1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT
PURSUANT TO
SECTION 13 OR 15(D)
OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE
FISCAL YEAR ENDED
DECEMBER 31, 1999
FIRST MANITOWOC BANCORP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
WISCONSIN 39-1435359
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
402 NORTH EIGHTH STREET
MANITOWOC, WISCONSIN 54221-0010
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (920) 684-6611
Securities to be registered under Section 12(b) of the Act:
None
Title of each class to Name of each exchange on which
be so registered. each class is to be registered.
None None
Securities to be registered under Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $1.00
(Title of Class)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2
1999 FORM 10-K
TABLE OF CONTENTS
DESCRIPTION PAGE NO.
----------- --------
PART I
ITEM 1. Business.................................................... 2
ITEM 2. Properties.................................................. 7
ITEM 3. Legal Proceedings........................................... 8
ITEM 4. Submission of Matters to a Vote of Security Holders......... 8
PART II
ITEM 5 Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 8
ITEM 6. Selected Financial Data..................................... 10
ITEM 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 11
ITEM 7A. Quantitative and Qualitative Disclosures about Market
Risk........................................................ 24
ITEM 8. Financial Statements and Supplementary Data................. 26
ITEM 9. Changes and Disagreements with Accountants on Accounting and
Financial Disclosure........................................ 45
PART III
ITEM 10. Directors and Executive Officers of the Registrant.......... 45
ITEM 11. Executive Compensation...................................... 47
ITEM 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 50
ITEM 13. Certain Relationships and Related Transactions.............. 51
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 52
Signatures................................................................. 53
3
PART I
ITEM 1
BUSINESS
GENERAL
First Manitowoc Bancorp, Inc. (the "Company"), a Wisconsin corporation
incorporated on April 9, 1982, became a registered bank holding company on
November 16, 1982 under the Bank Holding Company Act of 1956, as amended
("BHCA"). The Company engages in its business through its sole subsidiary, First
National Bank in Manitowoc (the "Bank"), a national banking association. The
Bank has a wholly owned investment subsidiary, FNBM Investment Corp. (FNBM
Investment Corp.). The Company acquired the Bank through the merger of the Bank
into an interim national banking association formed as a Company subsidiary for
the purpose of the merger, pursuant to a Plan of Reorganization and Agreement to
Merge (the "Plan") proposed by Bank management and approved by the Bank's
shareholders on June 12, 1982. Pursuant to the Plan, each outstanding share of
Bank common stock was exchanged for three shares of the Company's common stock.
The Bank's charter was not affected by the merger. Currently, the Company has
outstanding 1,734,317 shares of common stock, par value $1.00 per share
("Shares"). Shares were held by 570 holders of record on December 31, 1999.
On August 19, 1999, First Manitowoc Bancorp, Inc. (the "Registrant")
entered into an Agreement and Plan of Merger (the "Agreement") with Dairy State
Financial Services, Inc. ("Dairy State"), providing for the merger (the
"Merger") of Dairy State with a wholly owned subsidiary of Registrant. Following
the Merger, Dairy State was liquidated and Dairy State Bank, located in
Plymouth, Wisconsin, Dairy State's Wisconsin chartered bank subsidiary,
effective December 1, 1999 merged (the "Bank Merger") with and into First
National Bank in Manitowoc, Registrant's national bank subsidiary.
According to the terms of the Agreement, as a result of the Merger, Dairy
State Shareholders received cash in the amount of $4,662.33 for each of the
2,900 shares of outstanding common stock of Dairy State or an aggregate of
$13,520,757.00. Registrant provided the consideration from internal funds and no
borrowings by Registrant from any source were involved.
The Merger and the Bank Merger involved the acquisition by Registrant and
First National Bank in Manitowoc, its wholly-owned subsidiary, of all of the
assets of Dairy State and Dairy State Bank consisting of premises and equipment,
cash, Federal funds sold, securities and loans totaling approximately $66.6
million subject to the liabilities of Dairy State and Dairy State Bank,
consisting primarily of deposits, totaling approximately $60 million. Registrant
intends to continue the business of banking at the locations of Dairy State Bank
as branches of First National Bank in Manitowoc.
The Company's and the Bank's main office is located at 402 North Eighth
Street, Manitowoc, Manitowoc County, Wisconsin. The Bank has eleven full service
branch offices located in Francis Creek, St. Nazianz, Two Rivers, Mishicot,
Manitowoc, Kiel, Newton, New Holstein, Plymouth and Bellevue, Wisconsin.
As of December 31, 1999, the Bank had assets of approximately $462.5
million, net loans of approximately $294.9 million, and deposits of $363.3
million. For additional financial information, see the Consolidated Financial
Statements and Notes beginning at Item 8 of this Form 10-K.
BANKING PRODUCTS AND SERVICES
The Bank has been doing business in Wisconsin since 1894 and is engaged in
both the commercial and consumer banking business. The Bank provides a wide
range of personal banking services designed to meet the needs of local
consumers. Among the services provided are checking accounts, savings and time
accounts, safe deposit boxes, and installment and other personal loans,
especially residential mortgages, as well as home equity loans, automobile and
other consumer financing. As a convenience to its customers, the Bank offers
Saturday banking hours; drive-thru teller windows; "Telebanc," a telephone
banking service; and 24-hour automated teller machines. Additionally, the Bank
offers an Internet web site.
2
4
The Bank is also engaged in the financing of commerce and industry by
providing credit and deposit services for small to medium sized businesses and
for the agricultural community in the Bank's market area. The Bank offers many
forms of commercial lending, including lines of credit, revolving credit, term
loans, accounts receivable financing, and commercial real estate mortgage
lending and other forms of secured financing. A full range of commercial banking
services is offered, including the acceptance of checking and savings deposits.
Additional types of real estate loans, brokerage services, credit cards and
related services are also offered through correspondent banks or other third
parties.
The Bank offers a full range of trust services that include trust under
agreement, testamentary trust, guardianships and conservatorships, probate
estates and estate planning. In addition, the Bank added financial planning to
its trust services in 1998.
To attract new business and retain existing customers, the Bank relies on
local promotional activity, personal contact by its officers, staff and
directors, referrals by current customers, extended banking hours, and
personalized service.
DEPOSIT ACTIVITIES
The Bank continues to gain market share of deposits in Manitowoc,
Sheboygan, Calumet and Brown Counties. From December 31, 1997 to December 31,
1998, total deposits increased by 6.2%. From December 31, 1998 to December 31,
1999, deposits increased $86.8 million or 31.4% to $363.3 million. This increase
includes deposits of $60 million from the Dairy State acquisition.
No material portion of the Bank's deposits has been obtained from an
individual or a few individuals (including federal, state and local governments
and agencies) the loss of any one or more of which would have a materially
adverse effect on the Bank, nor is a material portion of the Bank's loans
concentrated within a single industry or group of related industries.
LENDING ACTIVITIES
The Bank has experienced growth in the number and dollar amount of loans as
a result of low interest rates and general marketing efforts. The loan portfolio
reflected $2.8 million or 1.2% growth in 1998 and $69.7 million or 30.5% growth
in 1999. Loans sold and serviced for others are not included in these growth
numbers. In 1999, the Bank increased the amount of loans sold and serviced for
others by $16.6 million, an increase of 33.9%. Loan growth in 1999 includes
$53.6 million from the Dairy State acquisition.
BANK SERVICE CORPORATIONS
The Bank owns 49.8% of the outstanding common stock of United Financial
Services, Inc. United Financial Services, Inc., located in Grafton, Wisconsin,
provides data processing services to owner banks Baylake Bank and First National
Bank in Manitowoc and to 54 other banks located in Wisconsin.
The Bank owns 100% of the outstanding common stock of FNBM Investment Corp.
FNBM Investment Corp., located in Las Vegas, Nevada, holds and manages a portion
of the bank's investment and loan portfolios.
SEASONALITY
The management of the Bank does not believe that the deposits or business
of the Bank in general are seasonal in nature. The deposits may, however, vary
with local and national economic conditions but not enough to have a material
effect on planning and policy making.
FOREIGN OPERATIONS
The Bank does not engage in operations in foreign countries.
3
5
EMPLOYEES
As of December 31, 1999, the Bank employed 183 individuals, 69 of whom
worked part-time.
COMPETITION
The Bank offers many personalized services and attracts customers by being
responsive and sensitive to the needs of the community. The Bank relies on
goodwill and referrals from satisfied customers as well as traditional media
advertising to attract new customers. To enhance a positive image in the
community, the Bank supports and participates in many local events, such as the
Manitowoc County Fair, Manitowoc County Airport Day, First National Bank
Maritime Bay Bike Classic, Two Rivers Ethnic Festival and French Creek Days.
Employees, officers, and directors represent the Bank on many boards and local
civic and charitable organizations.
The primary factors in competing for deposits are interest rates,
personalized services, the quality and range of financial services, convenience
of office locations and office hours. Competition for deposits comes primarily
from other commercial banks, savings associations, credit unions, money market
funds and other investment alternatives. The primary factors in competing for
loans are interest rates, loan origination fees, the quality and range of
lending services and personalized services. Competition for loans comes
primarily from
other commercial banks, savings associations, mortgage banking firms, credit
unions and other financial intermediaries. Competition in the Bank's market area
may be expected to continue for the foreseeable future.
SUPERVISION AND REGULATION
General. The Company and the Bank are extensively regulated under federal
and state law. Generally, these laws and regulations are intended to protect
depositors, not stockholders. The following is a summary description of certain
provisions of certain laws which affect the regulation of bank holding companies
and banks. The discussion is qualified in its entirety by reference to
applicable laws and regulation. Changes in such laws and regulations may have a
material effect on the business and prospects of the Company and the Bank.
Financial Modernization Act. On November 12, 1999 President Clinton signed
into law the Gramm-Leach-Bliley Act of 1999 (the "Financial Modernization Act").
The Financial Modernization Act revises the BHCA and repeals the two affiliation
provisions of the Glass-Steagall Act of 1933. As a result, a qualifying holding
company may become a financial holding company and engage in a full range of
financial activities, including banking, insurance and securities activities, as
well as merchant banking and additional activities that are determined by the
Federal Reserve to be "financial in nature or incidental to such financial
activity or are complimentary to a financial activity" so long as such
activities do not pose a substantial risk to the safety and soundness of
depository institutions or the financial system in general. Activities that are
considered to be financial in nature include underwriting and dealing in
securities and underwriting and brokering of insurance products.
Federal Bank Holding Company Regulation and Structure. The Company is a
bank holding company within the meaning of the BHCA, as amended, and as such, it
is subject to regulation, supervision, and examination by the Federal Reserve
Board ("FRB"). The Company is required to file annual and quarterly reports with
the FRB and to provide the FRB with such additional information as the FRB may
require. The FRB may conduct examinations of the Company and its subsidiaries.
With certain limited exceptions, the Company is required to obtain prior
approval from the FRB before acquiring direct or indirect ownership or control
of more than 5% of any voting securities or substantially all of the assets of a
bank or bank holding company, or before merging or consolidating with another
bank holding company. Additionally, with certain exceptions, any person
proposing to acquire control through direct or indirect ownership of 25% or more
of any voting securities of the Company is required to give 60 days' written
notice of the acquisition to the FRB, which may prohibit the transaction, and to
publish notice to the public.
Generally, a banking holding company may not engage in any activities other
than banking, managing or controlling its bank and other authorized
subsidiaries, and providing services to these subsidiaries. With prior
4
6
approval of the FRB, the Company may acquire more than 5% of the assets or
outstanding shares of a company engaging in non-bank activities determined by
the FRB to be closely related to the business of banking or of managing or
controlling banks. The FRB provides expedited procedures for expansion into
approved categories of non-bank activities.
Subsidiary banks of a bank holding company are subject to certain
quantitative and qualitative restrictions on extensions of credit to the bank
holding company or its subsidiaries, on investments in their securities and on
the use of their securities as collateral for loans to any borrower. These
regulations and restrictions may limit the Company's ability to obtain funds
from the Bank for its cash needs, including funds for the payment of dividends,
interest and operating expenses. Further, subject to certain exceptions, a bank
holding company and its subsidiaries are prohibited from engaging in certain
tie-in arrangements in connection with any extension of credit, lease or sale of
property or furnishing of services. For example, the Bank may not generally
require a customer to obtain other services from itself or the Company, and may
not require that a customer promise not to obtain other services from a
competitor as a condition to and extension of credit to the customer.
Under FRB policy, a bank holding company is expected to act as a source of
financial strength to its subsidiary banks and to make capital injections into a
troubled subsidiary bank, and the FRB may charge the bank holding company with
engaging in unsafe and unsound practices for failure to commit resources to a
subsidiary bank when required. A required capital injection may be called for at
a time when the holding company does not have the resources to provide it.
Federal Bank Regulation. The Company's banking subsidiary is a
federally-chartered national bank regulated by the Office of Comptroller of
Currency ("OCC"). The OCC may prohibit the institutions over which it has
supervisory authority from engaging in activities or investments that the agency
believes constitutes unsafe or unsound banking practices. Federal banking
regulators have extensive enforcement authority over the institutions they
regulate to prohibit or correct activities which violate law, regulation or a
regulatory agreement or which are deemed to constitute unsafe or unsound
practices. Enforcement actions may include the appointment of a conservator or
receiver, the issuance of a cease and desist order, the termination of deposit
insurance, the imposition of civil money penalties on the institution, its
directors, officers, employees and institution-affiliated parties, the issuance
of directives to increase capital, the issuance of formal and informal
agreements, the removal of or restrictions on directors, officers, employees and
institution-affiliated parties, and the enforcement of any such mechanisms
through restraining orders or other court actions.
The Bank is subject to certain restrictions on extensions of credit to
executive officers, directors, principal stockholders or any related interest of
such persons which generally require that such credit extensions be made on
substantially the same terms as are available to third persons dealing with the
Bank and not involve more than the normal risk of repayment. Other laws tie the
maximum amount which may be loaned to any one customer and its related interests
to capital levels.
Under the Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"), each federal banking agency is required to prescribe, by regulation,
non-capital safety and soundness standards for institutions under its authority.
The federal banking agencies, including the OCC, have adopted standards covering
internal controls, information systems and internal audit systems, loan
documentation, credit underwriting, interest rate exposure, asset growth, and
compensation, fees and benefits. An institution which fails to meet those
standards may be required by the agency to develop a plan acceptable to the
agency, specifying the steps that the institution will take to meet the
standards. Failure to submit or implement such a plan may subject the
institution to regulatory sanctions. The Company, on behalf of the Bank,
believes that it meets substantially all standards which have been adopted.
FDICIA also imposed new capital standards on insured depository institutions.
Before establishing new branch offices, the Bank must meet certain minimum
capital stock and surplus requirements and the Bank must obtain OCC approval.
5
7
Deposit Insurance. As a FDIC member institution, the Bank's deposits are
insured to a maximum of $100,000 per depositor through the Bank Insurance Fund
("BIF"), administered by the FDIC, and each institution is required to pay
quarterly deposit insurance premium assessments to the FDIC. The BIF assessment
rates have a range of 0 cents to 27 cents for every $100 in assessable deposits.
Banks with no premium are subject to an annual statutory minimum assessment.
Capital Requirements. The federal banking regulators have adopted certain
risk-based capital guidelines to assist in the assessment of the capital
adequacy of a banking organization's operations for both transactions reported
on the balance sheet as assets and transactions, such as letters of credit,
which are recorded as off balance sheet items. Under these guidelines, nominal
dollar amounts of assets and credit equivalent amounts of off balance sheet
items are multiplied by one of several risk adjustment percentages, which range
from 0% for assets with low credit risk, such as certain U.S. Treasury
securities, to 100% for assets with relatively high credit risk, such as
business loans.
A banking organization's risk-based capital ratios are obtained by dividing
its qualifying capital by its total risk adjusted assets. The regulators measure
risk-adjusted assets, which include off balance sheet items, against both total
qualifying capital (the sum of Tier 1 capital and limited amounts of Tier 2
capital) and Tier 1 capital. "Tier 1," or core capital, includes common equity,
less goodwill and other intangibles, subject to certain exceptions. "Tier 2," or
supplementary capital, includes the allowance for loan and lease losses, subject
to certain limitations. Banks and bank holding companies subject to the
risk-based capital guidelines are required to maintain a ratio of Tier 1 capital
to risk-weighted assets of at least 4% and a ratio of total capital to
risk-weighted assets of at least 8%. The appropriate regulatory authority may
set higher capital requirements when particular circumstances warrant. As of
December 31, 1999, the Bank's ratio of Tier 1 to risk-weighted assets stood at
8.6% and its ratio of total capital to risk-weighted assets stood at 9.8%. In
addition to risk-based capital, banks and bank holding companies are required to
maintain a minimum amount of Tier 1 capital to total assets, referred to as the
leverage capital ratio, of at least 4%. As of December 31, 1999, the Bank's
leverage capital ratio was 6.9%.
Federal banking agencies include in their evaluations of a bank's capital
adequacy an assessment of the Bank's interest rate risk ("IRR") exposure. The
standards for measuring the adequacy and effectiveness of a banking
organization's interest rate risk management includes a measurement of board of
director and senior management oversight, and a determination of whether a
banking organization's procedures for comprehensive risk management are
appropriate to the circumstances of the specific banking organization. The Bank
has internal IRR models that are used to measure and monitor IRR.
Failure to meet applicable capital guidelines could subject a banking
organization to a variety of enforcement actions, including limitations on its
ability to pay dividends, the issuance by the applicable regulatory authority of
a capital directive to increase capital and, in the case of depository
institutions, the termination of deposit insurance by the FDIC, as well as to
the measures described under "Federal Deposit Insurance Corporation Improvement
Act of 1991" below, as applicable to undercapitalized institutions. In addition,
future changes in regulations or practices could further reduce the amount of
capital recognized for purposes of capital adequacy. Such a change could affect
the ability of the Bank to grow and could restrict the amount of profits, if
any, available for the payment of dividends to the Company.
Federal Deposit Insurance Corporation Improvement Act of 1991. In December
1991, Congress enacted the Federal Deposit Insurance Corporation Improvement Act
of 1991 ("FDICIA"), which substantially revised the bank regulatory and funding
provisions of the Federal Deposit Insurance Act and made significant revisions
to several other federal banking statutes. FDICIA provides for, among other
things, (i) publicly available annual financial condition and management reports
for financial institutions, including audits by independent accountants, (ii)
the establishment of uniform accounting standards by federal banking agencies,
(iii) the establishment of a "prompt corrective action" system of regulatory
supervision and intervention, based on capitalization levels, with more scrutiny
and restrictions placed on depository institutions with lower levels of capital,
(iv) additional grounds for the appointment of a conservator or receiver, and
(v) restrictions or prohibitions on accepting brokered deposits, except for
institutions which significantly exceed minimum capital requirements. FDICIA
also provided for increased funding of the FDIC insurance funds and the
implementation of risked-based premiums. See "-Deposit Insurance."
6
8
A central feature of FDICIA is the requirement that the federal banking
agencies take "prompt corrective action" with respect to depository institutions
that do not meet minimum capital requirements. Pursuant to FDICIA, the federal
bank regulatory authorities have adopted regulations setting forth a five-
tiered system for measuring the capital adequacy of the depository institutions
that they supervise. Under these regulations, a depository institution is
classified in one of the following capital categories: "well capitalized,"
"adequately capitalized," "undercapitalized," "significantly undercapitalized"
and "critically undercapitalized." The Bank is classified as "adequately
capitalized" at December 31, 1999. An institution may be deemed by the
regulators to be in a capitalization category that is lower than is indicated by
its actual capital position if, among other things, it receives an
unsatisfactory examination rating with respect to asset quality, management,
earnings or liquidity.
FDICIA provides the federal banking agencies with significantly expanded
powers to take enforcement action against institutions which fail to comply with
capital or other standards. Such action may include the termination of deposit
insurance by the FDIC or the appointment of a receiver or conservator for the
institution. FDICIA also limits the circumstances under which the FDIC is
permitted to provide financial assistance to an insured institution before
appointment of a conservator or receiver.
Monetary Policy. The earnings of a bank holding company are affected by the
policies of regulatory authorities, including the FRB, in connection with the
FRB's regulation of the money supply. Various methods employed by the FRB are
open market operations in United States Government securities, changes in the
discount rate on member bank borrowing and changes in reserve requirements
against member bank deposits. These methods are used in varying combinations to
influence overall growth and distribution of bank loans, investments and
deposits, and their use may also affect interest rates charged on loans or paid
on deposits. Because of ongoing change in the national economy and in the money
markets, as well as the effect of monetary and fiscal policies of the Federal
Reserve System and Federal government, prediction cannot be made as to future
changes in interest rates, loan demand, deposit levels or the effect on the
earnings of the company.
ITEM 2
PROPERTIES
The Company owns real property at two branch locations at:
1509 Washington Street, Two Rivers, Wisconsin 54241 ("Two Rivers Branch
Office"); and
2915 Custer Street, Manitowoc, Wisconsin 54220 ("Custer Street Branch
Office").
The Bank owns real property at the location of its main office at 402 North
Eighth Street, Manitowoc, Wisconsin 54220; and at nine of its branch locations
at:
106 South Packer Drive, Francis Creek, Wisconsin 54214 ("Francis Creek
Branch Office");
109 South Fourth Avenue, St. Nazianz, Wisconsin 54232 ("St. Nazianz
Branch Office");
110 Baugniet Street, Mishicot, Wisconsin 54228 ("Mishicot Branch
Office");
108 Fremont Street, Kiel, Wisconsin 53042 ("Kiel Branch Office");
5724 CTH U, Newton, Wisconsin 53063 ("Newton Branch Office");
2210 Calumet Drive, New Holstein, Wisconsin 53061 ("New Holstein Branch
Office");
2323 Eastern Avenue, Plymouth, Wisconsin 53073 ("Plymouth East Branch
Office");
300 East Mill Street, Plymouth, Wisconsin 53073 ("Plymouth West Branch
Office"); and
2865 South Ridge Road, Green Bay, Wisconsin 54304 ("Ashwaubenon Branch
Office" under construction ).
The Bank leases real property at one branch location at:
2747 Manitowoc Road, Green Bay, Wisconsin 54311 ("Bellevue Branch
Office"). (As of January 2000, the Bank has purchased this location.)
There are no encumbrances on any of these properties.
7
9
ITEM 3
LEGAL PROCEEDINGS
The Company is involved in various legal actions arising in the normal
course of its business. While the ultimate outcome of these various legal
proceedings cannot be predicted with certainty, it is the opinion of management
and through consultation with legal counsel that the resolution of these legal
actions will not have a material effect on the Company's consolidated financial
condition or results of operation.
ITEM 4
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5
MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
There is no established public trading market for the Company's Shares.
Accordingly, there is no comprehensive record of trades or the prices of any
such trades. The following tables reflect stock prices for Company Shares to the
extent such information is made known and available to management of the
Company, and the dividends declared with respect thereto during the preceding
two years.
1999
- ---------------------------------------------------------------------
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
- --------------- --------------- --------------- ---------------
HIGH LOW HIGH LOW HIGH LOW HIGH LOW
---- --- ---- --- ---- --- ---- ---
$33.60 $33.60 $37.75 $35.00 $38.50 $37.75 $41.00 $38.50
1998
- ---------------------------------------------------------------------
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
- --------------- --------------- --------------- ---------------
HIGH LOW HIGH LOW HIGH LOW HIGH LOW
---- --- ---- --- ---- --- ---- ---
$24.80 $23.60 $31.20 $24.80 $32.80 $31.20 $32.80 $32.80
All market information shown above has been restated for stock dividends.
CASH DIVIDENDS
1999
- -------------------------------------------------------------
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER TOTAL
- ----------- ----------- ----------- ----------- -----
$0.12 $0.12 $0.12 $0.15 $0.51
1998
- -------------------------------------------------------------
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER TOTAL
- ----------- ----------- ----------- ----------- -----
$0.10 $0.10 $0.10 $0.16 $0.46
All cash dividends shown above have been restated for stock dividends.
HOLDERS
As of December 31, 1999 there were 570 holders of record of the Company's
Shares.
8
10
DIVIDENDS
The Company declared and paid a cash dividend per share totaling $0.51 per
share or $884,525 during 1999, and $0.46 per share or $790,937 during 1998. The
Board of Directors of the Company declared a dividend on February 16, 1999, of
$0.12 per share to be paid on March 12, 1999, to stockholders of record March 3,
1999. On May 18, 1999, a dividend of $0.12 per share was approved to be paid on
June 11, 1999, to stockholders of record as of June 2, 1999. In the third
quarter, a $0.12 dividend was announced on August 24, 1999, to be paid September
17, 1999, to stockholders of record September 8, 1999. The final dividend in
1999 of $0.12 per share, plus an extra cash dividend of $0.03 per share was
declared on November 23, 1999, for stockholders of record December 8, 1999, and
was paid on December 17, 1999.
On February 17, 1998, the Board of Directors declared a dividend to be paid
March 13, 1998 at the rate of $0.10 per share to stockholders of record as of
March 4, 1998. On May 19, 1998, a dividend of $0.10 per share was approved to be
paid on June 12, 1998, to stockholders of record as of June 3, 1998. In the
third quarter, a $0.10 dividend was announced on August 18, 1998, to be paid
September 11, 1998, to stockholders of record September 2, 1998. The final
dividend in 1998 of $0.10 per share, plus an extra cash dividend of $0.06 per
share was declared on November 17, 1998, for stockholders of record December 2,
1998, and was paid on December 11, 1998.
The holders of the Company's Shares will be entitled to dividends, when,
as, and if declared by the Company's Board of Directors, subject to the
restrictions imposed by Wisconsin law. The only statutory limitation applicable
to the Company is that dividends may not be paid if the Company is insolvent or
if the dividend would cause the Company to become insolvent. Currently, its only
source of income is from the dividends paid by the Bank to the Company.
Therefore, the dividend restrictions applicable to national banks will impact
the Company's ability to pay dividends.
Under the National Bank Act, dividends may be paid only out of retained
earnings as defined in the statute. The approval of the OCC is required if the
dividends for any year exceed the net profits, as defined, for that year plus
the retained net profits for the preceding two years. In addition, unless a
national bank's capital surplus equals or exceeds the stated capital for its
common stock, no dividends may be declared unless the bank makes transfers from
retained earnings to capital surplus.
There are no contractual restrictions that currently limit the Company's
ability to pay dividends or that the Company reasonably believes are likely to
limit materially the future payment of dividends on the Company's Shares.
BUSINESS COMBINATIONS
On August 19, 1999, First Manitowoc Bancorp, Inc. (the "Registrant")
entered into an Agreement and Plan of Merger (the "Agreement") with Dairy State
Financial Services, Inc. ("Dairy State"), providing for the merger (the
"Merger") of Dairy State with a wholly owned subsidiary of Registrant. Following
the Merger, Dairy State was liquidated and Dairy State Bank, located in
Plymouth, Wisconsin, Dairy State's Wisconsin chartered bank subsidiary,
effective December 1, 1999 merged (the "Bank Merger") with and into First
National Bank in Manitowoc, Registrant's national bank subsidiary.
According to the terms of the Agreement, as a result of the Merger, Dairy
State Shareholders received cash in the amount of $4,662.33 for each of the
2,900 shares of outstanding common stock of Dairy State or an aggregate of
$13,520,757.00. Registrant provided the consideration from internal funds and no
borrowings by Registrant from any source were involved.
The Merger and the Bank Merger involved the acquisition by Registrant and
First National Bank in Manitowoc, its wholly-owned subsidiary, of all of the
assets of Dairy State and Dairy State Bank consisting of premises and equipment,
cash, Federal funds sold, securities and loans totaling approximately $66.6
million subject to the liabilities of Dairy State and Dairy State Bank,
consisting primarily of deposits, totaling approximately $60 million. Registrant
intends to continue the business of banking at the locations of Dairy State Bank
as branches of First National Bank in Manitowoc.
9
11
ITEM 6
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
the Company's Consolidated Financial Statements and the related notes and with
the Company's Management's Discussion and Analysis of Financial Condition and
Results of Operations, provided elsewhere herein.
1999 1998 1997 1996 1995
FOR THE YEAR ---- ---- ---- ---- ----
Interest income.......... $ 27,097,768 $ 26,819,194 $ 25,162,021 $ 21,087,774 $ 19,346,287
Interest expense......... 13,602,612 $ 14,152,353 $ 13,135,748 $ 10,604,493 $ 9,551,729
Net interest income...... 13,495,156 $ 12,666,841 $ 12,026,273 $ 10,483,281 $ 9,794,558
Provision for loan
losses................. 850,836 800,000 600,000 430,000 105,000
Net interest income after
provision for loan
losses................. 12,644,320 11,866,841 11,426,273 10,053,281 9,689,558
Other operating income... 2,357,065 2,019,950 1,570,112 1,423,097 1,064,691
Other operating
expense................ 9,077,743 8,052,716 7,403,914 6,552,984 6,612,622
Net income............... 4,927,642 4,601,075 4,164,471 3,605,394 3,113,627
Per Share Data:*
Net income -- basic and
diluted................ $2.84 $2.65 $2.40 $2.08 $1.80
Cash dividends
declared............... $0.51 $0.46 $0.41 $0.36 $0.32
Book value............... $19.90 $19.54 $17.03 $14.66 $12.98
Weighted average shares
outstanding............ 1,734,317 1,734,317 1,734,317 1,734,317 1,734,317
AT YEAR END
Total assets............. $462,518,306 $367,828,279 $348,907,496 $300,419,746 $257,697,628
Loans.................... 298,639,636 228,916,657 226,067,546 203,537,238 177,015,116
Allowance for loan
losses................. 3,699,829 3,124,109 2,608,277 2,079,614 1,818,633
Investment securities.... 97,594,900 97,197,495 85,577,782 76,402,625 58,282,709
Deposits................. 363,285,912 276,494,614 260,466,017 232,765,720 207,968,667
Borrowed funds........... 38,000,000 28,801,713 31,572,241 18,431,120 6,517,930
Stockholders' equity..... 34,506,447 33,891,847 29,541,167 25,424,699 22,510,622
AVERAGE BALANCES
Assets................... $390,092,124 $355,018,896 $331,983,654 $278,406,139 $252,158,424
Deposits................. 293,575,265 267,331,741 246,986,724 222,519,686 203,715,822
Stockholders' equity..... 34,571,636 32,373,927 27,894,687 24,173,705 21,527,955
FINANCIAL RATIOS
Return on average
assets................. 1.26% 1.30% 1.25% 1.30% 1.23%
Return on average
equity................. 14.25% 14.21% 14.93% 14.91% 14.46%
Average equity to average
assets................. 8.86% 9.12% 8.40% 8.68% 8.54%
Dividend payout ratio.... 17.96% 17.36% 17.08% 17.31% 17.78%
- -------------------------
* Per share data for 1995 through 1999 is restated to reflect the 25% stock
dividends (five for four share exchanges) paid April 21, 1995; April 11, 1997
and April 16, 1999.
10
12
ITEM 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Balance Sheet Analysis
December 31, 1999 compared to December 31, 1998
During the past twelve month period from December 31, 1998 to December 31,
1999, total assets increased $94.7 million or 25.7%. This includes approximately
$66.6 million in assets acquired in the Company's acquisition of Dairy State.
Loans increased $69.7 million or 30.5% while investment securities increased
$397,000, or 0.4%. The increase in loans and securities resulted primarily from
the acquisition of Dairy State which added $53.6 million in loans and $700,000
in securities.
Securities
Total securities available for sale amounted to $97.6 million at December
31, 1999 compared to $97.2 million at December 31, 1998. The following table
shows the distribution of the investment portfolio.
SECURITIES AVAILABLE FOR SALE
DECEMBER 31, 1999
--------------------
AMORTIZED FAIR
COST VALUE
--------- -----
(IN THOUSANDS)
U.S. Treasury securities and obligations of U.S
Government corporations and agencies...................... $ 10,290 $ 9,924
Obligations of states and political subdivisions............ 54,278 52,400
Mortgage-backed securities.................................. 33,459 32,268
Corporate notes............................................. 897 884
Other securities............................................ 2,124 2,119
-------- -------
Total....................................................... $101,048 $97,595
======== =======
Loan Portfolio
The following table presents the composition of the Bank's loan portfolio
by significant concentration.
SUMMARY OF LOAN PORTFOLIO
DECEMBER 31, 1999 DECEMBER 31, 1998
----------------------- -----------------------
PERCENT OF PERCENT OF
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
------ ----------- ------ -----------
(IN THOUSANDS)
Commercial and Agricultural....................... $ 93,550 31.33% $ 91,122 39.81%
Commercial Real Estate............................ 69,248 23.19% 38,018 16.61%
Residential Real Estate........................... 114,176 38.23% 85,115 37.18%
Consumer.......................................... 20,199 6.76% 13,783 6.02%
Other............................................. 1,467 .49% 879 .38%
-------- ------- -------- -------
Total............................................. $298,640 100.00% $228,917 100.00%
======== ======= ======== =======
Liquidity Management
Liquidity describes the ability of the Bank to meet financial obligations
that arise out of the ordinary course of business. Liquidity is primarily needed
to meet borrowing and deposit withdrawal requirements of the customers of the
Bank and to fund current and planned expenditures. The Bank maintains its asset
liquidity position internally through short term investments, the maturity
distribution of the investment portfolio, loan repayments and income from
earning assets. A substantial portion of the investment portfolio
11
13
contains readily marketable securities that could be converted to cash
immediately. Refer to Note 2 in the Consolidated Financial Statements for a
table showing the maturity distribution of the Bank's securities portfolio and
the related estimated fair value. On the liability side of the balance sheet,
liquidity is affected by the timing of maturing liabilities and the ability to
generate new deposits or borrowings as needed. Other sources are available
through borrowings from the Federal Reserve Bank, the Federal Home Loan Bank and
from lines of credit approved at correspondent banks. Management knows of no
trend or event which will have a material impact on the Bank's ability to
maintain liquidity at satisfactory levels. See Note 9 in the Consolidated
Financial Statements.
The following table shows the maturity distribution of the Bank's
securities portfolio and the related fair value at December 31, 1999. Management
knows of no trend or event which will have a material impact on the Bank's
ability to maintain liquidity at satisfactory levels.
AMORTIZED FAIR
COST VALUE
--------- -----
Due in one year or less..................................... $ 5,691 $ 5,693
Due after one year through five years....................... 10,165 10,169
Due after five years through ten years...................... 17,190 17,023
Due after ten years......................................... 34,543 32,442
-------- -------
67,589 65,326
Mortgage-backed securities.................................. 33,459 32,268
-------- -------
Total....................................................... $101,048 $97,595
======== =======
Capital Resources and Adequacy
Total stockholders' equity increased $615,000 or 1.8% in 1999 to $34.5
million at the end of the year from $33.9 million at December 31, 1998. Net
income of $4.9 million, offset by a decrease of $3.4 million in accumulated
other comprehensive income (loss) and $885,000 dividends paid, primarily
contributed to this increase. Total stockholders' equity as of December 31, 1998
increased $4.3 million from December 31, 1997.
One measure of capital adequacy is the leverage ratio which is calculated
by dividing average total assets for the most recent quarter into Tier 1
capital. The regulatory minimum for this ratio is 4%. The leverage ratio for the
years ended December 31, 1999, 1998, and 1997 was 6.9%, 8.5%, and 7.7%,
respectively.
Another measure of capital adequacy is the risk based capital ratio or the
ratio of total capital to risk adjusted assets. Total capital is composed of
both core capital (Tier 1) and supplemental capital (Tier 2) including
adjustments for off balance sheet items such as letters of credit and taking
into account the different degrees of risk among various assets. Regulators
require a minimum total risk based capital ratio of 8%. The Bank's ratio at
December 31, 1999, and for each of the two preceding years was 9.8%, 13.6%, and
12.7%, respectively. According to FDIC capital guidelines, the Bank is
considered to be "adequately capitalized" as of December 31, 1999.
Management knows of no other trend or event which will have a material
impact on capital. Please also refer to Note 16 in the Notes to Consolidated
Financial Statements for additional discussion of regulatory matters.
The following discussion is designed to provide a better understanding of
the results of operations of the Company and should be read in conjunction with
the Consolidated Financial Statements and Notes.
Results of Operations Overview for fiscal years 1999, 1998 and 1997
The Company reported $4,927,642 in net income for 1999 or $2.84 per share
compared to 1998 net income of $4,601,075 or $2.65 per share, and $4,164,471 or
$2.40 per share for 1997. Earnings for the year represent a record level of
performance for the Company, exceeding the previous record of $4,601,075
achieved in 1998. The improvement was primarily attributed to growth in net
interest income and other
12
14
operating income, the Company's major income components. Return on assets was
1.26%, 1.30% and 1.25% in 1999, 1998 and 1997, respectively. Return on average
equity was 14.25% for 1999, 14.21% for 1998, and 14.93% for 1997. The
acquisition of Dairy State did not have a material impact on the results of
operations in 1999.
Net Interest Income and Net Interest Margin
Net interest income is the principal source of earnings for a banking
company. It represents the differences between interest and fees earned on the
loan and investment portfolios and interest-bearing deposits offset by the
interest paid on deposits and borrowings. 1998 and the first half of 1999 were
characterized by generally declining interest rates. Because deposits and loans
and other investments reprice at different rates and as a result of changes in
volume, the Bank's net interest income, on a fully tax-equivalent basis,
increased in 1999 and 1998.
Net interest income (on a tax equivalent basis) for 1999 increased by
$1,185,995 or 8.4% compared to the year ended December 31, 1998, while 1998 net
interest income increased by $895,992 or 6.8% from the previous year ended
December 31, 1997. The higher rate of increase for 1999 is largely the result of
the effect of increased interest rate spreads and increased volume of earning
assets. Interest rate spread is the difference between the average yield on
interest earning assets and the average rate paid on interest bearing
liabilities (deposits). Interest rate spread for the years ended December 31,
1999, 1998 and 1997 was 3.65%, 3.50%, and 3.62%, respectively. See the Table 1
titled "Average Balances, Yields and Rates" for additional information.
Net interest margin is calculated as tax equivalent net interest income
divided by average earning assets and represents the Bank's net yield on its
earning assets. For 1999, the net interest margin increased to 4.38% from 4.27%
in 1998. The net interest margin for 1998 decreased to 4.27% from 4.35% the
previous year. These changes are the result of repricing as previously discussed
and illustrated in Table 2 "Rate and Volume Variance Analysis Based on Average
Balances."
Management and the Board of Directors of the Bank monitor interest rates on
a regular basis to assess the Bank's competitive position and to maintain a
reasonable and profitable interest rate spread. The Bank also considers the
maturity distribution of loans, investments, and deposits and its effect on net
interest income as interest rates rise and fall over time.
13
15
The following Tables 1 and 2 do not include financial data for the Company
as they include only Bank financial information. In Table 1, nonaccrual loans
have been included in the average balances, loan fees are included in interest
income and the yield on tax exempt loans and securities is computed on a
tax-equivalent basis using a tax rate of 34%.
AVERAGE BALANCES, YIELD AND RATES
TABLE 1
FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, 1999 DECEMBER 31, 1998
----------------------------------- -----------------------------------
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE BALANCE EXPENSE RATE
------- ------- ------ ------- ------- ------
ASSETS
Interest earning assets:
Money market investments:
Federal funds sold................. $ 6,486,000 $ 369,038 5.69% $ 8,774,000 $ 525,545 5.99%
Investment securities:
U.S. Treasury securities and
obligations of U.S. government
agencies.......................... 39,492,000 2,538,082 6.43% 38,103,000 2,594,115 6.81%
Tax-exempt obligations of States
and political subdivisions........ 55,272,000 4,055,080 7.34% 48,580,000 3,601,635 7.41%
All other investment securities.... 6,919,000 392,134 5.67% 3,932,000 196,417 5.00%
------------ ----------- ------ ------------ ----------- ------
Total investment securities........ 101,683,000 6,985,297 6.87% 90,615,000 6,392,167 7.05%
Loans, net of unearned income:
Commercial loans................... 91,372,000 9,471,238 10.22% 88,242,000 9,500,280 10.77%
Mortgage loans..................... 132,000,000 10,142,855 7.68% 127,483,000 10,173,958 7.98%
Installment loans.................. 12,323,000 1,269,261 10.30% 10,771,000 1,073,069 9.96%
Other loans........................ 4,560,000 655,134 14.37% 4,064,000 599,795 14.76%
------------ ----------- ------ ------------ ----------- ------
Total loans........................ 240,255,000 21,538,488 8.96% 230,560,000 21,347,102 9.26%
------------ ----------- ------ ------------ ----------- ------
Total Interest Earning Assets...... 348,424,000 $28,892,823 8.29% 329,949,000 $28,264,814 8.57%
Cash and due from banks............ 10,275,000 8,702,000
Other assets....................... 13,965,000 11,299,000
Allowance for loan and lease
losses............................ (3,240,000) (2,775,000)
------------ ----------- ------ ------------ ----------- ------
Total Assets....................... $369,424,000 $347,175,000
============ =========== ====== ============ =========== ======
LIABILITIES
Interest-bearing liabilities:
Savings Deposits................... $ 27,443,000 $ 608,242 2.22% $ 26,061,000 $ 648,703 2.49%
Market Plus accounts............... 58,425,000 2,506,771 4.29% 46,153,000 2,182,856 4.73%
Super NOW accounts................. 13,234,000 278,560 2.10% 11,698,000 281,525 2.41%
Money market deposit accounts...... 7,291,000 204,034 2.80% 6,383,000 181,985 2.85%
Certificates of deposit and IRA
deposits.......................... 132,017,000 7,159,735 5.42% 137,887,000 8,103,059 5.88%
Repurchase agreements.............. 22,902,000 1,095,459 4.78% 21,355,000 1,111,441 5.20%
Federal funds purchased............ 919,000 43,365 4.72% 53,000 3,087 5.82%
Borrowings......................... 31,241,000 1,720,427 5.51% 29,993,000 1,661,923 5.54%
------------ ----------- ------ ------------ ----------- ------
Total Int-Bearing Liabilities...... 293,472,000 $13,616,593 4.64% 279,583,000 $14,174,579 5.07%
Demand deposits.................... 39,145,000 33,856,000
Other liabilities.................. 3,570,000 3,687,000
------------ ----------- ------ ------------ ----------- ------
Total liabilities.................. 336,187,000 317,126,000
Stockholders' equity............... 33,237,000 30,049,000
------------ ----------- ------ ------------ ----------- ------
Total Liabilities and Stockholders'
Equity............................ $369,424,000 $347,175,000
============ =========== ====== ============ =========== ======
Net interest income and interest
rate spread....................... $15,276,230 3.65% $14,090,235 3.50%
Net interest income as a percent of
earning assets.................... 4.38% 4.27%
============ =========== ====== ============ =========== ======
FOR THE YEAR ENDED
DECEMBER 31, 1997
-----------------------------------
AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE
------- ------- ------
ASSETS
Interest earning assets:
Money market investments:
Federal funds sold................. $ 5,969,000 $ 372,324 6.24%
Investment securities:
U.S. Treasury securities and
obligations of U.S. government
agencies.......................... 42,941,000 2,747,225 6.40%
Tax-exempt obligations of States
and political subdivisions........ 34,334,000 2,574,381 7.50%
All other investment securities.... 3,778,000 224,484 5.94%
------------ ----------- ------
Total investment securities........ 81,053,000 5,546,090 6.84%
Loans, net of unearned income:
Commercial loans................... 82,842,000 9,105,160 10.99%
Mortgage loans..................... 119,681,000 9,750,818 8.15%
Installment loans.................. 10,037,000 989,747 9.86%
Other loans........................ 4,005,000 581,604 14.52%
------------ ----------- ------
Total loans........................ 216,565,000 20,427,329 9.43%
------------ ----------- ------
Total Interest Earning Assets...... 303,587,000 $26,345,743 8.68%
Cash and due from banks............ 8,268,000
Other assets....................... 9,906,000
Allowance for loan and lease
losses............................ (2,261,000)
------------ ----------- ------
Total Assets....................... $319,500,000
============ =========== ======
LIABILITIES
Interest-bearing liabilities:
Savings Deposits................... $ 25,804,000 $ 640,525 2.48%
Market Plus accounts............... 34,964,000 1,700,496 4.86%
Super NOW accounts................. 11,688,000 275,957 2.36%
Money market deposit accounts...... 6,612,000 170,871 2.58%
Certificates of deposit and IRA
deposits.......................... 131,084,000 7,670,552 5.85%
Repurchase agreements.............. 20,944,000 1,062,572 5.07%
Federal funds purchased............ 470,000 27,321 5.81%
Borrowings......................... 28,194,000 1,603,206 5.69%
------------ ----------- ------
Total Int-Bearing Liabilities...... 259,760,000 $13,151,500 5.06%
Demand deposits.................... 30,771,000
Other liabilities.................. 3,311,000
------------ ----------- ------
Total liabilities.................. 293,842,000
Stockholders' equity............... 25,658,000
------------ ----------- ------
Total Liabilities and Stockholders'
Equity............................ $319,500,000
============ =========== ======
Net interest income and interest
rate spread....................... $13,194,243 3.62%
Net interest income as a percent of
earning assets.................... 4.35%
============ =========== ======
14
16
RATE AND VOLUME VARIANCE ANALYSIS
BASED ON AVERAGE BALANCES
TABLE 2
1999 COMPARED TO 1998 1998 COMPARED TO 1997
-------------------------------------- -----------------------------------
INCREASE CHANGE DUE TO INCREASE CHANGE DUE TO
(DECREASE) RATE VOLUME (DECREASE) RATE VOLUME
---------- ---- ------ ---------- ---- ------
INTEREST INCOME
Federal funds sold................ $ (156,507) $ (19,460) $ (137,047) $ 153,221 $ (21,744) $ 174,965
---------- ----------- ----------- ---------- --------- ----------
U.S. Treasury securities and
obligations of U.S. government
agencies........................ (56,032) (150,597) 94,565 (153,110) 156,409 (309,519)
Tax-exempt obligations of State
and political subdivisions...... 453,445 (42,688) 496,133 1,027,254 (40,918) 1,068,172
All other investment securities... 195,717 46,506 149,211 (28,067) (37,217) 9,150
---------- ----------- ----------- ---------- --------- ----------
Total investment securities....... 593,130 (146,779) 739,909 846,077 78,274 767,803
---------- ----------- ----------- ---------- --------- ----------
Commercial loans.................. (479,419) 753,214 (1,232,633) 433,698 (280,589) 714,287
Mortgage loans.................... 419,274 (1,375,287) 1,794,561 384,562 (139,509) 524,071
Installment loans................. 196,192 41,573 154,619 83,322 10,942 72,380
Other loans....................... 55,339 (17,864) 73,203 18,191 9,623 8,568
---------- ----------- ----------- ---------- --------- ----------
Total loans....................... 191,386 (598,364) 789,750 919,773 (399,533) 1,319,306
---------- ----------- ----------- ---------- --------- ----------
Total interest income............. $ 628,009 $ (764,603) $ 1,392,612 $1,919,071 $(343,003) $2,262,074
---------- ----------- ----------- ---------- --------- ----------
INTEREST EXPENSE
Savings Deposits.................. $ (40,461) $ (74,861) $ 34,400 $ 8,178 $ 1,799 $ 6,379
Market Plus accounts.............. 323,915 (256,502) 580,417 482,360 (61,824) 544,184
Super NOW accounts................ (2,965) (39,930) 36,965 5,568 5,332 236
Money market deposit accounts..... 22,049 (3,839) 25,888 11,114 17,032 (5,918)
Certificates of deposit and IRA
deposits........................ (943,324) (598,368) (344,956) 432,507 34,421 398,086
Repurchase agreements............. (15,982) (96,497) 80,515 48,869 28,017 20,852
Federal funds purchased........... 40,278 (10,162) 50,440 (24,234) 6 (24,240)
Borrowings........................ 58,504 (10,648) 69,152 58,717 (43,580) 102,297
---------- ----------- ----------- ---------- --------- ----------
Total interest expense............ $ (557,986) $(1,090,807) $ 532,821 $1,023,079 $ (18,797) $1,041,876
---------- ----------- ----------- ---------- --------- ----------
Net interest income............... $1,185,995 $ 326,204 $ 859,791 $ 895,992 $(324,206) $1,220,198
========== =========== =========== ========== ========= ==========
The rate and volume variance was determined by taking the difference in
rate times the previous year's balance.
Provision and Allowance for Loan Losses
For the year ended December 31, 1999, the Bank recorded net charge offs of
$849,280 compared to net charge offs of $284,168 in 1998 and $71,337 in 1997.
The Bank acquired $541,833 in loan loss allowance in the acquisition of Dairy
State. Internal loan review, in particular, has been effective in identifying
problem credits and in achieving timely recognition of potential and actual
losses within the loan portfolio.
Gross charge offs amounted to $964,741 in 1999, $322,687 in 1998, and
$107,198 in 1997, the majority of which were commercial loans. Loans charged off
are subject to ongoing review and effort is made to maximize recovery of
principal, interest and related expenses. Recoveries were $115,461 in 1999,
$38,519 in 1998, and $35,861 in 1997.
The allowance for loan losses is maintained at a level believed adequate by
management to absorb estimated loan losses. Management's quarterly evaluation of
the adequacy of the allowance is based on analysis of the loan portfolio
including the volume and character of loans outstanding; assessment of current
economic conditions; diversification and size of the portfolio; past loss
experience; the amount of non-performing loans; adequacy of collateral;
concentrations of credit; and experience, ability and depth of the
15
17
lending staff. The allowance for loan losses of $2,608,277 as of December 31,
1997 represents 1.15% of gross loans, and as of December 31, 1998, the
$3,124,109 allowance for loan losses reflected 1.36% of gross loans. The
allowance for loan losses of $3,699,829 as of December 31, 1999 amounted to
1.24% of the outstanding loan portfolio. The allowance for loan losses increased
by $541,833 from the acquisition of Dairy State. Analysis by internal loan
review supports the adequacy of the allowance. In management's opinion, the
allowance for loan losses is adequate as of December 31, 1999. See Note 4 in the
Consolidated Financial Statements.
The allocation of the allowance for loan losses is shown in the following
table.
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
TABLE 3
DECEMBER 31,
-----------------------------------------------------------------------------------------------------
% OF % OF % OF % OF
LOANS LOANS LOANS LOANS
IN CATEGORY IN CATEGORY IN CATEGORY IN CATEGORY
TO TOTAL TO TOTAL TO TOTAL TO TOTAL
1999 LOANS 1998 LOANS 1997 LOANS 1996 LOANS
---- ----------- ---- ----------- ---- ----------- ---- -----------
(IN THOUSANDS)
Specific Problem
Loans.............. $ 694 $ 516 $ 233 $ 277
Loan Type Allocation:
Commercial &
Agricultural....... 2,069 31.3 2,087 39.8 1,983 34.6 1,477 34.8
Commercial Real
Estate............. 192 23.2 127 16.6 182 20.2 136 18.6
Residential Real
Estate............. 72 38.2 76 37.2 68 39.3 51 40.6
Consumer............. 49 7.3 16 6.4 48 5.9 36 6.0
------ ------ ------ ------
2,382 2,306 2,281 1,700
Unallocated.......... 624 302 94 103
------ ------ ------ ------
Total................ $3,700 $3,124 $2,608 $2,080
====== ====== ====== ======
DECEMBER 31,
-----------------------
% OF
LOANS
IN CATEGORY
TO TOTAL
1995 LOANS
---- -----------
(IN THOUSANDS)
Specific Problem
Loans.............. $ 185
Loan Type Allocation:
Commercial &
Agricultural....... 1,375 35.6
Commercial Real
Estate............. 126 18.5
Residential Real
Estate............. 47 39.8
Consumer............. 33 6.1
------
1,581
Unallocated.......... 53
------
Total................ $1,819
======
Specific problem loans includes the factor of current problem credits for
the exposure of specifically identified problem loans. Loan volume allocation
includes the factor of loan volume trends, with management's goal for this
factor to maintain an adequate loan loss reserve for outstanding loans less the
specifically identified current problem credits. The allocation of the allowance
among the various loan types is based on the average proportion of the loan
types that make up the specific problem loans. The unallocated portion of the
allowance consists of the other factors included in the analysis because those
factors cannot be identified to specific loans or loan categories.
The allocation and total for the allowance for loan losses is not to be
interpreted as a single year's exposure for loss nor the loss for any specified
time period.
16
18
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
TABLE 4
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(IN THOUSANDS)
Balance at beginning of period...................... $3,124 $2,608 $2,080 $1,819 $1,815
Charge-offs:
Commercial Real Estate......................... $ 0 $ 0 $ 0 $ 11 $ 22
Residential Real Estate........................ 22 21 3 12 0
Commercial & Agricultural...................... 838 259 51 172 106
Consumer....................................... 105 43 53 25 25
------ ------ ------ ------ ------
$ 965 $ 323 $ 107 $ 220 $ 153
====== ====== ====== ====== ======
Recoveries:
Commercial Real Estate......................... $ 13 $ 13 $ 2 $ 1 $ 39
Residential Real Estate........................ 12 0 0 0 0
Commercial & Agricultural...................... 70 9 24 9 2
Consumer....................................... 21 17 9 41 11
------ ------ ------ ------ ------
$ 116 $ 39 $ 35 $ 51 $ 52
====== ====== ====== ====== ======
Net charge-offs..................................... 849 284 72 169 101
Provision for loan losses........................... 851 800 600 430 105
Balance related to acquisition...................... 574 0 0 0 0
------ ------ ------ ------ ------
Balance at end of period............................ $3,700 $3,124 $2,608 $2,080 $1,819
====== ====== ====== ====== ======
Ratio of net charge offs during period to average
loans outstanding during period................... .35% .12% .03% .09% .06%
Ratio of allowance for loan losses to total loans... 1.24% 1.36% 1.15% 1.02% 1.03%
The increase in the allowance for loan losses is primarily a result of the
growth in loan volume and the allowance acquired from Dairy State.
There are several factors that are included in the analysis of the adequacy
of the allowance for loan losses. Management considers loan volume trends,
levels and trends in delinquencies and non-accruals, current problem credits,
national and local economic trends and conditions, concentrations of credit by
industry, current and historical levels of charge-offs, the experience and
ability of the lending staff, and other miscellaneous factors. Management has
determined the allowance for loan losses is adequate to absorb probable loan
losses inherent in its loan portfolio as of December 31, 1999 based on its most
recent evaluation of these factors.
The factor of loan volume trends is based on actual lending activity. The
loan volume trends factor is for estimated losses that are believed to be
inherently part of the loan portfolio but that have not yet been identified as
specific problem credits. The factor current problem credits includes the
exposure believed to exist for specifically identified problem loans determined
on a loan-by-loan basis.
Other Operating Income
Other operating income increased $337,115, or 16.7%, from 1998 to 1999. The
growth resulted primarily from increases in service charges on deposit accounts
which increased due to collection of automated teller machine fees and
assessment of service charges on negative collected balances for an entire year.
This increase was partially offset by decreases in gain on sales of mortgage
loans held for sale which decreased due to the rising interest rate environment
which reduced loan demand and the related fee income.
17
19
Other operating income increased $449,838, or 28.7%, from 1997 to 1998. The
growth resulted primarily from increases in undistributed income from the data
processing subsidiary. Undistributed income from the data processing subsidiary
increased as a result of increased earnings of the data processing subsidiary.
Other Operating Expenses
Other operating expenses increased by $1,025,027, or 12.7%, from 1998 to
1999. This change was primarily a result of increases in salaries and employee
benefits and data processing fees. Increases in salaries and employee benefits
were the result of additional employees. In 1999, 60 new employees were added
and 19 employees left the Bank's employment. The overall result was a net
increase of 33.4 full-time equivalents. Increases in salaries and employee
benefits were also the result of annual merit increases to employees. In
addition, hourly employees also received a mid-year increase in their hourly
wage in addition to their annual merit increase. Data processing fees increased
primarily due to the costs of the Dairy State conversion of $35,700 and overall
volume increases of $43,900.
Other operating expenses increased by $648,802, or 8.76%, from 1997 to
1998. This change was primarily a result of increases in salaries, employee
benefits and professional fees. Increases in salaries and employee benefits were
the result of additional employees. In 1998, 20 new employees were hired and 19
employees left the Bank's employment. The overall result was a net increase of
2.6 full-time equivalents. Increases in salaries and employee benefits were also
the result of annual merit increases to employees. In addition, hourly employees
also received a mid-year increase in their hourly wage in addition to their
annual merit increase. Professional fees increased due to regulatory reporting
requirements. Professional fees incurred to meet regulatory reporting
requirements are expected to increase on an ongoing basis.
Income Taxes
The effective tax rates for the Company were 16.81%, 21.13%, and 25.53% for
1999, 1998, and 1997, respectively. The decrease in effective tax rates is a
direct result of additional assets held at the Bank's FNBM Investment Corp.
subsidiary. $24.3 million of securities were transferred by the Bank to the
Bank's investment subsidiary in the first quarter of 1998 while $32.0 million of
loans were transferred by the Bank to the Bank's investment subsidiary in the
fourth quarter of 1998. FNBM Investment Corp. is a wholly-owned subsidiary of
the Bank incorporated under the laws of Nevada and is subject to taxation in the
State of Nevada which does not currently impose a corporate income tax. See Note
11 in the Consolidated Financial Statements.
Securities
Securities available for sale are held for an indefinite period of time and
may be sold in response to changing market and interest rate conditions as part
of the asset/liability management strategy. Securities available for sale are
carried at fair value, with unrealized holding gains and losses, net of the
related tax effect, reported as a separate component of accumulated other
comprehensive income. Securities held to maturity are those that management has
both the positive intent and ability to hold to maturity, and are reported at
amortized cost. The Bank does not own trading or held to maturity securities.
The Bank manages the investment portfolios within policies which seek to achieve
desired levels of liquidity, manage interest rate sensitivity risk, meet
earnings objectives, and provide required collateral support for deposit
activities.
Total securities amounted to $97.6 million and $97.2 million as of December
31, 1999 and 1998, respectively. The slightly higher level of investments in
securities resulted primarily from the increase in available funds derived from
growth in deposits over loans.
The Bank manages its investment portfolios within policies which seek to
achieve desired levels of liquidity, manage interest rate sensitivity risk, meet
earnings objectives and provide required collateral support for deposit
activities. The Bank had no concentrations of securities from any single issues
that exceeded 10% of stockholders' equity. Table 5 exhibits the distribution, by
type, of the investment portfolio for the years ended December 31, 1999 and
1998. Concurrent with the acquisition of Dairy State, the Company transferred
all of Dairy State's held to maturity securities to securities available for
sale.
18
20
SECURITIES AVAILABLE FOR SALE
TABLE 5
DECEMBER 31, 1999 DECEMBER 31, 1998
----------------- -----------------
(IN THOUSANDS)
U.S. Treasury securities and obligations of U.S. Government
corporations and agencies................................. $ 10,290 $ 5,791
Obligations of states and political subdivisions............ 54,278 53,259
Mortgage-backed securities.................................. 33,459 27,473
Commercial paper............................................ 0 7,200
Other securities............................................ 2,124 1,694
Corporate Notes............................................. 897 0
-------- -------
Total amortized cost.............................. $101,048 $95,417
Total fair value.................................. $ 97,595 $97,197
The following table presents the maturity by type of the investment
portfolio for the year ended December 31, 1999.
INVESTMENT PORTFOLIO ANALYSIS
TABLE 6
DECEMBER 31, 1999
-------------------------------------------------------------------------------------------
U.S. GOVT. MORTGAGE BACKED CORPORATE
AGENCIES MUNICIPALS SECURITIES NOTES OTHER SECURITIES
---------------- ---------------- ---------------- -------------- -----------------
BOOK AVG TE BOOK AVG TE BOOK AVG TE BOOK AVG TE BOOK AVG TE
DESCRIPTION & TERM VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD
- ------------------ ----- ------ ----- ------ ----- ------ ----- ------ ----- ------
(IN THOUSANDS)
0 - 12 months........ $ 3,525 5.62 $ 2,475 7.35 $ 1,512 5.99 $ 0 n/a $ 0 n/a
1 - 5 Years.......... 1,000 5.48 8,169 7.29 15,083 6.33 897 6.50 100 6.81
5 - 10 Years......... 4,241 6.87 12,949 7.56 16,017 6.37 0 n/a 0 n/a
Over 10 Years........ 1,524 6.67 30,685 7.24 847 6.32 0 n/a 2,024 6.17
------- ---- ------- ---- ------- ---- ---- ---- ------ ----
Total................ $10,290 6.42 $54,278 7.33 $33,459 6.33 $897 6.50 $2,124 6.20
======= ==== ======= ==== ======= ==== ==== ==== ====== ====
DECEMBER 31, 1999
-------------------
TOTAL TOTAL
AMORTIZED FAIR
DESCRIPTION & TERM COST VALUE
- ------------------ --------- -----
(IN THOUSANDS)
0 - 12 months........ $ 7,512 $ 7,504
1 - 5 Years.......... 25,249 24,875
5 - 10 Years......... 33,207 32,313
Over 10 Years........ 35,080 32,903
-------- -------
Total................ $101,048 $97,595
======== =======
Loan Portfolio
The Bank is actively engaged in originating loans to customers in
Manitowoc, Calumet, Sheboygan and Brown counties. The Bank has policies and
procedures designed to mitigate credit risk and to maintain the quality of the
loan portfolio. These policies include underwriting standards for new credits as
well as the continuous monitoring and reporting of asset quality and the
adequacy of the allowance for loan losses. These polices, coupled with
continuous training efforts, have provided effective checks and balances for the
risk associated with the lending process. Lending authority is based on the
level of risk, size of the loan and the experience of the lending officer.
Bank underwriting procedures are based on a process which evaluates the
management, repayment ability, collateral support, credit history, and overall
financial strength of prospective and current customers from a relationship
oriented perspective. Residential mortgage loans are predominantly underwritten
to general FNMA guidelines.
The Bank extends the following types of credit: commercial loans,
agricultural loans, real estate loans and consumer loans.
Commercial loans are often secured with first liens on accounts receivable,
inventory and/or equipment. Commercial loans generally have loan to value ratios
of 80% or less. Agricultural loans are collateralized with first liens on crops,
farm products, farm personal property and/or real estate. Agricultural loans
generally have loan to value ratios of 70% or less, except for agricultural real
estate loans which have loan to value ratios of
19
21
80% or less. Real estate loans include commercial real estate loans and
residential real estate loans. Real estate loans are collateralized with first
mortgages. Commercial real estate loans generally have loan to value ratios of
80% or less while residential real estate loans have loan to value ratios of 90%
or less. Consumer loans include loans to individuals for personal, family or
household purposes. Consumer loans may be secured with first lien positions or
unsecured depending upon the credit quality. The Bank will make subordinate
loans in any category if the borrower's financial position justifies it. The
Bank is not involved in credit risk insurance.
Bank management assesses the loan portfolio mix at least annually as part
of its planning and budget process. While there are no predetermined fixed
targets for various loan types established in the loan policy, general
guidelines are established annually for new loan activity based on loan
portfolio mix and credit needs in the Bank's main markets. For 2000, the general
ranges for new loan activity by type are as follows:
Commercial Loans............................................ 45% to 55%
Residential Mortgage Loans.................................. 30% to 40%
Consumer Loans.............................................. 10% to 20%
Agricultural Loans.......................................... 5% to 10%
The risks associated with the Bank's loan categories are as follows:
Commercial and Agricultural. Credit risk is considered low. Past due loans
are below industry averages. Non-performing loans and net loan losses, although
higher than the previous year, remain below the averages for banks of similar
size. The portfolio is fairly diversified with residential real estate the only
SIC industry category exceeding 32% of the Bank's capital structure and
agricultural loans representing approximately 5% of total loans.
Real Estate. Credit risk is considered low, with delinquency ratios and
non-performing loans at low levels.
Consumer. Credit risk is considered low, with delinquency ratios and
non-performing loans at low levels.
No loan customer exceeds the legal lending limit among the loan categories.
The Bank's legal and internal lending limit as of December 31, 1999 was
$5,849,000.
Extensions of credit used predominantly for business or agricultural
purposes are classified as commercial and agricultural loans. Commercial loans
include lines of credit for seasonal requirements of businesses, short-term
loans payable within 12 months for one time specific purposes and term loans
with maturities greater than 12 months for capital assets and fixed assets which
are amortized and repaid from cash flow. Agricultural loans include short-term
farm operating loans, intermediate farm personal property loans and long-term
agricultural real estate loans. Agricultural real estate loans generally have
maturities exceeding five years. Commercial term loans for capital assets and
fixed assets and commercial real estate loans that have maturities of more than
five years are generally arranged through government assisted financing programs
such as SBA.
The increase in commercial loans and increase in commercial real estate
loans resulted mainly from the general credit needs within the Bank's primary
markets. The Bank also made it a priority to sell residential mortgage loans to
the FNMA secondary market and term commercial real estate loans to the SBA
secondary market.
20
22
Table 7 "Summary of Loan Portfolio" presents the composition of the Bank's
loan portfolio by significant concentration.
SUMMARY OF LOAN PORTFOLIO
TABLE 7
LOANS OUTSTANDING AS DECEMBER 31,
-----------------------------------------------------------------------------------
1999 1998 1997 1996
---------------------- ---------------------- ---------------------- --------
PERCENT OF PERCENT OF PERCENT OF
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT
------ ----------- ------ ----------- ------ ----------- ------
(IN THOUSANDS)
Commercial and
Agricultural........ $93,550 31.33% $91,122 39.81% $78,230 34.61% $70,775
Commercial
Real Estate......... 69,248 23.19% 38,018 16.61% 45,689 20.21% 38,003
Residential Real
Estate.............. 114,176 38.23% 85,115 37.18% 88,822 39.29% 82,538
Consumer............. 20,199 6.76% 13,783 6.02% 12,503 5.53% 11,599
Other................ 1,467 .49% 879 .38% 823 .36% 622
-------- ------- -------- ------- -------- ------- --------
Total................ $298,640 100.00% $228,917 100.00% $226,067 100.00% $203,537
======== ======= ======== ======= ======== ======= ========
LOANS OUTSTANDING AS DECEMBER 31,
------------------------------------
1996 1995
----------- ----------------------
PERCENT OF PERCENT OF
TOTAL LOANS AMOUNT TOTAL LOANS
----------- ------ -----------
(IN THOUSANDS)
Commercial and
Agricultural........ 34.77% $62,982 35.58%
Commercial
Real Estate......... 18.67% 32,825 18.54%
Residential Real
Estate.............. 40.55% 70,365 39.75%
Consumer............. 5.70% 10,335 5.84%
Other................ .31% 508.... 29%
------- -------- -------
Total................ 100.00% $177,015 100.00%
======= ======== =======
MATURITIES OF LOAN PORTFOLIO
TABLE 8
DECEMBER 31, 1999
------------------------------------------------------------------------------
COMMERCIAL COMMERCIAL RESIDENTIAL
MATURING & AGRICULTURAL REAL ESTATE REAL ESTATE CONSUMER OTHER TOTAL
-------- -------------- ----------- ----------- -------- ----- -----
(IN THOUSANDS)
0-12 months..................... $61,602 $25,888 $ 56,507 $ 4,195 $1,467 $149,659
1-5 years....................... 25,710 36,748 54,739 15,750 0 132,947
Over 5 years.................... 6,238 6,612 2,930 254 0 16,034
------- ------- -------- ------- ------ --------
Total........................... $93,550 $69,248 $114,176 $20,199 $1,467 $298,640
======= ======= ======== ======= ====== ========
MATURING FIXED RATE ADJUSTABLE RATE TOTAL
-------- ---------- --------------- -----
0-12 months................... $ 95,351 $54,308 $149,659
1-5 years..................... 127,430 5,517 132,947
Over 5 years.................. 12,307 3,727 16,034
-------- ------- --------
Total......................... $235,088 $63,552 $298,640
======== ======= ========
The Bank's policy is to make the majority of its loan commitments in the
market area it serves. This tends to reduce risk because management is familiar
with the credit histories of loan applicants and has an in-depth knowledge of
the risk to which a given credit is subject. The Bank had no foreign loans in
its portfolio as of December 31, 1999.
It is the policy of the Bank to place a loan in nonaccrual status whenever
there is substantial doubt about the ability of a borrower to pay principal or
interest on any outstanding credit. Management considers such factors as payment
history, the nature and value of collateral securing the loan and the overall
economic situation of the borrower when making a nonaccrual decision. Nonaccrual
loans are closely monitored by management. A non-accruing loan is restored to
current status when the prospects of future contractual payments are no longer
in doubt. Nonaccrual loans at December 31, 1999 and 1998 were $1,618,000 and
$927,000, respectively. The fluctuation in the level of nonaccrual loans over
the past five years is attributed mainly to isolated credit deterioration in a
few larger account relationships. These included commercial loans, agricultural
loans and residential real estate loans. However, these were individual isolated
accounts and no trend in economic, industrial, geographical or other factors
could be identified to account for the fluctuations
21
23
in the level of nonaccrual loans. Accruing loans 90 days or more past due
include loans that are both well secured and in the process of collection.
RISK ELEMENTS OF LOAN PORTFOLIO
TABLE 9
DECEMBER 31,
------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(IN THOUSANDS)
Nonaccrual loans....................................... $1,618 $ 927 $211 $708 $1,153
Accruing loans past due 90 days or more................ 21 181 84 229 36
------ ------ ---- ---- ------
Total nonperforming loans.............................. $1,639 $1,108 $295 $937 $1,189
Nonperforming loans as a percent of loans.............. .55% .47% .13% .47% .24%
Ratio of the allowance for loan losses to nonperforming
loans................................................ 226% 282% 884% 222% 153%
Total nonperforming loans at December 31, 1999 were $1.6 million, an
increase of $521,000 from $927,000 at December 31, 1998. The increase was
primarily due to two commercial loans. These are isolated accounts and no trend
in economic, industrial, geographical or other factor is responsible.
The following table shows the interest income that would have been recorded
under the original terms and the amount of interest income that was included in
interest income for the period.
FOREGONE LOAN INTEREST
TABLE 10
1999 1998 1997
---- ---- ----
(IN THOUSANDS)
Interest income that would have been recorded under original
terms..................................................... $187 $128 $47
Interest income recorded during the period.................. 98 43 16
---- ---- ---
Reduction in interest income................................ $ 89 $ 85 $31
Potential problem loans are loans where there are doubts as to the ability
of the borrower to comply with present repayment terms. The decision of
management to place loans in this category does not necessarily indicate that
the Bank expects losses to occur, but that management recognizes that a higher
degree of risk is associated with these performing loans.
At December 31, 1999, potential problem loans totaled $4.4 million. The
loans that have been reported as potential problem loans are not concentrated in
a particular industry, but rather cover a diverse range of businesses.
Management does not presently expect significant losses from credits in the
potential problem loan category.
Deposits
Deposit liabilities increased from $276.5 million at December 31, 1998 to
$363.3 million at December 31, 1999, an increase of $86.8 million, or 31.4%.
Savings and noninterest bearing demand deposits are the main source of deposit
growth. The Bank continues to experience strong competition from other
commercial banks, credit unions, the stock market and mutual funds. There are no
predetermined divisions for deposit categories. Table 1 displays the average
balances and average rates paid on all major deposits classifications for 1999,
1998 and 1997.
22
24
The following table represents maturities of time deposits in denominations
of $100,000 or more for the years ended December 31, 1999 and 1998.
MATURITY OF TIME DEPOSITS $100,000 OR MORE
TABLE 11
FOR THE YEARS ENDED
DECEMBER 31,
--------------------
1999 1998
---- ----
(IN THOUSANDS)
3 months or less............................................ $ 6,286 $ 5,077
3 - 6 months................................................ 7,668 5,626
6 - 12 months............................................... 7,880 5,310
Over 12 months.............................................. 4,210 2,171
------- -------
TOTAL....................................................... $26,044 $18,184
======= =======
SECURITIES SOLD UNDER REPURCHASE AGREEMENTS
(IN THOUSANDS)
DECEMBER 31,
TABLE 12
Securities sold under agreements to repurchase generally mature within one
day from the transaction date. The agreements to repurchase securities requires
that the Bank (seller) repurchase identical securities as those that were sold.
The securities underlying the agreements were under the institution's control at
December 31, 1999 and 1998.
Information concerning securities sold under agreements to repurchase for
1999, 1998 and 1997 is summarized as follows:
1999 1998 1997
---- ---- ----
Average balance during the year............................ $22,902 $21,355 $20,944
Average interest rate during the year...................... 4.79% 5.21% 5.07%
Maximum month-end balance during the year.................. $24,988 $25,667 $24,425
FHLB Advances
FHLB advances increased from $28.5 million to $36.0 million, an increase of
$7.5 million or 26.3%. FHLB advances are subject to a prepayment penalty if they
are repaid prior to maturity. FHLB advances are callable either six months or
one year after origination and quarterly thereafter.
Year 2000
The Bank followed the five phases recommended by the Federal Financial
Institutions Examination Council (FFIEC) to manage its Year 2000 project. The
phases were awareness, assessment, renovation, validation and implementation.
The Bank fully completed all five phases.
The Bank's mainframe computer and the software that run it are year 2000
compliant; that is, they have been successfully tested by advancing the
mainframe's internal calendar to and through the year 2000. All Mission Critical
Systems were tested and found to be compliant in the year 2000 environment.
Non-critical Systems were found to be compliant. Testing of Non-critical Systems
was completed. The entire inventory of software was reviewed to assess the
impact of the year 2000. The software that needed to be replaced was replaced
and all software is now Year 2000 compliant.
In addition, the Bank reviewed all non-information technology and equipment
systems. Non-information technology systems include all other business equipment
other than computer hardware, software and
23
25
peripheral devices, such as automated teller machines, modems and routers.
Non-information technology equipment includes security devices, time clocks,
heating and air conditioning systems, elevators, telephones and fax machines.
Testing of non-information technology and equipment systems was completed and
are Year 2000 compliant.
The Bank recognizes that its customers will be affected by the Year 2000
issues. As a result, the Bank contacted its significant business loan customers
to make them aware of the Year 2000 issues and to assess their readiness. The
Bank realizes that if its customers experience Year 2000 business interruptions
there may be more exposure to the Bank. Over 90% of the Bank's significant
business loan customers responded to the Year 2000 inquiries. Of those, over 92%
claim to be Year 2000 compliant. The responses were reviewed, ranked by degree
of risk, and quantified. Based on the low level of risk, no additional follow up
was deemed necessary. At this time, the Bank does not believe there is any
enforceability of any assurances from significant third parties or business loan
customers. The Bank has included the Year 2000 credit risk into its allowance
for loan losses. The Bank continued its customer awareness efforts throughout
1999, including utilizing the local radio and cable television media.
The Bank does not expect its Year 2000 compliance costs to be significant.
Equipment upgrades were made to take advantage of current technology in the
ordinary course of business and not solely as a result of the Year 2000 issue.
Costs incurred through December 31, 1999 related solely to Year 2000 compliance
were $120,000.
A business resumption contingency plan was established to address worst
case scenarios should they occur with the Year 2000 issue. The worst case
scenarios would be that all communications would be lost. If communications are
lost, the Bank would function in an "off-line" standby mode which would create
documents that could be done during evening batch processing at the Bank's data
processing center. Customer balances would be available the following morning.
The Bank experienced no problems with hardware or software systems at the
beginning of the Year 2000 and continues to experience no problems or issues
related to the millennium issue. The Bank is not aware of any borrowers
incurring significant Year 2000 issues or any vendors used by the Bank which
have incurred significant Year 2000 issues.
ITEM 7A
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Bank monitors interest rate factors on a monthly basis to assess
interest rate risk of the portfolio of assets and liabilities. Maturity terms of
assets are matched to the maturity terms of liabilities to the extent possible.
The maturity structure of the municipal securities, however, is long term to
optimize tax advantages and yield returns within an acceptable level of market
risk. In addition, based on prior experience, the average life of the mortgage
backed securities has been shorter than the scheduled maturities. There are no
interest rate caps or floors on variable rate instruments that could affect the
cash flows on those instruments. Variable rate loans, investments and deposits
reprice immediately because they are related to changes in the prime rate of
interest. Fixed rate commercial loans reprice at least annually. Fixed rate real
estate loans are scheduled for 1 to 2 years with balloon payments. Loans do not
have prepayment penalty clauses. The following table also assumes all loans and
deposits will be renewed under the same terms. Interest rates on those renewals
are based on anticipated rates at the date of renewal. There is a 10% prepayment
assumption for the entire loan portfolio based on historical trends.
Reinvestment rates are assumed at 95% for loans. Loans not renewed are assumed
to be replaced by loan originations. The table assumes that any deposits that
are withdrawn are
24
26
replaced by new deposit funds. The following table shows the expected cash flows
and yields for interest earning assets and interest bearing liabilities.
QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
EXPECTED PERIOD OF MATURITY
--------------------------------------------------------------------------------------------------
WITHIN 1 YEAR 1-2 YEARS 2-3 YEARS 3-4 YEARS GREATER THAN 4 YEARS
----------------- ---------------- ---------------- ---------------- ---------------------
YIELD/ YIELD/ YIELD/ YIELD/ YIELD/
DECEMBER 31, 1999 BALANCE RATE BALANCE RATE BALANCE RATE BALANCE RATE BALANCE RATE
----------------- ------- ------ ------- ------ ------- ------ ------- ------ ------- ------
(IN THOUSANDS)
Short-term
investments(V)...... $ 0 n/a $ 0 n/a $ 0 n/a $ 0 n/a $ 0 n/a
US Treasury, Agency
and Other
securities(F)....... 3,524 5.48% 1,006 5.53% 25 6.54% 896 6.50% 7,789 6.91%
US Treasury, Agency
and Other
securities(V)....... 0 n/a 21 7.51 50 7.52 0 n/a 0 n/a
Mortgage backed
Securities(F)....... 1,512 5.99 3,011 6.24 2,951 6.35 1,870 6.35 21,854 6.32
Mortgage backed
Securities(V)....... 2,261 6.11 0 n/a 0 n/a 0 n/a 0 n/a
Municipal
securities(F)....... 2,475 4.86 2,572 4.60 3,177 4.99 912 4.87 45,142 4.91
Commercial
loans(F)............ 41,933 8.28 27,450 8.62 13,725 8.62 8,946 8.18 18,069 9.13
Commercial
loans(V)............ 45,557 9.56 1,987 9.24 994 9.24 205 9.36 3,932 9.45
Residential real
estate(F)........... 47,756 8.28 28,932 8.29 14,466 8.29 4,608 8.23 7,537 8.36
Residential real
estate(V)........... 8,751 8.97 1,261 7.96 630 7.96 156 7.87 78 7.87
Consumer loans(F).... 4,106 8.88 5,712 9.42 2,921 10.60 6,226 8.94 1,145 8.93
Consumer loans(V).... 89 9.03 0 n/a 0 n/a 0 n/a 0 n/a
-------- ----- ------- ----- ------- ------ ------- ----- -------- -----
Total interest
earning
assets.......... $157,964 8.53% $71,952 8.27% $38,939 8.18% $23,819 7.98% $105,546 6.53%
======== ===== ======= ===== ======= ====== ======= ===== ======== =====
Interest bearing
deposits(F)......... $112,550 5.84% $31,664 4.60% $12,914 6.09% $ 680 5.41% $ 630 5.28%
Interest bearing
deposits(V)......... 137,565 3.35 0 n/a 0 n/a 0 n/a 0 n/a
Short term
borrowings(F)....... 3,829 4.41 0 n/a 0 n/a 0 n/a 0 n/a
Short term
borrowings(V)....... 20,523 4.99 0 n/a 0 n/a 0 n/a 0 n/a
Long term
Borrowings(F)....... 0 n/a 0 n/a 14,000 5.64 0 n/a 22,000 5.35
-------- ----- ------- ----- ------- ------ ------- ----- -------- -----
Total interest
bearing
liabilities..... $274,467 4.51% $31,664 4.60% $26,914 5.85% $ 680 5.41% $ 22,630 5.35%
======== ===== ======= ===== ======= ====== ======= ===== ======== =====
EXPECTED PERIOD OF MATURITY
----------------------------
TOTAL
----------------- FAIR
YIELD/ MARKET
DECEMBER 31, 1999 BALANCE RATE VALUE
----------------- ------- ------ ------
(IN THOUSANDS)
Short-term
investments(V)...... $ 0 n/a $ 0
US Treasury, Agency
and Other
securities(F)....... 13,240 6.40% 12,856
US Treasury, Agency
and Other
securities(V)....... 71 7.52 71
Mortgage backed
Securities(F)....... 31,198 6.32 30,007
Mortgage backed
Securities(V)....... 2,261 6.11 2,261
Municipal
securities(F)....... 54,278 4.84 52,400
Commercial
loans(F)............ 110,123 8.54 109,605
Commercial
loans(V)............ 52,675 9.53 52,641
Residential real
estate(F)........... 103,299 8.29 102,752
Residential real
estate(V)........... 10,876 8.77 10,833
Consumer loans(F).... 20,110 9.30 20,302
Consumer loans(V).... 89 9.03 89
-------- ----- --------
Total interest
earning
assets.......... $398,220 7.89% $393,817
======== ===== ========
Interest bearing
deposits(F)......... $158,438 5.61% $158,438
Interest bearing
deposits(V)......... 137,565 3.35 137,565
Short term
borrowings(F)....... 3,829 4.41% 3,829
Short term
borrowings(V)....... 20,523 4.99% 20,523
Long term
Borrowings(F)....... 36,000 5.46 36,000
-------- ----- --------
Total interest
bearing
liabilities..... $356,355 4.67% $356,355
======== ===== ========
- -------------------------
(V) Variable repricing terms
(F) Fixed repricing terms
25
27
ITEM 8
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
First Manitowoc Bancorp, Inc.:
We have audited the accompanying consolidated statements of financial
condition of First Manitowoc Bancorp, Inc. and subsidiaries (Corporation) as of
December 31, 1999 and 1998, and the related consolidated statements of income,
changes in stockholders' equity, and cash flows for each of the years in the
three-year period ended December 31, 1999. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the 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 First
Manitowoc Bancorp, Inc. and subsidiaries as of December 31, 1999 and 1998, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1999, in conformity with generally
accepted accounting principles.
KPMG LLP
Milwaukee, Wisconsin
February 4, 2000
26
28
FIRST MANITOWOC BANCORP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1999 AND 1998
1999 1998
---- ----
ASSETS
Cash and due from banks..................................... $ 21,007,142 $ 15,215,089
Federal funds sold.......................................... 19,708,767 15,622,650
------------ ------------
Cash and cash equivalents................................... 40,715,909 30,837,739
Securities available for sale, at fair value................ 97,594,900 97,197,495
Loans, net.................................................. 294,939,807 225,792,548
Premises and equipment, net................................. 8,872,047 4,187,201
Intangible assets, net of accumulated amortization of
$711,661 in 1999 and $471,062 in 1998..................... 8,706,189 914,905
Accrued interest receivable and other assets................ 11,689,454 8,898,391
------------ ------------
$462,518,306 $367,828,279
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits.................................................... $363,285,912 $276,494,614
Securities sold under repurchase agreements................. 22,352,259 24,693,765
Borrowed funds.............................................. 38,000,000 28,801,713
Accrued interest payable and other liabilities.............. 4,373,688 3,946,340
------------ ------------
Total liabilities........................................... 428,011,859 333,936,432
------------ ------------
Commitments and contingencies (notes 12 and 14)............. -- --
------------ ------------
Stockholders' equity:
Common stock, $1 par value; authorized 2,500,000 shares;
issued 1,895,907 shares in 1999 and 1998............... 1,895,907 1,895,907
Additional paid-in capital................................ 652,208 652,208
Retained earnings......................................... 34,906,018 30,869,428
Accumulated other comprehensive income (loss)............. (2,247,547) 1,174,443
Treasury stock at cost - 161,590 shares in 1999 and 1998.... (700,139) (700,139)
------------ ------------
Total stockholders' equity.................................. 34,506,447 33,891,847
------------ ------------
$462,518,306 $367,828,279
============ ============
See accompanying notes to consolidated financial statements.
27
29
FIRST MANITOWOC BANCORP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1999 1998 1997
---- ---- ----
Interest income:
Loans, including fees............................... $21,273,017 $21,183,965 $20,193,158
Federal funds sold.................................. 369,038 525,545 372,324
Securities:
Taxable.......................................... 2,787,897 2,740,187 2,902,867
Tax-exempt....................................... 2,667,816 2,369,497 1,693,672
----------- ----------- -----------
Total interest income....................... 27,097,768 26,819,194 25,162,021
----------- ----------- -----------
Interest expense:
Deposits............................................ 10,737,985 11,398,128 10,458,401
Securities sold under repurchase agreements......... 1,095,459 1,111,441 1,062,572
Borrowed funds...................................... 1,769,168 1,642,784 1,614,775
----------- ----------- -----------
Total interest expense...................... 13,602,612 14,152,353 13,135,748
----------- ----------- -----------
Net interest income................................... 13,495,156 12,666,841 12,026,273
Provision for loan losses............................. 850,836 800,000 600,000
----------- ----------- -----------
Net interest income after provision for loan losses... 12,644,320 11,866,841 11,426,273
----------- ----------- -----------
Other operating income:
Trust service fees.................................. 499,243 483,673 445,033
Service charges on deposit accounts................. 905,178 615,883 520,045
Loan servicing income............................... 325,947 313,569 187,988
Gain on sales of mortgage loans held for sale....... 138,304 200,512 55,810
Other............................................... 488,393 406,313 361,236
----------- ----------- -----------
Total other operating income................ 2,357,065 2,019,950 1,570,112
----------- ----------- -----------
Other operating expenses:
Salaries and employee benefits...................... 4,957,792 4,055,079 3,860,482
Occupancy........................................... 1,106,982 1,138,503 1,120,350
Data processing..................................... 718,286 638,680 641,321
Postage, stationery and supplies.................... 420,595 360,116 341,425
Amortization of goodwill and other intangibles...... 240,599 234,247 202,973
Other............................................... 1,633,489 1,626,091 1,237,363
----------- ----------- -----------
Total other operating expenses.............. 9,077,743 8,052,716 7,403,914
----------- ----------- -----------
Income before income tax expense...................... 5,923,642 5,834,075 5,592,471
Income tax expense.................................... 996,000 1,233,000 1,428,000
----------- ----------- -----------
Net income............................................ $ 4,927,642 $ 4,601,075 $ 4,164,471
=========== =========== ===========
Earnings per share: basic and diluted................. $2.84 $2.65 $2.40
----------- ----------- -----------
See accompanying notes to consolidated financial statements.
28
30
FIRST MANITOWOC BANCORP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
ACCUMULATED
ADDITIONAL OTHER
COMMON PAID-IN RETAINED COMPREHENSIVE TREASURY
STOCK CAPITAL EARNINGS INCOME (LOSS) STOCK TOTAL
------ ---------- -------- ------------- -------- -----
Balance at December 31,
1996.................... $1,895,907 $652,208 $23,605,515 $ (28,792) $(700,139) $25,424,699
Cash paid for fractional
shares.................. -- -- (3,001) -- -- (3,001)
Net Income................ -- -- 4,164,471 -- -- 4,164,471
Other comprehensive
income:
Unrealized holding gains
rising during year... -- -- -- 1,012,529 -- 1,012,529
Reclassification
adjustment for gains
realized in net
income............... -- -- -- (765) -- (765)
Income tax effect....... -- -- -- (349,071) -- (349,071)
-----------
Comprehensive income...... 4,827,164
Cash dividends ($.41 per
share).................. -- -- (707,695) -- -- (707,695)
---------- -------- ----------- ----------- --------- -----------
Balance at December 31,
1997.................... 1,895,907 652,208 27,059,290 633,901 (700,139) 29,541,167
Net Income................ -- -- 4,601,075 -- -- 4,601,075
Other comprehensive
income:
Unrealized holding gains
rising during year... -- -- -- 809,158 -- 809,158
Income tax effect....... -- -- -- (268,616) -- (268,616)
-----------
Comprehensive income...... 5,141,617
Cash dividends ($.46 per
share).................. -- -- (790,937) -- -- (790,937)
---------- -------- ----------- ----------- --------- -----------
Balance at December 31,
1998.................... 1,895,907 652,208 30,869,428 1,174,443 (700,139) 33,891,847
Cash paid for fractional
shares.................. -- -- (6,527) -- -- (6,527)
Net Income................ -- -- 4,927,642 -- -- 4,927,642
Other comprehensive
income:
Unrealized holding
losses rising during
year................. -- -- -- (5,233,418) -- (5,233,418)
Income tax effect....... -- -- -- 1,811,428 -- 1,811,428
-----------
Comprehensive income...... 1,505,652
Cash dividends ($.51 per
share).................. -- -- (884,525) -- -- (884,525)
---------- -------- ----------- ----------- --------- -----------
Balance at December 31,
1999.................... $1,895,907 $652,208 $34,906,018 $(2,247,547) $(700,139) $34,506,447
========== ======== =========== =========== ========= ===========
See accompanying notes to consolidated financial statements.
29
31
FIRST MANITOWOC BANCORP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1999 1998 1997
---- ---- ----
Cash flows from operating activities:
Net income................................................ $ 4,927,642 $ 4,601,075 $ 4,164,471
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses................................. 850,836 800,000 600,000
Depreciation and amortization of premises and equipment... 485,179 473,279 461,964
Amortization of intangible assets......................... 240,599 234,247 202,973
Amortization (accretion) of securities.................... 25,857 43,839 82,380
Proceeds from sales of mortgage loans held for sale....... 24,938,682 34,896,610 14,240,691
Originations of mortgage loans held for sale.............. (25,037,405) (33,487,722) (15,300,351)
Gain on sales of mortgage loans held for sale............. 138,304 200,512 55,810
Deferred income taxes..................................... 51,000 (240,000) (285,000)
Undistributed income of joint venture..................... (142,319) (50,345) (68,842)
Net loss on sale of premises and equipment................ -- -- 7,399
Net gain on sales of securities........................... -- -- (765)
Increase in accrued interest receivable and other
assets.................................................. (211,123) (1,906,915) (913,402)
Increase (decrease) in accrued interest payable and
other liabilities....................................... (792,516) 627,000 509,575
Other, net................................................ -- -- 12,000
------------ ------------ ------------
Net cash provided by operating activities................... 5,474,736 6,191,580 3,768,903
------------ ------------ ------------
Cash flows from investing activities:
Proceeds from maturities of securities available for
sale.................................................... 45,488,608 30,768,958 21,247,613
Purchases of securities available for sale................ (51,845,093) (41,395,290) (29,491,414)
Net increase in loans..................................... (16,119,571) (4,742,679) (21,597,795)
Bank acquisition, net of cash acquired.................... (4,258,316) -- --
Purchases of premises and equipment....................... (2,083,441) (725,552) (737,034)
Sales of premises and equipment........................... -- 55,000 56,086
------------ ------------ ------------
Net cash used in investing activities....................... (28,817,813) (16,039,563) (30,522,544)
------------ ------------ ------------
Cash flows from financing activities:
Net increase in deposits.................................. 26,942,464 16,028,596 27,700,297
Net increase (decrease) in securities sold under
repurchase agreements................................... (2,041,506) 685,034 4,503,289
Proceeds from advances of borrowed funds.................. 28,698,287 4,000,000 25,164,880
Repayments on borrowed funds.............................. (19,500,000) (6,770,528) (13,506,759)
Dividends paid............................................ (884,525) (790,937) (707,695)
Other..................................................... 6,527 -- (3,000)
------------ ------------ ------------
Net cash provided by financing activities................... 33,221,247 13,152,165 43,151,012
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents........ 9,878,170 3,304,182 16,397,371
Cash and cash equivalents at beginning of year.............. 30,837,739 27,533,557 11,136,186
------------ ------------ ------------
Cash and cash equivalents at end of year.................... 40,715,909 30,837,739 27,533,557
============ ============ ============
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest................................................ 13,341,000 14,225,000 12,989,000
Income taxes............................................ 965,000 1,649,000 1,516,000
============ ============ ============
Supplemental schedule of noncash investing activities--
Loans receivable satisfied through foreclosure or
acquisition of deeds in lieu of foreclosure............. 144,000 66,000 106,000
Transfer of securities from held to maturity to available
for sale................................................ 659,000 -- --
============ ============ ============
Acquisition:
Fair value of assets acquired............................. 67,130,000 -- --
Liabilities assumed....................................... 60,934,000 -- --
============ ============ ============
Cash paid for purchase of stock........................... (13,520,757) -- --
Cash acquired............................................. 9,262,441 -- --
------------ ------------ ------------
Net cash paid for acquisition............................. (4,258,316) -- --
============ ============ ============
See accompanying notes to consolidated financial statements.
30
32
FIRST MANITOWOC BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting policies followed by First Manitowoc Bancorp, Inc.
(Corporation) and its wholly owned subsidiaries, the First National Bank in
Manitowoc (Bank) and FNBM Investment Corp., conform to generally accepted
accounting principles and to general practice within the banking industry. FNBM
Realty, previously established due to environmental issues which surfaced upon
the purchase of a branch, was dissolved during 1998 after all remediation
efforts were completed. Upon dissolution, the land obtained by the Corporation
was sold to the Bank at the cost previously recorded by FNBM Realty. Management
of the Corporation has made a number of estimates and assumptions relating to
the reporting of assets and liabilities and revenues and expenses and the
disclosure of contingent assets and liabilities to prepare these financial
statements in conformity with generally accepted accounting principles. Actual
results could differ from those estimates. The more significant accounting
policies are summarized below:
The Corporation consummated the acquisition of Dairy State Financial
Services, Inc. (Dairy), a Wisconsin Bank holding company for a cash price of
approximately $13,521,000. Dairy's wholly-owned subsidiary, Dairy State Bank,
(DSB), has two locations in Plymouth, Wisconsin. Dairy had approximately $66
million in assets at date of acquisition. Dairy and its wholly-owned subsidiary,
DSB, were merged into the Bank at date of acquisition. The transaction was
accounted for under the purchase method of accounting and goodwill of
approximately $7.9 million was recorded. The Company's financial statements
reflect the accounts and operations of Dairy beginning on December 1, 1999. The
Corporation recorded all Dairy assets and liabilities at fair value at date of
acquisition. See note 17.
(A) DESCRIPTION OF BUSINESS
The Bank is a nationally-chartered commercial bank with eleven branch
locations principally in Manitowoc and Sheboygan Counties. The Bank accepts
FDIC-insured deposits and makes loans which are principally secured by real
estate, receivables, equipment, or inventories. The Bank also operates
trust operations. The primary regulators of the Bank are the OCC and the
FDIC.
(B) BASIS OF FINANCIAL STATEMENT PRESENTATION
The consolidated financial statements include the accounts of the
Corporation and its subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
(C) CASH AND CASH EQUIVALENTS
For purposes of the consolidated statements of cash flows, cash and
cash equivalents include cash and due from banks and federal funds sold and
repurchase agreements.
The Bank is required to maintain noninterest-bearing deposits on hand
or with the Federal Reserve Bank. At December 31, 1999, those required
reserves of $1,812,000 were satisfied by currency and coin holdings.
(D) LOANS
Loans are carried at their unpaid principal balance. Interest on loans
is calculated by using the simple interest method on daily balances of the
principal amount outstanding and is recognized in the period earned.
First mortgage loans held for sale are recorded at the lower of cost
or market as determined on an aggregate basis.
31
33
Nonaccrual loans are loans on which the accrual of interest ceases
when the timely collection of interest payments is determined to be
uncertain by management. It is the general policy of the Bank to
discontinue the accrual of interest when principal or interest payments are
delinquent 90 days or more unless the loan is well collateralized and in
process of collection.
A loan is classified as impaired when it is probable that a creditor
will be unable to collect all amounts due, including principal and interest
payments, according to the contractual terms of the loan agreement.
Impaired loans generally include nonperforming commercial loans for which
it is probable that the Bank will be unable to collect all principal and
interest amounts due according to the terms of the loan agreement. Large
groups of homogeneous loans such as mortgage and installment loans are
collectively evaluated for impairment. Impaired loans are measured and
reported based on the present value of expected cash flows discounted at
the loan's effective interest rate, or at the fair value of the loan's
collateral if the loan is deemed collateral dependent. Interest income on
impaired loans is recorded when cash is received and only if principal is
considered to be fully collectible.
(E) SECURITIES
The Corporation classifies all securities as available for sale.
Securities available for sale are securities for which there is no positive
intent to hold until maturity and which are carried at estimated fair
value. Concurrent with the acquisition of Dairy, the Corporation
transferred all Dairy held to maturity securities to securities available
for sale. Unrealized holding gains and losses, net of the related tax
effect on available for sale securities, are reported as a separate
component of comprehensive income until realized. Realized gains and losses
on the sale of available for sale securities are determined using the
specific identification method. Premiums and discounts are amortized as an
adjustment to yield using the straight-line method.
(F) 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
when management believes that the collectibility of the principal amount is
unlikely. Recoveries of amounts previously charged off are credited to the
allowance.
The provision for loan losses is based on management's evaluation of
the loan portfolio, including such factors as the volume and character of
loans outstanding, the relationship of the allowance for loan losses to
outstanding loans, past loan loss experience, the estimated value of any
underlying collateral, and general economic conditions.
Management believes that the allowance for loan losses is adequate.
While management uses available information to recognize losses on loans,
future additions to the allowance may be necessary based on changes in
economic conditions. In addition, various regulatory agencies, as an
integral part of their examination process, periodically review the Bank's
allowance for loan losses. Such agencies may require the Bank to recognize
additions to the allowance based on their judgments about information
available to them at the time of their examination.
(G) PREMISES AND EQUIPMENT
Land is carried at cost. Other premises and equipment are carried at
cost less accumulated depreciation. Depreciation is computed using the
straight-line method over the following terms: buildings and improvements,
15-39 years; furniture and equipment, 5-10 years.
(H) INVESTMENT IN CORPORATE JOINT VENTURE
The Bank's investment in a corporate joint venture is accounted for
under the equity method and is included in other assets.
32
34
(I) FORECLOSED PROPERTIES
Foreclosed properties acquired by the Bank through foreclosure or deed
in lieu of foreclosure on loans for which the borrowers have defaulted as
to the payment of principal and interest are initially recorded at the
lower of the fair value of the asset, less the estimated costs to sell the
asset or the carrying value of the related loan balance. Costs relating to
the development and improvement of the property are capitalized. Income and
expenses incurred in connection with holding and operating the property are
charged to expense. Valuations are periodically performed by management and
third parties and a charge to expense is taken for the excess of the
carrying value of a property over its fair value less costs to sell.
(J) INTANGIBLE ASSETS
Intangible assets attributable to the value of core deposits and the
excess of the purchase price over the fair value of net assets (goodwill)
acquired are stated at cost less accumulated amortization. Goodwill is
amortized on a straight-line basis over periods of 15-25 years. Core
deposits are amortized on a straight-line basis over a period of 10 years.
The Corporation reviews intangible assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. Adjustments are recorded if it is determined that the
benefit of the intangible asset has decreased.
(K) MORTGAGE SERVICING RIGHTS
The Corporation recognizes as a separate asset the rights to service
mortgage loans for others however those servicing rights are acquired.
Capitalized mortgage servicing rights are assessed for impairment based on
the fair value of those rights.
The value of mortgage servicing rights is amortized to expense in
relation to the servicing revenue expected to be earned. The Bank
periodically evaluates the carrying value and remaining amortization
periods of mortgage servicing rights. The evaluation takes into
consideration certain risk characteristics including loan type, interest
rate, prepayment trends, volatility and external market factors.
(L) INCOME TAXES
The Corporation and its subsidiaries file consolidated Federal income
tax returns. Federal income tax expense (benefit) is allocated based upon
an intercompany tax sharing agreement. The Corporation and the Bank file
separate state tax returns.
Income taxes are accounted for using the asset and liability method.
Under this method, deferred tax assets and liabilities are recognized for
the estimated future tax consequences attributable to the differences
between the financial statement carrying amount of assets and liabilities
and their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates in effect for the year in which those
temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is
recognized in the period that includes the enactment date.
(M) PER SHARE COMPUTATIONS
All per share financial information has been adjusted to reflect the
5-for-4 stock split declared in April, 1999. Weighted average shares
outstanding were 1,734,317 for the years ended December 31, 1999, 1998 and
1997.
(N) RECLASSIFICATIONS
Certain amounts as previously reported in the prior year financial
statements have been reclassified to conform with the current year
presentation.
33
35
(O) BUSINESS SEGMENTS
The Corporation through the branch network of its subsidiaries
provides a broad range of financial services to individuals and companies
in northeastern Wisconsin. These services include demand, time, and savings
deposits; commercial and retail lending; ATM processing; and trust
services. While the Corporation's chief decision maker monitors the revenue
streams of the various products and services, operations are managed and
financial performance is evaluated on a Corporate-wide basis. Accordingly,
all of the Corporation's operations are considered by management to be
aggregated in one reportable operating segment.
(2) SECURITIES AVAILABLE FOR SALE
The amortized cost and fair values of securities available for sale at
December 31, 1999 and 1998 are as follows:
1999
-----------------------------------------------------------
GROSS
UNREALIZED GROSS
AMORTIZED HOLDING UNREALIZED FAIR
COST GAINS HOLDING LOSSES VALUE
--------- ---------- -------------- -----
U.S. Treasury securities and obligations
of U.S. Government corporations and
agencies................................ $ 10,289,955 $ -- $ (365,512) $ 9,924,443
Obligations of states and political
subdivisions............................ 54,278,285 148,640 (2,027,333) 52,399,592
Mortgage-backed securities................ 33,459,162 57,214 (1,248,661) 32,267,715
Corporate notes........................... 896,486 -- (12,596) 883,890
Other securities.......................... 2,123,680 -- (4,420) 2,119,260
------------ ---------- ----------- -----------
$101,047,568 $ 205,854 $(3,658,522) $97,594,900
============ ========== =========== ===========
1998
-------------------------------------------------------------
GROSS
UNREALIZED GROSS
HOLDING UNREALIZED FAIR
AMORTIZED COST GAINS HOLDING LOSSES VALUE
-------------- ---------- -------------- -----
U.S. Treasury securities and obligations
of U.S. Government corporations and
agencies................................ $ 5,791,262 $ 32,395 $ -- $ 5,823,657
Obligations of states and political
subdivisions............................ 53,258,501 1,631,875 (27,954) 54,862,422
Mortgage-backed securities................ 27,473,104 216,175 (66,301) 27,622,978
Commercial paper.......................... 7,200,000 -- -- 7,200,000
Other securities.......................... 1,693,876 -- (5,438) 1,688,438
------------ ---------- ----------- -----------
$ 95,416,743 $1,880,445 $ (99,693) $97,197,495
============ ========== =========== ===========
The amortized cost and fair value of securities at December 31, 1999, by
contractual maturity, are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
AMORTIZED FAIR
COST VALUE
--------- -----
Due in one year or less..................................... $ 5,691,114 $ 5,692,544
Due after one year through five years....................... 10,164,613 10,169,458
Due after five years through ten years...................... 17,190,210 17,022,463
Due after ten years......................................... 34,542,469 32,442,720
------------ -----------
67,588,406 65,327,185
Mortgage-backed securities.................................. 33,459,162 32,267,715
------------ -----------
$101,047,568 $97,594,900
============ ===========
34
36
There were no sales of securities in 1999 or 1998. Proceeds from the sales
of securities for 1997 were $3,000,000. Gains on the sale of securities were
approximately $765 in 1997.
Securities with carrying values aggregating approximately $36,385,000 and
$33,974,000 at December 31, 1999 and 1998, respectively, were pledged to secure
public and trust deposits and securities sold under repurchase agreements.
(3) LOANS
Loans are summarized as follows:
1999 1998
---- ----
Commercial and agricultural................................. $ 93,549,859 $ 91,121,472
Commercial real estate...................................... 69,248,003 38,017,583
Residential real estate..................................... 114,175,392 85,115,414
Consumer.................................................... 20,198,954 13,783,150
Other....................................................... 1,467,428 879,038
------------ ------------
Subtotal.................................................. 298,639,636 228,916,657
Allowance for loan losses................................... (3,699,829) (3,124,109)
------------ ------------
$294,939,807 $225,792,548
============ ============
The following table presents data on impaired loans at December 31, 1999
and 1998:
1999 1998
---- ----
Impaired loans for which an allowance has been provided..... $1,506,000 $626,000
Impaired loans for which no allowance has been provided..... -- --
Impairment reserve (included in allowance for loan
losses)................................................... 368,000 119,000
FOR THE YEARS ENDED DECEMBER 31:
----------------------------------
1999 1998 1997
---- ---- ----
Average recorded investment in impaired loans............... $1,157,000 $625,000 $293,000
Cash basis interest income recognized from impaired loans... 78,000 29,000 --
Nonaccrual loans totaled $1,618,000 and $927,000 at December 31, 1999 and
1998, respectively. Interest income on nonaccrual loans of $98,000, $43,000 and
$16,000 was recognized for cash payments received in 1999, 1998 and 1997,
respectively.
Certain of the Corporation's and Bank's executive officers, directors, and
their associates are loan customers of the Bank. As of December 31, 1999 and
1998, loans aggregating approximately $2,416,000 and $3,289,000, respectively,
were outstanding to such parties. These loans were made in the ordinary course
of business and on substantially the same terms as those prevailing for
comparable transactions with other customers. During 1999, approximately
$651,000 of new loans (additions or renewals) were made, and repayments
(collections or maturities) totaled approximately $1,524,000.
The fair value of capitalized mortgage servicing approximates the carrying
value at December 31, 1999 and 1998. Changes in capitalized mortgage servicing
rights is summarized as follows:
1999 1998 1997
---- ---- ----
Balance -- beginning of year................................ $386,193 $249,305 $156,217
Originated servicing rights capitalized..................... 179,190 210,999 135,924
Amortization of servicing rights............................ (74,561) (74,111) (42,836)
Allowance for impairment.................................... -- -- --
-------- -------- --------
Balance -- end of year...................................... $490,822 $386,193 $249,305
======== ======== ========
35
37
Mortgage loans serviced for others are not included in the accompanying
consolidated statements of financial condition. The unpaid principal balances of
mortgage loans serviced for others was $65,443,000 and $48,884,000 at December
31, 1999 and 1998, respectively.
Custodial escrow balances maintained in connection with the foregoing loan
servicing, and included in demand deposits, were approximately $73,000 and
$51,000 at December 31, 1999 and 1998, respectively.
(4) ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses for the years ended December 31,
1999, 1998 and 1997 is summarized as follows:
1999 1998 1997
---- ---- ----
Balance at beginning of year............................. $3,124,109 $2,608,277 $2,079,614
Balance related to acquisition........................... 541,833 -- --
Provision charged to expense............................. 850,836 800,000 600,000
Charge-offs.............................................. (932,410) (322,687) (107,198)
Recoveries............................................... 115,461 38,519 35,861
---------- ---------- ----------
Balance at end of year................................... $3,699,829 $3,124,109 $2,608,277
========== ========== ==========
(5) PREMISES AND EQUIPMENT
A summary of premises and equipment at December 31, 1999 and 1998 is as
follows:
1999 1998
---- ----
Land........................................................ $ 1,197,578 $ 814,072
Buildings................................................... 6,820,869 3,546,832
Furniture and equipment..................................... 4,947,908 3,477,715
----------- ----------
12,966,355 7,838,619
Less accumulated depreciation............................... 4,094,308 3,651,418
----------- ----------
$ 8,872,047 $4,187,201
=========== ==========
(6) INVESTMENT IN CORPORATE JOINT VENTURE
The Bank and another financial institution each own 49.8% of the stock of a
corporate joint venture (venture) whose business is developing and providing
data processing services to the Bank and other financial institutions. The
venture has total assets of $3,765,000 and liabilities of $2,104,000. The Bank
guarantees a $468,000 loan used for the construction of the venture's new
facility. The Bank's earnings from its investment in the venture were
approximately $142,000, $51,000 and $69,000 for the years ending December 31,
1999, 1998 and 1997, respectively.
The Bank has a long-term cancelable contract with the venture that extends
through September, 2002. At that time, the contract is automatically renewed for
a period of 60 months. The Bank and the other financial institution each have
the option to terminate the contract any time, but would incur a termination
penalty of three times the average monthly fees over the prior three months. A
termination penalty is not incurred if the Bank provides 180 days notice and
continues processing up to the end of that period.
36
38
(7) DEPOSITS
The distribution of deposits at December 31 is as follows:
1999 1998
---- ----
Non-interest bearing demand deposits........................ $ 67,282,564 $ 41,374,241
Interest-bearing demand deposits............................ 36,936,111 20,895,231
Savings deposits............................................ 100,628,514 79,639,495
Time deposits............................................... 158,438,723 134,585,647
------------ ------------
$363,285,912 $276,494,614
============ ============
At December 31, 1999, the scheduled maturities of time deposits are as
follows:
2000........................................................ $112,550,578
2001........................................................ 31,664,145
2002........................................................ 12,914,000
2003........................................................ 680,000
2004........................................................ 630,000
------------
$158,438,723
============
Time deposits include approximately $26,044,000 and $18,184,000 of accounts
in denominations of $100,000 or more at December 31, 1999 and 1998,
respectively.
(8) SECURITIES SOLD UNDER REPURCHASE AGREEMENTS
Securities sold under agreements to repurchase generally mature within one
day from the transaction date. The agreements to repurchase securities requires
that the Bank (seller) repurchase identical securities as those that were sold.
The securities underlying the agreements were under the institution's control at
December 31, 1999 and 1998.
Information concerning securities sold under agreements to repurchase is
summarized as follows:
1999 1998 1997
---- ---- ----
Average balance during the year....................... $22,902,343 $21,354,712 $20,943,788
Average interest rate during the year................. 4.79% 5.21% 5.07%
Maximum month-end balance during the year............. $24,988,035 $25,667,090 $24,425,332
=========== =========== ===========
(9) BORROWED FUNDS
Borrowed funds are summarized as follows at December 31:
1999 1998
---- ----
FHLB advance, 5.71%, due June 2002.......................... $ 9,000,000 $ 9,000,000
FHLB advance, 4.91%, due October 2004....................... 5,000,000 --
FHLB advance, 5.45%, due October 2004....................... 13,000,000 --
FHLB advance, 5.50%, due October 2004....................... 5,000,000 --
FHLB advance, 5.57%, due November 2004...................... 4,000,000 --
FHLB advance, 5.33%, repaid................................. -- 15,500,000
FHLB advance, 5.43%, repaid................................. -- 4,000,000
Treasury, tax, and loan account............................. 2,000,000 301,713
----------- -----------
$38,000,000 $28,801,713
=========== ===========
The average rate paid on the treasury, tax and loan account was 5.60% in
1999, 5.24% in 1998, and 5.27% in 1997.
37
39
FHLB advances are subject to a prepayment penalty if they are repaid prior
to maturity. The FHLB advances are callable either six months or one year after
origination and quarterly thereafter. The Corporation is required to maintain as
collateral unencumbered first mortgage loans in its portfolio aggregating at
least 167% of the amount of outstanding advances from the Federal Home Loan
Bank. FHLB stock and loans totaling approximately $90,498,000 and $69,348,000
were maintained as collateral to secure FHLB advances at December 31, 1999 and
1998, respectively.
(10) BENEFIT PLANS
The Bank has a profit sharing 401(k) plan, a defined contribution plan,
which is available to all employees after completion of six months of service.
Employees may elect to contribute up to 10% of their income. The Bank may make a
discretionary contribution up to the limits established by IRS regulations. The
discretionary match was 35% of participant tax deferred contributions in 1999,
1998 and 1997. The Bank made an annual contribution to the plan as determined by
the Board of Directors of $94,000, $0, and $113,000 in 1999, 1998 and 1997,
respectively. Expense associated with the plan was approximately $177,000,
$91,000 and $185,000 in 1999, 1998 and 1997, respectively.
The Bank has a defined contribution pension plan which is available to all
employees after completion of six months of service provided that they are
employed on the last day of the fiscal year. The Bank contributed 4%, 3%, and 3%
of the qualified employees compensation for 1999, 1998 and 1997, respectively.
Expense associated with the plan was approximately $141,000, $91,000, and
$87,000 in 1999, 1998, and 1997, respectively.
Effective November 30, 1999, the DSB 401(k) plan was merged with the Bank's
profit sharing 401(k) plan. Participants in the DSB 401(k) plan became 100%
vested in their account balances. DSB employees were eligible to participate in
the benefit plans beginning December 1, 1999.
The Corporation has a deferred compensation agreement with one of its
officers. Under the terms of the agreement, benefits to be received in the
future vest over each year until the officer reaches retirement age. The
benefits are generally payable beginning with the date of the termination of
employment with the Corporation. The agreement requires an annual payment of
$80,600 over fifteen years which is based on the officer's final salary at
retirement age. Related expense for this agreement was approximately $214,000
for the year ended December 31, 1999. Included in other liabilities is the
vested present value of future payments of approximately $214,000 at December
31, 1999.
The Bank has a non-qualified deferred directors' fee compensation plan
which permits directors to defer a portion of their compensation. The benefits
are generally payable beginning with the earlier of attaining age 70 or
termination of employment with the Corporation. The Bank contributed
approximately $71,000 under this plan for the year ended December 31, 1999.
Included in other liabilities is the estimated present value of future payments
of approximately $1,017,000 at December 31, 1999.
(11) INCOME TAXES
Taxes applicable to income for the years ended December 31, 1999, 1998 and
1997 are summarized as follows:
1999 1998 1997
---- ---- ----
Current:
Federal.................................................. $945,000 $1,359,000 $1,481,000
Wisconsin................................................ -- 114,000 232,000
-------- ---------- ----------
945,000 1,473,000 1,713,000
Deferred:
Federal.................................................. 124,000 (209,000) (248,000)
Wisconsin................................................ (73,000) (31,000) (37,000)
-------- ---------- ----------
51,000 (240,000) (285,000)
-------- ---------- ----------
$996,000 $1,233,000 $1,428,000
======== ========== ==========
38
40
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and deferred tax liabilities at December 31,
1999 and 1998 are presented below:
1999 1998
---- ----
Deferred tax assets:
Unrealized depreciation on securities available for
sale................................................... $1,204,000 $ --
Loans, principally due to allowance for losses............ 1,268,000 1,042,000
Deferred compensation..................................... 399,000 339,000
Intangibles............................................... 89,000 62,000
Accrued vacation.......................................... 102,000 70,000
State net operating loss carryforward..................... 74,000 --
Cash to accrual adjustment from acquisition............... 92,000 --
Other..................................................... 9,000 8,000
---------- ----------
Gross deferred tax assets......................... 3,237,000 1,521,000
---------- ----------
Deferred tax liabilities:
Premises and equipment, principally due to differences in
depreciation........................................... (442,000) (63,000)
Discount accretion........................................ (51,000) (50,000)
Mortgage servicing rights................................. (192,000) (150,000)
Unrealized appreciation on securities available for
sale................................................... -- (607,000)
Other..................................................... (10,000) (6,000)
---------- ----------
Deferred tax liabilities.......................... (695,000) (876,000)
---------- ----------
Net deferred tax asset............................ $2,542,000 $ 645,000
========== ==========
The 1999 net deferred tax asset decreased by $1,897,000. The difference of
$1,762,000 between the increase and the deferred tax benefits included in income
taxes in 1999 is primarily attributable to the tax effect on the unrealized
depreciation on securities available for sale which does not have an income
statement impact as it is included in other comprehensive income.
The following summarizes the sources of differences between computing
income taxes at the statutory Federal rate of 34% and actual income tax expense:
1999 1998 1997
---- ---- ----
Tax expense at statutory rate............................ $2,087,000 $1,984,000 $1,901,000
Tax-exempt interest income............................... (824,000) (754,000) (537,000)
State income taxes, net of Federal income tax benefit.... (41,000) 55,000 129,000
Cash surrender value of life insurance................... (66,000) (61,000) (45,000)
Deferred compensation.................................... (84,000) -- --
Income of joint venture.................................. (48,000) (17,000) (23,000)
Other.................................................... (28,000) 26,000 3,000
---------- ---------- ----------
Actual income tax expense........................... $ 996,000 $1,233,000 $1,428,000
========== ========== ==========
(12) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Bank is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of customers. These
financial instruments include commitments to extend credit and standby letters
of credit and involve, to varying degrees, elements of credit and interest rate
risk in excess of the amounts recognized in the consolidated financial
statements. The contract amounts reflect the extent of involvement the Bank has
in these particular classes of financial instruments.
In the event of nonperformance, the Bank's exposure to credit loss for
commitments to extend credit and standby letters of credit is represented by the
contractual amount of those instruments. The Bank uses the same credit policies
in making commitments and conditional obligations as it does for instruments
reflected in the consolidated financial statements. The Bank does not utilize
derivative instruments.
39
41
Financial instruments whose contract amounts represent potential credit
risk at December 31, 1999 and 1998 are as follows:
1999 1998
---- ----
Commitments to extend credit................................ $50,834,000 $41,281,000
Standby letters of credit................................... 1,711,000 1,193,000
=========== ===========
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition in the contract. Commitments generally
have fixed expiration dates or other termination clauses and may require payment
of a fee. Since some commitments expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements of the
Bank. The Bank evaluates the creditworthiness of each customer on a case-by-case
basis and generally extends credit only on a secured basis. Collateral obtained
varies but consists primarily of accounts receivable, inventory, motor vehicles,
equipment, and real estate. The Bank's lending area primarily encompasses
Manitowoc and Sheboygan counties, Wisconsin.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. Standby letters of
credit outstanding totaling approximately $1,296,000 at December 31, 1999 expire
in 2000. Approximately $8,000 of letters of credit are irrevocable. 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 accounts
receivable, inventory, equipment, and real estate as collateral supporting those
commitments for which collateral is deemed necessary. Approximately 84% of
standby letters of credit outstanding at December 31, 1999 were supported by
collateral.
(13) FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, Disclosures About Fair Value of Financial Instruments,
requires that the Bank disclose estimated fair values for its financial
instruments. Fair value estimates, methods, and assumptions are set forth below
for the Bank's financial instruments.
The estimated fair values of the Corporation's financial instruments at
December 31, 1999 and 1998 are as follows:
1999 1998
---------------------------- ----------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
Financial Assets:
Cash and due from banks............. $ 21,007,142 $ 21,007,142 $ 15,215,089 $ 15,215,089
Federal funds sold and repurchase
agreements....................... 19,708,767 19,708,767 15,622,650 15,622,650
Securities.......................... 97,594,900 97,594,900 97,197,495 97,197,495
Loans............................... 294,939,807 297,690,000 225,792,548 232,047,000
Financial Liabilities:
Deposits............................ 363,285,912 363,285,912 276,494,614 277,044,000
Securities sold under repurchase
agreements....................... 22,352,259 22,352,259 24,693,765 24,693,765
Borrowed funds...................... 38,000,000 38,277,000 28,801,713 28,801,713
============ ============ ============ ============
(A) CASH AND DUE FROM BANKS AND FEDERAL FUNDS SOLD AND REPURCHASE AGREEMENTS
The carrying amounts of cash and due from banks and federal funds sold
and repurchase agreements approximate fair value because of their
short-term nature and because they do not present unanticipated credit
concerns.
40
42
(B) SECURITIES
The fair value of securities is estimated based on bid prices
published in financial newspapers or bid quotations received from
securities dealers.
(C) LOANS
Fair values are estimated for portfolios of loans with similar
financial characteristics. The fair value of performing loans is calculated
by discounting scheduled cash flows through the estimated maturity using
estimated market discount rates that reflect the credit and interest rate
risk inherent in the loan. The estimate of maturity is based on the Bank's
historical experience with repayments for each loan classification,
modified, as required, by an estimate of the effect of current economic and
lending conditions. The fair value estimate for credit card loans is based
on the carrying value of existing loans. The carrying value of first
mortgage loans held for sale approximates fair value due to the short-term
nature of the asset.
Fair value for significant nonperforming loans is based on carrying
value, less an estimate for credit risk.
The fair values of commitments to extend credit and standby letters of
credit are determined based upon the present value of fees received for
those products. These amounts are not significant at December 31, 1999.
(D) DEPOSITS
The fair value of deposits with no stated maturity, such as
noninterest-bearing demand deposits, savings, super NOW accounts, and money
market checking accounts, is equal to the amount payable on demand as of
December 31, 1999 and 1998. The fair value of other time deposits is based
on the discounted value of contractual cash flows. The discount rate is
estimated using the rates offered at December 31, 1999 and 1998 for
deposits of similar remaining maturities.
(E) SECURITIES SOLD UNDER REPURCHASE AGREEMENTS
The carrying amounts for securities sold under repurchase agreements
approximate fair value because they mature in 90 days or less.
(F) BORROWED FUNDS
The fair values of the Federal Home Loan Bank (FHLB) of Chicago
advances are estimated using discounted cash flow analyses, based on the
Bank's current incremental borrowing rates for similar types of borrowing
arrangements. The carrying amounts for other borrowings approximate fair
value.
(G) LIMITATIONS
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial instrument.
These estimates do not reflect any premium or discount that could result
from offering for sale at one time the Bank's entire holdings of a
particular financial instrument. Because no market exists for a significant
portion of the Bank's financial instruments, fair value estimates are based
on judgments regarding future expected loss experience, current economic
conditions, risk characteristics of various financial instruments, and
other factors. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment and, therefore, cannot be
determined with precision. Changes in assumptions could significantly
affect the estimates.
Fair value estimates are based on existing balance sheet financial
instruments without attempting to estimate the value of anticipated future
business and the value of assets and liabilities that are not considered
financial instruments. In addition, the tax ramifications related to the
realization of the
41
43
unrealized gains and losses can have a significant effect on fair value
estimates and have not been considered in the estimates.
(14) LEASES
In January 1995, the Bank entered into an operating lease agreement for a
new branch office building. The lease expires December 31, 2005, with an option
whereby the Bank may extend the lease agreement for three successive periods of
five years. The lease also contains an option in which after every five-year
period, the Bank may purchase the building for the then fair market value. Rent
expense under this agreement totaled approximately $78,000 for the years ended
December 31, 1999, 1998 and 1997. On January 14, 2000, the Bank optioned to
purchase the land and building for $762,000 thereby effectively terminating the
lease.
In August 1996, the Bank sold a branch office building and entered into a
one-year lease of the building. The lease was extended on a month-to-month basis
pending the completion of a new branch building. The building was completed and
the lease effectively terminated in June, 1999. Rent expense under this
agreement totaled approximately $5,300, $12,000 and $12,000 for the years ended
December 31, 1999, 1998 and 1997, respectively.
(15) LEGAL PROCEEDINGS
The Corporation is involved in various legal actions arising in the normal
course of its business. While the ultimate outcome of these various legal
proceedings cannot be predicted with certainty, it is the opinion of management
and through consultation with legal counsel that the resolution of these legal
actions will not have a material effect on the Corporation's consolidated
financial condition or results of operations.
(16) REGULATORY CAPITAL REQUIREMENTS
The Bank is subject to various regulatory capital requirements administered
by federal banking authorities. 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
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital to risk-weighted assets, and of Tier I
capital to average assets. Management believes, as of December 31, 1999, that
the Bank meets all capital adequacy requirements to which it is subject.
As of December 31, 1999 and 1998, the most recent notification from the
Office of the Comptroller of Currency and the Federal Deposit Insurance
Corporation categorized the Bank as adequately and well capitalized,
respectively, under the regulatory framework for prompt corrective action. To be
categorized as well capitalized the Bank must maintain minimum total risk-based,
Tier I risk-based, and Tier I leverage ratios as set forth in the table. There
are no conditions or events since that notification that management believes
have changed the institution's category.
42
44
The Bank's actual capital amounts and ratios are presented in the following
table:
TO BE WELL CAPITALIZED
FOR CAPITAL UNDER PROMPT
ACTUAL ADEQUACY PURPOSES CORRECTIVE ACTION
-------------------- -------------------- ----------------------
AMOUNT RATIO* AMOUNT RATIO* AMOUNT RATIO*
------ ------ ------ ------ ------ ------
As of December 31, 1999:
Total capital........... $30,454,000 9.8% $24,919,120 >8.0% $31,148,900 >10.0%
- -
Tier I capital.......... 26,754,000 8.6 12,459,560 >4.0 18,689,340 > 6.0
- -
Leverage................ 26,754,000 6.9 15,416,920 >4.0 19,271,150 > 5.0
- -
As of December 31, 1998:
Total capital........... 33,176,000 13.6 19,474,320 >8.0 24,342,900 >10.0
- -
Tier I capital.......... 30,132,000 12.4 9,737,160 >4.0 14,605,740 > 6.0
- -
Leverage................ 30,132,000 8.5 14,166,160 >4.0 17,707,700 > 5.0
- -
=========== ==== =========== ===== =========== ======
- -------------------------
* Total capital ratio is defined as Tier I capital plus Tier 2 capital divided
by total risk-weighted assets. The Tier I capital ratio is defined as Tier I
capital divided by total risk-weighted assets. The leverage ratio is defined
as Tier I capital divided by the most recent quarter's average total assets.
The declaration and payment of cash dividends by the Bank to the
Corporation is restricted by certain statutory and regulatory limitations. Such
dividends are also limited by regulatory capital requirements.
(17) FIRST MANITOWOC BANCORP, INC.
(PARENT COMPANY ONLY) FINANCIAL INFORMATION
CONDENSED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31,
--------------------------
1999 1998
---- ----
ASSETS
Cash........................................................ $ 12,088 $ 2,019
Repurchase agreements with Bank............................. 286,248 466,317
Investment in Bank.......................................... 33,038,984 32,260,166
Premises and equipment, net................................. 1,172,309 1,165,737
----------- -----------
$34,509,629 $33,894,239
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities........................................... $ 3,182 $ 2,392
Stockholders' equity........................................ 34,506,447 33,891,847
----------- -----------
$34,509,629 $33,894,239
=========== ===========
43
45
CONDENSED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31
--------------------------------------
1999 1998 1997
---- ---- ----
Income:
Dividends received from Bank........................... $ 720,000 $ 720,000 $ 720,000
Rental income received from Bank....................... 99,000 99,000 106,475
Interest and other income.............................. 19,530 25,688 21,488
---------- ---------- ----------
Total income...................................... 838,530 844,688 847,963
Operating expenses....................................... 105,062 105,616 101,928
---------- ---------- ----------
Income before income tax expense and equity in
undistributed net income of Bank....................... 733,468 739,072 746,035
Income tax expense....................................... 5,648 7,991 10,900
---------- ---------- ----------
Income before equity in undistributed net income
of subsidiaries................................ 727,820 731,081 735,135
Equity in undistributed net income of Bank............... 4,199,822 3,870,498 3,430,460
Equity in undistributed net loss of Realty............... -- (504) (1,124)
---------- ---------- ----------
Net income............................................. $4,927,642 $4,601,075 $4,164,471
========== ========== ==========
CONDENSED STATEMENTS OF CASH FLOWS
DECEMBER 31,
-----------------------------------------
1999 1998 1997
---- ---- ----
Cash flows from operating activities:
Net income.......................................... $ 4,927,642 $ 4,601,075 $ 4,164,471
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation..................................... 41,125 39,146 40,907
Increase (decrease) in other liabilities......... 790 (4,761) 1,271
Equity in undistributed net income of Bank....... (4,199,822) (3,870,498) (3,430,460)
Equity in undistributed net loss of Realty....... -- (504) 1,124
----------- ----------- -----------
Net cash provided by operating activities... 769,735 764,458 777,313
----------- ----------- -----------
Cash flows from investing activities:
Net purchases of premises and equipment............. (47,697) 34,445 --
(Increase) decrease in repurchase agreements........ 180,069 (49,716) (43,793)
Proceeds from sale of Realty land to Bank........... -- 107,000 --
Change in investment in Realty...................... -- (12,399) (15,000)
----------- ----------- -----------
Net cash used in investing activities....... 132,372 79,330 (58,793)
----------- ----------- -----------
Cash flows from financing activities:
Payment on borrowed funds........................... -- (57,818) (9,521)
Dividends paid...................................... (884,525) (790,937) (707,695)
Other............................................... (7,513) -- (3,000)
----------- ----------- -----------
Net cash used in financing activities....... (892,038) (848,755) (720,216)
----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents......................................... 10,069 (4,967) (1,696)
Cash and cash equivalents at beginning of year........ 2,019 6,986 8,682
----------- ----------- -----------
Cash and cash equivalents at end of year.............. $ 12,088 $ 2,019 $ 6,986
=========== =========== ===========
44
46
(18) PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
The following represents pro forma financial information of the Corporation
which reflects the acquisition of Dairy State Financial Services, Inc. and
subsidiary as if the acquisition had occurred as of the beginning of each year
presented. For purposes of the pro forma information, depreciation,
amortization, and income taxes have been adjusted to their accounting bases
recognized in recording the combination. The pro forma financial information
does not necessarily reflect the results of operations that would have occurred
had the companies constituted a single entity during such periods.
1999 1998
---- ----
Net interest income......................................... $13,802,000 $13,294,000
Net income.................................................. 3,800,000 3,895,000
Earnings per share.......................................... 2.19 2.25
ITEM 9
CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
ITEM 10
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
Nine Directors serve on the Company's Board of Directors, including Thomas
J. Bare, the Company's President. Each of the Directors also serve as Directors
of the Bank. Classified directorships are divided into three classes, each of
which are elected for three year terms.
Thomas J. Bare, 61, has served as a Bank Director continuously since 1981,
and as a Company Director since its formation in 1983. He was appointed Cashier
in 1977, and promoted to Vice President and Cashier in 1978. He served as Vice
President and Cashier until September 1983 when he was appointed Acting
President. In January 1984 he was elected President, his current position. Mr.
Bare also serves as President of the Company; Director of FNBM Investment
Corporation, the Bank's investment corporation; and Director, Secretary and
Treasurer of United Financial Services, Inc., the Bank's data processing
corporation. Mr. Bare's term expires in 2002.
John M. Jagemann, 54, has served as Bank Director continuously since 1996,
and as a Company Director since 1996. He is President of Aitken-Reed, Inc., a
company that manufactures wire harnesses and heaters. Mr. Jagemann's term
expires in 2000.
John C. Miller, 57, has served as Bank Director continuously since 1996,
and as a Company Director since 1996. He is President and Sole Director of
Miller-St. Nazianz, Inc., a company that manufactures farm equipment; President
and Sole Director of Miller Finance Corporation, a retail financing company; and
President and Sole Director of Badger Farm Systems, a company that markets farm
equipment. Mr. Miller's term expires in 2001.
John E. Nordstrom, 64, has served as a Bank Director continuously since
1992, and as a Company Director since 1993. He is President of Omega Mfg.
Corporation, a company that manufactures paper product packaging equipment. Mr.
Nordstrom's term expires in 2001.
Craig A. Pauly, 50, has served as a Bank Director continuously since 1980,
and as a Company Director since its formation in 1983. He is Director/MIS at
Jagemann Stamping Company, a company that manufactures metal stampings. Mr.
Pauly's term expires in 2002.
45
47
Katherine M. Reynolds, 49, has served as a Bank Director continuously since
1992, and as a Company Director since 1993. She is a attorney practicing as a
member of the Manitowoc Offices of Michael Best & Friedrich LLP. Ms. Reynolds'
term expires in 2002.
John M. Webster, 54, has served as a Bank Director continuously since 1998,
and as a Company Director since 1998. He is President and CEO of Crescent Woolen
Mills Co., a manufacturer of woolen and synthetic yarns; and Attorney of Counsel
with the Law Offices of Winter, Fox & Stangel, LLP. Mr. Webster's term expires
in 2000.
Robert S. Weinert, 60, has served as a Bank Director continuously since
1979, and as a Company Director since its formation in 1983. He is Chairman and
Treasurer of Crafts, Inc., a commercial roofing company; and Treasurer of
Corrosion Resistant Technologies, Inc., a coating company. Mr. Weinert's term
expires in 2000.
John J. Zimmer, 59, served as a Bank Director from 1974 to 1980. He was
re-appointed to the board and has served continuously since 1988, and as a
Company Director since 1989. Mr. Zimmer is President and Treasurer of J.J.
Stangel Co., A Subsidiary of Industrial Distribution Group, a wholesale
distributor of industrial supplies; and General Partner of Oak Park Land Co., a
real estate development partnership. Mr. Zimmer's term expires in 2001.
EXECUTIVE OFFICERS
Thomas J. Bare (see Directors)
Joseph W. Debilzen, 45, joined the bank in April 1983 serving as Loan
Officer. He was promoted to Francis Creek Branch Manager in September 1983. In
August 1988, he was promoted to Assistant Vice President Branch Manager. Mr.
Debilzen has served as Vice President of Branch Operations since March 1989.
Daniel J. Lalko, 49, has served as Senior Vice President of Lending since
March 1989. Mr. Lalko joined the bank in August 1982 as Vice President.
Charles P. Riley, 49, joined the bank in May 1997 as Senior Vice President
and Green Bay Marketing Manager.
Paul H. Wojta, 40, joined the bank in November 1983 as Auditor. He was
promoted to Cashier in December 1987. Mr. Wojta has served as Vice President,
Cashier and BSA Officer since February 1991. Mr. Wojta also serves as a director
of FNBM Investment Corporation, the Bank's investment corporation.
46
48
ITEM 11
EXECUTIVE COMPENSATION
The following table sets forth the annual compensation for each of the
Company's most highly compensated executive officers, whose cash compensation
exceeded $100,000, for the three previous fiscal years.
OTHER
ANNUAL*
NAME POSITION YEAR SALARY BONUS COMPENSATION
---- -------- ---- ------ ----- ------------
Thomas J. Bare.................... President 1999 $210,000 $38,000 $14,232
President 1998 200,000 35,000 21,624
President 1997 180,000 30,000 15,900
Daniel J. Lalko................... Senior Vice President 1999 105,000 10,000 10,950
Senior Vice President 1998 100,000 9,000 10,243
Senior Vice President 1997 92,000 8,500 10,178
Charles P. Riley.................. Senior Vice President 1999 102,000 3,500 10,636
Senior Vice President 1998 98,000 3,500 7,098
- -------------------------
* Other compensation includes amounts contributed by the Bank pursuant to a
401(k) Profit Sharing Plan and Trust that covers substantially all employees.
Each year, the Bank contributes a matching contribution equal to 35% of the
participant's deferral, up to 10% of the employee's salary, and a
discretionary amount determined each year by the Board of Directors. For 1999,
the discretionary amount was established at 3% of compensation.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
In 1998, the Company adopted a Supplemental Executive Retirement Plan
("SERP"), which provides post-retirement benefits to a key officer of the
Company. Under the SERP, benefit payments equal 80% of the participant's
projected retirement age salary, less benefits from other Company sponsored
retirement plans, including the 401(k) Plan. See Note 10 in the Consolidated
Financial Statements.
The estimated present value of annual benefits payable upon retirement,
less amounts received under other Company sponsored retirement plans, at the
normal retirement age of 65 for each of the executive officers participating is
as follows:
ESTIMATED ANNUAL BENEFITS ESTIMATED ANNUAL BENEFITS
PAYABLE UPON PAYABLE UPON
NAME RETIREMENT RETIREMENT
---- ------------------------- -------------------------
Thomas J. Bare.................................... $80,600 15 years
Daniel J. Lalko................................... None None
Charles P. Riley.................................. None None
DIRECTOR COMPENSATION
Directors of the Company receive $2,500 annual compensation for service in
that capacity. However, as Directors of the Bank, they receive $9,100 annual
compensation for service in that capacity. The Chairman of the Board of the Bank
receives $11,700 annual compensation for service in that capacity. Directors
receive $150 for each committee meeting attended. Directors who are also
employees of the Bank receive no compensation for their capacity as Directors of
the Bank's committees.
Under a non-qualified deferred compensation plan, the Bank permits
Directors to defer part of their compensation and fees by investing the deferred
income in insurance policies on the Director's life, with the Bank as owner and
beneficiary. The death benefit of such policies will be used by the Bank to fund
the payments to the Directors. If the Director lives to age 70, the retirement
age defined in the plan, the Bank will begin to pay the Director an amount which
will be calculated at that time in annual payments, based upon the
47
49
value of the life insurance policy and existing market conditions. If the
Director lives to age 70, but dies before receiving all of the payments, the
remaining payments will be paid to the Director's beneficiary. If a Director
retires prior to or after age 70, the payments will be discounted or increased,
as the case may be, based on the value of the life insurance policy. Finally, if
the Director dies prior to age 70, the annual payments will be calculated based
on the value of the life insurance policy death benefit and paid in annual
payments to the Director's beneficiary.
DIRECTOR FEE DEFERRED COMPENSATION RETIREMENT PLAN
The Company contributed $70,966 (interest only) for this plan for the year
ended December 31, 1999.
The estimated present value of annual benefits payable upon retirement for
a period of ten (10) years to each current director is as follows: Thomas Bare,
$40,409; John Jagemann, $56,186; John C. Miller, $40,878; John Nordstrom,
$35,236; Katherine M. Reynolds, $163,091; Craig Pauly, $119,325; John M.
Webster, $56,833; Robert Weinert, $67,606; and John Zimmer, $58,797.
COMPENSATION, PENSION AND RETIREMENT COMMITTEE REPORT
The Bank's compensation program offers competitive compensation
opportunities for all executive officers which are based on both the
individual's contribution and the Bank's performance. The compensation paid is
designed to attract, retain and reward executive officers who are capable of
leading the Bank in achieving its business objectives in an industry
characterized by complexity, competitiveness and constant change. The
compensation of key executives is reviewed and approved annually by the Bank's
Compensation, Pension and Retirement Committee.
In its consideration of whether to increase salaries from year to year, and
the amounts of increases, the Compensation, Pension and Retirement Committee
reviews the overall financial performance of the Bank during the past year and
the expectations for the current year. Specifically, the Committee looks to
whether total return on assets is satisfactory and compare total assets and
earnings levels with prior years. Special factors that are considered are
whether loan delinquencies are consistent with expectations, and whether there
have been any significant acquisitions or sales of assets or other extraordinary
events. While no specific financial targets are set, the Committee will
generally recommend increases to executives, including the chief executive
officer, if the Bank continues to experience anticipated levels of financial
growth.
Salaries are also based on merit, which involves an evaluation by the
Committee of how ably an executive performed the duties entailed in his or her
position. Employees generally are reviewed by management, while executive
officers have their performance evaluated by the President.
Most executives receive approximately the same percentage increase in
salary in any given year. In addition, as the Bank meets its budget
expectations, each executive may receive a bonus. The foregoing report has been
approved by the Bank's Board of Directors.
Directors Thomas J. Bare, John M. Jagemann, Katherine M. Reynolds, Robert
S. Weinert and John J. Zimmer serve as the Bank's Compensation, Pension and
Retirement Committee. Thomas J. Bare, a member of the Board of Directors of the
Bank since 1981 and of the Company since the Company's formation in 1983, also
serves as President of the Company and as President of the Bank. While Mr. Bare
specifically excluded himself from any Committee discussion concerning his
compensation, he did participate in Compensation, Pension and Retirement
Committee discussions concerning other key executives' compensation.
48
50
Performance Graph
The performance graph shown below compares the cumulative total return to
the Company's stockholders over the most recent 5-year period with the Russell
2000 Index and NASDAQ Bank Index. Returns are shown on a total return basis,
assuming the reinvestment of dividends based on a $100 investment beginning
December 31, 1994.
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN
FIRST MANITOWOC BANCORP, INC., RUSSELL 2000 INDEX, AND NASDAQ BANK
[LINE GRAPH]
- --------------------------------------------------------------------------------------------------------------
1994 1995 1996 1997 1998 1999
- --------------------------------------------------------------------------------------------------------------
First Manitowoc Bancorp, Inc.* $100.00 $118.06 $144.32 $180.46 $254.30 $321.83
- --------------------------------------------------------------------------------------------------------------
Russell 2000 Index 100.00 128.44 149.62 183.07 178.41 216.34
- --------------------------------------------------------------------------------------------------------------
NASDAQ Bank Index 100.00 144.81 182.69 298.85 263.68 242.63
- --------------------------------------------------------------------------------------------------------------
* Restated for the 25% stock dividends (five for four share splits) paid April
21, 1995; April 11, 1997 and April 16, 1999.
49
51
ITEM 12
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table reflects the beneficial ownership of the Company's
Shares by Directors, executive officers and by stockholders known to management
to own beneficially 5% or more of the Company's Shares as of December 31, 1999,
and includes all of the Company's Shares that may be acquired by such persons 60
days thereafter. The address of each of the persons named below is the address
of the Company.
NUMBER OF SHARES PERCENT OF CLASS
TITLE OF CLASS NAME BENEFICIALLY OWNED BENEFICIALLY OWNED
- ---------------------------- ---------------------------- ------------------ ------------------
Par Value $1.00 Director
Common Stock Thomas J. Bare 142,205(1) 8.19
John M. Jagemann 3,187 *
John C. Miller 77 *
John E. Nordstrom 3,255(2) *
Craig A. Pauly 20,944(3) 1.21
Katherine M. Reynolds 266 *
John M. Webster 125 *
Robert S. Weinert 14,725 *
John J. Zimmer 7,237 *
Executive Officer
Joseph W. Debilzen 9,774(4) *
Daniel J. Lalko 5,748(5) *
Charles P. Riley 12 *
Paul H. Wojta 13,760(6) *
All Directors and Executive Officers as a Group
(13 Persons) 12.71
- -------------------------
* Percent of class beneficially owned less than 1%.
(1) Includes 27,175 shares held by Thomas J. Bare as an individual; 16,820
shares held in First National Bank 401(k) Profit Sharing F/B/O Thomas J.
Bare; 15,983 shares held I/N/O Suzanne Bare/ Thomas J. Bare or Virginia S.
Bare POA; 15,340 shares held I/N/O Joanna M. Bare; 13,626 shares held I/N/O
Jonathan L. Bare; 13,771 shares held I/N/O Virginia S. Bare Custodian for
Michael Bare UGTMA WI; 725 shares held in Manbank & Co. I/N/O Thomas J. Bare
Custodial IRA; and 38,765 shares held in the name of Virginia S. Bare,
Trustee.
(2) Includes 1,362 shares held by John E. Nordstrom as an individual; 1,768
shares held by Barbara A. Nordstrom as an individual; and 125 shares held in
the name of John E. and Barbara A. Nordstrom JT.
(3) Includes 16,010 shares held by Craig A. Pauly as an individual; 1,206 shares
held in the name of Craig A. and Cynthia Pauly JT; 3,484 shares held in
Manbank & Co. I/N/O Craig A. Pauly Custodial IRA; and 244 shares held in
Manbank & Co. I/N/O Cynthia Pauly Custodial IRA.
(4) Includes 9,045 shares held in First National Bank 401(k) Profit Sharing Plan
F/B/O Joseph W. Debilzen; 434 shares held in Manbank & Co. I/N/O Janet
Debilzen Custodial IRA; 163 shares held in Manbank & Co. I/N/O Joseph W.
Debilzen Custodial IRA; 132 shares held I/N/O Janet L. Debilzen and Joseph
W. Debilzen.
(5) Includes 4,222 shares held by Daniel J. Lalko as an individual; 157 shares
held in the name of Daniel J. Lalko and Ann E. Lalko JT; 1,155 shares held
in Manbank & Co. I/N/O Daniel J. Lalko Custodial IRA; 159 shares held in
Manbank & Co. I/N/O Ann E. Lalko Custodial IRA; and 55 shares held in First
National Bank 401(k) Profit Sharing Plan F/B/O Daniel J. Lalko.
(6) Includes 6,229 shares held in the name of Paul H. and Jeanne C. Wojta; and
7,531 shares held in First National Bank 401(k) Profit Sharing Plan F/B/O
Paul H. Wojta.
50
52
ITEM 13
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the past year the Bank has had, and expects to have in the future,
banking transactions in the ordinary course of its business with its directors,
officers and owners of 5% or more of the Company's outstanding shares and with
their associates on substantially the same terms, including interest rates,
collateral, and repayment terms on loans, as those prevailing at the same time
for comparable transactions with others. The extensions of credit by the Bank to
these persons have not and do not currently involve more than the normal risk of
collectibility or present other unfavorable features. Loans outstanding to such
parties totaled $2,416,000 and $3,289,000 at December 31, 1999 and 1998,
respectively. During 1999, $651,000 of new loans were made and repayments
totaled $1,524,000.
51
53
PART IV
ITEM 14
EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) and (2) Financial Statements and Financial Statement Schedules
The following financial statements and financial statement schedules are
included under a separate caption "Financial Statements and Supplementary Data"
in Part II, Item 8 hereof and are incorporated herein by reference.
Independent Auditors' Report
Consolidated Statements of Financial Condition--December 31, 1999 and 1998
Consolidated Statements of Income--For the Years Ended December 31, 1999,
1998, and 1997
Consolidated Statements of Changes in Stockholders' Equity--For the Years
Ended December 31, 1999, 1998, and 1997
Consolidated Statements of Cash Flows--For the Years Ended December 31,
1999, 1998, and 1997
Notes to Consolidated Financial Statements
(a)(3) Exhibits
EXHIBIT NUMBER SEQUENTIAL PAGE REFERENCE TO NUMBER OR INCORPORATE BY
-------------- -----------------------------------------------------
(3)(1) Articles of Incorporation Filed as Exhibit (3)(1) to Report on Form 10 filed
May 5, 1999.
(3)(2) Bylaws Filed as Exhibit (3)(2) to Report on Form 10 filed
May 5, 1999.
(11) Statement Re Computation of Per Share See Note 1(m) in Part II Item 8
Earnings
(21) Subsidiaries of the Company Filed herewith
(23) Consent of Independent Auditors Filed herewith
(27) Financial Data Schedule Filed herewith
(b) Reports on Form 8-K
None
52
54
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.
FIRST MANITOWOC BANCORP, INC.
Date: March 17, 2000 By: /s/ THOMAS J. BARE
------------------------------------
Thomas J. Bare
President and Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ THOMAS J. BARE /s/ ROBERT S. WEINERT
- ----------------------------------------------------- -----------------------------------------------------
Thomas J. Bare, President and Treasurer Robert S. Weinert, Chairman
Date: March 17, 2000 Date: March 17, 2000
/s/ JOHN J. ZIMMER /s/ JOHN M. JAGEMANN
- ----------------------------------------------------- -----------------------------------------------------
John J. Zimmer, Vice President John M. Jagemann, Director
Date: March 17, 2000 Date: March 17, 2000
/s/ JOHN C. MILLER /s/ JOHN E. NORDSTROM
- ----------------------------------------------------- -----------------------------------------------------
John C. Miller, Director John E. Nordstrom, Director
Date: March 17, 2000 Date: March 17, 2000
/s/ CRAIG A. PAULY /s/ KATHERINE M. REYNOLDS
- ----------------------------------------------------- -----------------------------------------------------
Craig A. Pauly, Director Katherine M. Reynolds, Director
Date: March 17, 2000 Date: March 17, 2000
/s/ JOHN M. WEBSTER
- -----------------------------------------------------
John M. Webster, Director
Date: March 17, 2000
53