FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
{X} QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003
OR
{ } TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-18542
MID-WISCONSIN FINANCIAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
Wisconsin 06-1169935
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
132 West State Street, Medford, WI 54451
(Address of principal executive offices, including zip code)
(715) 748-8300
(Registrant's telephone number, including area code)
(Former name, former address & former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes No X
As of May 5, 2003, there were 1,684,475 shares of $0.10 par value common stock
outstanding.
MID-WISCONSIN FINANCIAL SERVICES, INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Consolidated Balance Sheets
March 31, 2003 and December 31, 2002 3
Consolidated Statements of Income
Three Months Ended March 31, 2003 and 2002 4
Consolidated Statements of Changes in
Stockholders' Equity
Three Months Ended March 31, 2003 5
Consolidated Statements of Cash Flows
Three Months Ended March 31, 2003 and 2002 5-6
Notes to Consolidated Financial Statements 7-9
Item 2. Management's Discussion and Analysis of
Financial Conditions and Results of
Operations 8-17
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 17
PART II. OTHER INFORMATION
Item 4. Controls and Procedures 17
Item 6. Exhibits and Reports of Form 8-K 18
Signatures 18
Certifications 19-21
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements:
Mid-Wisconsin Financial Services, Inc.
and Subsidiary
Consolidated Balance Sheet
March 31, 2003 December 31, 2002
(Unaudited) (Audited)
ASSETS
Cash and due from banks $10,943,083 $15,484,360
Interest-bearing deposits in other financial institutions 418,511 19,408
Federal funds sold 8,690,106 11,825,781
Securities available for sale -At fair value 76,232,615 76,321,696
Federal Home Loan Bank stock (at cost) 2,051,000 2,000,000
Loans held for sale 1,073,670 791,420
Loans receivable, net of allowance for loan losses of
$2,815,187 in 2003 and $2,701,709 in 2002 253,074,584 252,236,394
Accrued interest receivable 1,749,567 1,716,413
Premises and equipment 5,660,104 5,487,421
Intangible assets 796,301 873,887
Goodwill 295,316 295,316
Other assets 799,256 987,427
TOTAL ASSETS $361,784,113 $368,039,523
LIABILITIES AND STOCKHOLDERS' EQUITY
Noninterest-bearing deposits $35,580,970 $38,108,392
Interest-bearing deposits 238,222,229 236,383,561
Total deposits 273,803,199 274,491,953
Short-term borrowings 12,276,606 18,039,517
Long-term borrowings 40,000,000 40,000,000
Accrued interest payable 1,240,368 1,294,227
Accrued expenses and other liabilities 1,767,647 2,028,019
Total liabilities 329,087,820 335,853,716
Stockholders' equity:
Common stock-Par value $.10 per share:
Authorized - 6,000,000 shares
Issued & outstanding - 1,684,475 shares in 2003 and 2002 168,448 168,448
Additional paid-in capital 10,944,480 10,941,600
Retained earnings 20,407,926 19,812,670
Accumulated other comprehensive income 1,175,439 1,263,089
Total stockholders' equity 32,696,293 32,185,807
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $361,784,113 $368,039,523
The accompanying notes to consolidated financial statements are an integral part of these
statements.
ITEM 1. Financial Statements Continued:
MID-WISCONSIN FINANCIAL SERVICES, INC.
and Subsidiary
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three months ended
March 31, 2003 March 31, 2002
Interest income:
Interest and fees on loans $4,089,144 $4,238,982
Interest and dividends on securities:
Taxable 689,823 856,357
Tax-exempt 264,650 268,401
Other interest and dividend income 49,038 24,857
Total interest income 5,092,655 5,388,597
Interest expense:
Deposits 1,302,509 1,522,204
Short-term borrowings 46,720 85,003
Long-term borrowings 448,750 367,875
Total interest expense 1,797,979 1,975,082
Net interest income 3,294,676 3,413,515
Provision for loan losses 158,333 180,000
Net interest income after provision for loan losses 3,136,343 3,233,515
Noninterest income:
Service fees 197,266 199,353
Trust service fees 182,823 184,000
Investment product commissions 64,261 54,652
Other operating income 219,512 176,633
Total noninterest income 663,862 614,638
Noninterest expenses:
Salaries and employee benefits 1,406,920 1,296,442
Occupancy 311,794 272,327
Data processing and information systems 108,754 110,426
Purchase core deposit amortization 77,586 72,510
Other operating expenses 571,371 556,691
Total noninterest expenses 2,476,425 2,308,396
Income before provision for income taxes 1,323,780 1,539,757
Provision for income taxes 357,938 439,267
Net income $965,842 $1,100,490
Basic and diluted earnings per share $0.57 $0.65
Cash dividends paid per share $0.22 $0.22
The accompanying notes to consolidated financial statements are an integral part of these
statements.
ITEM 1. Financial Statements Continued:
Mid-Wisconsin Financial Services, Inc.
Consolidated Statement of Changes in Stockholders' Equity
(Unaudited)
Accumulated
Additional Other
Common Stock Paid-In Retained Comprehensive
Amount Capital Earnings Income (Loss) Totals
Balance, December 31, 2002 $168,448 $10,941,600 $19,812,670 $1,263,089 $32,185,807
Comprehensive Income:
Net Income 965,842 965,842
Other comprehensive income (87,650) (87,650)
Total comprehensive income 878,192
Stock-based compensation 2,880 2,880
Cash dividends paid, $0.22 per share (370,586) (370,586)
Balance March 31, 2003 $168,448 $10,944,480 $20,407,926 $1,175,439 $32,696,293
The accompanying notes to the consolidated financial statements are an integral part of these statements.
Mid-Wisconsin Financial Services, Inc.
and Subsidiary
Consolidated Statements of Cash Flows
Three Months Ended March 31, 2003 and 2002
(Unaudited)
2003 2002
Increase (decrease) in cash and due from banks:
Cash flows from operating activities:
Net income $965,842 $1,100,490
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for depreciation and net amortization 277,378 233,097
Provision for loan losses 158,333 180,000
Proceeds from sales of loans held for sale 5,219,696 2,293,532
Gain on sale of loans held for sale (87,938) (27,842)
Originations of loans held for sale (5,414,008) (1,898,140)
Loss on premises and equipment disposals 858 -
FHLB stock dividends (51,000) (21,000)
Stock-based compensation 2,880 -
Changes in operating assets and liabilities:
Other assets 292,164 (363,148)
Other liabilities (314,231) 113,949
Net cash provided by operating activities 1,049,975 1,610,938
ITEM 1. Financial Statements Continued:
Mid-Wisconsin Financial Services, Inc.
and Subsidiary
Consolidated Statements of Cash Flows
Three Months Ended March 31, 2003 and 2002
(Unaudited)
2003 2002
Cash flows from investing activities:
Net (increase) decrease in interest-bearing deposits in
other financial institutions (399,103) 6,749
Net (increase) decrease in federal funds sold 3,135,675 (360,136)
Securities available for sale:
Proceeds from maturities 10,064,204 10,693,047
Payment for purchases (10,155,975) (6,348,422)
Net increase in loans (1,366,855) (3,896,685)
Capital expenditures (326,349) (38,831)
Proceeds from sale of other real estate 279,402 -
Net cash provided by investing activities 1,230,999 55,722
Cash flows from financing activities:
Net decrease in noninterest-bearing deposits (2,527,422) (2,317,589)
Net increase (decrease) in interest-bearing deposits 1,838,668 (7,771,282)
Net increase (decrease) in short-term borrowing (5,762,911) 3,805,988
Cash dividends paid (370,585) (373,229)
Net cash used in financing activities (6,822,250) (6,656,112)
Net decrease in cash and due from banks (4,541,277) (4,989,452)
Cash and due from banks at beginning 15,484,360 15,052,383
Cash and due from banks at end $10,943,083 $10,062,931
Supplemental cash flow information: 2003 2002
Cash paid during the year for:
Interest $1,854,071 $2,294,859
Income taxes $7,000 $85,896
Noncash investing and financing activities:
Loans transferred to other real estate $369,402 $-
Loans charged off $47,721 $200,403
The accompanying notes to the consolidated financial statements are an integral part of these
statements.
MID-WISCONSIN FINANCIAL SERVICES, INC.
Notes to Consolidated Financial Statements
Note 1 - General
In the opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments necessary to present fairly Mid-Wisconsin
Financial Services, Inc.'s ("Company") financial position, results of its
operations, changes in stockholders' equity and cash flows for the periods
presented, and all such adjustments are of a normal recurring nature. The
consolidated financial statements include the accounts of all subsidiaries.
All material intercompany transactions and balances are eliminated. The
results of operations for the interim periods are not necessarily indicative of
the results to be expected for the full year.
These interim consolidated financial statements have been prepared according to
the rules and regulations of the Securities and Exchange Commission and,
therefore, certain information and footnote disclosures normally presented in
accordance with generally accepted accounting principles have been omitted or
abbreviated. The information contained in the consolidated financial
statements and footnotes in the Company's 2002 annual report on Form 10-K,
should be referred to in connection with the reading of these unaudited interim
financial statements.
In preparing the consolidated financial statements, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the balance sheet and revenues and expenses for
the periods presented. Actual results could differ significantly from those
estimates. Estimates that are susceptible to significant change include the
determination of the allowance for loan losses and the valuations of
investments.
Note 2 - Earnings Per Share
Basic earnings per common share is calculated by dividing net income available
to common stockholders by the weighted average number of common shares
outstanding. Diluted earnings per share is calculated by dividing net income
by the weighted average number of shares adjusted for the dilutive effect of
outstanding stock options.
Presented below are the calculations for basic and diluted earnings per share:
Three Months Ended March 31,
2003 2002
(In thousands, except per share data)
Net income available to common stockholders $966 $1,100
Weighted average shares outstanding 1,684 1,696
Effect of dilutive stock options outstanding 1 0
Diluted weighted average shares outstanding 1,685 1,696
Basic earnings per common share $0.57 $0.65
Diluted earnings per common share $0.57 $0.65
Note 3 - Changes in Accounting Principle
Effective January 1, 2003, the Company adopted the fair value recognition
provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation,
prospectively to all employee awards granted, modified, or settled after
January 1, 2003. Awards under the Company's plans vest six months after the
grant date. The cost related to stock-based employee compensation included in
the determination of net income is recognized over the vesting period using a
straight line method. Prior to 2003, the Company accounted for those plans
under the recognition and measurement provisions of APB Opinion No. 25,
Accounting for Stock Issued to Employees and related interpretations. No
stock-based employee compensation cost is reflected in 2002 net income.
The following table illustrates the effect on net income and earnings per share
if the fair value based method had been applied to all outstanding and unvested
awards in each period.
Three Months Ended March 31,
2003 2002
(In thousands, except per share data)
Net income, as reported $966 $1,100
Add: Stock-based employee
compensation expense included in
reported net income, net of related
tax effects 3 -
Deduct: Total stock-based
employee compensation expense
determined under the fair value
based method for all awards, net of
related tax effects (6) (5)
Pro forma net income $963 $1,095
Earnings per share - Basic and diluted:
As reported $0.57 $0.65
Proforma $0.57 $0.65
Note 4 - Long-Term Debt
Long-term debt at March 31 is as follows:
March March
2003 2002
Federal Home Loan Bank advances:
2.91% to 3.56%, fixed rate,
maturing in 2005 through 2006 $10,000,000
4.14% to 6.28%, fixed rate,
maturing in 2003 through 2008 $30,000,000 $30,000,000
$40,000,000 $30,000,000
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
The following discussion and analysis is presented to assist in the
understanding and evaluation of the Company's financial condition and results
of operations. It is intended to complement the unaudited financial
statements, footnotes, and supplemental financial data appearing elsewhere in
this Form 10-Q and should be read in conjunction therewith. Quarterly
comparisons reflect continued consistency of operations and do not reflect any
significant trends or events other than those noted in the comments.
Forward-looking statements have been made in this document that are subject to
risks and uncertainties. While the Company believes that these forward-looking
statements are based on reasonable assumptions, all such statements involve
risk and uncertainties that could cause actual results to differ materially
from these contemplated in this report.
The assumptions, risks and uncertainties relating to the forward-looking
statements in this report include those described under the caption "Cautionary
Statements Regarding Forward Looking Information" in Part I of the Company's
Form 10-K for the year ended December 31, 2002 and, from time to time, in the
Company's other filings with the Securities and Exchange Commission.
Results of Operations
Net income for the quarter ended March 31, 2003 totaled $966 thousand or $0.57
for basic and diluted earnings per share. Comparatively, net income for the
quarter ended March 31, 2002 was $1.1 million or $0.65 for basic and diluted
earnings per share. Operating results for the first quarter 2003 generated an
annualized return on average assets of 1.06% and an annualized return on
average equity of 12.01%, compared to 1.30% and 14.69% for the comparable
quarter in 2002. The net interest margin for the first quarter 2003 was 4.02%
compared to 4.48% for the comparable quarter in 2002.
The following Table 1 presents quarterly summary results of operations.
Table 1: Summary Results of Operations
(dollars in thousands, except per share data)
March 31, December 31, September 30, June 30, March 31,
2003 2002 2002 2002 2002
EARNINGS AND DIVIDENDS
Interest income $5,092 $5,303 $5,314 $5,380 $5,388
Interest expense 1,798 1,835 1,876 1,896 1,975
Net interest income 3,294 3,468 3,438 3,484 3,413
Provision for loan losses 158 120 150 175 180
Net interest income after
provision for loan losses 3,136 3,348 3,288 3,309 3,233
Noninterest income 664 740 643 701 614
Noninterest expense 2,476 2,416 2,470 2,416 2,308
Income before provision for income taxes 1,324 1,672 1,461 1,594 1,539
Provision for income taxes 358 483 405 456 439
Net income $966 $1,189 $1,056 $1,138 $1,100
Return on average assets 1.06% 1.38% 1.22% 1.33% 1.30%
Return on average equity 12.01% 15.45% 13.54% 14.92% 14.69%
Tangible equity to assets 8.57% 8.61% 8.69% 8.58% 8.48%
Net interest margin 4.02% 4.33% 4.42% 4.52% 4.48%
AVERAGE BALANCE SHEET
Loans net of unearned income 253,853 243,596 246,546 241,320 233,279
Assets 363,448 344,815 345,697 341,219 337,973
Deposits 273,805 257,355 258,233 248,236 254,396
Stockholders' equity 32,163 30,790 31,195 30,511 29,959
ENDING BALANCE SHEET
Loans net of unearned income $255,890 $254,938 $249,347 $245,310 $235,367
Assets 361,784 368,040 347,501 348,794 335,027
Deposits 273,803 274,492 266,831 249,803 248,313
Stockholders' equity 32,696 32,186 31,522 31,076 30,259
FINANCIAL CONDITION ANALYSIS
Total risk-based capital 12.97% 12.69% 12.84% 12.72% 12.93%
Net charge-offs to average loans 0.02% 0.09% 0.12% 0.10% 0.08%
Nonperforming assets to loans 0.89% 0.82% 1.52% 0.69% 0.96%
Efficiency ratio 59.69% 55.31% 58.30% 59.66% 59.53%
STOCKHOLDERS' DATA
Basic and diluted earnings per share $0.57 $0.71 $0.62 $0.67 $0.65
Dividends per share $0.22 $0.22 $0.22 $0.62 $0.22
Book value per share $19.41 $19.11 $18.73 $18.31 $17.84
Dividend payout ratio 38.4% 31.2% 35.4% 92.4% 33.9%
Average common shares outstanding 1,685 1,683 1,693 1,697 1,696
STOCK PRICE INFORMATION
High $28.00 $27.25 $28.33 $27.60 $26.30
Low 27.25 27.20 27.10 26.30 26.00
Market price at quarter end (1) 28.00 27.25 27.20 27.50 26.30
(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.
Net Interest Income
Net interest income on a fully taxable equivalent basis for the quarter ended
March 31, 2003 decreased $110 thousand to $3.5 million from the comparable
quarter last year. The net interest margin was 4.02% at March 31, 2003, down
46 basis points from 4.48% from the comparable quarter last year.
As noted in Table 1 Summary Results of Operations, during the third quarter
2002 the net interest margin started to decline. Since 2001, the Company has
benefited from the declining interest rate environment as the liability
sensitive balance sheet has repriced at the lower rates faster than long-term
securities and loans. The decline in the net interest margin can be attributed
to the yield on loans falling more rapidly than the cost of rate sensitive
liabilities, a deposit product with increasing contractual repricing features,
and principal pay-downs on high yielding mortgage-backed securities. The net
interest margin is expected not to strengthen until interest rates begin to
increase.
The yield on average earning assets decreased 85 basis points to 6.11% compared
to 6.96% at March 31, 2002. Similarly, the cost of interest bearing
liabilities decreased 46 basis points to 2.45% from 2.91% at March 31, 2002.
Table 2: Net Interest Income Analysis - Taxable Equivalent Basis
(dollars in thousands)
Three months ended March 31, 2003 Three months ended March 31, 2002
Average Interest Average Average Interest Average
Balance Income/Expense Yield/Rate Balance Income/Expense Yield/Rate
Assets
Loans (1) (2) $256,647 $4,113 6.41% $233,279 $4,253 7.29%
Investments and other 87,304 1,140 5.22% 85,347 1,288 6.04%
Total earning assets $343,951 $5,253 6.11% $318,626 $5,540 6.96%
Other assets, net 19,497 19,346
Total assets $363,448 $337,973
Liabilities & Equity:
Interest-bearing deposits $239,411 $1,303 2.18% $221,601 $1,522 2.75%
Wholesale funding 54,425 495 3.64% 50,078 453 3.62%
Total interest-bearing liabilities $293,836 $1,798 2.45% $271,679 $1,975 2.91%
Demand deposits 34,394 32,795
Other liabilities 3,055 3,539
Stockholders' equity 32,163 29,959
Total liabilities and equity $363,448 $337,973
Interest rate spread (2) 3.66% 4.05%
Net interest income
and net interest margin (2) $3,455 4.02% $3,565 4.48%
(1) Non-accrual loans are included in the daily average loan balances outstanding. (2)
(2) 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, those amounts are promptly charged
off against the allowance.
The provision for loan losses was $158 thousand for the quarter ended March 31,
2003, and $180 thousand for the comparable quarter in 2002. Net-charge offs to
average loans were 0.02% and 0.08% for the quarter ended March 31, 2003 and
2002. The ratio of allowance for loan losses to total loans continues to
remain constant at 1.10% March 31, 2003 and 2002 and 1.06% at December 31,
2002. See additional discussion under section "Allowance for Loan Losses."
Noninterest Income
Table 3: Noninterest Income
(dollars in thousands)
March 31, March 31, Dollar Percent
2003 2002 Change Change
Service fees $197 $199 $(2) -1.0%
Trust service fees 183 184 (1) -0.5%
Investment product commissions 64 55 9 16.4%
Other operating income 220 177 43 24.3%
Total noninterest income $664 $615 $49 8.0%
Investment product commissions consist of annuity sales, brokerage services,
mutual fund sales, life insurance commissions, and self-directed IRA fees.
Investment product commissions increased $9 thousand or 16.4% between
comparable three-month periods ended March 31, 2003. The increase is due to
additional investment representatives and increased sales volume.
Other operating income increased $43 thousand or 24.3% to $220 thousand at
March 31, 2003. The Company sells long-term fixed rate mortgage loans to the
secondary market. Gain on sale of such loans was $88 thousand at March 31,
2003 compared to $28 thousand at March 31, 2002. During the first quarter 2002
the Company received a one-time stock dividend of $12 thousand from a regional
ATM network.
Noninterest Expense
Table 4: Noninterest Expense
(dollars in thousands)
March 31, March 31, Dollar Percent
2003 2002 Change Change
Salaries and employee benefits $1,407 $1,296 $111 8.6%
Occupancy 312 272 40 14.7%
Data processing and information systems 109 110 (1) -0.9%
Amortization of intangibles 78 73 5 6.8%
Other operating expenses 570 557 13 2.3%
Total noninterest expenses $2,476 $2,308 $168 7.3%
Increases in salaries and employee benefits and occupancy expenses were
influenced by the opening of an additional Bank branch during the first quarter
2003. The number of full time equivalent employees increased to 130 at March
31, 2003 from 125 during the comparable quarter last year.
Amortization of intangibles increased due to the systematic amortization method
used. Other operating expenses increased during first quarter 2003 due to
additional advertising campaigns in the Bank's new market areas.
Balance Sheet
At March 31, 2003, total assets were $361.8 million, an increase of $26.8
million over March 31, 2002, while assets decreased $6.3 million from December
31, 2002. Gross loans were $257.0 million at March 31, 2003, increasing $21.5
million over first quarter 2002 and increasing $1.2 million over year-end 2002.
Investment securities were $76.2 million at March 31, 2003, decreasing $2.9
million from March 31, 2002 and $89 thousand from December 31, 2002. The
decline in the investment portfolio was due primarily to principal pay-downs on
mortgage-backed securities. Deposits increased $25.5 million from March 31,
2002 and decreased $689 thousand from December 31, 2002 to $273.8 million at
March 31, 2003. At March 31, 2003 liquidity decreased $7.2 million, or 26.6%
from December 31, 2002. The majority of the liquidity was used to payoff
short-term borrowings which declined $5.8 million since December 31, 2002.
Table 5: Period End Loan Composition
(dollars in thousands)
March 31, % of March 31, % of December 31, % of
2003 total 2002 total 2002 total
Commercial and financial $49,151 19.2% $41,747 17.7% $50,162 19.6%
Real estate construction 8,843 3.4% 6,131 2.6% 8,489 3.3%
Agricultural 33,901 13.2% 35,473 15.1% 33,575 13.1%
Lease financing 0 0.0% 7 0.0% 0 0.0%
Commercial 91,895 35.8% 83,358 35.4% 92,226 36.0%
Real estate residential 155,679 60.6% 142,233 60.4% 153,503 60.0%
Installment 9,390 3.6% 9,860 4.2% 10,001 4.0%
Total loans (including loans held for sale) $256,964 100.0% $235,451 100.0% $255,730 100.0%
While total loans continue to grow between time periods, agricultural and
installment loans have decreased over 4% from March 31, 2002. The Company has
tightened its credit standards and faces substantial competition from the Farm
Credit System and credit unions for such loans.
During the past year the Company has focused on writing adjustable rate loans
to match short-term liabilities in anticipation of the future interest rate
increases. The Company's loan demand for the first quarter 2003 has been slow
due to the present economy and winter season. There continues to be high
demand for loan refinancing of commercial and real estate 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 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's
internal risk analysis staff continuously reviews loan quality.
It is the Company's policy that when available information confirms that
specific loans and leases, or portions thereof, including impaired loans, are
uncollectible, these amounts are promptly charged off against the allowance.
The decrease in charge offs between comparable periods is due to the charge off
of two large commercial loans during 2002.
Table 6: Allowance for Loan Losses and Nonperforming Assets
(dollars in thousands)
At and for the At and for the
Three months ended Year ended
March 31, December 31,
2003 2002 2002
Allowance for loan losses at beginning of year $2,702 $2,597 $2,597
Loan charged off (48) (200) (560)
Recoveries 3 23 40
Net loans charged off (45) (177) (520)
Provision for loan losses 158 180 625
Allowance for loan losses at end of period $2,815 $2,600 $2,702
Nonperforming assets
Nonaccrual loans $1,112 $649 $417
Impaired loans $1,034 $997 $1,667
Accruing loans past due 90 days or more 34 65 62
Restructured loans 0 454 14
Total nonperforming loans 2,180 2,165 2,160
Other real estate owned 90 90 0
Total nonperforming assets $2,270 $2,255 $2,160
Ratios
Allowance for loan losses to total loans at end of period 1.10% 1.10% 1.06%
Net charge offs during the period to average loans outstanding 0.02% 0.08% 0.21%
In the opinion of management, the allowance for loan losses is adequate at
March 31, 2003. While management uses available information to recognize
losses on loans, future adjustments may be necessary based on changes in
economic conditions.
Nonperforming Loans and Other Real Estate Owned
Nonperforming assets include loans that are contractually past due 90 days or
more as to interest or principal payments, on nonaccrual status, or
restructured loans where the terms have been modified, because of deteriorating
financial condition of the borrower, to provide for a reduction of either
interest or principal and other real estate owned.
A commercial loan is considered impaired when, based on current information, it
is probable that the Bank will not collect all amounts due in accordance with
the contractual terms of the loan agreement. Impairment is based on discounted
cash flows of expected future payments using the loan's initial effective
interest rate or the fair value of the collateral if the loan is collateral
dependent. The decision of management to place loans in this category does not
necessarily mean that the Company expects losses to occur but that management
recognizes that a higher degree of risk is associated with these loans.
All interest accrued but not collected for loans (including applicable impaired
loans) that are placed on nonaccrual or charged off is reversed to interest
income.
The interest on these loans is accounted for on the cash basis until qualifying
for return to accrual status. Loans are returned to accrual status when all
the principal and interest amounts contractually due have been collected and
there is reasonable assurance that repayment will continue within a reasonable
time frame.
Total nonperforming assets remained constant at $2.3 million at March 31, 2003
and 2002. Nonperforming assets increased $110 thousand to $2.3 million at
March 31, 2003 from $2.2 million at December 31, 2002, primarily because the
Company repossessed $90 thousand of foreclosed assets. During the first
quarter 2003 impaired loans decreased $633 thousand to $1.0 million from year-
end due to loan pay-offs, loan charge-offs, and loans taken off the impaired
loan list.
Liquidity
Liquidity refers to the ability of the Company to generate adequate amounts of
cash to meet requirements of depositors and borrowers, as well as the operating
needs of the Company. Management views liquidity as the ability to raise
cash at a reasonable cost, or with a minimum of loss, and as a measure of
balance sheet flexibility to react to marketplace, regulatory and competitive
changes. Deposit growth is the primary source of liquidity. Retail consumer
deposits as a percentage of total funding sources were 80.7% at March 31, 2003
and 79.2% at March 31, 2002. Wholesale funding represents the balance of the
Company's total funding sources. The primary wholesale funding sources utilized
are Federal Home Loan Bank advances, federal funds purchased, repurchase
agreements from a base of individuals, businesses, and public entities, and
brokered CDs.
Table 8: Period End Deposit Composition
(dollars in thousands)
March 31 % of March 31 % of December 31, % of
2003 total 2002 total 2002 total
Demand $35,581 13.0% $32,810 13.1% $38,108 13.9%
NOW 28,144 10.3% 23,573 9.5% 29,106 10.6%
Money market 45,265 16.5% 48,949 19.7% 45,932 16.7%
Savings 21,475 7.8% 19,780 8.0% 20,990 7.7%
Brokered CDs 500 0.2% 500 0.2% 500 0.2%
Other time 142,838 52.2% 122,701 49.5% 139,856 50.9%
Total $273,803 100.0% $248,313 100.0% $274,492 100.0%
Capital
Stockholders' equity at March 31, 2003 increased $2.4 million to $32.7 million
from $30.3 million at March 31, 2002. The change in equity between the two
periods was primarily composed of the retention of earnings and the exercise of
stock options, with offsetting decreases to equity from the payment of
dividends. Stockholders' equity at March 31, 2003, included $1.2 million of
accumulated other comprehensive income, related to unrealized gains on
securities available-for-sale, net of the tax effect. At March 31, 2002
stockholders' equity included $583 thousand of accumulated other comprehensive
income, related to unrealized gains on securities available-for-sale, net of
the tax effect.
Cash dividends of $0.22 per common share were paid each quarter ended March 31,
2003 and 2002.
The adequacy of the Company's capital is reviewed regularly to ensure
sufficient capital is available for current and future needs and is in
compliance with regulatory guidelines. As of March 31, 2003 the Company's
capital ratios were well in excess of regulatory minimums.
The following are the Company's risk based capital ratios for the previous five
quarters:
Table 8: Capital Ratios
Tier 1 Capital Total Capital
March 31, 2003 11.9% 13.0%
December 31, 2002 11.6% 12.7%
September 30, 2002 11.7% 12.8%
June 30, 2002 11.6% 12.7%
March 31, 2002 11.8% 12.9%
Regulatory minimum requirements 4.0% 8.0%
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
There was no material change in the information provided in response to Item 7A
of the Company's Form 10-K for the year ended December 31, 2002.
ITEM 4. CONTROLS AND PROCEDURES
During the 90-day period prior to the filing date of this Form 10-Q,
management, under the supervision, and with the participation, of the Company's
President and Chief Executive Officer and the Chief Accounting 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 Accounting 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 II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits required by Item 601 of Regulation S-K
The following exhibits have been filed with the Securities and Exchange
Commission.
99.1 Certification under Section 906 of Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K.
Form 8-K dated April 24, 2003. The Company filed a Form 8-K on April 24, 2003
reporting earning information for the quarter ended March 31, 2003 under Item 5
and additional disclosures under Items 9, Regulation FD Disclosure, and 12,
Results of Operations and Financial Condition.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MID-WISCONSIN FINANCIAL SERVICES, INC.
Date: MAY 13, 2003 GENE C. KNOLL
Gene C. Knoll, President
(Principal Executive Officer)
Date: MAY 13, 2003 RHONDA R. KELLEY
Rhonda R. Kelley, Controller
(Principal Accounting Officer)
CERTIFICATIONS
I, Gene C. Knoll, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Mid-Wisconsin
Financial Services, Inc. (the "registrant");
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly 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
quarterly 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 quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly 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 quarterly 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: May 13, 2003 GENE C.KNOLL
Gene C. Knoll
President and Chief Executive Officer
CERTIFICATIONS
I, Rhonda R. Kelley, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Mid-Wisconsin
Financial Services, Inc. (the "registrant");
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly 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
quarterly 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 quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly 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 quarterly 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: May 13, 2003
RHONDA R. KELLEY
Rhonda R. Kelley
Controller
(Principal Accounting Officer)
EXHIBIT INDEX
to
FORM 10-Q
of
MID-WISCONSIN FINANCIAL SERVICES, INC.
for the quarterly period ended March 31, 2003
Pursuant to Section 102 (d) of Regulation S-T
(17 C.F.R. Section 232.102 (d))
The following exhibits are filed as part of this report:
99.1 Certification under Section 906 of Sarbanes-Oxley Act of 2002.