FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
{X} QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 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 0-18542
MID-WISCONSIN FINANCIAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
Wisconsin 06-1169935
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
132 West State Street, Medford, WI 54451
(Address of principal executive offices, including zip code)
(715) 748-8300
(Registrant's telephone number, including area code)
(Former name, former address & 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 No X
As of November 4, 2002, there were 1,682,784 shares of $.10 par value common
stock outstanding.
MID-WISCONSIN FINANCIAL SERVICES, INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Consolidated Balance Sheets
September 30, 2002 and December 31, 2001 3
Consolidated Statements of Income
Three Months Ended September 30, 2002 and 2001
And Nine Months Ended September 30, 2002 and 2001 4
Consolidated Statements of Changes in
Stockholders' Equity
Nine Months Ended September 30, 2002 5
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2002 and 2001 5-6
Notes to Consolidated Financial Statements 7-8
Item 2. Management's Discussion and Analysis of
Financial Conditions and Results of
Operations 8-18
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 18
PART II. OTHER INFORMATION
Item 4. Controls and Procedures 18
Item 6. Exhibits and Reports of Form 8-K 19
Signatures 20
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements:
Mid-Wisconsin Financial Services, Inc.
and Subsidiary
Consolidated Balance Sheet
September 30, 2002 December 31, 2001
(Unaudited) (Audited)
ASSETS
Cash and due from banks $13,405,435 $15,052,383
Interest-bearing deposits in other financial institutions 16,523 25,102
Federal funds sold 1,691,287 712,845
Securities available for sale -At fair value 74,356,933 83,514,352
Federal Home Loan Bank stock (at cost) 1,760,400 1,500,000
Loans held for sale 403,500 451,650
Loans receivable, net of allowance for credit losses of
$2,805,304 in 2002 and $2,597,416 in 2001 246,542,461 229,051,540
Accrued interest receivable 1,787,279 1,843,509
Premises and equipment 5,619,097 5,707,450
Purchased core deposit intangible 946,398 1,163,929
Goodwill 295,316 295,316
Other assets 676,339 1,171,500
TOTAL ASSETS $347,500,968 $340,489,576
LIABILITIES AND STOCKHOLDERS' EQUITY
Noninterest-bearing deposits $36,628,558 $35,127,283
Interest-bearing deposits 230,202,446 223,274,164
Total Deposits 266,831,004 258,401,447
Short-term borrowings 16,031,957 19,389,436
Long-term borrowings 30,000,000 30,000,000
Accrued expenses and other liabilities 3,115,964 3,145,572
Total liabilities 315,978,925 310,936,455
Stockholders' equity:
Common stock-Par value $.10 per share:
Authorized - 6,000,000 shares
Issued & outstanding - 1,682,784 shares in 2002
and 1,696,497 shares in 2001 168,278 169,650
Additional paid-in capital 10,896,812 10,972,612
Retained earnings 18,994,636 17,806,485
Unrealized gain on securities available for sale, net of tax 1,462,317 604,374
Total stockholders' equity 31,522,043 29,553,121
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $347,500,968 $340,489,576
The accompanying notes to consolidated financial statements are an integral part of these
statements.
ITEM 1. Financial Statements Continued:
MID-WISCONSIN FINANCIAL SERVICES, INC.
and Subsidiary
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three months ended Nine Months Ended
September 30, 2002 September 30, 2001 September 30, 2002 September 30, 2001
Interest income:
Interest and fees on loans $4,271,357 $4,775,992 $12,777,518 $14,720,791
Interest and dividends on securities:
Taxable 757,131 843,011 2,446,148 2,572,196
Tax-exempt 272,840 226,388 817,015 646,494
Other interest and dividend income 13,133 27,037 42,577 131,786
Total interest income 5,314,461 5,872,428 16,083,258 18,071,267
Interest expense:
Deposits 1,398,972 2,235,334 4,303,363 7,520,145
Short-term borrowings 101,177 196,384 328,078 749,002
Long-term borrowings 376,050 269,890 1,115,888 737,285
Total interest expense 1,876,199 2,701,608 5,747,329 9,006,432
Net interest income 3,438,262 3,170,820 10,335,929 9,064,835
Provision for credit losses 150,000 150,000 505,000 420,000
Net interest income after provision
for credit losses 3,288,262 3,020,820 9,830,929 8,644,835
Noninterest income:
Service fees 221,917 238,566 638,791 670,149
Trust service fees 173,533 169,061 518,712 507,276
Net realized gain on sale of securities
available for sale 0 0 17,349 0
Investment product commissions 86,529 43,528 260,892 150,576
Other operating income 160,524 176,647 499,955 515,053
Total noninterest income 642,503 627,802 1,935,699 1,843,054
Noninterest expenses:
Salaries and employee benefits 1,447,463 1,194,426 4,096,491 3,572,995
Occupancy 274,022 283,802 818,198 938,497
Data processing and information systems 103,136 118,051 314,959 347,128
Intangible amortization 72,510 89,375 217,531 268,125
Other operating 572,803 520,544 1,724,219 1,625,403
Total noninterest expenses 2,469,934 2,206,198 7,171,398 6,752,148
Income before income taxes 1,460,831 1,442,424 4,595,230 3,735,741
Provision for income taxes 405,212 399,069 1,300,681 955,714
Net income $1,055,619 $1,043,355 $3,294,549 $2,780,027
Basic and diluted earnings per share $0.62 $0.62 $1.94 $1.62
Cash dividends declared per share $0.22 $0.20 $1.06 $1.00
The accompanying notes to consolidated financial statements are an integral part of these statements.
ITEM 1. Financial Statements Continued:
Mid-Wisconsin Financial Services, Inc.
Consolidated Statement of Changes in Stockholders' Equity
(Unaudited)
Accumulated
Additional Other
Common Stock Paid-In Retained Comprehensive
Amount Capital Earnings Income (Loss) Totals
Balance, December 31, 2001 $169,650 $10,972,612 $17,806,485 $604,374 $29,553,121
Comprehensive Income:
Net Income 3,294,549 3,294,549
Unrealized gain on securities
for sale, net of tax 857,943 857,943
Total comprehensive income 4,152,492
Proceeds from stock options 64 17,162 17,226
Repurchase of common stock
returned to unissued (1,436) (92,962) (307,571) (401,969)
Cash dividends declared $1.06 per share (1,798,827) (1,798,827)
Balance September 30, 2002 $168,278 $10,896,812 $18,994,636 $1,462,317 $31,522,043
Mid-Wisconsin Financial Services, Inc.
and Subsidiary
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2002 and 2001
(Unaudited)
2002 2001
Increase (decrease) in cash and due from banks:
Cash flows from operating activities:
Net income $3,294,549 $2,780,027
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for depreciation and net amortization 694,959 834,934
Provision for credit losses 505,000 420,000
Proceeds from sales of loans held for sale 4,486,878 7,986,358
Gain on sale of loans held for sale (65,738) (94,613)
Originations of loans held for sale (4,372,990) (7,722,145)
Gain on sale of investment securities (17,349) -
Loss on premises and equipment disposals 7,170 25,383
FHLB stock dividends (60,100) (70,400)
Changes in operating assets and liabilities:
Other assets 62,527 110,520
Other liabilities (29,608) (360,194)
Net cash provided by operating activities 4,505,298 3,909,870
ITEM 1. Financial Statements Continued:
Mid-Wisconsin Financial Services, Inc.
and Subsidiary
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2002 and 2001
(Unaudited)
2002 2001
Cash flows from investing activities:
Net (increase) decrease in interest-bearing deposits
in other institutions 8,579 (1,120)
Net increase in federal funds sold (978,442) (5,374,155)
Securities available for sale:
Proceeds from sales 497,920 500,000
Proceeds from maturities 22,089,842 24,598,909
Payment for purchases (12,079,403) (23,975,777)
Payment for purchase of FHLB stock (200,300) -
Net (increase) decrease in loans (18,002,562) 564,743
Capital expenditures (392,138) (154,451)
Proceeds from sale of premises and equipment 8,955 74,734
Proceeds from sale of other real estate 6,796 -
Net cash provided by (used in) in investing activities (9,040,753) 1,608,158
Cash flows from financing activities:
Net increase (decrease) in noninterest-bearing deposits 1,501,275 (449,937)
Net increase in interest-bearing deposits 6,928,282 3,854,703
Net decrease in short-term borrowing (3,357,479) (6,729,302)
Proceeds from exercise of stock options 17,226 5,161
Payment for repurchase of common stock (401,969) (2,960,984)
Proceeds from issuance of long-term borrowings - 15,000,000
Principal payments on long-term borrowings - (9,200,000)
Dividends paid (1,798,827) (1,695,451)
Net cash provided by (used in) financing activities 2,888,508 (2,175,811)
Net increase (decrease) in cash and cash equivalents (1,646,948) 3,342,217
Cash and due from banks at beginning 15,052,383 14,126,994
Cash and due from banks at end $13,405,435 $17,469,211
Supplemental cash flow information: 2002 2001
Cash paid during the year for:
Interest $6,149,600 $9,688,555
Income taxes $1,563,396 $1,180,941
Supplemental schedule of non-cash investing and financing activities:
Loans transferred to other real estate $8,124 $56,070
Loans charged off $326,071 $223,523
Loans made in connection with the sale of other real estate $18,235 $69,382
The accompanying notes to consolidated financial statements are an integral part of these statements.
MID-WISCONSIN FINANCIAL SERVICES, INC.
Notes to Consolidated Financial Statements
NOTE 1 - GENERAL
In the opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments necessary to present fairly Mid-Wisconsin
Financial Services, Inc.'s ("Company") financial position, results of its
operations, changes in stockholders' equity and cash flows for the periods
presented, and all such adjustments are of a normal recurring nature. The
consolidated financial statements include the accounts of all subsidiaries.
All material intercompany transactions and balances are eliminated. The
results of operations for the interim periods are not necessarily indicative of
the results to be expected for the full year.
These interim consolidated financial statements have been prepared according to
the rules and regulations of the Securities and Exchange Commission and,
therefore, certain information and footnote disclosures normally presented in
accordance with generally accepted accounting principles have been omitted or
abbreviated. The information contained in the consolidated financial
statements and footnotes in the Company's 2001 annual report on Form 10-K,
should be referred to in connection with the reading of these unaudited interim
financial statements.
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 periods presented. Actual results could differ significantly from those
estimates. Estimates that are susceptible to significant change include the
determination of the allowance for credit losses and the valuations of
investments.
NOTE 2 - RECLASSIFICATIONS
Certain items in the prior period consolidated financial statements have been
reclassified to conform with the September 30, 2002 presentation.
NOTE 3 - CHANGES IN ACCOUNTING PRINCIPAL
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No.
141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS 141 requires that all business combinations initiated after June
30, 2001, be accounted for using the purchase method. Identifiable intangible
assets such as core deposit intangibles are recognized separately from goodwill
on the consolidated balance sheet. Identifiable intangible assets with a
definite life are amortized over their estimated useful lives and are also
tested for impairment periodically. Goodwill represents the excess price paid
for the acquisition of subsidiaries over the fair value of the net assets
acquired. Under SFAS No. 142, goodwill and indefinite life intangibles are no
longer amortized but are subject to impairment tests on at least an annual
basis. Any impairment of goodwill or intangibles will be recognized as an
expense in the period of impairment.
The Company's adoption of SFAS No. 142 on January 1, 2002, did not have a
material impact on the consolidated financial statements as of the date of
adoption. The elimination of goodwill amortization will result in a reduction
of amortization expense of approximately $86,000 for the year ended December
31, 2002, compared to 2001.
NOTE 4 - EARNINGS PER SHARE
Basic earnings per common share is calculated by dividing net income available
to common stockholders by the weighted average number of common shares
outstanding. Diluted earnings per share is calculated by dividing net income
by the weighted average number of shares adjusted for the dilutive effect of
outstanding stock options.
Presented below are the calculations for basic and diluted earnings per share:
Three Months Ended September 30, Nine Months Ended September 30,
2002 2001 2002 2001
(In thousands, except per share data)
Net income available to common stockholders $1,056 $1,043 $3,295 $2,780
Weighted average shares outstanding 1,693 1,695 1,695 1,719
Effect of dilutive stock options outstanding 0 0 0 0
Diluted weighted average shares outstanding 1,693 1,695 1,695 1,719
Basic earnings per common share $0.62 $0.62 $1.94 $1.62
Diluted earnings per common share $0.62 $0.62 $1.94 $1.62
NOTE 3 - LONG-TERM DEBT
Long-term debt at September 30 is as follows:
September 30, December 31,
2002 2001
Federal Home Loan Bank advances:
4.14% to 6.28%, fixed rate, maturing in
2003 through 2008 $30,000,000 $30,000,000
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis is presented to assist in the
understanding and evaluation of the Company's financial condition and results
of operations. It is intended to complement the unaudited financial
statements, footnotes, and supplemental financial data appearing elsewhere in
this Form 10-Q and should be read in conjunction therewith. Quarterly
comparisons reflect continued consistency of operations and do not reflect any
significant trends or events other than those noted in the comments.
Forward-looking statements have been made in this document that are subject to
risks and uncertainties. While the Company believes that these forward-looking
statements are based on reasonable assumptions, all such statements involve
risk and uncertainties that could cause actual results to differ materially
from these contemplated in this report.
The assumptions, risks and uncertainties relating to the forward-looking
statements in this report include those described under the caption "Cautionary
Statements Regarding Forward Looking Information" in Part I of the Company's
Form 10-K for the year ended December 31, 2001 and, from time to time, in the
Company's other filings with the Securities and Exchange Commission.
In the first quarter of 2002, the Company elected to become a financial holding
company.
RESULTS OF OPERATIONS - SUMMARY
Net income for the quarter ended September 30, 2002 totaled $1.1 million or
$0.62 for basic and diluted earnings per share. Comparatively, net income for
the quarter ended September 30, 2001 was $1.0 or $0.62 for basic and diluted
earnings per share. Operating results for the third quarter 2002 generated an
annualized return on average assets of 1.22% and an annualized return on
average equity of 13.54%, compared to 1.29% and 14.59% for the comparable
quarter in 2001. The net interest margin for the third quarter 2002 was 4.42%
compared to 4.36% for the comparable quarter in 2001.
The Company began to provide information technology consulting services during
the third quarter 2002. No revenue was recognized and expenses were
immaterial.
Table 1: Summary Results of Operations
(dollars in thousands, except per share data)
September 30, June 30, March 31, December 31, September 30,
2002 2002 2002 2001 2001
Earnings and Dividends:
Net interest income $3,438 $3,484 $3,413 $3,330 $3,171
Provision for credit losses 150 175 180 (50) 150
Net interest income after
provision for credit losses 3,288 3,309 3,233 3,380 3,021
Noninterest income 643 701 614 582 628
Noninterest expense 2,470 2,416 2,308 2,366 2,207
Income before income taxes 1,461 1,594 1,539 1,596 1,442
Provision for income taxes 405 456 439 527 399
Net income $1,056 $1,138 $1,100 $1,069 $1,043
Per common share
Basic and diluted earnings $0.62 $0.67 $0.65 $0.63 $0.62
Dividends declared 0.22 0.62 0.22 0.22 0.20
Book Value 18.73 18.31 17.84 17.42 17.45
Average common shares (000's) 1,693 1,697 1,696 1,696 1,695
Dividend payout ratio 35.4% 92.4% 33.9% 34.9% 32.5%
Balance Sheet Summary:
At quarter end:
Loans net of unearned income $249,347 $245,310 $235,367 $231,649 $226,289
Assets 347,501 348,794 335,027 340,490 322,460
Deposits 266,831 249,803 248,313 258,401 248,095
Stockholders' equity 31,522 31,076 30,259 29,553 29,588
Average balances:
Loans net of unearned income 246,546 241,320 233,279 228,170 228,848
Assets 345,697 341,219 337,973 325,261 324,476
Deposits 258,233 248,236 254,396 250,131 249,917
Stockholders' equity 31,195 30,511 29,959 28,806 28,600
Performance Ratios:
Return on average assets 1.22% 1.33% 1.30% 1.31% 1.29%
Return on average equity 13.54% 14.92% 14.69% 14.84% 14.59%
Tangible equity to assets 8.69% 8.58% 8.48% 8.45% 8.38%
Total risk-based capital 12.84% 12.72% 12.93% 12.11% 12.56%
Net loan charge-offs as a percentage
of average loans 0.12% 0.10% 0.08% 0.11% 0.02%
Nonperforming assets as a percentage
of loans and other real estate 1.52% 0.69% 0.96% 1.07% 1.69%
Net interest margin (1) 4.42% 4.52% 4.48% 4.39% 4.36%
Efficiency ratio 58.30% 59.66% 59.53% 57.22% 56.08%
Stock Price Information: (2)
High $28.33 $27.60 $26.30 $26.00 $25.10
Low 27.10 26.30 26.00 24.25 23.25
Market value at quarter end 27.20 27.50 26.30 26.00 25.10
(1) The yield on tax-exempt loans and securities was computed on a tax-equivalent basis using a tax rate of 34%
for all periods presented.
(2) The quotations reflect bid prices, without retail mark-up, markdown or commissions, and may not necessarily
represent actual transactions.
NET INTEREST INCOME
Net interest income on a fully taxable equivalent basis for the quarter ended
September 30, 2002 increased $288,000 to $3.6 million from the comparable
quarter last year. The net interest margin was 4.42% for September 30, 2002,
up 6 basis points from 4.36% from the comparable quarter last year. The
Company has benefited from a falling interest rate environment between
comparable nine-month periods, particularly by the lower costs of interest-
bearing liabilities.
The yield on average earning assets decreased 120 basis points to 6.72%
compared to 7.92% at September 30, 2001. Repricing of variable rate loans in a
lower interest rate environment as well as competitive pricing on new and
refinanced loans put downward pressure on loan yields. The average loan yield
decreased 142 basis points to 6.96% compared to 8.38% at September 30, 2001.
The average yield on investments and other earning assets decreased 49 basis
points to 6.00% at September 30, 2002.
Similarly, the cost of interest bearing liabilities decreased 145 basis points
to 2.72% from 4.17% at September 30, 2001. The cost of interest bearing
liabilities was 2.77% at June 30, 2002, reflecting a stable interest rate
environment. The average cost of interest-bearing deposits decreased 160 basis
points to 2.51% benefiting from a larger mix of lower-costing transaction
accounts, as well as from lower rates on all interest-bearing deposit products.
The cost of wholesale funding decreased 81 basis points to 3.63% over the
comparable quarter of 2001.
Average earning assets grew $21.9 million or 7.2% over the third quarter 2001.
The growth in earning assets came primarily from loans, up $17.7 million or
7.7%, while investments increased $4.2 million or 5.6%.
Average interest-bearing liabilities increased $16.6 million or 6.4% over third
quarter 2001. While interest bearing-liabilities increased, the mix is
significantly different between comparable quarters. Interest-bearing demand
deposits increased $1.7 million to $89.6 million, with a notable shift from
time deposits to transaction accounts. Average wholesale funding increased
$10.6 million, predominately in long-term debt, to 19.1% of total interest-
bearing liabilities for year-to-date 2002 compared to 11.7% year-to-date 2001.
The Company took additional long-term advances during the fourth quarter 2001
to leverage itself against interest rate risk. Long-term debt increased to
10.9% of average interest-bearing liabilities compared to 7.6% at September 30,
2001.
Table 2: Net Interest Income Analysis - Taxable Equivalent Basis
(dollars in thousands)
Three months ended September 30, 2002 Three months ended September 30, 2001
Average Interest Average Average Interest Average
Balance Income/expense Yield/Rate Balance Income/expense Yield/Rate
Assets
Loans (1) (2) $246,546 $4,287 6.96% $228,848 $4,795 8.38%
Investments and other (2) 78,937 1,184 6.00% 74,774 1,213 6.49%
Total earning assets $325,483 $5,470 6.72% $303,622 $6,008 7.92%
Other assets, net 20,214 20,854
Total assets $345,697 $324,476
Liabilities & Equity:
Interest-bearing deposits $223,332 $1,399 2.51% $217,356 $2,235 4.11%
Wholesale funding 52,613 477 3.63% 41,994 466 4.44%
Total interest-bearing liabilities $275,945 $1,876 2.72% $259,350 $2,702 4.17%
Demand deposits 34,901 32,561
Other liabilities 3,656 3,966
Stockholders' equity 31,195 28,600
Total liabilities and equity $345,697 $324,476
Interest rate spread 4.00% 3.75%
Net interest income $3,594 4.42% 3,306 4.36%
Tax equivalent adjustment $156 $135
Net interest income, as reported $3,438 $3,171
(1) Non-accrual loans are included in the daily average loan balances outstanding.
(2) The yield on tax-exempt loans and securities is computed on a tax-equivalent basis using a tax rate of 34%.
NON-INTEREST INCOME
Table 3: Noninterest Income
(dollars in thousands)
September 30 September 30 Dollar Percent
2002 2001 Change Change
Service fees on deposit accounts $222 $239 $(17) -7.1%
Trust service fees 174 169 5 3.0%
Investment product commissions 87 43 44 102.3%
Other operating income 160 177 (17) -9.6%
Total noninterest income $643 $628 $15 2.4%
Investment product commissions consist of annuity sales, brokerage services,
mutual fund sales, life insurance commissions, and self-directed IRA fees.
Investment product commissions increased $44,000, or 102.3% compared to the
quarter ended September 30, 2001. The increased revenue was predominantly due
to an increase in annuity sales. Investors continue to seek an investment with
a fixed-rate of return that annuities offer.
NON-INTEREST EXPENSE
Table 4: Noninterest Expense
(dollars in thousands)
September 30 September 30 Dollar Percent
2002 2001 Change Change
Salaries and employee benefits $1,447 $1,194 $253 21.2%
Occupancy 274 284 (10) -3.5%
Data processing and information systems 103 118 (15) -12.7%
Amortization of intangibles 73 89 (16) -18.0%
Other operating 573 521 52 10.0%
Total noninterest expense $2,470 $2,206 $264 12.0%
Salaries and employee benefits increased $253,000 or 21.2% over third quarter
2001 and represented 58.6% of total noninterest expense in 2002 compared to
54.1% in 2001. Salaries and employee benefits increased between comparable
periods, due primarily to merit increases, incentive bonuses, and pension plan
expense.
Occupancy expense decreased $10,000, primarily due to the rate decreases in
utilities, and equipment expense declining predominately in computer
depreciation expense. Data processing and information systems decreased
$15,000, primarily in software amortization expense.
Amortization of intangibles decreased due to the discontinuation of
amortization of goodwill on January 1, 2002 in accordance with SFAS No. 142
"Goodwill and Other Intangible Assets."
BALANCE SHEET
At September 30, 2002, total assets were $347.5 million, an increase of $25.0
million over September 30, 2001, while assets increased $7.0 million from
December 31, 2001. Loans were $249.8 million at September 30, 2002, growing
$23.5 million over third quarter 2001 and increasing $17.7 million over year-
end 2001. While loans continue to increase, there is a notable decline in the
percentage of agricultural loans to the total loan portfolio. Agricultural
loans decreased $3.7 million between comparable time periods and $3.8 million
from December 31, 2001, due to tightening agricultural credit standards and
lower interest rates offered by the Farm Credit System. Real estate loans
increased $20.5 million between comparable periods. The housing market remains
strong in the Company's market place. Total deposits were $266.8 million at
September 30, 2002, an increase of $18.7 million over third quarter 2001 and
increasing $8.4 million over year-end 2001. Demand deposits grew $5.0 million,
or 15.5% to represent 13.7% of total deposits compared to 12.7% a year ago.
Other time deposits were $137.6 million, an increase of $10.6 million over
September 30, 2001, while other time deposits increased $10.8 million from
December 31, 2001. The increase in other time deposits is due to certificate
of deposit promotions and the transfer of three million dollars from the
repurchase cash management accounts to certificates of deposit during the third
quarter 2002.
Table 5: Period End Loan Composition
(dollars in thousands)
September 30 % of September 30 % of December 31, % of
2002 total 2001 total 2001 total
Commercial and financial $48,210 19.3% $44,010 19.5% $44,320 19.1%
Construction loans 7,364 3.0% 5,046 2.2% 5,375 2.3%
Agricultural 32,977 13.2% 36,713 16.2% 36,815 15.9%
Real estate 150,922 60.4% 130,398 57.6% 135,421 58.4%
Installment loans to individuals 10,272 4.1% 10,108 4.5% 10,162 4.3%
Lease financing 6 0.0% 15 0.0% 8 0.0%
Total loans (including loans held for sale) $249,751 100.0% $226,290 100.0% $232,101 100.0%
Table 6: Period End Deposit Composition
(dollars in thousands)
September 30, % of September 30, % of December 31, % of
2002 total 2001 total 2001 total
Demand $36,629 13.7% $31,706 12.7% $35,127 13.6%
NOW 26,961 10.1% 19,926 8.0% 25,012 9.7%
Money market 44,993 16.9% 50,617 20.4% 52,245 20.2%
Savings 20,138 7.6% 18,349 7.4% 18,700 7.2%
Brokered CDs 500 0.2% 500 0.2% 500 0.2%
Other time 137,610 51.6% 126,997 51.3% 126,817 49.1%
Total Deposits $266,831 100.0% $248,095 100.0% $258,401 100.0%
ALLOWANCE FOR CREDIT LOSSES
The loan portfolio is the primary asset subject to credit risk. The Company's
process for monitoring credit risks includes weekly analysis of loan quality,
delinquencies, non-performing assets, and potential problem loans.
The allowance for credit losses represents management's estimate of an amount
adequate to provide for potential losses in the loan portfolio. Adequacy of
the allowance for credit losses is based on management's ongoing review and
grading of the loan portfolio, past loan loss experience, trends in past due
and nonperforming loans, and current economic conditions. The Company's
internal risk analysis staff continuously reviews loan quality.
It is the Company's policy that when available information confirms that
specific loans and leases, or portions thereof, including impaired loans, are
uncollectable, these amounts are promptly charged off against the allowance.
As of September 30, 2002, the allowance for credit losses was $2.8 million,
representing 1.12% of outstanding loans, compared to $2.9 million, or 1.28%, at
September 30, 2001, and $2.6 million, or 1.12% at December 2001. At September
30, 2002, the allowance for credit losses was 75.7% of nonperforming loans
compared to 77.6% and 108.8% at September 30 and December 31, 2001.
Table 7: Allowance for Credit Losses and Nonperforming Assets
(dollars in thousands)
At and for the At and for the
Nine months ended Year ended
September 30, December 31,
2002 2001 2001
Allowance for Credit Losses:
Balance at beginning of period $2,597 $2,593 $2,593
Charged off (326) (223) (491)
Recoveries 29 113 125
Net loans charged off (297) (110) (366)
Provision for credit losses 505 420 370
Balance at end of period $2,805 $2,903 $2,597
Nonperforming Assets:
Nonaccrual loans $3,621 $3,240 $1,905
Accruing loans past due 90 days or more 69 43 30
Restructured loans 15 457 453
Total nonperforming loans 3,705 3,740 2,388
Other real estate owned 91 76 90
Total nonperforming assets $3,796 $3,816 $2,478
Ratio of allowance for credit losses
to total loans at end of period 1.12% 1.28% 1.12%
Ratio of net charge offs during the
period to average loans outstanding 0.12% 0.05% 0.15%
Nonperforming loans to total loans 1.48% 1.65% 1.03%
Nonperforming assets to total assets 1.09% 1.18% 0.73%
Management is not aware of any additional loans that represent material credits
or of any information that causes management to have serious doubts as to the
ability of such borrowers to comply with the loan repayment terms.
In the opinion of management, the allowance for credit losses is adequate at
September 30, 2002. While management uses available information to recognize
losses on loans, future adjustments may be necessary based on changes in
economic conditions.
Loans, other than credit card loans, are placed on a nonaccrual status when
they become contractually past due 90 days or more as to interest or principal
payments. All interest accrued but not collected for loans (including
applicable impaired loans) that are placed on nonaccrual or charged off is
reversed to interest income.
The interest on these loans is accounted for on the cash basis until qualifying
for return to accrual status. Loans are returned to accrual status when all
the principal and interest amounts contractually due have been collected and
there is reasonable assurance that repayment will continue within a reasonable
time frame.
A loan is considered impaired when, based on current information, it is
probable that the Bank will not collect all amounts due in accordance with the
contractual terms of the loan agreement. Impairment is based on discounted
cash flows of expected future payments using the loan's initial effective
interest rate or the fair value of the collateral if the loan is collateral
dependent. The decision of management to place loans in this category does not
necessarily mean that the Company expects losses to occur but that management
recognizes that a higher degree of risk is associated with these loans.
The total of nonperforming assets remained constant at $3.8 million at
September 30, 2002 and 2001. Nonperforming assets have increased $1.3 million
from $2.5 million at December 31, 2001. Approximately $930,000 of the increase
in nonperforming loans is due to a participation that matured in July 2002
which cannot be renewed until one of the other participating banks is released
from the agreement. The Company intends to retain its participation interest
in the renewed loan. It is estimated this loan will be renewed in the fourth
quarter.
LIQUIDITY
Liquidity refers to the ability of the Company to generate adequate amounts of
cash to meet requirements of depositors and borrowers, as well as the operating
needs of the Company. Management views liquidity as the ability to raise
cash at a reasonable cost, or with a minimum of loss, and as a measure of
balance sheet flexibility to react to marketplace, regulatory and competitive
changes. Deposit growth is the primary source of liquidity. Retail consumer
deposits as a percentage of total funding sources were 80.5% at September 30,
2002 and 82.2% at September 30, 2001. Wholesale funding represents the balance
of the Company's total funding needs. The primary wholesale funding sources
utilized are Federal Home Loan Bank advances, federal funds purchased,
repurchase agreements from a base of individuals, businesses, and public
entities, and brokered CDs.
CAPITAL
Stockholders' equity at September 30, 2002 increased $1.9 million to $31.5
million, compared to $29.6 million at September 30, 2001. The change in equity
between the two periods was primarily composed of the retention of earnings and
the exercise of stock options, with offsetting decreases to equity from the
payment of dividends and the repurchase of common stock. Stockholders' equity
at September 30, 2002, included $1.5 million of accumulated other comprehensive
income, related to unrealized gains on securities available-for-sale, net of
the tax effect. At September 30, 2001, stockholders' equity included $1.4
million of accumulated other comprehensive income, related to unrealized gains
on securities available-for-sale, net of the tax effect.
Cash dividends of $1.06 per share were paid year-to-date 2002, compared to
$1.00 per share in year-to-date 2001, representing an increase of 6%.
The adequacy of the Company's capital is reviewed regularly to ensure
sufficient capital is available for current and future needs and is in
compliance with regulatory guidelines. As of September 30, 2002 the Company's
capital ratios were well in excess of regulatory minimums.
The following are the Company's risk based capital ratios for the previous five
quarters:
Table 8: Capital Ratios
Tier 1 Capital Total Capital
September 30, 2002 11.7% 12.8%
June 30, 2002 11.6% 12.7%
March 31, 2002 11.8% 12.9%
December 31, 2001 11.1% 12.1%
September 30, 2001 11.3% 12.6%
Regulatory minimum requirements 4.0% 8.0%
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
There was no material change in the information provided in response to Item 7A
of the Company's Form 10-K for the year ended December 31, 2001.
ITEM 4. CONTROLS AND PROCEDURES
The Company maintains controls and other procedures that are designed to ensure
that information required to be disclosed in the Company's reports under the
Securities Exchange Act of 1934 (the "Exchange Act") is recorded, processed,
summarized, and reported in accordance with Securities and Exchange Commission
rules, and that such information is accumulated and communicated to the
Company's management, including the President and Chief Executive Officer and
Chief Financial Officer, as appropriate, to allow timely decisions regarding
required disclosure. Management necessarily applied its judgment in assessing
the costs and benefits of such controls and procedures which, by their nature,
can provide only reasonable assurance regarding management's control
objectives.
Within 90 days prior to the date of this report, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
management, including the President and Chief Executive Officer along with the
Chief Financial Officer, of the effectiveness of the design and operation of
the Company's disclosure controls and procedures pursuant to Exchange Act Rule
13a-14. Based upon the foregoing, the President and Chief Executive Officer
along with the Chief Financial Officer concluded that the Company's disclosure
controls and procedures are effective in timely alerting them to material
information relating to the Company (including its consolidated subsidiaries)
required to be included in the Company's Exchange Act reports. There have been
no significant changes in the Company's internal controls or in other factors
which could significantly affect internal controls subsequent to the date the
Company carried out its evaluation.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits required by Item 601 of Regulation S-K
The following exhibits have been filed with the Securities and Exchange
Commission. No exhibits are filed as part of this report.
4.1 Articles of Incorporation, as amended (incorporated by reference to Exhibit
4.1 to the Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 2000)
4.2 Bylaws, as amended September 20, 1995 (incorporated by reference to Exhibit
4.2 to the Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 2000)
10.1* Mid-Wisconsin Financial Services, Inc. 1991 Employee Stock Option Plan
(incorporated by reference to Exhibit 10.1 to the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 2000)
10.2* Mid-Wisconsin Financial Services, Inc. Directors' Deferred Compensation
Plan as last amended July 19, 2000 (incorporated by reference to Exhibit 10.2
to the Registrant's Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 2000)
10.3* Director Retirement Benefit Policy (incorporated by reference to Exhibit
10(e) to the Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1999)
10.4* 1999 TeamBank Bonus Plan (incorporated by reference to Exhibit 10(f) to
the Registrant's Annual Report on Form 10-K for the fiscal year ended December
31, 1999)
10.5 Mid-Wisconsin Financial Services, Inc. Employee Stock Purchase Plan
(incorporated by reference to exhibit 10.7 to the Registrant's Quarterly Report
on Form 10-Q for the quarterly period ended June 30, 2000)
10.6* Mid-Wisconsin Financial Services, Inc. 1999 Stock Option Plan
(incorporated by reference to Exhibit 10.8 to the Registrant's Quarterly Report
on Form 10-Q for the quarterly period ended June 30, 2000)
22.1 Subsidiaries of the Registrant (incorporated by reference to Exhibit 21.1)
to the Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 2000)
99.1 Certification under Section 906 of Sarbanes-Oxley Act of 2002.
*Denotes Executive Compensation Plans and Arrangements
(b) Reports on Form 8-K.
Form 8-K dated October 15, 2002. The Company filed a Form 8-K on October 15,
2002 reporting earning information for the quarter ended September 30, 2002
under Item 5 and additional disclosure under Item 9, Regulation FD disclosure.
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 thereunto duly authorized.
MID-WISCONSIN FINANCIAL SERVICES, INC.
Date November 13, 2002 GENE C. KNOLL
Gene C. Knoll, President
(Principal Executive Officer)
Date November 13, 2002 RHONDA R. KELLEY
Rhonda R. Kelley, Controller
(Principal Accounting Officer)
EXHIBIT INDEX
to
FORM 10-Q
of
MID-WISCONSIN FINANCIAL SERVICES, INC.
for the quarterly period ended September 30, 2002
Pursuant to Section 102 (d) of Regulation S-T
(17 C.F.R. Section 232.102 (d))
The following exhibits are filed as part of this report:
99.1 Certification under Section 906 of Sarbanes-Oxley Act of 2002.