FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the fiscal year ended December 31, 2002
[ ] 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 (I.R.S. Employer
of incorporation or organization) Identification No.)
132 West State Street
Medford, Wisconsin 54451
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (715) 748-8300
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
$.10 Par Value Common Stock
(Title of Class)
Indicate by check 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 report), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12-b2 of the Exchange Act).
Yes No X
As of March 3, 2003, 1,684,475 shares of common stock were outstanding. The
aggregate market value of the voting stock held by non-affiliates as of June
28, 2002, was approximately $43,296,028. For purposes of this calculation, the
registrant has assumed its directors and executive officers are affiliates.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement dated March 21, 2003 (to the extent specified herein): Part III
FORM 10-K
MID-WISCONSIN FINANCIAL SERVICES, INC.
TABLE OF CONTENTS
PART I
ITEM
1. Business...................................................... 3
2. Properties.................................................... 7
3. Legal proceedings............................................. 7
4. Submission of matters to a vote of security holders........... 8
PART II
5. Market for registrant's common equity and related
stockholder matters........................................... 8
6. Selected financial data...................................... 10
7. Management's discussion and analysis of financial
condition and results of operations.......................... 11
7A. Quantitative and qualitative disclosures about market risk... 27
8. Financial statements and supplementary data.................. 28
9. Changes in and disagreements with accountants on accounting
and financial disclosure..................................... 67
PART III
10. Directors and executive officers of the registrant........... 67
11. Executive compensation....................................... 67
12. Security ownership of certain beneficial owners and
management and related stockholders matters.................. 67
13. Certain relationships and related transactions............... 68
14. Controls and procedures...................................... 68
PART IV
15. Exhibits, financial statement schedules, and reports on
Form 8-K..................................................... 69
PART I
ITEM 1. BUSINESS
General
Mid-Wisconsin Financial Services, Inc. ("the Company") is a registered
financial holding company under the Bank Holding Company Act of 1956, as
amended (the "BHCA"). The Company's subsidiary operates under the name Mid-
Wisconsin Bank (the "Bank") and has its principal office in Medford, Wisconsin.
Except as may otherwise be noted, this annual report on Form 10-K describes the
business of the Company and the Bank as in effect on December 31, 2002.
Acquisitions
The Company has a policy of actively pursuing opportunities to acquire
additional bank subsidiaries so that, at any given time, it may be engaged in
some tentative or preliminary discussions for such purpose with officers,
directors or principal shareholders of other holding companies or banks. There
are no plans, understandings, or arrangements, written or oral, regarding other
acquisitions as of the date hereof.
Business of the Bank
The day-to-day management of the Bank rests with its officers and board of
directors. The Bank is engaged in general commercial and retail banking
services, including trust services. The Bank serves individuals, businesses
and governmental units and offers most forms of commercial and consumer
lending, including lines of credit, term loans, real estate financing and
mortgage lending. In addition, the Bank provides a full range of personal
banking services, including checking accounts, savings and time accounts,
installment and other personal loans, as well as mortgage loans. New services
are frequently added to the Bank's retail banking departments.
The Trust and Investment Center located in Medford offers a wide variety of
fiduciary, investment management and advisory services to individuals,
corporations, charitable trusts, and foundations. The Bank administers
pension, profit sharing and other employee benefit plans, and personal trusts
and estates. The Bank also provides discount and full-service brokerage
services, including the sale of fixed and variable annuities, mutual funds and
securities.
The Bank
The Bank was incorporated on September 1, 1890, as a state bank under the laws
of Wisconsin. The Bank's principal office is located at 132 West State Street,
Medford, Wisconsin, 54451. The Bank's principal office and nine branches
provide service to northern and central Wisconsin markets in Taylor County and
portions of Eau Claire, Lincoln, Clark, Price and Oneida counties.
The Bank's principal branch offices are located in Medford, Colby, Neillsville,
Phillips, and Rhinelander Wisconsin. These branches provide commercial and
consumer banking services for customers located in the surrounding market
areas.
Bank Market Area and Competition
The Bank competes for loans, deposits, and financial services in all of its
principal markets. Much of this competition comes from companies which are
larger and have greater resources than the Company. The Bank competes directly
with other banks, savings associations, credit unions, finance companies,
mutual funds, life insurance companies and other financial and non-financial
companies. Many of these nonbank competitors offer products and services that
are functionally equivalent to the products and services offered by the Bank.
Competition involves efforts to obtain new deposits, interest rates paid on
deposits and charged on loans, as well as other aspects of banking.
Recent changes in banking laws have had a significant effect on the competitive
environment in which the Bank operates and are likely to continue to increase
competition for the Bank. For example, federal law permits adequately
capitalized and managed bank holding companies to engage in interstate banking
on a much broader scale than in the past. Banks are also permitted to create
interstate branching networks in states which do not "opt out" of the new laws.
The Gramm-Leach-Bliley Act of 1999 has also increased the competitive
environment for the Bank. Under this act, financial holding companies are now
permitted to conduct a broad range of banking, insurance and securities
activities. The Company believes that the combined effects of more interstate
banking and the development of greater "one-stop" availability for banking,
insurance and securities services will both increase the overall level of
competition and attract competitors with which the Bank may not now compete for
its customers.
Employees
All officers of the Company except the Chairman and the Vice President are
full-time employees of the Bank. As of March 1, 2003, the Company and its
subsidiaries had 133 full-time equivalent employees.
Executive Officers
The executive officers of the Company as of March 1, 2003, their ages, offices
and principal occupation during the last five years are set forth below.
Name Offices and Positions Held Date of Election
James F. Melvin Chairman of the Board of the Company May 2000
Age: 53
From August 1996 to May 2000 Vice
Chairman of the Board of the Company
From May 1998 to May 2000 Chairman
of the Board of the Bank
President of the Melvin Companies
Name Offices and Positions Held Date of Election
Norman A. Hatlestad Vice President of the Company May 2002
Age: 61
President of Medford Auto Supply, Inc.
Gene C. Knoll President of the Company October 1996
Age: 49
President, Chief Executive Officer
of the Bank
William A. Weiland Secretary and Treasurer of the May 1998
Age: 48 Company
Executive Vice President of the Bank
Rhonda R. Kelley Controller of the Company September 1998
Age: 29
Controller of the Bank
Prior to September 1998, accountant at
a public accounting firm
All executive officers are elected annually by the board of directors at its
annual meeting and hold office until the next annual meeting of the board of
directors, or until their respective successors are elected and qualified.
Regulation and Supervision
The Company and the Bank are subject to regulation under both federal and state
law. The Company is a registered financial holding company and is subject to
regulation and examination by the Board of Governors of the Federal Reserve
System (the "Board") pursuant to the BHCA. The Bank is subject to regulation
and examination by the Federal Deposit Insurance Corporation ("FDIC") and, as a
Wisconsin chartered bank, by the Wisconsin Department of Financial
Institutions.
The Board expects a financial holding company to be a source of strength for
its subsidiary banks. As such, the Company may be required to take certain
actions or commit certain resources to the Bank when it might otherwise choose
not to do so. Under federal and state banking laws, the Company and the Bank
are also subject to regulations which govern the Company's and the Bank's
capital adequacy, loans and loan policies (including the extension of credit to
affiliates), deposits, payment of dividends, establishment of branch offices,
mergers and other acquisitions, investments in or the conduct of other lines of
business, management personnel, interlocking directors and other aspects of the
operation of the Company and the Bank.
Bank regulators having jurisdiction over the Company and the Bank generally
have the authority to impose civil fines or penalties and to impose regulatory
sanctions for noncompliance with applicable banking regulations and policies.
In particular, the FDIC has broad authority to take corrective action if the
Bank fails to maintain required capital levels. Information concerning the
Company's compliance with applicable capital requirements is set forth under
the subheading "Capital" in Item 7 and Item 8, Note 14 of the Notes to
Consolidated Financial Statements.
Banking laws and regulations have undergone periodic revisions that often have
a direct effect on the Bank's operations and its competitive environment. From
time to time various formal or informal proposals, including new legislation,
relating to, among other things, changes with respect to deposit insurance,
permitted banking activities and restructuring of the federal regulatory scheme
have been made or may be made or adopted in the future. It is likely that such
changes may have a significant impact on the Company's competitive
circumstances and that such changes may have a material adverse effect on the
Company's consolidated financial condition, liquidity or results of operations.
Monetary Policy
The earnings and growth of the Bank, and therefore the Company, are affected by
the monetary and fiscal policies of the federal government and governmental
agencies. The Board has a direct and indirect influence on the costs of funds
used by the Bank for lending and its actions have a substantial effect on
interest rates, the general availability of credit and the economy as a whole.
These policies therefore affect the growth of Bank loans and deposits and the
rates charged for loans and paid for deposits. Governmental and Board policies
have had a significant effect on the operating results of commercial banks in
the past and are expected to do so in the future. Management of the Company is
not able to anticipate the future impact of such policies and practices on the
growth of the profitability of the Company.
Cautionary Statement Regarding Forward Looking Information
This report contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995 (the "Reform Act"). In
addition, certain statements in future filings by the Company with the
Securities and Exchange Commission, reports to shareholders, in press releases,
and in other oral and written statements made by or with the approval of the
Company which are not statements of historical fact will constitute forward-
looking statements within the meaning of the Act.
Examples of forward-looking statements include, but are not limited to: (i)
projections of revenues, income or loss, earnings or loss per share, the
payment or non-payment of dividends, capital structure and other financial
items; (ii) statements of plans and objectives of the Company or its management
or Board of Directors, including those relating to products or services; (iii)
statements of future economic performance; and (iv) statements of assumptions
underlying such statements. Words such as "believes", "anticipates",
"expects", "intends", "targeted", and similar expressions are intended to
identify forward-looking statements but are not the exclusive means of
identifying such statements. In making forward-looking statements within the
meaning of the Reform Act, the Company undertakes no obligation to publicly
update or revise any such statement.
Forward-looking statements of the Company are based on information available to
the Company as of the date of such statements, and reflect the Company's
expectations as of such date, but are subject to risks and uncertainties that
may cause actual results to vary materially. In addition to specific factors
which may be described in connection with any of the Company's forward-looking
statements, factors which could cause actual results to differ materially from
those discussed in the forward looking statements include, but are not limited
to the following: (i) the condition of the U.S. economy in general and the
condition of the local economies in which operations are conducted; (ii) the
effects of increased competition in the banking and financial services
industry; (iii) the effects of and changes in trade, monetary and fiscal
policies and laws, including interest rate policies of the Board of Governors
of the Federal Reserve System which reduce interest margins; (iv) the effects
of inflation, interest rate, market, and monetary fluctuations; (v) the timely
development of and acceptance of new products and services and perceived
overall value of these products and services by users; (vi) changes in consumer
spending, borrowing and saving habits; (vii) technological changes, including
increases in on-line banking or delivery of financial services; (viii) the
effect of acquisitions or the inability to consummate acquisitions to expand
the Company's service area; (ix) the ability to increase market share and
control expenses; (x) the effect of changes in laws and regulations (including
laws and regulations concerning taxes, banking, securities and insurance) with
which the Company and its subsidiaries must comply or which result in increased
competition (xi) the effect of changes in accounting policies and practices
required by bank or securities regulatory agencies or to comply with generally
accepted accounting principles; (xii) the costs and effects of litigation and
of unexpected or adverse outcomes in such litigation; and (xiii) the success of
the Company at managing the risks involved in the foregoing.
ITEM 2. PROPERTIES
The Company's operations are carried out at the Bank's administrative office
facility at 132 West State Street, Medford, Wisconsin. The Company does not
maintain any separate offices.
In addition to its administrative office, the Bank also owns nine branch
facilities. All of the branches are free-standing buildings that provide
adequate customer parking and, with one exception, all have drive-in
facilities. The Company considers its properties to be adequate for its needs.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any pending legal proceedings before any court,
administrative agency or other tribunal. Further, the Company is not aware of
any litigation which is threatened against it in any court, administrative
agency or other tribunal.
The Bank is engaged in legal actions and proceedings, both as plaintiffs and
defendants, from time to time in the ordinary course of its business. In some
instances, such actions and proceedings involve substantial claims for
compensatory or punitive damages or involve claims for an unspecified amount of
damages. There are, however, presently no proceedings pending or contemplated
which, in the opinion of the Company's management, would have a material
adverse effect on the operations, liquidity or consolidated financial condition
of the Bank or the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of stockholders during the fourth quarter
of 2002.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Market Information
There is no active established public trading market in Company common stock,
although two regional broker-dealers act as market makers for the stock. Bid
and ask quotations are published periodically in the MILWAUKEE JOURNAL SENTINEL
and prices are quoted on the OTC Bulletin Board under the symbol "MWFS.OB".
Transactions in the Company common stock are limited and sporadic.
Holders
As of March 3, 2003, there were approximately 837 holders of record of the
Company's $.10 per share par value common stock. Some of the Company's shares
are held in "street" name and the number of beneficial owners of such shares is
not known nor included in the foregoing number.
DIVIDEND POLICY
The Company's Bylaws provide that, subject to the provisions of applicable law,
the Board of Directors may declare dividends from unreserved and unrestricted
earned surplus, at such times and in such amounts as the board shall deem
advisable.
The Company's ability to pay dividends depends upon the receipt of dividends
from the Bank. Bank dividends are subject to limitation under banking laws and
regulations. As of December 31, 2002, the Bank could have paid $10,452,000 of
additional dividends to the Company without prior regulatory approval. The
declaration of dividends by the Company is discretionary and will depend upon
operating results and financial condition, regulatory limitations, tax
considerations and other factors. The Company has paid regular dividends since
its inception in 1986.
Market Prices and Dividends
Price ranges of over-the-counter quotations and dividends declared per share on
the Company common stock for the periods indicated are:
2002 Prices 2001 Prices
Quarter High Low Dividends (1) High Low Dividends (2)
1st $26.30 $26.00 $0.22 $22.50 $21.00 $0.20
2nd 27.60 26.30 0.62 23.25 20.12 0.60
3rd 28.33 27.20 0.22 25.10 23.25 0.20
4th 27.25 27.20 0.22 26.00 24.25 0.22
(1) The $.62 per share dividend declared in the second quarter of 2002
includes a special dividend of $.40 per share.
(2) The $.60 per share dividend declared in the second quarter of 2001
includes a special dividend of $.40 per share.
Prices detailed in item 6 for the common stock for the year ended December 31,
1998 represent the bid quotations as published in the MILWAUKEE JOURNAL
SENTINEL and since 1998, the bid prices reported on the OTC Bulletin Board.
The prices do not reflect retail mark-up, mark-down or commissions, and may not
necessarily represent actual transactions. There is no active established
trading market.
Sales of Unregistered Securities
During the three-fiscal year period ended December 31, 2002, the Company sold
common stock in connection with the various stock option plans as detailed in
the footnotes to the financial statements. Shares under the 1991 Employee
Stock Option Plan were not registered under the Securities Act of 1933, but
were offered in reliance on the exemptions afforded under sections 4(2) and
3(a) (11) thereof as all optionees were officers of the Bank and all are
residents of the State of Wisconsin. All proceeds from the sale of such shares
were used for general corporate purposes. Sales of unregistered shares during
each fiscal year were as follows:
Aggregate
Aggregate Consideration
Year Ended Shares Sold Received
2002 1,393 $37,378
2001 604 $14,496
2000 1,906 $37,168
ITEM 6. SELECTED FINANCIAL DATA
Table 1: Earnings Summary and Selected Financial Data
(In thousands, except per share data)
2002 2001 2000 1999 1998
FOR THE YEAR:
Interest income $21,385 $23,712 $24,216 $21,239 $21,142
Interest expense 7,582 11,317 12,911 9,844 10,104
Net interest income 13,803 12,395 11,305 11,395 11,038
Provision for loan losses 625 370 400 180 420
Net interest income after
provision for loan losses 13,178 12,025 10,905 11,215 10,618
Noninterest income 2,676 2,425 2,303 2,107 2,085
Noninterest expense 9,588 9,118 8,658 8,542 7,900
Income before provision for income taxes 6,266 5,332 4,550 4,780 4,803
Provision for income taxes 1,783 1,483 1,201 1,432 1,555
Net income $4,483 $3,849 $3,349 $3,348 $3,248
Return on average assets 1.30% 1.18% 1.07% 1.16% 1.19%
Return on average equity 14.56% 13.36% 11.74% 11.79% 11.37%
Equity to assets 8.75% 8.68% 9.45% 9.26% 10.54%
Net interest margin 4.43% 4.24% 4.02% 4.47% 4.55%
AVERAGE BALANCE SHEET:
Loans net of unearned income $243,597 $228,170 $225,308 $200,497 $190,014
Assets 344,815 325,261 314,318 288,287 272,084
Deposits 257,356 250,131 235,656 222,755 214,246
Stockholders' equity 30,790 28,806 28,520 28,396 28,558
ENDING BALANCE SHEET:
Loans net of unearned income $254,939 $231,649 $226,942 $217,546 $189,952
Assets 368,040 340,490 321,102 307,684 280,479
Deposits 274,492 258,401 244,691 230,170 222,322
Stockholders' equity 32,186 29,553 30,345 28,499 29,570
FINANCIAL CONDITION ANALYSIS:
Total risk-based capital 12.69% 12.11% 13.17% 12.93% 15.11%
Net charge-offs to average loans 0.21% 0.16% 0.04% 0.03% 0.13%
Nonperforming loans to loans 0.85% 1.03% 1.11% 0.85% 1.14%
Efficiency ratio 56.05% 59.44% 61.34% 61.12% 58.37%
Fee revenue to average assets 0.43% 0.47% 0.46% 0.46% 0.45%
STOCKHOLDERS' DATA:
Basic and diluted earnings per share $2.65 $2.25 $1.85 $1.83 $1.74
Book value per share $19.11 $17.42 $16.75 $15.62 $15.89
Dividends per share $1.28 $1.22 $1.20 $1.17 $0.81
Dividend payout ratio 48.3% 54.2% 64.9% 63.9% 46.6%
Average common shares outstanding 1,692 1,707 1,814 1,826 1,862
Shareholders of record at year end 838 818 803 816 830
STOCK PRICE INFORMATION
High $28.33 $26.00 $27.50 $27.50 $27.50
Low 26.00 20.12 21.50 25.50 23.00
Market Price at year end (1) 27.25 26.00 22.00 27.50 26.00
(1) Market value at year-end represents the bid price. The quotations reflect prices, without retail
mark-up, markdown, or commissions, and may not necessarily represent actual transactions.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCAL CONDITION AND RESULTS
OF OPERATIONS
The following management's discussion and analysis reviews significant factors
with respect to the Company's financial condition and results of operations at
and for the three-year period ended December 31, 2002. This discussion should
be read in conjunction with the consolidated financial statements, notes,
tables, and the selected financial data presented elsewhere in this report.
Management's discussion and analysis contains forward-looking statements that
are provided to assist in the understanding of anticipated future financial
performance. However, such performance involves risks and uncertainties that
may cause actual results to differ materially from those in such statements.
For a discussion of certain factors that may cause such forward-looking
statements to differ materially from actual results see Item 1, Cautionary
Statement Regarding Forward Looking Information, in this Annual Report on Form
10-K for the year ended December 31, 2002.
Results of Operations
The Company's net income for 2002 was $4.5 million, an increase of $.6 million
or 16.5% over the $3.8 million earned in 2001. Basic and diluted earnings per
share for 2002 were $2.65, a 17.8% increase over 2001 basic and diluted
earnings per share of $2.25. Return on average common stockholders' equity and
return on average assets were 14.56% and 1.30% for 2002 compared to 13.36% and
1.18% for 2001. Cash dividends paid in 2002 increased by 4.9% to $1.28 per
share over the $1.22 per share paid in 2001. Key factors behind these results
were:
Tax equivalent net interest income was $14.4 million for 2002, $1.5
million or 11.7% higher than 2001. Tax equivalent interest income
decreased by $2.2 million, while interest expense decreased $3.7 million.
The volume of average earning assets increased $20.5 million to $325.4
million, which exceeded the $15.1 million increase in interest bearing
liabilities to $276.4 million. Increases in volume and changes in
product mix added $1.1 million to taxable equivalent net interest income,
whereas changes in the rate environment of 2002 resulted in a $427,000
increase.
Total loans and deposits were $255.7 million and $274.5 million,
respectively, at December 31, 2002, compared to $232.1 million and $258.4
million, respectively, at December 31, 2001.
The allowance for loan losses increased to $2.7 million in 2002
from $2.6 million in 2001. Net loan charge-offs were $0.5 million, an
increase of $0.2 million from 2001, primarily due to two large commercial
credits. Net charge-offs were .21% of average loans compared to .16% in
2001. The ratio of allowance for loan losses to loans was 1.06% and
1.12% at December 31, 2002 and 2001.
Noninterest income was $2.7 million for 2002, $0.3 million or 10.4%
higher than 2001. Noninterest expense increased $0.5 million or 5.2%
over 2001 to $9.6 million.
Market Risk
Market risk is the risk of loss from adverse changes in market prices and
rates. The Company's market risk arises primarily from interest-rate risk
inherent in its lending and deposit taking activities. Management actively
monitors and manages its interest rate risk exposure. The measurement of the
market risk associated with financial instruments is meaningful only when all
related and offsetting on- and off-balance sheet transactions are aggregated,
and the resulting net positions are identified. Disclosures about the fair
value of financial instruments that reflect changes in market prices and rates
can be found in Notes 17 and 18 of the Notes to the Consolidated Financial
Statements.
The Company's primary objective in managing interest-rate risk is to minimize
the adverse impact of changes in interest rates on the Company's net interest
income and capital, while adjusting the Company's asset-liability structure to
obtain the maximum yield-cost spread on that structure. The Company relies
primarily on its asset-liability structure to control interest-rate risk.
However, a sudden and substantial increase or decrease in interest rates may
adversely impact the Company's earnings, to the extent that the interest rates
borne by assets and liabilities do not change at the same speed, to the same
extent, or on the same basis. The Company does not engage in trading
activities.
INCOME STATEMENT ANALYSIS
Net Interest Income
Net interest income represents the difference between interest earned on loans,
securities and other interest-earning assets, and the interest expense
associated with the deposits and borrowings that fund them. Interest rate
fluctuations together with changes in volume and types of earning assets and
interest-bearing liabilities combine to affect total net interest income.
Additionally, net interest income is impacted by the sensitivity of the balance
sheet to changes in interest rates, contractual maturities, and repricing
frequencies.
Net interest income was $13.8 million for 2002 compared to $12.4 million last
year. Tax equivalent net interest income was $14.4 million for 2002, an
increase of $1.5 million or 11.7% from 2001. The increase in tax equivalent
net interest income was due to low interest rates, particularly on the cost of
interest bearing liabilities, and a higher level of earning assets.
Average earning assets were $325.4 million in 2002, an increase of $20.4
million, or 6.7% from 2001. During 2002, average loans accounted for over 75%
of the growth in earning assets. Average loans were $243.6 million in 2002, up
$15.4 million or 6.8% compared to 2001. Average securities and other
investments increased $5.0 million, or 6.5% from 2001.
Average interest bearing liabilities were $276.4 million, an increase of $15.1
million, or 5.8% from 2001. Average interest bearing deposits increased $4.3
million. Average short-term borrowings decreased $0.6 million and average
long-term borrowings increased $11.5 million. The mix of interest bearing
liabilities changed significantly compared to 2001. Average interest bearing
deposits were 80.8% of average interest bearing liabilities compared to 83.8%
in 2001. To take advantage of the lower interest rates, and mitigate interest
rate risk the Company took additional long-term borrowings. As a result, long-
term borrowings increased to 11.2% of average interest bearing liabilities from
7.5% at December 31, 2001.
The tax equivalent net interest margin improved to 4.43% compared to 4.24% in
2001. In 2002, the yield on earning assets decreased 119 basis points,
decreasing interest income by $2.2 million while the cost of interest bearing
liabilities decreased 159 basis points, decreasing interest expense by $3.7
million for a net increase of $1.5 million in tax equivalent net interest
income. Asset growth, a shift in the deposit mix and the liability sensitive
repricing characteristics of the Company's balance sheet in the declining rate
environment experienced in 2002 all contributed to the margin improvement.
The average loan yield was 7.03%, down 144 basis points from last year.
Despite the loan growth, repricing of variable rate loans and competitive
pressure on new and refinanced loans in the 2002 interest rate environment put
downward pressure on the loan yield. Interest income declined $2.2 million in
2002 compared to 2001.
The decrease in yield on the securities and other investments portfolio
reflects increased prepayment activity and the resulting reinvestment of the
funds in the lower bond markets. Interest income declined $37,000 in 2002
compared to 2001.
The decrease in rates paid on interest bearing liabilities contributed
approximately $4.4 million of the decrease in interest expense while the
increase in volume offset the benefit by approximately $0.6 million in 2002
compared to the prior year.
Tax equivalent net interest income was $12.9 million for 2001 compared to $11.8
million in 2000, an increase of $1.1 million.
Average earning assets in 2001 were $305.0 million compared to $294.1 million
in 2000, an increase of $10.9 million or 3.7%. Average loans increased $2.9
million or 1.3%. The remainder of the increase was from investment securities
and other short-term investments.
Average interest bearing liabilities increased $9.2 million or 3.6% in 2001
compared to 2000. Average interest bearing deposits increased $13.3 million or
6.5%. Average short-term borrowings decreased $5.6 million while average long-
term borrowings increased $1.5 million.
The tax equivalent net interest margin was 4.24% in 2001 compared to 4.02% in
2000. The yield on earning assets decreased 46 basis points from 8.41% in 2000
to 7.95% in 2001 while the cost of interest bearing liabilities decreased 79
basis points from 5.12% in 2000 to 4.33% in 2001. The general decline of
interest rates during 2001, especially on the liability sensitive repricing
characteristics of the Company's balance sheet, resulted in the increase in
interest margin.
Despite the growth and composition change of average earning assets, the
interest on earning assets decreased $0.5 million from 2000. The yield on
loans was 8.47% in 2001 compared to 8.94% in 2000, a decrease of 47 basis
points. The yield on the investment securities and other short-term
investments decreased 44 basis points in 2001 compared to 2000.
The decrease in rates paid on interest bearing liabilities contributed
approximately $1.9 million of the decrease in interest expense while the
increase in volume offset the benefit by approximately $0.3 million in 2001
compared to 2000.
Table 2: Average Balances and Interest Rates
2002 2001 2000
Average Yield Average Yield Average Yield
Balance Interest Rate Balance Interest Rate Balance Interest Rate
(dollars in thousands)
ASSETS
Earnings Assets
Loans (1) (2) $243,597 $17,134 7.03% $228,170 $19,317 8.47% $225,308 $20,133 8.94%
Investment securities:
Taxable 53,268 3,173 5.96% 52,818 3,406 6.45% 50,112 3,263 6.51%
Tax exempt (2) 24,346 1,650 6.78% 18,691 1,333 7.13% 17,177 1,236 7.20%
Other Interest Income 4,232 55 1.30% 5,307 176 3.32% 1,476 91 6.17%
Total earning assets $325,443 $22,012 6.76% $304,986 $24,232 7.95% $294,073 $24,723 8.41%
Cash and cash equivalents 10,865 11,253 11,817
Other assets 11,233 11,801 10,868
Allowance for loan losses (2,726) (2,779) (2,440)
Total assets $344,815 $325,261 $314,318
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest bearing liabilities:
Interest earning demand $24,967 $201 0.81% $19,928 $240 1.20% $18,950 $343 1.81%
Savings deposits 67,200 667 0.99% 66,928 1,703 2.54% 57,481 2,152 3.74%
Time deposits 131,103 4,801 3.66% 132,149 7,434 5.63% 129,281 7,647 5.92%
Short-term borrowings 22,095 388 1.76% 22,700 863 3.80% 28,300 1,684 5.95%
Long-term borrowings 31,027 1,525 4.92% 19,575 1,077 5.50% 18,086 1,085 6.00%
Total interest bearing liabilities $276,392 $7,582 2.74% $261,280 $11,317 4.33% $252,098 $12,911 5.12%
Demand deposits 34,086 31,126 29,944
Other liabilities 3,547 4,049 3,756
Stockholders' equity 30,790 28,806 28,520
Total liabilities and
stockholders' equity $344,815 $325,261 $314,318
Interest rate spread 4.02% 3.62% 3.29%
Net interest income $14,430 4.43% $12,915 4.24% $11,812 4.02%
Taxable equivalent adjustment $627 $520 $507
Net interest income, as reported 13,803 12,395 11,305
(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%.
Table 3: Interest Income and Expense Volume and Rate Analysis
2002 Compared to 2001 2001 Compared to 2000
Increase (Decrease) Due to Increase (Decrease) Due to
Volume Rate Net Volume Rate Net
Interest income:
Loans (2) $1,307 $(3,490) $(2,183) $256 $(1,072) $(816)
Investment securities:
Taxable 29 (262) (233) 176 (33) 143
Tax exempt (2) 403 (86) 317 109 (12) 97
Other interest income (36) (85) (121) 236 (151) 85
Total earning assets (2) $1,703 $(3,923) $(2,220) $777 $(1,268) $(491)
Interest expense:
Interest bearing demand $60 $(99) $(39) $18 $(121) $(103)
Savings deposits 7 (1,043) (1,036) 353 (802) (449)
Time deposits (59) (2,574) (2,633) 170 (383) (213)
Short Term Borrowing (23) (452) (475) (333) (488) (821)
Long Term Borrowing 630 (182) 448 89 (97) (8)
Total interest-bearing liabilities 615 (4,350) (3,735) 297 (1,891) (1,594)
Net interest income(2) $1,088 $427 $1,515 $480 $623 $1,103
(1) The change in interest due to both rate and volume has been allocated to rate.
(2) The yield on tax-exempt loans and securities is computed on a tax equivalent basis using a tax rate of 34%.
Table 4: Yield on Earning Assets
December 31, 2002 December 31, 2001 December 31, 2000
Yield Change Yield Change Yield Change
Yield on earning assets (1) 6.76% -1.19% 7.95% -0.46% 8.41% 0.23%
Effective rate on all liabilities
as a percentage of earning assets 2.33% -1.38% 3.71% -0.68% 4.39% 0.68%
Net yield on earning assets 4.43% 0.19% 4.24% 0.22% 4.02% -0.45%
(1) The yield on tax-exempt loans and securities is computed on a tax
equivalent basis using a tax rate of 34%.
PROVISION FOR LOAN LOSSES
The adequacy of the allowance for loan losses is assessed based upon credit
quality, existing economic conditions and loss exposure by loan category.
Accordingly, the amount charged to expense is based on management's evaluation
of the loan portfolio. It is the Company's policy that when available
information confirms that specific loans and leases, or portions thereof,
including impaired loans, are uncollectible, these amounts are promptly charged
off against the allowance.
The ratio of the allowance for loan losses to total loans was 1.06%, down from
1.12% at December 31, 2001 and down from 1.14% at December 31 2000. See
additional discussion under section, "Allowance for Loan Losses."
Noninterest Income
Noninterest income was $2.7 million for 2002, $0.3 million or 10.4% higher than
2001. Fee income as a percentage of total revenues (defined as total
noninterest income less net realized gain on sale of securities available for
sale divided by total interest income plus total noninterest income) was 11.1%
for 2002 compared to 9.3% last year.
Table 5: Noninterest Income
% Change
From Prior
Years Ended December 31, Year
2002 2001 2000 2002 2001
Service fees $850 $883 $803 -3.7% 10.0%
Trust service fees 643 659 629 -2.4% 4.8%
Net realized gain on sale of securities
available for sale 17 8 - 112.5%
Investment product commissions 437 182 266 140.1% -31.6%
Other operating income 729 693 605 5.2% 14.5%
Total noninterest income $2,676 $2,425 $2,303 10.4% 5.3%
Service fees were $850,000, $33,000 or 3.7% lower than 2001. The majority of
the decrease was due to the loss of two large commercial demand deposit
accounts and the related service fees in 2002. Also non-sufficient fund
charges decreased due to the Bank making a conscious effort to close chronic
overdrawn demand deposit accounts in 2002.
Trust service fees for 2002 were $643,000, down 2.4% from last year. The
change was predominately due to market performance of trust assets under
management over the past year. Trust assets under management were $117.9
million and $125.8 million at December 31, 2002 and 2001, respectively. Trust
assets are excluded from the assets of the Company.
Investment product commissions consist of annuity sales, brokerage services,
mutual fund sales, life insurance commissions, and self-directed IRA fees.
Investment product commissions increased $255,000 or 140.1% from last year.
The increased revenue was predominately due to an increase in annuity sales.
Annuity sales jumped during 2002 due to investors seeking an investment product
with a fixed-rate of return that annuities offer. Also included in investment
products commission is a $107,000 settlement from the broker that serviced the
Bank's brokerage business in 2001. During 2001, there was an error in a trade
execution on a security held for investment.
Total noninterest income amounted to $2.4 million in 2001, an increase of $0.1
million or 5.3% from $2.3 million in 2000. Service fees were $883,000, $80,000
or 10.0% higher than 2000 due a deposit service fee increase during the second
quarter of 2001. Trust service fees for 2001 were $659,000, up 4.8% from 2000.
The Bank's Trust department experienced continued growth in assets under
management. Investment product commissions decreased $84,000, or 31.6%, from
2000. The fair market value of assets under management decreased from the
declines in the stock and bond markets during 2001 resulting in lower fees
collected from clients.
Noninterest Expense
Table 6: Noninterest Expense
% Change
From Prior
Years Ended December 31, Year
2002 2001 2000 2002 2001
Salaries and employee benefits $5,441 $4,918 $4,637 10.6% 6.1%
Occupancy 1,116 1,176 1,278 -5.1% -8.0%
Data processing and information systems 418 456 450 -8.3% 1.3%
Goodwill and purchased core deposit amortization 290 358 340 -19.0% 5.3%
Other operating expenses 2,323 2,210 1,952 5.1% 13.2%
Total noninterest expenses $9,588 $9,118 $8,657 5.2% 5.3%
Salaries and employee benefits increased $0.5 million or 10.6% over 2001 and
represented 56.7% of total noninterest expense in 2002 compared to 53.9% in
2001. Salary expense increased $0.3 million or 8.7% in 2002. Average full-
time equivalent employees were 133 during 2002, up 7 or 5.6% from the 126 full-
time equivalent employees during 2001. Benefits increased $0.2 million in
2002, primarily due to incentive bonuses and pension plan expense.
Occupancy expense was $1.1 million for 2002 decreasing 5.1% from last year.
The decrease is due to the combined effect of lower equipment maintenance costs
and depreciation expense in 2002. Data processing expenses essentially
remained unchanged from last year. Goodwill and purchased core deposit
amortization decreased 19.0% from 2001 to $0.3 million due to the
discontinuation of amortization of goodwill on January 1, 2002 in accordance
with SFAS No. 142 "Goodwill and Other Intangible Assets." See Note 2 "Changes
in Accounting Principles" and Note 7 "Intangible Assets" of the Notes to the
Consolidated Financial Statements.
Total noninterest expense amounted to $9.1 million in 2001, an increase of $0.4
million or 5.3% from $8.7 million in 2000. Salaries and employee benefits
increased $0.3 million or 6.1% over 2000. Salaries increased 1.5 % in 2001,
due to merit increases. Employee benefits increased $0.2 million the result of
an increase in profit sharing expense. Occupancy expense was $1.2 million for
2001 decreasing 8.0% from 2000. The decrease was due to the savings of
occupancy expenses realized from the discontinuation of one Bank branch in
2000. Data processing costs increased 1.3% reflecting the increased cost of
maintenance contracts. Other operating expense increased $258,000 or 13.2% in
2001 from December 31, 2000. The majority of the increase was due to a loss on
an error in a trade execution on a security held for investment.
Income Taxes
Income tax expense for 2002 was $1.8 million, up $0.3 million from 2001 income
tax expense of $1.5 million. The Company's effective tax rate was 28.5% in
2002, 27.8% in 2001, and 26.4% in 2000. See Note 11 "Income Taxes" of the
Notes to the Consolidated Financial Statements for additional tax information.
BALANCE SHEET ANALYSIS
Loans
Total loans were $255.7 million at December 31, 2002, an increase of $23.6
million or 10.2% over December 31, 2001, predominately in real estate loans.
Real estate loans were $153.5 million, up $18.1 million or 13.4% from year-end
2001. Although commercial loans were up $5.8 million or 13.2%, commercial
loans as a percentage of the total loan portfolio were 36.0% at the end of
2002, down from 37.2% at year-end 2001. The decrease in commercial loans as a
percentage of the total loan portfolio was due to the $3.2 million or 8.8%
decline in agricultural loans from 2001.
Table 7: Loan Composition
2002 2001 2000 1999 1998
% of % of % of % of % of
Amount Total Amount Total Amount Total Amount Total Amount Total
(dollars in thousands)
Commercial and financial $50,162 19.6% $44,320 19.1% $42,772 18.8% $43,360 19.9% $32,585 17.2%
Real estate construction 8,489 3.3% 5,375 2.3% 4,200 1.9% 4,137 1.9% 3,455 1.8%
Agricultural 33,575 13.1% 36,815 15.8% 41,435 18.2% 40,280 18.5% 36,103 19.0%
Lease financing 0 0.0% 8 0.0% 239 0.1% 247 0.1% 317 0.2%
Commercial 92,226 36.0% 86,518 37.2% 88,646 39.0% 88,024 40.4% 72,460 38.2%
Real estate residential 153,503 60.0% 135,421 58.4% 127,288 56.1% 118,641 54.5% 107,482 56.1%
Installment 10,001 4.0% 10,162 4.4% 11,177 4.9% 10,931 5.1% 10,962 5.7%
Total loans (including
loans held for sale) $255,730 100.0% $232,101 100.0% $227,111 100.0% $217,596 100.0% $190,904 100.0%
Commercial and financial loans were $50.2 million at the end of 2002, up $5.8
million or 13.2% since year-end 2001, and comprised 19.6% of total loans, up
from 19.1% at year-end 2001. The commercial and financial loan classification
consists of loans to sole proprietors, partnerships, small businesses and
corporations. Loans in this category are to a wide range of industries.
Real estate construction loans were $8.5 million at the end of 2002, up $3.1
million or 57.9% since year-end 2001, and comprised 3.3% of total loans, up
from 2.3% at year-end 2001. Loans in this classification provide short-term
financing for acquisition or development of commercial real estate, such as
multifamily residents or other commercial developments.
Agricultural loans decreased $3.2 million or 8.8% to $33.6 million,
representing 13.1% of the loan portfolio at the end of 2002, compared to $36.8
million or 15.9% at year-end 2001. Agricultural loans consist of loans secured
by farmland, and to finance agricultural production. The decrease in
agricultural loans was strongly influenced by tightening agricultural credit
standards and competition from the Farm Credit System.
Real estate residential loans totaled $153.5 million at the end of 2002, up
$18.1 million or 13.4% since year-end 2001, and comprised 60.0% of the total
loan portfolio, up from 58.4% at year-end 2001. Loans in this category include
conventional home mortgages, second mortgages, and home equity lines. The
housing market remained strong in the Company's market place in both new
construction and refinancing activities.
Installment loans decreased $0.2 million or 1.6% to $10.0 million, representing
4.0% of the loan portfolio at the end of 2002, compared to $10.2 million or
4.4% at year-end 2001. Installment loans include short-term installment loans,
automobile loans, recreational vehicle loans, credit card loans, and other
personal loans. The decrease in installment loans was strongly influenced by
extensive competition from local credit unions, and manufacturers zero percent
financing offers.
Table 8: Loan Maturity Distribution and Interest Rate Sensitivity
Loan Maturity
One Year Over one Year Over
or Less to Five Years Five Years
(dollars in thousands)
Commercial, financial and
commercial real estate $55,649 $76,911 $4,826
Agricultural 15,859 12,822 2,538
Real estate residential 14,312 34,279 20,111
Total $85,820 $124,012 $27,475
Fixed rate $51,520 $80,752 $3,104
Variable rate 34,300 43,260 24,371
Total $85,820 $124,012 $27,475
The loan portfolio is widely diversified by types of borrowers, industry
groups, and market areas. Significant loan concentrations are considered to
exist for a financial institution when there are amounts loaned to numerous
borrowers engaged in similar activities that would cause them to be similarly
impacted by economic conditions. At December 31, 2002, no concentrations
existed in the Company's portfolio in excess of 10% of total loans.
Allowance for Loan Losses
The loan portfolio is the primary asset subject to credit risk. Credit risk is
controlled by detailed underwriting procedures, comprehensive loan
administration, and periodic review of borrowers' outstanding loans and
commitments. The allowance for loan losses was $2.7 million at the end of
2002, up $0.1 million or 4.0% since year-end 2001. As of December 31, 2002
the allowance for loan losses as a percentage of total loans outstanding was
1.06% and covered 125.1% of nonperforming loans, compared to 1.12% and 108.8%,
respectively, at December 31, 2001.
Table 9: Loan Loss Experience
Years Ended December 31,
2002 2001 2000 1999 1998
(dollars in thousands)
Allowance for loan losses at
beginning of year $2,597 $2,593 $2,286 $2,159 $1,990
Loans charged off:
Commercial, financial and
Agricultural 475 389 78 31 211
Real Estate
Construction 0 0 0 0 0
Residential 10 21 12 11 46
Installment 75 81 103 86 72
Total loans charged off 560 491 193 128 329
Recoveries on loans previously charged off:
Commercial, financial, and
Agricultural 32 95 38 25 60
Real Estate
Construction 0 0 0 0 0
Residential 0 10 34 30 0
Installment 8 20 28 20 18
Total recoveries 40 125 100 75 78
Net loans charged off 520 366 93 53 251
Provision for loan losses 625 370 400 180 420
Allowance for loan losses at end of
year $2,702 $2,597 $2,593 $2,286 $2,159
Ratio of allowance for loan losses to
net charge offs 5.2 7.1 27.9 43.1 8.6
Ratio of allowance for loan losses
to total loans at end of period 1.06% 1.12% 1.14% 1.05% 1.14%
Ratio of net charge-offs to average loans 0.21% 0.16% 0.04% 0.02% 0.13%
The allowance for loan losses represents management's estimate of an amount
adequate to provide for potential losses in the loan portfolio. Adequacy of
the allowance for loan 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 has an
internal risk analysis and a review staff that continuously reviews loan
quality.
The allocation of the year-end allowance for loan losses for each of the past
five years based on management's estimates of loss exposure by category of
loans is shown in Table 10. The allocation methodology applied by the Company
focuses on changes in the size and character of the loan portfolio, current and
expected economic conditions, the geographic and industry mix of the loan
portfolio and historical losses by category. The total allowance is available
to absorb losses from any segment of the portfolio. Management allocates the
allowance for loan losses by pools of risk. The Company combines estimates of
the allowance needed for loans analyzed individually and loans analyzed on a
pool basis. The determination of allocated reserves for larger commercial
loans involves a review of individual higher-risk transactions, focusing on
loan grading, and assessment of specific loss content and possible resolutions
of problem credits.
In the opinion of management, the allowance for loan losses is adequate as of
December 31, 2002. While management uses available information to recognize
losses on loans, future adjustments may be necessary based on changes in
economic conditions and the impact of such changes on borrowers.
Table 10: Allocation of the Allowance for Loan Losses
As of December 31,
2002 2001 2000 1999 1998
(dollars in thousands)
Commercial, financial,
agricultural $875 $1,247 $1,200 $858 $865
Real estate residential 1,488 900 850 1,091 967
Installment 189 195 202 181 193
Impaired Loans 150 255 341 156 134
Unallocated 0 0 0 0 0
Total $2,702 $2,597 $2,593 $2,286 $2,159
Net loans charged off were $0.5 million or .21% of average loans for 2002,
compared to $0.4 million or .16% of average loans for 2001, and were $0.1
million or .04% of average loans for 2000. The $0.1 million increase in net
loans charged-off was the result of the increased charge-offs in the
commercial, financial, and agricultural categories in 2002 compared to 2001.
This increase in charge-offs is due to the charge off of two commercial loan
customers accounting for approximately $0.4 million of the charge-offs in 2002.
Loans charged-off are subject to continuous review and specific efforts are
taken to achieve maximum recovery of principal, accrued interest, and related
expenses.
Nonperforming Loans
Nonperforming loans are defined as nonaccrual loans, loans 90 days or more past
due but still accruing, and restructured loans. Loans are generally placed on
nonaccrual status when contractually past due 90 days or more as to interest or
principal payments. Previously accrued and uncollected interest on such loans
is reversed, and income is recorded only to the extent that interest payments
are subsequently received and principal is collectible.
Loans past due 90 days or more but still accruing interest are also included in
nonperforming loans. Also included in nonperforming loans are restructured
loans. Restructured loans involve the granting of concessions to the borrower
involving the modification of terms of the loan, such as changes in payment
schedule or interest rate.
Table 11: Nonperforming Loans and Other Real Estate Owned
December 31,
2002 2001 2000 1999 1998
(dollars in thousands)
Nonaccrual loans $417 $221 $517 $505 $1,416
Impaired loans 1,667 1,684 1,691 $866
Accruing loans past due 90 days or more 62 30 24 64 38
Restructured loans 14 453 295 419 710
Total non-performing loans $2,160 $2,388 $2,527 $1,854 $2,164
Other real estate owned $- $90 $98 $70 $56
Nonperforming loans at December 31, 2002, were $2.2 million, a decrease of $0.2
million from December 31, 2001. The ratio of nonperforming loans to total
loans was .84% at year end 2002, compared to 1.03% and 1.11% at December 31,
2001 and 2000.
Interest payments on impaired loans are typically applied to principal unless
collectability of the principal amount is fully assured, in which case interest
is recognized on the cash basis. The following table shows, the gross interest
that would have been reported if all loans had been current throughout the year
in accordance with their original terms.
Table 12: Forgone Loan Interest
Years Ended December 31,
2002 2001 2000
(dollars in thousands)
Interest income in accordance
with original terms $162 $124 $134
Interest income recognized (44) (123) (107)
Reduction in interest income 118 1 27
Investment Securities Portfolio
The investment securities portfolio is intended to provide the Company with
adequate liquidity, flexible asset/liability management and a source of stable
income. All securities are classified as available for sale and reported at
estimated fair value. Unrealized gains and losses are excluded from earnings
but are reported as other comprehensive income in a separate component of
stockholders' equity, net of income tax. The investment portfolio represented
23.8% of average earning assets at December 31, 2002 compared to 23.4% at year-
end 2001.
Table 13: Investment Securities Portfolio
Years Ended December 31,
2002 2001 2000
(dollars in thousands)
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $1,473 $4,502 $16,007
Mortgage-backed securities 47,730 51,210 34,548
Obligations of states and political
subdivisions 25,843 22,523 18,208
Corporate debt securities 1,125 125 75
Money market equity funds 0 5,003 579
Equity securities 151 151 141
Totals $76,322 $83,514 $69,558
At December 31, 2002, the Company's securities portfolio did not contain
securities of any single issuer where the aggregate carrying value of such
securities exceeded 10% of stockholders' equity.
Table 14: Investment Securities Portfolio Maturities
After After
One But Five but
Within Within Within After
One Year Five Years Ten Years Ten Years
Weighted Weighted Weighted Weighted
Amount Yields Amount Yields Amount Yields Amount Yields
U.S. Treasury securities and obligations
of U.S. government corporations
and agencies - - $1,259 5.66% $214 6.54% - -
Mortgage-backed securities 19,974 6.00% 23,217 5.35% 2,782 4.67% 1,757 7.63%
Obligations of states and political
subdivisions (1) 1,782 4.78% 11,680 4.09% 11,716 4.17% 665 5.24%
Corporate debt securities - - 25 7.50% 100 3.79% 1,000 6.00%
Equity securities - - - - - - 151 3.31%
Totals $21,756 5.90% $36,181 4.95% $14,812 4.30% $3,573 4.73%
(1) Weighted average yields on tax-exempt securities have been calculated on a tax equivalent basis using a tax rate of 34%.
Deposits
Deposits are the Company's largest source of funds. At December 31, 2002,
deposits were $274.5 million, up $16.1 million or 6.2% over last year. The
Company's retail deposit growth is continuously influenced by competitive
pressure from other financial institutions, as well as other investment
opportunities available to customers.
Table 15: Average Deposits Distribution
2002 2001 2000
% of % of % of
Amount Total Amount Total Amount Total
(dollars in thousands)
Non-interest bearing demand $34,086 13.2% $31,126 12.4% $29,944 12.7%
Interest-bearing demand 24,967 9.7% 19,928 8.0% 18,950 8.0%
Savings deposits 67,200 26.1% 66,928 26.8% 57,481 24.4%
Time deposits 131,103 51.0% 132,149 52.8% 129,281 54.9%
Total $257,356 100.0% $250,131 100.0% $235,656 100.0%
On average, deposits were $257.4 million for 2002, up $7.3 million or 2.9% over
the average for 2001. Starting in 2000, the deposit mix started shifting to
liquid, transaction accounts from time deposits and has continued each year
since.
Table 16: Maturity Distribution of Certificates of Deposit of $100,000 or More
December 31, 2002
(dollars in thousands)
3 months or less $17,259
Over 3 months through 6 months 7,721
Over 6 months through 12 months 12,422
Over 12 months 12,121
Total $49,523
Other Funding Sources
Other funding sources, including short-term and long-term borrowings, were
$58.0 million at December 31, 2002, up $8.6 million from $49.4 million at
December 31, 2001. Short-term borrowings consist of securities sold under
repurchase agreements and federal funds purchased. The repurchase agreements
are payable on demand. Long-term debt at December 31, 2002, was $40.0 million,
up $10.0 million from $30.0 million at year end 2001. Long-term debt consists
of advances from the Federal Home Bank.
The reliance on other funding sources increased during 2002. The mix of
wholesale funding shifted toward long-term borrowings. On average, long-term
borrowings represented 58.4% of other funding sources up from 46.3% at year-end
2001 due to favorable long-term interest rates and management's conscious
effort to control future interest rate risks by taking additional advances at
the current low interest rates.
Table 17: Short-term Borrowings
December 31,
2002 2001 2000
(dollars in thousands)
Securities sold under repurchase agreements $18,040 $18,465 $25,278
Federal funds purchased 0 924 681
Totals $18,040 $19,389 $25,959
Average amounts outstanding during year $22,095 $22,739 $28,294
Average interest rates on amounts
outstanding during year 1.8% 3.8% 6.0%
Maximum month-end amounts outstanding $34,937 $29,492 $42,095
Average interest rates on amounts
outstanding at end of year 1.2% 2.0% 6.0%
Liquidity and Interest Rate Sensitivity
The Bank's Asset Liability Management process provides a unified approach to
management of liquidity, capital and interest rate risk, and to provide
adequate funds to support the borrowing requirements and deposit flow of its
customers. 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.
Management's overall strategy is to coordinate the volume of rate sensitive
assets and liabilities to minimize the impact of interest rate movement on the
net interest margin. Table 18 represents the effect rate changes could have on
the Company's earnings at December 31, 2002. It is a static indicator which
does not reflect various repricing characteristics and may not indicate the
sensitivity of net interest income in a changing interest rate environment.
In addition, the Asset Liability Committee utilizes other financial modeling
techniques such as rate shocks that are a hypothetical measurement of plus or
minus 100 basis point proportional shock of changes in interest rates. The
resulting net interest income for the next 12 month period is compared to the
net interest income calculated using flat rates. This difference represents
the Company's earnings sensitivity to a plus or minus 100 basis point
proportional shock. The resulting simulations for December 31, 2002, projected
that net interest income could increase by 5.3% of budgeted net interest income
if rates rose by a 100 basis point shock, and projected net interest income
could decrease by 4.7% of budgeted net interest income if rates fell by a 100
basis point shock. At December 31, 2001, the 100 basis point shock up was
projected to increase net interest income by 12.7%, and the 100 basis point
shock down projected that net interest income would increase by 6.0%.
Table 18: Interest rate sensitivity gap analysis
December 31, 2002
0-90 Days 91-180 Days 181-365 Days 1-5 Years Beyond 5 Years Total
(dollars in thousands)
Earning Assets:
Loans $21,444 $20,685 $50,096 $135,582 $27,131 $254,938
Securities 4,787 3,126 13,843 36,181 20,385 $78,322
Other earning assets 11,845 11,845
Total $38,076 $23,811 $63,939 $171,763 $47,516 $345,105
Cumulative rate sensitive assets $38,076 $61,887 $125,826 $297,589 $345,105
Interest-bearing liabilities:
Interest-bearing deposits (1) $57,352 $23,513 $49,434 $60,400 $45,684 $236,383
Other interest-bearing liabilities 18,040 3,000 6,000 28,000 3,000 58,040
Total $75,392 $26,513 $55,434 $88,400 $48,684 $294,423
Cumulative interest sensitive liabilities $75,392 $101,905 $157,339 $245,739 $294,423
Interest sensitivity gap $(37,316) $(2,702) $8,505 $83,363 $(1,168)
Cumulative interest sensitivity gap $(37,316) $(40,018) $(31,513) $51,850 $50,682
Cumulative ratio of rate sensitive assets
to rate sensitive liabilities 50.5% 60.7% 80.0% 121.1% 117.2%
(1) The interest rate sensitivity assumptions for demand deposits, savings accounts, money market accounts, and interest-bearing
demand deposits accounts are based on current and historical experiences regarding portfolio retention and interest rate
repricing behavior. Based on these experiences, a portion of these balances are considered to be long-term and fairly stable
and are included in the 1-5 year category and beyond 5 years category.
Capital
Stockholders' equity at December 31, 2002, increased to $32.2 million or $19.11
per share compared with $29.6 million or $17.42 per share at year-end 2001. The
Company completed a self-tender offer of common stock January 31, 2001. The
Company accepted 116,117 shares of its common stock for repurchase at $25.50
per share. As a result, stockholders' equity decreased $3.0 million during
2001. Additionally, stockholders' equity at year-end 2002 included $1.3
million of accumulated other comprehensive income, related to unrealized gains
on securities available for sale, net of the tax effect. At December 31, 2001
stockholders' equity included $0.6 million of accumulated other comprehensive
income, related to unrealized gains on securities available for sale, net of
the tax effect.
Cash dividends paid in 2002 were $1.28 per share compared to $1.22 per share in
2001.
The adequacy of the Company's capital is regularly reviewed to ensure that
sufficient capital is available for current and future needs and is in
compliance with regulatory guidelines. As of December 31, 2002, 2001, and
2000, the Company's Tier 1 risk-based capital ratios, total risk-based capital
ratios and Tier 1 leverage ratios were well in excess of regulatory
requirements. Management feels the capital structure of the Company is
adequate.
Table 19: Capital Ratios
At December 31,
2002 2001 2000
(In thousands, except per share data)
Total Stockholders' Equity $32,186 $29,553 $30,345
Tier 1 Capital 29,754 27,490 28,282
Total Capital 32,456 30,087 30,875
Total equity to assets 8.8% 8.7% 9.5%
Tangible equity to assets 8.5% 8.3% 8.9%
Tier 1 risk-based capital ratio 11.6% 11.1% 12.1%
Total risk-based capital ratio 12.7% 12.1% 13.2%
Other Discussions
On February 10, 2003 the Bank opened its eleventh branch located in Weston,
Wisconsin. The branch will provide commercial, consumer banking services and
trust and investment services for customers located in Marathon County and the
surrounding market areas.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this Item 7A is set forth in Item 6, "Selected
Financial Data" and under subcaptions "Results of Operations", "Market Risk",
"Net Interest Income", "Allowance for Loan Losses", "Investment Securities
Portfolio", "Deposits", and "Liquidity and Interest Rate Sensitivity" under
Item 7, Management's Discussion and Analysis of Financial Conditions.
WIPFLI Independent Auditor's Report
Board of Directors
Mid-Wisconsin Financial Services, Inc.
Medford, Wisconsin
We have audited the accompanying consolidated balance sheets of Mid-Wisconsin
Financial Services, Inc. and Subsidiary as of December 31, 2002 and 2001, and
the related consolidated statements of income, changes in stockholders' equity,
and cash flows for each of the years in the three-year period ended December
31, 2002. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Mid-Wisconsin
Financial Services, Inc. and Subsidiary at December 31, 2002 and 2001, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2002, in conformity with accounting
principles generally accepted in the United States.
/SS/ WIPFLI ULLRICH BERTELSON LLP
Wipfli Ullrich Bertelson LLP
JANUARY 17, 2003
Wausau, Wisconsin
Mid-Wisconsin Financial Services, Inc. And Subsidiary
Consolidated Balance Sheets
December 31, 2002 And 2001
2002 2001
Assets
Cash and due from banks $15,484,360 $15,052,383
Interest-bearing deposits in other financial institutions 19,408 25,102
Federal funds sold 11,825,781 712,845
Securities available for sale - At fair value 76,321,696 83,514,352
Federal Home Loan Bank stock (at cost) 2,000,000 1,500,000
Loans held for sale 791,420 451,650
Loans receivable, net of allowance for loan losses of $2,701,709
In 2002 and $2,597,416 in 2001 252,236,394 229,051,540
Accrued interest receivable 1,716,413 1,843,509
Premises and equipment 5,487,421 5,707,450
Intangible assets 873,887 1,163,929
Goodwill 295,316 295,316
Other assets 987,427 1,171,500
Total Assets $368,039,523 $340,489,576
Liabilities and Stockholders' Equity
Non-interest-bearing deposits $38,108,392 $35,127,283
Interest-bearing deposits 236,383,561 223,274,164
Total deposits 274,491,953 258,401,447
Short-term borrowings 18,039,517 19,389,436
Long-Term Borrowings 40,000,000 30,000,000
Accrued interest payable 1,294,227 1,683,562
Accrued expenses and other liabilities 2,028,019 1,462,010
Total Liabilities 335,853,716 310,936,455
Stockholders' equity:
Common stock - Par value $.10 per share:
Authorized - 6,000,000 shares
Issued and outstanding - 1,684,475 shares in 2002 and
1,696,497 Shares In 2001 168,448 169,650
Additional paid-in capital 10,941,600 10,972,612
Retained earnings 19,812,670 17,806,485
Accumulated other comprehensive income 1,263,089 604,374
Total stockholders' equity 32,185,807 29,553,121
Total Liabilities and Stockholders' Equity $368,039,523 $340,489,576
See accompanying notes to consolidated financial statements.
Mid-Wisconsin Financial Services, Inc. And Subsidiary
Consolidated Statements of Income
Years Ended December 31, 2002, 2001, and 2000
2002 2001 2000
Interest income:
Interest and fees on loans $17,068,344 $19,250,624 $20,046,389
Interest and dividends on securities:
Taxable 3,161,464 3,409,726 3,262,893
Tax-exempt 1,089,107 879,670 816,100
Other interest and dividend income 66,030 171,954 91,084
Total interest income 21,384,945 23,711,974 24,216,466
Interest expense:
Deposits 5,668,506 9,376,858 10,141,916
Short-term borrowings 388,432 862,744 1,683,779
Long-term borrowings 1,524,597 1,077,425 1,085,697
Total interest expense 7,581,535 11,317,027 12,911,392
Net interest income 13,803,410 12,394,947 11,305,074
Provision for loan losses 625,000 370,000 400,000
Net interest income after provision for loan losses 13,178,410 12,024,947 10,905,074
Noninterest income:
Service fees 849,606 883,289 803,155
Trust service fees 642,737 658,555 629,372
Net realized gain on sale of securities available for sale 17,349 7,892 0
Investment product commissions 436,775 181,862 265,675
Other operating income 729,538 693,113 604,351
Total noninterest income 2,676,005 2,424,711 2,302,553
Noninterest expenses:
Salaries and employee benefits 5,441,313 4,918,212 4,636,860
Occupancy 1,116,205 1,175,876 1,277,739
Data processing and information systems 418,096 455,664 450,178
Goodwill and purchased core deposit amortization 290,042 357,500 339,767
Other operating expenses 2,322,843 2,211,081 1,952,734
Total noninterest expenses 9,588,499 9,118,333 8,657,278
Income before provision for income taxes 6,265,916 5,331,325 4,550,349
Provision for income taxes 1,783,080 1,482,575 1,201,289
Net income $4,482,836 $3,848,750 $3,349,060
Basic and diluted earnings per share $2.65 $2.25 $1.85
Cash dividends paid per share $1.28 $1.22 $1.20
See accompanying notes to consolidated financial statements.
Mid-Wisconsin Financial Services, Inc. and Subsidiary
Consolidated Statements of Changes in Stockholders' Equity
Years Ended December 31, 2002, 2001, and 2000
Accumulated
Additional Other
Common Stock Paid-In Retained Comprehensive
Shares Amount Capital Earnings Income (Loss) Totals
Balance, January 1, 2000 1,824,718 $182,472 $11,759,737 $17,356,953 ($800,525) $28,498,637
Comprehensive income:
Net income 3,349,060 3,349,060
Other comprehensive income 1,046,440 1,046,440
Total comprehensive income 4,395,500
Proceeds from stock benefit plans 1,906 191 36,977 37,168
Repurchase of common stock
returned to unissued (15,268) (1,527) (98,397) (311,037) (410,961)
Cash dividends paid, $1.20 per share (2,175,250) (2,175,250)
Balance, December 31, 2000 1,811,356 181,136 11,698,317 18,219,726 245,915 30,345,094
Comprehensive income:
Net income 3,848,750 3,848,750
Other comprehensive income 358,459 358,459
Total comprehensive income 4,207,209
Proceeds from stock benefit plans 1,258 126 30,217 30,343
Repurchase of common stock
returned to unissued (116,117) (11,612) (755,922) (2,193,450) (2,960,984)
Cash dividends paid, $1.22 per share (2,068,541) (2,068,541)
Balance, December 31, 2001 1,696,497 169,650 10,972,612 17,806,485 604,374 29,553,121
Comprehensive income:
Net income 4,482,836 4,482,836
Other comprehensive income 658,715 658,715
Total comprehensive income 5,141,551
Proceeds from stock benefit plans 2,334 234 61,950 62,184
Repurchase of common stock
returned to unissued (14,356) (1,436) (92,962) (307,571) (401,969)
Cash dividends paid, $1.28 per share (2,169,080) (2,169,080)
Balance, December 31, 2002 1,684,475 $168,448 $10,941,600 $19,812,670 $1,263,089 $32,185,807
See accompanying notes to consolidated financial statements.
Mid-Wisconsin Financial Services, Inc. and Subsidiary
Consolidated Statements of Cash Flows
Years Ended December 31, 2002, 2001, And 2000
2002 2001 2000
Increase (decrease) in cash and due from banks:
Cash flows from operating activities:
Net income $4,482,836 $3,848,750 $3,349,060
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for depreciation and net amortization 947,914 1,092,114 1,165,490
Provision for loan losses 625,000 370,000 400,000
Benefit for deferred income taxes (123,657) (37,461) (206,910)
Proceeds from sales of loans held for sale 10,085,265 10,956,441 2,755,311
Gain on sale of loans held for sale (154,175) (134,541) (40,791)
Originations of loans held for sale (10,270,860) (10,372,250) (2,834,120)
Gain on sale of investment securities (17,349) (7,892) 0
Loss on premises and equipment disposals 6,770 21,277 17,748
(Gain) loss on foreclosed real estate 18,329 0 (22,012)
FHLB stock dividends (82,200) (91,400) (62,000)
Changes in operating assets and liabilities:
Other assets (22,813) 294,984 (179,742)
Other liabilities 176,674 (761,778) 812,147
Net cash provided by operating activities 5,671,734 5,178,244 5,154,181
Cash flows from investing activities:
Net (increase) decrease in interest-bearing
deposits in other financial institutions 5,694 (6,528) (1,946)
Net increase in federal funds sold (11,112,936) (712,845) 0
Securities available for sale:
Proceeds from sales 497,921 1,622,892 0
Proceeds from maturities 33,340,989 36,561,064 15,001,991
Payment for purchases (25,646,479) (51,578,956) (20,507,728)
Payment for purchase of FHLB stock (417,800) (114,000) (232,600)
Net increase in loans (23,785,419) (5,901,643) (9,512,647)
Capital expenditures (410,208) (249,179) (407,869)
Proceeds from sale of premises and equipment 9,355 78,840 10,908
Proceeds from sale of other real estate 47,404 105,099 11,711
Net cash used in investing activities (27,471,479) (20,195,256) (15,638,180)
Mid-Wisconsin Financial Services, Inc. And Subsidiary
Consolidated Statements of Cash Flows (Continued)
Years Ended December 31, 2002, 2001, and 2000
2002 2001 2000
Cash flows from financing activities:
Net increase in deposits $16,090,506 $13,710,900 $14,520,464
Net increase (decrease) in short-term borrowings (1,349,919) (6,569,317) 39,088
Proceeds from issuance of long-term borrowings 10,000,000 23,000,000 4,000,000
Principal payments on long-term borrowings 0 (9,200,000) (7,800,000)
Proceeds from stock benefit plans 62,184 30,343 37,168
Payment for repurchase of common stock (401,969) (2,960,984) (410,961)
Cash dividends paid (2,169,080) (2,068,541) (2,175,250)
Net cash provided by financing activities 2,231,722 15,942,401 8,210,509
Net increase (decrease) in cash and due from banks 431,977 925,389 (2,273,490)
Cash and due from banks at beginning 15,052,383 14,126,994 16,400,484
Cash and due from banks at end $15,484,360 $15,052,383 $14,126,994
Supplemental cash flow information:
Cash paid during the year for:
Interest $7,981,419 $12,356,111 $12,361,909
Income taxes 2,034,775 1,505,941 1,486,000
Noncash investing and financing activities:
Loans transferred to other real estate 24,302 202,452 106,024
Loans charged off 560,134 490,791 192,430
Loans made in connection with the sale of other real estate 48,235 90,582 88,772
Mid-Wisconsin Financial Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principal Business Activity
Mid-Wisconsin Financial Services, Inc. (the "Company") operates as a full-
service financial institution with a primary market area including, but not
limited to, Clark, Taylor, Price, and Oneida Counties, Wisconsin. It provides
a variety of traditional banking products in addition to trust services and
uninsured investment product sales.
Principles of Consolidation
The consolidated financial statements include the accounts of Mid-Wisconsin
Financial Services, Inc. and its subsidiary, Mid-Wisconsin Bank (the "Bank").
All significant intercompany balances and transactions have been eliminated.
The accounting and reporting policies of the Company conform to generally
accepted accounting principles and to general practice within the banking
industry.
Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of income and expenses during the reporting
period. Actual results could differ from those estimates.
Cash Equivalents
For purposes of presentation in the consolidated statements of cash flows, cash
and cash equivalents are defined as those amounts included in the balance sheet
caption "cash and due from banks." Cash and due from banks includes cash on
hand and non-interest-bearing deposits at correspondent banks.
Mid-Wisconsin Financial Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Securities
Securities are classified as available for sale and are carried at fair value,
with unrealized gains and losses reported in other comprehensive income.
Amortization of premiums and accretion of discounts are recognized in interest
income using the interest method over the terms of the securities. Declines in
fair value of securities that are deemed to be other than temporary, if
applicable, are reflected in earnings as realized losses. Gains and losses on
the sale of securities are determined using the specific-identification method.
Federal Home Loan Bank Stock
As a member of the Federal Home Loan Bank (FHLB) system, the Bank is required
to hold stock in the FHLB based on the anticipated amount of FHLB borrowings to
be advanced. This stock is recorded at cost, which approximates fair value.
Transfer of the stock is substantially restricted.
Interest and Fees on Loans
Interest on loans is credited to income as earned. Interest income is not
accrued on loans where management has determined collection of such interest is
doubtful. When a loan is placed on nonaccrual status, previously accrued but
unpaid interest deemed uncollectible is reversed and charged against current
income. After being placed on nonaccrual status, additional income is recorded
only to the extent that payments are received or the collection of principal
becomes reasonably assured. Interest income recognition on impaired loans is
consistent with the recognition on all other loans.
Loan origination fees and certain direct loan origination costs are deferred
and amortized to income over the contractual lives of the underlying loans.
Mid-Wisconsin Financial Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Allowance for Loan Losses
The allowance for loan losses includes specific allowances related to loans
which have been judged to be impaired under current accounting standards
(primarily commercial loans). A loan is impaired when, based on current
information, it is probable that the Company will not collect all amounts due
in accordance with the contractual terms of the loan agreement. These specific
allowances are 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 allowance for loan losses is maintained at a level management believes is
adequate to absorb probable loan losses relating to specifically identified
loans and probable loan losses inherent in the loan portfolio. Management's
determination of the adequacy of the allowance is based on a regular, quarterly
assessment of the loan portfolio, past events, current economic conditions, and
other relevant factors. The allowance is adjusted through provisions for loan
losses charged to expense. Loans are charged against the allowance when
management believes the collectibility of the principal is unlikely.
Loans Held for Sale
Loans held for sale consist of the current origination of certain fixed-rate
mortgage loans and are recorded at the lower of aggregate cost or fair value.
A gain or loss is recognized at the time of the sale reflecting the present
value of the difference between the contractual interest rate of the loans sold
and the yield to the investor. Mortgage servicing rights are not retained.
Premises and Equipment
Premises and equipment are stated at cost, net of accumulated depreciation.
Maintenance and repair costs are charged to expense as incurred. Gains or
losses on disposition of premises and equipment are reflected in income.
Depreciation is computed on both accelerated and straight-line methods and is
based on the estimated useful lives of the assets.
Mid-Wisconsin Financial Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Foreclosed Real Estate
Real estate properties acquired through, or in lieu of, loan foreclosure are
held for sale and are initially recorded at fair value at the date of
foreclosure, establishing a new cost basis. After foreclosure, valuations are
periodically performed by management and the real estate is carried at the
lower of cost or fair value less estimated costs to sell. Revenue and expenses
from operations and changes in the valuation allowance are included in loss on
foreclosed real estate.
Goodwill and Purchased Intangibles
The excess of cost over the net assets acquired (goodwill) was amortized using
the straight-line method over a 15-year period from the date of acquisition.
Amortization of goodwill ceased on January 1, 2002, in accordance with the
change in accounting discussed in note 2. The Company tested for impairment
during the third quarter and determined that there was no impairment of
goodwill during 2002. No amortization or impairment expense was recognized in
2002.
The purchased core deposit intangible is amortized using a systematic method
over an eight-year period.
The company periodically evaluates the carrying value and remaining
amortization period of all long-lived assets including intangible assets for
impairment. Adjustments are recorded when the value of the asset decreases or
is determined to be impaired.
Income Taxes
Deferred income taxes have been provided under the liability method. Deferred
tax assets and liabilities are determined based upon the differences between
the financial statement and tax bases of assets and liabilities, as measured by
the enacted tax rates which will be in effect when these differences are
expected to reverse. Deferred tax expense is the result of changes in the
deferred tax asset and liability.
Mid-Wisconsin Financial Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Advertising Costs
Advertising costs are expensed as incurred.
Comprehensive Income
Comprehensive income consists of net income and other comprehensive income
(loss). Other comprehensive income (loss) includes unrealized gains and losses
on securities available for sale, net of tax, which are recognized as a
separate component of equity, accumulated other comprehensive income (loss).
Earnings Per Share
Basic earnings per share are based upon the weighted average number of common
shares outstanding. Diluted earnings per share includes the potential common
stock shares issuable under the stock options granted. The weighted average
number of shares outstanding were 1,692,227 in 2002, 1,706,958 in 2001, and
1,813,653 in 2000. The diluted, weighted average number of shares outstanding
were 1,692,491 in 2002, 1,706,958 in 2001, and 1,813,653 in 2000.
Reclassifications
Certain prior-year balances have been reclassified to conform to the current
year presentation.
NOTE 2 CHANGES IN ACCOUNTING PRINCIPLES
In June 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 141, "Business Combinations," and
SFAS No. 142, "Goodwill and Other Intangible Assets."
SFAS No. 141 requires the use of the purchase method of accounting for business
combinations initiated after June 30, 2001.
Mid-Wisconsin Financial Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements
NOTE 2 CHANGES IN ACCOUNTING PRINCIPLES (Continued)
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 continue to be amortized over their useful life. Goodwill and other
intangible assets with indefinite useful lives are tested for impairment
annually or more frequently if events or changes in circumstances indicate that
the asset may be impaired. The Company adopted SFAS no. 142 on January 1,
2002.
The following table illustrates the effect amortization of goodwill had on net
income previous to the adoption of Statement of Financial Accounting Standards
No. 142 for the year ended December 31:
2002 2001 2000
Net income $4,482,836 $3,848,750 $3,349,060
Goodwill amortization, net of tax 0 51,860 51,860
Adjusted net income $4,482,836 $3,900,610 $3,400,920
Adjusted basic and diluted earnings per share $2.65 $2.28 $1.88
NOTE 3 CASH AND DUE FROM BANKS
Cash and due from banks in the amount of $2,336,000 was restricted at December
31, 2002, to meet the reserve requirements of the Federal Reserve System.
In the normal course of business, the Bank maintains cash and due from bank
balances with correspondent banks. Accounts at each institution are insured by
the Federal Deposit Insurance Corporation up to $100,000. Total uninsured
balances at December 31, 2002, were approximately $3,398,958.
Mid-Wisconsin Financial Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements
NOTE 4 SECURITIES
The amortized cost, fair value, and gross unrealized gains and losses for the
Company's securities available for sale follow:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
December 31, 2002
U.S. Treasury securities and
obligations of U.S. Government
corporations and agencies $1,450,000 $22,891 $0 $1,472,891
Mortgage-backed securities 47,045,828 971,967 288,173 47,729,622
Obligations of states and political
subdivisions 24,591,415 1,252,143 0 25,843,558
Corporate debt securities 1,125,000 0 0 1,125,000
Total debt securities 74,212,243 2,247,001 288,173 76,171,071
Equity securities 150,625 0 0 150,625
Totals $74,362,868 $2,247,001 $288,173 $76,321,696
December 31, 2001
U.S. Treasury Securities and
obligations of U.S. government
corporations and agencies $4,449,669 $56,962 $5,000 $4,501,631
Mortgage-backed securities 50,626,722 985,268 401,515 51,210,475
Obligations of states and political
subdivisions 22,220,602 432,795 130,326 22,523,071
Corporate debt securities 125,000 0 0 125,000
Total debt securities 77,421,993 1,475,025 536,841 78,360,177
Money market equity funds 5,003,550 0 0 5,003,550
Equity securities 150,625 0 0 150,625
Totals $82,576,168 $1,475,025 $536,841 $83,514,352
Mid-Wisconsin Financial Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements
NOTE 4 SECURITIES (Continued)
The amortized cost and fair value of debt securities at December 31, 2002, by
contractual maturity, are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
Amortized Fair
Debt Securities Available for Sale Cost Value
Due in one year or less $1,760,840 $1,781,129
Due after one year through five years 12,389,155 12,964,307
Due after five years through ten years 11,381,420 12,031,193
Due after ten years through fifteen years 635,000 664,820
Due after fifteen years 1,000,000 1,000,000
Mortgage-backed securities 47,045,828 47,729,622
Total debt securities available for sale $74,212,243 $76,171,071
During 2002, proceeds from sales of investments were $497,921. There were
$17,349 of gross realized gains. There were proceeds of $1,622,892 during
2001, with $7,892 of gross realized gains. There were no sales of securities
during 2000.
Securities with a carrying value of $39,527,000 and $38,323,000 at December 31,
2002 and 2001, respectively, were pledged to secure public deposits, short-term
borrowings, and for other purposes required by law.
Mid-Wisconsin Financial Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements
NOTE 5 LOANS
The composition of loans at December 31 follows:
2002 2001
Commercial $50,204,025 $44,352,464
Agricultural 33,577,744 36,819,104
Real estate:
Construction 11,598,852 6,630,659
Commercial 75,577,244 70,622,818
Residential 77,167,182 64,375,070
Installment 10,001,291 10,169,623
Subtotals 258,126,338 232,969,738
Net deferred loan fees (78,277) (64,955)
Loans in process of disbursement (3,109,958) (1,255,827)
Allowance for loan losses (2,701,709) (2,597,416)
Net loans $252,236,394 $229,051,540
The aggregate amount of nonperforming loans was approximately $2,084,000 and
$1,905,000 at December 31, 2002 and 2001, respectively. Nonperforming loans
are those that are contractually past due 90 days or more as to interest or
principal payments, on nonaccrual of interest status, or loans the terms of
which have been renegotiated to provide a reduction or deferral of interest or
principal. If nonperforming loans had been current, approximately $164,000,
$205,000, and $84,000 of interest income would have been recognized for the
years ended December 31, 2002, 2001, and 2000, respectively.
The Company has an established process to determine the adequacy of the
allowance for loan losses which assesses the risk and losses inherent in its
portfolio. This process provides an allowance consisting of two components,
allocated and unallocated. To arrive at the allocated component of the
allowance, the Company combines estimates of the allowances needed for loans
analyzed individually (including impaired loans) and loans analyzed on a pool
basis.
Mid-Wisconsin Financial Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements
NOTE 5 LOANS (Continued)
The determination of allocated reserves for larger commercial and commercial
real estate loans involves a review of individual higher-risk transactions,
focusing on the accuracy of loan grading, assessments of specific loss content,
and, in some cases, strategies for resolving problem credits.
The Company's determination of the amount of the allowance and,
correspondingly, the provision for loan losses rests upon various judgments and
assumptions, including general economic conditions, loan portfolio composition,
prior loan loss experience, and the Company's ongoing examination process and
that of its regulators. The Company has an internal risk analysis and review
staff that continuously reviews loan quality and reports the results of its
examinations to executive management and the Board of Directors. Such reviews
also assist management in establishing the level of the allowance.
The allowance arrived at through this methodology is adjusted by management's
judgment concerning the effect of recent economic events on portfolio
performance.
Mid-Wisconsin Financial Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements
NOTE 5 LOANS (Continued)
An analysis of impaired loans at December 31 follows:
2002 2001
Impaired loans with a valuation allowance $1,474,069 $1,683,734
Impaired loans without a valuation allowance 192,498 445,635
Total impaired loans 1,666,567 2,129,369
Less - Allowance for loan losses 150,000 255,000
Net investment in impaired loans $1,516,567 $1,874,369
An analysis of impaired loans for the years ended December 31 follows:
2002 2001 2000
Average recorded investment $2,780,904 $2,469,376 $2,831,341
Interest income recognized $83,347 $124,371 $223,998
Interest income recognized using the cash basis $94,068 $122,893 $126,719
An analysis of the allowance for loan losses for the years ended December 31
follows:
2002 2001 2000
Balance, January 1 $2,597,416 $2,593,099 $2,285,675
Provision charged to operating expense 625,000 370,000 400,000
Recoveries on loans 39,427 125,108 99,854
Loans charged off (560,134) (490,791) (192,430)
Balance, December 31 $2,701,709 $2,597,416 $2,593,099
Mid-Wisconsin Financial Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements
NOTE 5 LOANS (Continued)
The Bank, in the ordinary course of business, grants loans to the Company's
executive officers and directors, including affiliated companies in which they
are principal owners. The Bank has a policy of making loans (limited to
$50,000 per individual) available to employees and executive officers at
interest rates slightly below those prevailing for comparable transactions with
other customers. In the opinion of management, such loans do not involve more
than the normal risk of collectibility or present other unfavorable features.
Activity in related-party loans for the years ended December 31 is summarized
below:
2002 2001
Loans outstanding, January 1 $1,130,450 $703,295
New loans 674,699 709,886
Repayments (717,290) (282,731)
Loans outstanding, December 31 $1,087,859 $1,130,450
NOTE 6 PREMISES AND EQUIPMENT
Premises and equipment consist of the following at December 31:
2002 2001
Land and improvements $919,679 $901,959
Buildings 5,811,103 5,771,281
Furniture and equipment 5,686,142 5,503,323
Total cost 12,416,924 12,176,563
Less - Accumulated depreciation 6,929,503 6,469,113
Totals $5,487,421 $5,707,450
Depreciation and amortization charged to operating expense totaled $611,118 in
2002, $726,078 in 2001, and $820,398 in 2000.
Mid-Wisconsin Financial Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements
NOTE 7 INTANGIBLE ASSETS
Intangible assets, other than goodwill, that have finite useful lives are
amortized using a systematic present value method over their useful lives.
Intangible assets that have indefinite useful lives are not amortized but are
tested at least annually for impairment. Intangible assets are considered
impaired if the fair value of the intangible asset is lower than cost.
The range of estimated lives and carrying values are summarized as follows:
2002
Range of Lives
(Years) 2002 2001
Purchased core deposit intangible 8 $2,218,437 $2,218,437
Less - Accumulated amortization 1,344,550 1,054,508
Totals $873,887 $1,163,929
Amortization expense for intangible assets was $290,042 in 2002, $271,067 in
2001, and $253,334 in 2000.
Amortization expense on intangible assets for each of the next three years is
as follows:
2003 $310,344
2004 332,069
2005 231,474
Total $873,887
Mid-Wisconsin Financial Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements
NOTE 8 INTEREST-BEARING DEPOSITS
Aggregate annual maturities of certificate and IRA accounts at December 31,
2002, are as follows:
2003 $94,167,225
2004 31,918,584
2005 8,497,436
2006 5,709,524
2007 645
Total $140,293,414
Deposits from the Company's directors, executive officers, and affiliated
companies in which they are principal owners totaled $3,317,046 and $3,655,862
at December 31, 2002 and 2001, respectively.
Interest-bearing deposits include $45,322,662 and $35,231,411 of certificates
of deposit in denominations greater than $100,000 at December 31, 2002 and
2001, respectively.
NOTE 9 SHORT-TERM BORROWINGS
Short-term borrowings at December 31 consist of the following:
2002 2001
Securities sold under repurchase agreements $18,039,517 $18,465,436
Federal funds purchased 0 924,000
Totals $18,039,517 $19,389,436
The Company pledges U.S. Treasury and agency securities available for sale as
collateral for repurchase agreements. The fair value of pledged securities,
including accrued interest receivable, totaled $19,622,122 and $25,612,921 at
December 31, 2002 and 2001, respectively.
Mid-Wisconsin Financial Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements
NOTE 9 SHORT-TERM BORROWINGS (Continued)
The following information relates to federal funds purchased and securities
sold under repurchase agreements for the years ended December 31:
2002 2001 2000
Weighted average rate at December 31 1.24% 2.05% 6.00%
For the year:
Highest month-end balance $34,936,710 $29,492,473 $42,095,209
Daily average balance 22,094,640 22,739,366 28,293,620
Weighted average rate 1.76% 3.79% 5.95%
NOTE 10 LONG-TERM BORROWINGS
Long-term borrowings at December 31 consist of the following:
2002 2001
6.28% FHLB advance, interest payable monthly with principal
due during 2003 $4,000,000 $4,000,000
4.65% TO 4.67% FHLB advances, interest payable monthly
with principal due during 2003 5,000,000 5,000,000
4.61% TO 5.07% FHLB advances, interest payable monthly
with principal due during 2004 10,000,000 10,000,000
2.91% TO 4.14% FHLB advances, interest payable monthly
with principal due during 2005 10,000,000 5,000,000
3.56% TO 4.44% FHLB advances, interest payable monthly
with principal due during 2006 8,000,000 3,000,000
5.30% TO 5.51% FHLB advances, interest payable monthly
with principal due during 2008, callable during 2003 3,000,000 3,000,000
Totals $40,000,000 $30,000,000
The FHLB advances are secured by FHLB stock and a blanket lien consisting
principally of one- to four-family real estate loans totaling approximately
$66,000,000 and $55,000,000 at December 31, 2002 and 2001, respectively.
Mid-Wisconsin Financial Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements
NOTE 11 INCOME TAXES
The components of the income tax provision are as follows:
2002 2001 2000
Current income tax expense:
Federal $1,779,203 $1,512,939 $1,408,174
State 127,534 7,097 25
Total current 1,906,737 1,520,036 1,408,199
Deferred income tax expense (credit):
Federal (104,909) (44,702) (142,156)
State (18,748) 7,241 (64,754)
Total deferred (123,657) (37,461) (206,910)
Total provision for income taxes $1,783,080 $1,482,575 $1,201,289
A summary of the source of differences between income taxes at the federal
statutory rate and the provision for income taxes for the years ended December
31 follows:
2002 2001 2000
Percent Percent Percent
of of of
Pretax Pretax Pretax
Amount Income Amount Income Amount Income
Tax expense at
Statutory rate $2,130,411 34.0 $1,812,651 34.0 $1,547,119 34.0
Increase (decrease)
in taxes resulting from:
Tax-exempt interest (402,261) (6.4) (328,452) (6.2) (316,982) (7.0)
State income taxes 71,798 1.1 9,463 0.2 (42,721) (0.9)
Other (16,868) (0.2) (11,087) (0.2) 13,873 0.3
Provision for income
taxes $1,783,080 28.5 $1,482,575 27.8 $1,201,289 26.4
Mid-Wisconsin Financial Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements
NOTE 11 INCOME TAXES (Continued)
Deferred income taxes are provided for the temporary differences between the
financial reporting basis and the tax basis of the Company's assets and
liabilities. The major components of the net deferred taxes are as follows:
2002 2001
Deferred tax assets:
Allowance for loan losses $705,095 $664,881
Deferred compensation 405,645 330,175
State net operating losses 36,654 34,912
Purchased deposit intangible 218,798 162,956
Totals 1,366,192 1,192,924
Less - Valuation allowance (36,654) (34,912)
Total deferred tax assets 1,329,538 1,158,012
Deferred tax liabilities:
Premises and equipment 156,346 140,794
FHLB stock 92,757 60,440
Unrealized gain on securities available for sale 695,739 333,810
Total deferred tax liabilities 944,842 535,044
Net deferred tax asset $384,696 $622,968
Both the Company and the Bank pay state income taxes on their individual net
earnings. At December 31, 2002, tax net operating losses at the parent company
of approximately $703,000 existed to offset future state taxable income. These
net operating losses will begin to expire in 2007. The valuation allowance has
been recognized to adjust deferred tax assets to the amount of tax net
operating losses expected to be realized. If realized, the tax benefit for
this item will reduce current tax expense for that period.
Mid-Wisconsin Financial Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements
NOTE 12 RETIREMENT PLANS
Effective December 1, 2002, the Company merged its noncontributory defined
contribution money purchase plan into its 401(k) profit sharing. The new plan
is referred to as the Profit Sharing and 401(k) Plan. The plan is available to
substantially all employees. Contributions to the plan are based on achieving
desired Company profitability. Additional discretionary contributions are
authorized by the Board of Directors based on a percentage of annual salary
and wages. The Company also matches 100% of participant contributions to the
plan up to 5% of pay deferred. Total expense associated with the plans was
$505,673, $398,462, and $281,276 for the years ended December 31, 2002, 2001,
and 2000, respectively.
NOTE 13 STOCK BENEFIT PLANS
Employee Stock Purchase Plan
Under the Company's Employee Stock Purchase Plan adopted during 2000, the
Company is authorized to issue up to 50,000 shares of common stock to its full-
time employees, nearly all of whom are eligible to participate. Under the
terms of the plan, employees can choose each year to have up to 5% of their
annual gross earnings withheld to purchase the Company's common stock. Stock
is purchased by employees under the plan annually. The purchase price of the
stock is 95% of the lower of its beginning-of-year or end-of-year market price.
Approximately 26% of eligible employees participated in the plan during 2002.
Stock issued under this plan totaled 413, 441, and 213 shares during 2002,
2001, and 2000, respectively. As of December 31, 2002, 48,933 shares of common
stock remain reserved for future grants to employees under the Employee Stock
Purchase Plan approved by the stockholders.
Incentive Stock Option Plan
Under the terms of an incentive stock option plan adopted during 2000, shares
of unissued common stock are reserved for options to officers and key employees
of the Company at prices not less than the fair market value of the shares at
the date of the grant. Options may be exercised no earlier than six months
after the grant date. These options expire ten years after the grant date.
Mid-Wisconsin Financial Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements
NOTE 13 STOCK BENEFIT PLANS (Continued)
Incentive Stock Option Plan (Continued)
Under the terms of a stock option plan terminated during 1999, 1,853
outstanding options may be exercised between the fourth and fifth anniversaries
of the date of the grant. All of the outstanding options under this plan will
be forfeited if they are not exercised during the exercise period.
The following table summarizes information regarding stock options at December
31, 2002:
Outstanding Options Exercisable Options
Weighted-
Number Average Weighted- Number Weighted
Range of Outstanding Remaining Average Exercisable Average
Exercise at Contractual Exercise at Exercise
Prices 12/31/02 Life Price 12/31/02 Price
$25 to $29 9,463 7.5 years $26.61 7,610 $26.76
Mid-Wisconsin Financial Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements
NOTE 13 STOCK BENEFIT PLANS (Continued)
Incentive Stock Option Plan (Continued)
For the years ended December 31, 2000, 2001, and 2002, activity in stock
options outstanding was as follows:
Weighted
Average
Shares Price
December 31, 1999 8,139 $24.16
Options granted 2,575 28.25
Options exercised (1,906) (19.50)
Options forfeited (209) (19.50)
December 31, 2000 8,599 26.53
Options granted 2,776 25.50
Options exercised (604) (24.00)
Options forfeited (1,202) (24.00)
December 31, 2001 9,569 26.53
Options granted 3,012 26.63
Options exercised (1,921) (26.62)
Options forfeited (1,197) (27.44)
December 31, 2002 9,463 26.61
As of December 31, 2002, 254,399 shares of common stock remain reserved for
future grants to officers and key employees under the incentive stock option
plan approved by the stockholders.
Mid-Wisconsin Financial Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements
NOTE 13 STOCK BENEFIT PLANS (Continued)
Incentive Stock Option Plan (Continued)
The Company follows the provisions of Accounting Principles Board (APB) opinion
No. 25, "Accounting for Stock Issued to Employees," and uses the "intrinsic
value method" of recording stock-based compensation cost. Because stock
options are granted with an exercise price equal to fair value at the date of
grant, no compensation expense is recorded.
The fair value of each option granted is estimated on the grant date using the
Black-Scholes methodology. The following assumptions were made in estimating
fair value for options granted for the years ended December 31:
2002 2001 2000
Dividend Yield 4.70% 4.73% 4.39%
Risk-free interest rate 4.03% 5.27% 5.12%
Weighted average expected life (years) 10 10 5
Expected volatility 9.55% 8.99% 7.33%
The weighted average fair value of options of their grant date, using the
assumptions shown above, was computed at $1.54 per share for options granted in
2002, $2.17 per share for options granted in 2001, and $1.73 per share for
options granted in 2000.
Mid-Wisconsin Financial Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements
NOTE 13 STOCK BENEFIT PLANS (Continued)
Incentive Stock Option Plan (Continued)
Had compensation cost for the Company's stock-based plans been determined in
accordance with SFAS No. 123, "Accounting for Stock-Based Compensation," based
on the fair value of the stock options, net income and earnings per share would
have been reduced for the years ended December 31 as follows:
2002 2001 2000
Net income:
As reported $4,482,836 $3,848,750 $3,349,060
Pro forma $4,478,198 $3,842,726 $3,344,605
Earnings per share - Basic and diluted:
As reported $2.65 $2.25 $1.85
Pro forma $2.65 $2.25 $1.84
NOTE 14 CAPITAL REQUIREMENTS
The Company and the Bank are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory-and possibly additional
discretionary-actions by regulators that, if undertaken, could have a direct
material effect on the Company's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank
must meet specific capital guidelines that involve quantitative measures of the
Bank's assets, liabilities, and certain off-balance-sheet items as calculated
under regulatory accounting practices. The Bank's capital amounts and
classification are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
Mid-Wisconsin Financial Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements
NOTE 14 CAPITAL REQUIREMENTS (Continued)
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the
following table) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to
average assets (as defined). Management believes, as of December 31, 2002,
that the Bank meets all capital adequacy requirements to which it is subject.
As of December 31, 2002, the most recent notification from the Federal Deposit
Insurance Corporation categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Bank must maintain minimum total risk-based, Tier I risk-
based, and Tier I leverage ratios as set forth in the table. There are no
conditions or events since that notification that management believes have
changed the Bank's category.
Mid-Wisconsin Financial Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements
NOTE 14 CAPITAL REQUIREMENTS (Continued)
The Company and the Bank's actual capital amounts and ratios are presented in
the following table:
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
As of December 31, 2002:
Total capital (to risk-
weighted assets):
Consolidated $32,456,000 12.7% >=$20,460,000 >=8.0% N/A
Subsidiary bank $31,520,000 12.3% >=$20,450,000 >=8.0% >=$25,563,000 >=10.0%
Tier I (to capital risk-
weighted assets):
Consolidated $29,754,000 11.6% >=$10,230,000 >=4.0% N/A
Subsidiary bank $28,818,000 11.3% >=$10,225,000 >=4.0% >=$15,338,000 >=6.0%
Tier I capital (to
Average assets):
Consolidated $29,754,000 8.5% >=$14,675,000 >=4.0% N/A
Subsidiary bank $28,818,000 8.2% >=$14,670,000 >=4.0% >=$18,338,000 >=5.0%
As of December 31, 2001:
Total capital (to risk-
weighted assets):
Consolidated $30,087,000 12.1% >=$19,877,000 >=8.0% N/A
Subsidiary bank $29,492,000 11.9% >=$19,865,000 >=8.0% >=$24,831,000 >=10.0%
Tier I capital (to risk-
weighted assets):
Consolidated $27,490,000 11.1% >=$9,938,000 >=4.0% N/A
Subsidiary Bank $26,895,000 10.8% >=$9,932,000 >=4.0% >=$14,898,000 >=6.0%
Tier I capital (to
Average assets):
Consolidated $27,490,000 8.3% >=$13,561,000 >=4.0% N/A
Subsidiary bank $26,895,000 8.1% >=$13,555,000 >=4.0% >=$16,944,000 >=5.0%
Mid-Wisconsin Financial Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements
NOTE 15 RESTRICTIONS ON RETAINED EARNINGS
The Bank is restricted by banking regulations from making dividend
distributions above prescribed amounts and limited in making loans and advances
to the Company. At December 31, 2002, the retained earnings of the Bank
available for distribution as dividends without regulatory approval was
approximately $10,452,000.
NOTE 16 ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Comprehensive income is shown in the consolidated statements of changes in
stockholders' equity. The Company's accumulated other comprehensive income
(loss) is comprised of the unrealized gain or loss on securities available for
sale. The following shows the activity in accumulated other comprehensive
income (loss):
2002 2001 2000
Accumulated other comprehensive income (loss) at beginning $604,374 $245,915 ($800,525)
Activity:
Unrealized gain on securities available for sale 1,037,993 560,861 1,675,186
Less - Reclassification adjustment for gains 17,349 7,892 0
Net unrealized gains 1,020,644 552,969 1,675,186
Tax effect 361,929 194,510 628,746
Other comprehensive income 658,715 358,459 1,046,440
Accumulated other comprehensive income at end $1,263,089 $604,374 $245,915
Mid-Wisconsin Financial Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements
NOTE 17 FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
Credit Risk
The Company is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit. Those instruments involve, to varying degrees, elements of
credit risk in excess of the amount recognized in the consolidated balance
sheets.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual amount of those
instruments. The Company uses the same credit policies in making commitments
and conditional obligations as it does for on-balance-sheet instruments. These
commitments at December 31, 2002 and 2001, are as follows:
2002 2001
Commitments to extend credit:
Fixed rate $11,060,177 $10,358,501
Adjustable rate 16,158,968 13,963,867
Standby and irrevocable letters of credit - Fixed rate 2,209,024 2,083,313
Credit card commitments 5,567,319 5,665,467
Commitments to extend credit 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. Since many of the commitments are expected
to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Company evaluates each
customer's creditworthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the Company upon extension of credit, is based
on management's credit evaluation of the party. Collateral held varies but may
include accounts receivable; inventory; property, plant, and equipment; and
income-producing commercial properties.
Mid-Wisconsin Financial Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements
NOTE 17 FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK (Continued)
Credit Risk (Continued)
Standby letters of credit are conditional commitments issued by the Company to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to support public and private borrowing arrangements. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers. The commitments are
structured to allow for collateralization on all standby letters of credit in
the same manner and terms as exist on loans of similar risk.
Credit card commitments are commitments on credit cards issued by the Company
and serviced by Elan Financial Services. These commitments are unsecured.
Commitments and Contingencies
In the normal course of business, the Company is involved in various legal
proceedings. In the opinion of management, any liability resulting from such
proceedings would not have a material adverse effect on the consolidated
financial statements.
Concentration of Credit Risk
The Company grants residential, commercial, agricultural, and consumer loans
predominantly in central and northern Wisconsin. There were no significant
concentrations of credit to any one debtor or industry group. It is felt that
the diversity of the local economy will prevent significant losses in the event
of an economic downturn.
Mid-Wisconsin Financial Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements
NOTE 18 FAIR VALUE OF FINANCIAL INSTRUMENTS
Current accounting standards require that the company disclose estimated fair
values for its financial instruments. Fair value estimates, methods, and
assumptions are set forth below for the Company's financial instruments.
Cash and Short-Term Investments - The carrying amounts reported in the
consolidated balance sheets for cash and due from banks, interest-bearing
deposits in other financial institutions, and federal funds sold approximate
the fair value of these assets.
Securities - Fair values are based on quoted market prices, where available.
If a quoted market price is not available, fair value is estimated using quoted
market prices for similar securities. Federal Home Loan Bank stock is carried
at cost, which is its redeemable value since the market for this stock is
limited.
Loans - Fair values are estimated for portfolios of loans with similar
financial characteristics. Loans are segregated by type such as commercial,
residential mortgage, and other consumer. The fair value of loans is
calculated by discounting scheduled cash flows through the estimated maturity
using estimated market discount rates that reflect the credit and interest rate
risk inherent in the loan. The estimate of maturity is based on the company's
repayment schedules for each loan classification. In addition, for impaired
loans, marketability and appraisal values for collateral were considered in the
fair value determination.
Deposit Liabilities - The fair value of deposits with no stated maturity, such
as non-interest-bearing demand deposits, savings, NOW accounts, and money
market accounts, is equal to the amount payable on demand at the reporting
date. The fair value of certificates of deposit is based on the discounted
value of contractual cash flows. The discount rate reflects the credit quality
and operating expense factors of the Company.
Short-Term Borrowings - The carrying amount reported in the consolidated
balance sheets for short-term borrowings approximates the liability's fair
value.
Long-Term Borrowings - The fair values of the Company's long-term borrowings
(other than deposits) are estimated using discounted cash flow analyses, based
on the Company's current incremental borrowing rates for similar types of
borrowing arrangements.
Mid-Wisconsin Financial Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements
NOTE 18 FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
Accrued Interest - The carrying amount of accrued interest approximates its
fair value.
Off-Balance-Sheet Instruments - The fair value of commitments is estimated
using the fees currently charged to enter into similar agreements, taking into
account the remaining terms of the agreements, the current interest rates, and
the present creditworthiness of the counter parties. Since this amount is
immaterial, no amounts for fair value are presented.
The carrying value and estimated fair value of financial instruments at
December 31, 2002 and 2001, were as follows:
2002 2001
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
Financial assets:
Cash and short-term
Investments $27,329,549 $27,329,549 $15,790,330 $15,790,330
Investment securities and
FHLB stock 78,321,696 78,321,696 85,014,352 85,014,352
Net loans 253,027,814 254,003,621 229,503,190 231,858,129
Accrued interest receivable 1,716,413 1,716,413 1,843,509 1,843,509
Financial liabilities:
Deposits 274,491,953 276,133,276 258,401,447 260,764,540
Short-term borrowings 18,039,517 18,039,517 19,389,436 19,389,436
Long-term borrowings 40,000,000 41,428,823 30,000,000 30,670,276
Accrued interest payable 1,294,227 1,294,227 1,683,562 1,683,562
Mid-Wisconsin Financial Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements
NOTE 18 FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
Limitations - Fair value estimates are made at a specific point in time based
on relevant market information and information about the financial instrument.
These estimates do not reflect any premium or discount that could result from
offering for sale at one time the Company's entire holdings of a particular
financial instrument. Because no market exists for a significant portion of
the Company's financial instruments, fair value estimates are based on
judgments regarding future expected loss experience, current economic
conditions, risk characteristics of various financial instruments, and other
factors. These estimates are subjective in nature and involve uncertainties
and matters of significant judgment and therefore cannot be determined with
precision. Changes in assumptions could significantly affect the estimates.
Fair value estimates are based on existing on- and off-balance-sheet financial
instruments without attempting to estimate the value of anticipated future
business and the value of assets and liabilities that are not considered
financial instruments. Significant assets and liabilities that are not
considered financial assets or liabilities include premises and equipment,
goodwill and intangibles, and other assets and other liabilities. In addition,
the tax ramifications related to the realization of the unrealized gains or
losses can have a significant effect on fair value estimates and have not been
considered in the estimates.
Mid-Wisconsin Financial Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements
NOTE 19 CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY
Balance Sheets
December 31, 2002 and 2001
2002 2001
Assets
Cash and due from banks $992,712 $565,918
Investment in subsidiary 31,250,328 28,957,882
Securities available for sale - At fair value 100,000 100,000
Premises and equipment 0 498
Other assets 32,947 50,331
Total assets $32,375,987 $29,674,629
Liabilities and Stockholders' Equity
Total liabilities $190,180 $121,508
Total stockholders' equity 32,185,807 29,553,121
Total liabilities and stockholders' equity $32,375,987 $29,674,629
Mid-Wisconsin Financial Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements
NOTE 19 CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY (Continued)
Statements of Income
Years Ended December 31, 2002, 2001, And 2000
2002 2001 2000
Income:
Dividends from subsidiary $2,850,000 $2,950,000 $1,600,000
Interest 10,550 23,917 162,130
Rental income 180,000 180,000 180,000
Other 1,424 255 0
Total income 3,041,974 3,154,172 1,942,130
Expenses:
Salaries and benefits 44,507 55,010 30,096
Other 148,825 201,149 218,711
Total expenses 193,332 256,159 248,807
Income before provision (credit) for income
taxes and equity in undistributed net income
of subsidiary 2,848,642 2,898,013 1,693,323
Provision (credit) for income taxes (462) (17,676) 31,730
Income before equity in undistributed net
Income of subsidiary 2,849,104 2,915,689 1,661,593
Equity in undistributed net income of subsidiary 1,633,732 933,061 1,687,467
Net income $4,482,836 $3,848,750 $3,349,060
Mid-Wisconsin Financial Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements
NOTE 19 CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY (Continued)
Statements of Cash Flows
Years Ended December 31, 2002, 2001, and 2000
2002 2001 2000
Increase (decrease) in cash and due from banks:
Cash flows from operating activities:
Net income $4,482,836 $3,848,750 $3,349,060
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for depreciation and net
amortization 499 28,932 78,383
Equity in undistributed net income of
subsidiary (1,633,732) (933,061) (1,687,467)
Changes in operating assets and liabilities:
Other assets 17,384 (15,263) (10,679)
Liabilities 68,672 (71,303) 6,538
Net cash provided by operating activities 2,935,659 2,858,055 1,735,835
Net cash used in investing activities - Payment for
purchase of securities available for sale 0 0 (100,000)
Cash flows from financing activities:
Proceeds from stock benefit plans 62,184 30,343 37,168
Payments for repurchase of common stock (401,969) (2,960,984) (410,961)
Cash dividends paid (2,169,080) (2,068,541) (2,175,250)
Net cash used in financing activities (2,508,865) (4,999,182) (2,549,043)
Net increase (decrease) in cash and due from banks 426,794 (2,141,127) (913,208)
Cash and due from banks at beginning 565,918 2,707,045 3,620,253
Cash and due from banks at end $992,712 $565,918 $2,707,045
Supplemental cash flow information:
Cash paid during the year for income taxes $1,882,799 $1,504,441 $1,460,000
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information relating to directors is incorporated in this Form 10-K by this
reference to the disclosure beginning with the sentence immediately preceding
the table under the caption Proposal No. 1 "Election of Directors" in
registrant's 2003 Proxy Statement dated March 21, 2003 (the "2003 Proxy
Statement") and continuing through the disclosure ending at the subcaption
"Committees and Meetings. Information relating to executive officers is found
in Part I of this form 10-K. Information required under Rule 405 of Regulation
S-K is incorporated in this Form 10-K by reference to the 2003 Proxy Statement
under the subcaption "Section 16(a) Beneficial Ownership Reporting Compliance."
ITEM 11. EXECUTIVE COMPENSATION
Information relating to executive and director compensation is incorporated in
this Form 10-K by this reference to the disclosure in the registrant's 2003
Proxy Statement under (1) the subcaption "Executive Officer Compensation," page
8, through the disclosure ending at the caption "Committees' Report on
Executive Compensation Policies", (2) the disclosure under the subcaption
"Committee Interlocks and Insider Participation", and (3) the disclosure under
the subcaption "Director Compensation".
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDERS MATTERS
Information relating to security ownership of certain beneficial owners is
incorporated in this Form 10-K by this reference to the disclosure in the
registrant's 2003 Proxy Statement under the caption "Beneficial Ownership of
Common Stock" through the table ending at the subcaption "Section 16(a)
Beneficial Ownership Reporting Compliance."
The following table sets forth, as of December 31, 2002, information with
respect to compensation plans under the Company's common stock is authorized
for issuance:
Number of securities
Number of securities remaining available for
to be issued upon Weighted-average future issuance under equity
exercise of exercise price of compensation plans
outstanding options, outstanding options, (excluding securities
Plan Category warrants and rights warrants and rights reflected in column (a))
(a) (b) (c)
Equity compensation
plans approved by
security holders 9,463 $26.61 303,332
Equity compensation
plans not approved by
security holders
Total 9,463 $26.61 303,332
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information relating to certain relationships and related transactions is
incorporated in this Form 10-K by this reference to the registrant's 2003 Proxy
Statement under the caption "Certain Relationships and Related Transactions."
ITEM 14. CONTROLS AND PROCEDURES
During the 90-day period prior to the filing date of this Form 10-K,
management, under the supervision, and with the participation, of the Company's
President and Chief Executive Officer and the Chief Financial Officer,
evaluated the effectiveness of the design and operation of the Company's
disclosure controls and procedures pursuant to Rule 13a-14 under the Securities
Exchange Act of 1934. Based upon, and as of the date of such evaluation, the
President and Chief Executive Officer and the Chief Financial Officer concluded
that the Company's disclosure controls and procedures were effective in all
material respects. 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, nor
were there any significant deficiencies or material weaknesses identified which
required any corrective action to be taken.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements
Description Page
Mid-Wisconsin Financial Services, Inc.
Consolidated Financial Statements
Accountants' Report 28
Consolidated Balance Sheets 29
Consolidated Statements of Income 30
Consolidated Statements of Changes in Stockholders' Equity 31
Consolidated Statements of Cash Flows 32
Notes to Consolidated Financial Statements 34
(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.
(c) Exhibits Required by Item 601 of Regulation S-K:
The following exhibits required by Item 601 of Regulation S-K are filed
as part of this annual report on Form 10-K:
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)
21.1 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.
23.1 Consent of Wipfli Ullrich Bertelson LLP
99.1 Certifications under Section 906 of Sarbanes-Oxley Act of 2002
*Denotes executive compensation plans and arrangements
The exhibits listed above are available upon request in writing to William A.
Weiland, Secretary, Mid-Wisconsin Financial Services, Inc., 132 West State
Street, Medford, Wisconsin 54451.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1994, the registrant had duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on March 21, 2003.
MID-WISCONSIN FINANCIAL SERVICES, INC.
James F. Melvin
James F. Melvin, Chairman of the Board
William A. Weiland
William A. Weiland, Secretary
and Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant on
March 21, 2003, and in the capacities indicated.
Norman A. Hatlestad Gene C. Knoll
Norman A. Hatlestad, Vice Chairman Gene C. Knoll, President and Chief
of the Board, and a Director Executive Officer
(Principal Executive Officer and a
Director)
Kim A. Gowey James P. Hager
Kim A. Gowey, DDS, Chairman of the James P. Hager, Director
Board of Mid-Wisconsin Bank and
a Director
Kurt D. Mertens Kathryn M. Hemer
Kurt D. Mertens, Director Kathryn M. Hemer, Director
Robert J. Schoofs Brian B. Hallgren
Robert J. Schoofs, Director Brian B. Hallgren, Director
Rhonda R. Kelley
Rhonda R. Kelley, Controller
(Principal Financial Officer)
CERTIFICATIONS
I, Gene C. Knoll, certify that:
1. I have reviewed this annual report on Form 10-K of Mid-Wisconsin
Financial Services, Inc. (the "registrant");
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: March 21, 2003
GENE C. KNOLL
Gene C. Knoll
President and Chief Executive Officer
I, Rhonda R. Kelley, certify that:
1. I have reviewed this annual report on Form 10-K of Mid-Wisconsin
Financial Services, Inc. (the "registrant");
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: March 21, 2003
RHONDA R. KELLEY
Rhonda R. Kelley
Controller (Principal Financial Officer)
EXHIBIT INDEX
to
FORM 10-K
of
MID-WISCONSIN FINANCIAL SERVICES, INC.
for the period ended December 31, 2002
Pursuant to Section 102(d) of Regulation S-T
(17 C.F.R.232.102(d))
23.1 Consent of Wipfli Ullrich Bertelson LLP
99.1 Certifications under Section 906 of Sarbanes-Oxley Act of 2002
Exhibits required by Item 601 of Regulation S-K which have been
previously filed and are incorporated by reference are set forth in Part IV,
Item 15 of the Form 10-K to which this Exhibit Index relates.
Exhibit 23.1
Board of Directors
Mid-Wisconsin Financial Services, Inc.
Medford, Wisconsin
We consent to the incorporation by reference in the Registration Statement (No.
33-37264) on Form S-8 of Mid-Wisconsin Financial Services, Inc. of our report
dated January 17,2003, relating to the consolidated balance sheets of Mid-
Wisconsin Financial Services, Inc. and Subsidiary as of December 31, 2002 and
2001, and the related consolidated statements of income, stockholders' equity,
and cash flows for the three years in the period ended December 31, 2002, which
appears in the December 31, 2002, annual report on Form 10-K of Mid-Wisconsin
Financial Services, Inc.
Wipfli Ullrich Bertelson LLP
Wausau, Wisconsin
March 20, 2003