UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2004
--------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
--------------------- ----------------------
Commission file number 0-25983
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First Manitowoc Bancorp, Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Wisconsin 39-1435359
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(State or other jurisdiction of incorporation (IRS employer
or organization) identification no.)
402 North Eighth Street, Manitowoc, Wisconsin 54220
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(Address of principal executive offices) (Zip code)
(920) 684-6611
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act.)
Yes X No
--- ---
The number of shares outstanding of registrant's common stock, par value $1.00
per share, at October 31, 2004, was 6,937,268 shares.
FIRST MANITOWOC BANCORP, INC.
TABLE OF CONTENTS
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited):
Consolidated Statements of Financial Condition -
September 30, 2004 and December 31, 2003 1
Consolidated Statements of Income -
Three and Nine Months Ended September 30, 2004
and 2003 2
Consolidated Statements of Changes in
Stockholders' Equity
Nine Months Ended September 30, 2004 and 2003 3
Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 2004 and 2003 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 17
Item 4. Controls and Procedures 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 6. Exhibits 18
Signatures 19
Exhibit Index 20
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
FIRST MANITOWOC BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(UNAUDITED)
September 30, December 31,
2004 2003
(In Thousands, Except Share Data)
ASSETS
Cash and due from banks $ 13,015 $ 16,355
Interest-bearing deposits 2,473 7,979
Federal funds sold 11,645 11,433
-------- ---------
Cash and cash equivalents 27,133 35,767
Securities available for sale, at fair value 157,761 138,275
Other investments (at cost) 5,267 5,052
Loans, net 379,528 367,126
Premises and equipment 8,861 8,608
Goodwill 8,968 8,968
Intangible assets 1,838 2,117
Cash surrender value of life insurance 11,574 11,244
Other assets 5,823 4,796
-------- ---------
Total Assets $606,753 $581,953
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $431,027 $428,284
Securities sold under repurchase agreements 61,541 55,359
Borrowed funds 41,926 31,910
Other liabilities 7,290 6,177
--------- ---------
Total liabilities 541,784 521,730
------- -------
Shareholders' equity:
Common stock, $1.00 par value; authorized
10,000,000 shares; issued 7,583,628 shares 7,584 7,584
Retained earnings 55,410 50,560
Accumulated other comprehensive income 2,675 2,779
Treasury stock at cost--646,360 shares (700) (700)
---------- -----------
Total shareholders' equity 64,969 60,223
--------- ------------
Total Liabilities and Shareholders' Equity $606,753 $581,953
======= ========
(See accompanying notes to Unaudited Consolidated Financial Statements.)
1
ITEM 1. FINANCIAL STATEMENTS CONTINUED:
FIRST MANITOWOC BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
2004 2003 2004 2003
---- ---- ---- ----
(In Thousands, Except Share Data)
Interest/Dividend income:
Loans, including fees $ 5,609 $ 5,331 $16,057 $16,381
Federal funds sold 59 58 141 256
Securities:
Taxable 646 364 1,762 1,406
Tax exempt 866 796 2,468 2,348
Other 71 42 226 126
--------- --------- -------- --------
Total interest/dividend income 7,251 6,591 20,654 20,517
------- ------- ------ ------
Interest expense:
Deposits 1,651 1,662 4,709 5,529
Securities sold under repurchase
agreements 317 308 841 953
Borrowed funds 276 324 885 1,012
-------- -------- -------- -------
Total interest expense 2,244 2,294 6,435 7,494
-------- -------- -------- -------
Net interest income 5,007 4,297 14,219 13,023
Provision for loan losses 150 300 350 950
-------- -------- -------- --------
Net interest income after
provision for loan losses 4,857 3,997 13,869 12,073
-------- ------ -------- ------
Other income:
Trust service fees 137 115 451 396
Service charges 352 413 1,114 1,133
Insurance Center commissions 571 414 1,672 1,263
Loan servicing income 354 213 318 637
Income on equity investment 104 96 303 267
Gain on sales of mortgage loans 37 802 197 1,760
Gain (loss) on sales of securities (12) --- 43 ---
Other 162 289 920 865
------ ------- ------ --------
Total other income 1,705 2,342 5,018 6,321
----- ------ ----- -------
Other expenses:
Salaries, commissions, and
employee benefits 2,215 2,173 6,523 6,365
Occupancy 424 223 1,279 700
Data processing 270 267 798 792
Postage, stationery and supplies 103 132 353 428
Advertising 58 84 253 240
Outside service fees 257 167 622 393
Amortization of intangibles 56 68 193 205
Other 385 589 1,011 1,691
-------- ------ ------- -----
Total other expenses 3,768 3,703 11,032 10,814
------- ------- ------ ------
Income before provision for
income taxes 2,794 2,636 7,855 7,580
Provision for income taxes 769 595 1,860 1,688
------- -------- ------- -------
Net Income $ 2,025 $ 2,041 $ 5,995 $ 5,892
====== ====== ====== ======
Earnings per share: basic and diluted $ 0.29 $ 0.29 $ 0.86 $ 0.85
======= ======= ======= =======
(See accompanying notes to Unaudited Consolidated Financial Statements.)
2
ITEM 1. FINANCIAL STATEMENTS CONTINUED:
FIRST MANITOWOC BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(UNAUDITED)
Nine Months Ended September 30, 2003
(In Thousands, Except Share Data)
Accumulated
Other
Common Retained Comprehensive Treasury
Stock Earnings Income (Loss) Stock Total
- --------------------------------------------------------------------------------
Balance at December 31,
2002 $7,584 $44,387 $3,013 ($700) $54,284
Comprehensive income:
Net income --- 5,892 --- --- 5,892
Other comprehensive
loss --- --- (350) --- (350)
---------
Total comprehensive income 5,542
Cash dividends
($0.15 per share) --- (1,040) --- --- (1,040)
- --------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30,
2003 $7,584 $49,239 $2,663 ($700) $58,786
====== ======= ====== ===== =======
Nine Months Ended September 30, 2004
(In Thousands, Except Share Data)
Accumulated
Other
Common Retained Comprehensive Treasury
Stock Earnings Income (Loss) Stock Total
- --------------------------------------------------------------------------------
Balance at December 31,
2003 $7,584 $50,560 $2,779 ($700) $60,223
Comprehensive income:
Net income --- 5,995 --- --- 5,995
Other comprehensive
income --- --- (104) --- (104)
-------
Total comprehensive income $ 5,891
Cash dividends
($0.165 per share) --- (1,145) --- --- (1,145)
- --------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30,
2004 $7,584 $55,410 $2,675 ($700) $64,969
====== ======= ====== ====== =======
(See accompanying notes to Unaudited Consolidated Financial Statements.)
3
ITEM 1. FINANCIAL STATEMENTS CONTINUED:
FIRST MANITOWOC BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
September 30,
------------
2004 2003
---- ----
(In Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $5,995 $5,892
Adjustments to reconcile net income
to net cash provided by operating
activities:
Provision for loan losses 350 950
Depreciation of premises and equipment 604 604
Amortization of intangible assets 194 206
Gain on sale of AFS securities (43) 0
Amortization of securities, net 604 859
Stock dividends on FHLB stock (215) (147)
Proceeds from sale of mortgage loans 43,915 126,109
Originations of mortgage loans held for sale (43,718) (124,330)
Gain on sales of mortgage loans held for sale (197) (1,760)
Gain on sale of fixed assets 0 (38)
Undistributed income of joint venture (303) (267)
Increase in other assets (888) (57)
Increase in other liabilities 1,113 494
---------- -------
Net cash provided by operating activities 7,411 8,515
---------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of securities
available for sale 64,234 54,063
Purchases of securities available for sale (84,466) (51,834)
Net increase in loans (12,752) (20,753)
Purchases of premises and equipment (857) (639)
Proceeds from sales of premises and equipment 0 38
Bank Owned Life insurance policies 0 (5,000)
Purchased FHLB Stock 0 (2,000)
----------------------
Net cash used in investing activities (33,841) (26,125)
---------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 2,743 1,631
Net increase (decrease) in securities sold
under repurchase agreements 6,182 (1,886)
Proceeds from advances on borrowed funds 26,629 21,747
Repayment of borrowed funds (16,613) (28,764)
Dividends paid (1,145) (1,040)
-------- --------
Net cash provided by (used in) financing activities 17,796 (8,312)
-------- --------
Net decrease in cash and cash equivalents (8,634) (25,922)
Cash and cash equivalents at beginning of period 35,767 56,089
-------- --------
Cash and cash equivalents at end of period $27,133 $30,167
------- ----------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $6,192 $ 7,493
Income taxes 1,518 1,292
(See accompanying notes to Unaudited Consolidated Financial Statements.)
4
ITEM 1. FINANCIAL STATEMENTS CONTINUED:
FIRST MANITOWOC BANCORP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial reporting and with instructions for Form 10-Q and Rule 10-01 of
Regulation S-X. In the opinion of management, these accompanying unaudited
consolidated financial statements contain all adjustments necessary to present
fairly First Manitowoc Bancorp, Inc.'s (the "Corporation's") financial position,
results of operations, changes in shareholders' equity and cash flows for the
periods presented. All adjustments necessary for the fair presentation of the
consolidated financial statements are of a normal recurring nature. The results
of operations for the interim periods are not necessarily indicative of the
results to be expected for the full year. This report should be read in
conjunction with the Corporation's 2003 annual report on Form 10-K.
In preparing the financial statements, management is required to make estimates
and assumptions that affect the reported amounts of assets and liabilities as of
the date of the balance sheet and revenues and expenses for the period. Actual
results could differ significantly from those estimates.
NOTE 2: The consolidated financial statements include the accounts of all
subsidiaries. The Corporation is a bank holding company that engages in its
business through its sole subsidiary, First National Bank in Manitowoc (the
"Bank"), a nationally chartered commercial bank. The Bank has two wholly owned
subsidiaries, FNBM Investment Corp. and Insurance Center of Manitowoc, Inc. (the
"Insurance Center"). All material intercompany transactions and balances are
eliminated. Investment in United Financial Services, Inc., the Bank's 49.8%
owned subsidiary, is accounted for under the equity method. Certain items in the
prior period consolidated financial statements have been reclassified to conform
with the September 30, 2004 presentation.
5
NOTE 3: Investment Securities
The amortized cost and fair values of investment securities available for sale
for the periods indicated are as follows:
Investment Securities
(In Thousands)
September 30, 2004
-------------------------------
Amortized Cost Fair Value
- ------------------------------------------------------------------------------
U.S. Treasury securities and obligations
of U.S. Government corporations and
agencies $ 2,988 $ 2,958
Obligations of states and political subdivisions 77,554 81,814
Mortgage-backed securities 73,070 72,885
Corporate notes 101 104
---------- ---------
Total $153,713 $157,761
======== ========
December 31, 2003
-------------------------------
Amortized Cost Fair Value
- ------------------------------------------------------------------------------
U.S. Treasury securities and obligations
of U.S. Government corporations
and agencies $ 13,663 $ 13,593
Obligations of states and political
subdivisions 70,357 74,743
Mortgage-backed securities 49,924 49,836
Corporate notes 100 103
-------- --------
Total $134,044 $138,275
======== ========
NOTE 4: Loan Portfolio
Loans are summarized as follows:
Summary of Loan Portfolio
(Dollars In Thousands)
September 30, 2004 December 31, 2003
------------------ -----------------
Percent of Percent of
Amount Total Loans Amount Total Loans
- --------------------------------------------------------------------------
Commercial and Agricultural $114,587 29.90% $110,884 29.88%
Commercial Real Estate 110,594 28.85% 109,469 29.49%
Residential Real Estate 137,708 35.93% 129,212 34.82%
Consumer 17,857 4.66% 18,301 4.93%
Other 2,531 0.66% 3,259 0.88%
-------- ------- -------- -------
Total $383,277 100.00% $371,125 100.00%
======= =======
Less: Allowance for Loan Loss (3,749) (3,999)
-------- --------
Net Loans $379,528 $367,126
======= =======
6
NOTE 5: Allowance for Loan Losses
Activity in the allowance for loan losses for the periods indicated is as
follows:
- --------------------------------------------------------------------------------
For the Nine For the Nine
Months Ended Months Ended
September 30, September 30,
2004 2003
----------------------------
(In Thousands)
Balance at beginning of period -
December 31, 2003 and 2002 $3,999 $3,384
Provision charged to expense 350 950
Charge-offs (684) (402)
Recoveries 84 85
------- ------
Balance at end of period $3,749 $4,017
======= ======
NOTE 6: Business Segments
The Corporation, through the Bank and the Bank's branch network, 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; trust services; and insurance services.
Operations are managed and financial performance of these services is evaluated
on a Corporation-wide basis. Accordingly, all of the Corporation's operations
are considered by management to be aggregated in one reportable operating
segment.
NOTE 7: Per Share Computations
Weighted average shares outstanding were 6,937,268 for the three and nine months
ended September 30, 2004 and 2003.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our Consolidated
Condensed Financial Statements and accompanying Notes thereto included elsewhere
herein and with our 2003 Annual Report on Form 10-K filed with the Commission on
March 12, 2004.
THE CORPORATION
First Manitowoc Bancorp, Inc. (the "Corporation") is a Wisconsin corporation and
registered bank holding company. The Corporation 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. and a wholly-owned insurance subsidiary, Insurance Center of
Manitowoc, Inc. (the "Insurance Center"). The Insurance Center also operates an
office known as Gary Vincent and Associates in Green Bay, Wisconsin. The
Insurance Center is an independent agency offering commercial, personal, life
and health insurance. The Bank owns 49.8% of the outstanding common stock of
United Financial Services, Inc. ("UFS"). UFS provides data processing services
to owner banks Baylake Bank of Sturgeon Bay and the Bank in addition to 52 other
banks located in Wisconsin.
The Corporation's and the Bank's main office is located at 402 North Eighth
Street, Manitowoc, Manitowoc County, Wisconsin. The Bank has thirteen full
service branch offices located in Francis Creek, St. Nazianz, Two Rivers,
Mishicot, Manitowoc, Kiel, Newton, New Holstein, Plymouth, Bellevue, and
Ashwaubenon, Wisconsin. The Bank has one limited service drive through and mini
lobby facility at 4712 Expo Drive in Manitowoc. The Corporation's home page on
the Internet is www.bankfirstnational.com. The Corporation's SEC filings are
available through our website. The Corporation's web site content is for
information purposes only, and it should not be relied upon for investment
purposes, nor is it incorporated by reference into this Form 10-Q.
7
FORWARD LOOKING INFORMATION
Forward-looking statements have been made by the Corporation in this document
and in documents incorporated by reference that are subject to risks and
uncertainties. These forward-looking statements, which are included in
Management's Discussion and Analysis of Financial Condition and Results of
Operations, describe future plans or strategies and include the Corporation's
expectations of future results of operations. Statements containing certain
terms including, but not limited to, the words "believes," "expects,"
"anticipates" or similar expressions constitute forward-looking statements.
Shareholders should note that many factors, some of which are discussed
elsewhere in this document could affect the future financial results of the
Corporation and could cause those results to differ materially from those
expressed in forward-looking statements contained in this document. These
factors include the following:
- operating, legal and regulatory risks;
- economic, political and competitive forces affecting the
Corporation's banking, securities, asset management and credit
services businesses;
- the risk that the Corporation's analyses of these risks and forces
could be incorrect and/or that the strategies developed to address
them could be unsuccessful;
- general market rates;
- general economic conditions;
- changes by the Federal government in monetary and fiscal policies;
and
- changes in composition of our loan portfolio.
These factors should be considered in evaluating the forward-looking statements,
and undue reliance should not be placed on such statements. The Corporation does
not undertake and specifically disclaims any obligation to update any
forward-looking statements to reflect the occurrence of anticipated or
unanticipated events or circumstances after the date of such statements.
CRITICAL ACCOUNTING POLICIES
In preparing the consolidated financial statements, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the balance sheet and revenues and expenses for
the period. Actual results could differ significantly from those estimates.
Estimates that are particularly susceptible to significant change include the
determination of the allowance for loan losses and mortgage servicing rights
valuation.
The consolidated financial statements of the Corporation are prepared in
conformity with accounting principles generally accepted in the United States of
America and follow general practices within the industries in which it operates.
This preparation requires management to make estimates, assumptions, and
judgments that affect the amounts reported in the financial statements and
accompanying notes. These estimates, assumptions, and judgments are based on
information available as of the date of the financial statements; accordingly,
as this information changes, actual results could differ from the estimates,
assumptions, and judgments reflected in the financial statements. Certain
policies inherently have a greater reliance on the use of estimates,
assumptions, and judgments and, as such, have a greater possibility of producing
results that could be materially different than originally reported. Management
believes the following policies are both important to the portrayal of the
Corporation's financial condition and results and require subjective or complex
judgments and, therefore, management considers the following to be critical
accounting policies.
Allowance for Loan Losses: Management's evaluation process used to determine the
adequacy of the allowance for loan losses is subject to the use of estimates,
assumptions, and judgments including management's ongoing review and grading of
the loan portfolio, consideration of past loan loss experience, trends in past
due and nonperforming loans, risk characteristics of the various classifications
of loans, existing economic conditions, the fair value of underlying collateral,
and other qualitative and quantitative factors which could affect probable
credit losses. Because current economic conditions can change and future events
are inherently difficult to predict, the anticipated amount of estimated loan
losses, and therefore the adequacy of the allowance, could change significantly.
As an integral part of their examination process, various regulatory agencies
also review the allowance for loan losses. Such agencies may require that
certain loan balances be charged off when their credit evaluations differ from
those of management, based on their judgments about information available to
them at the time of their examination. The Corporation believes the allowance
for loan losses is adequate and properly recorded in the financial statements.
See section "Allowance for Loan Losses."
8
Mortgage Servicing Rights Valuation: The fair value of the Corporation's
mortgage servicing rights asset is important to the presentation of the
consolidated financial statements in that mortgage servicing rights are subject
to a fair value-based impairment standard. Mortgage servicing rights do not
trade in an active open market with readily observable prices. As such, like
other participants in the mortgage banking business, the Corporation relies on
an internal estimated cash flow model to establish the fair value of its
mortgage servicing rights. While the Corporation believes that the values
produced by its internal model are indicative of the fair value of its mortgage
servicing rights portfolio, these values can change significantly depending upon
the then current interest rate environment, estimated prepayment speeds of the
underlying mortgages serviced, and other economic conditions. The proceeds that
might be received should the Corporation actually consider a sale of the
mortgage servicing rights portfolio could differ from the amounts reported at
any point in time. The Corporation believes the mortgage servicing rights asset
is properly recorded in the financial statements.
EARNINGS
Net Income
(Dollars In Thousands, Except Share Data)
- ----------------------------------------------------------------------------------------------
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
2004 2003 2004 2003
- ----------------------------------------------------------------------------------------------
Net Income $2,025 $2,041 $5,995 $5,892
Earnings Per Share -
Basic & Diluted $ 0.29 $ 0.29 $ 0.86 $ 0.85
Return on Average Assets 1.33% 1.44% 1.34% 1.39%
Return on Average Equity 12.81% 14.10% 12.77% 13.90%
- -----------------------------------------------------------------------------------------------
Weighted average shares outstanding were 6,937,268 for the nine months ended
September 30, 2004 and 2003.
Quarter Overview: The Corporation's net income for the three months ended
September 30, 2004 was $2,025,000 or $0.29 per basic and diluted share compared
to $2,041,000 or $0.29 for the same period last year. These amounts represented
a return on average assets of 1.33% and 1.44%, respectively, and a return on
average equity of 12.81% and 14.10%, respectively. Net income decreased $16,000
or 0.8% for the three months ended September 30, 2004 compared to the three
months ended September 30, 2003. An $860,000 increase in net interest income was
offset by a $637,000 decrease in other income and increases of $65,000 in other
expenses and $174,000 in the provision for income taxes.
Nine month Overview: The Corporation's net income for the nine months ended
September 30, 2004 was $5,995,000 or $0.86 per basic and diluted share compared
to $5,892,000 or $0.85 for the same period last year. These amounts represented
a return on average assets of 1.34% and 1.39%, respectively, and a return on
average equity of 12.77% and 13.90%, respectively. The increase of $103,000 in
net income for the nine months ended September 30, 2004 compared to the nine
months ended September 30, 2003 was attributable to a $1,196,000 increase in net
interest income and a $600,000 decrease in provision for loan losses which was
largely offset by a $1,303,000 decrease in other income and increases of
$218,000 in other expenses and $172,000 in the provision for income taxes.
The following tables and narrative on pages 13 through 16 discuss changes in the
components of net income during the three and nine month periods ended September
30, 2004 and 2003.
9
TABLE 1
Table 1 displays the average balances and average rates paid on all major
deposit classifications for the periods indicated.
AVERAGE BALANCES, YIELD AND RATES
For the Three Months For the Three Months
Ended September 30, 2004 Ended September 30, 2003
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
-------------------------------------------------------------
(Dollars In Thousands) (Dollars In Thousands)
ASSETS
Interest-earning assets:
Federal funds sold $ 16,231 $ 59 1.45% $ 23,120 $ 57 0.98%
Investment securities 163,761 2,141 5.20% 140,310 1,713 4.86%
Loans 381,245 5,746 6.00% 357,431 5,470 6.09%
------- ----- ----- ------- ----- -----
Total interest-earning
assets 561,237 $7,946 5.62% 520,861 $7,240 5.51%
Other assets 44,629 44,373
------- -------
Total Assets $605,866 $565,234
======= =======
LIABILITIES
Interest-bearing liabilities:
Interest-bearing deposits $362,959 $1,651 1.81% $348,290 $1,662 1.90%
Repurchase agreements 58,396 317 2.16% 49,485 308 2.48%
Borrowings 41,231 276 2.66% 33,198 324 3.89%
-------- ------ ----- -------- ------ -----
Total interest-bearing
liabilities $462,586 $2,244 1.93% $430,973 $2,294 2.12%
Demand deposits 73,265 69,439
Other liabilities 7,052 6,902
-------- --------
Total Liabilities 542,903 507,314
SHAREHOLDERS' EQUITY 62,963 57,920
-------- --------
Total Liabilities and
Shareholders' Equity $605,866 $565,234
======= =======
Net interest income and
interest rate spread $5,702 3.69% $4,946 3.40%
Net interest income as
a percent of earning assets (annualized) 4.03% 3.77%
===== =====
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. The tax equivalent adjustment was calculated using the statutory federal
income tax rate of 34%.
10
TABLE 1 (continued)
AVERAGE BALANCES, YIELD AND RATES
For the Nine Months For the Nine Months
Ended September 30, 2004 Ended September 30, 2003
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
-------------------------------------------------------------
(Dollars In Thousands) (Dollars In Thousands)
ASSETS
Interest-earning assets:
Federal funds sold $ 16,324 $ 141 1.15% $ 29,915 $ 255 1.14%
Investment securities 158,053 6,046 5.11% 141,019 5,377 5.10%
Loans 376,617 16,462 5.84% 350,197 16,775 6.40%
------- ------ ----- ------- ------ -----
Total interest-earning
assets 550,994 $22,649 5.50% 521,131 $22,407 5.75%
Other assets 43,853 42,357
-------- --------
Total Assets $594,847 $563,488
======= =======
LIABILITIES
Interest-bearing liabilities:
Interest-bearing deposits $359,273 $4,709 1.75% $350,737 $5,529 2.11%
Repurchase agreements 54,975 841 2.05% 50,168 953 2.54%
Federal funds purchased 14 --- --- --- --- ---
Borrowings 41,217 885 2.87% 35,309 1,012 3.83%
-------- ------ ----- -------- ------ -----
Total interest-bearing
liabilities $455,479 $6,435 1.89% $436,214 $7,494 2.30%
Demand deposits 70,491 63,954
Other liabilities 6,806 6,818
-------- --------
Total Liabilities 532,776 506,986
SHAREHOLDERS' EQUITY 62,071 56,502
-------- --------
Total Liabilities and
Shareholders' Equity $594,847 $563,488
======= ========
Net interest income and
interest rate spread $16,214 3.61% $14,913 3.45%
Net interest income as
a percent of earning assets (annualized) 3.93% 3.83%
===== =====
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. The tax equivalent adjustment was calculated using the statutory federal
income tax rate of 34%.
11
Table 1A sets forth the effects of changing rates and volumes on net interest
income of the Corporation for the periods indicated.
RATE AND VO LUME VARIANCE ANALYSIS
BASED ON AVERAGE BALANCES
For the nine months ended September 30, 2004
(In thousands)
TABLE 1A
2004 compared to 2003
Increase(Decrease) in Net Interest Income
Net Due to Due to
Interest earning assets: Change Rate Volume
------ ------ ------
Federal funds sold $ (114) $ (78) $ (36)
Investment securities:
US Treasury securities
and obligations of
US government agencies $ 392 $ (137) $ 529
Tax exempt obligations
of States and political
subdivisions $ 183 $ (306) $ 489
All other investment
securities $ 94 $ 91 $ 3
------- ------- ------
Total investment securities $ 669 $ (352) $1,021
Loans net of unearned income:
Commercial loans $ 354 $(1,945) $2,299
Mortgage loans $ (493) $ (640) $ 147
Installment loans $ (161) $ (156) $ (5)
Other loans $ (13) $ (12) $ (1)
------- ------- ------
Total loans $ (313) $(2,753) $2,440
TOTAL INTEREST EARNING ASSETS$ 242 $(3,184) $3,426
Interest bearing liabilities:
Savings deposits $ 6 $ (2) $ 8
Market Plus accounts $ 6 $ (24) $ 30
Super NOW accounts $ (43) $ (46) $ 3
Money market deposit
accounts $ 7 $ 7 $ 0
Certificates of deposit
and IRA deposit $ (796) $ (925) $ 129
Repurchase agreements $ (112) $ (269) $ 157
Federal funds purchased $ - $ - $ -
Borrowings $ (127) $ (399) $ 272
------- ------- ------
TOTAL INTEREST BEARING
LIABILITIES $(1,059) $(1,657) $ 598
Net Change in Net
Interest Income $ 1,301 $(1,527) $2,828
12
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 offset by the interest paid on deposits and borrowings.
The nine months ended September 30, 2004 has been characterized by stable
interest rates through June 2004 and increasing interest rates beginning in July
2004.
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. The tax equivalent adjustment was calculated using the statutory federal
income tax rate of 34%.
THIRD QUARTER 2004 COMPARED TO THIRD QUARTER 2003:
Net interest income (on a tax equivalent basis) for the three months ended
September 30, 2004 increased by $765,000 or 15.5% compared to the three months
ended September 30, 2003. Interest income increased $706,000 while interest
expense decreased $59,000. Total average loans increased from $357,431,000 for
the third quarter of 2003 to $381,245,000 for the third quarter of 2004 while
interest yield on loans decreased from 6.09% for the third quarter of 2003 to
6.00% for the third quarter of 2004. Average investment securities increased
from $140,310,000 for the third quarter of 2003 to $163,761,000 for the third
quarter of 2004. Total average interest-bearing deposits increased from
$430,973,000 for the third quarter of 2003 to $462,586,000 for the third quarter
of 2004 while interest rates paid on interest-bearing deposits decreased from
2.12% for the third quarter of 2003 to 1.92% for the third quarter of 2004. The
interest rate spread, which is the difference between the average yield on
interest earning assets and the average rate paid on interest bearing
liabilities, was 3.70% for the three months ended September 30, 2004, an
increase of 31 basis points from the interest rate spread of 3.39% for the three
months ended September 30, 2003.
Net interest margin for the three months ended September 30, 2004 was 4.04%
compared with 3.77% for the three months ended September 30, 2003.
YTD 2004 COMPARED TO YTD 2003:
Net interest income (on a tax equivalent basis) for the nine months ended
September 30, 2004 increased by $1,321,000 or 8.90% compared to the nine months
ended September 30, 2003. Interest income increased $242,000. Total average
loans increased to $376,617,000 for the first nine months of 2004 from
$350,197,000 for the first nine months of 2003. Total average investment
securities increased to $158,053,000 for the first nine months of 2004 from
$141,019,000 for the first nine months of 2003. Interest yields fell on loans.
Interest expense decreased $1,079,000 due to a decrease in interest rates paid.
Total average interest bearing deposits increased to $455,479,000 for the first
nine months of 2004 from $436,214,000 for the first nine months of 2003, while
interest rates paid on those deposits decreased to 1.88% in 2004 from 2.30% in
2003. The interest rate spread was 3.62% for the nine months ended September 30,
2004, an increase of 17 basis points from the interest rate spread of 3.45% for
the nine months ended September 30, 2003.
As shown in the rate/volume variance analysis in Table 1A, changes in net
interest income due to a decrease in interest rates resulted in a $1,508,000
decrease in taxable equivalent net interest income while changes due to volume
resulted in a $2,829,000 increase in taxable equivalent net interest income.
Interest expense for certificates of deposit/IRA deposits had a net decrease of
$795,000 primarily due to a decrease in interest rates. Interest income for
investment securities had a net increase of $669,000 primarily due to volume
while interest income for mortgage loans had a net decrease of $493,000
primarily due to rates.
Net interest margin for the nine months ended September 30, 2004 was 3.94%
compared with 3.83% for the nine months ended September 30, 2003.
13
PROVISION AND ALLOWANCE FOR LOAN LOSSES
For the nine months ended September 30, 2004, the Bank charged $350,000 to
expense for the provision for loan loss compared to $950,000 for the nine months
ended September 30, 2003.
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 in its loan
portfolio as of September 30, 2004 based on its most recent evaluation of these
factors.
The loan volume trend factor is based on actual lending activity. The factor is
used for calculating 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 current problem credits factor includes the exposure believed to
exist for specifically identified problem loans determined on a loan-by-loan
basis.
The following table shows the allocation of allowance for loan losses.
Allocation of Allowance for Loan Losses
(Dollars In Thousands)
- --------------------------------------------------------------------------------
September 30, December 31,
2004 2003
- --------------------------------------------------------------------------------
Specific Problem Loans $1,969 $2,262
Loan Type Allocation:
Commercial & Agricultural 790 950
Commercial Real Estate 108 87
Residential Real Estate 108 53
Consumer 187 221
------ ----------
1,193 1,311
Unallocated 587 426
------ ------
Total Reserve $3,749 $3,999
===== =====
Ratio of allowance for loan losses to total loans 0.98% 1.08%
- --------------------------------------------------------------------------------
The category Specific Problem Loans includes an allocation of the allowance for
Specific Problem Credits. Loan type 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 tied to
specific loans or loan categories. Local economic concerns continue to affect
the Bank's customers. These concerns are reflected in the changes shown in the
allocation of allowance for loan losses.
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.
NONPERFORMING LOANS
It is the policy of the Bank to place a loan in non-accrual status whenever
there is substantial doubt about the ability of a borrower to pay principal or
interest on any outstanding credit. The typical time frame for making the
determination to put a loan in non-accrual status is 90 days. 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 non-accrual decision. Non-accrual 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.
14
Total nonperforming loans at September 30, 2004 were $2,612,000, a decrease of
$666,000 from December 31, 2003. The following table presents nonperforming and
nonaccrual loan information as of the dates indicated.
Nonperforming Loans
(Dollars In Thousands)
- --------------------------------------------------------------------------------
September 30, December 31,
2004 2003
- --------------------------------------------------------------------------------
Nonaccrual loans $2,417 $3,272
Accruing loans past due 90 days or more 195 6
--------- ---------
Total nonperforming loans $2,612 $3,278
Nonperforming loans as a percent of loans 0.68% 0.88%
Ratio of the allowance for loan losses to
nonperforming loans 143.53% 122.00%
- --------------------------------------------------------------------------------
</Table>
OTHER INCOME
Other Income
(In Thousands)
- -----------------------------------------------------------------------------------------
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
2004 2003 2004 2003
- ------------------------------------------------------------------------------------------
Trust service fees $ 137 $ 115 $ 451 $ 396
Service charges 352 413 1,114 1,133
Insurance Center commissions 571 414 1,672 1,263
Loan servicing income 354 213 318 637
Income on equity investment 104 96 303 267
Gain on sales of mortgage loans 37 802 197 1,760
Gain (loss) on sale of securities (12) 0 43 0
Other 162 289 920 865
------ ------ ------- ------
Total other income $1,705 $2,342 $5,018 $6,321
- -----------------------------------------------------------------------------------------
THIRD QUARTER 2004 COMPARED TO THIRD QUARTER 2003:
Other income for the third quarter of 2004 was $1,705,000 compared to $2,342,000
for the third quarter of 2003, a decrease of $637,000 or 27.2%. Loan servicing
income increased $141,000 or 66.2% over last year. Other income for the third
quarter of 2004 includes a mortgage servicing rights accrual of $224,000
compared to $7,700 for the third quarter of 2003. The increase was due to the
extension of the weighted average life of the FNMA secondary market loan
portfolio during the quarter. However, gain on sales of mortgage loans sold to
the secondary market decreased $765,000 for the third quarter of 2004 compared
to the third quarter of 2003. Notably lower revenue from significantly lower
refinancing activity occurred throughout the industry. A related decrease in
closing fees collected for these loans accounts for the decrease in service
charge income. Insurance Center commissions increased $157,000 or 37.9% due to
increased volume. Other miscellaneous income decreased $127,000.
YTD 2004 COMPARED TO YTD 2003:
Total other income for the nine months ended September 30, 2004 was $5,018,000
compared to $6,321,000 for the nine months ended September 30, 2003, a decrease
of $1,303,000 or 20.6%. Trust service fees increased $55,000. Insurance Center
commissions increased $409,000 or 32.4% over last year, a result of increased
volume. The Insurance Center also received significant contingency commission
income as a result of lower than expected insurance claims. Mortgage serving
rights income decreased $319,000 or 50.1% while gain on sales of mortgage loans
decreased $1,563,000 or 88.8% from the same period last year. Increased interest
rates in 2004 from 2003's historically low levels caused the decline in mortgage
loan volume from the previous year.
15
OTHER EXPENSES
Other Expenses
(In Thousands)
<Table>
<Caption>
- ------------------------------------------------------------------------------------------
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
2004 2003 2004 2003
- ------------------------------------------------------------------------------------------
Salaries, commissions, and
employee benefits $2,215 $2,173 $6,523 $6,365
Occupancy 424 223 1,279 700
Data processing 270 267 798 792
Postage, stationery and
supplies 103 132 353 428
Advertising 58 84 253 240
Outside service fees 257 167 622 393
Amortization of intangibles 56 68 193 205
Other 385 589 1,011 1,691
------ ------ ------- -------
Total other expenses $3,768 $3,703 $11,032 $10,814
- -----------------------------------------------------------------------------------------
THIRD QUARTER 2004 COMPARED TO THIRD QUARTER 2003:
Other expenses for the third quarter of 2004 were $3,768,000 compared to
$3,703,000, an increase of $65,000. Occupancy expense increased $201,000 mainly
due to additional expenses associated with the opening of the Bank's new branch
location. Outside service fees include additional expense for Sarbanes-Oxley
internal control documentation requirements. Other miscellaneous expenses
decreased $204,000 from last year.
YTD 2004 COMPARED TO YTD 2003:
Other expenses for the first nine months of 2004 were $11,032,000 compared to
$10,814,000 for the first nine months of 2003, an increase of $218,000.
Occupancy expense increased $579,000 as a result of the opening of the Bank's
new branch location on Expo Drive in Manitowoc in May of 2004. Outside service
fees included a pollution abatement accrual and $241,000 for Sarbanes-Oxley
internal control documentation requirements.
INCOME TAXES
The Corporation's effective tax rate for the nine months ended September 30,
2004 was 23.7% compared to 22.3% for the nine months ended September 30, 2003.
The Bank maintains FNBM Investment Corp. ("FNBM Investment"), a Nevada company,
as a wholly-owned subsidiary engaged in investment activities. As a Nevada
company not conducting activities in Wisconsin, FNBM Investment has not been
subject to taxation in Wisconsin since its formation in 1993. The State of
Nevada does not currently impose a corporate income tax.
Although the earnings of FNBM Investment are not currently subject to tax in
Wisconsin, from time-to-time legislation has been proposed which, if adopted,
would (i) require combined income tax returns for entities headquartered in this
state, and (ii) result in taxation of FNBM Investments' earnings. To date, none
of these legislative proposals have been adopted. Within the past 18 months, the
Wisconsin Department of Revenue ("WDR") has increased its examinations of
banking entities and is proposing that income of out-of-state investment
subsidiaries, like FNBM Investment, be allocated to their parent banks. Indeed,
in 2003 the WDR began a large number of examinations aimed at the relationship
of financial institutions, including the Bank, with their investment
subsidiaries. As a result of the WDR examination, the Bank agreed to extend the
applicable statute of limitations for its taxable years 1997 through 2004. The
WDR is now taking the position that some or all investment subsidiary income is
allocable to the parent banks and taxable in Wisconsin. The WDR has written to
all affected Wisconsin banks, indicating a willingness to discuss settlements.
While the WDR has indicated settlement terms would depend on individual
situations, their letter also indicated that settlement payments would be less
than the full amount of the tax that could be assessed, that interest and
possibly penalties would be based on the actual settlement amount, and that some
limited future use of investment subsidiaries may be permitted. The WDR letter
noted that a number of banks have agreed to settlements. Management believes the
Bank, as well as FNBM Investment, has complied with the tax rules relating to
the income of out-of-state subsidiaries and with the private ruling issued to
the Bank by WDR in 1998 in connection with its formation and operation of FNBM
Investment. The WDR examination has not yet resulted in any assessment against
the Bank. The Bank would oppose an assessment, if any, and believes that it has
strong legal and equitable defenses. At this time, management cannot estimate
with any degree of certainty what, if any, liability may result in connection
with this matter.
16
BALANCE SHEET
SEPTEMBER 30, 2004 COMPARED TO DECEMBER 31, 2003
Assets
The Corporation's total assets increased from $582.0 million at December 31,
2003 to $606.8 million at September 30, 2004. Loans increased $12.4 million, a
result of increases in commercial loans and mortgage loans. Securities increased
$19.5 million to $157.8 million.
Liabilities
Deposits increased $2.7 million to $431.0 million at September 30, 2004 from
$428.3 million at December 31, 2003. Repurchase agreements increased $6.1
million while borrowed funds increased $10.0 million.
Off-Balance Sheet Arrangements
The Corporation has become a party to financial instruments with off-balance
sheet risk in the normal course of its business in order to meet the financing
needs of its customers and to reduce its own exposure to fluctuations in
interest rates. These financial instruments include commitments to extend credit
and standby letters of credit. Off-balance sheet financial instruments involve,
to varying degrees, elements of credit and interest rate risk in excess of the
amounts recognized in the Statement of Financial Condition. In the event of
non-performance by the other party to a financial instrument, the Corporation's
exposure to credit loss is represented by the contractual amount of the
instrument. The Corporation uses the same credit policies in granting
commitments and letters of credit as it does for on-balance sheet financial
instruments.
Off-balance-sheet financial instruments whose contract amounts represent credit
and/or interest rate risk are as follows:
Notional Amount
----------------------------
September 30, December 31,
2004 2003
- -----------------------------------------------------------------------------
(Dollars In Thousands)
Commitments to extend credit $86,955 $75,134
Credit card arrangements 6,321 2,510
Standby letters of credit 6,014 5,826
Commitments to extend credit and credit card arrangements are agreements to lend
to a customer as long as there is no violation of any condition established in
the contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. A portion of the
commitments are expected to be drawn upon, thus representing future cash
requirements. The Corporation evaluates each customer's creditworthiness on a
case-by-case basis. The amount of collateral obtained upon extension of credit
is based on management's credit evaluation of the counterparty. Collateral held
varies but may include accounts receivable; inventory; property, plant, and
equipment; real estate; and stocks and bonds.
Standby letters of credit are conditional commitments issued by the Corporation
to guarantee the performance of a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers. The Corporation holds collateral
supporting those commitments for which collateral is deemed necessary. Because
these instruments have fixed maturity dates and because many of them expire
without being drawn upon, they do not generally present any significant
liquidity risk to the Corporation.
The Corporation has no investments in nor is a party to transactions involving
derivative instruments, except mortgage-related securities which represent
minimal risk to the Corporation.
Like many Wisconsin financial institutions, the Corporation has a non-Wisconsin
subsidiary that holds and manages investment assets which have not been subject
to Wisconsin tax. The Wisconsin Department of Revenue has instituted an audit
program specifically aimed at out-of-state bank subsidiaries and has indicated
that it may withdraw favorable rulings previously issued in connection with such
subsidiaries. As a result of these developments, the Department may take the
position that the income of the out-of-state subsidiaries is taxable in
Wisconsin, which will likely be challenged by financial institutions in the
state. If the Department is successful in its efforts, it would result in a
negative impact on the earnings of the Corporation.
17
LIQUIDITY MANAGEMENT
Liquidity describes the ability of the Corporation to generate adequate amounts
of cash 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
cash and cash equivalents, short term investments, the maturity distribution of
the investment portfolio, loan repayments and income from earning assets. A
substantial portion of the investment portfolio contains readily marketable
securities that could be converted to cash immediately. 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 adequate levels.
CAPITAL RESOURCES AND ADEQUACY
The Corporation's actual capital amounts and ratios at December 31, 2003 and
September 30, 2004 are presented below:
Capital
(Dollars In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
September 30, December 31,
2004 2003
- --------------------------------------------------------------------------------
Shareholders' Equity $64,969 $60,223
Total capital (to risk-weighted assets):
Consolidated 13.6% 13.3%
First National Bank in Manitowoc 13.4% 13.1%
Tier 1 capital (to risk-weighted assets):
Consolidated 12.9% 12.3%
First National Bank in Manitowoc 12.6% 12.0%
Tier I capital (to average assets):
Consolidated 8.9% 8.6%
First National Bank in Manitowoc 8.7% 8.4%
Dividends Per Share-This Quarter $ 0.055 $ 0.060
Dividends Per Share-Year to Date 0.165 0.210
Earnings Per Share-This Quarter $ 0.29 $ 0.250
Earnings Per Share-Year to Date $ 0.86 1.100
Dividend Payout Ratio-This Quarter 18.97% 24.00%
Dividend Payout Ratio-Year to Date 19.19% 19.09%
- --------------------------------------------------------------------------------
Total shareholders' equity increased $4.8 million from $60.2 million at December
31, 2003 to $65.0 million at September 30, 2004. Net income for the nine-month
period ending September 30, 2004 was $6.0 million.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios of total and Tier 1
capital to risk-weighted assets, and of Tier 1 capital to average assets.
Management believes, as of September 30, 2004 and December 31, 2003, that the
Bank meets all capital adequacy requirements to which it is subject.
As of September 30, 2004, the Bank's and the Corporation's ratio of Tier 1
capital to risk-weighted assets was 12.6% and 12.9%, respectively. As of
September 30, 2004, the Bank's and the Corporation's ratio of total capital to
risk-weighted assets was 13.4% and 13.6%, respectively. 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 September 30, 2004, the Bank's and the
Corporation's leverage capital ratio was 8.7% and 8.9%, respectively.
18
As of September 30, 2004 and December 31, 2003, the most recent notification
from the Office of the Comptroller of Currency and the Federal Deposit Insurance
Corporation categorized the Bank as well capitalized and adequately 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 1 risk-based, and Tier 1 leverage ratios. There are no
conditions or events since such notifications that management believes have
changed the institution's category.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2003, the FASB issued SFAS No. 132 (revised 2003), "Employers'
Disclosures about Pensions and Other Postretirement Benefits - an amendment of
FASB Statement No. 87, 88 and 106," which was effective for the fourth quarter
of 2003. This Statement revises employers' disclosures about pension plans and
other postretirement benefit plans and these disclosures are included in Note 14
to the Corporation's December 31, 2003 Consolidated Financial Statements
included in the Corporation's Annual Report on Form 10-K.
On March 9, 2004, the SEC issued Staff Accounting Bulletin No. 105-Application
of Accounting Principles to Loan Commitments ("SAB 105"). SAB 105 summarizes the
views of the SEC staff regarding the application of generally accepted
accounting principles to loan commitments accounted for as derivative
instruments. The SEC staff believes that in recognizing a loan commitment,
entities should not consider expected future cash flows related to the
associated servicing of the loan until the servicing asset has been
contractually separated from the underlying loan by sale or securitization of
the loan with the servicing retained. The provisions of SAB 105 are applicable
to all loan commitments accounted for as derivatives and entered into subsequent
to March 31, 2004. The adoption of SAB 105 will not have a material impact on
the Corporation's consolidated results of operations or financial position, as
the Corporation's current accounting treatment for such loan commitments is
consistent with the provisions of SAB 105.
FINANCIAL STATEMENT DISCLOSURES
Commitments to sell residential mortgage loans to FNMA and commitments to fund
such loans to individual borrowers represent the Corporation's mortgage
derivatives, the fair value of which is not material at this time. Commitments
outstanding at September 30, 2004 were $3,783,275.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Corporation's management is aware of no material change to the market risk
position from that disclosed as of December 31, 2003 in the Corporation's 2003
Form 10-K Annual Report.
ITEM 4. CONTROLS AND PROCEDURES
The Corporation maintains disclosure controls and procedures that are designed
to ensure that information required to be disclosed in our periodic filings with
the SEC is recorded, processed, summarized, and reported within the time periods
specified in the SEC's rules and forms, and that such information is accumulated
and communicated to our management. The Corporation's senior management, with
the participation of the Corporation's chief executive officer and chief
financial officer, evaluated the effectiveness of the Corporation's disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities and Exchange Act of 1934 [the "Act"]) as of September 30, 2004. Based
on this evaluation, the Corporation's chief executive officer and chief
financial officer concluded that, as of September 30, 2004, the disclosure
controls and procedures were (1) designed to ensure that material information
relating to the Corporation, including the Bank and the Bank's wholly owned
subsidiaries, is made known to the Corporation's chief executive officer and
chief financial officer by others within those entities, particularly during the
period in which this report was being prepared and (2) effective, in that they
provide reasonable assurance that information required to be disclosed in the
reports that the Corporation files or submits under the Act is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms.
For the quarter ended September 30, 2004, the Corporation did not make any
significant changes in, nor take any corrective actions regarding, its internal
controls or other factors that could significantly affect these controls
subsequent to the date of their evaluation.
19
FIRST MANITOWOC BANCORP, INC.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Corporation is involved in various legal matters arising in the normal
course of its business. While the ultimate outcome of these various legal
matters cannot be predicted with certainty, it is the opinion of management in
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.
ITEM 6. EXHIBITS
a) Exhibits:
Exhibit Number Exhibit Descriptions
- -------------- --------------------
(3)(1) Articles of Incorporation of First Manitowoc
Bancorp, Inc., incorporated by reference to
Exhibit (3)(1) to the issuer's registration
statement on Form 10 filed with the SEC on
May 5, 1999. Amendment filed as Exhibit (3)(2)
to the issuer's quarterly report on Form 10-Q,
filed with the SEC on August 14, 2000.
(3)(2) Amended and Restated Bylaws of First Manitowoc
Bancorp, Inc., incorporated by reference to
Exhibit (3)(2) to the issuer's Annual Report on
Form 10-K, filed with the SEC on March 18, 2003.
31.1 Certification of Thomas J. Bare pursuant to
Rule 13a-14(a) or 15(d)-14(a)
31.2 Certification of Paul H. Wojta pursuant to
Rule 13a-14(a) or 15(d)-14(a)
32.1 Section 1350 Certification of Thomas J. Bare
32.2 Section 1350 Certification of Paul H. Wojta
b) Reports on Form 8-K:
There were no reports on Form 8-K filed for the quarter ended
September 30, 2004
</Table>
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
FIRST MANITOWOC BANCORP, INC.
Date: November 9, 2004 /s/ Thomas J. Bare
------------------
Thomas J. Bare
Chief Executive Officer
Date: November 9, 2004 /s/ Paul H. Wojta
-----------------
Paul H. Wojta
Chief Financial Officer
21