FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
{X} QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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 November 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
September 30, 2003 and December 31, 2002 3
Consolidated Statements of Income
Three Months Ended September 30, 2003 and 2002
And Nine Months Ended September 30, 2003 and 2002 4
Consolidated Statements of Changes in
Stockholders' Equity
Nine Months Ended September 30, 2003 5
Consolidated Statements of Cash Flows
Nine Months Ended September 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 9-19
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 19
Item 4. Controls and Procedure 20
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports of Form 8-K 20
Signatures 21
Exhibit Index 22
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
Mid-Wisconsin Financial Services, Inc.
and Subsidiary
Consolidated Balance Sheet
September 30, 2003 December 31, 2002
(Unaudited) (Audited)
ASSETS
Cash and due from banks $11,011,462 $15,484,360
Interest-bearing deposits in other financial institutions 16,157 19,408
Federal funds sold 5,776,328 11,825,781
Securities available for sale -At fair value 76,254,257 76,321,696
Federal Home Loan Bank stock (at cost) 2,117,100 2,000,000
Loans held for sale 1,155,365 791,420
Loans receivable, net of allowance for loan losses of
$2,770,462 in 2003 and $2,701,709 in 2002 259,584,356 252,236,394
Accrued interest receivable 1,638,346 1,716,413
Premises and equipment 5,668,104 5,487,421
Intangible assets 641,129 873,887
Goodwill 295,316 295,316
Other assets 4,947,448 987,427
TOTAL ASSETS $369,105,368 $368,039,523
LIABILITIES AND STOCKHOLDERS' EQUITY
Noninterest-bearing deposits $40,931,790 $38,108,392
Interest-bearing deposits 243,858,516 236,383,561
Total deposits 284,790,306 274,491,953
Short-term borrowings 13,296,762 18,039,517
Long-term borrowings 35,000,000 40,000,000
Accrued interest payable 1,153,837 1,294,227
Accrued expenses and other liabilities 1,708,232 2,028,019
Total liabilities 335,949,137 335,853,716
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 21,093,795 19,812,670
Accumulated other comprehensive income 943,430 1,263,089
Total stockholders' equity 33,156,231 32,185,807
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $369,105,368 $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
Three months ended Nine Months Ended
September 30, 2003 September 30, 2002 September 30, 2003 September 30, 2002
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Interest income:
Interest and fees on loans $4,179,868 $4,271,357 $12,438,272 $12,777,518
Interest and dividends on securities:
Taxable 455,243 757,131 1,708,856 2,446,148
Tax-exempt 257,525 272,840 779,815 817,015
Other interest and dividend income 37,236 13,133 118,714 42,577
Total interest income 4,929,872 5,314,461 15,045,657 16,083,258
Interest expense:
Deposits 1,265,363 1,398,972 3,852,640 4,303,363
Short-term borrowings 32,642 101,177 114,406 328,078
Long-term borrowings 407,044 376,050 1,291,823 1,115,888
Total interest expense 1,705,049 1,876,199 5,258,869 5,747,329
Net interest income 3,224,823 3,438,262 9,786,788 10,335,929
Provision for loan losses 80,000 150,000 396,667 505,000
Net interest income after provision
for loan losses 3,144,823 3,288,262 9,390,121 9,830,929
Noninterest income:
Service fees 208,462 221,917 623,092 638,791
Trust service fees 182,916 173,533 540,739 518,712
Net realized gain on sale of securities available
for sale 0 0 - 17,349
Investment product commissions 161,556 86,529 336,817 260,892
Other operating income 334,748 160,524 807,370 499,955
Total noninterest income 887,682 642,503 2,308,018 1,935,699
Noninterest expenses:
Salaries and employee benefits 1,402,074 1,447,463 4,199,326 4,096,491
Occupancy 310,071 274,022 933,437 818,198
Data processing and information systems 104,151 103,136 318,488 314,959
Purchase core deposit amortization 77,586 72,510 232,758 217,531
Other operating 599,385 572,803 1,775,189 1,724,219
Total noninterest expenses 2,493,267 2,469,934 7,459,198 7,171,398
Income before income taxes 1,539,238 1,460,831 4,238,941 4,595,230
Provision for income taxes 438,451 405,212 1,172,168 1,300,681
Net income $1,100,787 $1,055,619 $3,066,773 $3,294,549
Basic and diluted earnings per share $0.65 $0.62 $1.82 $1.94
Cash dividends declared per share $0.22 $0.22 $1.06 $1.06
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 3,066,773 3,066,773
Other comprehensive income (319,659) (319,659)
Total comprehensive income 2,747,114
Proceeds from stock benefit plans 12 3,186 3,198
Stock-based compensation 5,760 5,760
Cash dividends paid, $1.06 per share (1,785,648) (1,785,648)
Balance September 30, 2003 $168,460 $10,950,546 $21,093,795 $943,430 $33,156,231
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
Nine Months Ended September 30, 2003 and 2002
(Unaudited)
2003 2002
Increase (decrease) in cash and due from banks:
Cash flows from operating activities:
Net income $3,066,773 $3,294,549
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for depreciation and net amortization 798,267 694,959
Provision for loan losses 396,667 505,000
Proceeds from sales of loans held for sale 21,722,786 4,486,878
Gain on sale of loans held for sale (335,068) (65,738)
Originations of loans held for sale (21,751,753) (4,372,990)
Gain on sale of investment securities - (17,349)
(Gain) loss on premises and equipment disposals (542) 7,170
Loss on foreclosed real estate 2,000 -
FHLB stock dividends (117,100) (60,100)
Stock-based compensation 5,760 -
Changes in operating assets and liabilities:
Other assets (2,966,599) 62,527
Other liabilities (460,177) (29,608)
Net cash provided by operating activities 361,014 4,505,298
ITEM 1. FINANCIAL STATEMENTS CONTINUED:
Mid-Wisconsin Financial Services, Inc.
and Subsidiary
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2003 and 2002
(Unaudited)
2003 2002
Cash flows from investing activities:
Net decrease in interest-bearing deposits
in other financial institutions 3,251 8,579
Net (increase) decrease in federal funds sold 6,049,453 (978,442)
Securities available for sale:
Proceeds from sales - 497,920
Proceeds from maturities 34,212,641 22,089,842
Payment for purchases (34,738,133) (12,079,403)
Payment for purchase of FHLB stock - (200,300)
Net increase in loans (8,763,269) (18,002,562)
Capital expenditures (662,868) (392,138)
Proceeds from sale of premises and equipment 1,400 8,955
Proceeds from sale of other real estate 290,465 6,796
Net cash used in investing activities (3,607,060) (9,040,753)
Cash flows from financing activities:
Net increase in deposits 10,298,353 8,429,557
Net decrease in short-term borrowing (4,742,755) (3,357,479)
Proceeds from issuance of long-term borrowings 4,000,000 -
Principal payments on long-term borrowings (9,000,000) -
Proceeds from stock benefit plans 3,198 (384,743)
Cash dividends paid (1,785,648) (1,798,827)
Net cash provided by (used in) financing activities (1,226,852) 2,888,508
Net decrease in cash and due from banks (4,472,898) (1,646,947)
Cash and due from banks at beginning 15,484,360 15,052,383
Cash and due from banks at end $11,011,462 $13,405,436
Supplemental cash flow information:
Cash paid during the year for:
Interest $5,266,794 $6,149,600
Income taxes $1,193,066 $1,563,396
Noncash investing and financing activities:
Loans transferred to other real estate $1,553,536 $8,124
Loans charged off $376,736 $326,071
Loans made in connection with the sale of other real estate $536,840 $18,235
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 September 30, Nine Months Ended September 30,
2003 2002 2003 2002
(In thousands, except per share data)
Net income available to common stockholders $1,101 $1,056 $3,067 $3,295
Weighted average shares outstanding 1,684 1,693 1,684 1,695
Effect of dilutive stock options outstanding 1 0 1 0
Diluted weighted average shares outstanding 1,685 1,693 1,685 1,695
Basic earnings per common share $0.65 $0.62 $1.82 $1.94
Diluted earnings per common share $0.65 $0.62 $1.82 $1.94
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 September 30, Nine Months Ended September 30,
2003 2002 2003 2002
(In thousands, except per share data)
Net income, as reported $1,101 $1,056 $3,067 $3,295
Add: Stock-based employee
compensation expense included in
reported net income, net of related
tax effects - - 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)
Pro forma net income $1,101 $1,056 $3,067 $3,290
Earnings per share - Basic and diluted:
As reported $0.65 $0.62 $1.82 $1.94
Proforma $0.65 $0.62 $1.82 $1.94
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 for the first
reporting period ending after December 15, 2003. 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 September 30 is as follows:
September December
2003 2002
Federal Home Loan Bank advances:
2.02% to 6.28%, fixed rate,
maturing in 2003 through 2008 $35,000,000 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 a
critical accounting policy.
Management's evaluation process used to determine the adequacy of the allowance
for loan losses is subject to the use of estimates, assumptions, and judgments
and 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 September 30, 2003 totaled $1.1 million or
$0.65 for basic and diluted earnings per share. Comparatively, net income for
the quarter ended September 30, 2002 was $1.0 million or $0.62 for basic and
diluted earnings per share. Operating results for the third quarter 2003
generated an annualized return on average assets of 1.18% and an annualized
return on average equity of 13.59%, compared to 1.22% and 13.54% for the
comparable quarter in 2002. The net interest margin for the third quarter 2003
was 3.89% compared to 4.42% 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)
September 30, June 30, March 31, December 31, September 30,
2003 2003 2003 2002 2002
EARNINGS AND DIVIDENDS
Interest income $4,930 $5,023 $5,092 $5,303 $5,314
Interest expense 1,705 1,756 1,798 1,835 1,876
Net interest income 3,225 3,267 3,294 3,468 3,438
Provision for loan losses 80 158 158 120 150
Net interest income after
provision for loan losses 3,145 3,109 3,136 3,348 3,288
Noninterest income 888 756 664 718 643
Noninterest expense 2,494 2,489 2,476 2,394 2,470
Income before provision for income taxes 1,539 1,376 1,324 1,672 1,461
Provision for income taxes 438 376 358 483 405
Net income $1,101 $1,000 $966 $1,189 $1,056
Return on average assets 1.18% 1.10% 1.06% 1.38% 1.22%
Return on average equity 13.59% 12.26% 12.01% 15.45% 13.54%
Tangible equity to assets 8.48% 8.72% 8.57% 8.61% 8.69%
Net interest margin 3.89% 4.00% 4.02% 4.33% 4.42%
AVERAGE BALANCE SHEET
Loans net of unearned income $267,923 $263,189 $253,853 $243,596 $246,546
Assets 371,830 363,264 363,448 344,815 345,697
Deposits 285,698 277,052 273,805 257,355 258,233
Stockholders' equity 32,411 32,631 32,163 30,790 31,195
ENDING BALANCE SHEET
Loans net of unearned income $262,355 $267,118 $255,890 $254,938 $249,347
Assets 369,105 369,657 361,784 368,040 347,501
Deposits 284,790 283,463 273,803 274,492 266,831
Stockholders' equity 33,156 32,901 32,696 32,186 31,522
FINANCIAL CONDITION ANALYSIS
Total risk-based capital 12.85% 12.45% 12.97% 12.69% 12.84%
Net charge-offs to average loans 0.04% 0.07% 0.02% 0.09% 0.12%
Nonperforming assets to loans 0.69% 1.00% 0.89% 0.82% 1.52%
Efficiency ratio 58.37% 59.47% 59.69% 55.31% 58.30%
STOCKHOLDERS' DATA
Basic and diluted earnings per share $0.65 $0.59 $0.57 $0.71 $0.62
Dividends per share $0.22 $0.62 $0.22 $0.22 $0.22
Book value per share $19.68 $19.53 $19.41 $19.11 $18.73
Dividend payout ratio 33.7% 104.4% 38.4% 31.2% 35.4%
Average common shares outstanding 1,685 1,685 1,685 1,683 1,693
STOCK PRICE INFORMATION
High $28.65 $28.00 $28.00 $27.25 $28.33
Low 28.00 28.00 27.25 27.20 27.10
Market price at quarter end (1) 28.65 28.00 28.00 27.25 27.20
(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 $210,000 from
$3.6 million for the quarter ended September 30, 2002 to $3.4 million at
September 30, 2003 due to the compression of the net interest margin. The net
interest margin was 3.89% at September 30, 2003, down 53 basis points from
4.42% from the comparable quarter last year. The prolonged low interest rate
environment has put more pressure on earning asset yields than on already low
cost of funds. Earning assets continue to reprice at today's lower interest
rates without a corresponding decrease in interest bearing liability rates.
The average yield on earning assets at September 30, 2003 decreased 87 basis
points to 5.85% between comparable quarters while the rate paid on interest
bearing liabilities only decreased 42 basis points to 2.30% at September 30,
2003.
For the quarter ended September 30, 2003, average earning assets increased
$22.6 million, or 7.0%, when compared to the same quarter last year. Average
loans increased $21.4 million, or 8.7% while investments increased $1.3
million, or 1.6%, compared to the quarter ended September 30, 2002. The
Company has intentionally limited its investment in securities between
comparable quarters as loans have typically yielded a higher rate of return in
the current interest rate environment.
The average yield on earning assets was 5.85% at September 30, 2003 compared to
6.72% for the same period last year. Loan yields decreased 68 basis points to
6.28% while investments decreased 160 basis points to 4.40% between comparable
quarters a year ago. Average interest bearing deposit costs decreased 45 basis
points to 2.06% while short-term borrowings decreased 76 basis points to 1.03%
and long-term debt decreased 69 basis points to 4.32% as compared to the same
period a year ago.
Table 2: Net Interest Income Analysis - Taxable Equivalent Basis
(dollars in thousands)
Three months ended September 30, 2003 Three months ended September 30, 2002
Average Interest Average Average Interest Average
Balance Income/Expense Yield/Rate Balance Income/Expense Yield/Rate
Assets
Loans (1) (2) $267,923 $4,206 6.28% $246,546 $4,287 6.96%
Investments and other 80,187 883 4.40% 78,937 1,183 6.00%
Total earning assets $348,110 $5,089 5.85% $325,483 $5,470 6.72%
Other assets, net 23,720 20,214
Total assets $371,830 $345,697
Liabilities & Equity
Interest-bearing deposits $246,160 $1,265 2.06% $223,332 $1,399 2.51%
Short-term borrowings 12,647 33 1.03% 22,613 101 1.79%
Long-term debt 37,717 407 4.32% 30,000 376 5.01%
Total interest-bearing liabilities $296,524 $1,705 2.30% $275,945 $1,876 2.72%
Demand deposits 39,538 34,901
Other liabilities 3,357 3,656
Stockholders' equity 32,411 31,195
Total liabilities and equity $371,830 $345,697
Interest rate spread (2) 3.55% 4.00%
Net interest income and net interest
margin (2) $3,384 3.89% $3,594 4.42%
(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, especially non-performing and other potential problem
loans. 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 $80,000 for the quarter ended September 30,
2003, and $150,000 for the comparable quarter in 2002. Net-charge offs to
average loans were 0.12% and 0.11% for the quarters ended September 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 Nine months ended
September 30, September 30, Percent September 30, September 30, Percent
2003 2002 Change 2003 2002 Change
Service fees $208 $222 -6.3% $623 $639 -2.5%
Trust service fees 183 174 5.2% 541 519 4.2%
Net realized gain on sale of
securities available for sale - - - 17
Investment product commissions 162 87 86.2% 337 261 29.1%
Other operating income 335 160 109.4% 807 500 61.4%
Total noninterest income $888 $643 38.1% $2,308 $1,936 19.2%
Noninterest income increased $245,000, or 38.1%, for the three months ended
September 30, 2003 compared to the same period in 2002. Service fees decreased
$14,000, or 6.3%, in the third quarter of 2003 compared to the same quarter in
2002, primarily from decreasing non-sufficient fund fees due to the bank
closing problem demand deposit accounts and foregoing the related service fees.
Trust service fees increased $9,000, or 5.2%, in the third quarter of 2003
compared to the same quarter in 2002, primarily as a result of increasing
market values on trust accounts for which fees are assessed. Investment
product commissions for the third quarter of 2003 increased $75,000, or 86.2%,
to $162,000 over 2002 results. The increase was due to commissions received on
401(K) plans and a one time commission on the bank owned life insurance (BOLI)
purchase the bank made through the investment department.
Other operating income for the third quarter of 2003 increased $175,000, or
109.4%, to $335,000 over 2002 results. The Company sells long-term fixed rate
mortgage loans to the secondary market. Gain on sale of such loans was
$157,000 for the quarter ended September 30, 2003 compared to $18,000 at
September 30, 2002. Income from BOLI was $38,000 for the quarter ended
September 30, 2003. The Company purchased $3.0 million dollars of BOLI during
the second quarter 2003.
For the quarter ended September 30, 2003 there was no realized gain from the
sale of securities available for sale.
For the first nine months of 2003, noninterest income increased $372,000, or
19.2%, to $2.3 million from $1.9 million for the same period a year ago.
Service fees decreased $16,000, or 2.5%, for the first nine months of 2003
compared to the same time period in 2002, as a result of the decrease of NSF
fees due to the bank closing problem demand deposit accounts and foregoing the
related service fees.
Trust service fees increased $22,000, or 4.2%, to $541,000 for the first nine
months of 2003 compared to $519,000 for the same period in 2002 as a result of
increasing market values on trust accounts for which fees are assessed.
Investment product commissions for the first nine months of 2003 increased
$76,000, or 29.1%, to $337,000 over 2002 results. The increase was due to
commissions received on 401(K) plans and a one time commission on the BOLI
purchase the bank made through the investment department.
Other operating income increased $307,000, or 61.4%, to $807,000 for the first
nine months of 2003. Gains on sales of loans in the secondary market increased
$269,000 to $335,000 for the nine months ended September 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 nine months ended September 30, 2003
increased to $21.7 million, compared to $4.5 million for the same period a year
earlier. Income from BOLI was $57,000 for the nine months ended September 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 Nine months ended
September 30, September 30, Percent September 30, September 30, Percent
2003 2002 Change 2003 2002 Change
Salaries and employee benefits $1,402 $1,447 -3.1% $4,199 $4,096 2.5%
Occupancy 310 274 13.1% 933 818 14.1%
Data processing and information systems 104 103 1.0% 318 315 1.0%
Amortization of intangibles 78 73 6.8% 233 218 6.9%
Other operating expenses 600 573 4.7% 1,776 1,724 3.0%
Total noninterest expenses $2,494 $2,470 1.0% $7,459 $7,171 4.0%
Noninterest expense increased $24,000, or 1.0%, for the three months ended
September 30, 2003 compared to the same period in 2002. Salaries and employee
benefits decreased $45,000, or 3.1%, for the period as a result of an incentive
bonus accrual that was booked during the third quarter 2002 despite additional
branch staff added in 2003. 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 third
quarter 2003 due to additional advertising campaigns in the new market area and
costs related to the holding of other real estate owned properties and related
legal fees.
Noninterest expense increased $288,000, or 4.0%, for the nine months ended
September 30, 2003 compared to the same period in 2002. Salaries and employee
benefits increased $103,000, or 2.5%, for the period as a result of additional
staffing to operate the new branch and regular salary and related benefit
increases. Full time equivalent staff increased to 130 persons from 126 a year
earlier. Occupancy increased $115,000, or 14.1%, due to addition of a new bank
branch. Amortization of intangibles increased $15,000, or 6.9%, when compared
to the same period in 2002 due to the systematic amortization method used.
BALANCE SHEET
At September 30, 2003, total assets were $369.1 million, an increase of $21.6
million over September 30, 2002, while assets increased $1.1 million from
December 31, 2002. Gross loans were $263.5 million at September 30, 2003,
increasing $13.7 million over third quarter 2002 and increasing $7.8 million
over year-end 2002. Investment securities were $76.3 million at September 30,
2003 and December 31, 2002, increasing $1.9 million from September 30, 2002.
Deposits increased $18.0 million from September 30, 2002 and increased $10.3
million from December 31, 2002 to $284.5 million at September 30, 2003.
Table 5: Period End Loan Composition
(dollars in thousands)
September 30, % of September 30, % of December 31, % of
2003 total 2002 total 2002 total
Commercial real estate $94,500 35.9% $83,119 33.3% $85,605 33.5%
Real estate construction 9,860 3.7% 7,364 3.0% 8,489 3.3%
Commercial and financial 35,208 13.3% 39,127 15.7% 40,134 15.7%
Agricultural 35,304 13.4% 32,977 13.2% 33,575 13.1%
Lease financing 0 0.0% 6 0.0% 0 0.0%
Commercial 174,872 66.3% 162,593 65.2% 167,803 65.5%
Residential real estate 79,266 30.1% 76,886 30.8% 77,926 30.5%
Installment 9,372 3.6% 10,272 4.0% 10,001 4.0%
Total loans (including loans held for sale) $263,510 100.0% $249,751 100.0% $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 $94.5 million at September 30, 2003. Commercial real
estate loans grew as a result of branch expansion into a new market during the
first quarter 2003.
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 for loan loss
of $397,000 was recorded for the nine months ended September 30, 2003, a
decrease of $108,000, or 21.5%, compared to a year ago. Net loan charge offs
were $328,000 for the nine months ended September 30, 2003, compared to
$297,000 to the same period 2002. Net charge offs to average loans were 0.12%
at September 30, 2003 compared to 0.11% at September 30, 2002.
Table 6: Allowance for Loan Losses and Nonperforming Assets
(dollars in thousands)
At and for the At and for the
Nine months ended Year ended
September 30, December 31,
2003 2002 2002
Allowance for loan losses at beginning of year $2,702 $2,597 $2,597
Loan charged off (377) (326) (560)
Recoveries 49 29 40
Provision for loan losses 396 505 625
Allowance for loan losses at end of period $2,770 $2,805 $2,702
Nonperforming assets
Nonaccrual loans $502 $2,441 $417
Impaired loans $240 $1,180 $1,667
Accruing loans past due 90 days or more 41 69 62
Restructured loans 321 15 14
Total nonperforming loans 1,104 3,705 2,160
Other real estate owned 724 91 0
Total nonperforming assets $1,828 $3,796 $2,160
Ratios
Allowance for loan losses to total loans at end of period 1.05% 1.12% 1.06%
Net charge offs during the period to average loans outstanding 0.12% 0.11% 0.20%
In the opinion of management, the allowance for loan losses at September 30,
2003 is sufficient to absorb loan losses inherent in the loan portfolio
although future adjustments to the allowance may be necessary based on changes
in the performance of the loan portfolio or 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 $1.8 million at September 30, 2003 compared to $2.2
million at December 31, 2002. Other real estate owned was $724,000 at the
quarter ended September 30, 2003 and consisted of agricultural, residential and
commercial properties. Non-accrual loans were $502,000 of total nonperforming
loans at September 30, 2003. Impaired loans consisting of one commercial
property and one agricultural loan accounted for $240,000 of nonperforming
loans at September 30, 2003 and $1.7 million at December 31, 2002. Since year-
end the Company has received loan pay-offs, taken additional loan charge-offs
on the impaired loan balance and moved property into other real estate owned.
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 82.3% at September 30,
2003 and 80.5% at September 30, 2002.
Table 8: Period End Deposit Composition
(dollars in thousands)
September 30, % of September 30, % of December 31, % of
2003 total 2002 total 2002 total
Demand $40,932 14.4% $36,629 13.7% $38,108 13.9%
NOW 25,893 9.1% 26,961 10.1% 29,106 10.6%
Money market 49,944 17.5% 44,993 16.9% 45,932 16.7%
Savings 22,365 7.8% 20,138 7.5% 20,990 7.6%
Brokered CDs 10,500 3.7% 10,500 3.9% 10,500 3.8%
Other time 135,156 47.5% 127,610 47.8% 129,856 47.3%
Total $284,790 100.0% $266,831 100.0% $274,492 100.0%
Total deposits at September 30, 2003 increased $10.3 million, or 3.8%, to
$284.8 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 $9.7 million to $58.8 million at September 30, 2003
compared to $68.5 million at December 31, 2002.
CAPITAL
Stockholders' equity at September 30, 2003 increased $970,000 to $33.2 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
September 30, 2003, included $943,000 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 $0.22 per common share were paid for the quarters ended
September 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 September 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
September 30, 2003 11.8% 12.9%
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%
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 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 October 27, 2003. The Company filed a Form 8-K on October 27,
2003, reporting earning information for the quarter ended September 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: NOVEMBER 14, 2003 GENE C. KNOLL
Gene C. Knoll, President
and Chief Executive Officer
(Principal Executive Officer)
Date: NOVEMBER 14, 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 September 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