10-Q 1 c87409e10vq.txt QUARTERLY REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q (Mark One) [X} QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2004 ------------------------------------------------- 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 of incorporation or organization) (IRS employer identification no.) 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 [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act.) Yes [X] No [ ] The number of shares outstanding of registrant's common stock, par value $1.00 per share, at July 31, 2004, was 6,937,268 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 SHAREHOLDERS' EQUITY (UNAUDITED) Six Months Ended June 30, 2003 (Dollars In Thousands, Except Share Data)

Six Months Ended June 30, 2004 (Dollars 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)

(See accompanying notes to Unaudited Consolidated Financial Statements.) 4 ITEM 1. FINANCIAL STATEMENTS CONTINUED: FIRST MANITOWOC BANCORP, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS NOTE 1: The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial reporting and with instructions for Form 10-Q and Rule 10-01 of Regulation S-X. In the opinion of management, these accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly First Manitowoc Bancorp, Inc.'s (the "Corporation's") financial position, results of operations, changes in shareholders' equity and cash flows for the periods presented. All adjustments necessary for the fair presentation of the consolidated financial statements are of a normal recurring nature. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year. This report should be read in conjunction with the Corporation's 2003 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. Investment in United Financial Services, Inc., the Bank's 49.8% owned subsidiary, is accounted for under the equity method. Certain items in the prior period consolidated financial statements have been reclassified to conform with the June 30, 2004 presentation. 5 NOTE 3: Investment Securities The amortized cost and fair values of investment securities available for sale for the periods indicated are as follows: Investment Securities (Dollars In Thousands)

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

6 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's branch network, provides a broad range of financial services to individuals and companies in northeastern Wisconsin. These services include demand, time, and savings deposits; commercial and retail lending; ATM processing; trust services; and insurance services. Operations are managed and financial performance of these services is evaluated on a Corporate-wide basis. Accordingly, all of the Corporation's operations are considered by management to be aggregated in one reportable operating segment. NOTE 7: Per Share Computations Weighted average shares outstanding were 6,937,268 for the three and six months ended June 30, 2004 and 2003. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with our Consolidated Condensed Financial Statements and accompanying Notes thereto included elsewhere herein and with our 2003 Annual Report on Form 10-K filed with the Commission on March 12, 2004. THE CORPORATION First Manitowoc Bancorp, Inc. (the "Corporation") is a Wisconsin corporation and registered bank holding company. The Corporation engages in its business through its sole subsidiary, First National Bank in Manitowoc (the "Bank"), a national banking association. The Bank has a wholly owned investment subsidiary, FNBM Investment Corp. and a wholly-owned insurance subsidiary, Insurance Center of Manitowoc, Inc. (the "Insurance Center"). The Insurance Center also operates an office known as Gary Vincent and Associates in Green Bay, Wisconsin. The Insurance Center is an independent agency offering commercial, personal, life and health insurance. The Bank owns 49.8% of the outstanding common stock of United Financial Services, Inc. ("UFS"). UFS provides data processing services to owner banks Baylake Bank of Sturgeon Bay and the Bank in addition to 52 other banks located in Wisconsin. The Corporation's and the Bank's main office is located at 402 North Eighth Street, Manitowoc, Manitowoc County, Wisconsin. The Bank has thirteen full service branch offices located in Francis Creek, St. Nazianz, Two Rivers, Mishicot, Manitowoc, Kiel, Newton, New Holstein, Plymouth, Bellevue, and Ashwaubenon, Wisconsin. The Bank has one limited service drive through and mini lobby facility at 4712 Expo Drive in Manitowoc. The Corporation's home page on the Internet is www.bankfirstnational.com. The Corporation's SEC filings are available through our website. The Corporation's web site content is for information purposes only, and it should not be relied upon for investment purposes, nor is it incorporated by reference into this Form 10-Q. 7 FORWARD-LOOKING INFORMATION Forward-looking statements have been made by the "Corporation" in this document and in documents incorporated by reference that are subject to risks and uncertainties. These forward-looking statements, which are included in Management's Discussion and Analysis of Financial Condition and Results of Operations, describe future plans or strategies and include the Corporation's expectations of future results of operations. Statements containing certain terms including, but not limited to, the words "believes," "expects," "anticipates" or similar expressions constitute forward-looking statements. Shareholders should note that many factors, some of which are discussed elsewhere in this document could affect the future financial results of the Corporation and could cause those results to differ materially from those expressed in forward-looking statements contained in this document. These factors include the following: - 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. CRITICAL ACCOUNTING POLICIES In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ significantly from those estimates. Estimates that are particularly susceptible to significant change include the determination of the allowance for loan losses and mortgage servicing rights valuation. The consolidated financial statements of the Corporation are prepared in conformity with accounting principles generally accepted in the United States of America and follow general practices within the industries in which it operates. This preparation requires management to make estimates, assumptions, and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions, and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, actual results could differ from the estimates, assumptions, and judgments reflected in the financial statements. Certain policies inherently have a greater reliance on the use of estimates, assumptions, and judgments and, as such, have a greater possibility of producing results that could be materially different than originally reported. Management believes the following policies are both important to the portrayal of the Corporation's financial condition and results and require subjective or complex judgments and, therefore, management considers the following to be critical accounting policies. Allowance for Loan Losses: Management's evaluation process used to determine the adequacy of the allowance for loan losses is subject to the use of estimates, assumptions, and judgments including management's ongoing review and grading of the loan portfolio, consideration of past loan loss experience, trends in past due and nonperforming loans, risk characteristics of the various classifications of loans, existing economic conditions, the fair value of underlying collateral, and other qualitative and quantitative factors which could affect probable credit losses. Because current economic conditions can change and future events are inherently difficult to predict, the anticipated amount of estimated loan losses, and therefore the adequacy of the allowance, could change significantly. As an integral part of their examination process, various regulatory agencies also review the allowance for loan losses. Such agencies may require that certain loan balances be charged off when their credit evaluations differ from those of management, based on their judgments about information available to them at the time of their examination. The Corporation believes the allowance for loan losses is adequate and properly recorded in the financial statements. See section "Allowance for Loan Losses." 8 Mortgage Servicing Rights Valuation: The fair value of the Corporation's mortgage servicing rights asset is important to the presentation of the consolidated financial statements in that mortgage servicing rights are subject to a fair value-based impairment standard. Mortgage servicing rights do not trade in an active open market with readily observable prices. As such, like other participants in the mortgage banking business, the Corporation relies on an internal estimated cash flow model to establish the fair value of its mortgage servicing rights. While the Corporation believes that the values produced by its internal model are indicative of the fair value of its mortgage servicing rights portfolio, these values can change significantly depending upon the then current interest rate environment, estimated prepayment speeds of the underlying mortgages serviced, and other economic conditions. The proceeds that might be received should the Corporation actually consider a sale of the mortgage servicing rights portfolio could differ from the amounts reported at any point in time. The Corporation believes the mortgage servicing rights asset is properly recorded in the financial statements. EARNINGS Net Income (Dollars In Thousands, Except Share Data)

Weighted average shares outstanding were 6,937,268 for the six months ended June 30, 2004 and 2003. Net income for the three months ended June 30, 2004 was $1,823,000 compared to $1,950,000 for the three months ended June 30, 2003, a decrease of $127,000, or 6.5%. Interest income decreased $44,000 primarily as a result of a decrease in interest yields. Interest expense decreased $433,000 mainly as a result of a decrease in interest rates paid on deposits. Other income decreased $832,000. A further discussion of other income is located on page 14 in this report. Service charge income increased $59,000 while Insurance Center commissions increased $170,000. Securities were sold for a gain of $55,000. Loan servicing income decreased due to rate trends over the past six months. Gain on sales of mortgage loans decreased $437,000 over last year. As interest rates increase, the number of loans sold to the FNMA market has decreased dramatically. Other expenses increased $116,000. Earnings per share for the three months ended June 30, 2004 was $0.26 compared to $0.29 for the three months ended June 30, 2003. Net income for the six months ended June 30, 2004 was $3,970,000 compared to $3,851,000 for the six months ended June 30, 2003, an increase of $119,000 or 3.09%. Interest income decreased $523,000. Interest expense decreased $1,009,000. Other income decreased $666,000. Other expense increased $153,000. Earnings per share for the six months ended June 30, 2004 was $0.57 compared to $0.56 for the six months ended June 30, 2003. 9 Table 1 Table 1 displays the average balances and average rates paid on all major deposit classifications for the periods indicated. AVERAGE BALANCES, YIELD AND 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%. 11 Table 1A sets forth the effects of changing rates and volumes on net interest income of the Corporation for the periods indicated. RATE AND VOLUME VARIANCE ANALYSIS BASED ON AVERAGE BALANCES (In thousands) TABLE 1A

12 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, 2004 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 2004 COMPARED TO SECOND QUARTER 2003: (SEE TABLE 1) Net interest income (on a tax equivalent basis) for the three months ended June 30, 2004 increased by $421,000 or 8.6% compared to the three months ended June 30, 2003. Interest income decreased $20,000 primarily as a result of a decrease in yields. Total average loans increased from $350,176,000 for the second quarter of 2003 to $378,220,000 for the second quarter of 2004 while interest yield on loans decreased from 6.34% for the second quarter of 2003 to 5.68% for the second quarter of 2004. Average investment securities increased from $140,252,000 for the second quarter of 2003 to $157,968,000 for the second quarter of 2004. Interest expense decreased $441,000 primarily as a result of a decrease in interest rates paid. Total average interest-bearing deposits increased from $352,751,000 for the second quarter of 2003 to $360,913,000 for the second quarter of 2004 while interest rates paid on interest-bearing deposits decreased from 2.11% for the second quarter of 2003 to 1.72% for the second quarter of 2004. 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 3.50% for the three months ended June 30, 2004, an increase of 15 basis points from the interest rate spread of 3.35% for the three months ended June 30, 2003. Net interest margin for the three months ended June 30, 2004 was 3.82% compared with 3.72% for the three months ended June 30, 2003. YTD 2004 COMPARED TO YTD 2003: (SEE TABLE 1) Net interest income (on a tax equivalent basis) for the six months ended June 30, 2004 increased by $559,000 or 5.61% compared to the six months ended June 30, 2003. Interest income decreased $546,000 as a result of a decrease in yields which was offset by an increase in volume. Total average loans increased to $373,999,000 for the first six months of 2004 from $346,518,000 for the first six months of 2003. Total average investment securities increased to $146,068,000 for the first six months of 2004 from $133,096,000 for the first six months of 2003. Interest yields fell on both loans and investment securities for the six months ended June 30, 2004. Interest expense decreased $1,009,000 due to a decrease in interest rates paid. Total average interest bearing deposits increased to $357,399,000 for the first six months of 2004 from $351,971,000 for the first six months of 2003, while interest rates paid on those deposits decreased to 1.72% in the first half of 2004 from 2.20% in the first half of 2003. The interest rate spread was 3.64% for the six months ended June 30, 2004, an increase of 9 basis points from the interest rate spread of 3.55% for the six months ended June 30, 2003. Net interest margin for the six months ended June 30, 2004 was 3.93% compared with 3.90% for the six months ended June 30, 2003. 13 PROVISION AND ALLOWANCE FOR LOAN LOSSES For the six months ended June 30, 2004, the Bank charged $200,000 to expense for the provision for loan loss compared to $650,000 for the six months ended June 30, 2003. 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, 2004 based on its most recent evaluation of these factors. The loan volume trend factor is based on actual lending activity. The factor is used for calculating estimated losses that are believed to be inherently part of the loan portfolio but that have not yet been identified as specific problem credits. The current problem credits factor includes the exposure believed to exist for specifically identified problem loans determined on a loan-by-loan basis. The following table shows the allocation of allowance for loan losses. Allocation of Allowance for Loan Losses (Dollars In Thousands)

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. Local economic concerns continue to affect the Bank's customers. These concerns are reflected in the changes shown in the allocation of allowance for loan losses. The ratio dropped slightly in the current period because of an overall improvement in loan quality. 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. 14 Total nonperforming loans at June 30, 2004 were $2,221,000 a decrease of $1,057,000 from December 31, 2003. The following table presents nonperforming and nonaccrual loan information as of the dates indicated. Nonperforming Loans (Dollars In Thousands)

OTHER INCOME Other Income (Dollars In Thousands)

SECOND QUARTER 2004 COMPARED TO SECOND QUARTER 2003: Other income for the second quarter of 2004 was $1,261,000 compared to $2,093,000 for the second quarter of 2003, a decrease of $832,000 or 39.8%. Insurance Center commissions increased $170,000 due to increased volume. Mortgage servicing rights experienced a tremendous decrease during the quarter. Near record low interest rates early in the quarter caused a surge in refinancings. As a result, a significant drop in the average life calculation used to determine the value of mortgage servicing rights occurred. Gain on sales of mortgage loans decreased $437,000 or 81.4%. In 2003, mortgage loan volume and refinancings processed and sold to the FNMA secondary market were significant. As interest rates have increased over the quarter, the bank has seen a decrease in the number of loan applications. YTD 2004 COMPARED TO YTD 2003: Total other income for the six months ended June 30, 2004 was $3,313,000 compared to $3,979,000 for the six months ended June 30, 2003, a decrease of $666,000 or 16.7%. Insurance Center commissions increased $252,000 or 29.7% over last year, a result of increased volume. Mortgage servicing rights income decreased due to changes in the rate trends and average life calculations over the past six months. Gain on sales of mortgage loans decreased $798,000 as compared to 2003. Rate changes in the market affected the volume of loans sold to the FNMA secondary market. Other miscellaneous income saw an increase of $182,000 or 31.6% primarily due to the Insurance Center receiving significant contingency commission income as a result of lower than expected insurance claims. 15 OTHER EXPENSES The following table shows other expenses. Other Expenses (Dollars In Thousands)

SECOND QUARTER 2004 COMPARED TO SECOND QUARTER 2003: Other expenses for the second quarter of 2004 were $3,535,000 compared to $3,419,000 for the second quarter of 2003, an increase of $116,000, or 3.4%. Occupancy expense increased $181,000. This increase includes additional expenses associated with the opening of the new branch location on Expo Drive. Outside service fees include a pollution abatement accrual. YTD 2004 COMPARED TO YTD 2003: Other expenses for the first six months of 2004 were $7,264,000 compared to $7,111,000 for the first six months of 2003, an increase of $153,000 or 2.2%. Occupancy expenses increased in relation to a new branch opening in May of 2004. Outside service fees include a $115,000 expense for Sarbanes-Oxley internal control documentation requirements. INCOME TAXES The effective tax rate for the six months ended June 30, 2004 was 21.8% compared to 22.2% for the six months ended June 30, 2003. The decrease in effective tax rates in the period is the result of more tax exempt income as a percentage of total income. FNBM is incorporated in the State of Nevada, which does not currently impose a corporate income tax. Although the earnings of FNBM are not currently subject to taxation in the State of Wisconsin, from time-to-time legislation is proposed which, if adopted, would require consolidated income tax returns for entities headquartered in the state and result in taxation of FNBM's earnings. To date, none of these legislative proposals have been adopted. In addition, from time-to-time the Wisconsin Department of Revenue ("WDR") attempts to impose income tax on out-of-state investment subsidiaries like FNBM. Indeed, in 2003 the WDR began examinations of a number of financial institutions, including the Bank, specifically aimed at their relationships with their investment subsidiaries. Management believes the WDR may take the position that the income of FNBM is taxable in Wisconsin. Management believes the Bank, as well as FNBM, have complied with the tax rules relating to the income of out-of-state subsidiaries. The WDR has indicated that it may repudiate these rulings and management is uncertain at this time whether the WDR exam will result in an assessment. The Bank will vigorously oppose an assessment, if any. 16 BALANCE SHEET JUNE 30, 2004 COMPARED TO DECEMBER 31, 2003 Assets The Corporation's total assets increased from $582.0 million at December 31, 2003 to $607.2 million at June 30, 2004. Loans increased $8.4 million, a result of increases in commercial loans and mortgage loans. Securities increased $13.3 million to $151.6 million. Liabilities Deposits increased $8.2 million to $436.5 million at June 30, 2004 from $428.3 million at December 31, 2003. Securities increased $4.6 million while borrowed funds increased $10.4 million. Off-Balance Sheet Arrangements The Corporation has become a party to financial instruments with off-balance sheet risk in the normal course of its business in order to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit and standby letters of credit. Off-balance sheet financial instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the Statement of Financial Condition. In the event of non-performance by the other party to a financial instrument, the Corporation's exposure to credit loss is represented by the contractual amount of the instrument. The Corporation uses the same credit policies in granting commitments and letters of credit as it does for on-balance sheet financial instruments. Off-balance-sheet financial instruments whose contract amounts represent credit and/or interest rate risk are as follows:

Commitments to extend credit and credit card arrangements are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. A portion of the commitments are expected to be drawn upon, thus representing future cash requirements. The Corporation evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained upon extension of credit is based on management's credit evaluation of the counterparty. Collateral held varies but may include accounts receivable; inventory; property, plant, and equipment; real estate; and stocks and bonds. Standby letters of credit are conditional commitments issued by the Corporation to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Corporation holds collateral supporting those commitments for which collateral is deemed necessary. Because these instruments have fixed maturity dates and because many of them expire without being drawn upon, they do not generally present any significant liquidity risk to the Corporation. 17 The Corporation has no investments in nor is a party to transactions involving derivative instruments, except mortgage-related securities which represent minimal risk to the Corporation. Like many Wisconsin financial institutions, the Corporation has a non-Wisconsin subsidiary that holds and manages investment assets which have not been subject to Wisconsin tax. The Wisconsin Department of Revenue has instituted an audit program specifically aimed at out-of-state bank subsidiaries and has indicated that it may withdraw favorable rulings previously issued in connection with such subsidiaries. As a result of these developments, the Department may take the position that the income of the out-of-state subsidiaries is taxable in Wisconsin, which will likely be challenged by financial institutions in the state. If the Department is successful in its efforts, it would result in a negative impact on the earnings of the Corporation. LIQUIDITY MANAGEMENT Liquidity describes the ability of the Corporation to generate adequate amounts of cash to meet financial obligations that arise out of the ordinary course of business. Liquidity is primarily needed to meet borrowing and deposit withdrawal requirements of the customers of the Bank and to fund current and planned expenditures. The Bank maintains its asset liquidity position internally through cash and cash equivalents, short term investments, the maturity distribution of the investment portfolio, loan repayments and income from earning assets. A substantial portion of the investment portfolio contains readily marketable securities that could be converted to cash immediately. On the liability side of the balance sheet, liquidity is affected by the timing of maturing liabilities and the ability to generate new deposits or borrowings as needed. Other sources are available through borrowings from the Federal Reserve Bank, the Federal Home Loan Bank and from lines of credit approved at correspondent banks. Management knows of no trend or event which will have a material impact on the Bank's ability to maintain liquidity at adequate levels. CAPITAL RESOURCES AND ADEQUACY The Corporation's actual capital amounts and ratios at December 31, 2003 and June 30, 2004 are presented below: Capital (Dollars In Thousands, Except Share Data)

Total shareholders' equity increased $1.3 million from $60.2 million at December 31, 2003 to $61.5 million at June 30, 2004. Net income for the six month period ending June 30, 2004 was $4.0 million. 18 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, 2004 and December 31, 2003, that the Bank meets all capital adequacy requirements to which it is subject. As of June 30, 2004, the Bank's and the Corporation's ratio of Tier 1 capital to risk-weighted assets was 12.2% and 12.5%, respectively. As of June 30, 2004, the Bank's and the Corporation's ratio of total capital to risk-weighted assets was 13.1% and 13.3%, respectively. In addition to risk-based capital, banks and bank holding companies are required to maintain a minimum amount of Tier 1 capital to total assets, referred to as the leverage capital ratio, of at least 4%. As of June 30, 2004, the Bank's and the Corporation's leverage capital ratio was 8.6% and 8.8%, respectively. As of June 30, 2004 and December 31, 2003, the most recent notification from the Office of the Comptroller of Currency and the Federal Deposit Insurance Corporation categorized the Bank as well capitalized and adequately capitalized, respectively, under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios. There are no conditions or events since such notifications that management believes have changed the institution's category. RECENT ACCOUNTING PRONOUNCEMENTS In December 2003, the FASB issued SFAS No. 132 (revised 2003), "Employers' Disclosures about Pensions and Other Postretirement Benefits - an amendment of FASB Statement No. 87, 88 and 106," which was effective for the fourth quarter of 2003. This Statement revises employers' disclosures about pension plans and other postretirement benefit plans and these disclosures are included in Note 14 to the Corporation's December 31, 2003 Consolidated Financial Statements included in the Corporation's Annual Report on Form 10-K. On March 9, 2004, the SEC issued Staff Accounting Bulletin No. 105-Application of Accounting Principles to Loan Commitments ("SAB 105"). SAB 105 summarizes the views of the SEC staff regarding the application of generally accepted accounting principles to loan commitments accounted for as derivative instruments. The SEC staff believes that in recognizing a loan commitment, entities should not consider expected future cash flows related to the associated servicing of the loan until the servicing asset has been contractually separated from the underlying loan by sale or securitization of the loan with the servicing retained. The provisions of SAB 105 are applicable to all loan commitments accounted for as derivatives and entered into subsequent to March 31, 2004. The adoption of SAB 105 will not have a material impact on the Corporation's consolidated results of operations or financial position, as the Corporation's current accounting treatment for such loan commitments is consistent with the provisions of SAB 105. FINANCIAL STATEMENT DISCLOSURES Commitments to sell residential mortgage loans to FNMA and commitments to fund such loans to individual borrowers represent the Corporation's mortgage derivatives, the fair value of which is not material at this time. Commitments outstanding at June 30, 2004 were $5,348,650. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Corporation's management is aware of no material change to the market risk position from that disclosed as of December 31, 2003 in the Corporation's 2003 Annual Report on Form 10-K. 19 ITEM 4. CONTROLS AND PROCEDURES The Corporation maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in our periodic filings with the SEC is recorded, processed, summarized, and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management. The Corporation's senior management, with the participation of the Corporation's chief executive officer and chief financial officer, evaluated the effectiveness of the Corporation's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934 [the "Act"]) as of June 30, 2004. Based on this evaluation, the Corporation's chief executive officer and chief financial officer concluded that, as of June 30, 2004, the disclosure controls and procedures were (1) designed to ensure that material information relating to the Corporation, including the Bank and the Bank's wholly owned subsidiaries, is made known to the Corporation's chief executive officer and chief financial officer by others within those entities, particularly during the period in which this report was being prepared and (2) effective, in that they provide reasonable assurance that information required to be disclosed in the reports that the Corporation files or submits under the Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. For the quarter ended June 30, 2004, the Corporation did not make any significant changes in, nor take any corrective actions regarding, its internal controls or other factors that could significantly affect these controls subsequent to the date of their evaluation. FIRST MANITOWOC BANCORP, INC. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Corporation is involved in various legal matters arising in the normal course of its business. While the ultimate outcome of these various legal matters cannot be predicted with certainty, it is the opinion of management in consultation with legal counsel, that the resolution of these legal actions will not have a material effect on the Corporation's consolidated financial condition or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS a) The Corporation's Annual Meeting of Shareholders was held on April 19, 2004. b) Not Applicable. c) The only matter voted upon was the election of three directors for terms expiring in 2007. The results are as follows:

20 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a) Exhibits:

b) Reports on Form 8-K: There were no reports on Form 8-K filed for the quarter ended June 30, 2004. 21 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 10, 2004 /s/ Thomas J. Bare ------------------ Thomas J. Bare Chief Executive Officer Date: August 10, 2004 /s/ Paul H. Wojta ----------------- Paul H. Wojta Chief Financial Officer 22

FIRST MANITOWOC BANCORP INC 10-Q