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 JUNE 30, 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 August 5, 2003, there were 1,684,598 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
June 30, 2003 and December 31, 2002 3
Consolidated Statements of Income
Three Months Ended June 30, 2003 and 2002
And Six Months Ended June 30, 2003 and 2002 4
Consolidated Statements of Changes in
Stockholders' Equity
Six Months Ended June 30, 2003 5
Consolidated Statements of Cash Flows
Six Months Ended June 30, 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 9-20
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 20
Item 4. Controls and Procedures 20
PART II. OTHER INFORMATION
Item 5. Submission of Matters to Vote of Securities
Holders 20-21
Item 6. Exhibits and Reports of Form 8-K 21
Signatures 22
Exhibit Index 23
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
Mid-Wisconsin Financial Services, Inc.
and Subsidiary
Consolidated Balance Sheet
June 30, 2003 December 31, 2002
(Unaudited) (Audited)
ASSETS
Cash and due from banks $12,843,683 $15,484,360
Interest-bearing deposits in other financial institutions 17,402 19,408
Federal funds sold 2,131,332 11,825,781
Securities available for sale -At fair value 75,031,824 76,321,696
Federal Home Loan Bank stock (at cost) 2,083,600 2,000,000
Loans held for sale 936,080 791,420
Loans receivable, net of allowance for loan losses of
$2,791,317 in 2003 and $2,701,709 in 2002 264,326,593 252,236,394
Accrued interest receivable 1,714,042 1,716,413
Premises and equipment 5,602,904 5,487,421
Intangible assets 718,715 873,887
Goodwill 295,316 295,316
Other assets 3,955,602 987,427
TOTAL ASSETS $369,657,093 $368,039,523
LIABILITIES AND STOCKHOLDERS' EQUITY
Noninterest-bearing deposits $38,624,193 $38,108,392
Interest-bearing deposits 244,839,162 236,383,561
Total deposits 283,463,355 274,491,953
Short-term borrowings 11,439,710 18,039,517
Long-term borrowings 39,000,000 40,000,000
Accrued interest payable 1,259,873 1,294,227
Accrued expenses and other liabilities 1,593,584 2,028,019
Total liabilities 336,756,522 335,853,716
Stockholders' equity:
Common stock-Par value $.10 per share:
Authorized - 6,000,000 shares
Issued & outstanding - 1,684,598 shares in 2003
and 1,684,475 shares in 2002 168,460 168,448
Additional paid-in capital 10,950,546 10,941,600
Retained earnings 20,363,620 19,812,670
Accumulated other comprehensive income 1,417,945 1,263,089
Total stockholders' equity 32,900,571 32,185,807
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $369,657,093 $368,039,523
The accompanying notes to the 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
Three months ended Six Months Ended
June 30, 2003 June 30, 2002 June 30, 2003 June 30, 2002
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Interest income:
Interest and fees on loans $4,169,260 $4,267,179 $8,258,404 $8,506,161
Interest and dividends on securities:
Taxable 563,790 832,660 1,253,613 1,689,017
Tax-exempt 257,640 275,774 522,290 544,175
Other interest and dividend income 32,440 4,587 81,478 29,444
Total interest income 5,023,130 5,380,200 10,115,785 10,768,797
Interest expense:
Deposits 1,284,768 1,382,187 2,587,277 2,904,391
Short-term borrowings 35,044 141,898 81,764 226,901
Long-term borrowings 436,029 371,963 884,779 739,838
Total interest expense 1,755,841 1,896,048 3,553,820 3,871,130
Net interest income 3,267,289 3,484,152 6,561,965 6,897,667
Provision for loan losses 158,334 175,000 316,667 355,000
Net interest income after provision
for loan losses 3,108,955 3,309,152 6,245,298 6,542,667
Noninterest income:
Service fees 217,364 217,521 414,630 416,874
Trust service fees 175,000 184,000 357,823 368,000
Net realized gain on sale of securities available for sale 0 17,349 - 17,349
Investment product commissions 111,000 119,711 175,261 174,363
Other operating income 253,110 162,798 472,622 339,431
Total noninterest income 756,474 701,379 1,420,336 1,316,017
Noninterest expenses:
Salaries and employee benefits 1,390,332 1,375,407 2,797,252 2,671,849
Occupancy 311,572 271,849 623,366 544,176
Data processing and information systems 105,583 101,397 214,337 211,823
Purchase core deposit amortization 77,586 72,511 155,172 145,021
Other operating 604,433 594,726 1,175,804 1,151,417
Total noninterest expenses 2,489,506 2,415,890 4,965,931 4,724,286
Income before income taxes 1,375,923 1,594,641 2,699,703 3,134,398
Provision for income taxes 375,779 456,202 733,717 895,469
Net income $1,000,144 $1,138,439 $1,965,986 $2,238,929
Basic and diluted earnings per share $0.59 $0.67 $1.17 $1.32
Cash dividends declared per share $0.62 $0.62 $0.84 $0.84
The accompanying notes to the consolidated financial statements are an integral part of these statements.
ITEM 1. FINANCIAL STATEMENTS CONTINUED:
Mid-Wisconsin Financial Services, Inc.
and Subsidiary
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 1,965,986 1,965,986
Other comprehensive income 154,856 154,856
Total comprehensive income 2,120,842
Proceeds from stock benefit plans 12 3,186 3,198
Stock-based compensation 5,760 5,760
Cash dividends paid, $0.84 per share (1,415,036) (1,415,036)
Balance June 30, 2003 $168,460 $10,950,546 $20,363,620 $1,417,945 $32,900,571
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
Six Months Ended June 30, 2003 and 2002
(Unaudited)
2003 2002
Increase (decrease) in cash and due from banks:
Cash flows from operating activities:
Net income $1,965,986 $2,238,929
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for depreciation and net amortization 535,936 462,831
Provision for loan losses 316,667 355,000
Proceeds from sales of loans held for sale 11,142,037 3,435,301
Gain on sale of loans held for sale (177,669) (47,861)
Originations of loans held for sale (11,109,028) (3,252,690)
Gain on sale of investment securities - (17,349)
Loss on premises and equipment disposals 858 -
FHLB stock dividends (83,600) (39,700)
Stock-based compensation 5,760
Changes in operating assets and liabilities:
Other assets (2,722,089) 147,193
Other liabilities (468,788) (167,711)
Net cash provided by (used in) operating activities (593,930) 3,113,943
ITEM 1. FINANCIAL STATEMENTS CONTINUED:
Mid-Wisconsin Financial Services, Inc.
and Subsidiary
Consolidated Statements of Cash Flows
Six Months Ended June 30, 2003 and 2002
(Unaudited)
2003 2002
Cash flows from investing activities:
Net decrease in interest-bearing deposits
in other financial institutions 2,006 8,025
Net (increase) decrease in federal funds sold 9,694,449 (3,094,378)
Securities available for sale:
Proceeds from sales - 497,920
Proceeds from maturities 22,197,857 17,232,787
Payment for purchases (20,736,884) (10,063,622)
Payment for purchase of FHLB stock - (200,300)
Net increase in loans (13,024,259) (13,896,093)
Capital expenditures (430,679) (190,180)
Proceeds from sale of other real estate 291,006 -
Net cash used in investing activities (2,006,504) (9,705,841)
Cash flows from financing activities:
Net increase (decrease) in deposits 8,971,402 (8,598,636)
Net increase (decrease) in short-term borrowings (6,599,807) 15,547,274
Proceeds from issuance of long-term borrowings 2,000,000
Principal payments on long-term borrowings (3,000,000) -
Proceeds from stock benefit plans 3,198 17,226
Cash dividends paid (1,415,036) (1,425,456)
Net cash provided by (used in) financing activities (40,243) 5,540,408
Net decrease in cash and due from banks (2,640,677) (1,051,490)
Cash and due from banks at beginning 15,484,360 15,052,383
Cash and due from banks at end $12,843,683 $14,000,893
Supplemental cash flow information:
Cash paid during the year for:
Interest $3,593,343 $4,234,880
Income taxes $697,066 $1,038,701
Noncash investing and financing activities:
Loans transferred to other real estate $615,359 $-
Loans charged off $241,606 $259,481
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 June 30, Six Months Ended June 30,
2003 2002 2003 2002
(In thousands, except per share data)
Net income available to common stockholders $1,000 $1,138 $1,966 $2,239
Weighted average shares outstanding 1,684 1,697 1,684 1,697
Effect of dilutive stock options outstanding 1 0 1 0
Diluted weighted average shares outstanding 1,685 1,697 1,685 1,697
Basic earnings per common share $0.59 $0.67 $1.17 $1.32
Diluted earnings per common share $0.59 $0.67 $1.17 $1.32
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 June 30, Six Months Ended June 30,
2003 2002 2003 2002
(In thousands, except per share data)
Net income, as reported $1,000 $1,138 $1,966 $2,239
Add: Stock-based employee
compensation expense included in
reported net income, net of related
tax effects 3 - 6 -
Deduct: Total stock-based
employee compensation expense
determined under the fair value
based method for all awards, net
of related tax effects (6) (5) (6) (5)
Pro forma net income $997 $1,133 $1,966 $2,234
Earnings per share - Basic and diluted:
As reported $0.59 $0.67 $1.17 $1.32
Proforma $0.59 $0.67 $1.17 $1.32
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" (FIN 46). The objective of this interpretation is
to provide guidance on how to identify a variable interest entity and determine
when the assets, liabilities, noncontrolling interests, and results of
operations of a variable interest entity need to be included in a company's
consolidated financial statements. A company that holds variable interests in
any entity will need to consolidate the entity if the company's interest in the
variable interest entity is such that the company will absorb a majority of the
variable interest entity's losses and/or receive a majority of the entity's
expected residual returns, if they occur. FIN 46 also requires additional
disclosures by primary beneficiaries and other significant variable interest
holders. The provisions of this interpretation are effective upon issuance.
The requirements of FIN 46 did not have a material impact on the results of
operations, financial position, or liquidity.
In May 2003, FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity." SFAS No. 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its
scope as a liability (or an asset in some circumstances). Many of those
instruments were previously classified as equity. SFAS No. 150 is effective
for financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period beginning
after June 15, 2003. The adoption of SFAS No. 150 will not have a material
impact on the results of operations, financial position, or liquidity.
NOTE 4 - LONG -TERM DEBT
Long-term debt at June 30 is as follows:
June December
2003 2002
Federal Home Loan Bank advances:
2.91% to 6.28%, fixed rate,
maturing in 2003 through 2008 $39,000,000 40,000,000
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.
CRITICAL ACCOUNTING POLICIES
In preparing the consolidated financial statements, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the balance sheet and revenues and expenses for
the period. Actual results could differ significantly from those estimates.
Estimates that are particularly susceptible to significant change include the
determination of the allowance for loan losses.
The consolidated financial statements of the Company are prepared in conformity
with accounting principles generally accepted in the United States of America
and follow general practices within the industries in which its operates. This
preparation requires management to make estimates, assumptions, and judgments
that affect the amounts reported in the financial statements and accompanying
notes. These estimates, assumptions, and judgments are based on information
available as of the date of the financial statements; accordingly, as this
information changes, actual results could differ from the estimates,
assumptions, and judgments reflected in the financial statements. Certain
policies inherently have a greater reliance on the use of estimates,
assumptions, and judgments and, as such, have a greater possibility of
producing results that could be materially different than originally reported.
Management believes the following policies are both important to the portrayal
of the Company's financial condition and results and require subjective or
complex judgments and, therefore, management considers the following to be
critical accounting policies.
Allowance for Loan Losses: Subject to the use of estimates, assumptions, and
judgments is management's evaluation process used to determine the adequacy of
the allowance for loan losses which combines several factors: management's
ongoing review and grading of the loan portfolio, consideration of past loan
loss experience, trends in past due and nonperforming loans, risk
characteristics of the various classifications of loans, existing economic
conditions, the fair value of underlying collateral, and other qualitative and
quantitative factors which could affect probable credit losses. Because
current economic conditions can change and future events are inherently
difficult to predict, the anticipated amount of estimated loan losses, and
therefore the adequacy of the allowance, could change significantly. As an
integral part of their examination process, various regulatory agencies also
review the allowance for loan losses. Such agencies may require that certain
loan balances be charged off when their credit evaluations differ from those of
management, based on their judgments about information available to them at the
time of their examination. The Company believes the allowance for loan losses
is adequate and properly recorded in the financial statements. See additional
discussion under section "Allowance for Loan Losses."
RESULTS OF OPERATIONS
Net income for the quarter ended June 30, 2003 totaled $1.0 million or $0.59
for basic and diluted earnings per share. Comparatively, net income for the
quarter ended June 30, 2002 was $1.1 million or $0.67 for basic and diluted
earnings per share. Operating results for the second quarter 2003 generated an
annualized return on average assets of 1.10% and an annualized return on
average equity of 12.26%, compared to 1.33% and 14.92% for the comparable
quarter in 2002. The net interest margin for the second quarter 2003 was 4.00%
compared to 4.52% 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)
June 30, March 31, December 31, September 30, June 30,
2003 2003 2002 2002 2002
EARNINGS AND DIVIDENDS
Interest income $5,023 $5,092 $5,303 $5,314 $5,380
Interest expense 1,756 1,798 1,835 1,876 1,896
Net interest income 3,267 3,294 3,468 3,438 3,484
Provision for loan losses 158 158 120 150 175
Net interest income after
provision for loan losses 3,109 3,136 3,348 3,288 3,309
Noninterest income 756 664 718 643 701
Noninterest expense 2,489 2,476 2,394 2,470 2,416
Income before provision for income taxes 1,376 1,324 1,672 1,461 1,594
Provision for income taxes 376 358 483 405 456
Net income $1,000 $966 $1,189 $1,056 $1,138
Return on average assets 1.10% 1.06% 1.38% 1.22% 1.33%
Return on average equity 12.26% 12.01% 15.45% 13.54% 14.92%
Tangible equity to assets 8.72% 8.57% 8.61% 8.69% 8.58%
Net interest margin 4.00% 4.02% 4.33% 4.42% 4.52%
AVERAGE BALANCE SHEET
Loans net of unearned income $263,189 $253,853 $243,596 $246,546 $241,320
Assets 363,264 363,448 344,815 345,697 341,219
Deposits 277,052 273,805 257,355 258,233 248,236
Stockholders' equity 32,631 32,163 30,790 31,195 30,511
ENDING BALANCE SHEET
Loans net of unearned income $267,118 $255,890 $254,938 $249,347 $245,310
Assets 369,657 361,784 368,040 347,501 348,794
Deposits 283,463 273,803 274,492 266,831 249,803
Stockholders' equity 32,901 32,696 32,186 31,522 31,076
FINANCIAL CONDITION ANALYSIS
Total risk-based capital 12.45% 12.97% 12.69% 12.84% 12.72%
Net charge-offs to average loans 0.07% 0.02% 0.09% 0.12% 0.10%
Nonperforming assets to loans 1.00% 0.89% 0.82% 1.52% 0.69%
Efficiency ratio 59.47% 59.69% 55.31% 58.30% 55.63%
STOCKHOLDERS' DATA
Basic and diluted earnings per share $0.59 $0.57 $0.71 $0.62 $0.67
Dividends per share $0.62 $0.22 $0.22 $0.22 $0.62
Book value per share $19.53 $19.41 $19.11 $18.73 $18.31
Dividend payout ratio 104.4% 38.4% 31.2% 35.4% 92.4%
Average common shares outstanding 1,685 1,685 1,683 1,693 1,697
STOCK PRICE INFORMATION
High $28.00 $28.00 $27.25 $28.33 $27.60
Low 28.00 27.25 27.20 27.10 26.30
Market price at quarter end (1) 28.00 28.00 27.25 27.20 27.50
(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 decreased $212,000 from
$3.6 million for the quarter ended June 30, 2002 to $3.4 million at June 30,
2003. Contributing factors to the declining net interest income between the
comparable quarters were the compression of the net interest margin due to the
low interest rate environment and the asset sensitive position of the Company's
balance sheet. Earning assets continue to reprice at lower interest rates
without a corresponding decrease in interest bearing liability rates. The
average yield on earning assets at June 30, 2003 decreased 81 basis points to
6.06% between comparable quarters while the rate paid on interest bearing
liabilities only decreased 36 basis points to 2.41% at June 30, 2003.
For the quarter ended June 30, 2003, average earning assets increased $20.1
million, or 6.3%, when compared to the same quarter last year. Average loans
increased $21.9 million, or 9.1% while investments decreased $1.7 million, or
2.1%, compared to the quarter ended June 30, 2002. The Company has
intentionally decreased its investment in securities between comparable
quarters as loans have typically yielded a higher rate of return in the current
interest rate environment.
For the quarter ended June 30, 2003 the net interest margin decreased 52 basis
points to 4.00% compared to the same quarter last year. The average yield on
earning assets was 6.06 % at June 30, 2003 compared to 6.87% for the same
period last year. Loan yields decreased 72 basis points to 6.38% while
investments decreased 122 basis points to 4.97% between comparable quarters a
year ago. Average interest bearing deposit costs decreased 44 basis points to
2.13% while short-term borrowings decreased 74 basis points to 1.22% and long-
term debt decreased 47 basis points to 4.49% as compared to the same period a
year ago.
Table 2: Net Interest Income Analysis - Taxable Equivalent Basis
(dollars in thousands)
Three months ended June 30, 2003 Three months ended June 30, 2002
Average Interest Average Average Interest Average
Balance Income/Expense Yield/Rate Balance Income/Expense Yield/Rate
Assets
Loans (1) (2) $263,189 $4,198 6.38% $241,320 $4,282 7.10%
Investments and other 79,335 987 4.97% 81,053 1,255 6.19%
Total earning assets $342,524 $5,185 6.06% $322,373 $5,537 6.87%
Other assets, net 20,740 18,846
Total assets $363,264 $341,219
Liabilities & Equity
Interest-bearing deposits $240,885 $1,285 2.13% $215,194 $1,382 2.57%
Short-term borrowings 11,504 35 1.22% 28,981 142 1.96%
Long-term debt 38,813 436 4.49% 30,000 372 4.96%
Total interest-bearing liabilities $291,202 $1,756 2.41% $274,175 $1,896 2.77%
Demand deposits 36,167 33,042
Other liabilities 3,264 3,491
Stockholders' equity 32,631 30,511
Total liabilities and equity $363,264 $341,219
Interest rate spread (2) 3.65% 4.10%
Net interest income and net interest
margin (2) $3,429 4.00% $3,641 4.52%
(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%.
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 $158,000 for the quarter ended June 30, 2003,
and $175,000 for the comparable quarter in 2002. Net-charge offs to average
loans were 0.09% and 0.10% for the quarters ended June 30, 2003 and 2002. See
additional discussion under section "Allowance for Loan Losses."
NONINTEREST INCOME
Table 3: Noninterest Income
(dollars in thousands)
Three months ended Six months ended
June 30, June 30, Percent June 30, June 30, Percent
2003 2002 Change 2003 2002 Change
Service fees $217 $218 -0.5% $415 $417 -0.5%
Trust service fees 175 184 -4.9% 358 368 -2.7%
Net realized gain on sale of
securities available for sale - 17 - 17
Investment product commissions 111 120 -7.5% 175 174 0.6%
Other operating income 253 163 55.2% 472 340 38.8%
Total noninterest income $756 $702 7.7% $1,420 $1,316 7.9%
Trust service fees decreased $9,000, or 4.9%, in the second quarter of 2003
compared to the same quarter in 2002, primarily as a result of lower market
values on trust accounts for which fees are assessed.
Other operating income for the second quarter of 2003 increased $90,000, or
55.2%, to $253,000 over 2002 results. The Company sells long-term fixed rate
mortgage loans to the secondary market. Gain on sale of such loans was $90,000
for the quarter ended June 30, 2003 compared to $20,000 at June 30, 2002. The
long-term interest rates continued to stimulate mortgage production and
customer loan refinancing during the second quarter although this trend is
expected to decline in the near future. Income from bank owned life insurance
(BOLI) was $19,000 for the quarter ended June 30, 2003. The Company purchased
$3.0 million dollars of BOLI during the second quarter 2003.
For the quarter ended June 30, 2003 there was no realized gain from the sale of
securities available for sale.
For the first six months of 2003, noninterest income increased $104,000, or
7.9%, to $1.4 million from $1.3 million for the same period a year ago.
Trust service fees decreased $10,000, or 2.7%, to $358,000 for the first six
months of 2003 compared to $368,000 for the same period in 2002 as a result of
lower market values on trust accounts for which fees are assessed.
Other operating income increased $132,000, or 38.8%, to $472,000 for the first
six months of 2003. Gains on sales of loans in the secondary market increased
$130,000 to $178,000 for the six months ended June 30, 2003, when compared to
the same period in 2002, primarily as a result of increased sales of mortgage
loans. Sales of loans for the six months ended June 30, 2003 increased to
$11.0 million, compared to $3.4 million for the same period a year earlier.
Income from BOLI was $19,000 for the six months ended June 30, 2003. The
Company purchased $3.0 million dollars of BOLI during the second quarter of
2003.
NONINTEREST EXPENSE
Table 4: Noninterest Expense
(dollars in thousands)
Three months ended Six months ended
June 30, June 30, Percent June 30, June 30, Percent
2003 2002 Change 2003 2002 Change
Salaries and employee benefits $1,390 $1,375 1.1% $2,797 $2,672 4.7%
Occupancy 312 272 14.7% 623 544 14.5%
Data processing and information systems 106 101 5.0% 215 212 1.4%
Amortization of intangibles 78 73 6.8% 155 145 6.9%
Other operating expenses 604 595 1.5% 1,176 1,151 2.2%
Total noninterest expenses $2,490 $2,416 3.1% $4,966 $4,724 5.1%
Salaries and employee benefits increased $15,000, or 1.1%, for the quarter
ended June 30, 2003 compared to the same quarter in 2002. The Company
experienced 18% growth in salaries and health insurance during the second
quarter 2003. This increase was offset by cost savings from a change in
pension plan administrators during the fourth quarter 2002 and decrease in
incentive bonus accruals during the second quarter 2003. The number of full
time equivalent employees increased to 135 at June 30, 2003 from 132 a year
earlier. The increase in occupancy expenses, and data processing and
information systems were influenced by the opening of an additional bank branch
during the first quarter 2003 and increased customer volume. Amortization of
intangibles increased due to the systematic amortization method used. Other
operating expenses increased during the second quarter 2003 due to additional
advertising campaigns in the new market area.
Noninterest expense increased $242,000, or 5.1%, for the six months ended June
30, 2003 compared to the same period in 2002. Salaries and employee benefits
increased $125,000, or 4.7%, for the period as a result of additional staffing
to operate the new branch and increasing health care costs offset by a decrease
in pension plan administrator expenses and incentive bonus accruals. Occupancy
(increased $79,000, or 14.5%) and data processing and information systems
expenses (increased $3,000 or 1.4%) increased due to expansion in the Wausau
market. Amortization of intangibles increased $10,000, or 6.9%, when compared
to the same period in 2002 due to the systematic amortization method used.
Other operating expenses increased $25,000, or 2.2%, for the period ended June
30, 2003 when compared to the same period in 2002.
BALANCE SHEET
At June 30, 2003, total assets were $369.7 million, an increase of $20.9
million over June 30, 2002, while assets increased $1.7 million from December
31, 2002. Gross loans were $268.1 million at June 30, 2003, increasing $22.5
million over second quarter 2002 and increasing $12.4 million over year-end
2002. Investment securities were $75.0 million at June 30, 2003, decreasing
$2.0 million from June 30, 2002 and $1.3 million from December 31, 2002.
Deposits increased $33.7 million from June 30, 2002 and increased $9.0 million
from December 31, 2002 to $283.5 million at June 30, 2003.
Table 5: Period End Loan Composition
(dollars in thousands)
June 30, % of June 30, % of December 31, % of
2003 total 2002 total 2002 total
Commercial real estate $95,029 35.5% $85,034 34.6% $85,605 33.5%
Real estate construction 9,071 3.4% 6,216 2.5% 8,489 3.3%
Commercial and financial 40,857 15.3% 38,787 15.8% 40,134 15.7%
Agricultural 34,395 12.8% 31,712 12.9% 33,575 13.1%
Lease financing 0 0.0% 6 0.0% 0 0.0%
Commercial 179,352 67.0% 161,755 65.9% 167,803 65.5%
Residential real estate 79,399 29.6% 73,843 30.1% 77,926 30.5%
Installment 9,303 3.4% 10,029 4.1% 10,001 4.0%
Total loans (including loans held for sale) $268,054 100.0% $245,627 100.0% $255,730 100.0%
Growth in the Company's loan portfolio since December 31, 2002, was primarily
due to an increase in commercial real estate loans from $85.6 million at
December 31, 2002 to $95.0 million at June 30, 2003. Commercial real estate
loans grew as a result of branch expansion into a new market during the first
quarter 2003 and participation 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 quarterly review and
grading of the loan portfolio, past loan loss experience, trends in past due
and nonperforming loans, current economic conditions, and the fair value of
underlying collateral. The Company also has an internal risk analysis staff
that 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.
Based on management's analysis of the loan portfolio a provision of $317,000
was recorded for the six months ended June 30, 2003, a decrease of $38,000, or
10.7%, compared to a year ago. Net loan charge offs were $228,000 for the
second quarter of 2003, compared to $235,000 to the same period 2002. Net
charge offs to average loans were 0.09% at June 30, 2003 compared to 0.10% at
June 30, 2002.
Table 6: Allowance for Loan Losses and Nonperforming Assets
(dollars in thousands)
At and for the At and for the
Six months ended Year ended
June 30, December 31,
2003 2002 2002
Allowance for loan losses at beginning of year $2,702 $2,597 $2,597
Loan charged off (242) (259) (560)
Recoveries 14 24 40
Provision for loan losses 317 355 625
Allowance for loan losses at end of period $2,791 $2,717 $2,702
Nonperforming assets
Nonaccrual loans $1,455 $312 $417
Impaired loans $845 $999 $1,667
Accruing loans past due 90 days or more 37 37 62
Restructured loans 13 260 14
Total nonperforming loans 2,350 1,608 2,160
Other real estate owned 324 90 0
Total nonperforming assets $2,674 $1,698 $2,160
Ratios
Allowance for loan losses to total loans at end of period 1.04% 1.11% 1.06%
Net charge offs during the period to average loans outstanding 0.09% 0.10% 0.21%
In the opinion of management, the allowance for loan losses is adequate at June
30, 2003 to absorb loan losses inherent in the loan portfolio. 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.
Nonperforming assets were $2.7 million at June 30, 2003 compared to $2.2
million at December 31, 2002. Other real estate owned was $324,000 at the
quarter ended June 30, 2003 and consisted of agricultural and residential
properties. Non-accrual loans were $1.5 million of total nonperforming loans
at June 30, 2003. Impaired loans consisting of four commercial properties and
one agricultural loan accounted for $845,000 of nonperforming loans at June 30,
2003 and $1.7 million at December 31, 2002. Since year-end the Company has
received loan pay-offs, and taken additional loan charge-offs on the impaired
loan balance. No new loans have been classified as impaired since year-end.
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 81.7% at June 30, 2003
and 76.0% at June 30, 2002.
Table 8: Period End Deposit Composition
(dollars in thousands)
June 30, % of June 30, % of December 31, % of
2003 total 2002 total 2002 total
Demand $38,624 13.6% $35,424 14.2% $38,108 13.9%
NOW 30,115 10.6% 21,750 8.7% 29,106 10.6%
Money market 46,584 16.4% 44,719 17.9% 45,932 16.7%
Savings 22,370 7.9% 21,048 8.4% 20,990 7.6%
Brokered CDs 500 0.2% 500 0.2% 500 0.2%
Other time 145,270 51.3% 126,362 50.6% 139,856 51.0%
Total $283,463 100.0% $249,803 100.0% $274,492 100.0%
Total deposits at June 30, 2003 increased $9.0 million, or 3.3%, to $283.5
million from December 31, 2002. The Company opened a new bank branch during
the first quarter 2003 and has been experiencing deposit growth from this
market. The Company will continue to generate additional core deposits through
competitive pricing and expanding partnerships with customers in all markets by
providing quality service.
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. Total
wholesale funding decreased $7.6 million to $60.9 million at June 30, 2003
compared to $68.5 million at December 31, 2002.
CAPITAL
Stockholders' equity at June 30, 2003 increased $715,000 to $32.9 million from
$32.2 million at December 31, 2002. The change in equity between the two
periods was primarily composed of the retention of earnings with offsetting
decreases to equity from the payment of dividends. Stockholders' equity at
June 30, 2003, included $1.4 million of accumulated other comprehensive income,
related to unrealized gains on securities available-for-sale, net of the tax
effect. At December 31, 2002 stockholders' equity included $1.3 million of
accumulated other comprehensive income, related to unrealized gains on
securities available-for-sale, net of the tax effect.
Cash dividends of $0.62 per common share were paid quarters ended June 30, 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 June 30, 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
June 30, 2003 11.4% 12.5%
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%
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
As of the end of the period covered by this report, 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-15 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 5. SUBMISSION OF MATTERS TO VOTE OF SECURITIES HOLDERS
The annual meeting of shareholders of the Company was held on April 22, 2003.
The matters voted upon, including the number of votes cast for, against or
withheld, as well as the number of abstentions and broker non-votes, as to each
such matter were as follows:
MATTER SHARES
Broker
For Against Withheld Abstain Non-Vote
Election of Directors
1 Kathryn M. Hemer 1,163.544 N/A 20,274 N/A 0
Gene C. Knoll 1,163.476 N/A 20,342 N/A 0
Kurt D. Mertens 1,163,624 N/A 20,194 N/A 0
Approval of the appointment of
2 independent auditors for the
year ending December 31,
2003 1,155,273 2,100 5,887 0
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:
(a) Exhibits.
Exhibits required by Item 601 of Regulation S-K.
Exhibit
Number Description
31.1 Certification of CEO pursuant to Section 302 of Sarbanes-Oxley Act of
2002
31.2 Certification of CFO pursuant to Section 302 of Sarbanes-Oxley Act of
2002
32.1 Certification of CEO and CFO pursuant to Section 906 of Sarbanes-Oxley
Act of 2002
(b) Reports on Form 8-K:
Form 8-K dated May 24, 2003. The Company filed a Form 8-K on May 24, 2003,
reporting earning information for the quarter ended June 30, 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: AUGUST 13, 2003 GENE C. KNOLL
Gene C. Knoll, President
and Chief Executive Officer
(Principal Executive Officer)
Date: AUGUST 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 June 30, 2003
Pursuant to Section 102(d) of Regulation S-T
(17 C.F.R.232.102(d))
The following exhibits are filed as part this report:
31.1 Certification of CEO pursuant to Section 302 of Sarbanes-Oxley Act of
2002
31.2 Certification of CFO pursuant to Section 302 of Sarbanes-Oxley Act of
2002
32.1 Certification of CEO and CFO pursuant to Section 906 of Sarbanes-Oxley
Act of 2002