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.
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.
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
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.
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."
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
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.
ITEM 3
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
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None
PART II ITEM 5
ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED 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.
All market information shown above has been restated for stock dividends.
CASH DIVIDENDS
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.
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.
ITEM 6
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.
- ------------------------- * 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.
ITEM 7
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
Loan Portfolio
The following table presents the composition of the Bank's loan portfolio by significant concentration.
SUMMARY OF LOAN PORTFOLIO
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
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.
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
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.
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
RATE AND VOLUME VARIANCE ANALYSIS BASED ON AVERAGE BALANCES
TABLE 2
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
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
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.
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
TABLE 4
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.
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.
SECURITIES AVAILABLE FOR SALE
TABLE 5
The following table presents the maturity by type of the investment portfolio for the year ended December 31, 1999.
INVESTMENT PORTFOLIO ANALYSIS
TABLE 6
Loan Portfolio
The Bank is actively engaged in originating loans to customers in Manitowoc, Calumet, Sheboygan and Brown counties. The Bank has policies and procedures designed to mitigate credit risk and to maintain the quality of the loan portfolio. These policies include underwriting standards for new credits as well as the continuous monitoring and reporting of asset quality and the adequacy of the allowance for loan losses. These polices, coupled with continuous training efforts, have provided effective checks and balances for the risk associated with the lending process. Lending authority is based on the level of risk, size of the loan and the experience of the lending officer.
Bank underwriting procedures are based on a process which evaluates the management, repayment ability, collateral support, credit history, and overall financial strength of prospective and current customers from a relationship oriented perspective. Residential mortgage loans are predominantly underwritten to general FNMA guidelines.
The Bank extends the following types of credit: commercial loans, agricultural loans, real estate loans and consumer loans.
Commercial loans are often secured with first liens on accounts receivable, inventory and/or equipment. Commercial loans generally have loan to value ratios of 80% or less. Agricultural loans are collateralized with first liens on crops, farm products, farm personal property and/or real estate. Agricultural loans generally have loan to value ratios of 70% or less, except for agricultural real estate loans which have loan to value ratios of
80% or less. Real estate loans include commercial real estate loans and residential real estate loans. Real estate loans are collateralized with first mortgages. Commercial real estate loans generally have loan to value ratios of 80% or less while residential real estate loans have loan to value ratios of 90% or less. Consumer loans include loans to individuals for personal, family or household purposes. Consumer loans may be secured with first lien positions or 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:
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.
Table 7 "Summary of Loan Portfolio" presents the composition of the Bank's loan portfolio by significant concentration.
SUMMARY OF LOAN PORTFOLIO
TABLE 7
MATURITIES OF LOAN PORTFOLIO
TABLE 8
The Bank's policy is to make the majority of its loan commitments in the market area it serves. This tends to reduce risk because management is familiar with the credit histories of loan applicants and has an in-depth knowledge of the risk to which a given credit 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
in the level of nonaccrual loans. Accruing loans 90 days or more past due include loans that are both well secured and in the process of collection.
RISK ELEMENTS OF LOAN PORTFOLIO
TABLE 9
Total nonperforming loans at December 31, 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
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.
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
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:
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
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
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
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
- ------------------------- (V) Variable repricing terms
(F) Fixed repricing terms
ITEM 8
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders First Manitowoc Bancorp, Inc.:
We have audited the accompanying consolidated statements of financial condition of First Manitowoc Bancorp, Inc. and subsidiaries (Corporation) as of December 31, 1999 and 1998, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1999. These consolidated financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of First Manitowoc Bancorp, Inc. and subsidiaries as of December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1999, in conformity with generally accepted accounting principles.
KPMG LLP
Milwaukee, Wisconsin February 4, 2000
FIRST MANITOWOC BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION DECEMBER 31, 1999 AND 1998
See accompanying notes to consolidated financial statements.
FIRST MANITOWOC BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
See accompanying notes to consolidated financial statements.
FIRST MANITOWOC BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
See accompanying notes to consolidated financial statements.
FIRST MANITOWOC BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
See accompanying notes to consolidated financial statements.
FIRST MANITOWOC BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999 AND 1998
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting policies followed by First Manitowoc Bancorp, Inc. (Corporation) and its wholly owned subsidiaries, the First National Bank in Manitowoc (Bank) and FNBM Investment Corp., conform to generally accepted accounting principles and to general practice within the banking industry. FNBM Realty, previously established due to environmental issues which surfaced upon the purchase of a branch, was dissolved during 1998 after all remediation efforts were completed. Upon dissolution, the land obtained by the Corporation was sold to the Bank at the cost previously recorded by FNBM Realty. Management of the Corporation has made a number of estimates and assumptions relating to the reporting of assets and liabilities and revenues and expenses and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. The more significant accounting policies are summarized below:
The Corporation consummated the acquisition of Dairy State Financial Services, Inc. (Dairy), a Wisconsin Bank holding company for a cash price of approximately $13,521,000. Dairy's wholly-owned subsidiary, Dairy State Bank, (DSB), has two locations in Plymouth, Wisconsin. Dairy had approximately $66 million in assets at date of acquisition. Dairy and its wholly-owned subsidiary, DSB, were merged into the Bank at date of acquisition. The transaction was accounted for under the purchase method of accounting and goodwill of approximately $7.9 million was recorded. The Company's financial statements reflect the accounts and operations of Dairy beginning on December 1, 1999. The Corporation recorded all Dairy assets and liabilities at fair value at date of acquisition. See note 17.
(A) DESCRIPTION OF BUSINESS
The Bank is a nationally-chartered commercial bank with eleven branch locations principally in Manitowoc and Sheboygan Counties. The Bank accepts FDIC-insured deposits and makes loans which are principally secured by real estate, receivables, equipment, or inventories. The Bank also operates trust operations. The primary regulators of the Bank are the OCC and the FDIC.
(B) BASIS OF FINANCIAL STATEMENT PRESENTATION
The consolidated financial statements include the accounts of the Corporation and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
(C) CASH AND CASH EQUIVALENTS
For purposes of the consolidated statements of cash flows, cash and cash equivalents include cash and due from banks and federal funds sold and repurchase agreements.
The Bank is required to maintain noninterest-bearing deposits on hand or with the Federal Reserve Bank. At December 31, 1999, those required reserves of $1,812,000 were satisfied by currency and coin holdings.
(D) LOANS
Loans are carried at their unpaid principal balance. Interest on loans is calculated by using the simple interest method on daily balances of the principal amount outstanding and is recognized in the period earned.
First mortgage loans held for sale are recorded at the lower of cost or market as determined on an aggregate basis.
Nonaccrual loans are loans on which the accrual of interest ceases when the timely collection of interest payments is determined to be uncertain by management. It is the general policy of the Bank to discontinue the accrual of interest when principal or interest payments are delinquent 90 days or more unless the loan is well collateralized and in process of collection.
A loan is classified as impaired when it is probable that a creditor will be unable to collect all amounts due, including principal and interest payments, according to the contractual terms of the loan agreement. Impaired loans generally include nonperforming commercial loans for which it is probable that the Bank will be unable to collect all principal and interest amounts due according to the terms of the loan agreement. Large groups of homogeneous loans such as mortgage and installment loans are collectively evaluated for impairment. Impaired loans are measured and reported based on the present value of expected cash flows discounted at the loan's effective interest rate, or at the fair value of the loan's collateral if the loan is deemed collateral dependent. Interest income on impaired loans is recorded when cash is received and only if principal is considered to be fully collectible.
(E) SECURITIES
The Corporation classifies all securities as available for sale. Securities available for sale are securities for which there is no positive intent to hold until maturity and which are carried at estimated fair value. Concurrent with the acquisition of Dairy, the Corporation transferred all Dairy held to maturity securities to securities available for sale. Unrealized holding gains and losses, net of the related tax effect on available for sale securities, are reported as a separate component of comprehensive income until realized. Realized gains and losses on the sale of available for sale securities are determined using the specific identification method. Premiums and discounts are amortized as an adjustment to yield using the straight-line method.
(F) ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established through a provision for loan losses charged to expense. Loans are charged against the allowance when management believes that the collectibility of the principal amount is unlikely. Recoveries of amounts previously charged off are credited to the allowance.
The provision for loan losses is based on management's evaluation of the loan portfolio, including such factors as the volume and character of loans outstanding, the relationship of the allowance for loan losses to outstanding loans, past loan loss experience, the estimated value of any underlying collateral, and general economic conditions.
Management believes that the allowance for loan losses is adequate. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowance for loan losses. Such agencies may require the Bank to recognize additions to the allowance based on their judgments about information available to them at the time of their examination.
(G) PREMISES AND EQUIPMENT
Land is carried at cost. Other premises and equipment are carried at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the following terms: buildings and improvements, 15-39 years; furniture and equipment, 5-10 years.
(H) INVESTMENT IN CORPORATE JOINT VENTURE
The Bank's investment in a corporate joint venture is accounted for under the equity method and is included in other assets.
(I) FORECLOSED PROPERTIES
Foreclosed properties acquired by the Bank through foreclosure or deed in lieu of foreclosure on loans for which the borrowers have defaulted as to the payment of principal and interest are initially recorded at the lower of the fair value of the asset, less the estimated costs to sell the asset or the carrying value of the related loan balance. Costs relating to the development and improvement of the property are capitalized. Income and expenses incurred in connection with holding and operating the property are charged to expense. Valuations are periodically performed by management and third parties and a charge to expense is taken for the excess of the carrying value of a property over its fair value less costs to sell.
(J) INTANGIBLE ASSETS
Intangible assets attributable to the value of core deposits and the excess of the purchase price over the fair value of net assets (goodwill) acquired are stated at cost less accumulated amortization. Goodwill is amortized on a straight-line basis over periods of 15-25 years. Core deposits are amortized on a straight-line basis over a period of 10 years. The Corporation reviews intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Adjustments are recorded if it is determined that the benefit of the intangible asset has decreased.
(K) MORTGAGE SERVICING RIGHTS
The Corporation recognizes as a separate asset the rights to service mortgage loans for others however those servicing rights are acquired. Capitalized mortgage servicing rights are assessed for impairment based on the fair value of those rights.
The value of mortgage servicing rights is amortized to expense in relation to the servicing revenue expected to be earned. The Bank periodically evaluates the carrying value and remaining amortization periods of mortgage servicing rights. The evaluation takes into consideration certain risk characteristics including loan type, interest rate, prepayment trends, volatility and external market factors.
(L) INCOME TAXES
The Corporation and its subsidiaries file consolidated Federal income tax returns. Federal income tax expense (benefit) is allocated based upon an intercompany tax sharing agreement. The Corporation and the Bank file separate state tax returns.
Income taxes are accounted for using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to the differences between the financial statement carrying amount of assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date.
(M) PER SHARE COMPUTATIONS
All per share financial information has been adjusted to reflect the 5-for-4 stock split declared in April, 1999. Weighted average shares outstanding were 1,734,317 for the years ended December 31, 1999, 1998 and 1997.
(N) RECLASSIFICATIONS
Certain amounts as previously reported in the prior year financial statements have been reclassified to conform with the current year presentation.
(O) BUSINESS SEGMENTS
The Corporation through the branch network of its subsidiaries provides a broad range of financial services to individuals and companies in northeastern Wisconsin. These services include demand, time, and savings deposits; commercial and retail lending; ATM processing; and trust services. While the Corporation's chief decision maker monitors the revenue streams of the various products and services, operations are managed and financial performance is evaluated on a Corporate-wide basis. Accordingly, all of the Corporation's operations are considered by management to be aggregated in one reportable operating segment.
(2) SECURITIES AVAILABLE FOR SALE
The amortized cost and fair values of securities available for sale at December 31, 1999 and 1998 are as follows:
The amortized cost and fair value of securities at December 31, 1999, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
There were no sales of securities in 1999 or 1998. Proceeds from the sales of securities for 1997 were $3,000,000. Gains on the sale of securities were approximately $765 in 1997.
Securities with carrying values aggregating approximately $36,385,000 and $33,974,000 at December 31, 1999 and 1998, respectively, were pledged to secure public and trust deposits and securities sold under repurchase agreements.
(3) LOANS
Loans are summarized as follows:
The following table presents data on impaired loans at December 31, 1999 and 1998:
Nonaccrual loans totaled $1,618,000 and $927,000 at December 31, 1999 and 1998, respectively. Interest income on nonaccrual loans of $98,000, $43,000 and $16,000 was recognized for cash payments received in 1999, 1998 and 1997, respectively.
Certain of the Corporation's and Bank's executive officers, directors, and their associates are loan customers of the Bank. As of December 31, 1999 and 1998, loans aggregating approximately $2,416,000 and $3,289,000, respectively, were outstanding to such parties. These loans were made in the ordinary course of business and on substantially the same terms as those prevailing for comparable transactions with other customers. During 1999, approximately $651,000 of new loans (additions or renewals) were made, and repayments (collections or maturities) totaled approximately $1,524,000.
The fair value of capitalized mortgage servicing approximates the carrying value at December 31, 1999 and 1998. Changes in capitalized mortgage servicing rights is summarized as follows:
Mortgage loans serviced for others are not included in the accompanying consolidated statements of financial condition. The unpaid principal balances of mortgage loans serviced for others was $65,443,000 and $48,884,000 at December 31, 1999 and 1998, respectively.
Custodial escrow balances maintained in connection with the foregoing loan servicing, and included in demand deposits, were approximately $73,000 and $51,000 at December 31, 1999 and 1998, respectively.
(4) ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses for the years ended December 31, 1999, 1998 and 1997 is summarized as follows:
(5) PREMISES AND EQUIPMENT
A summary of premises and equipment at December 31, 1999 and 1998 is as follows:
(6) INVESTMENT IN CORPORATE JOINT VENTURE
The Bank and another financial institution each own 49.8% of the stock of a corporate joint venture (venture) whose business is developing and providing data processing services to the Bank and other financial institutions. The venture has total assets of $3,765,000 and liabilities of $2,104,000. The Bank guarantees a $468,000 loan used for the construction of the venture's new facility. The Bank's earnings from its investment in the venture were approximately $142,000, $51,000 and $69,000 for the years ending December 31, 1999, 1998 and 1997, respectively.
The Bank has a long-term cancelable contract with the venture that extends through September, 2002. At that time, the contract is automatically renewed for a period of 60 months. The Bank and the other financial institution each have the option to terminate the contract any time, but would incur a termination penalty of three times the average monthly fees over the prior three months. A termination penalty is not incurred if the Bank provides 180 days notice and continues processing up to the end of that period.
(7) DEPOSITS
The distribution of deposits at December 31 is as follows:
At December 31, 1999, the scheduled maturities of time deposits are as follows:
Time deposits include approximately $26,044,000 and $18,184,000 of accounts in denominations of $100,000 or more at December 31, 1999 and 1998, respectively.
(8) SECURITIES SOLD UNDER REPURCHASE AGREEMENTS
Securities sold under agreements to repurchase generally mature within one day from the transaction date. The agreements to repurchase securities requires that the Bank (seller) repurchase identical securities as those that were sold. The securities underlying the agreements were under the institution's control at December 31, 1999 and 1998.
Information concerning securities sold under agreements to repurchase is summarized as follows:
(9) BORROWED FUNDS
Borrowed funds are summarized as follows at December 31:
The average rate paid on the treasury, tax and loan account was 5.60% in 1999, 5.24% in 1998, and 5.27% in 1997.
FHLB advances are subject to a prepayment penalty if they are repaid prior to maturity. The FHLB advances are callable either six months or one year after origination and quarterly thereafter. The Corporation is required to maintain as collateral unencumbered first mortgage loans in its portfolio aggregating at least 167% of the amount of outstanding advances from the Federal Home Loan Bank. FHLB stock and loans totaling approximately $90,498,000 and $69,348,000 were maintained as collateral to secure FHLB advances at December 31, 1999 and 1998, respectively.
(10) BENEFIT PLANS
The Bank has a profit sharing 401(k) plan, a defined contribution plan, which is available to all employees after completion of six months of service. Employees may elect to contribute up to 10% of their income. The Bank may make a discretionary contribution up to the limits established by IRS regulations. The discretionary match was 35% of participant tax deferred contributions in 1999, 1998 and 1997. The Bank made an annual contribution to the plan as determined by the Board of Directors of $94,000, $0, and $113,000 in 1999, 1998 and 1997, respectively. Expense associated with the plan was approximately $177,000, $91,000 and $185,000 in 1999, 1998 and 1997, respectively.
The Bank has a defined contribution pension plan which is available to all employees after completion of six months of service provided that they are employed on the last day of the fiscal year. The Bank contributed 4%, 3%, and 3% of the qualified employees compensation for 1999, 1998 and 1997, respectively. Expense associated with the plan was approximately $141,000, $91,000, and $87,000 in 1999, 1998, and 1997, respectively.
Effective November 30, 1999, the DSB 401(k) plan was merged with the Bank's profit sharing 401(k) plan. Participants in the DSB 401(k) plan became 100% vested in their account balances. DSB employees were eligible to participate in the benefit plans beginning December 1, 1999.
The Corporation has a deferred compensation agreement with one of its officers. Under the terms of the agreement, benefits to be received in the future vest over each year until the officer reaches retirement age. The benefits are generally payable beginning with the date of the termination of employment with the Corporation. The agreement requires an annual payment of $80,600 over fifteen years which is based on the officer's final salary at retirement age. Related expense for this agreement was approximately $214,000 for the year ended December 31, 1999. Included in other liabilities is the vested present value of future payments of approximately $214,000 at December 31, 1999.
The Bank has a non-qualified deferred directors' fee compensation plan which permits directors to defer a portion of their compensation. The benefits are generally payable beginning with the earlier of attaining age 70 or termination of employment with the Corporation. The Bank contributed approximately $71,000 under this plan for the year ended December 31, 1999. Included in other liabilities is the estimated present value of future payments of approximately $1,017,000 at December 31, 1999.
(11) INCOME TAXES
Taxes applicable to income for the years ended December 31, 1999, 1998 and 1997 are summarized as follows:
The tax effects of temporary differences that give rise to significant portions of deferred tax assets and deferred tax liabilities at December 31, 1999 and 1998 are presented below:
The 1999 net deferred tax asset decreased by $1,897,000. The difference of $1,762,000 between the increase and the deferred tax benefits included in income taxes in 1999 is primarily attributable to the tax effect on the unrealized depreciation on securities available for sale which does not have an income statement impact as it is included in other comprehensive income.
The following summarizes the sources of differences between computing income taxes at the statutory Federal rate of 34% and actual income tax expense:
(12) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Bank is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of customers. These financial instruments include commitments to extend credit and standby letters of credit and involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the consolidated financial statements. The contract amounts reflect the extent of involvement the Bank has in these particular classes of financial instruments.
In the event of nonperformance, the Bank's exposure to credit loss for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for instruments reflected in the consolidated financial statements. The Bank does not utilize derivative instruments.
Financial instruments whose contract amounts represent potential credit risk at December 31, 1999 and 1998 are as follows:
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some commitments expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements of the Bank. The Bank evaluates the creditworthiness of each customer on a case-by-case basis and generally extends credit only on a secured basis. Collateral obtained varies but consists primarily of accounts receivable, inventory, motor vehicles, equipment, and real estate. The Bank's lending area primarily encompasses Manitowoc and Sheboygan counties, Wisconsin.
Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Standby letters of credit outstanding totaling approximately $1,296,000 at December 31, 1999 expire in 2000. Approximately $8,000 of letters of credit are irrevocable. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Bank holds accounts receivable, inventory, equipment, and real estate as collateral supporting those commitments for which collateral is deemed necessary. Approximately 84% of standby letters of credit outstanding at December 31, 1999 were supported by collateral.
(13) FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, Disclosures About Fair Value of Financial Instruments, requires that the Bank disclose estimated fair values for its financial instruments. Fair value estimates, methods, and assumptions are set forth below for the Bank's financial instruments.
The estimated fair values of the Corporation's financial instruments at December 31, 1999 and 1998 are as follows:
(A) CASH AND DUE FROM BANKS AND FEDERAL FUNDS SOLD AND REPURCHASE AGREEMENTS
The carrying amounts of cash and due from banks and federal funds sold and repurchase agreements approximate fair value because of their short-term nature and because they do not present unanticipated credit concerns.
(B) SECURITIES
The fair value of securities is estimated based on bid prices published in financial newspapers or bid quotations received from securities dealers.
(C) LOANS
Fair values are estimated for portfolios of loans with similar financial characteristics. The fair value of performing loans is calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risk inherent in the loan. The estimate of maturity is based on the Bank's historical experience with repayments for each loan classification, modified, as required, by an estimate of the effect of current economic and lending conditions. The fair value estimate for credit card loans is based on the carrying value of existing loans. The carrying value of first mortgage loans held for sale approximates fair value due to the short-term nature of the asset.
Fair value for significant nonperforming loans is based on carrying value, less an estimate for credit risk.
The fair values of commitments to extend credit and standby letters of credit are determined based upon the present value of fees received for those products. These amounts are not significant at December 31, 1999.
(D) DEPOSITS
The fair value of deposits with no stated maturity, such as noninterest-bearing demand deposits, savings, super NOW accounts, and money market checking accounts, is equal to the amount payable on demand as of December 31, 1999 and 1998. The fair value of other time deposits is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates offered at December 31, 1999 and 1998 for deposits of similar remaining maturities.
(E) SECURITIES SOLD UNDER REPURCHASE AGREEMENTS
The carrying amounts for securities sold under repurchase agreements approximate fair value because they mature in 90 days or less.
(F) BORROWED FUNDS
The fair values of the Federal Home Loan Bank (FHLB) of Chicago advances are estimated using discounted cash flow analyses, based on the Bank's current incremental borrowing rates for similar types of borrowing arrangements. The carrying amounts for other borrowings approximate fair value.
(G) LIMITATIONS
Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Bank's entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Bank's financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
Fair value estimates are based on existing balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. In addition, the tax ramifications related to the realization of the
unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.
(14) LEASES
In January 1995, the Bank entered into an operating lease agreement for a new branch office building. The lease expires December 31, 2005, with an option whereby the Bank may extend the lease agreement for three successive periods of five years. The lease also contains an option in which after every five-year period, the Bank may purchase the building for the then fair market value. Rent expense under this agreement totaled approximately $78,000 for the years ended December 31, 1999, 1998 and 1997. On January 14, 2000, the Bank optioned to purchase the land and building for $762,000 thereby effectively terminating the lease.
In August 1996, the Bank sold a branch office building and entered into a one-year lease of the building. The lease was extended on a month-to-month basis pending the completion of a new branch building. The building was completed and the lease effectively terminated in June, 1999. Rent expense under this agreement totaled approximately $5,300, $12,000 and $12,000 for the years ended December 31, 1999, 1998 and 1997, respectively.
(15) LEGAL PROCEEDINGS
The Corporation is involved in various legal actions arising in the normal course of its business. While the ultimate outcome of these various legal proceedings cannot be predicted with certainty, it is the opinion of management and through consultation with legal counsel that the resolution of these legal actions will not have a material effect on the Corporation's consolidated financial condition or results of operations.
(16) REGULATORY CAPITAL REQUIREMENTS
The Bank is subject to various regulatory capital requirements administered by federal banking authorities. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital to risk-weighted assets, and of Tier I capital to average assets. Management believes, as of December 31, 1999, that the Bank meets all capital adequacy requirements to which it is subject.
As of December 31, 1999 and 1998, the most recent notification from the Office of the Comptroller of Currency and the Federal Deposit Insurance Corporation categorized the Bank as adequately and well capitalized, respectively, under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the institution's category.
The Bank's actual capital amounts and ratios are presented in the following table:
- ------------------------- * Total capital ratio is defined as Tier I capital plus Tier 2 capital divided by total risk-weighted assets. The Tier I capital ratio is defined as Tier I capital divided by total risk-weighted assets. The leverage ratio is defined as Tier I capital divided by the most recent quarter's average total assets.
The declaration and payment of cash dividends by the Bank to the Corporation is restricted by certain statutory and regulatory limitations. Such dividends are also limited by regulatory capital requirements.
(17) FIRST MANITOWOC BANCORP, INC. (PARENT COMPANY ONLY) FINANCIAL INFORMATION
CONDENSED STATEMENTS OF FINANCIAL CONDITION
CONDENSED STATEMENTS OF INCOME
CONDENSED STATEMENTS OF CASH FLOWS
(18) PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
The following represents pro forma financial information of the Corporation which reflects the acquisition of Dairy State Financial Services, Inc. and subsidiary as if the acquisition had occurred as of the beginning of each year presented. For purposes of the pro forma information, depreciation, amortization, and income taxes have been adjusted to their accounting bases recognized in recording the combination. The pro forma financial information does not necessarily reflect the results of operations that would have occurred had the companies constituted a single entity during such periods.
ITEM 9
ITEM 9 CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
ITEM 10
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
Nine Directors serve on the Company's Board of Directors, including Thomas J. Bare, the Company's President. Each of the Directors also serve as Directors of the Bank. Classified directorships are divided into three classes, each of which are elected for three year terms.
Thomas J. Bare, 61, has served as a Bank Director continuously since 1981, and as a Company Director since its formation in 1983. He was appointed Cashier in 1977, and promoted to Vice President and Cashier in 1978. He served as Vice President and Cashier until September 1983 when he was appointed Acting President. In January 1984 he was elected President, his current position. Mr. Bare also serves as President of the Company; Director of FNBM Investment Corporation, the Bank's investment corporation; and Director, Secretary and Treasurer of United Financial Services, Inc., the Bank's data processing corporation. Mr. Bare's term expires in 2002.
John M. Jagemann, 54, has served as Bank Director continuously since 1996, and as a Company Director since 1996. He is President of Aitken-Reed, Inc., a company that manufactures wire harnesses and heaters. Mr. Jagemann's term expires in 2000.
John C. Miller, 57, has served as Bank Director continuously since 1996, and as a Company Director since 1996. He is President and Sole Director of Miller-St. Nazianz, Inc., a company that manufactures farm equipment; President and Sole Director of Miller Finance Corporation, a retail financing company; and President and Sole Director of Badger Farm Systems, a company that markets farm equipment. Mr. Miller's term expires in 2001.
John E. Nordstrom, 64, has served as a Bank Director continuously since 1992, and as a Company Director since 1993. He is President of Omega Mfg. Corporation, a company that manufactures paper product packaging equipment. Mr. Nordstrom's term expires in 2001.
Craig A. Pauly, 50, has served as a Bank Director continuously since 1980, and as a Company Director since its formation in 1983. He is Director/MIS at Jagemann Stamping Company, a company that manufactures metal stampings. Mr. Pauly's term expires in 2002.
Katherine M. Reynolds, 49, has served as a Bank Director continuously since 1992, and as a Company Director since 1993. She is a attorney practicing as a member of the Manitowoc Offices of Michael Best & Friedrich LLP. Ms. Reynolds' term expires in 2002.
John M. Webster, 54, has served as a Bank Director continuously since 1998, and as a Company Director since 1998. He is President and CEO of Crescent Woolen Mills Co., a manufacturer of woolen and synthetic yarns; and Attorney of Counsel with the Law Offices of Winter, Fox & Stangel, LLP. Mr. Webster's term expires in 2000.
Robert S. Weinert, 60, has served as a Bank Director continuously since 1979, and as a Company Director since its formation in 1983. He is Chairman and Treasurer of Crafts, Inc., a commercial roofing company; and Treasurer of Corrosion Resistant Technologies, Inc., a coating company. Mr. Weinert's term expires in 2000.
John J. Zimmer, 59, served as a Bank Director from 1974 to 1980. He was re-appointed to the board and has served continuously since 1988, and as a Company Director since 1989. Mr. Zimmer is President and Treasurer of J.J. Stangel Co., A Subsidiary of Industrial Distribution Group, a wholesale distributor of industrial supplies; and General Partner of Oak Park Land Co., a real estate development partnership. Mr. Zimmer's term expires in 2001.
EXECUTIVE OFFICERS
Thomas J. Bare (see Directors)
Joseph W. Debilzen, 45, joined the bank in April 1983 serving as Loan Officer. He was promoted to Francis Creek Branch Manager in September 1983. In August 1988, he was promoted to Assistant Vice President Branch Manager. Mr. Debilzen has served as Vice President of Branch Operations since March 1989.
Daniel J. Lalko, 49, has served as Senior Vice President of Lending since March 1989. Mr. Lalko joined the bank in August 1982 as Vice President.
Charles P. Riley, 49, joined the bank in May 1997 as Senior Vice President and Green Bay Marketing Manager.
Paul H. Wojta, 40, joined the bank in November 1983 as Auditor. He was promoted to Cashier in December 1987. Mr. Wojta has served as Vice President, Cashier and BSA Officer since February 1991. Mr. Wojta also serves as a director of FNBM Investment Corporation, the Bank's investment corporation.
ITEM 11
ITEM 11 EXECUTIVE COMPENSATION
The following table sets forth the annual compensation for each of the Company's most highly compensated executive officers, whose cash compensation exceeded $100,000, for the three previous fiscal years.
- ------------------------- * Other compensation includes amounts contributed by the Bank pursuant to a 401(k) Profit Sharing Plan and Trust that covers substantially all employees. Each year, the Bank contributes a matching contribution equal to 35% of the participant's deferral, up to 10% of the employee's salary, and a discretionary amount determined each year by the Board of Directors. For 1999, the discretionary amount was established at 3% of compensation.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
In 1998, the Company adopted a Supplemental Executive Retirement Plan ("SERP"), which provides post-retirement benefits to a key officer of the Company. Under the SERP, benefit payments equal 80% of the participant's projected retirement age salary, less benefits from other Company sponsored retirement plans, including the 401(k) Plan. See Note 10 in the Consolidated Financial Statements.
The estimated present value of annual benefits payable upon retirement, less amounts received under other Company sponsored retirement plans, at the normal retirement age of 65 for each of the executive officers participating is as follows:
DIRECTOR COMPENSATION
Directors of the Company receive $2,500 annual compensation for service in that capacity. However, as Directors of the Bank, they receive $9,100 annual compensation for service in that capacity. The Chairman of the Board of the Bank receives $11,700 annual compensation for service in that capacity. Directors receive $150 for each committee meeting attended. Directors who are also employees of the Bank receive no compensation for their capacity as Directors of the Bank's committees.
Under a non-qualified deferred compensation plan, the Bank permits Directors to defer part of their compensation and fees by investing the deferred income in insurance policies on the Director's life, with the Bank as owner and beneficiary. The death benefit of such policies will be used by the Bank to fund the payments to the Directors. If the Director lives to age 70, the retirement age defined in the plan, the Bank will begin to pay the Director an amount which will be calculated at that time in annual payments, based upon the
value of the life insurance policy and existing market conditions. If the Director lives to age 70, but dies before receiving all of the payments, the remaining payments will be paid to the Director's beneficiary. If a Director retires prior to or after age 70, the payments will be discounted or increased, as the case may be, based on the value of the life insurance policy. Finally, if the Director dies prior to age 70, the annual payments will be calculated based on the value of the life insurance policy death benefit and paid in annual payments to the Director's beneficiary.
DIRECTOR FEE DEFERRED COMPENSATION RETIREMENT PLAN
The Company contributed $70,966 (interest only) for this plan for the year ended December 31, 1999.
The estimated present value of annual benefits payable upon retirement for a period of ten (10) years to each current director is as follows: Thomas Bare, $40,409; John Jagemann, $56,186; John C. Miller, $40,878; John Nordstrom, $35,236; Katherine M. Reynolds, $163,091; Craig Pauly, $119,325; John M. Webster, $56,833; Robert Weinert, $67,606; and John Zimmer, $58,797.
COMPENSATION, PENSION AND RETIREMENT COMMITTEE REPORT
The Bank's compensation program offers competitive compensation opportunities for all executive officers which are based on both the individual's contribution and the Bank's performance. The compensation paid is designed to attract, retain and reward executive officers who are capable of leading the Bank in achieving its business objectives in an industry characterized by complexity, competitiveness and constant change. The compensation of key executives is reviewed and approved annually by the Bank's Compensation, Pension and Retirement Committee.
In its consideration of whether to increase salaries from year to year, and the amounts of increases, the Compensation, Pension and Retirement Committee reviews the overall financial performance of the Bank during the past year and the expectations for the current year. Specifically, the Committee looks to whether total return on assets is satisfactory and compare total assets and earnings levels with prior years. Special factors that are considered are whether loan delinquencies are consistent with expectations, and whether there have been any significant acquisitions or sales of assets or other extraordinary events. While no specific financial targets are set, the Committee will generally recommend increases to executives, including the chief executive officer, if the Bank continues to experience anticipated levels of financial growth.
Salaries are also based on merit, which involves an evaluation by the Committee of how ably an executive performed the duties entailed in his or her position. Employees generally are reviewed by management, while executive officers have their performance evaluated by the President.
Most executives receive approximately the same percentage increase in salary in any given year. In addition, as the Bank meets its budget expectations, each executive may receive a bonus. The foregoing report has been approved by the Bank's Board of Directors.
Directors Thomas J. Bare, John M. Jagemann, Katherine M. Reynolds, Robert S. Weinert and John J. Zimmer serve as the Bank's Compensation, Pension and Retirement Committee. Thomas J. Bare, a member of the Board of Directors of the Bank since 1981 and of the Company since the Company's formation in 1983, also serves as President of the Company and as President of the Bank. While Mr. Bare specifically excluded himself from any Committee discussion concerning his compensation, he did participate in Compensation, Pension and Retirement Committee discussions concerning other key executives' compensation.
Performance Graph
The performance graph shown below compares the cumulative total return to the Company's stockholders over the most recent 5-year period with the Russell 2000 Index and NASDAQ Bank Index. Returns are shown on a total return basis, assuming the reinvestment of dividends based on a $100 investment beginning December 31, 1994.
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN FIRST MANITOWOC BANCORP, INC., RUSSELL 2000 INDEX, AND NASDAQ BANK
[LINE GRAPH]
* Restated for the 25% stock dividends (five for four share splits) paid April 21, 1995; April 11, 1997 and April 16, 1999.
ITEM 12
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table reflects the beneficial ownership of the Company's Shares by Directors, executive officers and by stockholders known to management to own beneficially 5% or more of the Company's Shares as of December 31, 1999, and includes all of the Company's Shares that may be acquired by such persons 60 days thereafter. The address of each of the persons named below is the address of the Company.
- ------------------------- * Percent of class beneficially owned less than 1%.
(1) Includes 27,175 shares held by Thomas J. Bare as an individual; 16,820 shares held in First National Bank 401(k) Profit Sharing F/B/O Thomas J. Bare; 15,983 shares held I/N/O Suzanne Bare/ Thomas J. Bare or Virginia S. Bare POA; 15,340 shares held I/N/O Joanna M. Bare; 13,626 shares held I/N/O Jonathan L. Bare; 13,771 shares held I/N/O Virginia S. Bare Custodian for Michael Bare UGTMA WI; 725 shares held in Manbank & Co. I/N/O Thomas J. Bare Custodial IRA; and 38,765 shares held in the name of Virginia S. Bare, Trustee.
(2) Includes 1,362 shares held by John E. Nordstrom as an individual; 1,768 shares held by Barbara A. Nordstrom as an individual; and 125 shares held in the name of John E. and Barbara A. Nordstrom JT.
(3) Includes 16,010 shares held by Craig A. Pauly as an individual; 1,206 shares held in the name of Craig A. and Cynthia Pauly JT; 3,484 shares held in Manbank & Co. I/N/O Craig A. Pauly Custodial IRA; and 244 shares held in Manbank & Co. I/N/O Cynthia Pauly Custodial IRA.
(4) Includes 9,045 shares held in First National Bank 401(k) Profit Sharing Plan F/B/O Joseph W. Debilzen; 434 shares held in Manbank & Co. I/N/O Janet Debilzen Custodial IRA; 163 shares held in Manbank & Co. I/N/O Joseph W. Debilzen Custodial IRA; 132 shares held I/N/O Janet L. Debilzen and Joseph W. Debilzen.
(5) Includes 4,222 shares held by Daniel J. Lalko as an individual; 157 shares held in the name of Daniel J. Lalko and Ann E. Lalko JT; 1,155 shares held in Manbank & Co. I/N/O Daniel J. Lalko Custodial IRA; 159 shares held in Manbank & Co. I/N/O Ann E. Lalko Custodial IRA; and 55 shares held in First National Bank 401(k) Profit Sharing Plan F/B/O Daniel J. Lalko.
(6) Includes 6,229 shares held in the name of Paul H. and Jeanne C. Wojta; and 7,531 shares held in First National Bank 401(k) Profit Sharing Plan F/B/O Paul H. Wojta.
ITEM 13
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the past year the Bank has had, and expects to have in the future, banking transactions in the ordinary course of its business with its directors, officers and owners of 5% or more of the Company's outstanding shares and with their associates on substantially the same terms, including interest rates, collateral, and repayment terms on loans, as those prevailing at the same time for comparable transactions with others. The extensions of credit by the Bank to these persons have not and do not currently involve more than the normal risk of collectibility or present other unfavorable features. Loans outstanding to such parties totaled $2,416,000 and $3,289,000 at December 31, 1999 and 1998, respectively. During 1999, $651,000 of new loans were made and repayments totaled $1,524,000.
PART IV
ITEM 14
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) and (2) Financial Statements and Financial Statement Schedules
The following financial statements and financial statement schedules are included under a separate caption "Financial Statements and Supplementary Data" in Part II, Item 8 hereof and are incorporated herein by reference.
Independent Auditors' Report
Consolidated Statements of Financial Condition--December 31, 1999 and 1998
Consolidated Statements of Income--For the Years Ended December 31, 1999, 1998, and 1997
Consolidated Statements of Changes in Stockholders' Equity--For the Years Ended December 31, 1999, 1998, and 1997
Consolidated Statements of Cash Flows--For the Years Ended December 31, 1999, 1998, and 1997
Notes to Consolidated Financial Statements
(a)(3) Exhibits
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
FIRST MANITOWOC BANCORP, INC.
Date: March 17, 2000 By: /s/ THOMAS J. BARE ------------------------------------ Thomas J. Bare President and Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.