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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 2003
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
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC.
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(Exact name of registrant as specified in its charter)
Wisconsin 39-1413328
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(State or other jurisdiction of incorporation or (I.R.S. Employer
organization) Identification Number)
19105 West Capitol Drive, Suite 200
Brookfield, Wisconsin 53045
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(Address of principal executive office)
Registrant's telephone number, including area code: (262) 790-2120
Securities registered pursuant to Section 12(b) of the Act: Not Applicable
Securities registered pursuant to section 12(g) of the Act:
COMMON STOCK, PAR VALUE $1.00 PER SHARE
----------------------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports) and (2) has been subject to such filing requirements for
the past 90 days.
Yes [X] No [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
form 10-K [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2)
Yes [X] No [ ].
As of June 30, 2003 (the last business day of the Registrant's most recently
completed second fiscal quarter) the aggregate market value of the shares (based
upon the average bid/ask price) held by non-affiliates was approximately
$85,412,000.
As of March 1, 2004, 3,335,372 shares of Common Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 2004 Annual Meeting of Shareholders of
the Registrant are incorporated by reference into Part III of this report.
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC.
*****
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2003
PAGE
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PART I
Item 1. Business 3
Item 2. Properties 9
Item 3. Legal Proceedings 9
Item 4. Submission of Matters to a Vote of Security Holders 9
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 10
Item 6. Selected Financial Data 11
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 12
Item 7a. Quantitative and Qualitative Disclosures About Market Risk 26
Item 8. Financial Statements and Supplementary Data 27
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 27
Item 9(a). Controls and Procedures 28
PART III
Item 10. Directors and Executive Officers of the Registrant 28
Item 11. Executive Compensation 28
Item 12 Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters 28
Item 13. Certain Relationships and Related Transactions 28
Item 14. Principal Accountant Fees and Services 29
PART IV
Item 15. Exhibits, Financial Statements Schedules and Reports on Form 8-K 29
Signatures
2
PART I
ITEM 1. BUSINESS
GENERAL
Merchants and Manufacturers Bancorporation, Inc. ("Merchants") was
incorporated in Wisconsin in 1983 and is a registered bank holding company under
the Bank Holding Company Act of 1956. As of December 31, 2003, we had total
consolidated assets of $1.1 billion, consolidated loans of $857.1 million and
consolidated deposits of $911.9 million. Our executive offices are located at
19105 West Capitol Drive, Brookfield, Wisconsin 53045 (telephone number (262)
790-2120).
We are engaged in the community banking business through our Community
BancGroup(TM), which includes our eight bank subsidiaries. We operate six bank
subsidiaries in Wisconsin including; Lincoln State Bank; Grafton State Bank;
Franklin State Bank; Community Bank of Oconto County; Fortress Bank of Westby
and the Reedsburg Bank. We also operate two additional bank subsidiaries,
Fortress Bank of Cresco and Fortress Bank, N.A., which operate in Iowa and
Minnesota, respectively.
Through our banks, we provide a broad range of services to individual
and commercial customers. Collectively, our subsidiary banks enjoy the
competitive advantages of being able to offer the products, services,
operational capacity and the lending limit of a larger institution with the
timely personal customer service typically offered by a community bank.
In addition to traditional bank products, we offer our customers a
broad range of residential mortgage services through CBG Mortgage, Inc., and a
full range of investment, tax and life insurance products through CBG Financial
Services, Inc. Each of these subsidiaries enable our member banks to provide a
full range of financial products to their customers as well as contribute
non-interest income to us.
We also operate four additional non-bank operating subsidiaries:
Lincoln Neighborhood Redevelopment Corporation, which was organized in 1988 for
the purpose of redeveloping and rehabilitating certain areas located primarily
on the near south side of Milwaukee; CBG Services, Inc., which was formed in
1994 to provide operational services to our banks; Merchants Merger Corporation
which was formed in 1999 to facilitate bank acquisitions and Merchants New
Merger Corporation which was formed to facilitate the Reedsburg Bank
acquisition.
GROWTH STRATEGY
Over the last four years, our total assets have increased from $533
million as of December 31, 1999 to $1.1 billion as of December 31, 2003. During
the same four-year period, our earnings per share on a diluted basis has
increased from $1.41 to $2.56. The substantial increase in both total assets and
earnings per share is a direct result of the implementation of our growth
strategy. The key elements of our growth strategy include acquisitions, internal
growth and a focus on expanding our non-interest income.
ACQUISITIONS. We believe there are significant opportunities to
establish our presence in additional markets through the acquisition of selected
community banks, individual branches and other financial service businesses,
primarily in Wisconsin. We generally look at four things when analyzing a
potential acquisition:
- the profitability of the institution on a historical and
forward looking basis;
- the stability and experience of the management team and board
of directors;
- the growth potential of the geographical markets in which the
institution operates; and
- the asset quality track record of the institution and
management.
INTERNAL GROWTH. While we made acquisitions in 1999, 2001, 2002 and
2003, significant opportunities exist to expand through internal growth by
delivering quality products and by providing personal service to individuals and
small to mid-sized businesses. By focusing on customer service and convenience,
we provide the opportunity for customers to receive the personalized service
that they find attractive in smaller organizations and still realize many of the
efficiencies available to larger organizations.
In addition, we intend to expand through internal growth with the
addition of quality employees and through de novo branching into new markets by
our existing bank subsidiaries. During this growth period Merchants has made a
significant investment in recruiting and developing highly qualified and
productive loan officers. Merchants also plans to enter high growth markets
through branching.
NON-INTEREST INCOME. Through CBG Financial Services, Inc., and its Link
Community Financial Services, LLC subsidiary, we have significantly enhanced our
ability to provide investment and insurance products to our current customer
base. For example, as of December 31, 2003, Link had seven representatives
strategically located and dedicated to providing customers with a full range of
financial services. Over time, we expect this line of business to significantly
enhance our relationships with current bank customers and also provide the
subsidiary banks with additional opportunities for deposit and loan growth as
our investment and insurance customer base expands over time. In 2003 we
acquired Integrated Financial Services, Inc. ("IFS") and Keith C. Winters &
Associates ("KCW"). IFS is an insurance agency that was organized in 1999. 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.
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RECENT ACQUISITIONS
During 2003, we expanded our operations into Reedsburg, Wisconsin
market, through an acquisition. On November 1, 2003, we acquired Reedsburg
Bancorporation. ("Reedsburg") and its wholly-owned subsidiary, the Reedsburg
Bank. The purchase price for Reedsburg was $36.0 million including $17.8 million
in cash, $12.8 million in promissory notes and 146,800 shares of common stock
valued at $5.4 million based on the average price over the contractual pricing
period. At the date of the acquisition Reedsburg had assets of $141.8 million,
loans of $97.2 million and deposits of $120.6 million.
OUR BANK SUBSIDIARIES
We currently provide community-oriented, commercial and retail banking
services to individuals as well as to small to mid-size businesses in our
communities through 38 banking facilities in Wisconsin, Iowa & Minnesota. The
Banks have consistent products, services and delivery systems and comply with
similar regulatory guidance. As such they are not segments as that term is
defined in Financial Accounting Standards Board Statement 131. The table below
provides information regarding each of our banks and their respective markets.
TOTAL ASSETS AT NUMBER OF
BANK YEAR ORGANIZED YEAR ACQUIRED DECEMBER 31, 2002 COMMUNITIES SERVED FACILITIES
---- -------------- ------------- ----------------- ------------------ ----------
(DOLLARS IN THOUSANDS)
Lincoln State Bank 1919 1983 $392,795 Milwaukee, WI 7
Muskego, WI 2
Brookfield, WI 1
Greenfield, WI 2
Hales Corners, WI 1
New Berlin, WI 2
Pewaukee, WI 1
West Allis, WI 1
Grafton State Bank 1906 1999 $163,650 Grafton, WI 2
Saukville, WI 1
Franklin State Bank 1982 1984 $ 92,779 Franklin, WI 3
Community Bank of Oconto 1989 2001 $ 85,805 Oconto Falls, WI 1
County Gillett, WI 1
Little Suamico, WI 1
Fortress Bank of Westby 1992 2002 $121,601 Westby, WI 2
Coon Valley, WI 1
West Salem, WI 1
Chaseburg, WI 1
Fortress Bank of Cresco 1996 2002 $ 64,180 Cresco, IA 1
Fortress Bank, N.A. 1993 2002 $ 54,530 Houston, MN 1
Winona, WI 1
The Reedsburg Bank 1867 2003 $157,781 Reedsburg, WI 2
North Freedom, WI 1
Lime Ridge, WI 1
OUR BANKS
Through our banks, we provide a broad range of services to individual
and commercial customers. These services include accepting demand, savings and
time deposits, including regular checking accounts, NOW accounts, money market
accounts, savings accounts, certificates of deposit, individual retirement
accounts and club accounts. Our banks also make secured and unsecured
commercial, mortgage, construction and consumer term loans on both a fixed and
variable rate basis. The terms on the loans retained in the banks' portfolios
generally range from one month to five years. Our banks also provide lines of
credit to commercial borrowers and to individuals through home equity loans.
Lincoln State Bank. Lincoln State Bank was organized as a state banking
association under the laws of the State of Wisconsin in 1919. It operates seven
full service branch offices in the southeastern Wisconsin communities of
Milwaukee, Muskego, New Berlin, Brookfield and Pewaukee. In addition it operates
ten limited hours facilities in Milwaukee and Waukesha Counties. At December 31,
2003, Lincoln State Bank comprised 34.3% of our consolidated assets.
Grafton State Bank. Grafton State Bank was organized as a state banking
association under the laws of the State of Wisconsin in 1906. Its principal
office and a branch office are located in Grafton, Wisconsin and another branch
office is located in Saukville, Wisconsin. At December 31, 2003, Grafton State
Bank comprised 14.3% of our consolidated assets.
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Franklin State Bank. Franklin State Bank was organized as a state
banking association under the laws of the State of Wisconsin in 1982. Its
principal office and a branch office are located in Franklin, Wisconsin. At
December 31, 2003, Franklin State Bank comprised 8.1% of our consolidated
assets. In addition it also operates a limited hours facility in Franklin.
Community Bank of Oconto County. Community Bank of Oconto County is a
full service commercial bank serving all of Oconto County and the eastern
portion of Shawano County. In addition to the main office in the city of Oconto
Falls, which is located approximately 25 miles north of Green Bay, Wisconsin,
Community Bank of Oconto County operates two branch offices, one located in the
city of Gillett and another located in the town of Little Suamico. At December
31, 2003, Community Bank of Oconto County comprised 7.5% of our consolidated
assets.
Fortress Bank of Westby. Fortress Bank of Westby is a full service
commercial bank serving the banking needs of LaCrosse County, southeastern
Monroe County and northern Vernon County, Wisconsin. Fortress Bank of Westby has
offices in the southwestern Wisconsin communities of Westby, Coon Valley,
Chaseburg, and West Salem. At December 31, 2003, the Fortress Bank of Westby
comprised 10.6% of our consolidated assets.
Fortress Bank of Cresco. Fortress Bank of Cresco is a full service
commercial bank serving the banking needs of eastern Howard County and western
Winneshiek County, Iowa from its office in Cresco, Iowa. At December 31, 2003,
Fortress Bank of Cresco comprised 5.6% of our consolidated assets.
Fortress Bank, N.A. Fortress Bank, N.A., Houston, Minnesota is a full
service commercial bank serving the customers in Houston, Minnesota and
northeast Winona Counties in Minnesota from offices in Houston and Winona. At
December 31, 2003, Fortress Bank, N.A. comprised 4.8% of our consolidated
assets.
The Reedsburg Bank. The Reedsburg Bank is a full service commercial
bank serving the banking needs of Sauk County, and portions of Juneau, Richland,
and Adams Counties, Wisconsin. The Reedsburg Bank has offices in the Wisconsin
communities of Reedsburg, North Freedom and Lime Ridge. At December 31, 2003,
the Reedsburg Bank comprised 13.8% of our consolidated assets.
OUR OPERATING SUBSIDIARIES
CBG Financial Services, Inc. was formed in 2002 to provide tax as well
as non-insured investment and insurance products to customers of the Banks. For
the twelve months ended December 31, 2003, CBG Financial Services had revenues
of $1.2 million.
CBG Mortgage, Inc. was formed in 2002 to act as our mortgage broker. As
of December 31, 2003, CBG Mortgage services $160.5 million of residential
mortgages.
Fortress Mortgage Services Company acts as the mortgage broker for the
Fortress Banks. As of December 31, 2003, Fortress Mortgage services $74.0
million of residential mortgages.
Lincoln Neighborhood Redevelopment Corporation. The Lincoln
Neighborhood Redevelopment Corporation was formed in June 1988. The
Redevelopment Corporation was established to redevelop and rehabilitate certain
areas located on the south-side of Milwaukee by, among other things:
- providing home mortgage loans to customers with low to
moderate income;
- working with local businesses to keep commercial areas strong
and attractive;
- pursuing means to preserve and create jobs;
- encouraging appropriate land-use;
- involving community residents in economic planning; and
- retaining and attracting businesses.
As of December 31, 2003, the Redevelopment Corporation had assets of
$913,000, $558,000 in liabilities and equity of $355,000.
CBG Services, Inc. M&M Services was formed in January 1994 and changed
its name to CBG Services, Inc. in 2002. CBG Services provides operational
services to our banks. These services include, but are not limited to:
- human resources;
- auditing;
- marketing;
- financial analysis;
- loan document preparation;
- loan credit analysis;
- item processing;
- compliance;
- training; and
- operations.
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Merchants Merger Corp. Merchants Merger Corp. was formed in 1999 to
facilitate mergers and future acquisitions.
Merchants New Merger Corp. Merchants New Merger Corp. is the historical
Reedsburg Bancorporation parent company that was renamed following the
acquisition.
OTHER SUBSIDIARIES
Lincoln State Bank, Grafton State Bank, Community Bank of Oconto
County, Fortress Bank of Westby and the Reedsburg Bank each have a wholly owned
subsidiary. In 1991 an investment subsidiary known as M&M - Lincoln Investment
Corporation was formed to manage the majority of Lincoln State Bank's investment
portfolio and to enhance the overall return of the portfolio. The subsidiary
received a capital contribution of approximately $13 million of mortgage-backed
and other investment securities from Lincoln State Bank in exchange for 100% of
the stock of the subsidiary. In 1992 an investment subsidiary known as Westby
Investment Company, Inc. was formed to manage the majority of the Fortress Bank
of Westby's investment portfolio and to enhance the overall return of the
portfolio. The subsidiary received a capital contribution of approximately $10
million of municipal and other investment securities from the Fortress Bank of
Westby in exchange for 100% of the stock of the subsidiary. In 1992 an
investment subsidiary known as Reedsburg Investment Corp. was formed to manage
the majority of the Reedsburg Bank's investment portfolio and to enhance the
overall return of the portfolio. The subsidiary received a capital contribution
of approximately $13 million of municipal and other investment securities from
the Reedsburg Bank in exchange for 100% of the stock of the subsidiary. In 1996
an investment subsidiary known as GSB Investments, Inc. was formed to manage the
majority of Grafton State Bank's investment portfolio and to enhance the overall
return of the portfolio. The subsidiary received a capital contribution of
approximately $10 million of mortgage-backed and other investment securities
from Grafton State Bank in exchange for 100% of the stock of the subsidiary. In
2001 an investment subsidiary known as CBOC Investments, Inc. was formed to
manage the majority of the Community Bank of Oconto County's investment
portfolio and to enhance the overall return of the portfolio. The subsidiary
received a capital contribution of approximately $11 million of municipal and
other investment securities from Community Bank of Oconto County in exchange for
100% of the stock of the subsidiary. These subsidiaries are an intrinsic
component of their respective parent banks and assets thereof are included in
the total assets of the respective Banks above.
COMPETITION
Our banks serve their surrounding communities in their respective
markets located in Wisconsin, Iowa and Minnesota. There are presently in excess
of one hundred other financial institutions in our service areas that directly
compete with one or more of our banks. Our banks compete with other commercial
banks, savings banks, credit unions, mortgage brokers, small-loan companies,
insurance companies, investment banking firms and large retail companies.
The principal methods of competition include, interest rates paid on
deposits and charged on loans, personal contacts and efforts to obtain deposits
and loans and types and quality of services provided and convenience of the
locations.
EMPLOYEES
At December 31, 2003, we (along with our subsidiaries) employed 381
full-time and 104 part-time employees. We provide a wide range of benefits to
employees, including educational activities, and consider our employee relations
to be excellent. We conduct extensive training programs in order to enhance
job-related knowledge and skills of our people and to train our employees with a
sales-oriented approach to customers. Eligible employees participate in a 401(k)
plan as well as group life and major medical insurance programs. None of our
employees are represented by a labor union.
SUPERVISION AND REGULATION
We are extensively regulated under both federal and state laws. Laws
and regulations to which Merchants and Manufacturers and our banks are subject
govern, among other things, the scope of business, investments, reserve levels,
capital levels relative to operations, the nature and amount of collateral for
loans, the establishment of branches, mergers and consolidations and the payment
of dividends. These laws and regulations are intended to protect our depositors.
Any change in applicable laws or regulations may have a material effect on our
business and prospects, and legislative and policy changes may affect our
operations. We cannot predict the nature or the extent of the effects on our
business and earnings that fiscal or monetary policies, economic controls or new
federal or state legislation may have in the future.
The following references to statutes and regulations affecting us and
the banks are brief summaries only and do not claim to be complete and are
qualified in their entirety by reference to the statutes and regulations.
6
RECENT LEGISLATION
In 2001, Congress enacted the Uniting and Strengthening America by
Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of
2001 (the "USA PATRIOT Act"). The USA PATRIOT Act is designed to deny terrorists
and criminals the ability to obtain access to the United States financial
system, and has significant implications for depository institutions, brokers,
dealers and other businesses involved in the transfer of money. The USA PATRIOT
Act mandates or will require financial services companies to implement
additional policies and procedures with respect to, or additional measures
designed to address, any or all of the following matters, among others: money
laundering, terrorist financing, identifying and reporting suspicious activities
and currency transactions, and currency crimes.
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 a company's chief executive officer and chief financial
officer to certify financial statements; (ii) prohibiting trading of securities
by officers and directors during periods in which certain employee benefit plans
are prohibited from trading; (iii) requiring a company's chief executive officer
and chief financial officer to forfeit salary and bonuses, including profits on
the sale of company securities, in certain situations; and (iv) protecting
whistleblowers and informants; d) Expansion of power of the audit committee,
including the requirements that the audit committee: (i) have direct control of
the engagement of the outside auditor; (ii) be able to hire and fire the
auditor, and (iii) approve all non-audit services; e) Expanded disclosure
requirements, including accelerated reporting of stock transactions by insiders
and the prohibition of most loans to directors and executive officers of
non-financial institutions; mandatory disclosure by analysts of potential
conflicts of interest; and f) a range of enhanced penalties for fraud and other
violations.
The earnings and business of Merchants and Manufacturers Bancorporation
and its bank subsidiaries also are affected by the general economic and
political conditions in the United States and abroad and by monetary and fiscal
policies of various federal agencies. The Federal Reserve Board impacts the
competitive conditions under which we operate by determining the cost of funds
obtained from money market sources for lending and investing and by exerting
influence on interest rates and credit conditions. In addition, legislative and
economic factors can be expected to have an ongoing impact on the competitive
environment within the financial services industry. The impact of fluctuating
economic conditions and federal regulatory policies on the future profitability
of our organization cannot be predicted with certainty.
BANK HOLDING COMPANY REGULATION
We are a bank holding company registered under the Bank Holding Company
Act of 1956, as amended. Under the Bank Holding Company Act, we are subject to
periodic examination by the Federal Reserve and are required to file periodic
reports of our operations and such additional information as the Federal Reserve
may require.
Investments and Activities. A bank holding company must obtain approval
from the Federal Reserve before:
- acquiring, directly or indirectly, ownership or control of any
voting shares of another bank or bank holding company if, after the acquisition,
it would own or control more than 5% of the shares of the bank or bank holding
company (unless it already owns or controls the majority of the shares);
- acquiring all or substantially all of the assets of another
bank or bank holding company; or
- merging or consolidating with another bank holding company.
The Federal Reserve will not approve any acquisition, merger or
consolidation that would have a substantially anticompetitive result unless the
anticompetitive effects of the proposed transaction are clearly outweighed by a
greater public interest in meeting the convenience and needs of the community to
be served. The Federal Reserve also considers capital adequacy and other
financial and managerial factors in reviewing acquisitions or mergers.
With certain exceptions, a bank holding company is also prohibited
from:
- acquiring or retaining direct or indirect ownership or control
of more than 5% of the voting shares of any company that is not a bank or bank
holding company; and
- engaging, directly or indirectly, in any business other than
that of banking, managing and controlling banks or furnishing services to banks
and their subsidiaries.
Bank holding companies may, however, engage in businesses found by the
Federal Reserve to be closely related to the business of banking or of managing
or controlling banks. These activities include:
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- making or servicing loans and certain types of leases;
- engaging in certain insurance and discount brokerage
activities;
- performing certain data processing services;
- acting in certain circumstances as a fiduciary or investment
or financial advisor;
- owning savings associations; and
- making investments in corporations or projects designed to
promote community welfare.
We are also authorized to engage in the expanded activities permitted
under the Gramm-Leach-Bliley Act since we elected to become a "financial holding
company" and to otherwise qualify for financial holding company status.
Finally, subject to certain exceptions, the Bank Holding Company Act
and the Change in Bank Control Act, and the Federal Reserve's implementing
regulations, require Federal Reserve approval prior to any acquisition of
"control" of a bank holding company, such as Merchants and Manufacturers. In
general, a person or company is presumed to have acquired control if it acquires
as little as 5% of the outstanding shares of a bank or bank holding company and
is conclusively determined to have acquired control if it acquires 25% or more
of the outstanding shares of a bank or bank holding company.
Source of Strength. The Federal Reserve expects us to act as a source
of financial strength and support for our bank subsidiaries and to take measures
to preserve and protect the banks in situations where additional investments in
the banks may not otherwise be warranted. The Federal Reserve may require a bank
holding company to terminate any activity or relinquish control of a non-bank
subsidiary (other than a non-bank subsidiary of a bank) upon the Federal
Reserve's determination that the activity or control constitutes a serious risk
to the financial soundness or stability of any subsidiary depository institution
of the bank holding company. Further, federal bank regulatory authorities have
additional discretion to require a bank holding company to divest itself of any
bank or non-bank subsidiary if the agency determines that divestiture may aid
the depository institution's financial condition.
Capital Requirements. The Federal Reserve uses capital adequacy
guidelines in its examination and regulation of bank holding companies and
banks. If the capital falls below minimum guideline levels, a bank holding
company, among other things, may be denied approval to acquire or establish
additional banks or non-bank businesses. The Federal Reserve's capital
guidelines establish a risk-based requirement expressed as a percentage of total
risk-weighted assets and a leverage requirement expressed as a percentage of
total assets. The risk-based requirement consists of a minimum ratio of total
capital to total risk-weighted assets of 8%, of which at least one-half must be
Tier 1 capital (which consists principally of shareholders' equity). The
leverage requirement consists of a minimum ratio of Tier 1 capital to total
assets of 3% for strong bank holding companies and for bank holding companies
that have implemented the Federal Reserve's risk based capital measure for
market risk (otherwise the minimum ratio is 4%).
The risk-based and leverage standards presently used by the Federal
Reserve are minimum requirements, and higher capital levels may be required if
warranted by the particular circumstances or risk profiles of individual banking
organizations. Further, any banking organization experiencing or anticipating
significant growth would be expected to maintain capital ratios, including
tangible capital positions, which is Tier 1 capital less all intangible assets,
well above the minimum levels.
Dividends. The Federal Reserve has issued a policy statement concerning
the payment of cash dividends by bank holding companies. The policy statement
provides that a bank holding company experiencing earnings weaknesses should not
pay cash dividends exceeding its net income or which could only be funded in
ways that weakened the bank holding company's financial health, such as by
borrowing. Also, the Federal Reserve possesses enforcement powers over bank
holding companies and their non-bank subsidiaries to prevent or remedy actions
that represent unsafe or unsound practices or violations of applicable statutes
and regulations. Among these powers is the ability to proscribe the payment of
dividends by banks and bank holding companies.
BANK REGULATIONS
Lincoln State Bank, Grafton State Bank, Franklin State Bank, Community
Bank of Oconto County and the Reedsburg Bank operate under Wisconsin state bank
charters and are subject to regulation by the Wisconsin Department of Financial
Institutions Division of Banking and the FDIC. Fortress Bank of Westby operates
under a Wisconsin state bank charter and as a member of the Federal Reserve Bank
and is therefore regulated by that agency and the Wisconsin Department of
Financial Institutions Division of Banking. The Fortress Bank of Cresco, Iowa
operates under an Iowa state bank charter and is a member of the Federal Reserve
Bank and is subject to regulation by that agency and the Iowa Division of
Banking. Fortress Bank, N.A., operates as a national banking association and is
subject to regulation by the Office of the Comptroller of the Currency. The
state banking regulators detailed above, the FDIC, the Comptroller of the
Currency, and the Federal Reserve Bank regulate or monitor all areas of the
banks' operations, including capital requirements, issuance of stock,
declaration of dividends, interest rates, deposits, record keeping,
establishment of branches, acquisitions, mergers, loans, investments, borrowing,
security devices and procedures and employee responsibility and conduct. The
regulators place limitations on activities of the banks including the issuance
of capital notes or debentures and the holding of real estate and personal
property and require the banks to maintain a certain ratio of reserves against
deposits. The regulators also require the banks to file reports annually showing
receipts and disbursements of the banks, in addition to any periodic reports
requested.
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AVAILABLE INFORMATION
We maintain our corporate website at www.mmbancorp.com and we make
available, free of charge, through this website our annual report on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to
those reports that we file with or furnish to the Securities and Exchange
Commission, as soon as reasonably practicable after we electronically file such
material with, or furnish it to, the Securities and Exchange Commission.
ITEM 2. PROPERTIES
In 2003 our corporate headquarters relocated to an office building
located in Brookfield, Wisconsin. We lease approximately 5,000 square feet from
the building's owner. At this location, we maintain our corporate operations and
personnel.
The main office of Lincoln State Bank is at located at 3131 South 13th
Street, Milwaukee, Wisconsin in a one-story building. Lincoln State Bank also
operates branch offices at 2266 South 13th Street and 5400 West Forest Home
Avenue. Both of theses offices are located in Milwaukee. Another branch of
Lincoln State Bank is located in a one-story, 1,700 square foot building at
13510 Janesville Road, Muskego, Wisconsin. While another branch of Lincoln State
Bank is located at 14000 West National Avenue, New Berlin, Wisconsin. The New
Berlin branch is approximately 7,000 square feet. In 1995 Lincoln State Bank
opened two other full-service branches one located Brookfield, Wisconsin and the
other in Pewaukee, Wisconsin. Lincoln State Bank owns all of its facilities
except the New Berlin branch and Brookfield branch which it leases from the
buildings' owners.
In addition, Lincoln State Bank operates limited hour facilities at
Villa St. Francis located at South 20th and Ohio Streets in Milwaukee, at
Clement Manor located at South 92nd Street and West Howard Avenue in Milwaukee,
at Friendship Village located at North 73rd and West Dean Road in Milwaukee, at
Stoney Creek Adult Community in Muskego, at the Milwaukee Protestant Home
located on North Downer Avenue in Milwaukee, at Forest Ridge located in Hales
Corners, Wisconsin, at the Landmark located in West Allis, Wisconsin at Deer
Creek located in New Berlin, Wisconsin and at Lexington Village located in the
City of Greenfield, Wisconsin. Lincoln State Bank leases facilities at all of
the limited hour locations.
Grafton State Bank's main office is located at 101 Falls Road, Grafton,
Wisconsin in a seven-story building. Portions of the building that are not used
by Grafton State Bank are leased to various tenants. Grafton State Bank owns the
facility. Grafton State Bank also operates two branch facilities. One branch of
Grafton State Bank is located at 112 North Port Washington Road in Grafton,
while the other is located at 524 East Green Bay Avenue in Saukville, Wisconsin.
Grafton State Bank owns the Saukville location while it leases the other branch
facility.
Franklin State Bank's main office is located in a three-story building
at 7000 South 76th Street in Franklin, Wisconsin. The bank leases 5,700 square
feet from the building's owner. The building was sold in 1999 to a group of
investors and subsequently sub-leased back to Merchants and Manufacturers.
Portions of the building that are not used by Franklin State Bank are leased to
various tenants. In 1998 Franklin State Bank opened a branch facility at 9719
South Franklin Drive in the Franklin Business Park, Franklin, Wisconsin.
Franklin State Bank owns the facility. In addition, Franklin State Bank operates
a limited hour facility at Brenwood Park, also located in Franklin. Franklin
State Bank leases its limited hour facility.
The Community Bank of Oconto County's main office is located in a
one-story building at 500 Cherry Avenue, Oconto Falls, Wisconsin. Community Bank
of Oconto County operates branch facilities at 202 East Main Street, Gillett,
Wisconsin and at 1288 East Frontage Road, in the town of Little Suamico,
Wisconsin. The Community Bank of Oconto County owns all of its facilities.
The Fortress Bank of Westby's main office is located in a two-story
building at 100 North Main Street, Westby, Wisconsin. The Fortress Bank of
Westby also operates branch offices in the Wisconsin communities of Coon Valley,
Chaseburg and West Salem. The Fortress Bank of Westby owns all of its
properties.
The Fortress Bank of Cresco's main office is located in a one-story
building at 130 North Park Place, Cresco, Iowa. The Fortress Bank of Cresco owns
its facility.
The Fortress Bank, N.A. main office is located in a two-story building
at 225 Lafayette, Houston, Minnesota. Fortress Bank, N.A. also operates a branch
office in the Minnesota community of Winona. The Fortress Bank, N.A. owns both
facilities.
The Reedsburg Bank's main office is located in a two-story building at
201 Main Street, Reedsburg, Wisconsin. The Reedsburg Bank also operates branch
offices in the Wisconsin communities of North Freedom and Lime Ridge. The
Reedsburg Bank owns all of its properties.
ITEM 3. LEGAL PROCEEDINGS
From time to time, we and our subsidiaries are party to legal
proceedings arising out of our general lending activities and other operations.
However, as of the date of this report, there are no pending legal proceedings
to which we or our subsidiaries are a party, or to which their property is
subject, which, if determined adversely to us, would individually or in the
aggregate have a material adverse effect on our consolidated financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of 2003.
9
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS
Our stock is not listed on any stock exchange or quoted on the National
Association of Securities Dealers Quotation Automated Quotation System. Our
stock has been quoted on "Pink Sheets", an inter-broker quotation medium, since
April 1993, and in the Over The Counter Bulletin Board, an electronic quotation
service. Robert W. Baird & Co., Incorporated, a regional securities and
investment banking firm headquartered in Milwaukee, Wisconsin, and Howe Barnes
Investments, Incorporated, headquartered in Chicago, Illinois, act as the market
makers for the Corporation's stock. Our stock is quoted in the "Other Stocks"
section of the Milwaukee Journal/Sentinel. Our common stock trading symbol is
"MMBI."
The following table sets forth the quarterly high and low bid prices
for the period indicated. The quotations below reflect inter-dealer prices,
without retail mark-ups, mark-downs or commissions and do not necessarily
represent actual transactions.
Quotation or Price
Quarter Ended Low Bid High Bid
- --------------------------- ------- --------
March 31, 2002 $ 24.32 $ 26.36
June 30, 2002 25.00 30.82
September 30, 2002 27.27 29.09
December 31, 2002 26.45 27.64
MARCH 31, 2003 $ 26.55 $ 28.64
JUNE 30, 2003 27.59 31.80
SEPTEMBER 30, 2003 31.27 33.18
DECEMBER 31, 2003 32.86 46.35
The approximate number of holders of record of our common stock is
1,054 as of December 31, 2003.
Holders of the our stock are entitled to receive such dividends as may
be declared from time to time by the Board of Directors from funds legally
available for such payments. Our ability to pay cash dividends is dependent
primarily on the ability of each subsidiary to pay dividends to us. The ability
of each subsidiary to pay dividends depends on its earnings and financial
condition and on compliance with banking statutes and regulations.
Quarterly dividends for the years ended December 31, 2003 and 2002 are
shown in Item 6 "Selected Financial Data."
On October 15, 2003, Merchants and Manufacturers Statutory Trust III, a
Connecticut statutory trust wholly owned by the Corporation, issued $7.5 million
of fixed rate capital securities to one accredited investor. The Trust used the
proceeds from the Capital Securities to purchase a like amount of fixed rate
junior subordinated debentures of the Corporation. The Capital Securities accrue
and pay dividends quarterly at a fixed rate equal to 8.25%. The Corporation has
fully and unconditionally guaranteed all of the obligations of the Trust. The
Capital Securities are mandatorily redeemable upon maturity of the Debentures on
October 15, 2033 or earlier as provided in the indenture with respect to the
Debentures. The Corporation has the right to redeem the Debentures on or after
October 15, 2008. The Corporation believes it has satisfied the exemption from
the securities registration requirement provided by section 4(2) of the
Securities Act of 1933 and Regulation D promulgated thereunder in this offering
since the securities were sold in a private placement to an accredited investor,
who provided representations which Merchants deemed necessary to satisfy itself
that it was an accredited investor and was purchasing for investment and not
with a view to resale in connection with a public offering.
On October 15, 2003, Merchants and Manufacturers Statutory Trust IV, a
Connecticut statutory trust wholly owned by the Corporation, issued $7.5 million
of floating rate capital securities to one accredited investor. The Trust used
the proceeds from the Capital Securities to purchase a like amount of floating
rate junior subordinated debentures of the Corporation. The Capital Securities
accrue and pay dividends quarterly at a variable rate, reset quarterly, equal to
3-month LIBOR plus 2.95%. The Corporation has fully and unconditionally
guaranteed all of the obligations of the Trust. The Capital Securities are
mandatorily redeemable upon maturity of the Debentures on October 15, 2033 or
earlier as provided in the indenture with respect to the Debentures. The
Corporation has the right to redeem the Debentures on or after October 15, 2008.
The Corporation believes it has satisfied the exemption from the securities
registration requirement provided by section 4(2) of the Securities Act of 1933
and Regulation D promulgated thereunder in this offering since the securities
were sold in a private placement to an accredited investor, who provided
representations which Merchants deemed necessary to satisfy itself that it was
an accredited investor and was purchasing for investment and not with a view to
resale in connection with a public offering.
Effective November 1, 2003, the Corporation issued approximately $12.8
million of promissory notes to certain of the shareholders of Reedsburg pursuant
to the Reedsburg acquisition. The promissory notes will mature on the fifth
anniversary of the date of issuance, and principal on the promissory notes is
due in five equal annual installments on November 1 of each year from 2004
through 2008. The promissory notes bear interest at the rate of 5.35% per year,
payable quarterly. The promissory notes are secured by an irrevocable letter of
credit issued by M&I Marshall & Ilsley Bank. The Corporation believes it has
satisfied the exemption from the securities registration requirement provided by
section 3(a)(2) of the Securities Act of 1933 since the promissory notes are
guaranteed by a bank pursuant to the irrevocable letter of credit.
10
ITEM 6. SELECTED FINANCIAL DATA
The following table summarizes our certain historical financial data.
This information is derived in part from, and should be read in conjunction
with, the our Consolidated Financial Statements presented elsewhere herein
(dollars in thousands, except per share data):
AT OR FOR THE YEAR ENDED DECEMBER 31,
2003(1) 2002(2) 2001(3) 2000 1999(3)
--------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
INCOME STATEMENT DATA:
Interest income (taxable equivalent) (4)............. $ 51,871 $ 40,421 $ 43,782 $ 43,256 $ 36,092
Interest expense..................................... 15,871 13,106 19,798 21,718 15,863
---------- --------- -------- -------- --------
Net interest income.................................. 36,000 27,315 23,984 21,538 20,229
Provision for loan losses............................ 1,311 1,156 1,125 1,239 974
---------- --------- -------- -------- --------
Net interest income after provision for loan losses 34,689 26,159 22,859 20,299 19,255
Noninterest income.................................. 11,163 6,127 4,682 4,395 3,815
Merger related expenses............................. -- -- -- 296 490
Noninterest expense................................. 32,736 22,139 18,554 16,757 15,793
---------- --------- -------- -------- --------
Income before provision for income taxes............ 13,116 10,147 8,987 7,641 6,787
Provision for income taxes.......................... 4,067 3,244 2,733 2,267 2,129
Less taxable equivalent adjustment.................. 821 518 546 606 594
---------- --------- -------- -------- --------
Net income.......................................... $ 8,228 $ 6,385 $ 5,708 $ 4,768 $ 4,064
========== ========= ======== ======== ========
DIVIDENDS:
Common stock........................................ $ 2,213 $ 1,790 $ 1,802 $ 1,599 $ 1,432
Dividend payout ratio............................... 26.90% 28.03% 31.57% 33.54% 35.24%
PER SHARE DATA: (5)
Net income-Basic ................................... $ 2.58 $ 2.30 $ 2.05 $ 1.70 $ 1.44
Net income-Diluted ................................. 2.56 2.29 2.04 1.69 1.41
Book value.......................................... 24.04 21.92 19.07 17.50 16.18
BALANCE SHEET DATA:
Investment securities............................... $ 156,597 $ 130,125 $ 66,143 $ 78,847 $ 83,997
Loans, net.......................................... 847,938 657,775 477,332 473,161 395,533
Total assets........................................ 1,144,523 909,095 608,020 600,460 533,268
Total deposits...................................... 911,948 729,456 477,785 458,051 430,225
Short-term borrowings............................... 34,007 18,088 17,046 43,928 14,879
Long-term borrowings................................ 59,528 72,322 55,800 44,700 38,900
Company-obligated mandatorily redeemable preferred
securities......................................... 35,000 10,000 -- -- --
Total stockholders' equity.......................... 79,974 69,329 52,929 48,515 45,735
EARNINGS RATIOS:
Return on average total assets ..................... 0.86% 0.99% 0.95% 0.84% 0.81%
Return on average total stockholder' equity ........ 11.29 11.55 11.15 10.18 9.00
Net interest margin (6)............................. 4.03 4.48 4.21 4.05 4.34
Efficiency ratio (7)................................ 70.64 67.24 65.98 67.33 69.44
ASSET QUALITY RATIOS:
Allowance for loan losses to loans.................. 1.07 1.15 1.15 1.05 1.01
Nonaccrual loans to loans (8)....................... 0.62 0.48 0.92 0.38 0.56
Allowance for loan losses to nonperforming loans (8) 172.96 239.24 125.60 276.03 179.79
Nonperforming assets to total assets (9)............ 0.63 0.61 0.75 0.32 0.44
Net loan charge-offs to average loans............... 0.14 0.21 0.12 0.06 0.11
CAPITAL RATIOS:
Total stockholders' equity to total assets.......... 6.99 7.63 8.71 8.08 8.58
Total capital to risk-weighted assets ratio......... 10.25 10.71 11.53 11.19 12.42
Tier 1 capital to risk-weighted assets ratio........ 9.24 9.63 10.43 10.14 11.44
Tier 1 capital to average assets ratio.............. 8.02 9.41 8.72 8.25 9.44
1) Year-end data for 2003 includes Reedsburg Bancorporation, Inc. and
subsidiaries acquired by Merchants on November 1, 2003.
2) Year-end data for 2002 includes Fortress Bancshares, Inc. and subsidiaries
acquired by Merchants on November 30, 2002.
3) Restated to reflect the January 16, 2001 acquisition of CBOC, Inc. and the
December 31, 1999 acquisition of Pyramid Bancorp; both acquisitions were
accounted for as pooling-of-interests.
4) Taxable-equivalent adjustments to interest income involve the conversion of
tax-exempt sources of interest income to the equivalent amounts of interest
income that would be necessary to derive the same net return if the
investments had been subject to income taxes. A 34% incremental income tax
rate, consistent with our historical experience, is used in the conversion of
tax-exempt interest income to a tax-equivalent basis.
5) All per share information presented in this report has been retroactively
restated to give effect to the 10% stock dividend declared in November 2003,
as if each occurred as of January 1, 1999.
6) Net interest margin is the ratio of net interest income (expressed on a
tax-equivalent basis) to average interest-earning assets.
7) Efficiency ratio is the ratio of noninterest expense to the sum of net
interest income and noninterest income.
8) Nonperforming loans consist of nonaccrual loans and certain loans with
restructured terms.
9) Nonperforming assets consist of nonperforming loans and other real estate.
11
Effective January 1, 2002, Merchants adopted Statement of Financial
Accounting Standards ("SFAS") No. 142 "Goodwill and Other Intangible Assets".
SFAS No. 142 changed the accounting for goodwill from a model that required
amortization of goodwill, supplemented by impairment tests, to an accounting
model that is based solely upon impairment tests.
A reconciliation of Merchants Consolidated Statements of Earnings for
each of the five years ending December 31, 2001 from amounts reported to amounts
exclusive of goodwill amortization is shown below.
2001(1) 2000 1999(1)
------- ------- -------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income as reported ........................... $ 5,708 $ 4,768 $ 4,064
Add: goodwill amortization, net of tax............ 46 46 46
------- ------- -------
Adjusted net income............................... $ 5,754 $ 4,814 $ 4,018
======= ======= =======
Basic earnings per share as reported.............. $ 2.25 $ 1.87 $ 1.58
Add: goodwill amortization, net of tax............ 0.02 0.02 0.02
------- ------- -------
Adjusted basic earnings per share................. $ 2.27 $ 1.89 $ 1.60
======= ======= =======
Diluted earnings per share as reported............ $ 2.24 $ 1.86 $ 1.55
Add: goodwill amortization, net of tax............ 0.02 0.02 0.02
------- ------- -------
Adjusted diluted earnings per share............... $ 2.26 $ 1.88 $ 1.57
======= ======= =======
- ------------------
(1) Restated to reflect the January 16, 2001 acquisition of CBOC, Inc. and the
December 31, 1999 acquisition of Pyramid Bancorp both acquisitions were
accounted for as pooling-of-interests.
QUARTERLY FINANCIAL DATA
The following table sets forth our selected quarterly financial data.
The fourth quarter 2003 data includes Reedsburg Bancorporation, Inc. and
subsidiaries acquired by Merchants on November 1, 2003.
THREE MONTHS ENDED 2003 THREE MONTHS ENDED 2002
DECEMBER SEPTEMBER JUNE MARCH DECEMBER SEPTEMBER JUNE MARCH
-------- --------- -------- -------- -------- ----------------------------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
Interest income
(taxable-equivalent) (1) $ 13,840 $ 12,657 $ 12,469 $ 12,905 $ 11,106 $ 9,849 $ 9,753 $9,713
Interest expense 4,202 3,770 3,905 3,994 3,488 3,094 3,140 3,384
-------- --------- -------- -------- -------- --------- ------- ------
Net interest income 9,638 8,887 8,564 8,911 7,618 6,755 6,613 6,329
Provision for loan losses 297 372 340 302 312 282 282 280
Noninterest income 2,787 3,043 3,111 2,222 2,092 1,401 1,455 1,179
Noninterest expense 8,954 8,178 8,005 7,599 6,550 5,157 5,144 5,288
-------- --------- -------- -------- -------- --------- ------- ------
Income before taxes 3,174 3,380 3,330 2,232 2,848 2,717 2,642 1,940
Provision for income taxes 867 1,083 1,088 1,029 956 863 844 581
Less taxable-equivalent
adjustment 229 194 191 207 147 116 124 131
-------- --------- -------- -------- -------- --------- ------- -------
Net income $ 2,078 $ 2,103 $ 2,051 $ 1,996 $ 1,745 $ 1,738 $ 1,674 $ 1,228
======== ========= ======== ======== ======== ========= ======= =======
Basic earnings per share $ 0.64 $ 0.66 $ 0.65 $ 0.63 $ 0.61 $ 0.63 $ 0.61 $ 0.45
Diluted earnings per share $ 0.63 $ 0.65 $ 0.65 $ 0.63 $ 0.60 $ 0.63 $ 0.61 $ 0.45
Dividends per share $ 0.17 $ 0.17 $ 0.17 $ 0.17 $ 0.17 $ 0.17 $ 0.15 $ 0.15
- ------------------
(1) Taxable-equivalent adjustments to interest loans involve the conversion
of tax-exempt sources of interest income to the equivalent amounts of
interest income that would be necessary to derive the same net return
if the investments had been subject to income taxes. A 34% incremental
income tax rate, consistent with our historical experience, is used in
the conversion of tax-exempt interest income to a tax-equivalent basis.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The following presents management's discussion and analysis of our
financial condition and results of operations as of the dates and for the
periods indicated. You should read this discussion in conjunction with our
"Selected Consolidated Financial Data", our consolidated financial statements
and the accompanying notes, and the other financial data contained elsewhere in
this report.
12
On November 1, 2003, we acquired Reedsburg Bancorporation, Inc.
("Reedsburg") and its wholly-owned subsidiary, the Reedsburg Bank. The purchase
price for Reedsburg was $36.0 million including $17.8 million in cash, $12.8
million in promissory notes and 146,800 shares of common stock valued at $5.4
million based on the average price over the contractual pricing period. The
transaction was recorded as a purchase. Application of purchase accounting
requires the inclusion of Reedsburg and the Reedsburg Banks' operating results
in the consolidated financial statements from the date of the acquisition.
Accordingly Reedsburg and the Reedsburg Banks' operating results are included in
the consolidation results of operations since November 1, 2003.
On November 30, 2002, we acquired Fortress Bancshares, Inc.
("Fortress") and its wholly-owned subsidiaries, Fortress Bank of Westby,
Wisconsin, Fortress Bank of Cresco, Iowa and Fortress Bank, N.A. headquartered
in Houston, Minnesota ("Fortress Banks"). The purchase price for Fortress was
$21.5 million including $9.5 million in cash and 390,000 shares of common stock
valued at $11.7 million based on the average price over the contractual pricing
period. The transaction was recorded as a purchase. Application of purchase
accounting requires the inclusion of Fortress and the Fortress Banks' operating
results in the consolidated financial statements from the date of the
acquisition. Accordingly Fortress and the Fortress Banks' operating results are
included in the consolidation results of operations since November 30, 2002.
This discussion contains forward-looking statements that involve risks
and uncertainties. Our actual results could differ significantly from those
anticipated in these forward-looking statements as a result of various factors.
Important factors that could cause actual results to differ materially from the
results anticipated or projected include, but are not limited to, the following:
(1) expected cost savings and synergies from our recently completed merger of
Reedsburg Bancorporation, Inc., might not be realized within the expected time
frame; (2) the credit risks of lending activities, including changes in the
level and direction of loan delinquencies and write-offs; (3) changes in
management's estimate of the adequacy of the allowance for loan losses; (4)
competitive pressures among depository institutions; (5) interest rate movements
and their impact on customer behavior and our net interest margin; (6) the
impact of repricing and competitors' pricing initiatives on loan and deposit
products; (7) our ability to adapt successfully to technological changes to meet
customers' needs and developments in the market place; (8) our ability to access
cost-effective funding; (9) changes in financial markets and general economic
conditions; (10) new legislation or regulatory changes; and (11) changes in
accounting principles, policies or guidelines.
Certain statements contained in or incorporated by reference into this
report constitute forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934. We intend such forward-looking statements to be covered by the safe harbor
provisions for forward-looking statements contained in the Private Securities
Litigation Reform Act of 1995, and are including this statement for purposes of
invoking these safe harbor provisions. You can identify these statements from
our use of the words "may," "will," "should," "expect," "plan," "intend,"
"anticipate," "could," "believe," "estimate," "predict," "objective,"
"potential," "projection," "forecast," "goal," "project," "anticipate," "target"
and similar expressions. These forward-looking statements may include, among
other things:
- statements relating to projected growth, anticipated
improvements in earnings, earnings per share and other financial performance
measures, and management's long term performance goals;
- statements relating to the anticipated effects on results of
operations or financial condition from expected developments or events;
- statements relating to our business and growth strategies,
including potential acquisitions; and
- any other statements which are not historical facts.
Such forward-looking statements involve known and unknown risks,
uncertainties and other important factors that could cause our actual results,
performance or achievements, or industry results, to differ materially from our
expectations of future results, performance or achievements expressed or implied
by such forward-looking statements. Although we believe that the expectations
reflected in any forward-looking statements are reasonable, we cannot guarantee
future events or results. Except as may be required under federal law, we
undertake no obligation to update publicly any forward-looking statements for
any reason, even if new information becomes available or other events occur. In
addition, our past results of operations do not necessarily indicate our future
results.
RESULTS OF OPERATIONS
Net income for 2003 was $8.2 million or $2.56 per diluted share, up
from $6.4 million or $2.29 per diluted share in 2002 and $5.7 million or $2.04
per diluted share in 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. Net interest income is the most significant component of earnings.
Taxable-equivalent adjustments to interest income involve the conversion of
tax-exempt sources of interest income to the equivalent amounts of interest
income that would be necessary to derive the same net return if the investments
had been subject to income taxes on a fully tax equivalent basis. A 34%
incremental income tax rate, consistent with our historical experience, is used
in the conversion of tax-exempt interest income to a taxable-equivalent basis.
13
Net interest income on a fully tax equivalent basis increased to $36.0
million in 2003, compared with $27.3 million in 2002 and $24.0 million in 2001.
In 2003, net interest income increased $8.7 million due to organic growth in
earning assets, the additional growth from the Reedsburg acquisition and the
full year growth impact from the Fortress acquisition partially offset by a
lower net interest margin versus the prior year. In 2002, net interest income
increased due to organic growth in earning assets as well as the additional
growth from the Fortress acquisition. The net interest margin, on a fully
tax-equivalent basis, was 4.03% for 2003, compared with 4.48% and 4.21% the
preceding two years. The decreasing rate environment that began in 2002, along
with the incremental effect of the acquisitions resulted in lower margins in
2003.
The following table sets forth, for the periods indicated, information
regarding the average balances of assets and liabilities and the total dollar
amount of interest income from average interest-earning assets and interest
expense on average interest-bearing liabilities, resulting yields, interest rate
spread, ratio of interest-earning assets to interest-bearing liabilities, and
net interest margin. Average balances have been calculated using average daily
balances during such periods (dollars in thousands):
AT OR FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------
2003 2002 2001
---- ---- ----
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
------- -------- ------- -------- -------- ------- ------- -------- -------
(DOLLARS IN THOUSANDS)
ASSETS
Loans,net (1)(2) $724,469 $ 45,184 6.24% $507,142 $ 35,637 7.03% $477,412 $ 38,402 8.04%
Loans exempt from federal income
taxes (3) 3,481 279 8.01% 1,573 120 7.63% 1,656 150 9.06%
Taxable investment securities (4) 42,486 2,080 4.90% 20,240 893 4.41% 21,653 1,259 5.81%
Mortgage-related securities (4) 69,283 1,988 2.87% 39,226 2,050 5.23% 31,638 1,985 6.27%
Investment securities exempt
from federal income taxes
(3)(4) 36,909 2,136 5.79% 21,201 1,403 6.62% 21,311 1,455 6.83%
Other securities 16,647 204 1.23% 19,816 318 1.60% 15,377 531 3.45%
-------- -------- -------- -------- -------- --------
Interest earning assets 893,275 51,871 5.81% 609,198 40,421 6.64% 569,047 43,782 7.69%
-------- -------- --------
Non interest earning assets 67,559 38,600 31,791
-------- -------- --------
Average assets $960,834 $647,798 $600,838
======== ======== ========
LIABILITIES AND STOCKHOLDERS'
EQUITY
NOW deposits $ 64,578 400 0.62% $ 37,849 334 0.88% $ 32,715 585 1.79%
Money market deposits 230,298 3,320 1.44% 108,247 1,857 1.72% 87,213 3,168 3.63%
Savings deposits 90,723 623 0.69% 78,357 843 1.08% 72,209 1,224 1.70%
Time deposits 283,156 7,316 2.58% 213,791 7,261 3.40% 209,297 10,715 5.12%
Short-term borrowings 25,493 594 2.33% 20,802 502 2.41% 24,723 1,260 5.10%
Long-term borrowings 67,235 2,463 3.66% 55,692 2,244 4.03% 53,296 2,846 5.34%
Company-obligated mandatorily
redeemable preferred
securities 19,073 1,155 6.06% 1,361 65 4.78% -- -- --
-------- -------- -------- -------- -------- --------
Interest bearing liabilities 780,556 15,871 2.03% 516,099 13,106 2.54% 479,453 19,798 4.13%
-------- -------- -------- -------- -------- --------
Demand deposits and other non
interest bearing liabilities 107,404 76,400 70,197
Stockholders' equity 72,874 55,299 51,188
-------- -------- --------
Average liabilities and
stockholders' equity $960,834 $647,798 $600,838
======== ======== ========
Net interest spread (5) $ 36,000 3.78% $ 27,315 4.10% $ 23,984 3.56%
Net interest earning assets $112,719 $ 93,099 $ 89,594
Net interest margin on a fully
tax equivalent basis (6) 4.03% 4.48% 4.21%
Net interest margin (6) 3.94% 4.40% 4.12%
Ratio of average
interest-earning assets to
average interest-bearing
liabilities 1.14 1.18 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.
14
The following table sets forth the effects of changing interest rates
and volumes of interest earning assets and interest bearing liabilities on our
net interest income. Information is provided with respect to (i) effect on net
interest income attributable to changes in volume (changes in volume multiplied
by prior rate), (ii) effects on net interest income attributable to changes in
rate (changes in rate multiplied by prior volume), (iii) changes in a
combination of rate and volume (changes in rate multiplied by changes in
volume), and (iv) net change:
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
2003 VS. 2002 2002 VS. 2001
------------- -------------
INCREASE/(DECREASE) INCREASE/(DECREASE)
DUE TO DUE TO
------ ------
TOTAL TOTAL
VOLUME INCREASE VOLUME INCREASE
VOLUME RATE & RATE (DECREASE) VOLUME RATE & RATE (DECREASE)
------- --------- --------- ---------- ------- ------- -------- ----------
(DOLLARS IN THOUSANDS)
Interest-Earning Assets:
Loans, net (1) $15,271 ($ 4,007) ($ 1,717) $ 9,547 $2,391 ($ 4,854) ($ 302) ($ 2,765)
Loans exempt from federal income
taxes (2) 146 6 7 159 (7) (24) 1 (30)
Taxable investment securities 981 98 108 1,187 (82) (304) 20 (366)
Mortgage-related securities 1,570 (924) (708) (62) 477 (332) (80) 65
Investment securities exempt from
federal income taxes (2) 1,039 (176) (130) 733 (7) (45) -- (52)
Other securities (51) (75) 12 (114) 153 (284) (82) (213)
------- --------- -------- ---------- ------ -------- -------- ----------
Total interest-earning assets $18,956 ($ 5,078) ($ 2,428) $ 11,450 $2,925 ($ 5,843) ($ 443) ($ 3,361)
======= ========= ======== ========== ====== ======== ======== ==========
Interest-Bearing Liabilities:
NOW deposits $ 236 ($ 100) ($ 70) $ 66 $ 91 ($ 296) ($ 46) ($ 251)
Money market deposits 2,093 (296) (334) 1,463 764 (1,672) (403) (1,311)
Savings deposits 133 (305) (48) (220) 104 (447) (38) (381)
Time deposits 2,356 (1,737) (564) 55 230 (3,607) (77) (3,454)
Short-term borrowings 113 (17) (4) 92 (200) (663) 105 (758)
Long-term borrowings 465 (204) (42) 219 128 (699) (31) (602)
Company-obligated mandatorily
redeemable preferred securities 846 17 227 1,090 -- -- 65 65
------- --------- -------- ---------- ------ -------- -------- ----------
Total interest-bearing liabilities $ 6,242 ($ 2,642) ($ 835) $ 2,765 $1,117 ($ 7,384) ($ 425) ($ 6,692)
======= ========= ======== ========== ====== ======== ======== ==========
Net change in net interest income $ 8,685 $ 3,331
========== ==========
- ------------------------------
(1) Interest earned on loans includes loan fees (which are not material in
amount) and interest income which has been received from borrowers
whose loans were removed from nonaccrual during the period indicated.
(2) Taxable-equivalent adjustments were made using a 34% corporate tax rate
for all years presented in calculating interest income and yields.
PROVISION FOR LOAN LOSSES
During 2003, we made a provision of $1.3 million to the allowance for
loan losses, as compared to a provision of $1.2 million in 2002 and $1.1 million
in 2001. The increased 2003 provision reflects the growth in the overall loan
portfolio especially in higher risk categories of commercial and commercial real
estate loans and management's assessment of general economic conditions. Net
loan charge-offs for 2003 were $1.1 million unchanged from the $1.1 million of
net charge-offs in 2002. This compares to net charge-offs of $572,000 in 2001.
Although we consider the allowance for loan losses to be adequate to provide for
potential losses in the loan portfolio, there can be no assurance that losses
will not exceed estimated amounts or that the subsidiary banks will not be
required to make further and possibly larger additions to their allowance in the
future.
15
NON-INTEREST INCOME
Total non-interest income increased $5.0 million in 2003 and $1.4
million in 2002. The increase was primarily from growth in mortgage banking
revenues and service charges collected on loans to which were the result of
higher origination volumes generated in the lower rate environment.
Additionally, non-interest income increased during 2003 from growth in tax,
brokerage and insurance commissions due to growth in sales and the acquisitions
of KCW and IFS during 2003. The growth in non-interest income was also
positively impacted by the completed acquisitions of Fortress and Reedsburg. The
increase in 2002 was primarily from growth in mortgage banking revenues due to
higher origination volumes generated in the lower rate environment as well as
growth in non-interest income from the acquisition of Fortress. The composition
of non-interest income is shown in the following table (dollars in thousands).
For the Year Ended December 31,
2003 2002 2001
------- ------ ------
Service charges on deposit accounts $ 2,649 $1,625 $1,302
Service charges on loans 2,565 1,260 722
Securities gains, net 360 111 88
Gain on sale of loans, net 1,859 695 332
Net gain on sale of premises 2 360 557
Other 3,728 2,076 1,681
------- ------ ------
Total non-interest income $11,163 $6,127 $4,682
======= ====== ======
Service charge income on deposit accounts increased $1.0 million in
2003 and $323,000 in 2002. The increases in both years continued to reflect the
benefits from growth in deposit accounts, both organic and through acquisition
and fee structure modifications company wide.
Service charges on loans increased $1.3 million from $1.3 million in
2002 to $2.6 million in 2003. The increase is due directly to the amount of
mortgage and commercial loans refinanced and originated in 2003. The increase in
loan fees from 2001 to 2002 can be attributed to the high volume of new loans
generated and refinanced in 2002.
We recorded a net gain of $360,000 on the sale of $15.1 million of
securities in 2003, a gain of $111,000 on the sale of $7.7 million of securities
in 2002 and a gain of $88,000 on the sale of $4.2 million of securities in 2001.
The proceeds from the sale of the investments were used to fund loan demand or
pay off debt.
We recorded $1.9 million in gains on the sale of loans in 2003,
compared to $695,000 in 2002 and $332,000 in 2001. All-time low market interest
rates led to higher secondary market sales of 15 and 30 year residential
mortgage loans in 2003 and 2002. Higher interest rates in 2001 resulted in
reduced opportunities to sell loans. It is anticipated that gains on sales of
loans will be significantly less in 2004 as mortgage interest rates have begun
to rise.
In each year, 2000 and 1999, we sold a banking facility and
subsequently leased it back from the new owners. The 2000 transaction resulted
in an immediate gain of $786,000 while the 1999 transaction resulted in an
immediate gain of $566,000 at the time of the sale. The remaining portion of the
gains have been recognized monthly over the terms of the leases. During 2002,
$360,000 was accreted into income related to the 2000 transaction. During 2001,
$201,000 was accreted into income related to the 1999 transaction.
Other income in 2003 included commissions on tax, investment and
insurance products of $1.2 million in revenues generated from the acquisitions
of IFS in April 2003 and KCW in May 2003.
NON-INTEREST EXPENSE
Non-interest expense increased $10.6 million (47.9%) for the year ended
December 31, 2003, and increased $3.6 million (19.3%) for the year ended
December 31, 2002. In 2003, the acquisitions of Reedsburg, IFS and KCW and the
full year impact of the previous year's fourth quarter acquisition of Fortress
contributed to the rise in expenses. In 2002, the Fortress acquisition also
contributed to the rise in expenses. The major components of non-interest
expense are shown in the following table (dollars in thousands).
For the Year Ended December 31,
2003 2002 2001
------- ------- -------
Salaries and employee benefits $18,655 $12,439 $10,533
Premises and equipment 4,079 3,419 3,075
Data processing fees 1,193 1,261 951
Marketing and business development 1,509 894 878
Federal deposit insurance premiums 129 102 99
Other 7,171 4,024 3,018
------- ------- -------
Total noninterest expense $32,736 $22,139 $18,554
======= ======= =======
16
Salaries and employee benefits increased $6.2 million in 2003 primarily
due to acquisitions. Also impacting salaries and employee benefits in 2003 were
additional staff hires particularly in the business development and acquisition
support staff areas, higher benefit costs, changes in personnel and normal pay
raises. Salaries and employee benefits increased $1.9 million in 2002. The
increase was due to normal pay increases and staff additions in the loan
generation and loan services area.
Premises and equipment expense increased $660,000 in 2003 and $344,000
in 2002. The lease payments, depreciation, maintenance of our facilities and
acquisitions contributed to the increase.
Data processing fees decreased $68,000 in 2003 and increased $310,000
in 2002. The 2003 decrease was due to the efficiencies gained from a larger
organization. The 2002 increase was due to the increased reliance on outside
consultants for information technology issues as well as equipment and software
upgrades.
Marketing and business development costs increased $615,000 in 2003,
and increased $16,000 in 2002. The increase in 2003 can be attributed to the
development of a marketing program associated with the non-insured investment
products, advertising of deposit products and effects of the acquisitions.
Federal deposit insurance fees represent premiums paid for FDIC
insurance on the banks' deposits. The FDIC assesses the banks based on the level
of deposits. In 2003 the premiums paid amounted to $129,000 compared to $102,000
in 2002 and $99,000 in 2001.
Other expenses increased $3.1 million in 2003 and $1.0 million in 2002.
The increases in 2003 are the result of implementing our strategic plan,
training our employees sales techniques, maintaining our internet banking
program, various consulting fees and legal fees. The acquisitions completed in
2003 and 2002 also impacted other expenses.
INCOME TAXES
Our consolidated income tax rate varies from statutory rates
principally due to interest income from tax-exempt securities and loans and
interest income on assets held in the portfolios of M&M Lincoln Investment
Corporation, GSB Investments, CBOC Investments, Westby Investment Company and
Reedsburg Investment Corp. for which state taxes have not been imposed.
Currently, the Wisconsin Department of Revenue is conducting audits at some of
our investment subsidiaries which may result in state taxes being imposed,
including prior periods. Our recorded provisions for income taxes totaled $4.1
million in 2003, $3.2 million in 2002 and $2.7 million in 2001. The
corresponding effective tax rate for the same years were 33.1%, 33.7% and 32.4%.
17
LOANS RECEIVABLE
Loans receivable (net of allowance) increased $190.1 million, or 28.9%,
from $657.8 million at December 31, 2002, to $847.9 million at December 31,
2003. The 2003 loan growth can be attributed to both organic growth as well as
acquisition growth associated with the Reedsburg acquisition. At the time of the
acquisition, the Reedsburg Bank had $97.2 million of loans. Low market interest
rates offered on single-family residential loans resulted in customers
refinancing their adjustable rate mortgages. These adjustable rate mortgages
were replaced with lower rate fifteen and thirty-year mortgages. We do not
retain the long-term mortgages, choosing to sell these loans on the secondary
market. During 2003 we sold $181.3 million of single-family residential loans
compared to $108.8 million in 2002. Loans receivable consist mainly of
commercial business loans secured by business assets, real estate and guarantees
as well as mortgages secured by residential properties located in our primary
market area. The following table shows the composition of our loan portfolio on
the dates indicated:
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
2003 2002 2001 2000 1999
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
First mortgage:
Conventional single-family residential $113,479 $ 98,075 $ 78,377 $ 98,730 $ 78,278
Commercial and multifamily residential 283,433 198,250 180,102 173,107 148,856
Construction 47,894 32,995 34,744 47,767 32,882
Farmland 43,676 20,847 7,312 7,027 6,363
-------- -------- -------- -------- --------
488,482 350,167 300,535 326,631 266,379
Commercial business loans 294,645 246,787 140,671 110,291 97,835
Consumer and installment loans 51,886 51,883 32,401 33,327 23,487
Home equity loans 14,664 9,492 6,140 4,545 7,094
Other 7,397 7,109 3,148 3,377 3,788
-------- -------- -------- -------- --------
368,592 315,271 182,360 151,540 133,200
Less:
Allowance for loan losses 9,136 7,663 5,563 5,010 4,046
-------- -------- -------- -------- --------
$847,938 $657,775 $477,332 $473,161 $395,533
======== ======== ======== ======== ========
The following table presents information as of December 31, 2003
regarding first mortgage and commercial business loan maturities and contractual
principal repayments of loans during the periods indicated. Loans with
adjustable interest rates are shown maturing in the year of their contractual
maturity. Also provided are the amounts due after one year classified according
to the sensitivity to changes in interest rates.
AFTER ONE BUT
WITHIN FIVE AFTER FIVE
WITHIN ONE YEAR YEARS YEARS TOTAL
--------------- ------------- ---------- ---------
(DOLLARS IN THOUSANDS)
Commercial business loans $173,237 $ 116,836 $ 4,572 $ 294,645
First mortgage loans 228,288 247,233 12,961 488,482
-------- --------- ------- ---------
$401,525 $ 364,069 $17,533 $ 783,127
======== ======== ======= =========
Loans maturing after one year with:
Fixed interest rates $ 345,893 $17,516
Variable interest rates 18,176 17
--------- -------
$ 364,069 $17,533
========= =======
ALLOWANCE FOR LOAN LOSSES
Management believes the allowance for loan losses accounting policy is
critical to the portrayal and understanding of our financial condition and
results of operations. As such, selection and application of this "critical
accounting policy" involves judgments, estimates, and uncertainties that are
susceptible to change. In the event that different assumptions or conditions
were to prevail, and depending upon the severity of such changes, the
possibility of materially different financial condition or results of operations
is a reasonable likelihood.
18
The allowance for loan losses is maintained at an amount that we
believe will be adequate to absorb probable losses on existing loans, based on
an evaluation of the collectibility of loans and prior loss experience. This
evaluation also takes into consideration such factors as changes in the nature
and volume of the loan portfolio, the value of underlying collateral, overall
portfolio quality, review of specific problem loans, and current economic
conditions that may affect the borrower's ability to pay. While management uses
the best information available to make its evaluation, future adjustments to the
allowance may be necessary if there are significant changes in economic
conditions. In addition, as an integral part of their examination process
regulatory agencies periodically review our allowance for loan losses and may
require us to make additions to the allowance based on their evaluation of
information available at the time of their examinations. The allowance for loan
losses increased from $7.7 million at December 31, 2002, to $9.1 million at
December 31, 2003. The 2003 allowance for loan losses growth can be attributed
to both organic growth as well as acquisition growth associated with the
Reedsburg acquisition. At the time of the acquisition, the Reedsburg Bank had
$1.2 million allowance for loan losses. The remaining increase was due to the
growth in the loan portfolio, the general uncertainty regarding economic
conditions and the increase in non-performing loans and charge-offs recorded in
2003 and 2002. The ratio of the allowance for loan losses to total loans was
1.07% for 2003 and 1.15% for 2002. Based on the present economic environment and
our analysis of the financial condition of the borrowers, we consider the
present allowance to be appropriate and adequate to cover probable losses
inherent in the loan portfolio, however, changes in future economic conditions
and in the financial condition of borrowers cannot be predicted at this time.
Deterioration in such conditions could result in increases in charge-offs or
adversely classified loans and accordingly, in additional provisions for loan
losses.
The balance of the allowance for loan losses and actual loss experience
for the last five years is summarized in the following table:
AT OR FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------
2003 2002 2001 2000 1999
------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
Balance at beginning of year $ 7,663 $ 5,563 $ 5,010 $ 4,047 $ 3,486
Charge-offs:
Conventional single-family mortgage residential 84 1 6 91 48
Commercial and multifamily residential 69 647 -- -- --
Commercial business loans 532 99 210 107 290
Consumer and installment loans 746 429 379 92 94
------- ------- ------- ------- -------
Total charge-offs 1,431 1,176 595 290 432
Recoveries (390) (112) (23) (14) (19)
------- ------- ------- ------- -------
Net charge-offs 1,041 1,064 572 276 413
Increase due to acquisition 1,203 2,008 -- -- --
Provisions charged to operations 1,311 1,156 1,125 1,239 974
------- ------- ------- ------- -------
Balance at end of year $ 9,136 $ 7,663 $ 5,563 $ 5,010 $ 4,047
======= ======= ======= ======= =======
Ratios:
Net charge-offs to average loans outstanding 0.14% 0.21% 0.11% 0.06% 0.11%
Net charge-offs to total allowance 11.39% 13.88% 10.28% 5.51% 10.21%
Allowance to year end gross loans outstanding 1.07% 1.15% 1.15% 1.05% 1.01%
NON-PERFORMING AND DELINQUENT LOANS
When in the opinion of management, serious doubt exists as to the
collectability of a loan, the loan is placed on non-accrual status and interest
previously accrued but unpaid is deducted from interest income. We do not
recognize income on any loans past due 90 days or more. In 2003, $613,000 of
additional income on nonaccrual loans would have been reported if the loans had
been current in accordance with their original terms and had been outstanding
throughout the year. Additionally, in 2003 we recorded $368,000 of interest
income on non-accrual loans.
Nonperforming assets increased by $1.6 million from $5.6 million at
December 31, 2002 to $7.3 million at December 31, 2003. The increase in
non-performing assets can be attributed to the increase in nonaccrual loans,
primarily consumer loans, which was partially offset by the sale of property
previously held in other real estate owned. Other real estate owned is
principally comprised of commercial properties acquired in partial or total
satisfaction of problem loans. Management believes that losses on non-performing
assets will be minimal due to the collateral position in each situation.
19
The following table summarizes non-performing assets on the dates
indicated (dollars in thousands):
AT DECEMBER 31,
---------------
2003 2002 2001 2000 1999
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
Nonaccrual loans $ 5,282 $ 3,203 $ 4,429 $ 1,815 $ 2,251
Other real estate owned 1,945 2,382 139 117 107
--------- --------- --------- --------- ---------
Total non-performing assets $ 7,227 $ 5,585 $ 4,568 $ 1,932 $ 2,358
========= ========= ========= ========= =========
Ratios:
Non-accrual loans to total loans 0.62% 0.48% 0.92% 0.38% 0.56%
Allowance to non-accrual loans 172.96% 239.24% 125.60% 276.03% 179.79%
Non-performing assets to total assets 0.63% 0.61% 0.75% 0.32% 0.44%
POTENTIAL PROBLEM LOANS
We utilize an internal asset classification system as a means of
reporting problem and potential problem assets. At least quarterly, a watch list
is presented to each subsidiary bank's Board of Directors (except one, which is
presented upon request of the Board of Directors) showing all loans listed as
"Management Attention (or equivalent designation at the various subsidiary
banks)", "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 (or
equivalent designation at the various subsidiary banks). As of December 31,
2003, loans classified as Substandard, Doubtful, or Management Attention,
totaled $51.7 million on a consolidated holding company basis.
Our determination as to the classification of our assets and the amount
of our valuation allowances is subject to review by the Banks' primary
regulators, which can order the establishment of additional general or specific
loss allowances. The FDIC, in conjunction with the other federal banking
agencies, has adopted an interagency policy statement on the allowance for loan
losses. The policy statement provides guidance for financial institutions on
both the responsibilities of management for the assessment and establishment of
adequate allowances and guidance for banking agency examiners to use in
determining the adequacy of general valuation guidelines. Generally, the policy
statement recommends that (i) institutions have effective systems and controls
to identify, monitor and address asset quality problems; (ii) management has
analyzed all significant factors that affect the collectibility of the portfolio
in a reasonable manner; and (iii) management has established acceptable
allowance evaluation processes that meet the objectives set forth in the policy
statement. We have established an adequate allowance for probable loan losses.
We analyze the process regularly, with modifications made if needed, and report
those results four times per year to each subsidiary bank's Board of Directors
(except one, which is presented upon request of the Board of Directors).
However, there can be no assurance that regulators, in reviewing our loan
portfolio, will not request us to materially increase our allowance for loan
losses at the time. Although management believes that adequate specific and
general loan loss allowances have been established, actual losses are dependent
upon future events and, as such, further additions to the level of specific and
general loan loss allowances may become necessary.
INVESTMENT SECURITIES
The investment portfolio is intended to provide us with adequate
liquidity, flexibility in asset/liability management and lastly earnings
potential. Investment securities at December 31, 2003 were $156.6 million
compared to $130.1 million at December 31, 2002. The 2003 investment security
growth can be attributed to both organic growth as well as acquisition growth
associated with the Reedsburg acquisition. At the time of the acquisition, the
Reedsburg Bank had $24.7 million of investment securities. The 2003 growth in
investment securities was primarily due to excess funds created through deposit
growth.
Management determines the appropriate classification of securities
(including mortgage-related securities) at the time of purchase.
Available-for-sale securities are stated at fair value, with the unrealized
gains and losses, net of tax, reported as a separate component of stockholder's
equity. See Notes 1 and 4 to Consolidated Financial Statements for further
details.
20
The amortized cost of debt securities is adjusted for amortization of
premiums and accretion of discounts to maturity, or in the case of
mortgage-related securities, over the estimated life of the security. Such
amortization is included in interest income from the related security. Interest
and dividends are included in interest income from the related securities.
Realized gains and losses, and declines in value judged to be
other-than-temporary are included in securities gains (losses). The cost of
securities sold is based on the specific identification method.
The following table sets forth our estimated fair value of investment
securities available-for-sale at the dates indicated:
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------
2003 2002 2001
--------- --------- --------
(DOLLARS IN THOUSANDS)
U.S. Treasury and other U.S.
government securities $ 32,403 $ 24,064 $ 4,494
State and political subdivision securities 48,985 39,901 24,178
Corporate bonds 75 75 1,614
Mutual funds -- 3,069 3,066
Collateralized mortgage obligations 34,121 28,611 14,116
Mortgage-backed securities 41,013 34,405 17,575
--------- --------- --------
$ 156,597 $ 130,125 $ 66,143
========= ========= ========
The maturity distribution (based upon the average life) and weighted
average yield of our securities portfolio as of December 31, 2003 are summarized
in the following table:
WITHIN ONE YEAR ONE TO FIVE YEARS FIVE TO TEN YEARS OVER TEN YEARS
------------------- ------------------ ------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
-------- -------- -------- -------- ------- -------- -------- ---------
U.S. TREASURY AND OTHER
GOVERNMENT AGENCY SECURITIES $ 17,874 2.18% $ 8,649 3.73% $ 4,422 5.08% $ 1,049 5.71%
STATE AND POLITICAL SUBDIVISION
CERTIFICATES 2,323 5.07 15,030 4.56 22,697 4.45 6,751 4.47
CORPORATE BONDS -- -- 75 5.30 -- -- -- --
COLLATERALIZED MORTGAGE OBLIGATIONS 3,934 3.52 28,299 3.62 2,039 4.09 -- --
MORTGAGE-BACKED SECURITIES 584 5.16 31,505 3.89 1,979 4.30 6,744 3.34
-------- ---- -------- ---- ------- ---- -------- ----
$ 24,715 2.74% $ 83,558 3.90% $31,137 4.51% $ 14,544 4.04%
======== ==== ======== ==== ======= ==== ======== ====
Weighted average yield is calculated by dividing income within each
maturity range by the outstanding amount of the related investment based on
carrying value.
TOTAL DEPOSITS
We continue to stress core deposit accumulation and retention as a
basis for sound growth and profitability. Core deposits consist of all deposits
other than public funds and certificates of deposit in excess of $100,000.
21
Total deposits increased $182.5 million to $911.9 million on December
31, 2003, from $729.5 million on December 31, 2002. The 2003 deposit growth can
be attributed to both organic growth as well as acquisition growth associated
with the Reedsburg acquisition. At the time of the acquisition, the Reedsburg
Bank had $120.6 million of deposits. The average increase in time deposits
occurred via increases in retail certificates of deposits and retail jumbo
certificates of deposits, while the increase in NOW and money market deposits
can be attributed to depositors desiring to stay liquid as market interest rates
remained at historical lows in 2003. The following table sets forth the average
amount of and the average rate paid by the banks on deposits by deposit
category:
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
2003 2002 2001
---- ---- ----
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE
--------- ------- --------- ------- --------- -------
(DOLLARS IN THOUSANDS)
Non-interest-bearing demand
deposits $ 95,351 0.00% $ 72,662 0.00% $ 67,165 0.00%
NOW and money market deposits
294,876 1.26 146,096 1.50 119,928 3.13
Savings deposits 90,723 0.69 78,357 1.08 72,209 1.70
Time deposits 283,156 2.58 213,791 3.40 209,297 5.12
--------- ----- --------- ----- --------- -------
Total $ 764,106 1.52% $ 510,906 2.02% $ 468,599 3.35%
========= ===== ========= ===== ========= =======
Maturities of time deposits and certificate accounts with balances of
$100,000 or more, outstanding at December 31, 2003, are summarized as follows
(dollars in thousands):
3 MONTHS OR LESS $17,914
OVER 3 THROUGH 6 MONTHS 15,658
OVER 6 THROUGH 12 MONTHS 21,955
OVER 12 MONTHS 18,628
-------
TOTAL $74,155
=======
BORROWINGS
Although deposits are our primary source of funds, it has been our
policy to utilize borrowings as an alternative source of funds. We utilize both
short-term and long-term borrowings, as well as repurchase agreements as a part
of our asset/liability management strategy. Borrowings are secured when we
believe we can profitably re-invest those funds for our benefit. A significant
component of our borrowings are federal funds purchased and advances from the
Federal Home Loan Bank (FHLB). The FHLB advances are collateralized by the
capital stock of the FHLB that we hold, certain mortgage loans in our loan
portfolio and certain investment securities. Such advances are made pursuant to
several different credit programs, each of which has its own interest rate and
range of maturities.
The following table shows outstanding amounts of borrowings together
with the weighted average interest rates, at December 31, for each of the past
three years (dollars in thousands).
At December 31,
2003 2002 2001
-------------------- ----------------------- --------------------
BALANCE RATE Balance Rate Balance Rate
-------- ----- ----------- ---- ------- -----
Federal Funds purchased $ 24,500 1.29% $ -- --% $ 9,300 2.13%
Securities sold under agreements to
repurchase 1,588 1.27 3,101 1.53 3,524 2.72
Other short-term borrowings 7,919 2.54 14,987 3.34 4,222 5.18
Long-term borrowings 72,346 4.00 72,322 3.96 55,800 4.77
-- -- -- --
Company-obligated mandatorily redeemable
preferred securities 35,000 6.30 10,000 4.75 -- --
-------- ----- ----------- ---- ------- -----
$141,353 3.99% $ 100,410 3.87% $72,846 4.36%
======== ===== =========== ==== ======= =====
22
The following table shows the maximum amounts outstanding of borrowings
for each of the past three years (dollars in thousands).
At December 31,
2003 2002 2001
-------- -------- --------
Federal Funds purchased $ 24,500 $ 19,313 $ 35,900
Securities sold under agreements to
repurchase 8,425 9,894 7,326
Other short-term borrowings 16,222 14,987 4,222
Long-term borrowings 83,879 72,322 55,800
-- --
Company-obligated mandatorily redeemable
preferred securities 35,000 10,000 --
-------- -------- --------
$168,026 $126,516 $103,248
======== ======== ========
The following table shows for the periods indicated the daily average
amount outstanding for the categories of borrowings, the interest paid and the
weighted average rates (dollars in thousands).
At December 31,
2003 2002 2001
---------------- ---------------- ----------------
BALANCE RATE Balance Rate Balance Rate
-------- ---- -------- ---- -------- ----
Federal Funds purchased $ 7,245 1.57% $ 8,474 2.07% $ 15,756 5.24%
Securities sold under agreements to
repurchase 5,059 1.28 7,273 1.88 5,516 3.93
Other short-term borrowings 11,124 2.70 6,189 3.44 3,451 6.29
Long-term borrowings 69,300 3.71 55,692 4.03 53,296 5.34
-- -- -- --
Company-obligated mandatorily redeemable
preferred securities 19,073 6.06 1,361 4.75 -- --
-------- ---- -------- ---- -------- ----
$111,801 3.77% $ 78,989 3.59% $ 78,019 5.26%
======== ==== ======== ==== ======== ====
CAPITAL RESOURCES AND ADEQUACY
Stockholders' equity increased from $69.3 million at December 31, 2002
to $80.0 million at December 31, 2003. Approximately $5.4 million of capital
growth was due to the Reedsburg acquisition. The $8.2 million increase from
earnings retention were partially offset by the payment of $2.2 million in cash
dividends to shareholders and the $785,000 decrease in the investment portfolio
market value.
Pursuant to regulations promulgated by the Federal Reserve Board, bank
holding companies are required to maintain minimum levels of core capital as a
percent of total assets and total capital as a percent of risk-based assets. The
minimum core capital requirement ranges from 3% to 5% of total assets, depending
upon the Federal Reserve Board's determination of the financial institution's
strength. Similar capital guidelines are also established for our individual
banking subsidiaries. Most financial institutions are required to meet a minimum
core capital requirement of 4% or more of total assets. The regulations assign
risk weightings to assets and off-balance sheet items and require minimum
risk-based capital ratios. Bank holding companies generally are required to have
total capital equal to not less than 8% of risk weighted assets. Core capital
consists principally of shareholders' equity less intangibles, while qualifying
total capital consists of core capital, portions of trust preferred securities
and a portion of the reserve for loan losses. As of December 31, 2003, we had a
total capital to risk weighted assets ratio of 10.23%, and 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. and the
Reedsburg Bank had total capital to risk weighted assets ratios of 10.80%,
10.87%, 12.32%, 11.68%, 11.96%, 15.38%, 14.17% and 12.74% respectively. These
ratios are above the 2003 minimum requirements established by regulatory
agencies to be well-capitalized.
23
$26.4 million of the trust preferred securities are currently included
in the Tier 1 capital, with the remainder included in Tier II capital of the
Corporation for regulatory capital purposes. However, because the Trusts will no
longer be a part of the Corporation's financial statements, the Federal Reserve
Board may in the future disallow inclusion of the trust preferred securities in
Tier 1 capital for regulatory capital purposes. In July 2003, the Federal
Reserve Board issued a supervisory letter instructing bank holding companies to
continue to include the trust preferred securities in their Tier 1 capital for
regulatory capital purposes until notice is given to the contrary. The Federal
Reserve Board intends to review the regulatory implications of the change in
accounting treatment of subsidiary trusts that issue trust preferred securities
and, if necessary or warranted, provide further appropriate guidance. There can
be no assurance that the Federal Reserve Board will continue to permit
institutions to include trust preferred securities in Tier I capital for
regulatory capital purposes. As of December 31, 2003, assuming the Corporation
was not permitted to include the $35 million in trust preferred securities
issued by the Trusts in its Tier 1 and Tier II capital, the Company would still
exceed the regulatory required minimums for capital adequacy purposes. If the
trust preferred securities were no longer permitted to be included in Tier 1
capital, the Corporation would also be permitted to redeem the capital
securities without penalty.
For a summary of the banks' regulatory capital ratios at December 31,
2003, please see Note 17 to Consolidated Financial Statements.
Management strives to maintain a strong capital position to take
advantage of opportunities for profitable geographic and product expansion and
to maintain depositor and investor confidence. Conversely, management believes
that capital must be maintained at levels that provide adequate returns on the
capital employed. Management actively reviews capital strategies for us and for
each of our subsidiaries to ensure that capital levels are appropriate based on
perceived business risks, growth and regulatory standards.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity management involves the ability to meet the cash flow
requirements of customers who may be either depositors wanting to withdraw funds
or borrowers needing assurance that sufficient funds will be available to meet
their credit needs. We had liquid assets of $47.7 million and $61.8 million on
December 31, 2003 and December 31, 2002, respectively. The decrease in liquid
assets from December 31, 2002 to December 31, 2003 can be largely attributed to
a decrease in federal funds sold. Management believes liquidity and capital
levels are adequate at December 31, 2003.
Our liquidity, represented by cash and cash equivalents, is a product
of our operating activities, investing activities and financing activities.
These activities are summarized below:
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
2003 2002 2001
--------- --------- ---------
(DOLLARS IN THOUSANDS)
Cash and cash equivalents at beginning of period $ 61,755 $ 37,468 $ 23,133
Operating activities:
Net income 8,228 6,385 5,708
Adjustments to reconcile net income to net cash
provided (used) by operating activities 1,935 4,033 (2,102)
--------- --------- ---------
Net cash provided by operating activities 10,163 10,418 3,606
Net cash provided (used in) by investing
activities (109,462) (57,473) 8,705
Net cash provided by financing activities 85,199 71,342 2,024
--------- --------- ---------
Increase (decrease) in cash and cash equivalents $ (14,100) $ 24,287 $ 14,335
========= ========= =========
Cash and cash equivalents at end of period $ 47,655 $ 61,755 $ 37,468
========= ========= =========
Net cash was provided by operating activities during the years ended
December 31, 2003, 2002 and 2001 primarily as a result of normal ongoing
business operations. The non-cash items, such as the provisions for loan losses
and depreciation and the net amortization of premiums, also contributed to net
cash provided by operating activities during these periods.
Liquidity is also necessary at the parent company level. The parent
company's primary source of funds are dividends from subsidiaries, borrowings
and proceeds from issuance of equity. The parent company manages its liquidity
position to provide the funds necessary to pay dividends to shareholders,
service debt, invest in subsidiaries and satisfy other operating requirements.
Dividends received from subsidiaries totaled $7.3 million, $3.5 million and $3.3
million for the years ended December 31, 2003, 2002 and 2001, respectively, and
will continue to be the parent company's main source of long-term liquidity. The
dividends from our banks were sufficient to pay cash dividends to our
shareholders of $2.2 million, $1.8 million and $1.8 million for the years ended
December 31, 2003, 2002 and 2001 respectively. At December 31, 2003, the parent
company had $20.0 in million lines of credit with unaffiliated banks available,
with $7.4 million balance outstanding.
24
The following table summarizes our significant contractual obligations
and other potential funding needs at December 31, 2003 (dollars in thousands).
Time deposits Long-term debt (1) Operating leases Total
2004 $229,641 $ 24,233 $ 1,042 $ 254,916
2005 66,558 14,642 1,032 82,232
2006 18,745 3,000 971 22,716
2007 5,366 6,000 723 12,089
2008 5,815 7,000 721 13,536
Thereafter -- 39,653 -- 39,653
Total $326,125 $ 94,528 $ 4,489 $ 425,142
Commitments to originate mortgage loans $ 29,248
Unused lines of credit $ 139,266
Standby letters of credit $ 10,275
(1) Long-term debt includes company-obligated mandatorily redeemable
preferred securities.
ASSET/LIABILITY MANAGEMENT
Financial institutions are subject to interest rate risk to the extent
their interest-bearing liabilities (primarily deposits) mature or reprice at
different times and on a different basis than their interest-earning assets
(consisting primarily of loans and securities). Interest rate sensitivity
management seeks to match maturities on assets and liabilities and avoid
fluctuating net interest margins while enhancing net interest income during
periods of changing interest rates. The difference between the amount of
interest-earning assets maturing or repricing within a specific time period and
the amount of interest-bearing liabilities maturing or repricing within the same
time period is referred to as an interest rate gap. A gap is considered positive
when the amount of interest rate sensitive assets exceeds the amount of interest
rate sensitive liabilities. A gap is considered negative when the amount of
interest rate sensitive liabilities exceeds the amount of interest rate
sensitive assets. During periods of rising interest rates, a negative gap tends
to adversely affect net interest income while a positive gap tends to result in
an increase in net interest income. During a period of falling interest rates, a
negative gap tends to result in an increase in net interest income while a
positive gap tends to adversely affect net interest income.
25
The following table shows the interest rate sensitivity gap for four
different time intervals as of December 31, 2003. Certain assumptions regarding
prepayment and withdrawal rates are based upon our historical experience, and
management believes such assumptions are reasonable.
AMOUNTS MATURING OR REPRICING AS OF DECEMBER 31, 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 $ 39,449 $ 78,626 $ 235,783 $ 12,944 $ 366,802
Adjustable-rate mortgage loans 97,029 13,184 11,450 17 121,680
---------- ------------- ----------- ---------- ----------
Total mortgage loans 136,478 91,810 247,233 12,961 488,482
Commercial business loans 130,853 42,385 116,835 4,572 294,645
Consumer and other loans 17,121 5,964 32,512 3,686 59,283
Home equity loans 14,300 183 79 102 14,664
Mortgage-related securities 19,655 16,989 23,161 15,329 75,134
Fixed rate investment securities and other 14,287 6,246 24,573 36,473 81,579
Variable rate investment securities and
other 34,383 0 25 0 49,337
---------- ------------- ----------- ---------- ----------
Total interest-earning assets $ 367,077 $ 163,577 $ 444,418 $ 73,123 $1,048,195
========== ============= =========== ========== ==========
Interest-bearing liabilities:
Deposits
Time deposits $ 136,386 $ 100,436 $ 83,535 $ 5,768 $ 326,125
NOW accounts 5,083 5,083 50,828 23,719 84,713
Savings accounts 7,469 7,568 59,581 34,856 109,474
Money market accounts 36,928 15,635 156,353 72,965 281,881
Company-obligated mandatorily redeemable
preferred securities 17,500 0 0 17,500 35,000
Borrowings 35,643 35,318 30,741 4,651 106,353
---------- ------------- ----------- ---------- ----------
Total interest-bearing liabilities $ 239,009 $ 164,040 $ 381,038 $ 159,459 $ 943,546
========== ============= =========== ========== ==========
Interest-earning assets less
interest-bearing
Liabilities $ 127,186 ($ 463) $ 64,262 ($ 86,336) $ 104,649
========== ============= =========== ========== ==========
Cumulative interest rate sensitivity gap $ 127,186 $ 126,723 $ 190,985 $ 104,649
========== ============= =========== ==========
Cumulative interest rate sensitivity gap as
a percentage of total assets 11.11% 11.07% 16.69% 9.14%
========== ============= =========== ==========
At December 31, 2003, our cumulative interest-rate sensitive gap as a
percentage of total assets was a positive 11.11% for six months and a positive
11.07% for one-year maturities. Therefore, we are positively gapped 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 have
similar maturities or periods of repricing, they may react in different degrees
to changes in market interest rates. Also, the interest rates on certain types
of assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag behind changes in market
rates. Additionally, certain assets, such as adjustable rate mortgage loans,
have features that restrict changes in interest rates on a short-term basis over
the life of the asset. Further, in the event of a change in interest rates,
prepayment and early withdrawal levels would likely deviate significantly from
those assumed in calculating the schedule. Finally, the ability of many
borrowers to service their debt may decrease in the event of an interest rate
increase.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our financial performance is impacted by, among other factors, interest
rate risk and credit risk. We utilize no derivatives to mitigate our interest
rate risk. To control credit risk we rely instead on loan review and an adequate
loan loss reserve.
Interest rate risk is the risk of loss of net interest income due to
changes in interest rates. This risk is addressed by our Asset Liability
Management Committee, which includes senior management representatives. The
Asset Liability Management Committee monitors and considers methods of managing
interest rate risk by monitoring changes in net interest income under various
interest rate scenarios. The Asset Liability Management Committee attempts to
manage various components of our balance sheet to minimize the impact of sudden
and sustained changes in interest rate on net interest income.
26
Our exposure to interest rate risk is reviewed on at least a quarterly
basis by the Asset Liability Management Committee. Interest rate risk exposure
is measured using interest rate sensitivity analysis to determine our change in
net interest income in the event of hypothetical changes in interest rates and
interest liabilities. If potential changes to net interest income resulting from
hypothetical interest rate swings are not within the limits established by the
Asset Liability Management Committee, the asset and liability mix may be
adjusted to bring interest rate risk within approved limits.
In order to reduce the exposure to interest rate fluctuations, we have
developed strategies to manage our liquidity, shorten the effective maturities
of certain interest-earning assets, and increase the effective maturities of
certain interest-bearing liabilities. One strategy used is focusing our
residential lending on adjustable rate mortgages, which generally reprice within
one to three years. Another strategy used is concentrating our non-residential
lending on adjustable or floating rate and/or short-term loans. We have also
focused our investment activities on short and medium-term securities, while
attempting to maintain and increase our savings account and transaction deposit
accounts, which are considered to be relatively resistant to changes in interest
rates.
Along with the analysis of the interest rate sensitivity gap,
determining the sensitivity of future earnings to a hypothetical plus 200 basis
point rate change or minus 100 basis point change can be accomplished through
the use of simulation modeling. In addition to the assumptions used to measure
the interest rate sensitivity gap, simulation of earnings includes the modeling
of the balance sheet as an ongoing entity. Future business assumptions involving
administered rate products, prepayments for future rate sensitive balances, and
the reinvestment of maturing assets and liabilities are included. These items
are then modeled to project income based on a hypothetical change in interest
rates. The resulting pretax income for the next 12-month period is compared to
the pretax income calculated using flat rates. This difference represents our
earning sensitivity to a plus 200 basis point rate change or minus 100 basis
point change. The table below illustrates these amounts as of December 31, 2003.
PERCENT CHANGE IN NET INTEREST INCOME
-------------------------------------
CHANGE IN INTEREST RATES 2003 2002
- ------------------------ ---- ----
+ 200 basis points 8.16% 9.51%
+ 150 basis points 5.46% 6.65%
+ 100 basis points 2.76% 3.79%
+ 50 basis points 1.07% 0.85%
Base Scenario 0.00% 0.00%
- 50 basis points (5.76)% (5.10)%
- 100 basis points (7.55)% (7.26)%
These results are based solely on immediate and sustained parallel
changes in market rates and do not reflect the earnings sensitivity that may
arise from other factors such as changes in the shape of the yield curve, the
change in spread between key market rates, or accounting recognition for
impairment of certain intangibles. The above results also do not include any
management action to mitigate potential income variances within the simulation
process. This action would include, but would not be limited to, adjustments to
the repricing characteristics of any on or off balance sheet item with regard to
short-term rate projections and current market value assessments.
We determine another component of interest rate risk, fair value at
risk, through the technique of simulating the fair value of equity in changing
rate environment. This technique involves determining the present value of all
contractual asset liability cash flows (adjusted for prepayments) based on a
predetermined discount rate. The net result of all these balance sheet items
determine the fair value of equity. The fair value of equity resulting from the
current flat rate scenario is compared to the fair value of equity calculated
using discount rates plus 200 basis point rate change or minus 100 basis point
change to determine the fair value of equity at risk. Currently, fair value of
equity at risk is less than 1.0% of our market value as of December 31, 2003.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated balance sheets of the Corporation and its subsidiaries
as of December 31, 2003 and 2002 and the related consolidated statements of
income, stockholders' equity and cash flows for each of the years in the three
year period ended December 31, 2003 are attached. Selected quarterly financial
data is included in Item 6.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
27
ITEM 9A. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, the Corporation
carried out an evaluation, under the supervision and with the participation of
the Corporation's management, including the Corporation's Chairman of the Board
and Principal Executive Officer and the Corporation's Chief Financial Officer,
of the Corporation's disclosure controls and procedures (as defined in Rules
13a-15(e) and 15(d)-15(e) under the Securities Exchange Act of 1934, as
amended). Based on this evaluation, the Corporation's Chairman of the Board and
Principal Executive Officer and the Corporation's Chief Financial Officer
concluded that the Corporation's disclosure controls and procedures were
effective in timely alerting them to material information relating to the
Corporation required to be included in the Corporation's periodic filings with
the Securities and Exchange Commission. 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. The Corporation
has designed its disclosure controls and procedures to reach a level of
reasonable assurance of achieving the desired control objectives and, based on
the evaluation described above, the Corporation's Chairman of the Board and
Principal Executive Officer and the Corporation's Chief Financial Officer
concluded that the Corporation's disclosure controls and procedures were
effective at reaching the level of reasonable assurance.
There was no change in the Corporation's internal control over
financial reporting (as defined in Rules 13a-15(f) and 15(d)-15(f) under the
Securities Exchange Act of 1934, as amended) during the Corporation's most
recently completed fiscal quarter that has materially affected, or is reasonably
likely to materially affect, the Corporation's internal control over financial
reporting.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information in response to this item is incorporated herein by
reference to the Corporation's proxy statement, which shall be filed with the
Securities and Exchange Commission no later than 120 days after the
Corporation's fiscal year end covered by this report.
ITEM 11. EXECUTIVE COMPENSATION
The information in response to this item is incorporated herein by
reference to the Corporation's proxy statement, which shall be filed with the
Securities and Exchange Commission no later than 120 days after the
Corporation's fiscal year end covered by this report.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information in response to this item is incorporated herein by
reference to the Corporation's proxy statement, which shall be filed with the
Securities and Exchange Commission no later than 120 days after the
Corporation's fiscal year end covered by this report.
EQUITY COMPENSATION PLAN INFORMATION
The following table summarizes share information, as of December 31,
2003, for the Corporation's equity compensation plan, the 1996 Incentive Stock
Option Plan. This plan has been approved by the Corporation's shareholders.
NUMBER OF NUMBER OF
COMMON SHARES TO BE COMMON SHARES
ISSUED UPON EXERCISE WEIGHTED-AVERAGE AVAILABLE FOR FUTURE
OF OUTSTANDING EXERCISE PRICE OF ISSUANCE UNDER
OPTIONS, OUTSTANDING OPTIONS, EQUITY
PLAN CATEGORY WARRANTS, AND RIGHTS WARRANTS, AND RIGHTS COMPENSATION PLANS
- ------------- -------------------- -------------------- ------------------
Equity compensation plans approved by
stockholders 73,251 $24.15 136,749
Equity compensation plans not approved
by stockholders N/A N/A N/A
------ ------ -------
Total 73,251 $24.15 136,749
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information in response to this item is incorporated herein by
reference to the Corporation's proxy statement, which shall be filed with the
Securities and Exchange Commission no later than 120 days after the
Corporation's fiscal year end covered by this report.
28
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information in response to this item is incorporated herein by
reference to the Corporation's proxy statement, which shall be filed with the
Securities and Exchange Commission no later than 120 days after the
Corporation's fiscal year end covered by this report.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) DOCUMENTS FILED:
1 and 2. Financial Statements and Financial Statement Schedules. The
following financial statements of Merchants and Manufacturers
Bancorporation, Inc. and subsidiaries are filed as a part of
this report under Item 8. "Financial Statements and
Supplementary Data":
Report of Independent Auditors
Consolidated Statements of Financial Condition as of
December 31, 2003 and 2002
Consolidated Statements of Income for the years ended
December 31, 2003, 2002, and 2001
Consolidated Statements of Changes in Stockholders'
Equity for the years ended December 31, 2003, 2002,
and 2001
Consolidated Statements of Cash Flows for the years
ended December 31, 2003, 2003 and 2001
Notes to Consolidated Financial Statements
All financial statement schedules have been omitted as they
are not applicable or because the information is included in
the financial statements or notes thereto.
3. Exhibits. All required exhibits have been furnished in connection
with and are incorporated by reference to previous filing,
except for the exhibits set forth on the Exhibit List
appearing elsewhere in this filing.
(b) REPORTS ON FORM 8-K:
The Corporation furnished a report Form 8-K on October 20,
2003, pursuant to Items 9 and 12 regarding its press release
of its September 30, 2003 earnings report.
The Corporation filed a report on Form 8-K on November 6,
2003, reporting pursuant to Item 2 its acquisition of
Reedsburg Bancorporation, Inc. and incorporating by reference
the required historical financial information of Reedsburg
Bancorporation, Inc. and the required pro forma financial
information into Item 7.
29
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC.
By: /s/ Michael J. Murry
-------------------------------------------
Michael J. Murry
Chairman of the Board of Directors &
Principal Executive Officer
Date: March 15, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the registrant
and in the capacities and on the dates indicated.
PRINCIPAL EXECUTIVE OFFICERS
/s/ Michael J. Murry Chairman of the Board of Directors March 15, 2004
- ------------------------------------ & Principal Executive Officer
Michael J. Murry
/s/ James C. Mroczkowski Executive Vice President & Chief March 15, 2004
- ------------------------------------ Financial Officer
James C. Mroczkowski
DIRECTORS
/s/ Michael J. Murry Chairman of the Board of Directors March 15, 2004
- ------------------------------------
Michael J. Murry
/s/ James F. Bomberg Director March 15, 2004
- ------------------------------------
James F. Bomberg
/s/ Nicholas S. Logarakis Director March 15, 2004
- ------------------------------------
Nicholas S. Logarakis
/s/ Conrad C. Kaminski Director March 15, 2004
- ------------------------------------
Conrad C. Kaminski
/s/ Keith C. Winters Director March 15, 2004
- ------------------------------------
Keith C. Winters
/s/ Rodney T. Goodell Director March 15, 2004
- ------------------------------------
Rodney Goodell
/s/ Donald A. Zellmer Director March 15, 2004
- ------------------------------------
Donald Zellmer
/s/ Duane H. Bluemke Director March 15, 2004
- ------------------------------------
Duane Bluemke
/s/ Duane P. Cherek Director March 15, 2004
- ------------------------------------
Duane P. Cherek
/s/ James A. Sass Director March 15, 2004
- ------------------------------------
James A. Sass
30
/s/ Thomas J. Sheehan Director March 15, 2004
- ------------------------------------
Thomas J. Sheehan
/s/ Jerome T. Sarnowski Director March 15, 2004
- ------------------------------------
Jerome T. Sarnowski
/s/ J. Michael Bartels Director March 15, 2004
- ------------------------------------
J. Michael Bartels
/s/ Michael T. Judge Director March 15, 2004
- ------------------------------------
Michael T. Judge
/s/ Casimir S. Janiszewski Director March 15, 2004
- ------------------------------------
Casimir S. Janiszewski
/s/ Edward H. Cichurski Director March 15, 2004
- ------------------------------------
Edward H. Cichurski
/s/ Donald L. Rowland Director March 15, 2004
- ------------------------------------
Donald L. Rowland
/s/ Erich Mildenberg Director March 15, 2004
- ------------------------------------
Erich Mildenberg
/s/ Milburn M. Hahs Director March 15, 2004
- ------------------------------------
Milburn M. Hahs
31
[MCGLADREY & PULLEN CERTIFIED PUBLIC ACCOUNTANTS LOGO]
MERCHANTS AND MANUFACTURERS
BANCORPORATION, INC. AND SUBSIDIARIES
Consolidated Financial Report
12.31.2003
McGladrey & Pullen, LLP is a member firm of RSM International,
an affiliation of separate and independent legal entities.
MERCHANTS AND MANUFACTURERS
BANCORPORATION, INC. AND SUBSIDIARIES
CONTENTS
Independent Auditor's Report 1
Consolidated Financial Statements
Consolidated Balance Sheets 2
Consolidated Statements of Income 3
Consolidated Statements of Changes in Stockholders' Equity 4
Consolidated Statements of Cash Flows 5-6
Notes to Consolidated Financial Statements 7-38
[MCGLADREY & PULLEN CERTIFIED PUBLIC ACCOUNTANTS LOGO]
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Merchants and Manufacturers Bancorporation, Inc. and Subsidiaries
New Berlin, Wisconsin
We have audited the accompanying consolidated balance sheets of Merchants and
Manufacturers Bancorporation, Inc. and subsidiaries as of December 31, 2003 and
2002, and the related consolidated statements of income, changes in
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 2003. These consolidated financial statements are the
responsibility of the Corporation's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as, evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Merchants and
Manufacturers Bancorporation, Inc. and subsidiaries as of December 31, 2003 and
2002, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 2003 in conformity with accounting
principles generally accepted in the United States of America.
/s/ McGladrey & Pullen, LLP
Madison, Wisconsin
February 13, 2004
McGladrey & Pullen, LLP is an independent member firm of RSM International,
an affiliation of separate and independent legal entities.
1
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2003 AND 2002
2003 2002
-------------- ------------
(Amounts In Thousands, Except
Share and Per Share Amounts)
ASSETS
Cash and Due From Banks $ 29,376 $ 31,539
Interest Bearing Deposits in Banks 2,647 3,825
Federal Funds Sold 15,632 26,391
----------- -----------
Cash and cash equivalents 47,655 61,755
Available-for-Sale Securities 156,597 130,125
Loans, less allowance for loan losses of $9,136 and $7,663
at December 31, 2003 and 2002, respectively 847,938 657,775
Accrued Interest Receivable 4,421 4,248
FHLB Stock 16,245 14,935
Premises and Equipment 20,591 15,406
Goodwill and Intangible Assets 30,502 9,681
Other Assets 20,574 15,170
----------- -----------
TOTAL ASSETS $ 1,144,523 $ 909,095
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits:
Non-interest bearing $ 109,755 $ 97,288
Interest bearing 802,193 632,168
----------- -----------
Total deposits 911,948 729,456
Short-term borrowings 34,007 18,088
Long-term borrowings 72,346 72,322
Company Obligated Mandatorily Redeemable Preferred Securities
of subsidiary trusts holding solely subordinated debentures 35,000 10,000
Accrued interest payable 1,417 1,403
Other liabilities 9,831 8,497
----------- -----------
TOTAL LIABILITIES 1,064,549 839,766
----------- -----------
Stockholders' Equity
Preferred stock, $1.00 par value; 250,000 shares authorized, shares
issued and shares outstanding - none - -
Common stock $1.00 par value; 6,000,000 shares
authorized; shares issued: 3,436,051-2003; 2,977,231-2002;
shares outstanding: 3,326,104-2003; 2,875,155-2002 3,436 2,977
Additional paid-in capital 43,691 26,308
Retained earnings 35,007 41,489
Accumulated other comprehensive income 663 1,448
Treasury stock, at cost (109,947 shares-2003; 102,076 shares-2002) (2,823) (2,893)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 79,974 69,329
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,144,523 $ 909,095
=========== ===========
See Notes to Consolidated Financial Statements.
2
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001
2003 2002 2001
-------- -------- --------
(Amounts In Thousands,
Except Per Share Amounts)
Interest income:
Interest and fees on loans $ 45,368 $ 35,716 $ 38,501
Interest and dividends on securities:
Taxable 2,080 893 1,259
Tax-exempt 1,410 926 960
Interest on mortgage-backed securities 1,988 2,050 1,985
Interest on interest bearing deposits in banks and
federal funds sold 204 318 531
-------- -------- --------
TOTAL INTEREST INCOME 51,050 39,903 43,236
-------- -------- --------
Interest expense:
Interest on deposits 11,659 10,295 15,692
Interest on short-term borrowings 479 502 1,260
Interest on long-term borrowings 2,578 2,244 2,846
Interest on Company Obligated Mandatorily Redeemable
Preferred Securities 1,155 65 -
-------- -------- --------
TOTAL INTEREST EXPENSE 15,871 13,106 19,798
-------- -------- --------
NET INTEREST INCOME 35,179 26,797 23,438
Provision for loan losses 1,311 1,156 1,125
-------- -------- --------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 33,868 25,641 22,313
-------- -------- --------
Noninterest income:
Service charges on deposit accounts 2,649 1,625 1,302
Service charges on loans 2,565 1,260 722
Securities gains, net 360 111 88
Gain on sale of loans, net 1,859 695 332
Net gain on sale of premises and equipment 2 360 557
Other 3,728 2,076 1,681
-------- -------- --------
TOTAL NONINTEREST INCOME 11,163 6,127 4,682
-------- -------- --------
Noninterest expenses:
Salaries and employee benefits 18,655 12,439 10,533
Premises and equipment 4,079 3,419 3,075
Data processing fees 1,193 1,261 951
Marketing and business development 1,509 894 878
Federal deposit insurance premiums 129 102 99
Other 7,171 4,024 3,018
-------- -------- --------
TOTAL NONINTEREST EXPENSES 32,736 22,139 18,554
-------- -------- --------
INCOME BEFORE INCOME TAXES 12,295 9,629 8,441
Income taxes 4,067 3,244 2,733
-------- -------- --------
NET INCOME $ 8,228 $ 6,385 $ 5,708
======== ======== ========
Basic earnings per share $ 2.58 $ 2.30 $ 2.05
======== ======== ========
Diluted earnings per share $ 2.56 $ 2.29 $ 2.04
======== ======== ========
See Notes to Consolidated Financial Statements.
3
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001
Accumulated
Additional Other
Common Paid-in Retained Comprehensive Treasury
Stock Capital Earnings Income (Loss) Stock Total
------ -------- ---------- ------------- -------- --------
(Amounts In Thousands, Except Share and Per Share Amounts)
Balance at December 31, 2000 $2,588 $ 15,452 $ 32,988 $ (304) $(2,209) $ 48,515
Comprehensive income:
Net income - - 5,708 - - 5,708
Change in net unrealized gains on
available-for-sale securities - - - 1,101 - 1,101
Reclassification adjustment for gains
included in net income - - - (88) - (88)
Income tax effect - - - (379) - (379)
--------
TOTAL COMPREHENSIVE INCOME 6,342
--------
Sale of 10,550 shares of treasury stock - - - - 336 336
Purchase of 29,092 shares of treasury stock - - - - (795) (795)
Cash dividends paid - $0.71 per share - - (1,802) - - (1,802)
Exercise of stock options - (497) - - 830 333
------ -------- -------- ------- ------- --------
Balance at December 31, 2001 2,588 14,955 36,894 330 (1,838) 52,929
--------
Comprehensive income:
Net income - - 6,385 - - 6,385
Change in net unrealized gains on
available-for-sale securities - - - 1,799 - 1,799
Reclassification adjustment for gains
included in net income - - - (111) - (111)
Income tax effect - - - (570) - (570)
--------
TOTAL COMPREHENSIVE INCOME 7,503
--------
Issuance of 389,722 shares of stock
for acquisition 389 11,356 - - - 11,745
Sale of 525 shares of treasury stock - (3) - - 18 15
Purchase of 38,937 shares of treasury stock - - - - (1,073) (1,073)
Cash dividends paid - $0.72 per share - - (1,790) - - (1,790)
------ -------- -------- ------- ------- --------
Balance at December 31, 2002 2,977 26,308 41,489 1,448 (2,893) 69,329
--------
Comprehensive income:
Net income - - 8,228 - - 8,228
Change in net unrealized gains on
available-for-sale securities - - - (789) - (789)
Reclassification adjustment for gains
included in net income - - - (360) - (360)
Income tax effect - - - 364 - 364
--------
TOTAL COMPREHENSIVE INCOME 7,443
--------
Issuance of 146,792 shares of stock
for acquisition 147 5,249 - - - 5,396
Sale of 159 shares of treasury stock - - - - 5 5
Purchase of 25 shares of treasury stock - - - - (1) (1)
Stock dividend 312 12,169 (12,497) - - (16)
Cash dividends paid - $0.76 per share - - (2,213) - - (2,213)
Exercise of stock options - (35) - - 66 31
------ -------- -------- ------- ------- --------
BALANCE AT DECEMBER 31, 2003 $3,436 $ 43,691 $ 35,007 $ 663 $(2,823) $ 79,974
====== ======== ======== ======= ======= ========
See Notes to Consolidated Financial Statements.
4
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001
2003 2002 2001
---------- ---------- ---------
(Amounts In Thousands)
Cash Flows From Operating Activities
Net income $ 8,228 $ 6,385 $ 5,708
Adjustments to reconcile net income to cash
provided by operating activities:
Provision for loan losses 1,311 1,156 1,125
Depreciation 1,681 1,073 889
Amortization and accretion of premiums
and discounts, net 817 232 43
Deferred income taxes (46) (361) (475)
Securities gains, net (360) (111) (88)
Gain on sale of loans, net (1,859) (695) (332)
Net gain on sale of premises and equipment - (360) (557)
Decrease in accrued interest receivable 414 743 745
Decrease in accrued interest payable (256) (209) (131)
Other, net (1,940) 2,227 (928)
--------- --------- --------
NET CASH PROVIDED BY OPERATIONS BEFORE LOAN
ORIGINATIONS AND SALES 7,990 10,080 5,999
Loans originated for sale (181,297) (108,441) (83,419)
Proceeds from sales of loans 183,470 108,779 81,026
--------- --------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 10,163 10,418 3,606
--------- --------- --------
Cash Flows From Investing Activities
Purchase of available-for-sale securities (78,454) (40,190) (51,865)
Proceeds from sales of available-for-sale securities 15,093 7,666 4,174
Proceeds from redemptions and maturities of
available-for-sale securities 59,701 23,057 61,422
Net increase in loans (95,901) (37,135) (2,708)
Purchases of premises and equipment (3,195) (1,852) (1,915)
Proceeds from sales of other real estate 817 - -
Cash received (paid) in acquisition (6,405) 663 -
Purchases of FHLB stock (1,118) (9,682) (403)
--------- --------- --------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (109,462) (57,473) 8,705
--------- --------- --------
Cash Flows From Financing activities
Net increase in deposits 61,268 75,851 19,734
Net increase (decrease) in short-term borrowings 15,919 1,042 (26,882)
Dividends paid (2,213) (1,790) (1,802)
Proceeds from long-term borrowings 15,000 6,500 47,500
Repayment of long-term borrowings (29,794) (19,203) (36,400)
Issuance of Company Obligated Mandatorily Redeemable
Preferred Securities 25,000 10,000 -
Stock dividend (16) - -
Common stock transactions, net 35 (1,058) (126)
--------- --------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 85,199 71,342 2,024
--------- --------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (14,100) 24,287 14,335
Cash and cash equivalents at beginning of year 61,755 37,468 23,133
--------- --------- --------
Cash and cash equivalents at end of year $ 47,655 $ 61,755 $ 37,468
========= ========= ========
(Continued)
5
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001
2003 2002 2001
-------- -------- --------
(Amounts In Thousands)
Supplemental Cash Flow Information and Noncash Transactions:
Interest paid $ 16,127 $ 13,315 $ 19,929
Income taxes paid 4,277 3,209 2,872
Loans transferred to other real estate owned 380 2,234 22
Supplemental Schedules of Noncash Investing Activities:
Change in accumulated other comprehensive income, unrealized
gains on available-for-sale securities, net $ 785 $ 1,118 $ 634
Acquisitions (Note 2)
Assets acquired:
Cash and cash equivalents $ 13,956 $ 10,449
Available-for-sale securities 24,715 53,634
Accrued interest receivable 587 2,041
Loans, net 96,267 146,338
FHLB stock 487 1,679
Premises and equipment, net 3,693 4,349
Other 5,573 4,334
Excess of cost over fair value of net assets acquired 19,383 7,232
-------- --------
164,661 230,056
-------- --------
Liabilities assumed:
Deposits 121,224 175,820
Accrued interest payable 270 584
Short-term borrowings - 22,825
Long-term borrowings 2,000 6,400
Other liabilities 2,312 2,896
-------- --------
125,806 208,525
-------- --------
Net assets acquired $ 38,855 $ 21,531
======== ========
Cash paid $ 20,361 $ 9,786
Note issued 13,098 -
Stock issued 5,396 11,745
-------- --------
Total price paid $ 38,855 $ 21,531
======== ========
See Notes to Consolidated Financial Statements.
6
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Banking Activities: The consolidated income of Merchants and
Manufacturers Bancorporation, Inc. (the Corporation) is principally from the
income of its wholly owned subsidiaries. The Banks, as defined in the following
paragraph, provide a full range of personal and commercial financial services to
customers. The Corporation and the Banks are subject to competition from other
financial institutions. Merchants and Manufacturers Statutory Trust I, II, III
and IV (the "Trusts"), also wholly-owned subsidiaries, were capitalized November
2002, May 2003, October 2003 and October 2003, respectively, for the purpose of
issuing Trust Preferred securities. The Corporation and the Banks are also
subject to the regulations of certain federal and state agencies and undergo
periodic examinations by those regulatory agencies.
Consolidation: The consolidated financial statements of the Corporation include
the accounts of its wholly owned subsidiaries: Lincoln State Bank (Lincoln),
Franklin State Bank (Franklin), Grafton State Bank (Grafton), Community Bank of
Oconto County (Oconto), Fortress Bank of Cresco (Cresco), Fortress Bank of
Westby (Westby), Fortress Bank N.A. (Houston), and The Reedsburg Bank
(Reedsburg) - collectively referred to as "the Banks," CBG Services, Inc., which
provides management services for the Banks, Lincoln Neighborhood Redevelopment
Corporation, which provides redevelopment and rehabilitation to certain areas
located primarily on the near south side of Milwaukee, Merchants Merger Corp.,
which is used to facilitate acquisitions, CBG Financial Services, Inc., which
provides non-insured investment and insurance products to customers of the Banks
and Lincoln's wholly owned subsidiary, M&M Lincoln Investment Corp., Grafton's
wholly owned subsidiary, GSB Investments Inc., Oconto's wholly owned subsidiary,
CBOC Investments Inc., and Westby's wholly owned subsidiary, Westby Investment
Company, Inc., which manage the investment portfolio for the Banks and CBG
Mortgage, Inc., which acts as the Corporation's mortgage broker. CBG Financial
Services, Inc. also includes the accounts of its wholly-owned subsidiaries Link
Community Financial Services and Keith C. Winters and Associates. The
consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America and
conform to general practices within the banking industry. All significant
intercompany accounts and transactions have been eliminated in the consolidated
financial statements.
Use of Estimates: In preparing the consolidated financial statements in
conformity with accounting principles generally accepted in the United States of
America, management is required to make estimates and assumptions that affect
the reported amounts of assets and liabilities as of the date of the balance
sheet and reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Material estimates that are
particularly susceptible to significant change in the near term relate to the
determination of the allowance for loan losses, and the valuation of foreclosed
real estate and deferred tax assets. The fair value disclosure of financial
instruments is an estimate that can be computed within a range.
Presentation of Cash Flows: For purposes of reporting cash flows, cash and due
from banks include cash on hand and amounts due from banks, interest bearing
deposits in banks and federal funds sold. Cash flows from loans, deposits, and
short-term borrowings are treated as net increases or decreases.
Cash and Due From Banks: The Banks maintain amounts due from banks which, at
times, may exceed federally insured limits. Management monitors these
correspondent relationships. The Banks have not experienced any losses in such
accounts.
7
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Available-for-Sale Securities: Securities classified as available-for-sale are
those debt securities that the Banks intend to hold for an indefinite period of
time, but not necessarily to maturity. Any decision to sell a security
classified as available-for-sale would be based on various factors, including
significant movements in interest rates, changes in the maturity mix of the
Banks' assets and liabilities, liquidity needs, regulatory capital
consideration, and other similar factors. Securities classified as
available-for-sale are carried at fair value. Unrealized gains or losses are
reported as increases or decreases in accumulated other comprehensive income,
net of the related deferred tax effect. Realized gains or losses, determined on
the basis of the cost of specific securities sold, are included in earnings.
Declines in the fair value of held-to-maturity and available-for-sale securities
below their cost that are deemed to be other than temporary are reflected in
earnings as realized losses. In estimating other-than-temporary impairment
losses, management considers (1) the length of time and the extent to which the
fair value has been less than cost, (2) the financial condition and near-term
prospects of the issuer, and (3) the intent and ability of the Corporation to
retain its investment in the issuer for a period of time sufficient to allow for
any anticipated recovery in fair value.
Loans: Loans are stated at the amount of unpaid principal, reduced by an
allowance for loan losses. Interest income is accrued on the unpaid principal
balance. The accrual of interest income on loans is discontinued at the time the
loan is 90 days delinquent unless the credit is well-secured and in the process
of collection. When interest accrual is discontinued, all unpaid accrued
interest is reversed against interest income. Accrual of interest is generally
resumed when the customer is current on all principal and interest payments and
has been paying on a timely basis for a period of time.
Mortgage Loans Held for Sale: Mortgage loans originated and intended for sale in
the secondary market are carried at the lower of cost or estimated market value
in the aggregate. All sales are made without recourse. The balance of mortgage
loans held for sale are included in the loan balance in the financial
statements.
Mortgage loans held for sale are generally sold with the mortgage servicing
rights retained by the Corporation. The carrying value of mortgage loans sold is
reduced by the cost allocated to the associated mortgage servicing rights. Gains
or losses on sales of mortgage loans are recognized based on the difference
between the selling price and the carrying value of the related mortgage loans
sold.
Allowance for Loan Losses: The allowance for loan losses is established through
a provision for loan losses charged to expense. Loans are charged against the
allowance for loan losses when management believes that the collectibility of
the principal is unlikely. Subsequent recoveries, if any, are credited to the
allowance. The allowance is based on past events and current economic
conditions, and does not include the effects of expected losses on specific
loans or groups of loans that are related to future events or expected changes
in economic conditions. While management uses the best information available to
make its evaluation, future adjustments to the allowance may be necessary if
there are significant changes in economic conditions.
Impaired loans are measured based on the present value of expected future cash
flows discounted at the loan's effective interest rate or, as a practical
expedient, at the loan's observable market price or the fair value of the
collateral if the loan is collateral dependent. A loan is impaired when it is
probable the creditor will be unable to collect all contractual principal and
interest payments due in accordance with the terms of the loan agreement. Cash
collections on impaired loans are credited to the loan receivable balance and no
interest income is recognized on those loans until the principal balance is
current.
8
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In addition, various regulatory agencies periodically review the allowance for
loan losses. These agencies may require the Banks to make additions to the
allowance for loan losses based on their judgments of collectibility based on
information available to them at the time of their examination.
Credit Related Financial Instruments: In the ordinary course of business the
Banks have entered into off-balance-sheet financial instruments consisting of
commitments to extend credit and standby letters of credit. Such financial
instruments are recorded in the financial statements when they are funded.
Transfers of Financial Assets: Transfers of financial assets are accounted for
as sales only when control over the assets has been surrendered. Control over
transferred assets is deemed to be surrendered when (1) the assets have been
isolated from the Corporation, (2) the transferee obtains the right (free of
conditions that constrain it from taking advantage of the right) to pledge or
exchange the transferred assets, and (3) the Corporation does not maintain
effective control over the transferred assets through an agreement to repurchase
them before their maturity or the ability to unilaterally cause the holder to
return specific assets.
Premises and Equipment: Premises and equipment are stated at cost, less
accumulated depreciation. Provisions for depreciation are computed using the
straight-line or double-declining-balance methods, over the estimated useful
lives of the assets ranging from 3 years to 39 years.
Goodwill and Intangible Assets: The Corporation's goodwill and intangible assets
include the value of ongoing customer relationships (core deposits) and the
excess of cost over the fair value of net assets acquired (goodwill) arising
from the purchase of certain assets and the assumption of certain liabilities
from unrelated entities. Core deposit intangibles are amortized over a 10-year
period and goodwill is evaluated on an annual basis to determine impairment, if
any. Any impairment in the intangibles would be recorded against income in the
period of impairment.
Other Real Estate Owned: Other real estate owned, acquired through partial or
total satisfaction of loans, is carried at the lower of cost or fair value, less
cost to sell. At the date of acquisition losses are charged to the allowance for
loan losses. Revenue and expenses from operations and changes in the valuation
allowance are included in loss on foreclosed real estate. The balance of other
real estate owned is included in other assets in the financial statements.
Stock-Based Compensation Plan: At December 31, 2003, the Corporation had a
stock-based key officer and employee compensation plan, which is described more
fully in Note 11. The Corporation accounts for this plan under the recognitions
and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related Interpretations. No stock-based employee compensation
cost is reflected in the income, as all options granted under this plan had an
exercise price equal to the market value of the underlying common stock on the
date of grant. The table on the following page illustrates the effect on net
income and earnings per share if the Corporation had applied the fair value
recognition provisions of the Financial Accounting Standards Board (FASB)
Statement No. 123, Accounting for Stock-Based Compensation, to stock-based
employee compensation.
9
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Years Ended December 31,
---------------------------------
2003 2002 2001
--------- --------- ---------
(Amounts In Thousands,
Except Per Share Data)
Net income, as reported $ 8,228 $ 6,385 $ 5,708
Deduct total stock-based employee
compensation expense determined
under fair value based method for all
awards, net of related tax effects 876 389 306
--------- --------- ---------
PRO FORMA NET INCOME $ 7,352 $ 5,996 $ 5,402
========= ========= =========
Earnings per share:
Basic:
As reported $ 2.58 $ 2.30 $ 2.05
Pro forma 2.30 2.16 1.94
Diluted:
As reported 2.56 2.29 2.04
Pro forma 2.29 2.15 1.93
In determining compensation cost using the fair value method prescribed in
Statement No. 123, the value of each grant is estimated at the grant date with
the following weighted-average assumptions used for grants in 2003, 2002, and
2001, respectively: dividend yield of 1.50 percent, 2.44 percent, and 2.65
percent; expected price volatility of 16.66 percent, 14.78 percent, and 15.08
percent; blended risk-free interest rates of 2.34 percent, 3.95 percent, and
4.96 percent; and expected lives of 10 years, respectively.
Income Taxes: The Corporation files a consolidated federal income tax return and
individual subsidiary state income tax returns. Accordingly, amounts equal to
tax benefits of those companies having taxable federal losses or credits are
reimbursed by the other companies that incur federal tax liabilities.
Amounts provided for income tax expense are based on income reported for
financial statement purposes, and do not necessarily represent amounts currently
payable under tax laws. Deferred income tax assets and liabilities are computed
annually for differences between the financial statement and tax bases of assets
and liabilities that will result in taxable or deductible amounts in the future
based on enacted tax laws and rates applicable to the periods in which the
differences are expected to affect taxable income. As changes in tax laws or
rates are enacted, deferred tax assets and liabilities are adjusted through the
provision for income taxes. Valuation allowances are established when necessary
to reduce deferred tax assets to the amount expected to be realized.
Trust Assets: Property held for customers in fiduciary or agency capacities,
other than cash on deposit at the Banks, is not included in the accompanying
balance sheets, since such items are not assets of the Corporation.
10
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Earnings Per Share: Earnings per share of common stock have been computed based
on the weighted-average number of common stock and common stock equivalents, if
dilutive, outstanding during each year. In the computation of diluted earnings
per share, all dilutive stock options are assumed to be exercised at the
beginning of each year and the proceeds are used to purchase shares of the
Corporation's common stock at the average market price during the year.
On November 21, 2003, the Corporation declared a 10 percent stock dividend
payable December 15, 2003 to Shareholders as of December 1, 2003. As a result,
earnings per share for the years ended December 31, 2003, 2002 and 2001 have
been adjusted to give retroactive effect to the 10 percent stock dividend issued
on December 15, 2003 as if the stock dividend had occurred on January 1, 2001.
Earnings per common share have been computed for the years ended December 31,
2003, 2002, and 2001 based on the following:
2003 2002 2001
---------- ---------- ----------
(Amounts In Thousands,
Except Share Amounts)
Net income $ 8,228 $ 6,385 $ 5,708
========== ========== ==========
Weighted average common shares
outstanding 3,190,207 2,522,507 2,539,418
Effect of dilutive options 18,376 16,134 9,124
---------- ---------- ----------
Weighted average common shares
outstanding used to calculate diluted
earnings per common share 3,208,583 2,538,641 2,548,542
========== ========== ==========
Comprehensive Income: Accounting principles generally require that recognized
revenue, expenses, gains, and losses be included in net income. Although certain
changes in assets and liabilities, such as unrealized gains and losses on
available-for-sale securities, are reported as a separate component of the
equity section of the balance sheet, such items, along with net income, are
components of comprehensive income.
Segment Reporting: The Corporation is managed as one unit and does not have
separate operating segments. The Corporation's chief operating decision-maker
uses consolidated results to make operating and strategic decisions.
Adoption of Statement of Financial Accounting Standards (SFAS) No. 142: On
January 1, 2002, the Corporation implemented SFAS No. 142, Goodwill and Other
Intangible Assets. Under the provisions of SFAS No. 142, goodwill is no longer
subject to amortization over its useful life, but instead will be subject to at
least annual assessments for impairment by applying a fair value based test.
SFAS No. 142 also requires that an acquired intangible asset should be
separately recognized if the benefit of the intangible asset is obtained through
contractual or other legal rights, or if the asset can be sold, transferred,
licensed, rented, or exchanged, regardless of the acquirer's intent to do so.
The Corporation determined that no transitional impairment loss was required at
January 1, 2002. In addition, no impairment loss was required for the year ended
December 31, 2003 and 2002.
11
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Had provisions of SFAS No. 142 been applied in fiscal year 2001, the
Corporation's net income and net income per share would have been as follows:
Year Ended December 31, 2001
-------------------------------------
Basic Diluted
Net Earnings Earnings
Income Per Share Per Share
-------- --------- ---------
(Amounts In Thousands)
Net income:
As reported $ 5,708 $ 2.05 $ 2.04
Add: Goodwill amortization,
net of tax 46 0.02 0.02
-------- --------- ---------
PRO FORMA NET INCOME $ 5,754 $ 2.07 $ 2.06
======== ========= =========
Current Accounting Developments: FIN No. 46, Consolidation of Variable Interest
Entities, an Interpretation of Accounting Research Bulletin No. 51 (Revised
December 2003): FIN 46 establishes accounting guidance for consolidation of
variable interest entities (VIE) that function to support the activities of the
primary beneficiary. The primary beneficiary of a VIE entity is the entity that
absorbs a majority of the VIE's expected losses, receives a majority of the VIE
s expected residual returns, or both, as a result of ownership, controlling
interest, contractual relationship or other business relationship with a VIE.
Prior to the implementation of FIN 46, VIEs were generally consolidated by an
enterprise when the enterprise had a controlling financial interest through
ownership of a majority of voting interest in the entity. The provisions of FIN
46 were effective immediately for all arrangements entered into after January
31, 2003. However, subsequent revisions to the interpretation deferred the
implementation date of FIN 46 until the first period ending after March 15,
2004.
The Corporation will adopt FIN 46, as revised, in connection with its
consolidated financial statements for the quarter ended March 31, 2004. The
implementation of FIN 46 will require the Corporation to de-consolidate its
investment in the Trusts because the Corporation is not the primary beneficiary.
There will be no impact on shareholders equity or net income upon adoption of
the standard.
The trust preferred securities issued by the Trusts are currently included in
the Tier 1 capital of the Corporation for regulatory capital purposes. However,
because the financial statements of the Trusts will no longer be included in the
Corporation's consolidated financial statements, the Federal Reserve Board may
in the future disallow inclusion of the trust preferred securities in Tier 1
capital for regulatory capital purposes. In July 2003, the Federal Reserve Board
issued a supervisory letter instructing bank holding companies to continue to
include the trust preferred securities in their Tier 1 capital for regulatory
capital purposes until notice is given to the contrary. The Federal Reserve
Board intends to review the regulatory implications of the change in accounting
treatment of subsidiary trusts that issue trust preferred securities and, if
necessary or warranted, provide further appropriate guidance. There can be no
assurance that the Federal Reserve Board will continue to permit institutions to
include trust preferred securities in Tier I capital for regulatory capital
purposes.
12
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Accounting Standards Executive Committee has issued Statement of Position
(SOP) 03-3 "Accounting for Certain Loans or Debt Securities Acquired in a
Transfer". This Statement applies to all loans acquired in a transfer, including
those acquired in the acquisition of a bank or a branch, and provides that such
loans be accounted for at fair value with no allowance for loan losses, or other
valuation allowance, permitted at the time of acquisition. The difference
between cash flows expected at the acquisition date and the investment in the
loan should be recognized as interest income over the life of the loan. If
contractually required payments for principal and interest are less than
expected cash flows, this amount should not be recognized as a yield adjustment,
a loss accrual, or a valuation allowance. For the Corporation this Statement is
effective for calendar year 2005 and, early adoption, although permitted, is not
planned. No significant impact is expected on the consolidated financial
statements at the time of adoption.
Reclassification: Certain amounts in the prior year financial statements have
been reclassified, with no effect on net income, to conform with the 2003
presentation.
NOTE 2. BUSINESS COMBINATIONS
On November 1, 2003, the Corporation acquired all of the outstanding stock of
Reedsburg Bancorporation, Inc. (Reedsburg), a holding company owning a community
bank in Reedsburg, Wisconsin. The acquisition was a combination of 85 percent
cash and promissory notes and 15 percent common stock. Each shareholder of
Reedsburg received $765 of cash or notes and 3.6726 shares of common stock for
each share of Reedsburg common stock. The transaction was accounted for under
the purchase method of accounting. Accordingly, the results of operations have
been included in the Corporation's results of operations since the date of
acquisition. Under this method of accounting, the purchase price is allocated to
the respective assets acquired and liabilities assumed based on their estimated
fair values, net of applicable income tax effects. The excess cost over fair
value of net assets acquired of approximately $17.6 million has been recorded as
goodwill.
On November 30, 2002, the Corporation acquired Fortress Bancshares, Inc.
(Fortress), a multi-bank holding company that owns three separately chartered
community banks in Wisconsin, Minnesota, and Iowa. The acquisition was a
combination of 45 percent cash and 55 percent common stock. Each shareholder of
Fortress was paid $30 for each share of common stock held by such shareholders
or received 1.0153 shares of common stock for each one share of Fortress common
stock. The transaction was accounted for under the purchase method of
accounting. Accordingly, the results of operations have been included in the
Corporation's results of operations since the date of acquisition. Under this
method of accounting, the purchase price is allocated to the respective assets
acquired and liabilities assumed based on their estimated fair values, net of
applicable income tax effects. The excess cost over fair value of net assets
acquired of approximately $7.2 million has been recorded as goodwill.
13
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. BUSINESS COMBINATIONS (CONTINUED)
The unaudited pro forma results of operations, which follow, assume that these
acquisitions had occurred on January 1, 2001. In addition to combining the
historical results of operations, the pro forma calculations include purchase
accounting adjustments related to the acquisition. The pro forma calculations do
not include any anticipated cost savings as a result of the acquisition.
Unaudited pro forma consolidated results of operations for the years ended
December 31, 2003, 2002 and 2001, as though Reedsburg and Fortress had been
acquired January 1, 2001 are as follows:
2003 2002 2001
---------- ---------- ----------
(Amounts In Thousands,
Except Per Share Amounts)
Net interest income $ 40,277 $ 40,590 $ 30,967
========== ========== ==========
Net income $ 9,856 $ 10,100 $ 7,187
========== ========== ==========
Basic earnings per common share $ 2.98 $ 3.05 $ 2.23
========== ========== ==========
Diluted earnings per common share $ 2.96 $ 3.04 $ 2.23
========== ========== ==========
The pro forma results of operations are not necessarily indicative of the actual
results of operation that would have occurred had the Reedsburg and Fortress
acquisitions actually taken place at the beginning of the year ended December
31, 2001, or results that may occur in the future.
NOTE 3. CASH AND DUE FROM BANKS
The Banks are required to maintain vault cash and reserve balances with the
Federal Reserve Bank based upon a percentage of deposits. These requirements
approximated $3,503,000 and $3,076,000 at December 31, 2003 and 2002,
respectively.
14
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. AVAILABLE-FOR-SALE SECURITIES
Amortized costs and fair values of available-for-sale securities as of December
31, 2003 and 2002 are summarized as follows:
December 31, 2003
----------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
--------- ---------- ---------- --------
(Amounts In Thousands)
U.S. treasury and other U.S.
government agency securities $ 32,423 $ 50 $ (71) $ 32,402
State and political subdivisions 47,794 1,175 (110) 48,859
Corporate bonds 75 - - 75
Collateralized mortgage obligations 34,407 140 (298) 34,249
Mortgage-backed securities 40,853 301 (142) 41,012
-------- ------- --------- --------
$155,552 $ 1,666 $ (621) $156,597
======== ======= ========= ========
December 31, 2002
----------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
--------- ---------- ---------- --------
(Amounts In Thousands)
U.S. treasury and other U.S.
government agency securities $ 23,654 $ 410 $ - $ 24,064
State and political subdivisions 39,006 970 (75) 39,901
Corporate bonds 75 - - 75
Mutual funds 3,069 - - 3,069
Collateralized mortgage obligations 28,274 357 (20) 28,611
Mortgage-backed securities 33,853 568 (16) 34,405
-------- ------- --------- --------
$127,931 $ 2,305 $ (111) $130,125
======== ======= ========= ========
15
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. AVAILABLE-FOR-SALE SECURITIES (CONTINUED)
Unrealized losses and fair value, aggregated by investment category and length
of time that individual securities have been in a continuous unrealized loss
position, as of December 31, 2003 are summarized as follows:
Less than 12 months 12 Months or More Total
--------------------- -------------------- --------------------
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
-------- ---------- ------- ---------- -------- ----------
(Amounts In Thousands)
U.S. treasury and other U.S.
government agency securities $ 5,126 $ (71) $ - $ - $ 5,126 $ (71)
State and political subdivisions 1,159 (104) 286 (6) 1,445 (110)
Corporate bonds - - - - - -
Collateralized mortgage obligations 21,155 (292) 855 (6) 22,010 (298)
Mortgage-backed securities 9,993 (141) 51 (1) 10,044 (142)
-------- ------- ------- -------- -------- -----
$ 37,433 $ (608) $ 1,192 $ (13) $ 38,625 $(621)
======== ======= ======= ======== ======== =====
For all of the above investment securities, the unrealized losses are generally
due to changes in interest rates and, as such, are considered to be temporary,
by the Corporation.
The amortized cost and fair value of available-for-sale securities at December
31, 2003, by contractual maturity, are shown below. Expected maturities will
differ from contractual maturities in mortgage-related securities, and
collateralized mortgage obligations since the anticipated maturities are not
readily determinable. Therefore, these securities are not included in the
maturity categories in the following summary:
Amortized Fair
Cost Value
--------- --------
(Amounts In Thousands)
Due in one year or less $ 18,856 $ 19,066
Due after one year through five years 24,011 24,775
Due after five years through ten years 29,287 28,122
Due after ten years 8,138 9,373
-------- --------
80,292 81,336
Collateralized mortgage obligations 34,407 34,249
Mortgage-related securities 40,853 41,012
-------- --------
$155,552 $156,597
======== ========
Proceeds from sales of available-for-sale securities during the years ended
December 31, 2003, 2002, and 2001, were $15,093,000, $7,666,000, and $4,174,000,
respectively. Gross gains of $360,000, $215,000, and $96,000 were recorded on
those sales for the years ended December 31, 2003, 2002, and 2001, respectively.
Gross losses of $0, $104,000, and $8,000 were also recorded in the years ended
December 31, 2003, 2002, and 2001, respectively.
16
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. AVAILABLE-FOR-SALE SECURITIES (CONTINUED)
Securities with a fair value of $58,125,000 and $50,548,000 at December 31, 2003
and 2002, respectively, were pledged as collateral on public deposits and for
other purposes as required or permitted by law.
NOTE 5. LOANS
Major classifications of loans are as follows:
December 31,
----------------------
2003 2002
---------- ---------
(Amounts In Thousands)
First mortgage:
Conventional single-family residential $113,479 $ 98,075
Commercial and multi-family residential 283,433 198,250
Construction 47,894 32,995
Farmland 43,676 20,847
-------- --------
488,482 350,167
-------- --------
Commercial business loans 294,645 246,787
Consumer and installment loans 51,886 51,883
Home equity loans 14,664 9,492
Other 7,397 7,109
-------- --------
368,592 315,271
-------- --------
Less allowance for loan losses 9,136 7,663
-------- --------
$847,938 $657,775
======== ========
Changes in the allowance for loan losses for the years ended December 31, 2003,
2002, and 2001 are presented as follows:
December 31,
------------------------------
2003 2002 2001
-------- -------- --------
(Amounts In Thousands)
Balance at beginning of year $ 7,663 $ 5,563 $ 5,010
Increase due to acquisition 1,203 2,008 -
Provisions charged to expense 1,311 1,156 1,125
Recoveries 390 112 23
Charge-offs (1,431) (1,176) (595)
------- ------- -------
Balance at end of year $ 9,136 $ 7,663 $ 5,563
======= ======= =======
17
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5. LOANS (CONTINUED)
The following is a summary of information pertaining to impaired loans:
December 31,
----------------------
2003 2002
------ ------
(Amounts In Thousands)
Impaired loans for which an allowance
has been provided $3,288 $3,203
Impaired loans for which no allowance
has been provided 1,994 -
------ ------
Total loans determined to be impaired $5,282 $3,203
====== ======
Allowance provided for impaired loans,
included in the allowance for loan losses $ 433 $ 745
====== ======
Year Ended December 31,
------------------------------
2003 2002 2001
-------- -------- --------
(Amounts In Thousands)
Average investment in impaired loans $ 4,645 $ 3,397 $ 3,276
======== ======== ========
Nonaccruing loans totaled $5,282,000 and $3,203,000 as of December 31, 2003 and
2002, respectively. Interest income in the amount of approximately $613,000,
$311,000, and $48,000 would have been earned on the nonaccrual loans had they
been performing in accordance with their original terms during the years ended
December 31, 2003, 2002, and 2001, respectively. The interest collected on
nonaccrual loans and impaired loans included in income for the years ended
December 31, 2003, 2002, and 2001 was approximately $368,000, $350,000, and
$104,000, respectively.
Certain directors and executive officers of the Corporation, and their related
interests, had loans outstanding in the aggregate amounts of $27,654,000 and
$25,100,000 at December 2003 and 2002, respectively. During 2003, $10,914,000 of
new loans were made, repayments totaled $9,969,000 and there was an increase of
$1,609,000 due to changes in related party interests. These loans were made on
substantially the same terms, including interest rates and collateral, as those
prevailing at the same time for comparable transactions with other persons, and
did not involve more than normal risks of collectibility or present other
unfavorable features.
The unpaid principal balance of mortgage loans serviced for others, which are
not included on the consolidated balance sheet, were approximately $279,107,000
and $187,121,000 at December 31, 2003 and 2002, respectively. Mortgage servicing
rights, which are included with other assets, were $1,712,000 and $703,000,
respectively, at December 31, 2003 and 2002. The fair value of the servicing
rights was determined using a discount rate of 10 percent, prepayment speeds
ranging from 1 percent to 8 percent, depending upon the stratification of the
specific right, and a weighted average default rate of zero percent. The
carrying values of these mortgage servicing rights approximate fair market
values as of December 31, 2003 and 2002, respectively.
18
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5. LOANS (CONTINUED)
The following summarizes the activity pertaining to mortgage servicing rights:
Years Ended December 31,
----------------------------
2003 2002 2001
-------- ------- ------
(In Thousands)
Balance at beginning of year $ 703 $ - $ -
Mortgage servicing rights capitalized 1,542 1,084 -
Mortgage servicing rights amortized (533) (381) -
Provision for loss in fair value - - -
------- ------- ------
Balance at end of year $ 1,712 $ 703 $ -
======= ======= ======
NOTE 6. PREMISES AND EQUIPMENT
Premises and equipment are stated at cost, less accumulated depreciation, and
are summarized as follows:
December 31,
----------------------
2003 2002
--------- ---------
(Amounts In Thousands)
Land $ 3,554 $ 2,290
Office buildings and improvements 20,240 14,893
Furniture and equipment 17,952 13,814
------- -------
41,746 30,997
Less accumulated depreciation 21,155 15,591
------- -------
$20,591 $15,406
======= =======
During the year ended December 31, 1999 and 2000, the Corporation sold certain
land and buildings and, subsequently, leased a portion of the buildings back
from the new owners. The total gain on the sales was $2,600,000, of which
$1,352,000 was immediately recognized in income. The remaining gain is being
accreted into income over the remaining lease terms. The gains recognized during
the years ended December 31, 2003, 2002, and 2001 were $0, $356,000, and
$557,000, respectively.
19
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7. GOODWILL AND INTANGIBLE ASSETS
Goodwill and intangible assets consisted of the following at December 31, 2003
and 2002:
2003 2002
------- -------
(Amounts In Thousands)
Goodwill $27,634 $ 8,250
Core deposit intangibles 3,443 2,152
Other intangibles 563 -
------- -------
31,640 10,402
Less accumulated amortization 1,138 721
------- -------
Intangibles assets, net $30,502 $ 9,681
======= =======
The Corporation's goodwill and intangible assets include the excess of cost over
fair value of net assets acquired (goodwill), the value of ongoing customer
relationships (core deposit and other intangibles) arising from the purchase of
certain assets and the assumption of certain liabilities from unrelated
entities. For the years ended December 31, 2003 and 2002, the Corporation
acquired $19,384,000 and $7,232,000, of goodwill, $1,291,000 and $2,152,000 of
core deposit intangibles and $563,000 and $0 of other intangibles, respectively.
In accordance with the provisions of SFAS No. 142, goodwill of $27,634,000
related to acquisitions is not being amortized, but is evaluated annually for
impairment. Core deposit intangibles of $3,443,000 are being amortized over a
10-year period. Other intangibles of $563,000 are being amortized over a 16-year
period. Core deposit intangible assets are periodically reviewed for impairment.
Any impairment in the core deposit intangibles, other intangibles or goodwill
would be recognized against income in the period of impairment.
Amortization of core deposit intangibles was $394,000 and $99,000 during the
years ended December 31, 2003 and 2002, respectively. For the years ended
December 31, 2003 and 2002, amortization of other intangibles was $23,000 and
$0, respectively. Estimated aggregate amortization expense for the core deposit
and other intangibles for the next five years is as follows:
Years Ending December 31,
- -------------------------
2004 $529,000
2005 434,000
2006 360,000
2007 322,000
2008 322,000
20
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8. DEPOSITS
Deposits consisted of the following as of December 31:
2003 2002
-------- --------
(Amounts In Thousands)
Negotiable Order of Withdrawal accounts:
Non-interest bearing $109,755 $ 97,288
Interest-bearing 84,713 56,080
Savings deposits 109,474 83,239
Money market investment accounts 281,881 194,196
Time deposits and certificate accounts 326,125 298,653
-------- --------
$911,948 $729,456
======== ========
The scheduled maturities of time deposits and certificate accounts at December
31, 2003 are as follows (amounts in thousands):
Years Ending December 31,
- -------------------------
2004 $229,641
2005 66,558
2006 18,745
2007 5,366
2008 5,815
--------
$326,125
========
At December 31, 2003 and 2002, time deposits and certificate accounts with
balances greater than $100,000 amounted to $74,155,000 and $74,532,000,
respectively.
21
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. BORROWINGS
Short-term borrowings consisted of the following at December 31:
2003 2002
-------- --------
(Amounts In Thousands)
Short-term borrowings:
Federal funds purchased, 1.2857% $24,500 $ -
Securities sold under agreements to repurchase
with rates ranging from 0.40% to 1.46% 1,588 3,101
Lines of credit with unaffiliated banks with rates
ranging from 2.57% to 5.125% 7,736 14,100
Treasury, tax, and loan accounts with the Federal
Home Loan Bank (FHLB) of Chicago 183 887
------- -------
Total short-term borrowings $34,007 $18,088
======= =======
Securities sold under agreements to repurchase generally mature within 120 days.
Information concerning securities sold under agreements to repurchase is
summarized as follows:
2003 2002
-------- --------
(Amounts In Thousands)
Average daily balance during the year $5,059 $7,273
Average daily interest rate during the year 1.29% 1.88%
Maximum month-end balance during the year $8,425 $9,894
Weighted average rate as of December 31 1.27% 1.53%
Securities underlying the agreements at year-end:
Carrying value $2,017 $3,698
Estimated fair value 2,017 3,698
22
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. BORROWINGS (CONTINUED)
Long-term borrowings consist of the following as of December 31:
2003 2002
------- --------
(Amounts In Thousands)
Long-term borrowings:
Acquisition notes payable, 5.35 percent, equal
payments of $2,564 until 2008 $12,818 $ -
Notes payable to FHLB, maturing during fiscal year
2003 with rates ranging from 1.85% to 6.50% - 29,150
Notes payable to FHLB, maturing during fiscal year
2004 with rates ranging from 1.43% to 5.12% 24,233 21,675
Notes payable to FHLB, maturing during fiscal year
2005 with rates ranging from 1.86% to 6.53% 14,642 9,754
Notes payable to FHLB, maturing during fiscal year
2006 at 2.62% 3,000 -
Notes payable to FHLB, maturing during fiscal year
2007 with rates ranging from 3.17% to 3.27% 6,000 -
Notes payable to FHLB, maturing during fiscal year
2008 with rates ranging from 4.35% to 5.34% 7,000 7,058
Notes payable to FHLB, maturing thereafter
with rates ranging from 4.33% to 5.95% 4,653 4,685
------- -------
Total long-term borrowings $72,346 $72,322
======= =======
At December 31, 2003, FHLB borrowings are collateralized by securities with a
fair value of $32,839,000 and loans receivable with an outstanding balance of
$106,606,000. At December 31, 2002, FHLB borrowings were collateralized by
securities with a fair value of $24,825,000 and loans receivable with an
outstanding balance of $89,763,000.
Of the borrowings due in 2005, $1,000 is callable quarterly, all of the
borrowings in 2008 are callable quarterly, $4,000 of the borrowings due
thereafter are callable quarterly and $500 of the borrowings due thereafter is
callable in 2006.
23
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10. COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF
SUBSIDIARY TRUST HOLDING SOLELY SUBORDINATED DEBENTURES
In November 2002, May 2003, October 2003 and October 2003, the Corporation the
Trusts, all Connecticut statutory business trusts, and issued $10 million, $10
million, $7.5 million, and $7.5 million, respectively, of three-month LIBOR plus
3.35 percent, 8.25 percent fixed, three-month LIBOR plus 2.95 percent, and 8.25
percent fixed, respectively, Company obligated mandatorily redeemable trust
preferred securities (the trust preferred securities). These securities
represent preferred beneficial interests in the assets of the Trust. The trust
preferred securities will mature on November 11, 2032, May 30, 2033, October 15,
2033, and October 15, 2033, respectively, and are redeemable, in whole or in
part, at the option of the Corporation at any time after five years. The Trusts
also issued $310 thousand, $310 thousand, $232 thousand, and $232 thousand,
respectively, of common equity securities to the Corporation. The Trusts used
the proceeds of the offering of the trust preferred securities to purchase $10.3
million, $10.3 million, $7.7 million, and $7.7 million, respectively, of junior
subordinated deferrable interest debentures (the debentures) issued by the
Corporation, which have interest rates and terms substantially similar to the
trust preferred securities. Debt issuance cost totaling $44 thousand, $210
thousand, $9 thousand, and $9 thousand and underwriting fees of $300 thousand,
$300 thousand, $169 thousand, and $169 thousand, respectively, were capitalized
related to the offerings and are being amortized over the estimated life of the
trust preferred securities. Holders of the capital securities have no voting
rights, are unsecured, and rank junior in priority of payment to all of the
Corporation's indebtedness and senior to the Corporation's capital stock.
Payments of distributions on the trust preferred securities and payments on
redemption of the trust preferred securities are guaranteed by the Corporation
on a limited basis. The Corporation also entered into an agreement as to
expenses and liabilities with the Trust pursuant to which it agreed, on a
subordinated basis, to pay any costs, expenses or liabilities of the Trust other
than those arising under the trust preferred securities. The obligations of the
Corporation under the junior subordinated debentures, the related indenture, the
trust agreement establishing the Trusts, the guarantee and the agreement as to
expenses and liabilities, in the aggregate, constitute a full and unconditional
guarantee by the Corporation of the Trusts' obligations under the trust
preferred securities.
The Corporation owns all of the outstanding common stock of the Trusts. The
Trusts are considered variable interest entities (VIEs) under Financial
Accounting Standards Board Interpretation (FIN) No. 46, "Consolidation of
Variable Interest Entities, an interpretation of Accounting Research Bulletin
No. 51", as revised. Prior to FIN 46, VIEs were generally consolidated by an
enterprise when the enterprise had a controlling financial interest through
ownership of a majority of voting interest in the entity. Under FIN 46, a VIE
should be consolidated by its primary beneficiary. The Corporation will adopt
FIN 46 during the first quarter of 2004. Because the Corporation is not the
primary beneficiary of the Trusts, the financial statements of the Trusts will
no longer be included in the consolidated financial statements of the
Corporation. The Corporation's prior financial statements will be restated to
de-consolidate the Corporation's investment in the Trust. See Note 1 -- Summary
of Significant Accounting Policies -- Current Accounting Developments.
24
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10. COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF
SUBSIDIARY TRUST HOLDING SOLELY SUBORDINATED DEBENTURES (CONTINUED)
$26,437,000 of the trust preferred securities are currently included in the Tier
1 capital, with the remainder included in Tier II capital of the Corporation for
regulatory capital purposes. However, because the Trusts will no longer be a
part of the Corporation's financial statements, the Federal Reserve Board may in
the future disallow inclusion of the trust preferred securities in Tier 1
capital for regulatory capital purposes. In July 2003, the Federal Reserve Board
issued a supervisory letter instructing bank holding companies to continue to
include the trust preferred securities in their Tier 1 capital for regulatory
capital purposes until notice is given to the contrary. The Federal Reserve
Board intends to review the regulatory implications of the change in accounting
treatment of subsidiary trusts that issue trust preferred securities and, if
necessary or warranted, provide further appropriate guidance. There can be no
assurance that the Federal Reserve Board will continue to permit institutions to
include trust preferred securities in Tier I capital for regulatory capital
purposes. As of December 31, 2003, assuming the Corporation was not permitted to
include the $35 million in trust preferred securities issued by the Trusts in
its Tier 1 and Tier II capital, the Company would still exceed the regulatory
required minimums for capital adequacy purposes (see Note 17 -- Capital
Requirements). If the trust preferred securities were no longer permitted to be
included in Tier 1 capital, the Corporation would also be permitted to redeem
the capital securities without penalty.
NOTE 11. STOCK BASED COMPENSATION
The Corporation has an Incentive Stock Option Plan under which 210,000 shares of
common stock are reserved for the grant of options to officers and key employees
at a price not less than the fair market value of the stock on the date of the
grant. The Incentive Stock Option Plan limits the options that may be granted to
each employee to $100,000 (based on aggregate fair market value at the date of
the grant) per calendar year, on a cumulative basis. Options must be exercised
within ten years of the date of grant and can be regranted if forfeited.
25
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11. STOCK BASED COMPENSATION (CONTINUED)
Activity in the Incentive Stock Option Plan is summarized in the following
table:
Weighted- Weighted-
Average Average
Number Exercise Price Remaining
of Shares Per Share Contractual Life Exercisable
--------- -------------- ---------------- -----------
Total outstanding at
December 31, 2000 68,265 $ 25.11 6.04 68,265
Granted 4,000 28.00
Exercised (21,450) 18.50
Forfeited -
-------
Total outstanding at
December 31, 2001 50,815 $ 29.60 7.15 50,815
Acquisition 17,767 16.62
Granted -
Exercised -
Forfeited -
-------
Total outstanding at
December 31, 2002 68,582 26.24 4.82 68,582
Stock dividend 6,659
Granted -
Exercised (1,990) 15.15
Forfeited -
-------
Total outstanding at
December 31, 2003 73,251 24.15 5.20 73,251
=======
26
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11. STOCK BASED COMPENSATION (CONTINUED)
The following table summarizes information about stock options outstanding and
exercisable as of December 31, 2003.
Options Outstanding Options Exercisable
------------------------------------------- -----------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Range of Number Contractual Life Exercise Number Exercise
Exercise Price Outstanding (In Years) Price Exercisable Price
-------------- ----------- ---------------- --------- ----------- ---------
$13.77 to $15.11 21,358 4.2 $15.00 21,358 $ 15.00
$25.45 to $28.31 51,893 5.7 27.92 51,893 27.92
------- -------
73,251 73,251
======= =======
NOTE 12. INCOME TAXES
The provision for income taxes consisted of the following:
December 31,
------------------------------
2003 2002 2001
-------- -------- --------
(Amounts In Thousands)
Current $ 4,113 $ 3,605 $ 3,208
Deferred (46) (361) (475)
------- ------- -------
$ 4,067 $ 3,244 $ 2,733
======= ======= =======
27
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12. INCOME TAXES (CONTINUED)
The provision for income taxes differs from that computed at the federal
statutory corporate tax rate as follows:
2003 2002 2001
------------------ ----------------- -----------------
% of % of % of
Pretax Pretax Pretax
Amount Income Amount Income Amount Income
-------- ------ -------- ------ -------- ------
(Amounts In Thousands)
Computed "expected" tax
expense $ 4,303 35.0% $ 3,370 35.0% $ 2,954 35.0%
Effect of graduated tax
rates (123) (1.0) (96) (1.0) (84) (1.0)
Tax-exempt income, net (643) (5.2) (384) (4.0) (351) (4.2)
State income taxes, net
of federal benefit 552 4.5 323 3.4 187 2.2
Other, net (22) (0.2) 31 0.3 27 0.3
------- ----- ------- ----- ------- -----
$ 4,067 33.1% $ 3,244 33.7% $ 2,733 32.3%
======= ===== ======= ===== ======= =====
The net deferred tax assets included with other assets in the accompanying
consolidated balance sheets include the following amounts:
December 31,
----------------------
2003 2002
-------- --------
(Amounts In Thousands)
Deferred tax assets:
Allowance for loan losses $ 3,183 $ 2,553
Net operating loss carryforwards 1,549 1,149
Deferred compensation 1,089 700
Other assets 1,220 650
------- -------
Total deferred tax assets 7,041 5,052
Valuation allowance (1,549) (1,149)
------- -------
5,492 3,903
------- -------
Deferred tax liabilities:
Depreciation 515 312
Purchase accounting 2,169 904
Unrealized gain on available-for-sale securities 382 746
Other liabilities 2,275 615
------- -------
Total deferred tax liabilities 5,341 2,577
------- -------
Net deferred tax asset $ 151 $ 1,326
======= =======
28
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13. PROFIT-SHARING AND PENSION PLAN
Profit-Sharing Plan: The Corporation has a 401(k) Profit Sharing Plan and Trust
which covers substantially all employees with at least six months of service who
have attained age twenty and one-half. Participating employees may annually
contribute up to 12 percent of their pretax compensation. The Corporation's
annual contribution consists of a discretionary matching percentage, limited to
1 percent of employee compensation, and an additional discretionary amount which
is determined annually by the Board of Directors. The Corporation's
contributions for 2003, 2002 and 2001, were approximately $437,000, $319,000,
and $288,000, respectively.
Pension Plan: The Corporation has a non-contributory defined contribution
pension plan covering substantially all employees of the Cresco, Westby and
Houston banks. Total pension expense was approximately $206,000, $195,000, and
$189,000 during 2003, 2002, and 2001, respectively.
NOTE 14. SALARY CONTINUATION AGREEMENT
The Corporation has entered into salary continuation agreements with various
executive officers. The agreements provide for the payment of specified amounts
upon the employee's retirement or death which is being accrued over the
anticipated remaining period of employment. Expense recognized for future
benefits under these agreements totaled $183,000, $153,000, and $174,000 during
2003, 2002, and 2001, respectively.
Although not part of the agreement, the Corporation purchased insurance on the
lives of the officers which could provide funding for the payment of benefits.
Included in other assets is $2,693,000 and $2,648,000 of related cash surrender
value of life insurance as of December 31, 2003 and 2002, respectively.
NOTE 15. COMMITMENTS AND CONTINGENT LIABILITIES
In the normal course of business, the Corporation is involved in various legal
proceedings. In the opinion of management, any liability resulting from such
proceedings would not have a material adverse effect on the consolidated
financial statements.
Like many Wisconsin financial institutions, several of our subsidiaries have
non-Wisconsin subsidiaries which hold and manage assets, the income for which
state taxes are not imposed. Currently, the Wisconsin Department of Revenue is
conducting audits at some of our investment subsidiaries which may result in
state taxes be imposed, including prior periods. Any settlement amount at this
point is undeterminable.
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.
29
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15. COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
Off-balance-sheet financial instruments whose contracts represented credit
and/or interest rate risk at December 31, 2003 and 2002, are as follows:
December 31,
----------------------
2003 2002
-------- -------
(Amounts In Thousands)
Commitments to originate mortgage loans $ 29,248 $23,845
Unused lines of credit:
Commercial business 108,163 71,074
Home equity 13,957 11,088
Credit cards 17,146 10,832
Standby letters of credit 10,275 9,346
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. Standby letters of credit are conditional
commitments issued to guarantee the performance of a customer to a third party.
Those guarantees are primarily issued to support public and private borrowing
arrangements. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to customers.
The Corporation evaluates each customer's credit worthiness on a case-by-case
basis. The amount of collateral obtained, if deemed necessary by the Corporation
upon extension of credit, is based on management's credit evaluation of the
counterparty. Collateral held varies but may include accounts receivable,
inventory, property and equipment, and income-producing commercial properties.
Credit card commitments are unsecured.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to support public and private borrowing arrangements and,
generally, have terms of one year or less. The credit risk involved in issuing
letters of credit is essentially the same as that involved in extending loan
facilities to customers. The Bank holds collateral, which may include accounts
receivable, inventory, property, equipment, and income-producing properties,
supporting those commitments if deemed necessary. In the event the customer does
not perform in accordance with the terms of the agreement with the third party,
the Bank would be required to fund the commitment. The maximum potential amount
of future payments the Bank could be required to make is represented by the
contractual amount shown in the summary above. If the commitment is funded the
Bank would be entitled to seek recovery from the customer. At December 31, 2003
and 2002, no amounts have been recorded as liabilities for the Bank's potential
obligations under these guarantees.
Except for the above-noted commitments to originate loans in the normal course
of business, the Corporation and the Banks have not undertaken the use of
off-balance-sheet derivative financial instruments for any purpose.
30
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15. COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
Various subsidiary banks of the Corporation have entered into noncancelable
leases for certain branch facilities. The following is a schedule of future
minimum rental payments required under the noncancelable lease agreements
(dollars in thousands):
Years Ending December 31,
- -------------------------
2004 $1,042
2005 1,032
2006 971
2007 723
2008 721
------
$4,489
======
NOTE 16. CONCENTRATION OF CREDIT RISK
The Corporation and the Banks do not engage in the use of interest-rate swaps,
futures, or option contracts as of December 31, 2003.
Practically all of the Banks' loans, commitments, and standby letters of credit
have been granted to customers in the Banks' market areas. Although the Banks
have a diversified loan portfolio, the ability of their debtors to honor their
contracts is dependent on the economic conditions of the counties surrounding
the Banks. The concentration of credit by type of loan is set forth in Note 5.
Investment securities issued by state and political subdivisions (see Note 4)
also involve governmental entities within the Banks' market areas.
NOTE 17. REGULATORY CAPITAL REQUIREMENTS AND RESTRICTIONS OF DIVIDENDS
The Corporation (on a consolidated basis) and Banks are subject to various
regulatory capital requirements administered by the federal banking agencies.
Failure to meet minimum capital requirements can initiate certain mandatory -
and possibly additional discretionary - actions by regulators that, if
undertaken, could have a direct material effect on the Banks' financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Banks must meet specific capital guidelines that
involve quantitative measures of the Banks' assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices. The
capital amounts and classification are also subject to qualitative judgments by
the regulators about components, risk weightings, and other factors. Prompt
corrective action provisions are not applicable to bank holding companies.
Quantitative measures established by regulation to ensure capital adequacy
require the Corporation and Banks to maintain minimum amounts and ratios (set
forth in the table on the following page) of total and Tier I capital (as
defined in the regulations), to risk-weighted assets (as defined), and Tier 1
capital (as defined), to average assets (as defined). Management believes, as of
December 31, 2003 and 2002, that the Corporation and Banks meet all capital
adequacy requirements to which they are subject.
31
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17. REGULATORY CAPITAL REQUIREMENTS AND RESTRICTIONS OF DIVIDENDS
(CONTINUED)
As of December 31, 2003, the most recent notification from the Federal Deposit
Insurance Corporation categorized all the Banks as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Banks must maintain minimum total risk-based, Tier I
risk-based, and Tier I leverage ratios as set forth in the table on the
following page. There are no conditions or events since that notification that
management believes have changed the Corporation's or Banks' classification as
of December 31, 2003.
The Corporation's and Banks' actual capital amounts and ratios as of December
31, 2003 and 2002 are presented in the following table.
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------ ------------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
-------- ------ -------- ------ --------- ------
(Amounts In Thousands)
AS OF DECEMBER 31, 2003
Total capital (to risk-weighted assets):
Consolidated $ 92,602 10.23% $ 72,434 8.00% $ 90,543 N/A
Lincoln State Bank 38,253 10.80 28,339 8.00 35,424 10.00%
Franklin State Bank 9,213 10.87 6,782 8.00 8,478 10.00
Grafton State Bank 14,661 12.32 9,519 8.00 11,898 10.00
Community Bank Oconto County 7,860 11.68 5,383 8.00 6,729 10.00
Fortress Bank of Westby 11,287 11.96 7,551 8.00 9,439 10.00
Fortress Bank of Cresco 6,346 15.38 3,300 8.00 4,126 10.00
Fortress Bank N.A. 5,097 14.17 2,878 8.00 3,598 10.00
Reedsburg 12,888 12.74 8,090 8.00 10,113 10.00
Tier 1 capital (to risk-weighted assets):
Consolidated $ 74,903 8.27% $ 36,217 4.00% $ 54,236 N/A
Lincoln State Bank 34,909 9.85 14,170 4.00 21,255 6.00%
Franklin State Bank 8,322 9.82 3,391 4.00 5,087 6.00
Grafton State Bank 13,598 11.43 4,759 4.00 7,139 6.00
Community Bank Oconto County 7,317 10.87 2,692 4.00 4,038 6.00
Fortress Bank of Westby 10,355 10.97 3,776 4.00 5,663 6.00
Fortress Bank of Cresco 5,830 14.13 1,650 4.00 2,475 6.00
Fortress Bank N.A. 4,647 12.92 1,439 4.00 2,159 6.00
Reedsburg 11,612 11.48 4,045 4.00 6,068 6.00
Tier 1 capital (to average assets):
Consolidated $ 74,903 7.19% $ 41,696 4.00% $ 51,120 N/A
Lincoln State Bank 34,909 9.06 15,415 4.00 19,269 5.00%
Franklin State Bank 8,322 9.09 3,662 4.00 4,578 5.00
Grafton State Bank 13,598 8.60 6,324 4.00 7,904 5.00
Community Bank Oconto County 7,317 8.87 3,300 4.00 4,125 5.00
Fortress Bank of Westby 10,355 8.92 4,644 4.00 5,805 5.00
Fortress Bank of Cresco 5,830 9.72 2,398 4.00 2,998 5.00
Fortress Bank N.A. 4,647 8.79 2,116 4.00 2,645 5.00
Reedsburg 11,612 8.23 5,643 4.00 7,053 5.00
32
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17. REGULATORY CAPITAL REQUIREMENTS AND RESTRICTIONS OF DIVIDENDS
(CONTINUED)
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------ ------------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
-------- ------ -------- ------ --------- ------
(Amounts In Thousands)
AS OF DECEMBER 31, 2002
Total capital (to risk-weighted assets):
Consolidated $76,003 10.71% $56,755 8.00% $70,944 N/A
Lincoln State Bank 36,104 11.91 24,248 8.00 30,310 10.00%
Franklin State Bank 7,583 10.17 5,962 8.00 7,453 10.00
Grafton State Bank 14,236 12.62 9,022 8.00 11,278 10.00
Community Bank Oconto County 7,446 13.32 4,471 8.00 5,589 10.00
Fortress Bank of Westby 10,346 12.57 6,583 8.00 8,229 10.00
Fortress Bank of Cresco 5,766 15.16 3,043 8.00 3,803 10.00
Fortress Bank N.A 4,961 13.15 3,018 8.00 3,772 10.00
Tier 1 capital (to risk-weighted assets):
Consolidated $68,340 9.63% $28,378 4.00% $42,566 N/A
Lincoln State Bank 32,938 10.87 12,124 4.00 18,186 6.00%
Franklin State Bank 6,699 8.99 2,981 4.00 4,472 6.00
Grafton State Bank 13,192 11.70 4,511 4.00 6,767 6.00
Community Bank Oconto County 6,918 12.38 2,235 4.00 3,353 6.00
Fortress Bank of Westby 9,332 11.34 3,292 4.00 4,937 6.00
Fortress Bank of Cresco 5,290 13.91 1,521 4.00 2,282 6.00
Fortress Bank N.A 4,489 11.90 1,509 4.00 2,263 6.00
Tier 1 capital (to average assets):
Consolidated $68,340 9.41% $29,440 4.00% $36,801 N/A
Lincoln State Bank 32,938 9.54 13,813 4.00 17,267 5.00%
Franklin State Bank 6,699 7.91 3,387 4.00 4,234 5.00
Grafton State Bank 13,192 8.73 6,042 4.00 7,553 5.00
Community Bank Oconto County 6,918 9.51 2,910 4.00 3,637 5.00
Fortress Bank of Westby 9,332 8.60 4,342 4.00 5,427 5.00
Fortress Bank of Cresco 5,290 8.92 2,372 4.00 2,966 5.00
Fortress Bank N.A 4,489 8.26 2,173 4.00 2,717 5.00
33
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17. REGULATORY CAPITAL REQUIREMENTS AND RESTRICTIONS OF DIVIDENDS
(CONTINUED)
Dividends are paid by the Corporation from funds which are mainly provided by
dividends from the Banks. However, certain restrictions exist regarding the
ability of the Banks to transfer funds to the Corporation in the form of cash
dividends, loans, or advances. Approval of the regulatory authorities is
required to pay dividends in excess of certain levels of the Banks' retained
earnings.
As of December 31, 2003, the subsidiary banks collectively had equity of
approximately $125,219,000 of which approximately $12,169,000 was available for
distribution to the Corporation as dividends without prior regulatory approval.
NOTE 18. FAIR VALUES OF FINANCIAL INSTRUMENTS
FASB Statement No. 107, Disclosures About Fair Value of Financial Instruments
(SFAS No. 107), requires disclosure of fair value information about financial
instruments, whether recognized or not recognized in the balance sheet, for
which it is practicable to estimate that value. The fair value of a financial
instrument is the current amount that would be exchanged between willing
parties, other than a forced liquidation. Fair value is best-determined base
upon quoted market prices. However, in many instances, there are no quoted
market prices for the Corporation's various financial instruments. In cases
where quoted market prices are not available, fair values are based on estimates
using present value or other valuation techniques. Those techniques are
significantly affected by assumptions used, including the discount rate and
estimates of future cash flows. Accordingly, the fair value estimates may not be
realized in an immediate settlement of the instrument. SFAS No. 107 excludes
certain financial instruments and all nonfinancial instruments from its
disclosure requirements. Accordingly, the aggregate fair value amounts presented
may not necessarily represent the underlying fair value of the Corporation.
The following methods and assumptions were used by the Corporation in estimating
fair value disclosures for financial instruments:
Cash and due from banks: The carrying amounts of cash and due from
banks equal their fair values.
Interest bearing deposits in banks: The carrying amounts of interest
bearing deposits in banks equal their fair values.
Federal funds sold: The carrying amounts of federal funds sold equal
their fair values.
Available-for-sale securities: Fair values for securities are based on
quoted market prices.
Loans: For variable-rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on carrying
values. Fair values for all other loans are estimated by discounting
contractual cash flows using estimated market discount rates which
reflect the credit and interest rate risk inherent in the loan.
FHLB stock: FHLB stock is carried at cost which is its redeemable value
since the market for this stock is restricted.
34
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
Accrued interest receivable and payable: The carrying amounts of
accrued interest receivable and payable equal their fair values.
Deposits: The fair values disclosed for demand deposits (interest and
non-interest checking, passbook savings, and certain types of money
market accounts) are, by definition, equal to the amount payable on
demand at the reporting date. Fair values for fixed-rate certificates
of deposit are estimated using a discounted cash flow calculation that
applies interest rates currently being offered on certificates within
the marketplace.
Short-term borrowings: The carrying amounts of short-term borrowings
approximate their fair values.
Long-term borrowings: The fair values of long-term borrowings are
estimated using discounted cash flow analysis based on current interest
rates being offered on instruments with similar terms and credit
quality.
Company Obligated Mandatorily Redeemable Preferred Securities: The
carrying amount of the Company Obligated Mandatorily Redeemable
Preferred Securities equals its fair value.
Off-balance-sheet instruments: The estimated fair value of fee income
on letters of credit at December 31, 2003 and 2002 is insignificant.
Loan commitments on which the committed interest rate is less that the
current market rate are also insignificant at December 31, 2003 and
2002.
The estimated fair values of the Corporation's financial instruments are as
follows:
2003 2002
-------------------- --------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------- ---------- -------- ----------
(Amounts In Thousands)
Financial assets:
Cash and due from banks $ 29,376 $ 29,376 $ 31,539 $ 31,539
Interest bearing deposits in banks 2,647 2,647 3,825 3,825
Federal funds sold 15,632 15,632 26,391 26,391
Available-for-sale securities 156,597 156,597 130,125 130,125
Loans, net 847,938 852,570 657,775 674,395
Accrued interest receivable 4,421 4,421 4,248 4,248
FHLB stock 16,245 16,245 14,935 14,935
Financial liabilities:
Deposits 911,948 911,632 729,456 731,641
Short-term borrowings 34,007 34,007 18,088 18,088
Long-term borrowings 72,346 72,910 72,322 73,266
Company Obligated Mandatorily
Redeemable Preferred Securities 35,000 35,000 10,000 10,000
Accrued interest payable 1,417 1,417 1,403 1,403
35
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19. PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
CONDENSED BALANCE SHEETS
(PARENT COMPANY ONLY)
December 31,
---------------------
2003 2002
--------- ---------
(Amounts In Thousands)
ASSETS
Cash and cash equivalents $ - $ 223
Loans receivable - 500
Investment in subsidiaries 131,942 83,873
Premises and equipment 1,478 569
Other assets 4,701 3,732
--------- --------
TOTAL ASSETS $ 138,121 $ 88,897
========= ========
LIABILITIES
Short-term borrowings $ 7,375 $ 7,700
Long-term borrowings 12,818 -
Subordinated debentures 36,084 10,310
Other liabilities 1,870 1,558
--------- --------
Total liabilities 58,147 19,568
--------- --------
STOCKHOLDERS' EQUITY
Common stock 3,436 2,977
Additional paid-in capital 43,691 26,308
Retained earnings 35,007 41,489
Accumulated other comprehensive income 663 1,448
Treasury stock (2,823) (2,893)
--------- --------
TOTAL STOCKHOLDERS' EQUITY 79,974 69,329
--------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 138,121 $ 88,897
========= ========
36
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19. PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION (CONTINUED)
CONDENSED STATEMENTS OF INCOME
(PARENT COMPANY ONLY)
Years Ended December 31,
---------------------------
2003 2003 2001
------- ------- ------
(Amounts In Thousands)
Income:
Interest on loans, including fees $ 23 $ - $ 11
Dividends from subsidiaries 7,298 3,459 3,307
Other 2,915 2,273 2,210
------- ------- ------
10,236 5,732 5,528
------- ------- ------
Expenses:
Salaries and employee benefits 3,870 3,663 2,990
Occupancy 1,465 1,225 1,146
Interest 1,419 257 198
Other 1,669 1,100 1,073
------- ------- ------
8,423 6,245 5,407
------- ------- ------
Income (loss) before income tax benefit and equity
in undistributed net income of subsidiaries 1,813 (513) 121
Income tax benefit 1,876 1,371 1,094
------- ------- ------
Income before equity in undistributed net income
of subsidiaries 3,689 858 1,215
Equity in undistributed net income of subsidiaries 4,539 5,527 4,493
------- ------- ------
NET INCOME $ 8,228 $ 6,385 $5,708
======= ======= ======
37
MERCHANTS AND MANUFACTURERS BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19. PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION (CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
(PARENT COMPANY ONLY)
Years Ended December 31,
--------------------------------
2003 2002 2001
--------- --------- --------
(Amounts In Thousands)
Cash Flows From Operating Activities
Net income $ 8,228 $ 6,385 $ 5,708
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Equity in undistributed net income of subsidiaries (4,539) (5,527) (4,493)
Depreciation 156 131 77
Gain on sale of premises and equipment - (69) (178)
Other, net 3,123 (1,255) (714)
-------- -------- -------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES 6,968 (335) 400
-------- -------- -------
Cash Flows From Investing Activities
Payment for acquisition (20,282) (9,786) -
Net change in loans 500 (500) 311
Capital infusion, subsidiaries (8,825) - -
Investment in Merchants and Manufacturers
Statutory Trusts (774) (310) -
Purchases of equipment (1,065) (221) (204)
-------- -------- -------
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES (30,446) (10,817) 107
-------- -------- -------
Cash Flows From Financing Activities
Net increase (decrease) in short-term borrowings (325) 3,898 1,090
Dividends paid (2,213) (1,790) (1,802)
Issuance of subordinated debentures 25,774 10,310 -
Stock dividend (16) - -
Common stock transactions, net 35 (1,058) (126)
-------- -------- -------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES 23,255 11,360 (838)
-------- -------- -------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (223) 208 (331)
Cash and cash equivalents at beginning of year 223 15 346
-------- -------- -------
Cash and cash equivalents at end of year $ - $ 223 $ 15
======== ======== =======
38
10-K EXHIBIT LIST
EXHIBIT NO. DESCRIPTION
----------- -----------
EXHIBIT 10.1 Employment Agreement between Reedsburg Bank and
Milburn Hahs
EXHIBIT 21.1 Subsidiaries
EXHIBIT 23.1 Independent Auditors' Consent
EXHIBIT 31.1 Certification of Principal Executive Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
EXHIBIT 31.2 Certification of Principal Financial Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
EXHIBIT 32.1* Certification of Principal Executive Officer pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
EXHIBIT 32.2* Certification of Principal Financial Officer pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
- ---------------------------
*This certification is not "filed" for purposes of Section 18 of the Securities
Exchange Act of 1934, as amended, or incorporated by reference into any filing
under the Securities Act of 1933, as amended, or the Securities Exchange Act of
1934, as amended.
32