10-Q 1 c71369e10vq.txt FORM 10-Q FOR QUARTER ENDED JUNE 30, 2002 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q (Mark One) [ ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2002 ------------------------------------------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ------------- -------------- Commission file number 0-25983 --------------------------------------------------------- First Manitowoc Bancorp, Inc. -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Wisconsin 39-1435359 ------------------------------------------------------------------------------- (State or other jurisdiction (IRS employer identification no.) of incorporation or organization) 402 North Eighth Street, Manitowoc, Wisconsin 54220 ------------------------------------------------------------------------------- (Address of principal executive offices) (Zip code) (920) 684-6611 -------------------------------------------------------------------------------- Registrant's telephone number, including area code) -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No _____ The number of shares outstanding of registrant's common stock, par value $1.00 per share, at July 31, 2002, was 3,468,634 shares. FIRST MANITOWOC BANCORP, INC. TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS: FIRST MANITOWOC BANCORP, INC. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)

(See accompanying notes to Unaudited Consolidated Financial Statements.) 1 ITEM 1. FINANCIAL STATEMENTS CONTINUED: FIRST MANITOWOC BANCORP, INC. CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(See accompanying notes to Unaudited Consolidated Financial Statements.) 2 ITEM 1. FINANCIAL STATEMENTS CONTINUED: FIRST MANITOWOC BANCORP, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED) Six Months Ended June 30, 2001 (In Thousands, Except Share Data)

Six Months Ended June 30, 2002 (In Thousands, Except Share Data)

(See accompanying notes to Unaudited Consolidated Financial Statements.) 3 ITEM 1. FINANCIAL STATEMENTS CONTINUED: FIRST MANITOWOC BANCORP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

4 Acquisition: Cash paid for purchase of stock --- $ (733) Cash acquired --- 666 ------------------------------------------------------------------------------------------------------------------- Net cash paid for acquisition --- (67) Fair value of assets acquired --- 563 Acquisition intangibles --- 2,582 Liabilities assumed --- 1,611 Notes payable to former shareholders --- 1,467

(See accompanying notes to Unaudited Consolidated Financial Statements.) 5 ITEM 1. FINANCIAL STATEMENTS CONTINUED: FIRST MANITOWOC BANCORP, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS NOTE 1: The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial reporting and with instructions for Form 10-Q and Rule 10-01 of Regulation S-X. In the opinion of management, these accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly First Manitowoc Bancorp, Inc.'s ("Corporation") financial position, results of its operations, changes in stockholders' equity and cash flows for the periods presented. All adjustments necessary for the fair presentation of the consolidated financial statements are of a normal recurring nature. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year. This report should be read in conjunction with the Corporation's 2001 annual report on Form 10-K. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ significantly from those estimates. NOTE 2: The consolidated financial statements include the accounts of all subsidiaries. The Corporation is a bank holding company that engages in its business through its sole subsidiary, First National Bank in Manitowoc ("Bank"), a nationally chartered commercial bank. The Bank has two wholly owned subsidiaries, FNBM Investment Corp. and Insurance Center of Manitowoc, Inc. ("Insurance Center"). All material intercompany transactions and balances are eliminated. Certain items in the prior period consolidated financial statements have been reclassified to conform with the June 30, 2002 presentation. In January 2001, the Bank acquired 100% ownership in the Insurance Center of Manitowoc, Inc. Insurance Center also operates an office known as Gary Vincent and Associates in Green Bay, Wisconsin. Insurance Center is an independent agency offering commercial, personal, life, and health insurance. It is being operated as a wholly owned subsidiary of the Bank. Insurance Center had approximately $563,000 in assets at date of acquisition. The transaction was accounted for under the purchase method of accounting and goodwill of approximately $2.6 million was recorded. The Corporation's financial statements reflect the accounts and operations of Insurance Center beginning January 1, 2001. The Corporation recorded all Insurance Center assets and liabilities at fair value at date of acquisition. 6 NOTE 3: Investment Securities The amortized cost and fair values of investment securities available for sale for the periods indicated are as follows: Investment Securities (In Thousands)

NOTE 4: Loan Portfolio Loans are summarized as follows: Summary of Loan Portfolio (Dollars In Thousands)

7 NOTE 5: Allowance for Loan Losses Activity in the allowance for loan losses for the periods indicated is as follows:

NOTE 6: Business Segments The Corporation through the bank and the bank branch network provides a broad range of financial services to individuals and companies in northeastern Wisconsin. These services include demand, time, and savings deposits; commercial and retail lending; ATM processing; trust services; and insurance services. While the Corporation's president 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. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING INFORMATION Forward-looking statements have been made by First Manitowoc Bancorp, Inc. (the "Corporation") in this document and in documents incorporated by reference that are subject to risks and uncertainties. These forward-looking statements, which are included in Management's Discussion and Analysis, describe future plans or strategies and include the Corporation's expectations of future results of operations. Statements containing certain terms including, but not limited to, the words "believes," "expects," "anticipates" or similar expressions constitute forward-looking statements. Shareholders should note that many factors, some of which are discussed elsewhere in this document could affect the future financial results of the Corporation and could cause those results to differ materially from those expressed in forward-looking statements contained in this document. These factors include the following: - operating, legal and regulatory risks; - economic, political and competitive forces affecting the Corporation's banking, securities, asset management and credit services businesses; - the risk that the Corporation's analyses of these risks and forces could be incorrect and/or that the strategies developed to address them could be unsuccessful; - general market rates; - general economic conditions; - changes by the Federal government in monetary and fiscal policies; and - changes in composition of our loan portfolio. These factors should be considered in evaluating the forward-looking statements, and undue reliance should not be placed on such statements. The Corporation does not undertake and specifically disclaims any obligation to update any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements. 8 EARNINGS Net Income (Dollars In Thousands, Except Share Data)

Weighted average shares outstanding were 3,468,634 for the six months ended June 30, 2002 and 2001. Net income for the three months ended June 30, 2002 was $1,796,000 compared to $1,233,000 for the three months ended June 30, 2001, an increase of $563,000, or 45.7%. Interest income decreased $1,216,000 primarily as a result of a decrease in interest yields. Interest expense decreased $1,804,000 mainly as a result of a decrease in interest rates paid on deposits. Other income increased $30,000 mainly as a result of an increase in loan servicing income and an increase in gain on sale of mortgage loans held for sale. Other expense increased $87,000. This is a result of increased salaries, commissions and related benefits primarily due to annual merit increases in wages for employees. Other increases in expense include data processing, software, and marketing. Earnings per share for the three months ended June 30, 2002 was $0.52 compared to $0.35 for the three months ended June 30, 2001. Return on average assets (ROA) on an annualized basis for the second quarter 2002 was 1.37% compared to 0.98% for the second quarter 2001. Return on average equity (ROE) on an annualized basis for the second quarter 2002 was 14.63% compared to 11.61% for the second quarter 2001. Net income for the six months ended June 30, 2002 was $3,665,000 compared to $2,584,000 for the six months ended June 30, 2001, an increase of $1,081,000 or 41.8%. Interest income decreased $2,400,000 primarily as a result of a decrease in interest yields. Interest expense decreased $3,791,000 primarily due to a decrease in interest rates paid on deposits. Other income increased $182,000 primarily as a result of insurance commission income and gain on sales of mortgage loans held for sale. Other expense increased $154,000, a result of increased salaries, commissions and related benefits primarily due to annual merit increases. Amortization of goodwill decreased as a result of the adoption of FASB 142. Earnings per share for the six months ended June 30, 2002 was $1.06 compared to $0.74 for the six months ended June 30, 2001. Return on average assets (ROA) on an annualized basis for the first six months of 2002 was 1.41% compared to 1.04% for the first six months in 2001. Return on average equity (ROE) on an annualized basis for the first six months of 2002 was 15.22% compared to 12.35% for the first six months of 2001. 9 AVERAGE BALANCES, YIELD AND RATES

10 AVERAGE BALANCES, YIELD AND RATES

11 NET INTEREST INCOME AND NET INTEREST MARGIN Net interest income is the principal source of earnings for a banking company. It represents the differences between interest and fees earned on the loan and investment portfolios offset by the interest paid on deposits and borrowings. The six months ended June 30, 2002 has been characterized by fairly stable interest rates. Net interest margin is calculated as tax equivalent net interest income divided by average earning assets and represents the Bank's net yield on its earning assets. The tax equivalent adjustment was calculated using the statutory federal income tax rate of 34%. SECOND QUARTER 2002 COMPARED TO SECOND QUARTER 2001: Net interest income (on a tax equivalent basis) for the three months ended June 30, 2002 increased by $530,000 or 11.2% compared to the three months ended June 30, 2001. Interest income decreased $1,274,000 primarily as a result of a decrease in yields. Total average loans decreased from $332,876,000 for the second quarter of 2001 to $332,522,000 for the second quarter of 2002 while interest yield on loans decreased from 8.75% for the second quarter of 2001 to 7.29% for the second quarter of 2002. Average investment securities increased from $121,927,000 for the second quarter of 2001 to $135,190,000 for the second quarter of 2002. Interest expense decreased $1,804,000 primarily as a result of a decrease in interest rates paid. Total average interest-bearing deposits decreased from $332,015,000 for the second quarter of 2001 to $321,981,000 for the second quarter of 2002 while interest rates paid on interest-bearing deposits decreased from 4.75% for the second quarter of 2001 to 2.76% for the second quarter of 2002. The interest rate spread, which is the difference between the average yield on interest earning assets and the average rate paid on interest bearing liabilities, was 3.91% for the three months ended June 30, 2002, an increase of 49 basis points from the interest rate spread of 3.42% for the three months ended June 30, 2001. Net interest margin for the three months ended June 30, 2002 was 4.34% compared with 4.08% for the three months ended June 30, 2001. YTD 2002 COMPARED TO YTD 2001: Net interest income (on a tax equivalent basis) for the six months ended June 30, 2002 increased by $1,281,000 or 13.8% compared to the six months ended June 30, 2001. Interest income decreased $2,514,000 primarily as a result of a decrease in yields. Total average loans decreased to $330,186,000 for the first six months of 2002 from $331,180,000 for the first six months of 2001. Total average investment securities increased to $134,218,000 for the first six months of 2002 from $121,118,000 for the first six months of 2001. Interest yields fell on both loans and investment securities for the six months ended June 30, 2002. Interest expense decreased $3,795,000 primarily due to a decrease in interest rates paid on deposits and borrowings. Total average interest bearing deposits decreased to $324,871,000 for the first six months of 2002 from $331,966,000 for the first six months of 2001, while interest rates paid on those deposits decreased to 2.85% in the first half of 2002 from 4.95% in the first half of 2001. The interest rate spread was 3.98% for the six months ended June 30, 2002, an increase of 61 basis points from the interest rate spread of 3.37% for the six months ended June 30, 2001. Net interest margin for the six months ended June 30, 2002 was 4.41% compared with 4.07% for the six months ended June 30, 2001. 12 PROVISION AND ALLOWANCE FOR LOAN LOSSES For the six months ended June 30, 2002, the Bank charged $750,000 to expense for the provision for loan loss compared to $1,030,000 for the six months ended June 30, 2001. Allowance for Loan Losses (In Thousands)

The decrease in the ratio of allowance for loan losses to total loans is primarily a result of higher charge-offs in December 2001. There are several factors that are included in the analysis of the adequacy of the allowance for loan losses. Management considers loan volume trends, levels and trends in delinquencies and non-accruals, current problem credits, national and local economic trends and conditions, concentrations of credit by industry, current and historical levels of charge-offs, the experience and ability of the lending staff, and other miscellaneous factors. Management has determined the allowance for loan losses is adequate to absorb probable loan losses in its loan portfolio as of June 30, 2002 based on its most recent evaluation of these factors. The factor of loan volume trends is based on actual lending activity. The loan volume trends factor is for estimated losses that are believed to be inherently part of the loan portfolio but that have not yet been identified as specific problem credits. The current problem credits factor includes the exposure believed to exist for specifically identified problem loans determined on a loan-by-loan basis. A table showing the allocation of allowance for loan losses is shown below. Allocation of Allowance for Loan Losses (In Thousands)

13 Specific problem loans includes the allocation of the allowance for specific problem credits. Loan type allocation includes the factor of loan volume trends, with management's goal for this factor to maintain an adequate loan loss reserve for outstanding loans less the specifically identified current problem credits. The allocation of the allowance among the various loan types is based on the average proportion of the loan types that make up the specific problem loans. The unallocated portion of the allowance consists of the other factors included in the analysis because those factors cannot be tied to specific loans or loan categories. The allocation and total for the allowance for loan losses is not to be interpreted as a single year's exposure for loss nor the loss for any specified time period. NONPERFORMING LOANS It is the policy of the Bank to place a loan in non-accrual status whenever there is substantial doubt about the ability of a borrower to pay principal or interest on any outstanding credit. Management considers such factors as payment history, the nature and value of collateral securing the loan and the overall economic situation of the borrower when making a non-accrual decision. Non-accrual loans are closely monitored by management. A non-accruing loan is restored to current status when the prospects of future contractual payments are no longer in doubt. Total nonperforming loans at June 30, 2002 were $2,391,000, a decrease of $450,000 from December 31, 2001. The following table presents nonperforming and nonaccrual loan information as of the dates indicated. Nonperforming Loans (In Thousands)

OTHER INCOME Other Income (In Thousands)

SECOND QUARTER 2002 COMPARED TO SECOND QUARTER 2001: Other income for the second quarter of 2002 was $1,194,000 compared to $1,164,000 for the second quarter of 2001, an increase of $30,000 or 2.6%. Trust service fees increased $13,000. Loan servicing income decreased $105,000 for the second quarter of 2002. Other income increased $108,000. 14 YTD 2002 COMPARED TO YTD 2001: Other income for the six months ended June 30, 2002 was $2,436,000 compared to $2,254,000 for the six months ended June 30, 2001, an increase of $182,000 or 8.1%. Gain on sales of mortgage loans held for sale increased $114,000, resulting from an increase in the number of new residential mortgage loans and refinancings processed and sold in the secondary market during the first six months of 2002. Insurance commission income increased $37,000 during the six months ended June 30, 2002. OTHER EXPENSE Other Expense (In Thousands)

SECOND QUARTER 2002 COMPARED TO SECOND QUARTER 2001: Other expense for the second quarter of 2002 was $3,292,000 compared to $3,205,000 for the second quarter of 2001, an increase of $87,000, or 2.7%. The increase is a result of increased salaries, commissions and related benefits due primarily to annual merit increases for employees. YTD 2002 COMPARED TO YTD 2001: Other expense for the first six months of 2002 was $6,805,000 compared to $6,651,000 for the first six months of 2001, an increase of $154,000 or 2.3%. The increase is a result of increased salaries, commissions, and related benefits due primarily to annual merit increases for employees. Other expenses increased primarily due to increased software amortization, other real estate expense, legal and professional fees, and marketing expense. INCOME TAXES The effective tax rate for the six months ended June 30, 2002 was 21.7% compared to 13.3% for the six months ended June 30, 2001. The increase in effective tax rates in the period is the result of taxable income increasing at a greater rate than tax exempt income. BALANCE SHEET JUNE 30, 2002 COMPARED TO DECEMBER 31, 2001 The Corporation's total assets increased from $527.3 million at December 31, 2001 to $542.9 million at June 30, 2002. Loans increased $8.6 million, a result of an increase in commercial loans. Securities increased $7.1 million mainly due to increases in U.S. Government Agency securities. Fed Funds sold increased and cash and due from banks decreased due to conversion of interest bearing deposits to Fed Funds. Deposits decreased $5.4 million to $388.7 million at June 30, 2002 from $394.1 million at December 31, 2001, due to decreases in non-interest bearing deposits and certificates of deposit. Securities sold under repurchase agreements increased $20.0 million and borrowed funds decreased $4.0 million at June 30, 2002. 15 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 cash and cash equivalents, short term investments, the maturity distribution of the investment portfolio, loan repayments and income from earning assets. A substantial portion of the investment portfolio contains readily marketable securities that could be converted to cash immediately. On the liability side of the balance sheet, liquidity is affected by the timing of maturing liabilities and the ability to generate new deposits or borrowings as needed. Other sources are available through borrowings from the Federal Reserve Bank, the Federal Home Loan Bank and from lines of credit approved at correspondent banks. Management knows of no trend or event which will have a material impact on the Bank's ability to maintain liquidity at adequate levels. CAPITAL RESOURCES AND ADEQUACY Capital (Dollars In Thousands, Except Share Data)

Total stockholders' equity increased $4.7 million from $46.5 million at December 31, 2001 to $51.2 million at June 30, 2002. Net income for the six month period ending June 30, 2002 was $1.8 million. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios of total and Tier 1 capital to risk-weighted assets, and of Tier 1 capital to average assets. Management believes, as of June 30, 2002 and December 31, 2001, that the Bank meets all capital adequacy requirements to which it is subject. As of June 30, 2002, the Bank's and the Corporation's ratio of Tier 1 capital to risk-weighted assets was 10.9% and 11.2%, respectively. As of June 30, 2002, the Bank's and the Corporation's ratio of total capital to risk-weighted assets was 11.7% and 12.0%, respectively. In addition to risk-based capital, banks and bank holding companies are required to maintain a minimum amount of Tier 1 capital to total assets, referred to as the leverage capital ratio, of at least 4%. As of June 30, 2002, the Bank's and the Corporation's leverage capital ratio was 7.3% and 7.4%, respectively. 16 As of June 30, 2002 and December 31, 2001, the most recent notification from the Office of the Comptroller of Currency and the Federal Deposit Insurance Corporation categorized the Bank as well capitalized and adequately capitalized, respectively, under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios. There are no conditions or events since that notification that management believes have changed the institution's category. RECENT ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 supersedes Accounting Principles Board (APB) Opinion No. 16, "Business Combinations," and SFAS No. 38, "Accounting for Preacquisition Contingencies of Purchased Enterprises." SFAS No. 141 requires the use of the purchase method of accounting for business combinations initiated after June 30, 2001. SFAS No. 142 supersedes APB Opinion No. 17, "Intangible Assets." SFAS No. 142 addresses how intangible assets acquired outside of a business combination should be accounted for upon acquisition and how goodwill and other intangible assets should be accounted for after they have been initially recognized. SFAS No. 142 eliminates the amortization for goodwill and other intangible assets with indefinite lives. Other intangible assets with a finite life will be amortized over their useful life. Goodwill and other intangible assets with indefinite useful lives shall be tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset may be impaired. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001. The Corporation adopted SFAS No. 142 and passed step one of the goodwill impairment test on January 1, 2002. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There has been no material change to the market risk position from that disclosed as of December 31, 2001 in the Corporation's 2001 Form 10-K Annual Report. FIRST MANITOWOC BANCORP, INC. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Neither the Corporation nor its subsidiary is involved in any pending legal proceedings involving amounts in which management believes are material to the financial condition and results of operations of the Corporation. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS None ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5. OTHER INFORMATION None 17 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a) Exhibits: Exhibit Number Sequential Page Number or Incorporate by Reference to (3)(1) Articles of Incorporation Filed as Exhibit (3)(1) to Report on Form 10 filed May 5, 1999. Amendment filed as Exhibit (3)(2) to Form 10-Q filed August 14, 2000. (3)(2) Bylaws Filed as Exhibit (3)(2) to Report on Form 10 filed May 5, 1999. (99)(1) CEO and CFO Certification Filed as Exhibit (99)(1) b) Reports on Form 8-K: There were no reports on Form 8-K filed for the quarter ended June 30, 2002. 18 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. FIRST MANITOWOC BANCORP, INC. (Registrant) Date: August 14, 2002 /s/ Thomas J. Bare ------------------ Thomas J. Bare President Date: August 14, 2002 /s/ Paul H. Wojta ----------------- Paul H. Wojta Senior Vice President and Principal Financial Officer 19

FIRST MANITOWOC BANCORP INC 10-Q