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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT
PURSUANT TO
SECTION 13 OR 15(D)
OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE
FISCAL YEAR ENDED
DECEMBER 31, 1999
FIRST MANITOWOC BANCORP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
WISCONSIN 39-1435359
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
402 NORTH EIGHTH STREET
MANITOWOC, WISCONSIN 54221-0010
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (920) 684-6611
Securities to be registered under Section 12(b) of the Act:
None
Title of each class to Name of each exchange on which
be so registered. each class is to be registered.
None None
Securities to be registered under Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $1.00
(Title of Class)
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1999 FORM 10-K
TABLE OF CONTENTS
DESCRIPTION PAGE NO.
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PART I
ITEM 1. Business.................................................... 2
ITEM 2. Properties.................................................. 7
ITEM 3. Legal Proceedings........................................... 8
ITEM 4. Submission of Matters to a Vote of Security Holders......... 8
PART II
ITEM 5 Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 8
ITEM 6. Selected Financial Data..................................... 10
ITEM 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 11
ITEM 7A. Quantitative and Qualitative Disclosures about Market
Risk........................................................ 24
ITEM 8. Financial Statements and Supplementary Data................. 26
ITEM 9. Changes and Disagreements with Accountants on Accounting and
Financial Disclosure........................................ 45
PART III
ITEM 10. Directors and Executive Officers of the Registrant.......... 45
ITEM 11. Executive Compensation...................................... 47
ITEM 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 50
ITEM 13. Certain Relationships and Related Transactions.............. 51
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 52
Signatures................................................................. 53
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PART I
ITEM 1
BUSINESS
GENERAL
First Manitowoc Bancorp, Inc. (the "Company"), a Wisconsin corporation
incorporated on April 9, 1982, became a registered bank holding company on
November 16, 1982 under the Bank Holding Company Act of 1956, as amended
("BHCA"). The Company engages in its business through its sole subsidiary, First
National Bank in Manitowoc (the "Bank"), a national banking association. The
Bank has a wholly owned investment subsidiary, FNBM Investment Corp. (FNBM
Investment Corp.). The Company acquired the Bank through the merger of the Bank
into an interim national banking association formed as a Company subsidiary for
the purpose of the merger, pursuant to a Plan of Reorganization and Agreement to
Merge (the "Plan") proposed by Bank management and approved by the Bank's
shareholders on June 12, 1982. Pursuant to the Plan, each outstanding share of
Bank common stock was exchanged for three shares of the Company's common stock.
The Bank's charter was not affected by the merger. Currently, the Company has
outstanding 1,734,317 shares of common stock, par value $1.00 per share
("Shares"). Shares were held by 570 holders of record on December 31, 1999.
On August 19, 1999, First Manitowoc Bancorp, Inc. (the "Registrant")
entered into an Agreement and Plan of Merger (the "Agreement") with Dairy State
Financial Services, Inc. ("Dairy State"), providing for the merger (the
"Merger") of Dairy State with a wholly owned subsidiary of Registrant. Following
the Merger, Dairy State was liquidated and Dairy State Bank, located in
Plymouth, Wisconsin, Dairy State's Wisconsin chartered bank subsidiary,
effective December 1, 1999 merged (the "Bank Merger") with and into First
National Bank in Manitowoc, Registrant's national bank subsidiary.
According to the terms of the Agreement, as a result of the Merger, Dairy
State Shareholders received cash in the amount of $4,662.33 for each of the
2,900 shares of outstanding common stock of Dairy State or an aggregate of
$13,520,757.00. Registrant provided the consideration from internal funds and no
borrowings by Registrant from any source were involved.
The Merger and the Bank Merger involved the acquisition by Registrant and
First National Bank in Manitowoc, its wholly-owned subsidiary, of all of the
assets of Dairy State and Dairy State Bank consisting of premises and equipment,
cash, Federal funds sold, securities and loans totaling approximately $66.6
million subject to the liabilities of Dairy State and Dairy State Bank,
consisting primarily of deposits, totaling approximately $60 million. Registrant
intends to continue the business of banking at the locations of Dairy State Bank
as branches of First National Bank in Manitowoc.
The Company's and the Bank's main office is located at 402 North Eighth
Street, Manitowoc, Manitowoc County, Wisconsin. The Bank has eleven full service
branch offices located in Francis Creek, St. Nazianz, Two Rivers, Mishicot,
Manitowoc, Kiel, Newton, New Holstein, Plymouth and Bellevue, Wisconsin.
As of December 31, 1999, the Bank had assets of approximately $462.5
million, net loans of approximately $294.9 million, and deposits of $363.3
million. For additional financial information, see the Consolidated Financial
Statements and Notes beginning at Item 8 of this Form 10-K.
BANKING PRODUCTS AND SERVICES
The Bank has been doing business in Wisconsin since 1894 and is engaged in
both the commercial and consumer banking business. The Bank provides a wide
range of personal banking services designed to meet the needs of local
consumers. Among the services provided are checking accounts, savings and time
accounts, safe deposit boxes, and installment and other personal loans,
especially residential mortgages, as well as home equity loans, automobile and
other consumer financing. As a convenience to its customers, the Bank offers
Saturday banking hours; drive-thru teller windows; "Telebanc," a telephone
banking service; and 24-hour automated teller machines. Additionally, the Bank
offers an Internet web site.
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The Bank is also engaged in the financing of commerce and industry by
providing credit and deposit services for small to medium sized businesses and
for the agricultural community in the Bank's market area. The Bank offers many
forms of commercial lending, including lines of credit, revolving credit, term
loans, accounts receivable financing, and commercial real estate mortgage
lending and other forms of secured financing. A full range of commercial banking
services is offered, including the acceptance of checking and savings deposits.
Additional types of real estate loans, brokerage services, credit cards and
related services are also offered through correspondent banks or other third
parties.
The Bank offers a full range of trust services that include trust under
agreement, testamentary trust, guardianships and conservatorships, probate
estates and estate planning. In addition, the Bank added financial planning to
its trust services in 1998.
To attract new business and retain existing customers, the Bank relies on
local promotional activity, personal contact by its officers, staff and
directors, referrals by current customers, extended banking hours, and
personalized service.
DEPOSIT ACTIVITIES
The Bank continues to gain market share of deposits in Manitowoc,
Sheboygan, Calumet and Brown Counties. From December 31, 1997 to December 31,
1998, total deposits increased by 6.2%. From December 31, 1998 to December 31,
1999, deposits increased $86.8 million or 31.4% to $363.3 million. This increase
includes deposits of $60 million from the Dairy State acquisition.
No material portion of the Bank's deposits has been obtained from an
individual or a few individuals (including federal, state and local governments
and agencies) the loss of any one or more of which would have a materially
adverse effect on the Bank, nor is a material portion of the Bank's loans
concentrated within a single industry or group of related industries.
LENDING ACTIVITIES
The Bank has experienced growth in the number and dollar amount of loans as
a result of low interest rates and general marketing efforts. The loan portfolio
reflected $2.8 million or 1.2% growth in 1998 and $69.7 million or 30.5% growth
in 1999. Loans sold and serviced for others are not included in these growth
numbers. In 1999, the Bank increased the amount of loans sold and serviced for
others by $16.6 million, an increase of 33.9%. Loan growth in 1999 includes
$53.6 million from the Dairy State acquisition.
BANK SERVICE CORPORATIONS
The Bank owns 49.8% of the outstanding common stock of United Financial
Services, Inc. United Financial Services, Inc., located in Grafton, Wisconsin,
provides data processing services to owner banks Baylake Bank and First National
Bank in Manitowoc and to 54 other banks located in Wisconsin.
The Bank owns 100% of the outstanding common stock of FNBM Investment Corp.
FNBM Investment Corp., located in Las Vegas, Nevada, holds and manages a portion
of the bank's investment and loan portfolios.
SEASONALITY
The management of the Bank does not believe that the deposits or business
of the Bank in general are seasonal in nature. The deposits may, however, vary
with local and national economic conditions but not enough to have a material
effect on planning and policy making.
FOREIGN OPERATIONS
The Bank does not engage in operations in foreign countries.
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EMPLOYEES
As of December 31, 1999, the Bank employed 183 individuals, 69 of whom
worked part-time.
COMPETITION
The Bank offers many personalized services and attracts customers by being
responsive and sensitive to the needs of the community. The Bank relies on
goodwill and referrals from satisfied customers as well as traditional media
advertising to attract new customers. To enhance a positive image in the
community, the Bank supports and participates in many local events, such as the
Manitowoc County Fair, Manitowoc County Airport Day, First National Bank
Maritime Bay Bike Classic, Two Rivers Ethnic Festival and French Creek Days.
Employees, officers, and directors represent the Bank on many boards and local
civic and charitable organizations.
The primary factors in competing for deposits are interest rates,
personalized services, the quality and range of financial services, convenience
of office locations and office hours. Competition for deposits comes primarily
from other commercial banks, savings associations, credit unions, money market
funds and other investment alternatives. The primary factors in competing for
loans are interest rates, loan origination fees, the quality and range of
lending services and personalized services. Competition for loans comes
primarily from
other commercial banks, savings associations, mortgage banking firms, credit
unions and other financial intermediaries. Competition in the Bank's market area
may be expected to continue for the foreseeable future.
SUPERVISION AND REGULATION
General. The Company and the Bank are extensively regulated under federal
and state law. Generally, these laws and regulations are intended to protect
depositors, not stockholders. The following is a summary description of certain
provisions of certain laws which affect the regulation of bank holding companies
and banks. The discussion is qualified in its entirety by reference to
applicable laws and regulation. Changes in such laws and regulations may have a
material effect on the business and prospects of the Company and the Bank.
Financial Modernization Act. On November 12, 1999 President Clinton signed
into law the Gramm-Leach-Bliley Act of 1999 (the "Financial Modernization Act").
The Financial Modernization Act revises the BHCA and repeals the two affiliation
provisions of the Glass-Steagall Act of 1933. As a result, a qualifying holding
company may become a financial holding company and engage in a full range of
financial activities, including banking, insurance and securities activities, as
well as merchant banking and additional activities that are determined by the
Federal Reserve to be "financial in nature or incidental to such financial
activity or are complimentary to a financial activity" so long as such
activities do not pose a substantial risk to the safety and soundness of
depository institutions or the financial system in general. Activities that are
considered to be financial in nature include underwriting and dealing in
securities and underwriting and brokering of insurance products.
Federal Bank Holding Company Regulation and Structure. The Company is a
bank holding company within the meaning of the BHCA, as amended, and as such, it
is subject to regulation, supervision, and examination by the Federal Reserve
Board ("FRB"). The Company is required to file annual and quarterly reports with
the FRB and to provide the FRB with such additional information as the FRB may
require. The FRB may conduct examinations of the Company and its subsidiaries.
With certain limited exceptions, the Company is required to obtain prior
approval from the FRB before acquiring direct or indirect ownership or control
of more than 5% of any voting securities or substantially all of the assets of a
bank or bank holding company, or before merging or consolidating with another
bank holding company. Additionally, with certain exceptions, any person
proposing to acquire control through direct or indirect ownership of 25% or more
of any voting securities of the Company is required to give 60 days' written
notice of the acquisition to the FRB, which may prohibit the transaction, and to
publish notice to the public.
Generally, a banking holding company may not engage in any activities other
than banking, managing or controlling its bank and other authorized
subsidiaries, and providing services to these subsidiaries. With prior
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approval of the FRB, the Company may acquire more than 5% of the assets or
outstanding shares of a company engaging in non-bank activities determined by
the FRB to be closely related to the business of banking or of managing or
controlling banks. The FRB provides expedited procedures for expansion into
approved categories of non-bank activities.
Subsidiary banks of a bank holding company are subject to certain
quantitative and qualitative restrictions on extensions of credit to the bank
holding company or its subsidiaries, on investments in their securities and on
the use of their securities as collateral for loans to any borrower. These
regulations and restrictions may limit the Company's ability to obtain funds
from the Bank for its cash needs, including funds for the payment of dividends,
interest and operating expenses. Further, subject to certain exceptions, a bank
holding company and its subsidiaries are prohibited from engaging in certain
tie-in arrangements in connection with any extension of credit, lease or sale of
property or furnishing of services. For example, the Bank may not generally
require a customer to obtain other services from itself or the Company, and may
not require that a customer promise not to obtain other services from a
competitor as a condition to and extension of credit to the customer.
Under FRB policy, a bank holding company is expected to act as a source of
financial strength to its subsidiary banks and to make capital injections into a
troubled subsidiary bank, and the FRB may charge the bank holding company with
engaging in unsafe and unsound practices for failure to commit resources to a
subsidiary bank when required. A required capital injection may be called for at
a time when the holding company does not have the resources to provide it.
Federal Bank Regulation. The Company's banking subsidiary is a
federally-chartered national bank regulated by the Office of Comptroller of
Currency ("OCC"). The OCC may prohibit the institutions over which it has
supervisory authority from engaging in activities or investments that the agency
believes constitutes unsafe or unsound banking practices. Federal banking
regulators have extensive enforcement authority over the institutions they
regulate to prohibit or correct activities which violate law, regulation or a
regulatory agreement or which are deemed to constitute unsafe or unsound
practices. Enforcement actions may include the appointment of a conservator or
receiver, the issuance of a cease and desist order, the termination of deposit
insurance, the imposition of civil money penalties on the institution, its
directors, officers, employees and institution-affiliated parties, the issuance
of directives to increase capital, the issuance of formal and informal
agreements, the removal of or restrictions on directors, officers, employees and
institution-affiliated parties, and the enforcement of any such mechanisms
through restraining orders or other court actions.
The Bank is subject to certain restrictions on extensions of credit to
executive officers, directors, principal stockholders or any related interest of
such persons which generally require that such credit extensions be made on
substantially the same terms as are available to third persons dealing with the
Bank and not involve more than the normal risk of repayment. Other laws tie the
maximum amount which may be loaned to any one customer and its related interests
to capital levels.
Under the Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"), each federal banking agency is required to prescribe, by regulation,
non-capital safety and soundness standards for institutions under its authority.
The federal banking agencies, including the OCC, have adopted standards covering
internal controls, information systems and internal audit systems, loan
documentation, credit underwriting, interest rate exposure, asset growth, and
compensation, fees and benefits. An institution which fails to meet those
standards may be required by the agency to develop a plan acceptable to the
agency, specifying the steps that the institution will take to meet the
standards. Failure to submit or implement such a plan may subject the
institution to regulatory sanctions. The Company, on behalf of the Bank,
believes that it meets substantially all standards which have been adopted.
FDICIA also imposed new capital standards on insured depository institutions.
Before establishing new branch offices, the Bank must meet certain minimum
capital stock and surplus requirements and the Bank must obtain OCC approval.
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Deposit Insurance. As a FDIC member institution, the Bank's deposits are
insured to a maximum of $100,000 per depositor through the Bank Insurance Fund
("BIF"), administered by the FDIC, and each institution is required to pay
quarterly deposit insurance premium assessments to the FDIC. The BIF assessment
rates have a range of 0 cents to 27 cents for every $100 in assessable deposits.
Banks with no premium are subject to an annual statutory minimum assessment.
Capital Requirements. The federal banking regulators have adopted certain
risk-based capital guidelines to assist in the assessment of the capital
adequacy of a banking organization's operations for both transactions reported
on the balance sheet as assets and transactions, such as letters of credit,
which are recorded as off balance sheet items. Under these guidelines, nominal
dollar amounts of assets and credit equivalent amounts of off balance sheet
items are multiplied by one of several risk adjustment percentages, which range
from 0% for assets with low credit risk, such as certain U.S. Treasury
securities, to 100% for assets with relatively high credit risk, such as
business loans.
A banking organization's risk-based capital ratios are obtained by dividing
its qualifying capital by its total risk adjusted assets. The regulators measure
risk-adjusted assets, which include off balance sheet items, against both total
qualifying capital (the sum of Tier 1 capital and limited amounts of Tier 2
capital) and Tier 1 capital. "Tier 1," or core capital, includes common equity,
less goodwill and other intangibles, subject to certain exceptions. "Tier 2," or
supplementary capital, includes the allowance for loan and lease losses, subject
to certain limitations. Banks and bank holding companies subject to the
risk-based capital guidelines are required to maintain a ratio of Tier 1 capital
to risk-weighted assets of at least 4% and a ratio of total capital to
risk-weighted assets of at least 8%. The appropriate regulatory authority may
set higher capital requirements when particular circumstances warrant. As of
December 31, 1999, the Bank's ratio of Tier 1 to risk-weighted assets stood at
8.6% and its ratio of total capital to risk-weighted assets stood at 9.8%. In
addition to risk-based capital, banks and bank holding companies are required to
maintain a minimum amount of Tier 1 capital to total assets, referred to as the
leverage capital ratio, of at least 4%. As of December 31, 1999, the Bank's
leverage capital ratio was 6.9%.
Federal banking agencies include in their evaluations of a bank's capital
adequacy an assessment of the Bank's interest rate risk ("IRR") exposure. The
standards for measuring the adequacy and effectiveness of a banking
organization's interest rate risk management includes a measurement of board of
director and senior management oversight, and a determination of whether a
banking organization's procedures for comprehensive risk management are
appropriate to the circumstances of the specific banking organization. The Bank
has internal IRR models that are used to measure and monitor IRR.
Failure to meet applicable capital guidelines could subject a banking
organization to a variety of enforcement actions, including limitations on its
ability to pay dividends, the issuance by the applicable regulatory authority of
a capital directive to increase capital and, in the case of depository
institutions, the termination of deposit insurance by the FDIC, as well as to
the measures described under "Federal Deposit Insurance Corporation Improvement
Act of 1991" below, as applicable to undercapitalized institutions. In addition,
future changes in regulations or practices could further reduce the amount of
capital recognized for purposes of capital adequacy. Such a change could affect
the ability of the Bank to grow and could restrict the amount of profits, if
any, available for the payment of dividends to the Company.
Federal Deposit Insurance Corporation Improvement Act of 1991. In December
1991, Congress enacted the Federal Deposit Insurance Corporation Improvement Act
of 1991 ("FDICIA"), which substantially revised the bank regulatory and funding
provisions of the Federal Deposit Insurance Act and made significant revisions
to several other federal banking statutes. FDICIA provides for, among other
things, (i) publicly available annual financial condition and management reports
for financial institutions, including audits by independent accountants, (ii)
the establishment of uniform accounting standards by federal banking agencies,
(iii) the establishment of a "prompt corrective action" system of regulatory
supervision and intervention, based on capitalization levels, with more scrutiny
and restrictions placed on depository institutions with lower levels of capital,
(iv) additional grounds for the appointment of a conservator or receiver, and
(v) restrictions or prohibitions on accepting brokered deposits, except for
institutions which significantly exceed minimum capital requirements. FDICIA
also provided for increased funding of the FDIC insurance funds and the
implementation of risked-based premiums. See "-Deposit Insurance."
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A central feature of FDICIA is the requirement that the federal banking
agencies take "prompt corrective action" with respect to depository institutions
that do not meet minimum capital requirements. Pursuant to FDICIA, the federal
bank regulatory authorities have adopted regulations setting forth a five-
tiered system for measuring the capital adequacy of the depository institutions
that they supervise. Under these regulations, a depository institution is
classified in one of the following capital categories: "well capitalized,"
"adequately capitalized," "undercapitalized," "significantly undercapitalized"
and "critically undercapitalized." The Bank is classified as "adequately
capitalized" at December 31, 1999. An institution may be deemed by the
regulators to be in a capitalization category that is lower than is indicated by
its actual capital position if, among other things, it receives an
unsatisfactory examination rating with respect to asset quality, management,
earnings or liquidity.
FDICIA provides the federal banking agencies with significantly expanded
powers to take enforcement action against institutions which fail to comply with
capital or other standards. Such action may include the termination of deposit
insurance by the FDIC or the appointment of a receiver or conservator for the
institution. FDICIA also limits the circumstances under which the FDIC is
permitted to provide financial assistance to an insured institution before
appointment of a conservator or receiver.
Monetary Policy. The earnings of a bank holding company are affected by the
policies of regulatory authorities, including the FRB, in connection with the
FRB's regulation of the money supply. Various methods employed by the FRB are
open market operations in United States Government securities, changes in the
discount rate on member bank borrowing and changes in reserve requirements
against member bank deposits. These methods are used in varying combinations to
influence overall growth and distribution of bank loans, investments and
deposits, and their use may also affect interest rates charged on loans or paid
on deposits. Because of ongoing change in the national economy and in the money
markets, as well as the effect of monetary and fiscal policies of the Federal
Reserve System and Federal government, prediction cannot be made as to future
changes in interest rates, loan demand, deposit levels or the effect on the
earnings of the company.
ITEM 2
PROPERTIES
The Company owns real property at two branch locations at:
1509 Washington Street, Two Rivers, Wisconsin 54241 ("Two Rivers Branch
Office"); and
2915 Custer Street, Manitowoc, Wisconsin 54220 ("Custer Street Branch
Office").
The Bank owns real property at the location of its main office at 402 North
Eighth Street, Manitowoc, Wisconsin 54220; and at nine of its branch locations
at:
106 South Packer Drive, Francis Creek, Wisconsin 54214 ("Francis Creek
Branch Office");
109 South Fourth Avenue, St. Nazianz, Wisconsin 54232 ("St. Nazianz
Branch Office");
110 Baugniet Street, Mishicot, Wisconsin 54228 ("Mishicot Branch
Office");
108 Fremont Street, Kiel, Wisconsin 53042 ("Kiel Branch Office");
5724 CTH U, Newton, Wisconsin 53063 ("Newton Branch Office");
2210 Calumet Drive, New Holstein, Wisconsin 53061 ("New Holstein Branch
Office");
2323 Eastern Avenue, Plymouth, Wisconsin 53073 ("Plymouth East Branch
Office");
300 East Mill Street, Plymouth, Wisconsin 53073 ("Plymouth West Branch
Office"); and
2865 South Ridge Road, Green Bay, Wisconsin 54304 ("Ashwaubenon Branch
Office" under construction ).
The Bank leases real property at one branch location at:
2747 Manitowoc Road, Green Bay, Wisconsin 54311 ("Bellevue Branch
Office"). (As of January 2000, the Bank has purchased this location.)
There are no encumbrances on any of these properties.
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ITEM 3
LEGAL PROCEEDINGS
The Company is involved in various legal actions arising in the normal
course of its business. While the ultimate outcome of these various legal
proceedings cannot be predicted with certainty, it is the opinion of management
and through consultation with legal counsel that the resolution of these legal
actions will not have a material effect on the Company's consolidated financial
condition or results of operation.
ITEM 4
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5
MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
There is no established public trading market for the Company's Shares.
Accordingly, there is no comprehensive record of trades or the prices of any
such trades. The following tables reflect stock prices for Company Shares to the
extent such information is made known and available to management of the
Company, and the dividends declared with respect thereto during the preceding
two years.
1999
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1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
- --------------- --------------- --------------- ---------------
HIGH LOW HIGH LOW HIGH LOW HIGH LOW
---- --- ---- --- ---- --- ---- ---
$33.60 $33.60 $37.75 $35.00 $38.50 $37.75 $41.00 $38.50
1998
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1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
- --------------- --------------- --------------- ---------------
HIGH LOW HIGH LOW HIGH LOW HIGH LOW
---- --- ---- --- ---- --- ---- ---
$24.80 $23.60 $31.20 $24.80 $32.80 $31.20 $32.80 $32.80
All market information shown above has been restated for stock dividends.
CASH DIVIDENDS
1999
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1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER TOTAL
- ----------- ----------- ----------- ----------- -----
$0.12 $0.12 $0.12 $0.15 $0.51
1998
- -------------------------------------------------------------
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER TOTAL
- ----------- ----------- ----------- ----------- -----
$0.10 $0.10 $0.10 $0.16 $0.46
All cash dividends shown above have been restated for stock dividends.
HOLDERS
As of December 31, 1999 there were 570 holders of record of the Company's
Shares.
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DIVIDENDS
The Company declared and paid a cash dividend per share totaling $0.51 per
share or $884,525 during 1999, and $0.46 per share or $790,937 during 1998. The
Board of Directors of the Company declared a dividend on February 16, 1999, of
$0.12 per share to be paid on March 12, 1999, to stockholders of record March 3,
1999. On May 18, 1999, a dividend of $0.12 per share was approved to be paid on
June 11, 1999, to stockholders of record as of June 2, 1999. In the third
quarter, a $0.12 dividend was announced on August 24, 1999, to be paid September
17, 1999, to stockholders of record September 8, 1999. The final dividend in
1999 of $0.12 per share, plus an extra cash dividend of $0.03 per share was
declared on November 23, 1999, for stockholders of record December 8, 1999, and
was paid on December 17, 1999.
On February 17, 1998, the Board of Directors declared a dividend to be paid
March 13, 1998 at the rate of $0.10 per share to stockholders of record as of
March 4, 1998. On May 19, 1998, a dividend of $0.10 per share was approved to be
paid on June 12, 1998, to stockholders of record as of June 3, 1998. In the
third quarter, a $0.10 dividend was announced on August 18, 1998, to be paid
September 11, 1998, to stockholders of record September 2, 1998. The final
dividend in 1998 of $0.10 per share, plus an extra cash dividend of $0.06 per
share was declared on November 17, 1998, for stockholders of record December 2,
1998, and was paid on December 11, 1998.
The holders of the Company's Shares will be entitled to dividends, when,
as, and if declared by the Company's Board of Directors, subject to the
restrictions imposed by Wisconsin law. The only statutory limitation applicable
to the Company is that dividends may not be paid if the Company is insolvent or
if the dividend would cause the Company to become insolvent. Currently, its only
source of income is from the dividends paid by the Bank to the Company.
Therefore, the dividend restrictions applicable to national banks will impact
the Company's ability to pay dividends.
Under the National Bank Act, dividends may be paid only out of retained
earnings as defined in the statute. The approval of the OCC is required if the
dividends for any year exceed the net profits, as defined, for that year plus
the retained net profits for the preceding two years. In addition, unless a
national bank's capital surplus equals or exceeds the stated capital for its
common stock, no dividends may be declared unless the bank makes transfers from
retained earnings to capital surplus.
There are no contractual restrictions that currently limit the Company's
ability to pay dividends or that the Company reasonably believes are likely to
limit materially the future payment of dividends on the Company's Shares.
BUSINESS COMBINATIONS
On August 19, 1999, First Manitowoc Bancorp, Inc. (the "Registrant")
entered into an Agreement and Plan of Merger (the "Agreement") with Dairy State
Financial Services, Inc. ("Dairy State"), providing for the merger (the
"Merger") of Dairy State with a wholly owned subsidiary of Registrant. Following
the Merger, Dairy State was liquidated and Dairy State Bank, located in
Plymouth, Wisconsin, Dairy State's Wisconsin chartered bank subsidiary,
effective December 1, 1999 merged (the "Bank Merger") with and into First
National Bank in Manitowoc, Registrant's national bank subsidiary.
According to the terms of the Agreement, as a result of the Merger, Dairy
State Shareholders received cash in the amount of $4,662.33 for each of the
2,900 shares of outstanding common stock of Dairy State or an aggregate of
$13,520,757.00. Registrant provided the consideration from internal funds and no
borrowings by Registrant from any source were involved.
The Merger and the Bank Merger involved the acquisition by Registrant and
First National Bank in Manitowoc, its wholly-owned subsidiary, of all of the
assets of Dairy State and Dairy State Bank consisting of premises and equipment,
cash, Federal funds sold, securities and loans totaling approximately $66.6
million subject to the liabilities of Dairy State and Dairy State Bank,
consisting primarily of deposits, totaling approximately $60 million. Registrant
intends to continue the business of banking at the locations of Dairy State Bank
as branches of First National Bank in Manitowoc.
9
11
ITEM 6
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
the Company's Consolidated Financial Statements and the related notes and with
the Company's Management's Discussion and Analysis of Financial Condition and
Results of Operations, provided elsewhere herein.
1999 1998 1997 1996 1995
FOR THE YEAR ---- ---- ---- ---- ----
Interest income.......... $ 27,097,768 $ 26,819,194 $ 25,162,021 $ 21,087,774 $ 19,346,287
Interest expense......... 13,602,612 $ 14,152,353 $ 13,135,748 $ 10,604,493 $ 9,551,729
Net interest income...... 13,495,156 $ 12,666,841 $ 12,026,273 $ 10,483,281 $ 9,794,558
Provision for loan
losses................. 850,836 800,000 600,000 430,000 105,000
Net interest income after
provision for loan
losses................. 12,644,320 11,866,841 11,426,273 10,053,281 9,689,558
Other operating income... 2,357,065 2,019,950 1,570,112 1,423,097 1,064,691
Other operating
expense................ 9,077,743 8,052,716 7,403,914 6,552,984 6,612,622
Net income............... 4,927,642 4,601,075 4,164,471 3,605,394 3,113,627
Per Share Data:*
Net income -- basic and
diluted................ $2.84 $2.65 $2.40 $2.08 $1.80
Cash dividends
declared............... $0.51 $0.46 $0.41 $0.36 $0.32
Book value............... $19.90 $19.54 $17.03 $14.66 $12.98
Weighted average shares
outstanding............ 1,734,317 1,734,317 1,734,317 1,734,317 1,734,317
AT YEAR END
Total assets............. $462,518,306 $367,828,279 $348,907,496 $300,419,746 $257,697,628
Loans.................... 298,639,636 228,916,657 226,067,546 203,537,238 177,015,116
Allowance for loan
losses................. 3,699,829 3,124,109 2,608,277 2,079,614 1,818,633
Investment securities.... 97,594,900 97,197,495 85,577,782 76,402,625 58,282,709
Deposits................. 363,285,912 276,494,614 260,466,017 232,765,720 207,968,667
Borrowed funds........... 38,000,000 28,801,713 31,572,241 18,431,120 6,517,930
Stockholders' equity..... 34,506,447 33,891,847 29,541,167 25,424,699 22,510,622
AVERAGE BALANCES
Assets................... $390,092,124 $355,018,896 $331,983,654 $278,406,139 $252,158,424
Deposits................. 293,575,265 267,331,741 246,986,724 222,519,686 203,715,822
Stockholders' equity..... 34,571,636 32,373,927 27,894,687 24,173,705 21,527,955
FINANCIAL RATIOS
Return on average
assets................. 1.26% 1.30% 1.25% 1.30% 1.23%
Return on average
equity................. 14.25% 14.21% 14.93% 14.91% 14.46%
Average equity to average
assets................. 8.86% 9.12% 8.40% 8.68% 8.54%
Dividend payout ratio.... 17.96% 17.36% 17.08% 17.31% 17.78%
- -------------------------
* Per share data for 1995 through 1999 is restated to reflect the 25% stock
dividends (five for four share exchanges) paid April 21, 1995; April 11, 1997
and April 16, 1999.
10
12
ITEM 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Balance Sheet Analysis
December 31, 1999 compared to December 31, 1998
During the past twelve month period from December 31, 1998 to December 31,
1999, total assets increased $94.7 million or 25.7%. This includes approximately
$66.6 million in assets acquired in the Company's acquisition of Dairy State.
Loans increased $69.7 million or 30.5% while investment securities increased
$397,000, or 0.4%. The increase in loans and securities resulted primarily from
the acquisition of Dairy State which added $53.6 million in loans and $700,000
in securities.
Securities
Total securities available for sale amounted to $97.6 million at December
31, 1999 compared to $97.2 million at December 31, 1998. The following table
shows the distribution of the investment portfolio.
SECURITIES AVAILABLE FOR SALE
DECEMBER 31, 1999
--------------------
AMORTIZED FAIR
COST VALUE
--------- -----
(IN THOUSANDS)
U.S. Treasury securities and obligations of U.S
Government corporations and agencies...................... $ 10,290 $ 9,924
Obligations of states and political subdivisions............ 54,278 52,400
Mortgage-backed securities.................................. 33,459 32,268
Corporate notes............................................. 897 884
Other securities............................................ 2,124 2,119
-------- -------
Total....................................................... $101,048 $97,595
======== =======
Loan Portfolio
The following table presents the composition of the Bank's loan portfolio
by significant concentration.
SUMMARY OF LOAN PORTFOLIO
DECEMBER 31, 1999 DECEMBER 31, 1998
----------------------- -----------------------
PERCENT OF PERCENT OF
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
------ ----------- ------ -----------
(IN THOUSANDS)
Commercial and Agricultural....................... $ 93,550 31.33% $ 91,122 39.81%
Commercial Real Estate............................ 69,248 23.19% 38,018 16.61%
Residential Real Estate........................... 114,176 38.23% 85,115 37.18%
Consumer.......................................... 20,199 6.76% 13,783 6.02%
Other............................................. 1,467 .49% 879 .38%
-------- ------- -------- -------
Total............................................. $298,640 100.00% $228,917 100.00%
======== ======= ======== =======
Liquidity Management
Liquidity describes the ability of the Bank to meet financial obligations
that arise out of the ordinary course of business. Liquidity is primarily needed
to meet borrowing and deposit withdrawal requirements of the customers of the
Bank and to fund current and planned expenditures. The Bank maintains its asset
liquidity position internally through short term investments, the maturity
distribution of the investment portfolio, loan repayments and income from
earning assets. A substantial portion of the investment portfolio
11
13
contains readily marketable securities that could be converted to cash
immediately. Refer to Note 2 in the Consolidated Financial Statements for a
table showing the maturity distribution of the Bank's securities portfolio and
the related estimated fair value. On the liability side of the balance sheet,
liquidity is affected by the timing of maturing liabilities and the ability to
generate new deposits or borrowings as needed. Other sources are available
through borrowings from the Federal Reserve Bank, the Federal Home Loan Bank and
from lines of credit approved at correspondent banks. Management knows of no
trend or event which will have a material impact on the Bank's ability to
maintain liquidity at satisfactory levels. See Note 9 in the Consolidated
Financial Statements.
The following table shows the maturity distribution of the Bank's
securities portfolio and the related fair value at December 31, 1999. Management
knows of no trend or event which will have a material impact on the Bank's
ability to maintain liquidity at satisfactory levels.
AMORTIZED FAIR
COST VALUE
--------- -----
Due in one year or less..................................... $ 5,691 $ 5,693
Due after one year through five years....................... 10,165 10,169
Due after five years through ten years...................... 17,190 17,023
Due after ten years......................................... 34,543 32,442
-------- -------
67,589 65,326
Mortgage-backed securities.................................. 33,459 32,268
-------- -------
Total....................................................... $101,048 $97,595
======== =======
Capital Resources and Adequacy
Total stockholders' equity increased $615,000 or 1.8% in 1999 to $34.5
million at the end of the year from $33.9 million at December 31, 1998. Net
income of $4.9 million, offset by a decrease of $3.4 million in accumulated
other comprehensive income (loss) and $885,000 dividends paid, primarily
contributed to this increase. Total stockholders' equity as of December 31, 1998
increased $4.3 million from December 31, 1997.
One measure of capital adequacy is the leverage ratio which is calculated
by dividing average total assets for the most recent quarter into Tier 1
capital. The regulatory minimum for this ratio is 4%. The leverage ratio for the
years ended December 31, 1999, 1998, and 1997 was 6.9%, 8.5%, and 7.7%,
respectively.
Another measure of capital adequacy is the risk based capital ratio or the
ratio of total capital to risk adjusted assets. Total capital is composed of
both core capital (Tier 1) and supplemental capital (Tier 2) including
adjustments for off balance sheet items such as letters of credit and taking
into account the different degrees of risk among various assets. Regulators
require a minimum total risk based capital ratio of 8%. The Bank's ratio at
December 31, 1999, and for each of the two preceding years was 9.8%, 13.6%, and
12.7%, respectively. According to FDIC capital guidelines, the Bank is
considered to be "adequately capitalized" as of December 31, 1999.
Management knows of no other trend or event which will have a material
impact on capital. Please also refer to Note 16 in the Notes to Consolidated
Financial Statements for additional discussion of regulatory matters.
The following discussion is designed to provide a better understanding of
the results of operations of the Company and should be read in conjunction with
the Consolidated Financial Statements and Notes.
Results of Operations Overview for fiscal years 1999, 1998 and 1997
The Company reported $4,927,642 in net income for 1999 or $2.84 per share
compared to 1998 net income of $4,601,075 or $2.65 per share, and $4,164,471 or
$2.40 per share for 1997. Earnings for the year represent a record level of
performance for the Company, exceeding the previous record of $4,601,075
achieved in 1998. The improvement was primarily attributed to growth in net
interest income and other
12
14
operating income, the Company's major income components. Return on assets was
1.26%, 1.30% and 1.25% in 1999, 1998 and 1997, respectively. Return on average
equity was 14.25% for 1999, 14.21% for 1998, and 14.93% for 1997. The
acquisition of Dairy State did not have a material impact on the results of
operations in 1999.
Net Interest Income and Net Interest Margin
Net interest income is the principal source of earnings for a banking
company. It represents the differences between interest and fees earned on the
loan and investment portfolios and interest-bearing deposits offset by the
interest paid on deposits and borrowings. 1998 and the first half of 1999 were
characterized by generally declining interest rates. Because deposits and loans
and other investments reprice at different rates and as a result of changes in
volume, the Bank's net interest income, on a fully tax-equivalent basis,
increased in 1999 and 1998.
Net interest income (on a tax equivalent basis) for 1999 increased by
$1,185,995 or 8.4% compared to the year ended December 31, 1998, while 1998 net
interest income increased by $895,992 or 6.8% from the previous year ended
December 31, 1997. The higher rate of increase for 1999 is largely the result of
the effect of increased interest rate spreads and increased volume of earning
assets. Interest rate spread is the difference between the average yield on
interest earning assets and the average rate paid on interest bearing
liabilities (deposits). Interest rate spread for the years ended December 31,
1999, 1998 and 1997 was 3.65%, 3.50%, and 3.62%, respectively. See the Table 1
titled "Average Balances, Yields and Rates" for additional information.
Net interest margin is calculated as tax equivalent net interest income
divided by average earning assets and represents the Bank's net yield on its
earning assets. For 1999, the net interest margin increased to 4.38% from 4.27%
in 1998. The net interest margin for 1998 decreased to 4.27% from 4.35% the
previous year. These changes are the result of repricing as previously discussed
and illustrated in Table 2 "Rate and Volume Variance Analysis Based on Average
Balances."
Management and the Board of Directors of the Bank monitor interest rates on
a regular basis to assess the Bank's competitive position and to maintain a
reasonable and profitable interest rate spread. The Bank also considers the
maturity distribution of loans, investments, and deposits and its effect on net
interest income as interest rates rise and fall over time.
13
15
The following Tables 1 and 2 do not include financial data for the Company
as they include only Bank financial information. In Table 1, nonaccrual loans
have been included in the average balances, loan fees are included in interest
income and the yield on tax exempt loans and securities is computed on a
tax-equivalent basis using a tax rate of 34%.
AVERAGE BALANCES, YIELD AND RATES
TABLE 1
FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, 1999 DECEMBER 31, 1998
----------------------------------- -----------------------------------
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE BALANCE EXPENSE RATE
------- ------- ------ ------- ------- ------
ASSETS
Interest earning assets:
Money market investments:
Federal funds sold................. $ 6,486,000 $ 369,038 5.69% $ 8,774,000 $ 525,545 5.99%
Investment securities:
U.S. Treasury securities and
obligations of U.S. government
agencies.......................... 39,492,000 2,538,082 6.43% 38,103,000 2,594,115 6.81%
Tax-exempt obligations of States
and political subdivisions........ 55,272,000 4,055,080 7.34% 48,580,000 3,601,635 7.41%
All other investment securities.... 6,919,000 392,134 5.67% 3,932,000 196,417 5.00%
------------ ----------- ------ ------------ ----------- ------
Total investment securities........ 101,683,000 6,985,297 6.87% 90,615,000 6,392,167 7.05%
Loans, net of unearned income:
Commercial loans................... 91,372,000 9,471,238 10.22% 88,242,000 9,500,280 10.77%
Mortgage loans..................... 132,000,000 10,142,855 7.68% 127,483,000 10,173,958 7.98%
Installment loans.................. 12,323,000 1,269,261 10.30% 10,771,000 1,073,069 9.96%
Other loans........................ 4,560,000 655,134 14.37% 4,064,000 599,795 14.76%
------------ ----------- ------ ------------ ----------- ------
Total loans........................ 240,255,000 21,538,488 8.96% 230,560,000 21,347,102 9.26%
------------ ----------- ------ ------------ ----------- ------
Total Interest Earning Assets...... 348,424,000 $28,892,823 8.29% 329,949,000 $28,264,814 8.57%
Cash and due from banks............ 10,275,000 8,702,000
Other assets....................... 13,965,000 11,299,000
Allowance for loan and lease
losses............................ (3,240,000) (2,775,000)
------------ ----------- ------ ------------ ----------- ------
Total Assets....................... $369,424,000 $347,175,000
============ =========== ====== ============ =========== ======
LIABILITIES
Interest-bearing liabilities:
Savings Deposits................... $ 27,443,000 $ 608,242 2.22% $ 26,061,000 $ 648,703 2.49%
Market Plus accounts............... 58,425,000 2,506,771 4.29% 46,153,000 2,182,856 4.73%
Super NOW accounts................. 13,234,000 278,560 2.10% 11,698,000 281,525 2.41%
Money market deposit accounts...... 7,291,000 204,034 2.80% 6,383,000 181,985 2.85%
Certificates of deposit and IRA
deposits.......................... 132,017,000 7,159,735 5.42% 137,887,000 8,103,059 5.88%
Repurchase agreements.............. 22,902,000 1,095,459 4.78% 21,355,000 1,111,441 5.20%
Federal funds purchased............ 919,000 43,365 4.72% 53,000 3,087 5.82%
Borrowings......................... 31,241,000 1,720,427 5.51% 29,993,000 1,661,923 5.54%
------------ ----------- ------ ------------ ----------- ------
Total Int-Bearing Liabilities...... 293,472,000 $13,616,593 4.64% 279,583,000 $14,174,579 5.07%
Demand deposits.................... 39,145,000 33,856,000
Other liabilities.................. 3,570,000 3,687,000
------------ ----------- ------ ------------ ----------- ------
Total liabilities.................. 336,187,000 317,126,000
Stockholders' equity............... 33,237,000 30,049,000
------------ ----------- ------ ------------ ----------- ------
Total Liabilities and Stockholders'
Equity............................ $369,424,000 $347,175,000
============ =========== ====== ============ =========== ======
Net interest income and interest
rate spread....................... $15,276,230 3.65% $14,090,235 3.50%
Net interest income as a percent of
earning assets.................... 4.38% 4.27%
============ =========== ====== ============ =========== ======
FOR THE YEAR ENDED
DECEMBER 31, 1997
-----------------------------------
AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE
------- ------- ------
ASSETS
Interest earning assets:
Money market investments:
Federal funds sold................. $ 5,969,000 $ 372,324 6.24%
Investment securities:
U.S. Treasury securities and
obligations of U.S. government
agencies.......................... 42,941,000 2,747,225 6.40%
Tax-exempt obligations of States
and political subdivisions........ 34,334,000 2,574,381 7.50%
All other investment securities.... 3,778,000 224,484 5.94%
------------ ----------- ------
Total investment securities........ 81,053,000 5,546,090 6.84%
Loans, net of unearned income:
Commercial loans................... 82,842,000 9,105,160 10.99%
Mortgage loans..................... 119,681,000 9,750,818 8.15%
Installment loans.................. 10,037,000 989,747 9.86%
Other loans........................ 4,005,000 581,604 14.52%
------------ ----------- ------
Total loans........................ 216,565,000 20,427,329 9.43%
------------ ----------- ------
Total Interest Earning Assets...... 303,587,000 $26,345,743 8.68%
Cash and due from banks............ 8,268,000
Other assets....................... 9,906,000
Allowance for loan and lease
losses............................ (2,261,000)
------------ ----------- ------
Total Assets....................... $319,500,000
============ =========== ======
LIABILITIES
Interest-bearing liabilities:
Savings Deposits................... $ 25,804,000 $ 640,525 2.48%
Market Plus accounts............... 34,964,000 1,700,496 4.86%
Super NOW accounts................. 11,688,000 275,957 2.36%
Money market deposit accounts...... 6,612,000 170,871 2.58%
Certificates of deposit and IRA
deposits.......................... 131,084,000 7,670,552 5.85%
Repurchase agreements.............. 20,944,000 1,062,572 5.07%
Federal funds purchased............ 470,000 27,321 5.81%
Borrowings......................... 28,194,000 1,603,206 5.69%
------------ ----------- ------
Total Int-Bearing Liabilities...... 259,760,000 $13,151,500 5.06%
Demand deposits.................... 30,771,000
Other liabilities.................. 3,311,000
------------ ----------- ------
Total liabilities.................. 293,842,000
Stockholders' equity............... 25,658,000
------------ ----------- ------
Total Liabilities and Stockholders'
Equity............................ $319,500,000
============ =========== ======
Net interest income and interest
rate spread....................... $13,194,243 3.62%
Net interest income as a percent of
earning assets.................... 4.35%
============ =========== ======
14
16
RATE AND VOLUME VARIANCE ANALYSIS
BASED ON AVERAGE BALANCES
TABLE 2
1999 COMPARED TO 1998 1998 COMPARED TO 1997
-------------------------------------- -----------------------------------
INCREASE CHANGE DUE TO INCREASE CHANGE DUE TO
(DECREASE) RATE VOLUME (DECREASE) RATE VOLUME
---------- ---- ------ ---------- ---- ------
INTEREST INCOME
Federal funds sold................ $ (156,507) $ (19,460) $ (137,047) $ 153,221 $ (21,744) $ 174,965
---------- ----------- ----------- ---------- --------- ----------
U.S. Treasury securities and
obligations of U.S. government
agencies........................ (56,032) (150,597) 94,565 (153,110) 156,409 (309,519)
Tax-exempt obligations of State
and political subdivisions...... 453,445 (42,688) 496,133 1,027,254 (40,918) 1,068,172
All other investment securities... 195,717 46,506 149,211 (28,067) (37,217) 9,150
---------- ----------- ----------- ---------- --------- ----------
Total investment securities....... 593,130 (146,779) 739,909 846,077 78,274 767,803
---------- ----------- ----------- ---------- --------- ----------
Commercial loans.................. (479,419) 753,214 (1,232,633) 433,698 (280,589) 714,287
Mortgage loans.................... 419,274 (1,375,287) 1,794,561 384,562 (139,509) 524,071
Installment loans................. 196,192 41,573 154,619 83,322 10,942 72,380
Other loans....................... 55,339 (17,864) 73,203 18,191 9,623 8,568
---------- ----------- ----------- ---------- --------- ----------
Total loans....................... 191,386 (598,364) 789,750 919,773 (399,533) 1,319,306
---------- ----------- ----------- ---------- --------- ----------
Total interest income............. $ 628,009 $ (764,603) $ 1,392,612 $1,919,071 $(343,003) $2,262,074
---------- ----------- ----------- ---------- --------- ----------
INTEREST EXPENSE
Savings Deposits.................. $ (40,461) $ (74,861) $ 34,400 $ 8,178 $ 1,799 $ 6,379
Market Plus accounts.............. 323,915 (256,502) 580,417 482,360 (61,824) 544,184
Super NOW accounts................ (2,965) (39,930) 36,965 5,568 5,332 236
Money market deposit accounts..... 22,049 (3,839) 25,888 11,114 17,032 (5,918)
Certificates of deposit and IRA
deposits........................ (943,324) (598,368) (344,956) 432,507 34,421 398,086
Repurchase agreements............. (15,982) (96,497) 80,515 48,869 28,017 20,852
Federal funds purchased........... 40,278 (10,162) 50,440 (24,234) 6 (24,240)
Borrowings........................ 58,504 (10,648) 69,152 58,717 (43,580) 102,297
---------- ----------- ----------- ---------- --------- ----------
Total interest expense............ $ (557,986) $(1,090,807) $ 532,821 $1,023,079 $ (18,797) $1,041,876
---------- ----------- ----------- ---------- --------- ----------
Net interest income............... $1,185,995 $ 326,204 $ 859,791 $ 895,992 $(324,206) $1,220,198
========== =========== =========== ========== ========= ==========
The rate and volume variance was determined by taking the difference in
rate times the previous year's balance.
Provision and Allowance for Loan Losses
For the year ended December 31, 1999, the Bank recorded net charge offs of
$849,280 compared to net charge offs of $284,168 in 1998 and $71,337 in 1997.
The Bank acquired $541,833 in loan loss allowance in the acquisition of Dairy
State. Internal loan review, in particular, has been effective in identifying
problem credits and in achieving timely recognition of potential and actual
losses within the loan portfolio.
Gross charge offs amounted to $964,741 in 1999, $322,687 in 1998, and
$107,198 in 1997, the majority of which were commercial loans. Loans charged off
are subject to ongoing review and effort is made to maximize recovery of
principal, interest and related expenses. Recoveries were $115,461 in 1999,
$38,519 in 1998, and $35,861 in 1997.
The allowance for loan losses is maintained at a level believed adequate by
management to absorb estimated loan losses. Management's quarterly evaluation of
the adequacy of the allowance is based on analysis of the loan portfolio
including the volume and character of loans outstanding; assessment of current
economic conditions; diversification and size of the portfolio; past loss
experience; the amount of non-performing loans; adequacy of collateral;
concentrations of credit; and experience, ability and depth of the
15
17
lending staff. The allowance for loan losses of $2,608,277 as of December 31,
1997 represents 1.15% of gross loans, and as of December 31, 1998, the
$3,124,109 allowance for loan losses reflected 1.36% of gross loans. The
allowance for loan losses of $3,699,829 as of December 31, 1999 amounted to
1.24% of the outstanding loan portfolio. The allowance for loan losses increased
by $541,833 from the acquisition of Dairy State. Analysis by internal loan
review supports the adequacy of the allowance. In management's opinion, the
allowance for loan losses is adequate as of December 31, 1999. See Note 4 in the
Consolidated Financial Statements.
The allocation of the allowance for loan losses is shown in the following
table.
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
TABLE 3
DECEMBER 31,
-----------------------------------------------------------------------------------------------------
% OF % OF % OF % OF
LOANS LOANS LOANS LOANS
IN CATEGORY IN CATEGORY IN CATEGORY IN CATEGORY
TO TOTAL TO TOTAL TO TOTAL TO TOTAL
1999 LOANS 1998 LOANS 1997 LOANS 1996 LOANS
---- ----------- ---- ----------- ---- ----------- ---- -----------
(IN THOUSANDS)
Specific Problem
Loans.............. $ 694 $ 516 $ 233 $ 277
Loan Type Allocation:
Commercial &
Agricultural....... 2,069 31.3 2,087 39.8 1,983 34.6 1,477 34.8
Commercial Real
Estate............. 192 23.2 127 16.6 182 20.2 136 18.6
Residential Real
Estate............. 72 38.2 76 37.2 68 39.3 51 40.6
Consumer............. 49 7.3 16 6.4 48 5.9 36 6.0
------ ------ ------ ------
2,382 2,306 2,281 1,700
Unallocated.......... 624 302 94 103
------ ------ ------ ------
Total................ $3,700 $3,124 $2,608 $2,080
====== ====== ====== ======
DECEMBER 31,
-----------------------
% OF
LOANS
IN CATEGORY
TO TOTAL
1995 LOANS
---- -----------
(IN THOUSANDS)
Specific Problem
Loans.............. $ 185
Loan Type Allocation:
Commercial &
Agricultural....... 1,375 35.6
Commercial Real
Estate............. 126 18.5
Residential Real
Estate............. 47 39.8
Consumer............. 33 6.1
------
1,581
Unallocated.......... 53
------
Total................ $1,819
======
Specific problem loans includes the factor of current problem credits for
the exposure of specifically identified problem loans. Loan volume allocation
includes the factor of loan volume trends, with management's goal for this
factor to maintain an adequate loan loss reserve for outstanding loans less the
specifically identified current problem credits. The allocation of the allowance
among the various loan types is based on the average proportion of the loan
types that make up the specific problem loans. The unallocated portion of the
allowance consists of the other factors included in the analysis because those
factors cannot be identified to specific loans or loan categories.
The allocation and total for the allowance for loan losses is not to be
interpreted as a single year's exposure for loss nor the loss for any specified
time period.
16
18
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
TABLE 4
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(IN THOUSANDS)
Balance at beginning of period...................... $3,124 $2,608 $2,080 $1,819 $1,815
Charge-offs:
Commercial Real Estate......................... $ 0 $ 0 $ 0 $ 11 $ 22
Residential Real Estate........................ 22 21 3 12 0
Commercial & Agricultural...................... 838 259 51 172 106
Consumer....................................... 105 43 53 25 25
------ ------ ------ ------ ------
$ 965 $ 323 $ 107 $ 220 $ 153
====== ====== ====== ====== ======
Recoveries:
Commercial Real Estate......................... $ 13 $ 13 $ 2 $ 1 $ 39
Residential Real Estate........................ 12 0 0 0 0
Commercial & Agricultural...................... 70 9 24 9 2
Consumer....................................... 21 17 9 41 11
------ ------ ------ ------ ------
$ 116 $ 39 $ 35 $ 51 $ 52
====== ====== ====== ====== ======
Net charge-offs..................................... 849 284 72 169 101
Provision for loan losses........................... 851 800 600 430 105
Balance related to acquisition...................... 574 0 0 0 0
------ ------ ------ ------ ------
Balance at end of period............................ $3,700 $3,124 $2,608 $2,080 $1,819
====== ====== ====== ====== ======
Ratio of net charge offs during period to average
loans outstanding during period................... .35% .12% .03% .09% .06%
Ratio of allowance for loan losses to total loans... 1.24% 1.36% 1.15% 1.02% 1.03%
The increase in the allowance for loan losses is primarily a result of the
growth in loan volume and the allowance acquired from Dairy State.
There are several factors that are included in the analysis of the adequacy
of the allowance for loan losses. Management considers loan volume trends,
levels and trends in delinquencies and non-accruals, current problem credits,
national and local economic trends and conditions, concentrations of credit by
industry, current and historical levels of charge-offs, the experience and
ability of the lending staff, and other miscellaneous factors. Management has
determined the allowance for loan losses is adequate to absorb probable loan
losses inherent in its loan portfolio as of December 31, 1999 based on its most
recent evaluation of these factors.
The factor of loan volume trends is based on actual lending activity. The
loan volume trends factor is for estimated losses that are believed to be
inherently part of the loan portfolio but that have not yet been identified as
specific problem credits. The factor current problem credits includes the
exposure believed to exist for specifically identified problem loans determined
on a loan-by-loan basis.
Other Operating Income
Other operating income increased $337,115, or 16.7%, from 1998 to 1999. The
growth resulted primarily from increases in service charges on deposit accounts
which increased due to collection of automated teller machine fees and
assessment of service charges on negative collected balances for an entire year.
This increase was partially offset by decreases in gain on sales of mortgage
loans held for sale which decreased due to the rising interest rate environment
which reduced loan demand and the related fee income.
17
19
Other operating income increased $449,838, or 28.7%, from 1997 to 1998. The
growth resulted primarily from increases in undistributed income from the data
processing subsidiary. Undistributed income from the data processing subsidiary
increased as a result of increased earnings of the data processing subsidiary.
Other Operating Expenses
Other operating expenses increased by $1,025,027, or 12.7%, from 1998 to
1999. This change was primarily a result of increases in salaries and employee
benefits and data processing fees. Increases in salaries and employee benefits
were the result of additional employees. In 1999, 60 new employees were added
and 19 employees left the Bank's employment. The overall result was a net
increase of 33.4 full-time equivalents. Increases in salaries and employee
benefits were also the result of annual merit increases to employees. In
addition, hourly employees also received a mid-year increase in their hourly
wage in addition to their annual merit increase. Data processing fees increased
primarily due to the costs of the Dairy State conversion of $35,700 and overall
volume increases of $43,900.
Other operating expenses increased by $648,802, or 8.76%, from 1997 to
1998. This change was primarily a result of increases in salaries, employee
benefits and professional fees. Increases in salaries and employee benefits were
the result of additional employees. In 1998, 20 new employees were hired and 19
employees left the Bank's employment. The overall result was a net increase of
2.6 full-time equivalents. Increases in salaries and employee benefits were also
the result of annual merit increases to employees. In addition, hourly employees
also received a mid-year increase in their hourly wage in addition to their
annual merit increase. Professional fees increased due to regulatory reporting
requirements. Professional fees incurred to meet regulatory reporting
requirements are expected to increase on an ongoing basis.
Income Taxes
The effective tax rates for the Company were 16.81%, 21.13%, and 25.53% for
1999, 1998, and 1997, respectively. The decrease in effective tax rates is a
direct result of additional assets held at the Bank's FNBM Investment Corp.
subsidiary. $24.3 million of securities were transferred by the Bank to the
Bank's investment subsidiary in the first quarter of 1998 while $32.0 million of
loans were transferred by the Bank to the Bank's investment subsidiary in the
fourth quarter of 1998. FNBM Investment Corp. is a wholly-owned subsidiary of
the Bank incorporated under the laws of Nevada and is subject to taxation in the
State of Nevada which does not currently impose a corporate income tax. See Note
11 in the Consolidated Financial Statements.
Securities
Securities available for sale are held for an indefinite period of time and
may be sold in response to changing market and interest rate conditions as part
of the asset/liability management strategy. Securities available for sale are
carried at fair value, with unrealized holding gains and losses, net of the
related tax effect, reported as a separate component of accumulated other
comprehensive income. Securities held to maturity are those that management has
both the positive intent and ability to hold to maturity, and are reported at
amortized cost. The Bank does not own trading or held to maturity securities.
The Bank manages the investment portfolios within policies which seek to achieve
desired levels of liquidity, manage interest rate sensitivity risk, meet
earnings objectives, and provide required collateral support for deposit
activities.
Total securities amounted to $97.6 million and $97.2 million as of December
31, 1999 and 1998, respectively. The slightly higher level of investments in
securities resulted primarily from the increase in available funds derived from
growth in deposits over loans.
The Bank manages its investment portfolios within policies which seek to
achieve desired levels of liquidity, manage interest rate sensitivity risk, meet
earnings objectives and provide required collateral support for deposit
activities. The Bank had no concentrations of securities from any single issues
that exceeded 10% of stockholders' equity. Table 5 exhibits the distribution, by
type, of the investment portfolio for the years ended December 31, 1999 and
1998. Concurrent with the acquisition of Dairy State, the Company transferred
all of Dairy State's held to maturity securities to securities available for
sale.
18
20
SECURITIES AVAILABLE FOR SALE
TABLE 5
DECEMBER 31, 1999 DECEMBER 31, 1998
----------------- -----------------
(IN THOUSANDS)
U.S. Treasury securities and obligations of U.S. Government
corporations and agencies................................. $ 10,290 $ 5,791
Obligations of states and political subdivisions............ 54,278 53,259
Mortgage-backed securities.................................. 33,459 27,473
Commercial paper............................................ 0 7,200
Other securities............................................ 2,124 1,694
Corporate Notes............................................. 897 0
-------- -------
Total amortized cost.............................. $101,048 $95,417
Total fair value.................................. $ 97,595 $97,197
The following table presents the maturity by type of the investment
portfolio for the year ended December 31, 1999.
INVESTMENT PORTFOLIO ANALYSIS
TABLE 6
DECEMBER 31, 1999
-------------------------------------------------------------------------------------------
U.S. GOVT. MORTGAGE BACKED CORPORATE
AGENCIES MUNICIPALS SECURITIES NOTES OTHER SECURITIES
---------------- ---------------- ---------------- -------------- -----------------
BOOK AVG TE BOOK AVG TE BOOK AVG TE BOOK AVG TE BOOK AVG TE
DESCRIPTION & TERM VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD
- ------------------ ----- ------ ----- ------ ----- ------ ----- ------ ----- ------
(IN THOUSANDS)
0 - 12 months........ $ 3,525 5.62 $ 2,475 7.35 $ 1,512 5.99 $ 0 n/a $ 0 n/a
1 - 5 Years.......... 1,000 5.48 8,169 7.29 15,083 6.33 897 6.50 100 6.81
5 - 10 Years......... 4,241 6.87 12,949 7.56 16,017 6.37 0 n/a 0 n/a
Over 10 Years........ 1,524 6.67 30,685 7.24 847 6.32 0 n/a 2,024 6.17
------- ---- ------- ---- ------- ---- ---- ---- ------ ----
Total................ $10,290 6.42 $54,278 7.33 $33,459 6.33 $897 6.50 $2,124 6.20
======= ==== ======= ==== ======= ==== ==== ==== ====== ====
DECEMBER 31, 1999
-------------------
TOTAL TOTAL
AMORTIZED FAIR
DESCRIPTION & TERM COST VALUE
- ------------------ --------- -----
(IN THOUSANDS)
0 - 12 months........ $ 7,512 $ 7,504
1 - 5 Years.......... 25,249 24,875
5 - 10 Years......... 33,207 32,313
Over 10 Years........ 35,080 32,903
-------- -------
Total................ $101,048 $97,595
======== =======
Loan Portfolio
The Bank is actively engaged in originating loans to customers in
Manitowoc, Calumet, Sheboygan and Brown counties. The Bank has policies and
procedures designed to mitigate credit risk and to maintain the quality of the
loan portfolio. These policies include underwriting standards for new credits as
well as the continuous monitoring and reporting of asset quality and the
adequacy of the allowance for loan losses. These polices, coupled with
continuous training efforts, have provided effective checks and balances for the
risk associated with the lending process. Lending authority is based on the
level of risk, size of the loan and the experience of the lending officer.
Bank underwriting procedures are based on a process which evaluates the
management, repayment ability, collateral support, credit history, and overall
financial strength of prospective and current customers from a relationship
oriented perspective. Residential mortgage loans are predominantly underwritten
to general FNMA guidelines.
The Bank extends the following types of credit: commercial loans,
agricultural loans, real estate loans and consumer loans.
Commercial loans are often secured with first liens on accounts receivable,
inventory and/or equipment. Commercial loans generally have loan to value ratios
of 80% or less. Agricultural loans are collateralized with first liens on crops,
farm products, farm personal property and/or real estate. Agricultural loans
generally have loan to value ratios of 70% or less, except for agricultural real
estate loans which have loan to value ratios of
19
21
80% or less. Real estate loans include commercial real estate loans and
residential real estate loans. Real estate loans are collateralized with first
mortgages. Commercial real estate loans generally have loan to value ratios of
80% or less while residential real estate loans have loan to value ratios of 90%
or less. Consumer loans include loans to individuals for personal, family or
household purposes. Consumer loans may be secured with first lien positions or
unsecured depending upon the credit quality. The Bank will make subordinate
loans in any category if the borrower's financial position justifies it. The
Bank is not involved in credit risk insurance.
Bank management assesses the loan portfolio mix at least annually as part
of its planning and budget process. While there are no predetermined fixed
targets for various loan types established in the loan policy, general
guidelines are established annually for new loan activity based on loan
portfolio mix and credit needs in the Bank's main markets. For 2000, the general
ranges for new loan activity by type are as follows:
Commercial Loans............................................ 45% to 55%
Residential Mortgage Loans.................................. 30% to 40%
Consumer Loans.............................................. 10% to 20%
Agricultural Loans.......................................... 5% to 10%
The risks associated with the Bank's loan categories are as follows:
Commercial and Agricultural. Credit risk is considered low. Past due loans
are below industry averages. Non-performing loans and net loan losses, although
higher than the previous year, remain below the averages for banks of similar
size. The portfolio is fairly diversified with residential real estate the only
SIC industry category exceeding 32% of the Bank's capital structure and
agricultural loans representing approximately 5% of total loans.
Real Estate. Credit risk is considered low, with delinquency ratios and
non-performing loans at low levels.
Consumer. Credit risk is considered low, with delinquency ratios and
non-performing loans at low levels.
No loan customer exceeds the legal lending limit among the loan categories.
The Bank's legal and internal lending limit as of December 31, 1999 was
$5,849,000.
Extensions of credit used predominantly for business or agricultural
purposes are classified as commercial and agricultural loans. Commercial loans
include lines of credit for seasonal requirements of businesses, short-term
loans payable within 12 months for one time specific purposes and term loans
with maturities greater than 12 months for capital assets and fixed assets which
are amortized and repaid from cash flow. Agricultural loans include short-term
farm operating loans, intermediate farm personal property loans and long-term
agricultural real estate loans. Agricultural real estate loans generally have
maturities exceeding five years. Commercial term loans for capital assets and
fixed assets and commercial real estate loans that have maturities of more than
five years are generally arranged through government assisted financing programs
such as SBA.
The increase in commercial loans and increase in commercial real estate
loans resulted mainly from the general credit needs within the Bank's primary
markets. The Bank also made it a priority to sell residential mortgage loans to
the FNMA secondary market and term commercial real estate loans to the SBA
secondary market.
20
22
Table 7 "Summary of Loan Portfolio" presents the composition of the Bank's
loan portfolio by significant concentration.
SUMMARY OF LOAN PORTFOLIO
TABLE 7
LOANS OUTSTANDING AS DECEMBER 31,
-----------------------------------------------------------------------------------
1999 1998 1997 1996
---------------------- ---------------------- ---------------------- --------
PERCENT OF PERCENT OF PERCENT OF
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT
------ ----------- ------ ----------- ------ ----------- ------
(IN THOUSANDS)
Commercial and
Agricultural........ $93,550 31.33% $91,122 39.81% $78,230 34.61% $70,775
Commercial
Real Estate......... 69,248 23.19% 38,018 16.61% 45,689 20.21% 38,003
Residential Real
Estate.............. 114,176 38.23% 85,115 37.18% 88,822 39.29% 82,538
Consumer............. 20,199 6.76% 13,783 6.02% 12,503 5.53% 11,599
Other................ 1,467 .49% 879 .38% 823 .36% 622
-------- ------- -------- ------- -------- ------- --------
Total................ $298,640 100.00% $228,917 100.00% $226,067 100.00% $203,537
======== ======= ======== ======= ======== ======= ========
LOANS OUTSTANDING AS DECEMBER 31,
------------------------------------
1996 1995
----------- ----------------------
PERCENT OF PERCENT OF
TOTAL LOANS AMOUNT TOTAL LOANS
----------- ------ -----------
(IN THOUSANDS)
Commercial and
Agricultural........ 34.77% $62,982 35.58%
Commercial
Real Estate......... 18.67% 32,825 18.54%
Residential Real
Estate.............. 40.55% 70,365 39.75%
Consumer............. 5.70% 10,335 5.84%
Other................ .31% 508.... 29%
------- -------- -------
Total................ 100.00% $177,015 100.00%
======= ======== =======
MATURITIES OF LOAN PORTFOLIO
TABLE 8
DECEMBER 31, 1999
------------------------------------------------------------------------------
COMMERCIAL COMMERCIAL RESIDENTIAL
MATURING & AGRICULTURAL REAL ESTATE REAL ESTATE CONSUMER OTHER TOTAL
-------- -------------- ----------- ----------- -------- ----- -----
(IN THOUSANDS)
0-12 months..................... $61,602 $25,888 $ 56,507 $ 4,195 $1,467 $149,659
1-5 years....................... 25,710 36,748 54,739 15,750 0 132,947
Over 5 years.................... 6,238 6,612 2,930 254 0 16,034
------- ------- -------- ------- ------ --------
Total........................... $93,550 $69,248 $114,176 $20,199 $1,467 $298,640
======= ======= ======== ======= ====== ========
MATURING FIXED RATE ADJUSTABLE RATE TOTAL
-------- ---------- --------------- -----
0-12 months................... $ 95,351 $54,308 $149,659
1-5 years..................... 127,430 5,517 132,947
Over 5 years.................. 12,307 3,727 16,034
-------- ------- --------
Total......................... $235,088 $63,552 $298,640
======== ======= ========
The Bank's policy is to make the majority of its loan commitments in the
market area it serves. This tends to reduce risk because management is familiar
with the credit histories of loan applicants and has an in-depth knowledge of
the risk to which a given credit is subject. The Bank had no foreign loans in
its portfolio as of December 31, 1999.
It is the policy of the Bank to place a loan in nonaccrual status whenever
there is substantial doubt about the ability of a borrower to pay principal or
interest on any outstanding credit. Management considers such factors as payment
history, the nature and value of collateral securing the loan and the overall
economic situation of the borrower when making a nonaccrual decision. Nonaccrual
loans are closely monitored by management. A non-accruing loan is restored to
current status when the prospects of future contractual payments are no longer
in doubt. Nonaccrual loans at December 31, 1999 and 1998 were $1,618,000 and
$927,000, respectively. The fluctuation in the level of nonaccrual loans over
the past five years is attributed mainly to isolated credit deterioration in a
few larger account relationships. These included commercial loans, agricultural
loans and residential real estate loans. However, these were individual isolated
accounts and no trend in economic, industrial, geographical or other factors
could be identified to account for the fluctuations
21
23
in the level of nonaccrual loans. Accruing loans 90 days or more past due
include loans that are both well secured and in the process of collection.
RISK ELEMENTS OF LOAN PORTFOLIO
TABLE 9
DECEMBER 31,
------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(IN THOUSANDS)
Nonaccrual loans....................................... $1,618 $ 927 $211 $708 $1,153
Accruing loans past due 90 days or more................ 21 181 84 229 36
------ ------ ---- ---- ------
Total nonperforming loans.............................. $1,639 $1,108 $295 $937 $1,189
Nonperforming loans as a percent of loans.............. .55% .47% .13% .47% .24%
Ratio of the allowance for loan losses to nonperforming
loans................................................ 226% 282% 884% 222% 153%
Total nonperforming loans at December 31, 1999 were $1.6 million, an
increase of $521,000 from $927,000 at December 31, 1998. The increase was
primarily due to two commercial loans. These are isolated accounts and no trend
in economic, industrial, geographical or other factor is responsible.
The following table shows the interest income that would have been recorded
under the original terms and the amount of interest income that was included in
interest income for the period.
FOREGONE LOAN INTEREST
TABLE 10
1999 1998 1997
---- ---- ----
(IN THOUSANDS)
Interest income that would have been recorded under original
terms..................................................... $187 $128 $47
Interest income recorded during the period.................. 98 43 16
---- ---- ---
Reduction in interest income................................ $ 89 $ 85 $31
Potential problem loans are loans where there are doubts as to the ability
of the borrower to comply with present repayment terms. The decision of
management to place loans in this category does not necessarily indicate that
the Bank expects losses to occur, but that management recognizes that a higher
degree of risk is associated with these performing loans.
At December 31, 1999, potential problem loans totaled $4.4 million. The
loans that have been reported as potential problem loans are not concentrated in
a particular industry, but rather cover a diverse range of businesses.
Management does not presently expect significant losses from credits in the
potential problem loan category.
Deposits
Deposit liabilities increased from $276.5 million at December 31, 1998 to
$363.3 million at December 31, 1999, an increase of $86.8 million, or 31.4%.
Savings and noninterest bearing demand deposits are the main source of deposit
growth. The Bank continues to experience strong competition from other
commercial banks, credit unions, the stock market and mutual funds. There are no
predetermined divisions for deposit categories. Table 1 displays the average
balances and average rates paid on all major deposits classifications for 1999,
1998 and 1997.
22
24
The following table represents maturities of time deposits in denominations
of $100,000 or more for the years ended December 31, 1999 and 1998.
MATURITY OF TIME DEPOSITS $100,000 OR MORE
TABLE 11
FOR THE YEARS ENDED
DECEMBER 31,
--------------------
1999 1998
---- ----
(IN THOUSANDS)
3 months or less............................................ $ 6,286 $ 5,077
3 - 6 months................................................ 7,668 5,626
6 - 12 months............................................... 7,880 5,310
Over 12 months.............................................. 4,210 2,171
------- -------
TOTAL....................................................... $26,044 $18,184
======= =======
SECURITIES SOLD UNDER REPURCHASE AGREEMENTS
(IN THOUSANDS)
DECEMBER 31,
TABLE 12
Securities sold under agreements to repurchase generally mature within one
day from the transaction date. The agreements to repurchase securities requires
that the Bank (seller) repurchase identical securities as those that were sold.
The securities underlying the agreements were under the institution's control at
December 31, 1999 and 1998.
Information concerning securities sold under agreements to repurchase for
1999, 1998 and 1997 is summarized as follows:
1999 1998 1997
---- ---- ----
Average balance during the year............................ $22,902 $21,355 $20,944
Average interest rate during the year...................... 4.79% 5.21% 5.07%
Maximum month-end balance during the year.................. $24,988 $25,667 $24,425
FHLB Advances
FHLB advances increased from $28.5 million to $36.0 million, an increase of
$7.5 million or 26.3%. FHLB advances are subject to a prepayment penalty if they
are repaid prior to maturity. FHLB advances are callable either six months or
one year after origination and quarterly thereafter.
Year 2000
The Bank followed the five phases recommended by the Federal Financial
Institutions Examination Council (FFIEC) to manage its Year 2000 project. The
phases were awareness, assessment, renovation, validation and implementation.
The Bank fully completed all five phases.
The Bank's mainframe computer and the software that run it are year 2000
compliant; that is, they have been successfully tested by advancing the
mainframe's internal calendar to and through the year 2000. All Mission Critical
Systems were tested and found to be compliant in the year 2000 environment.
Non-critical Systems were found to be compliant. Testing of Non-critical Systems
was completed. The entire inventory of software was reviewed to assess the
impact of the year 2000. The software that needed to be replaced was replaced
and all software is now Year 2000 compliant.
In addition, the Bank reviewed all non-information technology and equipment
systems. Non-information technology systems include all other business equipment
other than computer hardware, software and
23
25
peripheral devices, such as automated teller machines, modems and routers.
Non-information technology equipment includes security devices, time clocks,
heating and air conditioning systems, elevators, telephones and fax machines.
Testing of non-information technology and equipment systems was completed and
are Year 2000 compliant.
The Bank recognizes that its customers will be affected by the Year 2000
issues. As a result, the Bank contacted its significant business loan customers
to make them aware of the Year 2000 issues and to assess their readiness. The
Bank realizes that if its customers experience Year 2000 business interruptions
there may be more exposure to the Bank. Over 90% of the Bank's significant
business loan customers responded to the Year 2000 inquiries. Of those, over 92%
claim to be Year 2000 compliant. The responses were reviewed, ranked by degree
of risk, and quantified. Based on the low level of risk, no additional follow up
was deemed necessary. At this time, the Bank does not believe there is any
enforceability of any assurances from significant third parties or business loan
customers. The Bank has included the Year 2000 credit risk into its allowance
for loan losses. The Bank continued its customer awareness efforts throughout
1999, including utilizing the local radio and cable television media.
The Bank does not expect its Year 2000 compliance costs to be significant.
Equipment upgrades were made to take advantage of current technology in the
ordinary course of business and not solely as a result of the Year 2000 issue.
Costs incurred through December 31, 1999 related solely to Year 2000 compliance
were $120,000.
A business resumption contingency plan was established to address worst
case scenarios should they occur with the Year 2000 issue. The worst case
scenarios would be that all communications would be lost. If communications are
lost, the Bank would function in an "off-line" standby mode which would create
documents that could be done during evening batch processing at the Bank's data
processing center. Customer balances would be available the following morning.
The Bank experienced no problems with hardware or software systems at the
beginning of the Year 2000 and continues to experience no problems or issues
related to the millennium issue. The Bank is not aware of any borrowers
incurring significant Year 2000 issues or any vendors used by the Bank which
have incurred significant Year 2000 issues.
ITEM 7A
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Bank monitors interest rate factors on a monthly basis to assess
interest rate risk of the portfolio of assets and liabilities. Maturity terms of
assets are matched to the maturity terms of liabilities to the extent possible.
The maturity structure of the municipal securities, however, is long term to
optimize tax advantages and yield returns within an acceptable level of market
risk. In addition, based on prior experience, the average life of the mortgage
backed securities has been shorter than the scheduled maturities. There are no
interest rate caps or floors on variable rate instruments that could affect the
cash flows on those instruments. Variable rate loans, investments and deposits
reprice immediately because they are related to changes in the prime rate of
interest. Fixed rate commercial loans reprice at least annually. Fixed rate real
estate loans are scheduled for 1 to 2 years with balloon payments. Loans do not
have prepayment penalty clauses. The following table also assumes all loans and
deposits will be renewed under the same terms. Interest rates on those renewals
are based on anticipated rates at the date of renewal. There is a 10% prepayment
assumption for the entire loan portfolio based on historical trends.
Reinvestment rates are assumed at 95% for loans. Loans not renewed are assumed
to be replaced by loan originations. The table assumes that any deposits that
are withdrawn are
24
26
replaced by new deposit funds. The following table shows the expected cash flows
and yields for interest earning assets and interest bearing liabilities.
QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
EXPECTED PERIOD OF MATURITY
--------------------------------------------------------------------------------------------------
WITHIN 1 YEAR 1-2 YEARS 2-3 YEARS 3-4 YEARS GREATER THAN 4 YEARS
----------------- ---------------- ---------------- ---------------- ---------------------
YIELD/ YIELD/ YIELD/ YIELD/ YIELD/
DECEMBER 31, 1999 BALANCE RATE BALANCE RATE BALANCE RATE BALANCE RATE BALANCE RATE
----------------- ------- ------ ------- ------ ------- ------ ------- ------ ------- ------
(IN THOUSANDS)
Short-term
investments(V)...... $ 0 n/a $ 0 n/a $ 0 n/a $ 0 n/a $ 0 n/a
US Treasury, Agency
and Other
securities(F)....... 3,524 5.48% 1,006 5.53% 25 6.54% 896 6.50% 7,789 6.91%
US Treasury, Agency
and Other
securities(V)....... 0 n/a 21 7.51 50 7.52 0 n/a 0 n/a
Mortgage backed
Securities(F)....... 1,512 5.99 3,011 6.24 2,951 6.35 1,870 6.35 21,854 6.32
Mortgage backed
Securities(V)....... 2,261 6.11 0 n/a 0 n/a 0 n/a 0 n/a
Municipal
securities(F)....... 2,475 4.86 2,572 4.60 3,177 4.99 912 4.87 45,142 4.91
Commercial
loans(F)............ 41,933 8.28 27,450 8.62 13,725 8.62 8,946 8.18 18,069 9.13
Commercial
loans(V)............ 45,557 9.56 1,987 9.24 994 9.24 205 9.36 3,932 9.45
Residential real
estate(F)........... 47,756 8.28 28,932 8.29 14,466 8.29 4,608 8.23 7,537 8.36
Residential real
estate(V)........... 8,751 8.97 1,261 7.96 630 7.96 156 7.87 78 7.87
Consumer loans(F).... 4,106 8.88 5,712 9.42 2,921 10.60 6,226 8.94 1,145 8.93
Consumer loans(V).... 89 9.03 0 n/a 0 n/a 0 n/a 0 n/a
-------- ----- ------- ----- ------- ------ ------- ----- -------- -----
Total interest
earning
assets.......... $157,964 8.53% $71,952 8.27% $38,939 8.18% $23,819 7.98% $105,546 6.53%
======== ===== ======= ===== ======= ====== ======= ===== ======== =====
Interest bearing
deposits(F)......... $112,550 5.84% $31,664 4.60% $12,914 6.09% $ 680 5.41% $ 630 5.28%
Interest bearing
deposits(V)......... 137,565 3.35 0 n/a 0 n/a 0 n/a 0 n/a
Short term
borrowings(F)....... 3,829 4.41 0 n/a 0 n/a 0 n/a 0 n/a
Short term
borrowings(V)....... 20,523 4.99 0 n/a 0 n/a 0 n/a 0 n/a
Long term
Borrowings(F)....... 0 n/a 0 n/a 14,000 5.64 0 n/a 22,000 5.35
-------- ----- ------- ----- ------- ------ ------- ----- -------- -----
Total interest
bearing
liabilities..... $274,467 4.51% $31,664 4.60% $26,914 5.85% $ 680 5.41% $ 22,630 5.35%
======== ===== ======= ===== ======= ====== ======= ===== ======== =====
EXPECTED PERIOD OF MATURITY
----------------------------
TOTAL
----------------- FAIR
YIELD/ MARKET
DECEMBER 31, 1999 BALANCE RATE VALUE
----------------- ------- ------ ------
(IN THOUSANDS)
Short-term
investments(V)...... $ 0 n/a $ 0
US Treasury, Agency
and Other
securities(F)....... 13,240 6.40% 12,856
US Treasury, Agency
and Other
securities(V)....... 71 7.52 71
Mortgage backed
Securities(F)....... 31,198 6.32 30,007
Mortgage backed
Securities(V)....... 2,261 6.11 2,261
Municipal
securities(F)....... 54,278 4.84 52,400
Commercial
loans(F)............ 110,123 8.54 109,605
Commercial
loans(V)............ 52,675 9.53 52,641
Residential real
estate(F)........... 103,299 8.29 102,752
Residential real
estate(V)........... 10,876 8.77 10,833
Consumer loans(F).... 20,110 9.30 20,302
Consumer loans(V).... 89 9.03 89
-------- ----- --------
Total interest
earning
assets.......... $398,220 7.89% $393,817
======== ===== ========
Interest bearing
deposits(F)......... $158,438 5.61% $158,438
Interest bearing
deposits(V)......... 137,565 3.35 137,565
Short term
borrowings(F)....... 3,829 4.41% 3,829
Short term
borrowings(V)....... 20,523 4.99% 20,523
Long term
Borrowings(F)....... 36,000 5.46 36,000
-------- ----- --------
Total interest
bearing
liabilities..... $356,355 4.67% $356,355
======== ===== ========
- -------------------------
(V) Variable repricing terms
(F) Fixed repricing terms
25
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ITEM 8
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
First Manitowoc Bancorp, Inc.:
We have audited the accompanying consolidated statements of financial
condition of First Manitowoc Bancorp, Inc. and subsidiaries (Corporation) as of
December 31, 1999 and 1998, and the related consolidated statements of income,
changes in stockholders' equity, and cash flows for each of the years in the
three-year period ended December 31, 1999. These consolidated financial
statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducte