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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2003
-----------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
-------------------- -------------------
Commission file number 0-25983
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First Manitowoc Bancorp, Inc.
- ------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Wisconsin 39-1435359
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(State or other jurisdiction of (IRS employer
incorporation or organization) identification no.)
402 North Eighth Street, Manitowoc, Wisconsin 54220
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(Address of principal executive offices) (Zip code)
(920) 684-6611
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Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year, if
changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act.)
Yes X No
--- ---
The number of shares outstanding of registrant's common stock, par value $1.00
per share, at July 31, 2003, was 6,937,268 shares.
FIRST MANITOWOC BANCORP, INC.
TABLE OF CONTENTS
PAGE
NO.
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited):
Consolidated Statements of Financial Condition -
June 30, 2003 and December 31, 2002 1
Consolidated Statements of Income - Three and
Six Months Ended June 30, 2003 and 2002 2
Consolidated Statements of Changes in Stockholders'
Equity Six Months Ended June 30, 2003 and 2002 3
Consolidated Statements of Cash Flows - Six Months
Ended June 30, 2003 and 2002 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 17
Item 4. Controls and Procedures 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities and Use of Proceeds 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
Exhibits
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
FIRST MANITOWOC BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(UNAUDITED)
June 30, December 31,
2003 2002
---- ----
(In Thousands, Except Share Data)
ASSETS
Cash and due from banks $ 20,778 $ 17,139
Interest-bearing deposits 22,051 18,491
Federal funds sold 9,714 20,459
--------- ---------
Cash and cash equivalents 52,543 56,089
Securities available for sale, at fair value 131,090 135,747
Other investments (at cost) 2,962 2,858
Loans, net 351,049 340,719
Premises and equipment 8,674 8,653
Goodwill 8,968 8,968
Intangible assets 2,176 2,143
Other assets 15,014 10,633
--------- ---------
Total Assets $ 572,476 $ 565,810
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $ 419,270 $ 416,099
Securities sold under repurchase agreements 50,570 50,884
Borrowed funds 37,375 38,138
Other liabilities 6,788 6,405
--------- ---------
Total liabilities 514,003 511,526
--------- ---------
Shareholders' equity:
Common stock, $1.00 par value; authorized
10,000,000 shares; issued 7,583,628 shares 7,584 7,584
Retained earnings 47,544 44,387
Accumulated other comprehensive income 4,045 3,013
Treasury stock at cost--646,360 shares (700) (700)
--------- ---------
Total shareholders' equity 58,473 54,284
--------- ---------
Total Liabilities and Shareholders' Equity $ 572,476 $ 565,810
========= =========
(See accompanying notes to Unaudited Consolidated Financial Statements.)
1
ITEM 1. FINANCIAL STATEMENTS CONTINUED:
FIRST MANITOWOC BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
------- -------
2003 2002 2003 2002
---- ---- ---- ----
(In Thousands, Except Share Data)
Interest income:
Loans, including fees $ 5,454 $ 5,751 $11,050 $11,747
Federal funds sold 94 78 198 148
Securities:
Taxable 457 1,100 1,126 2,071
Tax exempt 786 775 1,552 1,522
------- ------- ------- -------
Total interest income 6,791 7,704 13,926 15,488
------- ------- ------- -------
Interest expense:
Deposits 1,871 2,219 3,867 4,590
Securities sold under repurchase agreements 316 346 645 613
Borrowed funds 346 433 688 926
------- ------- ------- -------
Total interest expense 2,533 2,998 5,200 6,129
------- ------- ------- -------
Net interest income 4,258 4,706 8,726 9,359
Provision for loan losses 450 525 650 750
------- ------- ------- -------
Net interest income after provision for loan losses 3,808 4,181 8,076 8,609
------- ------- ------- -------
Other income:
Trust service fees 147 151 281 281
Service charges 371 278 720 571
Insurance Center commissions 439 444 849 794
Loan servicing income 219 161 424 382
Income on equity investment 85 86 171 169
Gain on sales of mortgage loans 537 68 958 215
Other 295 213 576 462
------- ------- ------- -------
Total other income 2,093 1,401 3,979 2,874
------- ------- ------- -------
Other expenses:
Salaries, commissions, and employee benefits 1,994 1,759 4,192 3,757
Occupancy 236 223 477 444
Data processing 257 236 525 488
Postage, stationery and supplies 140 113 296 239
Advertising 96 79 156 204
Outside service fees 98 131 226 222
Amortization of intangibles 69 69 137 137
Other 529 683 1,102 1,314
------- ------- ------- -------
Total other expenses 3,419 3,293 7,111 6,805
------- ------- ------- -------
Income before provision for income taxes 2,482 2,289 4,944 4,678
Provision for income taxes 532 493 1,093 1,013
------- ------- ------- -------
Net income $ 1,950 $ 1,796 $ 3,851 $ 3,665
======= ======= ======= =======
Earnings per share: basic and diluted $ 0.29 $ 0.26 $ 0.56 $ 0.53
======= ======= ======= =======
(See accompanying notes to Unaudited Consolidated Financial Statements.)
2
ITEM 1. FINANCIAL STATEMENTS CONTINUED:
FIRST MANITOWOC BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(UNAUDITED)
Six Months Ended June 30, 2002
(In Thousands, Except Share Data)
Accumulated
Other
Common Retained Comprehensive Treasury
Stock Earnings Income (Loss) Stock Total
- ---------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2001 $7,584 $38,563 $1,042 ($700) $ 46,489
Comprehensive income:
Net income --- 3,665 --- --- 3,665
Other comprehensive income --- --- 1,647 --- 1,647
-----
Total comprehensive income $ 5,312
Cash dividends ($0.085 per share) --- (590) --- --- (590)
- ---------------------------------------------------------------------------------------------------------------------
BALANCE AT JUNE 30, 2002 $7,584 $41,638 $2,689 ($700) $51,211
===== ====== ====== ====== ======
Six Months Ended June 30, 2003
(In Thousands, Except Share Data)
Accumulated
Other
Common Retained Comprehensive Treasury
Stock Earnings Income (Loss) Stock Total
- ---------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2002 $7,584 $44,387 $3,013 ($700) $54,284
Comprehensive income:
Net income --- 3,851 --- --- 3,851
Other comprehensive income --- --- 1,032 --- 1,032
-------
Total comprehensive income $ 4,883
Cash dividends ($0.10 per share) --- (694) --- --- (694)
- ---------------------------------------------------------------------------------------------------------------------
BALANCE AT JUNE 30, 2003 $7,584 $47,544 $4,045 ($700) $58,473
====== ======= ====== ===== =======
(See accompanying notes to Unaudited Consolidated Financial Statements.)
3
ITEM 1. FINANCIAL STATEMENTS CONTINUED:
FIRST MANITOWOC BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
June 30,
-------
2003 2002
------- ------
(In Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,851 $ 3,665
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 650 750
Depreciation of premises and equipment 399 440
Amortization of intangible assets 137 137
Amortization of securities, net 608 83
Stock dividends on FHLB stock (36) (63)
Proceeds from sale of mortgage loans 76,893 39,002
Originations of mortgage loans held for sale (75,935) (38,694)
Gain on sales of mortgage loans held for sale (958) (215)
Gain on sale of fixed assets (38) 0
Undistributed income of joint venture (171) (169)
(Increase) decrease in other assets 293 (1,395)
Increase in other liabilities 383 226
-------- --------
Net cash provided by operating activities 5,800 3,767
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of securities
available for sale 37,152 12,631
Purchases of securities available for sale (31,533) (17,469)
Net increase in loans (10,980) (9,162)
Purchases of premises and equipment (421) (173)
Proceeds from sales of premises and equipment 38 0
Acquisition, net of cash acquired 0 0
Purchased Bank Owned Life Insurance policies (5,000) 0
-------- --------
Net cash used in investing activities (10,744) (14,173)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits 3,170 (5,377)
Net increase (decrease) in securities sold
under repurchase agreements (314) 20,031
Proceeds from advances on borrowed funds 21,747 21,747
Repayment of borrowed funds (22,510) (25,760)
Dividends paid (694) (590)
-------- --------
Net cash provided by financing activities 1,399 10,051
-------- --------
Net decrease in cash and cash equivalents (3,545) (355)
Cash and cash equivalents at beginning of period 56,089 39,896
-------- --------
Cash and cash equivalents at end of period $ 52,544 $ 39,541
-------- --------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 5,200 $ 6,826
Income taxes 677 573
-------- --------
Supplemental schedule of noncash activities:
Investments reclassified as loans $ 0 $ 201
(See accompanying notes to Unaudited Consolidated Financial Statements.)
4
ITEM 1. FINANCIAL STATEMENTS CONTINUED:
FIRST MANITOWOC BANCORP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial reporting and with instructions for Form 10-Q and Rule 10-01 of
Regulation S-X. In the opinion of management, these accompanying unaudited
consolidated financial statements contain all adjustments necessary to present
fairly First Manitowoc Bancorp, Inc.'s (the "Corporation's") financial position,
results of operations, changes in shareholders' equity and cash flows for the
periods presented. All adjustments necessary for the fair presentation of the
consolidated financial statements are of a normal recurring nature. The results
of operations for the interim periods are not necessarily indicative of the
results to be expected for the full year. This report should be read in
conjunction with the Corporation's 2002 annual report on Form 10-K.
In preparing the financial statements, management is required to make estimates
and assumptions that affect the reported amounts of assets and liabilities as of
the date of the balance sheet and revenues and expenses for the period. Actual
results could differ significantly from those estimates.
NOTE 2: The consolidated financial statements include the accounts of all
subsidiaries. The Corporation is a bank holding company that engages in its
business through its sole subsidiary, First National Bank in Manitowoc ("Bank"),
a nationally chartered commercial bank. The Bank has two wholly owned
subsidiaries, FNBM Investment Corp. and Insurance Center of Manitowoc, Inc.
("Insurance Center"). All material intercompany transactions and balances are
eliminated. Certain items in the prior period consolidated financial statements
have been reclassified to conform with the June 30, 2003 presentation.
5
NOTE 3: Investment Securities
The amortized cost and fair values of investment securities available for sale
for the periods indicated are as follows:
Investment Securities
(In Thousands)
June 30, 2003
Amortized Cost Fair Value
- -------------------------------------------------------------------------------------------------------------------
U.S. Treasury securities and obligations of U.S. Government
corporations and agencies $ 12,929 $ 13,012
Obligations of states and political subdivisions 43,588 43,746
Mortgage-backed securities 67,414 73,323
Corporate notes 1,000 1,009
-------- --------
Total $124,931 $131,090
======== ========
December 31, 2002
Amortized Cost Fair Value
- -------------------------------------------------------------------------------------------------------------------
U.S. Treasury securities and obligations of U.S. Government
corporations and agencies $ 16,427 $ 16,603
Obligations of states and political subdivisions 62,784 66,355
Mortgage-backed securities 50,915 51,766
Corporate notes 999 1,023
-------- --------
Total $131,125 $135,747
======== ========
NOTE 4: Loan Portfolio
Loans are summarized as follows:
Summary of Loan Portfolio
(Dollars In Thousands)
June 30, 2003 December 31, 2002
------------- -----------------
Percent of Percent of
Amount Total Loans Amount Total Loans
- --------------------------------------------------------------------------------------------------
Commercial and Agricultural $100,997 28.46% $ 90,374 26.26%
Commercial Real Estate 106,374 29.97% 104,042 30.24%
Residential Real Estate 124,937 35.20% 126,122 36.65%
Consumer 19,683 5.55% 20,627 6.00%
Other 2,918 0.82% 2,938 0.85%
-------- ------- --------- -------
Total $354,909 100.00% $344,103 100.00%
======= =======
Less: Allowance for Loan Loss (3,860) (3,384)
-------- ---------
Net Loans $351,049 $ 340,719
======== =========
6
NOTE 5: Allowance for Loan Losses
Activity in the allowance for loan losses for the periods indicated is as
follows:
For the Six For the Six
Months Ended Months Ended
June 30, June 30,
2003 2002
---- ----
(In Thousands)
- -----------------------------------------------------------------------------
Balance at beginning of
period - December 31, 2002 and 2001 $3,384 $2,737
Provision charged to expense 650 750
Charge-offs (231) (835)
Recoveries 57 85
------ ------
Balance at end of period $3,860 $2,737
====== ======
NOTE 6: Business Segments
The Corporation, through the Bank and the Bank's branch network, provides a
broad range of financial services to individuals and companies in northeastern
Wisconsin. These services include demand, time, and savings deposits; commercial
and retail lending; ATM processing; trust services; and insurance services.
Operations are managed and financial performance of these services is evaluated
on a Corporate-wide basis. Accordingly, all of the Corporation's operations are
considered by management to be aggregated in one reportable operating segment.
NOTE 7: Per Share Computations
Weighted average shares outstanding were 6,937,268 for the six months ended June
30, 2003 and 2002.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING INFORMATION
Forward-looking statements have been made by the "Corporation" in this document
and in documents incorporated by reference that are subject to risks and
uncertainties. These forward-looking statements, which are included in
Management's Discussion and Analysis of Financial Condition and Results of
Operations, describe future plans or strategies and include the Corporation's
expectations of future results of operations. Statements containing certain
terms including, but not limited to, the words "believes," "expects,"
"anticipates" or similar expressions constitute forward-looking statements.
Shareholders should note that many factors, some of which are discussed
elsewhere in this document could affect the future financial results of the
Corporation and could cause those results to differ materially from those
expressed in forward-looking statements contained in this document. These
factors include the following:
o operating, legal and regulatory risks;
o economic, political and competitive forces affecting the Corporation's
banking, securities, asset management and credit services businesses;
o the risk that the Corporation's analyses of these risks and forces
could be incorrect and/or that the strategies developed to address
them could be unsuccessful;
o general market rates;
o general economic conditions;
o changes by the Federal government in monetary and fiscal policies; and
o changes in composition of our loan portfolio.
7
These factors should be considered in evaluating the forward-looking statements,
and undue reliance should not be placed on such statements. The Corporation does
not undertake and specifically disclaims any obligation to update any
forward-looking statements to reflect the occurrence of anticipated or
unanticipated events or circumstances after the date of such statements.
CRITICAL ACCOUNTING POLICIES
In preparing the consolidated financial statements, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the balance sheet and revenues and expenses for
the period. Actual results could differ significantly from those estimates.
Estimates that are particularly susceptible to significant change include the
determination of the allowance for loan losses and mortgage servicing rights
valuation.
The consolidated financial statements of the Corporation are prepared in
conformity with accounting principles generally accepted in the United States of
America and follow general practices within the industries in which it operates.
This preparation requires management to make estimates, assumptions, and
judgments that affect the amounts reported in the financial statements and
accompanying notes. These estimates, assumptions, and judgments are based on
information available as of the date of the financial statements; accordingly,
as this information changes, actual results could differ from the estimates,
assumptions, and judgments reflected in the financial statements. Certain
policies inherently have a greater reliance on the use of estimates,
assumptions, and judgments and, as such, have a greater possibility of producing
results that could be materially different than originally reported. Management
believes the following policies are both important to the portrayal of the
Corporation's financial condition and results and require subjective or complex
judgments and, therefore, management considers the following to be critical
accounting policies.
Allowance for Loan Losses: Management's evaluation process used to determine the
adequacy of the allowance for loan losses is subject to the use of estimates,
assumptions, and judgments including management's ongoing review and grading of
the loan portfolio, consideration of past loan loss experience, trends in past
due and nonperforming loans, risk characteristics of the various classifications
of loans, existing economic conditions, the fair value of underlying collateral,
and other qualitative and quantitative factors which could affect probable
credit losses. Because current economic conditions can change and future events
are inherently difficult to predict, the anticipated amount of estimated loan
losses, and therefore the adequacy of the allowance, could change significantly.
As an integral part of their examination process, various regulatory agencies
also review the allowance for loan losses. Such agencies may require that
certain loan balances be charged off when their credit evaluations differ from
those of management, based on their judgments about information available to
them at the time of their examination. The Corporation believes the allowance
for loan losses is adequate and properly recorded in the financial statements.
See section "Allowance for Loan Losses."
Mortgage Servicing Rights Valuation: The fair value of the Corporation's
mortgage servicing rights asset is important to the presentation of the
consolidated financial statements in that mortgage servicing rights are subject
to a fair value-based impairment standard. Mortgage servicing rights do not
trade in an active open market with readily observable prices. As such, like
other participants in the mortgage banking business, the Corporation relies on
an internal estimated cash flow model to establish the fair value of its
mortgage servicing rights. While the Corporation believes that the values
produced by its internal model are indicative of the fair value of its mortgage
servicing rights portfolio, these values can change significantly depending upon
the then current interest rate environment, estimated prepayment speeds of the
underlying mortgages serviced, and other economic conditions. The proceeds that
might be received should the Corporation actually consider a sale of the
mortgage servicing rights portfolio could differ from the amounts reported at
any point in time. The Corporation believes the mortgage servicing rights asset
is properly recorded in the financial statements.
8
EARNINGS
Net Income
(Dollars In Thousands, Except Share Data)
- --------------------------------------------------------------------------------------------------------------------
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
2003 2002 2003 2002
- --------------------------------------------------------------------------------------------------------------------
Net Income $1,950 $1,796 $3,851 $3,665
Earnings Per Share -Basic & Diluted $ 0.29 $ 0.26 $ 0.56 $ 0.53
Return on Average Assets 1.38% 1.37% 1.37% 1.41%
Return on Average Equity 13.73% 14.63% 13.81% 15.22%
- --------------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding were 6,937,268 for the six months ended June
30, 2003 and 2002.
Net income for the three months ended June 30, 2003 was $1,950,000 compared to
$1,796,000 for the three months ended June 30, 2002, an increase of $154,000, or
8.6%. Interest income decreased $913,000 primarily as a result of a decrease in
interest yields. Interest expense decreased $465,000 mainly as a result of a
decrease in interest rates paid on deposits. Other income increased $692,000 due
to an increase in loan servicing income and an increase in gain on sales of
mortgage loans held for sale. Other expenses increased $126,000. This is a
result of increased salaries, commissions and related benefits primarily due to
annual merit increases in wages for employees. Earnings per share for the three
months ended June 30, 2003 was $0.29 compared to $0.26 for the three months
ended June 30, 2002.
Return on average assets (ROA) on an annualized basis for the second quarter
2003 was 1.38% compared to 1.37% for the second quarter 2002. Return on average
equity (ROE) on an annualized basis for the second quarter 2003 was 13.73%
compared to 14.63% for the second quarter 2002.
Net income for the six months ended June 30, 2003 was $3,851,000 compared to
$3,665,000 for the six months ended June 30, 2002, an increase of $186,000 or
5.07%. Interest income decreased $1,562,000 primarily as a result of a decrease
in interest yields. Interest expense decreased $929,000 primarily due to a
decrease in interest rates paid on deposits and borrowed funds. Other income
increased $1,105,000 as a result of increases in loan servicing income and gain
on sales of mortgage loans held for sale. Other expense increased $306,000, a
result of increased salaries, commissions and related benefits primarily due to
annual merit increases. Earnings per share for the six months ended June 30,
2003 was $0.56 compared to $0.53 for the six months ended June 30, 2002.
Return on average assets (ROA) on an annualized basis for the first six months
of 2003 was 1.37% compared to 1.41% for the first six months in 2002. Return on
average equity (ROE) on an annualized basis for the first six months of 2003 was
13.81% compared to 15.22% for the first six months of 2002. The drop in return
on average equity (ROE) is due to an increase in other comprehensive income from
unrealized gain/loss on securities.
9
Average Balances, Yield and Rates
For the Three Months For the Three Months
Ended June 30, 2003 Ended June 30, 2002
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
-----------------------------------------------------------------------------
(In Thousands) (In Thousands)
ASSETS
Interest-earning assets:
Federal funds sold $ 30,472 $ 94 1.23% $ 19,049 $ 76 1.60%
Investment securities 140,252 1,739 4.93% 135,190 2,149 6.38%
Loans 350,176 5,584 6.34% 332,522 6,043 7.29%
-------- ------ ---- -------- ------ ----
Total interest-earning assets 520,900 $7,417 5.65% 486,761 $8,268 6.81%
Other assets 43,639 40,769
-------- --------
Total Assets $564,539 $527,530
======== ========
LIABILITIES
Interest-bearing liabilities:
Interest-bearing deposits $352,751 $1,871 2.11% $321,981 $2,219 2.76%
Repurchase agreements 49,087 316 2.56% 50,048 346 2.77%
Borrowings 36,314 346 3.79% 41,945 433 4.14%
-------- ------ ---- -------- ------ ----
Total interest-bearing liabilities $438,152 $2,533 2.30% $413,974 $2,998 2.90%
Demand deposits 62,567 57,612
Other liabilities 7,019 6,708
-------- --------
Total Liabilities 507,738 478,294
SHAREHOLDERS' EQUITY 56,801 49,236
-------- --------
Total Liabilities and
Shareholders' Equity $564,539 $527,530
======== ========
Net interest income and
interest rate spread $4,884 3.35% $5,270 3.91%
Net interest income as
a percent of earning assets (annualized) 3.72% 4.34%
==== ====
Net interest margin is calculated as tax equivalent net interest income divided
by average earning assets and represents the Bank's net yield on its earning
assets. The tax equivalent adjustment was calculated using the statutory federal
income tax rate of 34%.
10
AVERAGE BALANCES, YIELD AND RATES
For the Six Months For the Six Months
Ended June 30, 2003 Ended June 30, 2002
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
-------------------------------------------------------------------------------
(In Thousands) (In Thousands)
ASSETS
Interest-earning assets:
Federal funds sold $ 33,358 $ 198 1.19% $ 17,454 $ 148 1.71%
Investment securities 141,378 3,662 5.19% 134,218 4,339 6.52%
Loans 346,518 11,307 6.54% 330,186 12,185 7.44%
-------- ------- ---- -------- ------- ----
Total interest-earning assets 521,254 $15,167 5.84% 481,858 $16,672 6.98%
Other assets 41,318 40,849
-------- --------
Total Assets $562,572 $522,707
======== ========
LIABILITIES
Interest-bearing liabilities:
Interest-bearing deposits $351,971 $ 3,867 2.20% $324,871 $4,590 2.85%
Repurchase agreements 50,515 645 2.56% 43,838 613 2.82%
Federal funds purchased 0 0 -- 12 0 0.00%
Borrowings 36,373 688 3.79% 43,683 926 4.27%
-------- ------ ----- -------- ------ -----
Total interest-bearing liabilities $438,859 5,200 2.38% $412,404 $6,129 3.00%
Demand deposits 61,174 55,314
Other liabilities 6,772 6,433
-------- --------
Total Liabilities 506,805 474,151
SHAREHOLDERS' EQUITY 55,767 48,556
-------- --------
Total Liabilities and
Shareholders' Equity $562,572 $522,707
======== ========
Net interest income and
interest rate spread $ 9,967 3.46% $10,543 3.98%
Net interest income as
a percent of earning assets (annualized) 3.83% 4.41%
==== ====
Net interest margin is calculated as tax equivalent net interest income divided
by average earning assets and represents the Bank's net yield on its earning
assets. The tax equivalent adjustment was calculated using the statutory federal
income tax rate of 34%.
11
NET INTEREST INCOME AND NET INTEREST MARGIN
Net interest income is the principal source of earnings for a banking company.
It represents the differences between interest and fees earned on the loan and
investment portfolios offset by the interest paid on deposits and borrowings.
The six months ended June 30, 2003 has been characterized by fairly stable
interest rates.
Net interest margin is calculated as tax equivalent net interest income divided
by average earning assets and represents the Bank's net yield on its earning
assets. The tax equivalent adjustment was calculated using the statutory federal
income tax rate of 34%.
SECOND QUARTER 2003 COMPARED TO SECOND QUARTER 2002:
Net interest income (on a tax equivalent basis) for the three months ended June
30, 2003 decreased by $386,000 or 7.32% compared to the three months ended June
30, 2002. Interest income decreased $851,000 as a result of a decrease in
yields. Total average loans increased from $332,522,000 for the second quarter
of 2002 to $350,176,000 for the second quarter of 2003 while interest yield on
loans decreased from 7.29% for the second quarter of 2002 to 6.34% for the
second quarter of 2003. Average investment securities increased from
$135,190,000 for the second quarter of 2002 to $140,252,000 for the second
quarter of 2003. Interest expense decreased $465,000 primarily as a result of a
decrease in interest rates paid. Total average interest-bearing deposits
increased from $321,981,000 for the second quarter of 2002 to $352,751,000 for
the second quarter of 2003 while interest rates paid on interest-bearing
deposits decreased from 2.76% for the second quarter of 2002 to 2.11% for the
second quarter of 2003. The interest rate spread, which is the difference
between the average yield on interest earning assets and the average rate paid
on interest bearing liabilities, was 3.35% for the three months ended June 30,
2003, a decrease of 56 basis points from the interest rate spread of 3.91% for
the three months ended June 30, 2002.
Net interest margin for the three months ended June 30, 2003 was 3.72% compared
with 4.34% for the three months ended June 30, 2002.
YTD 2003 COMPARED TO YTD 2002:
Net interest income (on a tax equivalent basis) for the six months ended June
30, 2003 decreased by $576,000 or 5.46% compared to the six months ended June
30, 2002. Interest income decreased $1,505,000 as a result of a decrease in
yields. Total average loans increased to $346,518,000 for the first six months
of 2003 from $330,186,000 for the first six months of 2002. Total average
investment securities increased to $141,378,000 for the first six months of 2003
from $134,218,000 for the first six months of 2002. Interest yields fell on both
loans and investment securities for the six months ended June 30, 2003. Interest
expense decreased $929,000 due to a decrease in interest rates paid. Total
average interest bearing deposits increased to $351,971,000 for the first six
months of 2003 from $324,871,000 for the first six months of 2002, while
interest rates paid on those deposits decreased to 2.20% in the first half of
2003 from 2.85% in the first half of 2002. The interest rate spread was 3.46%
for the six months ended June 30, 2003, a decrease of 52 basis points from the
interest rate spread of 3.98% for the six months ended June 30, 2002.
Net interest margin for the six months ended June 30, 2003 was 3.83% compared
with 4.41% for the six months ended June 30, 2002.
12
PROVISION AND ALLOWANCE FOR LOAN LOSSES
For the six months ended June 30, 2003, the Bank charged $650,000 to expense for
the provision for loan loss compared to $750,000 for the six months ended June
30, 2002.
Allowance for Loan Losses
(In Thousands)
- ----------------------------------------------------------------------------------------------------------------
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
2003 2002 2003 2002
- ----------------------------------------------------------------------------------------------------------------
Balance at beginning of period $3,431 $2,827 $3,384 $2,737
Charge-offs (57) (658) (231) (835)
Recoveries 36 43 57 85
------ ------ ------ ------
Net (charge-offs) recoveries (21) (615) (174) (750)
Provision for loan losses 450 525 650 750
------ ------ ------ ------
Balance at end of period $3,860 $2,737 $3,860 $2,737
====== ====== ====== ======
Ratio of net charge-offs during period to
average loans outstanding during period 0.01% 0.18% 0.05% 0.23%
Ratio of allowance for loan losses
to total loans 1.09% 0.81% 1.09% 0.81%
- ----------------------------------------------------------------------------------------------------------------
The ratio of allowance for loan losses to total loans increased to 1.09% at June
30, 2003 from 0.81% at June 30, 2002.
There are several factors that are included in the analysis of the adequacy of
the allowance for loan losses. Management considers loan volume trends, levels
and trends in delinquencies and non-accruals, current problem credits, national
and local economic trends and conditions, concentrations of credit by industry,
current and historical levels of charge-offs, the experience and ability of the
lending staff, and other miscellaneous factors. Management has determined the
allowance for loan losses is adequate to absorb probable loan losses in its loan
portfolio as of June 30, 2003 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 current problem credits factor includes the exposure
believed to exist for specifically identified problem loans determined on a
loan-by-loan basis.
A table showing the allocation of allowance for loan losses is shown below.
Allocation of Allowance for Loan Losses
(In Thousands)
- --------------------------------------------------------------------------------------------
June 30, December 31,
2003 2002
- --------------------------------------------------------------------------------------------
Specific Problem Loans $2,123 $1,974
Loan Type Allocation:
Commercial & Agricultural 968 1,006
Commercial Real Estate 85 31
Residential Real Estate 48 13
Consumer 201 77
------ ------
1,302 1,127
Unallocated 435 283
------ ------
Total Reserve $3,860 $3,384
====== ======
13
Specific problem loans includes the allocation of the allowance for specific
problem credits. Loan type allocation includes the factor of loan volume trends,
with management's goal for this factor to maintain an adequate loan loss reserve
for outstanding loans less the specifically identified current problem credits.
The allocation of the allowance among the various loan types is based on the
average proportion of the loan types that make up the specific problem loans.
The unallocated portion of the allowance consists of the other factors included
in the analysis because those factors cannot be tied to specific loans or loan
categories.
The allocation and total for the allowance for loan losses is not to be
interpreted as a single year's exposure for loss nor the loss for any specified
time period.
NONPERFORMING LOANS
It is the policy of the Bank to place a loan in non-accrual status whenever
there is substantial doubt about the ability of a borrower to pay principal or
interest on any outstanding credit. Management considers such factors as payment
history, the nature and value of collateral securing the loan and the overall
economic situation of the borrower when making a non-accrual decision.
Non-accrual loans are closely monitored by management. A non-accruing loan is
restored to current status when the prospects of future contractual payments are
no longer in doubt.
Total nonperforming loans at June 30, 2003 were $4,849,000, an increase of
$3,046,000 from December 31, 2002. This increase includes two loans totaling
$2,300,000. The following table presents nonperforming and nonaccrual loan
information as of the dates indicated.
Nonperforming Loans
(In Thousands)
- ------------------------------------------------------------------------------------------------------------------
June 30, December 31,
2003 2002
- ------------------------------------------------------------------------------------------------------------------
Nonaccrual loans $4,236 $1,801
Accruing loans past due 90 days or more 613 2
------ -------
Total nonperforming loans $4,849 $1,803
Nonperforming loans as a percent of loans 1.37% 0.52%
Ratio of the allowance for loan losses to
nonperforming loans 79.60% 187.00%
- ------------------------------------------------------------------------------------------------------------------
OTHER INCOME
Other Income
(In Thousands)
- ------------------------------------------------------------------------------------------------------------------
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
2003 2002 2003 2002
- ------------------------------------------------------------------------------------------------------------------
Trust service fees $ 147 $ 151 $ 281 $ 281
Service charges 371 278 720 571
Insurance Center commissions 439 444 849 794
Loan servicing income 219 161 424 382
Income on equity investment 85 86 171 169
Gain on sales of mortgage loans 537 68 958 215
Other 295 213 576 462
------ ------ ------ ------
Total other income $2,093 $1,401 $3,979 $2,874
- ------------------------------------------------------------------------------------------------------------------
SECOND QUARTER 2003 COMPARED TO SECOND QUARTER 2002:
Other income for the second quarter of 2003 was $2,093,000 compared to
$1,401,000 for the second quarter of 2002, an increase of $692,000 or 49.4%. An
increase in the number of residential mortgage loans and refinancings processed
and sold to the FNMA secondary market accounted for an increase of $469,000 in
gains on sales of mortgage loans in the quarter ended June 30, 2003. Service
charges on deposit accounts and FNMA loans and closing fees on mortgage loans
also contributed to the increase.
14
YTD 2003 COMPARED TO YTD 2002:
Total other income for the six months ended June 30, 2003 was $3,979,000
compared to $2,874,000 for the six months ended June 30, 2002, an increase of
$1,105,000 or 38.4%. Service charges increased $149,000 while loan servicing
income increased $58,000. Gain on sales of mortgage loans held for sale
increased $743,000, resulting from an increase in the number of new
residential mortgage loans and refinancings processed and sold in the
secondary market during the first six months of 2003. Other income increased
$114,000 while Insurance Center commissions increased $55,000.
OTHER EXPENSES
Other Expenses
(In Thousands)
- --------------------------------------------------------------------------------------------------------------------------
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
2003 2002 2003 2002
- --------------------------------------------------------------------------------------------------------------------------
Salaries, commissions, and employee benefits $1,994 $1,759 $4,192 $3,757
Occupancy 236 223 477 444
Data processing 257 236 525 488
Postage, stationery and supplies 140 113 296 239
Advertising 96 79 156 204
Outside service fees 98 131 226 222
Amortization of intangibles 69 69 137 137
Other 529 683 1,102 1,314
------ ------ ----- ------
Total other expenses $3,419 $3,293 $7,111 $6,805
- --------------------------------------------------------------------------------------------------------------------------
SECOND QUARTER 2003 COMPARED TO SECOND QUARTER 2002:
Other expenses for the second quarter of 2003 were $3,419,000 compared to
$3,293,000 for the second quarter of 2002, an increase of $126,000, or 3.8%. The
increase is a result of increased salaries, commissions and related benefits due
primarily to annual merit increases for employees.
YTD 2003 COMPARED TO YTD 2002:
Other expenses for the first six months of 2003 were $7,111,000 compared to
$6,805,000 for the first six months of 2002, an increase of $306,000 or 4.5%.
The increase is a result of increased salaries, commissions, and related
benefits due primarily to annual merit increases for employees. Other expenses
increased primarily due to increased software amortization, other real estate
expense, and increased postage costs.
INCOME TAXES
The effective tax rate for the six months ended June 30, 2003 was 22.2% compared
to 21.7% for the six months ended June 30, 2002. The increase in effective tax
rates in the period is the result of taxable income increasing at a greater rate
than tax exempt income.
BALANCE SHEET
JUNE 30, 2003 COMPARED TO DECEMBER 31, 2002
The Corporation's total assets increased from $565.8 million at December 31,
2002 to $572.4 million at June 30, 2003. Loans increased $11.4 million, a result
of an increase in commercial loans. The increase in other assets is due to the
purchase of a $5.0 million life insurance policy on certain officers of the
bank.
Deposits increased $3.1 million to $419.2 million at June 30, 2003 from $416.1
million at December 31, 2002, due to increases in non-interest bearing deposits
and certificates of deposit.
15
LIQUIDITY MANAGEMENT
Liquidity describes the ability of the Corporation to generate adequate amounts
of cash to meet financial obligations that arise out of the ordinary course of
business. Liquidity is primarily needed to meet borrowing and deposit withdrawal
requirements of the customers of the Bank and to fund current and planned
expenditures. The Bank maintains its asset liquidity position internally through
cash and cash equivalents, short term investments, the maturity distribution of
the investment portfolio, loan repayments and income from earning assets. A
substantial portion of the investment portfolio contains readily marketable
securities that could be converted to cash immediately. On the liability side of
the balance sheet, liquidity is affected by the timing of maturing liabilities
and the ability to generate new deposits or borrowings as needed. Other sources
are available through borrowings from the Federal Reserve Bank, the Federal Home
Loan Bank and from lines of credit approved at correspondent banks. Management
knows of no trend or event which will have a material impact on the Bank's
ability to maintain liquidity at adequate levels.
CAPITAL RESOURCES AND ADEQUACY
Capital
Dollars In Thousands, Except Share Data)
- -----------------------------------------------------------------------------------------------
June 30, December 31,
2003 2002
- -----------------------------------------------------------------------------------------------
Shareholders' Equity $58,473 $54,284
Total capital (to risk-weighted assets):
Consolidated 12.8% 12.3%
First National Bank in Manitowoc 12.5% 12.0%
Tier 1 capital (to risk-weighted assets):
Consolidated 11.8% 11.4%
First National Bank in Manitowoc 11.5% 11.1%
Tier I capital (to average assets):
Consolidated 8.1% 7.7%
First National Bank in Manitowoc 7.9% 7.5%
Dividends Per Share-This Quarter $ 0.050 $ 0.054
Dividends Per Share-Year to Date 0.100 0.183
Earnings Per Share-This Quarter $ 0.290 $ 0.220
Earnings Per Share-Year to Date 0.560 1.020
Dividend Payout Ratio-This Quarter 17.24% 24.55%
Dividend Payout Ratio-Year to Date 17.86% 17.94%
- -----------------------------------------------------------------------------------------------
Total shareholders' equity increased $4.2 million from $54.2 million at December
31, 2002 to $58.4 million at June 30, 2003. Net income for the six month period
ending June 30, 2003 was $3.8 million.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios of total and Tier 1
capital to risk-weighted assets, and of Tier 1 capital to average assets.
Management believes, as of June 30, 2003 and December 31, 2002, that the Bank
meets all capital adequacy requirements to which it is subject.
As of June 30, 2003, the Bank's and the Corporation's ratio of Tier 1 capital to
risk-weighted assets was 11.5% and 11.8%, respectively. As of June 30, 2003,
the Bank's and the Corporation's ratio of total capital to risk-weighted assets
was 12.5% and 12.8%, respectively. In addition to risk-based capital, banks and
bank holding companies are required to maintain a minimum amount of Tier 1
capital to total assets, referred to as the leverage capital ratio, of at least
4%. As of June 30, 2003, the Bank's and the Corporation's leverage capital ratio
was 7.9% and 8.1%, respectively.
16
As of June 30, 2003 and December 31, 2002, the most recent notification from the
Office of the Comptroller of Currency and the Federal Deposit Insurance
Corporation categorized the Bank as well capitalized and adequately capitalized,
respectively, under the regulatory framework for prompt corrective action. To be
categorized as well capitalized, the Bank must maintain minimum total
risk-based, Tier 1 risk-based, and Tier 1 leverage ratios. There are no
conditions or events since such notifications that management believes have
changed the institution's category.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure," as an amendment to SFAS
No. 123, "Accounting for Stock-Based Compensation." SFAS No. 148 provides
alternative methods of transition for a voluntary change to the fair value-based
method of accounting for stock-based employee compensation. The Corporation does
not use stock-based employee compensation, therefore the release of SFAS No. 148
does not effect the financial statements.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" (FIN 46). The objective of this interpretation is to
provide guidance on how to identify a variable interest entity and determine
when the assets, liabilities, noncontrolling interests, and results of
operations of a variable interest entity need to be included in a company's
consolidated financial statements. A company that holds variable interests in an
entity will need to consolidate the entity if the company's interest in the
variable interest entity is such that the company will absorb a majority of the
variable interest entity's losses and/or receive a majority of the entity's
expected residual returns, if they occur. FIN 46 also requires additional
disclosures by primary beneficiaries and other significant variable interest
holders. The provisions of this interpretation are effective upon issuance. The
requirements of FIN 46 did not have a material impact on the results of
operations, financial position, or liquidity.
In May 2003, FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity." SFAS No. 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). Many of those instruments
were previously classified as equity. SFAS No. 150 is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003. The adoption of SFAS No. 150 will not have a material impact on the
results of operations, financial position, or liquidity.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There has been no material change to the market risk position from that
disclosed as of December 31, 2002 in the Corporation's 2002 Form 10-K Annual
Report.
ITEM 4. CONTROLS AND PROCEDURES
The Corporation's senior management, with the participation of the Corporation's
chief executive officer and chief financial officer, evaluated the effectiveness
of the Corporation's disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Exchange Act) as of June 30, 2003. Based on
this evaluation, the Corporation's chief executive officer and chief financial
officer concluded that, as of June 30, 2003, the disclosure controls and
procedures were (1) designed to ensure that material information relating to the
Corporation, including the Bank and the Bank's wholly-owned subsidiaries, is
made known to the Corporation's chief executive officer and chief financial
officer by others within those entities, particularly during the period in which
this report was being prepared and (2) effective, in that they provide
reasonable assurance that information required to be disclosed in the reports
that the Corporation files or submits under the Act is recorded, processed,
summarized and reported within the time periods specified in the SEC's rules and
forms.
17
FIRST MANITOWOC BANCORP, INC.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Neither the Corporation nor its subsidiary is involved in any pending
legal proceedings involving amounts in which management believes are material to
the financial condition and results of operations of the Corporation.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits:
Exhibit Number Exhibit Descriptions
-------------- --------------------
(3)(1) Articles of Incorporation of First Manitowoc Bancorp,
Inc. (1)
(3)(2) Amended and Restated Bylaws of First Manitowoc Bancorp,
Inc. (2)
(10) First National Bank in Manitowoc Profit Sharing Plan (3)
(31) Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002 (4)
(32) Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 (4)
(99) Item 3 of Part I of First Manitowoc Bancorp, Inc.'s Report
on Form 10-K filed March 18, 2003, hereby incorporated by
reference (5)
(1) Incorporated by reference to Exhibit (3)(1) filed with the
Corporation's Registration Statement on Form 10 filed May 5, 1999.
Amendment filed as Exhibit (3)(2) to the Corporation's Quarterly
Report on Form 10-Q for the quarterly period ended June 30, 2000.
18
(2) Incorporated by reference to Exhibit (3)(2) filed with the
Corporation's Annual Report on Form 10-K for the fiscal year ended
December 31, 2002.
(3) Incorporated by reference to Exhibit (10)(1) filed with the
Corporation's Quarterly Report on Form 10-Q for the quarterly period
ended March 31, 2003.
(4) Filed herewith.
(5) Incorporated by reference to the Corporation's Annual Report on Form
10-K for the fiscal year ended December 31, 2002.
b) Reports on Form 8-K:
There were no reports on Form 8-K filed for the quarter ended
June 30, 2003.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
FIRST MANITOWOC BANCORP, INC.
(Registrant)
Date: August 14, 2003 /s/ Thomas J. Bare
------------------
Thomas J. Bare
Chief Executive Officer
and Chief Financial Officer
19
EXHIBIT INDEX
Exhibit Number Exhibit Descriptions
-------------- --------------------
(3)(1) Articles of Incorporation of First Manitowoc Bancorp,
Inc. (1)
(3)(2) Amended and Restated Bylaws of First Manitowoc Bancorp,
Inc. (2)
(10) First National Bank in Manitowoc Profit Sharing Plan (3)
(31) Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002 (4)
(32) Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 (4)
(99) Item 3 of Part I of First Manitowoc Bancorp, Inc.'s Report
on Form 10-K filed March 18, 2003, hereby incorporated by
reference (5)
(1) Incorporated by reference to Exhibit (3)(1) filed with the
Corporation's Registration Statement on Form 10 filed May 5, 1999.
Amendment filed as Exhibit (3)(2) to the Corporation's Quarterly Report
on From 10-Q for the quarterly period ended June 30, 2000.
(2) Incorporated by reference to Exhibit (3)(2) filed with the
Corporation's Annual Report on Form 10-K for the fiscal year ended
December 31, 2002.
(3) Incorporated by reference to Exhibit (10)(1) filed with the
Corporation's Quarterly Report on Form 10-Q for the quarterly period
ended March 31, 2003.
(4) Filed herewith.
(5) Incorporated by reference to the Corporation's Annual Report on
Form 10-K for the fiscal year ended December 31, 2002.