ITEM 1 BUSINESS
GENERAL
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. Insurance Center of Manitowoc, Inc. 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 Corporation acquired the Bank through the merger of the Bank into an interim national banking association formed as a Corporation 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 in 1982. Pursuant to the Plan, each outstanding share of Bank common stock was exchanged for three shares of the Corporation's common stock. The Bank's charter was not affected by the merger. Currently, the Corporation has outstanding 6,937,268 shares of common stock, par value $1.00 per share ("Shares"). Shares were held by 605 holders of record on February 28, 2003.
As of December 31, 2002, the Corporation had assets of approximately $565.8 million, net loans of approximately $340.7 million, and deposits of $416.1 million. For additional financial information, see the Consolidated Financial Statements and Notes beginning at Item 8 of this Form 10-K.
The Corporation's and the Bank's main office is located at 402 North Eighth Street, Manitowoc, Manitowoc County, Wisconsin. The Bank has twelve full service branch offices located in Francis Creek, St. Nazianz, Two Rivers, Mishicot, Manitowoc, Kiel, Newton, New Holstein, Plymouth, Bellevue, and Ashwaubenon, Wisconsin. The Corporation's home page on the Internet is www.bankfirstnational.com. 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-K.
Throughout this Form 10-K information from parts of other documents filed with the Securities and Exchange Commission ("SEC") is incorporated by reference. The SEC allows us to disclose important information by referring to it in this manner, and you should review this information.
We make our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and proxy statement for our annual shareholders' meeting, as well as any amendments to those reports filed pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, available free of charge through our web site as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Our SEC reports can be accessed through the "About; First Manitowoc Bancorp, Inc." link of our web site, namely www.bankfirstnational.com/bancorp. The SEC also maintains a web site at www.sec.gov that contains reports, proxy statements and other information regarding SEC registrants.
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, which includes on-line banking.
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, estate planning, and financial planning.
Insurance products, including commercial, personal, life, and health insurance, are offered through Insurance Center of Manitowoc, Inc.
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
From December 31, 2001 to December 31, 2002, deposits increased $22.0 million or 5.6% to $416.1 million. From December 31, 2000 to December 31, 2001, deposits decreased $0.5 million or 0.1% to $394.1 million.
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.
LENDING ACTIVITIES
The Bank has experienced growth in the number and dollar amount of loans as a result of relatively low interest rates and general marketing efforts. Loans sold and serviced for others are not included in these growth numbers. Loan portfolio growth from December 31, 2001 to December 31, 2002 was $16.7 million or 5.1%. In 2002, the amount of loans sold and serviced for others increased by $42.6 million compared to 2001. The loan portfolio reflected $0.9 million or 0.3% growth in 2001. In 2001, the Bank increased the amount of loans sold and serviced for others by $35.3 million. No material portion of the Bank's loans is concentrated within a single industry or group of related industries.
BANK SUBSIDIARY 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 51 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.
The Bank owns 100% of the outstanding common stock of the Insurance Center of Manitowoc, Inc., an independent agency offering commercial, personal, life and health insurance.
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.
EMPLOYEES
As of February 28, 2003, the Corporation employed 208 individuals, 83 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 is expected to continue for the foreseeable future.
SUPERVISION AND REGULATION
General. The Corporation and the Bank are extensively regulated under federal and state law. Generally, these laws and regulations are intended to protect depositors, not shareholders. 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 Corporation and the Bank.
Federal Bank Holding Company Regulation and Structure. The Corporation 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 Corporation 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 Corporation and its subsidiaries.
With certain limited exceptions, the Corporation 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 Corporation 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 bank 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 approval of the FRB, the Corporation 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 Corporation'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 Corporation, and may not require that a customer promise not to obtain other services from a competitor as a condition to an 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 Corporation'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 shareholders 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 Corporation, 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.
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. The Bank pays a quarterly deposit insurance premium assessment to the FDIC. The insurance premium assessment is based upon the FDIC's maintains risk-based assessment system by which institutions are assigned to one of three categories based on their capitalization and one of three subcategories based on examination ratings and other supervisory information. An institution's assessment rate depends on the "supervisory rating" it receives
from the FDIC ("A," "B," or "C") and on their regulatory capital level ("well capitalized," "adequately capitalized," or "undercapitalized"). Assessment rates for insured institutions are determined semiannually by the FDIC and currently range from zero basis points for the healthiest institutions to 27 basis points for the riskiest. The FDIC has authority to increase insurance assessments and is required under federal law to establish assessment rates that will maintain the insurance fund's ratio of reserves to insured deposits at $1.25 per $100. The Bank was classified as "well capitalized" at December 31, 2002.
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 4.0% and a ratio of total capital to risk-weighted assets of at least 8.0%. The appropriate regulatory authority may set higher capital requirements when particular circumstances warrant. As of December 31, 2002, the Bank's and the Corporation's ratio of Tier 1 to risk-weighted assets was 11.1% and 11.4%, respectively. As of December 31, 2002, the Bank's and the Corporation's ratio of total capital to risk-weighted assets was 12.0% and 12.3%, 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 average assets, referred to as the leverage capital ratio, of at least 4.0%. As of December 31, 2002, the Bank's and the Corporation's leverage capital ratio was 7.5% and 7.7%, respectively.
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. 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 Corporation.
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 Corporation.
Anti-Terrorism Act. On October 6, 2002 the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act (the "Patriot Act") was signed into law. While not primarily banking legislation, the Patriot Act contained provisions requiring financial institutions to adopt a variety of policies aimed at preventing money-laundering. The OCC is the primary regulator for purposes of insuring compliance by the Bank with Patriot Act requirements and certain of those requirements will not become effective until adoption of implementing regulations by the OCC. Management of the Bank does not believe that compliance with the Patriot Act and its implementing regulations will have a significant impact on the Bank's business.
ITEM 2
ITEM 2 PROPERTIES
The Corporation 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
2747 Manitowoc Road, Green Bay, Wisconsin 54311 ("Bellevue Branch Office").
The Bank leases real property at one branch location:
2865 South Ridge Road, Green Bay, Wisconsin, 54304 ("Ashwaubenon Branch Office").
Insurance Center of Manitowoc, Inc. owns real property located at:
4712 Expo Drive, Manitowoc, Wisconsin 54220 ("Insurance Center of Manitowoc, Inc. Office").
Insurance Center of Manitowoc, Inc. leases real property at:
425 South Adams Street, Green Bay, Wisconsin, 54301 ("Gary G. Vincent & Associates, Inc. Office").
There are no encumbrances on any of these properties.
ITEM 3
ITEM 3 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.
ITEM 4
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5
ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
MARKET INFORMATION
There is no established public trading market for the Corporation's Shares. Accordingly, there is no comprehensive record of trades or the prices of any such trades. The following tables reflect stock prices for Corporation Shares to the extent such information is made known and available to management of the Corporation, and the dividends declared with respect thereto during the preceding two years.
All market information shown above has been restated for stock dividends and stock splits.
CASH DIVIDENDS
All cash dividends shown above have been restated for stock dividends and stock splits.
HOLDERS
As of February 28, 2003 there were approximately 605 holders of record of the Corporation's Shares.
DIVIDENDS
The Corporation declared and paid cash dividends per share totaling $0.183 per share or $1,265,000 during fiscal 2002, and $0.150 per share or $1,041,000 during fiscal 2001. The Corporation currently expects that comparable cash dividends will continue in the future.
The holders of the Corporation's Shares will be entitled to dividends, when, as, and if declared by the Corporation's Board of Directors, subject to the restrictions imposed by Wisconsin law. The only statutory limitation applicable to the Corporation is that dividends may not be paid if the Corporation is insolvent or if the dividend would cause the Corporation to become insolvent. There are no contractual restrictions that
currently limit the Corporation's ability to pay dividends or that the Corporation reasonably believes are likely to limit materially the future payment of dividends on the Corporation's Shares. Currently, its only source of income is from the dividends paid by the Bank to the Corporation. Therefore, the dividend restrictions applicable to national banks will impact the Corporation'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.
ITEM 6
ITEM 6 SELECTED FINANCIAL DATA IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
The following selected financial data should be read in conjunction with the Corporation's Consolidated Financial Statements and the related notes and with the Corporation's Management's Discussion and Analysis of Financial Condition and Results of Operations, provided elsewhere herein.
- ------------------------- * Per share data for 1998 through 2002 is restated to reflect the 25% stock dividend (five-for-four stock split) effective April 16, 1999, and the two-for-one stock splits effective June 30, 2000 and October 18, 2002.
SUMMARY QUARTERLY FINANCIAL INFORMATION
- ------------------------- * Per share data has been adjusted to reflect the two-for-one stock split effective October 18, 2002.
FORWARD-LOOKING STATEMENTS
The discussions in this Report on Form 10-K and the documents incorporated herein by reference which are not statements of historical fact (including statements in the future tense and those which include terms such as "believe," "will," "expect," and "anticipate") contain forward-looking statements that involve risks and uncertainties. The Corporation's actual future results could materially differ from those discussed. Factors that might cause actual results to differ from the results discussed in forward-looking statements include, but are not limited to:
- General economic conditions, either nationally or the state in which the Corporation does business;
- Legislation or regulatory changes which adversely affect the businesses in which the Corporation is engaged;
- Changes in the interest rate environment which increase or decrease interest rate margins;
- Changes in securities markets with respect to the market value of financial assets and the level of volatility in certain markets such as foreign exchange;
- Significant increases in competition in the banking and financial services industry resulting from industry consolidation, regulatory changes and other factors, as well as actions taken by particular competitors;
- Changes in consumer spending, borrowing and savings habits;
- Technological changes;
- Acquisitions and unanticipated occurrences which delay or reduce the expected benefits of acquisitions;
- The Corporation's ability to increase market share and control expenses;
- The effect of compliance with legislation or regulatory changes;
- The effect of changes in accounting policies and practices;
- The costs and effects of unanticipated litigation and of unexpected or adverse outcomes in such litigation; and
- The factors discussed in Item 1 in this report and in the Management's Discussion and Analysis in Item 7, as well as those discussed elsewhere in this report and the documents incorporated herein by reference.
All forward-looking statements contained in this report are based upon information presently available and the Corporation assumes no obligation to update any forward-looking statements.
ITEM 7
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Balance Sheet Analysis
December 31, 2002 compared to December 31, 2001
For the twelve-month periods ended December 31, 2001 and December 31, 2002, total assets increased $38.5 million or 7.3%. Investment securities increased $9.0 million, while net loans increased $16.0 million. Total deposits increased $22.0 million.
Liquidity Management
Liquidity management describes the ability of the Bank to access funding sources at a minimum cost to meet fluctuating deposit, withdrawal, and loan demand needs 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 interest earning assets. A substantial portion of the investment portfolio contains readily marketable securities that could be converted to cash immediately. Refer to Note 3 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 that will have a material impact on the Bank's ability to maintain liquidity at satisfactory levels.
Capital Resources and Adequacy
Total shareholders' equity increased $7.8 million or 16.8% in 2002 to $54.3 million at the end of the year from $46.5 million at December 31, 2001. Net income of $7.1 million and an increase of $2.0 million in accumulated other comprehensive income less $1.3 million dividends paid primarily contributed to this increase.
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 4.0%. The Bank's leverage ratio for the years ended December 31, 2002, 2001, and 2000 was 7.5%, 6.8%, and 6.8%, 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 8.0%. The Bank's ratio at December 31, 2002, and for each of the two preceding years was 12.0%, 11.3%, and 10.7%, respectively. According to FDIC capital guidelines, the Bank is considered to be "well capitalized" as of December 31, 2002.
Management knows of no other trend or event which will have a material impact on capital. Please also refer to Note 15 in the 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 Corporation and should be read in conjunction with the Consolidated Financial Statements and Notes.
Results of Operations Overview for fiscal years 2002, 2001 and 2000
The Corporation reported $7,089,000 in net income for 2002 or $1.02 per share compared to 2001 net income of $5,405,000 or $0.78 per share, and $5,301,000 or $0.77 per share for 2000. Earnings for the year represent a record level of performance for the Corporation, exceeding the previous record of $5,405,000 achieved in 2001. The improvement was primarily attributed to growth in net interest income and other operating income, the Corporation's major income components. Return on average assets was 1.33%, 1.07% and 1.12% in 2002, 2001 and 2000, respectively. Return on average equity was 13.97% for 2002, 12.07% for 2001, and 14.15% for 2000.
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. Interest rates fell during 2002 and 2001. Because deposits, loans and 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 both 2002 and 2001.
Net interest income (on a tax equivalent basis) for 2002 increased by $1,132,000 or 5.8% compared to the year ended December 31, 2001, while 2001 net interest income increased by $1,668,000 or 9.3% from the previous year ended December 31, 2000. The smaller rate of increase for 2002 is the result of the relatively small increase in loans and a significant decrease in interest rates during 2002. 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, 2002, 2001 and 2000 was 3.76%, 3.55%, and 3.51%, 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 2002, the net interest margin was 4.20% compared to 4.21% in 2001. The net interest margin for 2000 was 4.21%. 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.
Tables 1 and 2 do not include financial data for the Corporation 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
RATE AND VOLUME VARIANCE ANALYSIS BASED ON AVERAGE BALANCES
TABLE 2
Provision and Allowance for Loan Losses
For the year ended December 31, 2002, the Bank recorded net charge-offs of $1,303,000 compared to net charge-offs of $4,087,000 in 2001 and $941,000 in 2000. The large increase in net charge-offs in 2001 is primarily the result of one commercial loan charge-off in the amount of $2,073,000. 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 $1,578,000 in 2002, $4,134,000 in 2001, and $996,000 in 2000, 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 $275,000 in 2002, $47,000 in 2001, and $55,000 in 2000.
The allowance for loan losses is maintained at a level believed adequate by management to absorb estimated loan losses. 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 nonaccruals, 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.
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 current problem credits factor includes the exposure believed to exist for specifically identified problem loans determined on a loan-by-loan basis.
The allowance for loan losses of $3,384,000 as of December 31, 2002 amounted to 0.98% of the outstanding loan portfolio. As of December 31, 2001, the $2,737,000 allowance for loan losses was 0.84% of gross loans, and the allowance for loan losses of $3,824,000 as of December 31, 2000 represented 1.17% of gross loans. Analysis by internal loan review supports the adequacy of the allowance. Management has determined that the allowance for loan losses is adequate to absorb probable loan losses as of December 31, 2002. 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
Specific problem loans include the allocation of the allowance for specific problem credits. 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 tied 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.
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
TABLE 4
The increase in the allowance for loan losses from $2,737,000 at December 31, 2001 to $3,384,000 at December 31, 2002 is primarily due to an increase in the provision for loan losses because of slow economic activity and higher current problem loans. The higher than normal recoveries of loans previously charged off also is a factor in the increased allowance for loan losses. Management's analysis of the allowance for loan losses at December 31, 2002 indicates that the balance is adequate.
Other Income
Other income increased $1,241,000, or 23.2%, from 2001 to 2002. The growth resulted primarily from an increase in Trust service fees, an increase in loan servicing income, and increases in gain on sales of mortgage loans held for sale. Increases in gain on sales of mortgage loans resulted from the lower interest rate environment that increased loan demand and related fee income.
Other income increased $2,633,000, or 97.1%, from 2000 to 2001. The growth resulted primarily from $1,497,000 of insurance commission income from the Insurance Center acquisition, an increase in loan servicing income, and increases in gain on sales of mortgage loans held for sale.
Other Expense
Other expense increased by $1,087,000, or 8.1%, from 2001 to 2002. This change was primarily a result of increases in salaries and employee benefits due to annual merit increases for employees. Other accounts with significantly higher expenses included data processing, occupancy expense, insurance commissions, software amortization, legal and professional fees, marketing, and telephone expenses.
Other expenses increased by $2,027,000, or 17.7%, from 2000 to 2001. This change was primarily a result of increases in salaries and employee benefits due to additional salaries, commissions, and related benefits for
employees acquired in the Insurance Center acquisition, and annual merit increases for employees. Occupancy expense increased due to offices obtained in the Insurance Center acquisition. Amortization of goodwill increased as a result of the Insurance Center acquisition.
Income Taxes
The effective tax rates for the Corporation were 20.58%, 14.59%, and 14.53%, for 2002, 2001, and 2000 respectively. The effective tax rate remained consistent from 2000 to 2001. The increase in the effective tax rate for 2002 is a result of higher taxable income in 2002. The primary reason for higher taxable income is that the percent of non-taxable municipal interest income is much less as a percent of total income than in past years dropping from 17% of pretax net income in 2001 to 11% in 2002. See Note 13 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.
Total securities amounted to $135.7 million and $126.8 million as of December 31, 2002 and 2001, respectively. The higher level of investments in securities resulted primarily from the increase in available funds derived from increases in deposits and securities sold under repurchase agreements.
The Bank manages its investment portfolios within policies that 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 shareholders' equity. Table 5 exhibits the distribution, by type, of the investment portfolio as of December 31.
SECURITIES AVAILABLE FOR SALE
TABLE 5
The following table presents the maturity by type of the investment portfolio for the year ended December 31, 2002.
INVESTMENT PORTFOLIO ANALYSIS
TABLE 6
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 Federal National Mortgage Association (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 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 be 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.
The risks associated with the Bank's loan categories are as follows:
Commercial and Agricultural. Credit risk is considered moderate. Past due loans are below industry averages. The portfolio is fairly diversified with no significant concentrations within one industry. Agricultural loans represent 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 moderate, 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, 2002 was $8,472,000.
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-term farm personal property loans and long-term agricultural real estate loans. Agricultural real estate loans generally are written for one to two year terms with amortizations 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 Small Business Administration (SBA).
The increase in commercial loans and 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.
Table 7 "Summary of Loan Portfolio" presents the composition of the Bank's loan portfolio by significant concentration.
SUMMARY OF LOAN PORTFOLIO
TABLE 7
MATURITIES OF LOAN PORTFOLIO
TABLE 8
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 or is subject. The Bank had no foreign loans in its portfolio as of December 31, 2002.
It is the policy of the Bank to place a loan on 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 nonaccrual loan is restored to current status when the prospects of future contractual payments are no longer in doubt. Nonaccrual loans at December 31, 2002 and 2001 were $1,801,000 and $2,312,000, 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, no trend in economic, industrial, geographical or other factors could be identified to account for the fluctuations 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
Total nonperforming loans at December 31, 2002 were $1,803,000, a decrease of $1,038,000 from $2,841,000 at December 31, 2001.
Management maintains a listing of potential problem loans. 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. 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 $22.0 million from $394.1 million at December 31, 2001 to $416.1 million at December 31, 2002. The Bank continues to experience strong competition from other commercial banks, credit unions, the stock market and mutual funds. There are no predetermined divisions in the asset/liability policy for the mix of deposits. Table 1 displays the average balances and average rates paid on all major deposits classifications for 2002, 2001 and 2000.
The following table represents maturities of time deposits in denominations of $100,000 or more for the years ended December 31, 2002 and 2001.
MATURITY OF TIME DEPOSITS $100,000 OR MORE
TABLE 10
Borrowings
FHLB advances decreased from $45.0 million at December 31, 2001 to $35.0 million at December 31, 2002, a decrease of $10.0 million or 22.2%. 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. Promissory notes to former shareholders of the Insurance Center at 9% maturing July 1, 2008 totaled $405,000 at December 31, 2002, and promissory notes to former shareholders of the Insurance Center at prime plus 1% were $733,000 at December 31, 2002. These promissory notes decreased by $788,000 or 40.9% from December 31, 2001 to December 31, 2002.
ITEM 7A
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Corporation's primary exposure to market risk relates to changes in interest rates, exchange rates, commodity prices, and other relevant market rate or price risk through our banking operations. 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 year terms 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 20% prepayment assumption for the entire loan portfolio based on historical trends. 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
TABLE 11
- ------------------------- (V) Variable repricing terms (F) Fixed repricing terms
ITEM 8
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEPENDENT AUDITOR'S REPORT
Board of Directors and Shareholders First Manitowoc Bancorp, Inc. Manitowoc, Wisconsin
We have audited the accompanying consolidated balance sheets of First Manitowoc Bancorp, Inc. and Subsidiaries as of December 31, 2002 and 2001, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2002. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. 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 at December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States.
Wipfli Ullrich Bertelson LLP January 31, 2003 Green Bay, Wisconsin
FIRST MANITOWOC BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2002 AND 2001
See accompanying notes to consolidated financial statements.
FIRST MANITOWOC BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000
See accompanying notes to consolidated financial statements.
FIRST MANITOWOC BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000
See accompanying notes to consolidated financial statements.
FIRST MANITOWOC BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
See accompanying notes to consolidated financial statements.
FIRST MANITOWOC BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of First Manitowoc Bancorp, Inc. and Subsidiaries (the "Corporation") conform to generally accepted accounting principles and general practices within the financial institution industry. Significant accounting and reporting policies are summarized below.
Principles of Consolidation -- The accompanying consolidated financial statements include the accounts of First Manitowoc Bancorp, Inc., its wholly owned subsidiary, First National Bank in Manitowoc (the "Bank"), and the Bank's wholly owned subsidiaries, FNBM Investment Corp. and Insurance Center of Manitowoc, Inc. (the "Insurance Center"). All significant intercompany balances and transactions have been eliminated. Investment in the Bank's 49.8% owned subsidiary is accounted for on the equity method.
On January 1, 2001, the Bank acquired 100% ownership in the Insurance Center. The Insurance Center includes Gary Vincent and Associates in Green Bay, Wisconsin. The Insurance Center is an independent agency offering commercial, personal, life, and health insurance. It is being operated as a wholly owned subsidiary of the Bank. The Insurance Center had approximately $563,000 in assets at date of acquisition. The transaction was accounted for under the purchase method of accounting and goodwill of approximately $2.6 million was recorded.
The Corporation's consolidated financial statements reflect the accounts and operations of the Insurance Center beginning January 1, 2001. The Corporation recorded all Insurance Center assets and liabilities at fair value at date of acquisition.
Business -- The Corporation provides a full range of financial services to individual and corporate customers in Northeastern Wisconsin through First National Bank in Manitowoc. The Corporation is subject to competition from other traditional and nontraditional financial institutions and is also subject to the regulations of certain federal agencies and undergoes periodic examinations by those regulatory authorities.
Use of Estimates in Preparation of Financial Statements -- The preparation of the accompanying consolidated financial statements of First Manitowoc Bancorp, Inc. and Subsidiaries in conformity with generally accepted accounting principles requires management to make estimates and assumptions that directly affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results may differ from those estimates.
Cash and Cash Equivalents -- For purposes of reporting cash flows, cash and cash equivalents include cash on hand, due from banks, interest-bearing deposits, and federal funds sold. Generally, federal funds are purchased and sold for one-day periods.
The Bank is required to maintain non-interest-bearing deposits on hand or with the Federal Reserve Bank. At December 31, 2002, those required reserves of $1,216,000 were satisfied by currency and coin holdings.
In the normal course of business, the Bank maintains cash and due from bank balances with correspondent banks. Accounts at each institution are insured by the Federal Deposit Insurance Corporation up to $100,000. Total uninsured balances at December 31, 2002, were approximately $1,944,000.
Investment Securities -- The Company's securities are classified and accounted for as securities available for sale. Available-for-sale securities are stated at fair value with the unrealized gains and losses, net of tax, reported as accumulated other comprehensive income (loss) within shareholders' equity until realized. Interest and dividends are included in interest income from securities as earned. Premiums are recognized in interest income using the interest method over the period to the call date. Discounts are recognized in interest income using the interest method over the period to maturity. Realized gains and losses and declines in value
judged to be other than temporary are included in net gains and losses from sales of investment and mortgage-related securities. The cost of securities sold is based on the specific-identification method.
Fair values of many securities are estimates based on financial methods or prices paid for similar securities. It is possible interest rates could change considerably resulting in a material change in the estimated fair value.
Other Investments -- Other investments are carried at cost and consist of Federal Home Loan Bank stock, Federal Reserve stock, Bankers Bancorporation stock, and preferred stock in a community development project. Other investments are evaluated for impairment on an annual basis.
Loans Held for Sale -- Loans held for sale consist of the current origination of certain fixed-rate mortgage loans which are recorded at the lower of aggregate cost or fair value. A gain or loss is recognized at the time of the sale reflecting the present value of the difference between the contractual interest rate of the loans sold and the yield to the investor, adjusted for the initial value of mortgage servicing rights.
Loans and Related Interest Income -- 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.
Interest on loans is accrued and credited to income as earned. Accrual of interest is generally discontinued either when reasonable doubt exists as to the full, timely collection of interest or principal or generally when a loan becomes contractually past due by 90 days or more with respect to interest or principal. At that time, any accrued but uncollected interest is reversed and additional income is recorded only to the extent that payments are received and the collection of principal is reasonably assured. Loans are restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time, and the ultimate collectibility of the total contractual principal and interest is reasonably assured.
Loan Fees and Related Costs -- Loan-origination fees are credited to income when received and the related loan-origination costs are expensed as incurred. Capitalization of the fees net of the related costs would not have a material effect on the consolidated financial statements.
Allowance for Loan Losses -- The allowance for loan losses is provided for based on past experience and prevailing market conditions. Management's evaluation of loss considers various factors including, but not limited to, general economic conditions, loan portfolio composition, and prior loss experience. This evaluation is inherently subjective since it requires material estimates that may be susceptible to significant change. Loans are charged against the allowance for loan losses when management believes the collectibility of the principal is unlikely. In addition, various regulatory agencies periodically review the allowance for loan losses. These agencies may require additions to the allowance for loan losses based on their judgments of collectibility.
The Corporation considers loans secured by one- to four-unit residential properties and all consumer loans to be large groups of smaller-balance homogenous loans. These loans are collectively evaluated in the analysis of the adequacy of the allowance for loan losses.
The Corporation's commercial portfolio is subject to a loan-by-loan analysis of the adequacy of the allowance for loan losses and impairment. These loans are considered impaired when, based on current information, it is probable the Corporation will not collect all amounts due in accordance with the contractual terms of the loan agreement. The value of impaired loans is based on discounted cash flows of expected future payments using the loan's internal effective interest rate or the fair value of the collateral if the loan is collateral dependent. Interest income on impaired loans is recorded when cash is received and only if principal is considered to be fully collectible.
In management's judgment, the allowance for loan losses is adequate to cover probable losses relating to specifically identified loans, as well as probable losses inherent in the balance of the loan portfolio.
Mortgage Servicing Rights -- The Corporation recognizes mortgage-servicing rights on loans that are originated and subsequently sold or securitized and servicing is retained. A portion of the cost of the loans is required to be allocated to the servicing rights based on the relative fair values of the loans and the servicing rights. The Corporation amortizes these mortgage servicing rights over the period of estimated net servicing revenue. Impairment of mortgage servicing rights is assessed based on the fair value of those rights. Fair values are estimated using discounted cash flows based on a current market interest rate.
Premises and Equipment -- Premises and equipment are stated at cost. Maintenance and repair costs are charged to expense as incurred. Gains or losses on disposition of premises and equipment are reflected in income. Depreciation is computed on the straight-line method and is based on the estimated useful lives of the assets.
Foreclosed Properties -- Foreclosed properties acquired by the Corporation 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.
Intangible Assets and Goodwill -- Intangible assets consist of the value of core deposits purchased as part of the bank acquisitions, servicing assets, and trade name and customer base intangibles acquired in the acquisition of the Insurance Center. Intangible assets are stated at cost less accumulated amortization and are amortized over a period of one to ten years. Intangible assets that have finite useful lives are amortized using a straight-line method over their useful lives. Intangible assets that have indefinite useful lives are not amortized but are tested at least annually for impairment. Intangible assets are considered impaired if the fair value of the intangible asset is lower than cost. The Corporation reviews intangible assets for impairment whenever events or changes in circumstances indicate 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.
The excess of cost over the assets acquired (goodwill) was amortized using the straight-line method over periods of 15 to 20 years. Amortization of goodwill ceased on January 1, 2002, in accordance with the change in accounting discussed below. The Corporation tested goodwill for impairment during the fourth quarter and determined that there was no impairment during 2002. No amortization or impairment expense was recognized in 2002.
Income Taxes -- The Corporation files one consolidated federal income tax return. Federal income tax expense (credit) is allocated to each subsidiary based on an intercompany tax sharing agreement. The subsidiaries file separate state tax returns as applicable.
Deferred income taxes have been provided under the liability method. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities as measured by the current enacted tax rates which will be in effect when these differences are expected to reverse. Deferred tax expense (benefit) is the result of changes in the deferred tax asset and liability.
Advertising Costs -- Advertising costs are expensed as incurred.
Comprehensive Income -- Comprehensive income consists of net income and other comprehensive income. Other comprehensive income includes unrealized gains and losses on securities available for sale, net of tax, which are recognized as a separate component of equity, accumulated other comprehensive income (loss).
Per Share Computations -- All per share financial information and equity accounts have been adjusted to reflect the 2-for-1 stock splits declared in October 2002 and June 2000. Weighted average shares outstanding were 6,937,268 for the years ended December 31, 2002, 2001, and 2000.
Reclassifications -- Certain reclassifications have been made to the 2001 and 2000 consolidated financial statements to conform to the 2002 classifications.
NOTE 2 CHANGES IN ACCOUNTING PRINCIPLES
Effective January 1, 2002, the Corporation adopted Statement of Financial Accounting Standards (SFAS) No. 147, "Acquisitions of Certain Financial Institutions." Except for transactions between two or more mutual enterprises, this statement removes acquisitions of financial institutions from the scope of both SFAS No. 72, "Accounting for Certain Acquisitions of Banking or Thrift Institutions," and the Financial Accounting Standards Board (FASB) Interpretation No. 9, "Applying APB Opinions No. 16 and 17 When a Savings and Loan Association or a Similar Institution Is Acquired in a Business Combination Accounted for by the Purchase Method," and requires that those transactions be accounted for in accordance with SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets."
SFAS No. 141 supersedes Accounting Principles Board (APB) Opinion No. 16, "Business Combinations," and SFAS No. 38, "Accounting for Preacquisition Contingencies of Purchased Enterprises." SFAS No. 141 requires the use of the purchase method of accounting for business combinations initiated after June 30, 2001.
SFAS No. 142 supersedes APB Opinion No. 17, "Intangible Assets." SFAS No. 142 addresses how intangible assets acquired outside of a business combination should be initially recognized. SFAS No. 142 eliminates the amortization for goodwill and other intangible assets with indefinite lives. Other intangible assets with a finite life will be amortized over their useful life. Goodwill and other intangible assets with indefinite useful lives shall be tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset may be impaired.
SFAS No. 147 also amends SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," to include in its scope long-term customer-relationship intangible assets of financial institutions, such as depositor- and borrower-relationship intangible assets and credit cardholder intangible assets. Consequently, those intangible assets are subject to the same undiscounted cash flow recoverability test and impairment loss recognition and measurement provision that SFAS No. 144 requires for other long-lived assets that are held and used.
The effect of the adoption of SFAS No. 142 is detailed in Note 9.
NOTE 3 SECURITIES AVAILABLE FOR SALE
The amortized cost and estimated fair value of securities available for sale are as follows:
The amortized cost and estimated fair value of securities at December 31, 2002, 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.
There were no sales of securities in 2002, 2001, or 2000.
The amortized cost and estimated fair value of investment securities available for sale pledged to secure public deposits, securities sold under repurchase agreements, FHLB advances, and for other purposes required by law were $68,821,000 and $70,368,000, respectively, as of December 31, 2002.
NOTE 4 LOANS
The composition of loans at December 31 follows:
An analysis of the allowance for loan losses for the years ended December 31 follows:
The aggregate amount of nonperforming loans was approximately $1,803,000 and $2,824,000 at December 31, 2002 and 2001, respectively. Nonperforming loans are those which are contractually past due 90 days or more as to interest or principal payments, on nonaccrual of interest status, or loans the terms of which have been renegotiated to provide a reduction or deferral of interest or principal. If nonperforming loans had been current, approximately $234,000, $322,000, and $297,000 of interest income would have been recorded for the years ended December 31, 2002, 2001, and 2000, respectively. Interest income on nonperforming loans of $54,000, $155,000, and $101,000 was recognized for cash payments received in 2002, 2001, and 2000, respectively.
Information regarding impaired loans as of December 31 follows:
The Bank, in the ordinary course of banking business, grants loans to the Corporation's executive officers and directors, including their immediate families and affiliated companies in which they are principal owners. Substantially all loans to officers, directors, and shareholders owning 5% or more of the Corporation were made on the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with others and did not involve more than the normal risk of collectibility or present other unfavorable features.
Activity in such loans during 2002 is summarized below (in thousands):
NOTE 5 LOAN SERVICING
Mortgage loans of $151,963,000 and $109,406,000 as of December 31, 2002 and 2001, respectively, were serviced for others. These loans are not included in the accompanying consolidated balance sheets. Mortgage servicing rights are capitalized when the serviced loans are sold. This asset is amortized over the estimated period that servicing income is recognized. The following is an analysis of changes in mortgage servicing rights:
No impairment of mortgage servicing rights existed at December 31, 2002 or 2001; therefore, no valuation allowance was recorded.
The carrying value of the mortgage servicing rights is included with intangible assets and approximates fair market value at December 31, 2002 and 2001. The fair value of mortgage servicing rights was determined using the present value of future cash flows method.
NOTE 6 PREMISES AND EQUIPMENT
Premises and equipment at December 31 consist of the following:
Depreciation and amortization expense was $946,000, $870,000, and $789,000 for the years ended December 31, 2002, 2001, and 2000, respectively.
NOTE 7 INVESTMENT IN CORPORATION
The Bank owns 49.8% of the stock of a corporation ("venture") whose business is developing and providing data processing services to the Bank and other financial institutions. The venture has total assets of $3,986,000 and liabilities of $534,000. The Bank's earnings from its investment in the venture were approximately $378,000, $282,000, and $247,000 for the years ended December 31, 2002, 2001, and 2000, respectively. Data processing service fees paid by the Bank to the venture were approximately $843,000, $824,000, and $812,000 for the years ended December 31, 2002, 2001, and 2000, respectively.
The Bank has a long-term cancelable contract with the venture that extends through December 2004. At that time, the contract is automatically renewed for a period of one year. The Bank has the option to terminate the contract at any time, but would incur a termination penalty of approximately $880,000 at December 31, 2002. The termination penalty is calculated using the greater of 50% of the total estimated remaining unpaid monthly processing fees or six times the average monthly fee 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.
NOTE 8 INTANGIBLE ASSETS
Intangible assets consist of the following at December 31:
Amortization expense for intangible assets, excluding mortgage servicing rights, was $303,000 in 2002, $223,000 in 2001, and $151,000 in 2000.
The following table shows the estimated future amortization expense for amortizing intangible assets. The projections of amortization expense are based on existing asset balances as of December 31, 2002.
NOTE 9 GOODWILL
The changes in the carrying amount of goodwill for the years ended December 31 are as follows:
The following table illustrates the effect amortization of goodwill had on net income previous to the adoption of Statement of Financial Accounting Standards No. 142 for the years ended December 31:
NOTE 10 DEPOSITS
The distribution of deposits at December 31 is as follows:
Time deposits of $100,000 or more were approximately $45,269,000 and $39,205,000 at December 31, 2002 and 2001, respectively. Interest expense on time deposits of $100,000 or more was approximately $1,505,000, $1,978,000, and $1,614,000 for the years ended December 31, 2002, 2001, and 2000, respectively.
At December 31, 2002, the scheduled maturities of time deposits are as follows (in thousands):
NOTE 11 SECURITIES SOLD UNDER REPURCHASE AGREEMENTS
Securities sold under agreements to repurchase have contractual maturities up to one year from the transaction date with variable and fixed-rate terms. The agreements to repurchase securities require that the Corporation (seller) repurchase identical securities as those that are sold. The securities underlying the agreements were under the Corporation's control.
Information concerning securities sold under agreements to repurchase consist of the following:
Securities sold under agreements to repurchase with the Corporation's executive officers, directors, and affiliated companies in which they are principal owners were $2,890,000 and $1,840,000 at December 31, 2002 and 2001, respectively.
NOTE 12 BORROWED FUNDS
Borrowed funds are summarized as follows at December 31:
The Corporation is a Treasury, Tax & Loan (TT&L) depository for the Federal Reserve Bank (FRB) and, as such, it accepts TT&L deposits. The Corporation is allowed to borrow these funds until they are called. The average rate paid on the treasury, tax, and loan account was 1.46% in 2002, 3.70% in 2001, and 6.15% in 2000. U.S. Agency Securities with a face value greater than or equal to the amount borrowed are pledged as a condition of borrowing TT&L deposits.
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 FHLB. Total loans pledged as collateral were approximately $106,018,000 and $113,804,000 at December 31, 2002 and 2001, respectively. The FHLB advances are also collateralized by $2,435,100 and $2,312,800 of FHLB stock owned by the Corporation and included in other investments at December 31, 2002 and 2001, respectively. This stock is recorded at cost, which approximates fair value. Transfer of the stock is substantially restricted.
Scheduled maturities of borrowed funds outstanding at December 31, 2002, are as follows (in thousands):
NOTE 13 INCOME TAXES
The provision for income taxes consists of the following:
A summary of the source of differences between income taxes at the federal statutory rate and the provision for income taxes for the years ended December 31 follows:
Deferred income taxes are provided for the temporary differences between the financial reporting basis and the tax basis of the Corporation's assets and liabilities. The major components of net deferred tax assets at December 31 are as follows:
The Bank has state net operating loss carryforwards of approximately $5,218,000. The Bank's net operating losses begin to expire in 2014. The Corporation's alternative minimum tax credit carryovers have no expiration date.
Effective January 1, 2002, the Corporation merged its defined contribution money purchase plan into its defined contribution profit sharing 401(k) plan. The plan is available to all employees after completion of six months of service. Employees participating in the plan may elect to defer a minimum of 2% of compensation up to the limits specified by law. The Corporation may make discretionary contributions up to the limits established by IRS regulations. The discretionary match was 35% of participant tax deferred contributions up to 10% in 2002, 2001, and 2000. The Corporation made additional discretionary contributions to the plan of $323,000, $283,000, and $240,000 in 2002, 2001, and 2000, respectively. All discretionary contributions are at the direction of the Board of Directors. Total expense associated with the plans was approximately $487,000, $411,000, and $364,000 in 2002, 2001, and 2000, respectively.
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 termination of employment with the Corporation. The agreement requires an annual payment of $80,600 over 15 years. Related expense for this agreement was approximately $107,000, $108,000, and $107,000 for the years ended December 31, 2002, 2001, and 2000, respectively. Included in other liabilities is the vested present value of future payments of approximately $536,000 and $429,000 at December 31, 2002 and 2001, respectively.
The Corporation has a nonqualified 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 resignation from the Board of the Corporation. Included in other liabilities is the estimated present value of future payments of approximately $1,443,000 and $1,254,000 at December 31, 2002 and 2001, respectively. Expense associated with this plan was approximately $200,000, $188,000, and $171,000 in 2002, 2001, and 2000, respectively.
NOTE 15 SHAREHOLDERS' EQUITY
The Corporation is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory -- and possibly additional discretionary -- actions by regulators that, if undertaken, could have a direct material effect on the Corporation's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation must meet specific capital guidelines that involve quantitative measures of the Corporation's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Corporation'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 Corporation 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, 2002, that the Corporation meets all capital adequacy requirements to which it is subject.
As of December 31, 2002, the most recent notification from the regulatory agencies categorized the Bank as well capitalized 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 Bank's category.
The Corporation's and Bank's actual and regulatory capital amounts and ratios are as follows:
At December 31, 2002, the Bank could have paid approximately $16,147,000 of additional dividends to the Corporation without prior regulatory approval. The payment of dividends is restricted by certain statutory and regulatory limitations and may be further limited because of the need for the Bank to maintain capital ratios satisfactory to applicable regulatory agencies.
NOTE 16 ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Comprehensive income is shown in the consolidated statements of shareholders' equity. The Corporation's accumulated other comprehensive income (loss) is comprised of the unrealized gain or loss on securities available for sale. The following shows the activity in accumulated other comprehensive income (loss):
NOTE 17 SEGMENT INFORMATION
First Manitowoc Bancorp, Inc., through a branch network of its subsidiary, First National Bank in Manitowoc, provides a full range of consumer and commercial financial institution services to individuals and businesses in Northeastern Wisconsin. These services include demand, time, and savings deposits; ATM processing; insurance services; and trust services.
While the Corporation's chief decision-makers monitor the revenue streams of various Corporation products and services, operations are managed and financial performance is evaluated on a Corporationwide basis. Accordingly, all of the Corporation's financial institution operations are considered by management to be aggregated in one reportable operating segment.
NOTE 18 COMMITMENTS AND CONTINGENCIES
The Corporation is party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments consist of commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. The contract amounts reflect the extent of involvement the Corporation has in the particular class of financial instrument. The Corporation's maximum exposure to credit loss for commitments to extend credit is represented by the contract amount of those instruments.
Off-balance-sheet financial instruments whose contract amounts represent credit and/or interest rate risk at December 31 are as follows:
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.
NOTE 19 FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value estimates, methods, and assumptions for the Corporation's financial instruments are summarized below.
Cash and Cash Equivalents -- The carrying values approximate the fair values for these assets.
Securities Available for Sale -- Fair values are based on quoted market prices where available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.
Other Investments -- The carrying amount reported in the consolidated balance sheets for other investments approximates the fair value of these assets.
Loans and Loans Held for Sale -- For certain homogeneous categories of loans, such as fixed-rate residential mortgages, fair value is estimated using the quoted market prices for securities backed by similar
loans, adjusted for differences in loan characteristics. The fair value of other types of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings.
The methodology in determining fair value of nonaccrual loans is to average them into the blended interest rate at 0% interest. This has the effect of decreasing the carrying amount below the risk-free rate amount and therefore discounts the estimated fair value.
Impaired loans are measured at the estimated fair value of the expected future cash flows at the loan's effective interest rate or the fair value of the collateral for loans which are collateral dependent. Therefore, the carrying values of impaired loans approximate the estimated fair values for these assets.
Mortgage Servicing Rights -- Fair values were determined using the present value of future cash flow method. Carrying value approximates fair value.
Deposits -- The fair value of deposits with no stated maturity, such as passbooks, negotiable order of withdrawal accounts, and variable rate insured money market accounts, is the amount payable on demand on the reporting date. The fair value of fixed-rate, fixed-maturity certificate accounts is estimated using discounted cash flows with discount rates at interest rates currently offered for deposits of similar remaining maturities.
Securities Sold Under Repurchase Agreements -- The fair value of securities sold under repurchase agreements with variable rates or due on demand is the amount payable at the reporting date. The fair value of securities sold under repurchase agreements with fixed terms is estimated using discounted cash flows with discount rates at interest rates currently offered for securities sold under repurchase agreements of similar remaining maturities.
Borrowed Funds -- Rates currently available to the Corporation for debt with similar terms and remaining maturities are used to estimate fair value of existing debt. The fair value of borrowed funds due on demand is the amount payable at the reporting date. The fair value of borrowed funds with fixed terms is estimated using discounted cash flows with discount rates at interest rates currently offered by lenders for similar remaining maturities.
Accrued Interest -- The carrying amount of accrued interest approximates its fair value.
Off-Balance-Sheet Instruments -- The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements, the current interest rates, and the present creditworthiness of the counterparties. Since this amount is immaterial, no amounts for fair value are presented.
The carrying amount and estimated fair value of financial instruments at December 31 were as follows:
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 Corporation's entire holdings of a particular instrument. Because no market exists for a significant portion of the Corporation'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 that could affect the estimates. Fair value estimates are based on existing on- and off-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. Deposits with no stated maturities are defined as having a fair value equivalent to the amount payable on demand. This prohibits adjusting fair value derived from retaining those deposits for an expected future period of time. This component, commonly referred to as a deposit base intangible, is neither considered in the above amounts nor is it recorded as an intangible asset on the consolidated balance sheets. Significant assets and liabilities that are not considered financial assets and liabilities include premises and equipment. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.
NOTE 20 CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS
BALANCE SHEETS
STATEMENTS OF INCOME
STATEMENTS OF CASH FLOWS
ITEM 9
ITEM 9 CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 401 of Regulation S-K is included in the Corporation's definitive Proxy Statement, prepared for the 2003 Annual Meeting of Shareholders, under the caption "Election of Directors," and the information concerning executive officers of the registrant, under the caption "Executive Officers Who Are Not Directors," which is incorporated herein by reference. The information required by Item 405 of Regulation S-K concerning compliance with Section 16(a) of the Exchange Act is included in the Corporation's definitive Proxy Statement, prepared for the 2003 Annual Meeting of Shareholders, under the caption "Section 16(a) Beneficial Ownership Reporting Compliance," which is incorporated herein by reference.
ITEM 11
ITEM 11 EXECUTIVE COMPENSATION
The information required by this item is included under the heading "Compensation of Executive Officers and Directors" in the Corporation's definitive Proxy Statement, prepared for the 2003 Annual Meeting of Shareholders, which is incorporated herein by reference.
ITEM 12
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDERS MATTERS
The information required by this item is included under the heading "Security Ownership of Certain Beneficial Owners and Management" in the Corporation's definitive Proxy Statement, prepared for the 2003 Annual Meeting of Shareholders, which is incorporated herein by reference.
ITEM 13
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is included under the heading "Indebtedness of Management and Certain Transactions" in the Corporation's definitive Proxy Statement, prepared for the 2003 Annual Meeting of Shareholders, which is incorporated herein by reference.
PART IV
ITEM 14
ITEM 14 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. Within the 90-day period preceding the filing date of this report, an evaluation of the Corporation's disclosure controls and procedures (as defined in Section 13(a)-14(c) of the Securities Exchange Act of 1934 (the "Act") was carried out under the supervision and with the participation of the Corporation's Chief Executive Officer, Chief Financial Officer and several other members of the Corporation's senior management, as appropriate. Based on the evaluation, the Corporation's Chief Executive Officer and Chief Financial Officer concluded that the Corporation's disclosure controls and procedures as currently in effect are effective in ensuring that the information required to be disclosed by the Corporation in the reports it files or submits under the Act is (i) accumulated and communicated to the Corporation's management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms.
For the quarter ended December 31, 2002, 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.
ITEM 15
ITEM 15 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a)(1) Financial Statements
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 Balance Sheets -- December 31, 2002 and 2001
Consolidated Statements of Income -- For the Years Ended December 31, 2002, 2001, and 2000
Consolidated Statements of Shareholders' Equity -- For the Years Ended December 31, 2002, 2001, and 2000
Consolidated Statements of Cash Flows -- For the Years Ended December 31, 2002, 2001, and 2000
Notes to Consolidated Financial Statements
(a)(2) Financial Statement Schedules
All financial statement schedules have been omitted because they are not applicable, not required, or the information has been otherwise supplied in the Consolidated Financial Statements or notes to the Consolidated Financial Statements.
(a)(3) Exhibits
A copy of one or more of the exhibits listed herein can be obtained by writing Thomas J. Bare, Chief Financial Officer, First Manitowoc Bancorp, 402 North Eighth Street, Manitowoc, Manitowoc County, Wisconsin.
(b) Reports on Form 8-K
During the fourth quarter of 2002, the Corporation did not file any current reports on Form 8-K.
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 14, 2003 /s/ THOMAS J. BARE -------------------------------------- Thomas J. Bare Chief Executive Officer and Chief Financial Officer
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.
CERTIFICATION
I, Thomas J. Bare, certify that:
1. I have reviewed this annual report on Form 10-K of First Manitowoc Bancorp, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue statement of material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
c) Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):
a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: March 14, 2003
By: /s/ Thomas J. Bare --------------------- Thomas J. Bare Chief Executive Officer
/s/ Thomas J. Bare ---------------------- Thomas J. Bare Chief Financial Officer