2003 period compared to a $4.5 million decrease in 2002.
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
believe that the Banks could borrow $96.2 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 March 31, 2003. 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 MARCH 31, 2003
----------------------------------------------------------------
WITHIN SIX TO TWELVE ONE TO FIVE OVER
SIX MONTHS MONTHS YEARS FIVE YEARS TOTAL
----------------------------------------------------------------
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Fixed-rate mortgage loans $ 28,617 $ 40,684 $ 175,749 $ 16,119 $261,169
Adjustable-rate mortgage loans 59,802 11,010 11,894 184 82,890
----------------------------------------------------------------
Total mortgage loans 88,419 51,694 187,643 16,303 344,059
Commercial business loans 129,776 35,885 108,612 10,519 284,792
Consumer loans 15,941 4,437 29,582 1,937 51,897
Home equity loans 9,010 227 77 135 9,449
Tax-exempt loans 13 915 792 1,703 3,423
Mortgage-related securities 14,879 13,093 25,296 16,499 69,767
Fixed rate investment securities and other 3,274 1,613 20,127 32,457 57,471
Variable rate investment securities and other 44,393 0 50 0 44,443
----------------------------------------------------------------
Total interest-earning assets $ 305,705 $ 107,864 $ 372,179 $ 79,553 $865,301
================================================================
Interest-bearing liabilities:
Deposits
Time deposits $ 101,774 $ 76,286 $ 98,008 $ 2,028 $278,096
NOW accounts 3,621 3,621 36,213 16,900 60,355
Savings accounts 5,037 5,822 50,372 23,507 84,738
Money market accounts 29,669 11,629 116,287 54,267 211,852
Borrowings 45,544 24,900 33,263 9,159 112,866
----------------------------------------------------------------
Total interest-bearing liabilities $ 185,645 $ 122,258 $ 334,143 $ 105,861 $747,907
================================================================
Interest-earning assets less interest-bearing
liabilities $ 120,060 $ (14,394) $ 38,036 $ (26,308) $117,394
================================================================
Cumulative interest rate sensitivity gap $ 120,060 $ 105,666 $ 143,702 $ 117,394
=====================================================
Cumulative interest rate sensitivity gap as a
percentage of total assets 12.96% 11.40% 15.51% 12.67%
=====================================================
20
At March 31, 2003, the Corporation's cumulative interest-rate sensitive gap as a
percentage of total assets was a positive 12.96% for six months and a positive
11.40% for one-year maturities. Therefore, we are 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; (10) changes in
accounting principles, policies or guidelines; and (11) the acquisitions of
Reedsburg Bancorporation, Inc. and Random Lake Bancorp, Limited are each subject
to a number of conditions, including shareholder and regulatory approvals and
customary closing conditions, and no assurance can be given that either
acquisition will be completed or, if completed, that the terms of either
acquisition will be as presently contemplated.
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, 2002, from that disclosed in the Corporation's 2002
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. It should be noted that in designing and evaluating the
disclosure controls and procedures, management recognized that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and management
necessarily was required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures.
There have been no significant changes to the Corporation's internal controls or
in other factors that could significantly affect these controls subsequent to
the date that the internal controls were most recently evaluated. There were no
significant deficiencies or material weaknesses identified in that evaluation
and, therefore, no corrective actions were taken.
22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
As of March 31, 2003 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 May 14, 2003. /s/ Michael J. Murry
-----------------------------------
Michael J. Murry
Chairman of the Board of Directors
and Principal Executive Officer
Date May 14, 2003. /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: May 14, 2003
/s/ Michael J. Murry
-------------------------------------
Michael J. Murry
Chairman of the Board of Directors and Principal Executive
Officer
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: May 14, 2003
/s/ James C. Mroczkowski
-------------------------------------------------
James C. Mroczkowski
Executive Vice President and Chief Financial Officer
26
10-Q EXHIBIT LIST
EXHIBIT NO. DESCRIPTION
EXHIBIT 99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
EXHIBIT 99.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
27